-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JXoSEivb9vSpOoFR2Y1i/XlfG2XABzCralsPcRCybP7uefPIjCNiHc+fQG1/QlAQ O7GxycQ6sXOJOXbWSSv2+g== 0000910647-99-000264.txt : 19991018 0000910647-99-000264.hdr.sgml : 19991018 ACCESSION NUMBER: 0000910647-99-000264 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19991015 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WIDECOM GROUP INC CENTRAL INDEX KEY: 0000922023 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 980139939 STATE OF INCORPORATION: A6 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-89109 FILM NUMBER: 99729101 BUSINESS ADDRESS: STREET 1: 72 DEVON ROAD STREET 2: BRAMPTON CITY: ONTARIO, CANADA L4Z STATE: A6 BUSINESS PHONE: 9057120505 MAIL ADDRESS: STREET 1: 72 DEVON ROAD STREET 2: BRAMPTON CITY: ONTARIO, CANADA L4Z STATE: A6 SB-2 1 FORM SB-2 As filed with the Securities and Exchange Commission on October 15, 1999 File No. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ THE WIDECOM GROUP INC. (Exact name of Registrant as specified in its charter) Ontario, Canada 3669 98-0139939 (State of Incorporation) (Primary Standard (I.R.S. Employer Industrial Identification Classification No.) Number) ------------------------ 72 Devon Road, Unit # 18 Brampton, Ontario Canada, L6T 5B4 (905) 712-0505 (Address, including zip code, and telephone number, including area code, of Company's principal executive offices) Suneet S. Tuli, Executive Vice President c/o The Corporation Trust Company 1633 Broadway, New York, New York 10019 (905) 712-0505 (Name and address, including zip code, and telephone number, including area code, of agent for service) ------------------------ With copies to: VICTOR J. DiGIOIA, ESQ. MICHAEL A. GOLDSTEIN, ESQ. GOLDSTEIN & DiGIOIA, LLP 369 Lexington Avenue New York, New York 10017 Telephone (212) 599-3322 Facsimile (212) 557-0295 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE (1)
Proposed Proposed Maximum Maximum Amount of Title of Shares Amount to be Offering Price Aggregate Registration to be Registered Registered per Share (2) Offering Price(2) Fee - ------------------------------------------------------------------------------------------------- Common Stock, par value $.01(3) 538,441 $6.0625 $3,264,298.56 $ 907.47 Common Stock, par value $.01 451,000 $6.0625 $2,734,187.50 $ 760.11 Common Stock, par value $.01(4) 50,000 $6.0625 $ 303,125 $ 84.27 Total 1,039,441 $6,301,611.06 $1,751.85 - ------------------ This Registration Statement on Form SB-2 is being filed pursuant to Rule 429 under the Securities Act of 1933, as amended. 41,250 shares of common stock underlying Underwriters' Warrants, and 167,500 shares of common stock underlying privately issued warrants were previously registered, and a fee of $2,648.71 was previously paid, under our Registration Statement on Form F-1, No. 333-78004, which is hereby combined with this Registration Statement under Rule 429. Total estimated solely for the purpose of determining the registration fee. Based upon the closing bid price of Widecom's stock on the Nasdaq Small Cap Market on October 11, 1999 ($6.0625). Represents Shares of Common Stock issuable upon exercise of outstanding Common Stock purchase warrants held by certain security holders. Pursuant to Rule 416 of the Securities Act of 1933, as amended (the "Act"), there are being registered such additional number of shares of Common Stock as may become issuable pursuant to the anti- dilution provisions of the Warrants. Represent Shares of Common Stock issuable upon conversion of outstanding promissory notes held by certain security holders. Pursuant to Rule 416 of the Securities Act of 1933, as amended (the "Act"), there are being registered such additional number of shares of Common Stock as may become issuable pursuant to the anti-dilution provisions of the notes.
EXPLANATORY NOTE The purpose of this Registration Statement on Form SB-2 of the Widecom Group, Inc. is to register an additional 1,039,441 shares of our common stock, par value $.01 per share. An additional 41,250 shares of common stock underlying common stock purchase warrants issued to our underwriters in our initial public offering and 167,500 shares of common stock underlying privately issued common stock purchase warrants were previously registered under our Registration Statement on Form F-1, No. 333-78004, which is hereby combined with this Registration Statement pursuant to Rule 429 under the Securities Act. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to Section 8(a) may determine. P R O S P E C T U S 1,039,441 Shares THE WIDECOM GROUP INC. Common Stock This Prospectus covers an aggregate of 1,039,441 shares of common stock, par value $.01, (the "Shares") of The Widecom Group Inc., an Ontario corporation ("Widecom") including: (i) 232,441 Shares issuable upon exercise of 232,441 outstanding common stock purchase warrants which were originally sold as part of Widecom's initial public offering (the "Public Warrants"); (ii) 306,000 Shares underlying privately issued common stock purchase warrants (the"Private Warrants"); (iii) 50,000 shares of Common Stock issuable upon conversion of $200,000 principal amount of convertible notes (the "Notes") and (iv) 451,000 Shares held by certain selling shareholders. The Prospectus is intended to be utilized by the Selling Shareholders, their assigns and transferees. Widecom will bear all the expenses incident to the registration of the Shares under the Securities Act of 1933, as amended, and state securities laws, if any, on behalf of the Selling Shareholders. Widecom will not receive any of the proceeds from the sale of the Shares by the Selling Shareholders. The Public Warrants are quoted on the Bulletin Board under the symbol "WIDEF" and on the Boston Stock Exchange as "WDEW." Widecom's common stock is traded in the over-the counter market and is quoted on the Nasdaq Small Cap Market under the symbol "WIDE" and on the Boston Stock Exchange under the symbol "WDE". On _________, 1999, the closing bid and asked prices for the common stock as reported on Nasdaq were $____ and $____, respectively. THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" PAGE 5 OF THIS PROSPECTUS THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE OFFERED FOR SALE IN THE STATE OF MARYLAND PURSUANT TO REGISTRATION WITH THE DIVISION OF SECURITIES OF THE DEPARTMENT OF LAW OF MARYLAND, BUT REGISTRATION IS PERMISSIVE ONLY AND DOES NOT CONSTITUTE A FINDING THAT THIS PROSPECTUS IS TRUE, COMPLETE AND NOT MISLEADING, NOR HAS THE DIVISION OF SECURITIES PASSED IN ANY WAY UPON THE MERITS OF, RECOMMENDED, OR GIVEN APPROVAL ON THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is ___________, 1999 TABLE OF CONTENTS Page ---- PROSPECTUS SUMMARY 1 THE OFFERING 3 RISK FACTORS 5 ADDITIONAL INFORMATION 15 USE OF PROCEEDS 15 SELLING SECURITY HOLDERS 15 SELLING SECURITY HOLDERS AND TRANSACTIONS WITH SELLING SECURITY HOLDERS 16 SELECTED FINANCIAL DATA 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19 DESCRIPTION OF BUSINESS 24 LEGAL PROCEEDINGS 34 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 35 EXECUTIVE COMPENSATION 37 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 38 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 39 DESCRIPTION OF SECURITIES 40 EXPERTS 41 CHANGES IN ACCOUNTANTS 41 DISCLOSURE OF COMMISSION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 42 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 42 PLAN OF DISTRIBUTION 43 FORWARD LOOKING STATEMENTS 43 PROSPECTUS SUMMARY The following summary is intended to set forth certain pertinent facts and highlights from material contained in the body of this Prospectus. The summary is qualified in its entirety by reference to the more detailed information and consolidated financial statements appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, all numbers have been adjusted to reflect a one-for-four (1:4) reverse stock split effective on January 29, 1999. THE COMPANY The Widecom Group Inc. was incorporated in Ontario, Canada in June 1990. We design, assemble and recently commenced marketing of high-speed, high- performance document systems which transmit, receive, print, copy and/or archive wide format documents, such as blueprints, schematics, newspaper layouts and other mechanical and engineering drawings. Our Products In developing and marketing wide-format document systems, we currently market the following different products: * Widecom SLC936-C Color scanner, which offers high speed, high quality scanning capabilities; * Widecom SLC1036 advanced scanner, which offers faster scanning and output functions than the SLC936-C; * Widecom SLC972 wide format scanner, which can handle documents up to six feet wide and 1/2-inch thick; * Widecom WC936P Plotter/Printer, which can print wide format documents onto a variety of media; * Widecom Modular Digital Multi-Function Unit, which incorporates a scanner module, a plotter module, optional internal modems and software; and * print and scan heads, software drivers and other accessories. Our Approach to the Market Our primary marketing strategy is to sell our products to targeted commercial markets in which we believe that wide format document systems have potential for significant applications, principally architectural, engineering and construction firms. We believe that the reproduction, archiving and transmission of wide format documents are essential to those businesses. We also market our products for use by manufacturers in the garment, woodworking and graphic arts industries, utilities, government agencies and the newspaper and advertising industries. We believe that our products are used by consumers in these markets for a variety of applications, including the transmission of construction plans, architectural drawings, newspaper and advertising layouts and clothing patterns. In general, we believe that users of wide format documents have an increasing need for systems which can more efficiently scan, copy, print, transmit, receive and archive wide format documents. About Widecom We were incorporated in the Province of Ontario, Canada in June of 1990. Our executive offices are located at 72 Devon Road, Unit 18, Brampton, Ontario, Canada L6T 5B4. Our telephone number is (905) 712-0505. About This Prospectus The Shares registered hereby may be sold from time to time by the Selling Shareholders, or by the transferees of the Selling Shareholders. No underwriting arrangements have been entered into by the Selling Shareholders. The distribution of the Shares by the Selling Shareholders and/or their transferees may be effected in one or more transactions that may take place on the over-the-counter market, including ordinary brokers transactions, privately negotiated transactions or through sales to one or more dealers for resale of the Shares as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The Shares may be sold by the Selling Shareholders either (i) to a broker or dealer as principal for resale as such broker or dealer for its account pursuant to this Prospectus (e.g. in a transaction with a "market maker"); (ii) in brokerage transactions, including transactions in which the broker solicits purchasers or (iii) in privately negotiated transactions pursuant to any applicable exemption under the Securities Act of 1933, as amended. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the Selling Shareholders in connection with such sales. The Selling Shareholders and intermediaries through whom such Shares are sold may be deemed "underwriters" within the meaning of the Securities Act, with respect to the Shares offered. THE OFFERING Securities Offered by the Company 1,039,441 Common Stock Outstanding Prior to Offering (1) 2,556,041 Common Stock Outstanding After the Offering (2) 3,144,482 Risk Factors This Offering involves a high degree of risk. See "Risk Factors." Use of Proceeds (3) Widecom will not receive any proceeds from the sales of the Selling Shareholders. We anticipate that proceeds received from the exercise of any of the Public or Private Warrants will be used for working general corporate purposes. See "Use of Proceeds." Nasdaq Smallcap Market Symbol (Common Stock): "WIDE" Boston Stock Exchange Symbol (Common Stock): "WDE" Bulletin Board Symbol (Public Warrants): "WIDEF" Boston Stock Exchange Symbol (Public Warrants): "WDEW" - ------------------- [FN] As of September 23, 1999. Does not include (i) 125,000 shares of Common Stock reserved for issuance under the Company's 1995 Employee Stock Option Plan, of which 114,583 shares have been reserved for currently outstanding options and 10,417 shares are available for future issuances. Assumes the exercise of all of the Warrants for which underlying Shares are being registered hereby. Does not include (i)125,000 shares of Common Stock reserved for issuance under the Company's 1995 Employee Stock Option Plan, of which 114,583 shares have been reserved for currently outstanding options and 10,417 shares are available for future issuances. The Company will receive up to approximately $2,384,205 in proceeds if all Warrants are exercised within 120 days from the effective date of this Registration Statement and $4,546,410 in proceeds if all such Warrants are exercised thereafter. Widecom plans to use all such proceeds for working capital and general corporate purposes. See "Use of Proceeds." RISK FACTORS The securities offered hereby are speculative in nature and involve a high degree of risk, including, but not limited to, the risk factors described below. Each prospective investor should carefully consider the following risk factors before making an investment decision. We have a limited operating history and we are losing money. We began marketing our first 36" wide format facsimile machine on a limited basis, primarily for demonstration purposes, in 1992, and other wide format document systems in 1994. We have only recently commenced commercialization of the full line of our products. Therefore, we have only a limited relevant operating history upon which an evaluation of our prospects and performance can reasonably be based. We are subject to all of the risks, expenses, delays, problems and difficulties typically encountered in the establishment of a new business in an industry characterized by intense competition, as well as those encountered in the shift from development to commercialization of new products based on innovative technologies. Since inception, we have generated limited revenues from operations and have lost money every year since 1996. For the fiscal year ended March 31, 1998, we sustained a loss of $3,335,865. For the fiscal year ended March 31, 1999, we sustained a loss of $2,244,351. For the quarter ended June 30, 1999, we sustained a further loss of $89,634. The losses for these fiscal years would have been greater if we did not receive revenues from research and development grants and similar reimbursement programs from various Canadian government programs. Unfavorable general economic conditions, including any possible future downturns in domestic or international economies, including the construction industry where many of our products are used, could materially and adversely affect our future operating results. There can be no assurance that we will be able to achieve increased levels of revenue in the future or that our future operations will be profitable. Our Common Stock may be delisted from Nasdaq. Our common stock is listed for trading on the Nasdaq SmallCap Market under the symbol WIDE. Under Nasdaq rules, in order to maintain listing of its common stock and warrants on the Nasdaq SmallCap Market, a company must have, among other things, $2,000,000 of net tangible assets or market capitalization of $35,000,000 or $500,000 of net income in the latest fiscal year or 2 of 3 previous fiscal years and a minimum bid price of $1.00 per share. In addition, Nasdaq reserves the right to withdraw or terminate a company's listing on the Nasdaq SmallCap Market at any time and for any reason. Widecom completed a one-for-four (1:4) reverse stock split in January, 1999, to raise the bid price of our common stock over the minimum bid price requirement of $1.00. If we are unable to maintain continued quotation on the Nasdaq Small Cap Market, we may be subject to additional disclosure requirements applicable to Penny Stocks under the Exchange Act Rules. A Penny Stock, as defined in Rule 3a51-1 of the Exchange Act, is generally an equity security that has a market price of less than U.S.$5.00 per share, other than a reported security listed or registered with a national securities exchange, like Nasdaq. Absent an exception, the Exchange Act Rules require that broker/dealers deliver to any potential purchaser prior to the execution of any transaction involving the purchase or sale of a Penny Stock, a disclosure schedule explaining the Penny Stock market and the risks associated therewith. In addition, the Exchange Act Rules also make it unlawful for a broker/dealer to sell or purchase Penny Stocks on behalf of any customer, other than an established customer of such a broker/dealer or an accredited investor, unless the broker/dealer: * obtains information concerning the financial situation, investment experience and investment objectives of its customer; * makes a special written determination based on the information received, which must be delivered to its customer, that transactions in Penny Stocks are suitable for its customer and that its customer has sufficient knowledge and experience to be capable of evaluating the risks of transactions in Penny Stocks; and * receives, prior to the execution of the transaction, its customers' written consent to the transaction, setting forth, among other things, the identity and quantity of the Penny Stock to be purchased. An accredited investor, as defined under Rule 501 (a) of the Act, is generally an individual with a net worth in excess of U.S.$1,000,000 or an annual income exceeding U.S.$200,000 individually or U.S.$300,000 together with his/her spouse. If our securities become subject to the Exchange Act Rules applicable to Penny Stocks, the market liquidity for our securities could be adversely affected. We have limited working capital. Our heavy investment in property, plant, equipment and inventories, our continuing operating losses and our $1,850,000 investment in Technologies NovImage have substantially reduced our cash position. Additionally, the lack of product sales and costs incurred while developing and introducing the new Series SLC936 Scanners have further weakened our capital position. We may need to obtain additional financing to continue the introduction of our new products and to finance research and development of further additional products. To the extent that any future financing involves the sale of our equity securities, the interests of our then existing shareholders could be diluted. A substantial portion of our sales have been derived from the sale of our 4-series scanner units since their introduction in May 1995. Since we have only recently introduced our new products and have not, to date, achieved significant sales revenue from these products, a decline in the sale of our scanner units would have a material adverse effect on our business. For the fiscal years ended March 31, 1998 and March 31, 1999, sales of our 4-series scanner units accounted for approximately 78.6% and 0%, respectively, of our product sales. There can be no assurance that we will not be dependent upon non-recurring sales of WIDEfax Modular Units to a limited number of customers, which sales could constitute a substantial portion of our revenues. Our products may not be accepted by our customers. The wide format document systems industry is a highly specialized segment of the document systems industry and is characterized by evolving specialized markets and an increasing number of entrants who have introduced or are developing an array of new wide format products based on a variety of technologies. Each of these entrants is seeking to establish its products and technologies as the preferred method for reproducing, transmitting and storing wide format documents. To the extent that a competitor establishes its technologies as the preferred method within the industry, we may be required to modify or discontinue our products. As is typical in the case of niche-markets, demand and market acceptance for newly introduced products is subject to a high level of uncertainty. Achieving market acceptance of our products, especially new products, will require substantial marketing efforts and expenditures of significant funds to create awareness and demand. In addition, potential customers may elect to utilize other products which they believe to be more efficient or have other advantages over our products or may be reluctant to purchase our products due to significant capital investment in other wide format document systems. There can be no assurance that niche-markets for our products will not be limited, that we will have the funds or other resources necessary to achieve marketing objective or that our efforts will result in successful product commercialization or initial or continued market acceptance for its products. We may not be able to sell our new products. We commenced making our first 36" wide format facsimile machine on a limited basis, primarily for demonstration purposes in 1992, and other wide format document systems in 1994. We have only recently commenced the marketing and sales of our new Series SLC936 Scanners and WC936P plotter/printer. There can be no assurance that the market will accept these new products. Since inception, we have generated limited revenues from operations and have not yet achieved profitability. To date, our revenues have been derived from product sales and research and development grants and reimbursements from the Canadian government. We have limited marketing experience and we depend on others to market our products. We have limited marketing experience and limited financial, personnel and other resources to independently undertake extensive marketing activities. In light of the foregoing, we have entered into third-party marketing arrangements and intend to rely primarily on domestic and foreign distributors and dealers to market our products. We will be dependent upon the efforts of our distributors and dealers and may be dependent upon a limited number of distributors and dealers for a significant portion of our revenues. For the years ended March 31, 1998, and March 31, 1999 our five largest distributors accounted for approximately 43% and 8%, respectively, of our product sales. We have only recently entered into marketing arrangements with many of our key distributors and dealers. Our prospects will depend to a large extent upon their efforts and our ability to develop and maintain strategic marketing relationships with these and additional distributors and dealers. Some of our dealers and distributors represent various product lines generally, and cannot be expected to increase their sales efforts for our products in the absence of increased incentives or product. We will also be dependent upon our distributors and dealers to provide installation and support services. To the extent that these third parties provide inadequate service and support, over which we will not have direct control, our reputation, and our ability to continue to sell additional products could be adversely affected. Our products may not work with all technology. Although we have completed the development of our current generation of wide format document scanners and plotters, which we believe perform the principal functions for which they have been designed, our products have been only recently commercialized and are currently being utilized by only a limited number of customers. As a result, there can be no assurance that, upon widespread commercial use, our products will satisfactorily perform all of the functions for which they have been designed or that they will be reliable or durable in extensive applications. We may be required to devote considerable efforts and resources to enhance and refine our wide format products and to develop additional products. Such efforts remain subject to all the risks inherent in development and commercialization of new products, including unanticipated delays, expenses, technical problems or difficulties, as well as the possible insufficiency of funds to implement efforts, which could result in abandonment or substantial change in product development or commercialization. Our success will be largely dependent upon proposed products meeting targeted cost and performance objectives and our ability to adapt our products to keep pace with evolving technological advances in the industry, and may also be dependent upon their timely introduction into the marketplace. The inability to successfully complete development of a product or a determination by Widecom, for financial, technical or other reasons, not to complete development or commercialization of any product, particularly in instances in which we have already made significant capital expenditures, could have a material adverse effect on our business. Our products may not be competitive. The markets for document systems are characterized by intense competition between various manufacturers of wide format copiers, scanners, plotters and printers. Widecom competes with numerous well-established foreign and domestic companies that market or are developing wide format document systems, as well as those which manufacture standard facsimile machines, copiers, scanners, plotters, and printers. We also expect that companies that manufacture and sell standard facsimile machines, copiers, plotters, scanners and printers could develop, without substantial delay of time, wide format document systems directly competitive with our products. Many of these companies possess substantially greater financial, technical, marketing, personnel and other resources than we do and have established reputations for success in the development and marketing of facsimile machines, copiers, plotters, scanners and printers and have sufficient budgets to permit them to implement extensive advertising and promotional campaigns to enter new markets. The markets for our products are also characterized by rapidly changing technology and evolving industry standards, sometimes resulting in rapid product obsolescence or short product life cycles. As a result, our ability to compete may be dependent upon our ability to continually enhance and improve our products, to complete development of and introduce into the marketplace in a timely manner of our new products and to successfully develop and market these new products. There can be no assurance that we will be able to compete successfully, that competitors will not develop technologies or products that render our products obsolete or less marketable, or that we will be able to enhance successfully our existing products or develop new products. We may not receive any money from government-sponsored programs. Uncertainty of Revenue from Government Sponsored Programs. In the past, a substantial portion of Widecom's revenues have been derived from research and development grants and reimbursement from the Canadian government. Government sponsored programs are designed to encourage and support the development and exploitation of new technologies by providing partial reimbursement to Canadian businesses for expenses incurred in connection with research and development activities. During the fiscal years ended March 31, 1998 and March 31, 1999, however, we did not seek reimbursement from the Canadian government for any expenses. Other government sponsored research grants and subsidies have also been provided to us in the past to fund specific research programs. The majority of these grants and subsidies have been provided under the Industrial Research Assistance Program which is administered by the Canadian National Research Council. Grants are made on the condition that research and development activities are performed in Canada and with the prior approval by the Research Council of the scope, content and objectives of the research to be performed. For the fiscal year ended March 31, 1998, we did not receive any grants. Widecom, together with a branch of the government of the Province of Quebec became equal shareholders in a research and development company named 3994340 Canada Inc., doing business as NovImage. The joint venture allows NovImage to receive grants in excess of 40% of qualified research expenditures. Products derived from the research are then licensed back to Widecom at a nominal royalty of 0.5% of sales of those products. The formation of NovImage enables Widecom to obtain a substantial increase in the amount of research that can be performed at a significantly reduced cost. However, there can be no assurances that these grants and programs will be continued beyond the immediate future. In the event of the discontinuance of any such programs, we may incur higher research and development and employee costs. We rely on others for the components of our products. We are dependent upon third-party suppliers and subcontractors for our supply of custom and component parts incorporated into our products. We believe that alternative sources of supply for most of our components and custom parts are readily available on commercially reasonable terms. We are currently dependent upon Alberta Microelectronics, Inc., our principal supplier of print heads. Moreover, we do not maintain supply agreements with any of our suppliers or subcontractors and we purchase components and custom parts pursuant to purchase orders in the ordinary course of business. We are dependent on the ability of our suppliers and subcontractors to, among other things, satisfy performance and quality specifications and dedicate sufficient production capacity within scheduled delivery times. There can be no assurance that our suppliers and subcontractors will be able to satisfy our scheduled delivery requirements. Failure or delay by our suppliers and subcontractors in supplying components or custom parts to us would adversely affect our operating margins and our ability to manufacture and deliver products on a timely and competitive basis. We sell to foreign countries. We rely on sales to foreign markets for a substantial portion of our revenues. For the fiscal years ended March 31, 1998 and March 31, 1999, sales of our products to customers in the Middle East and Asia accounted for approximately 22% and 30.4%, respectively, of our sales. We are seeking to expand product sales in foreign markets, but there can be no assurance that we will be successful or that such markets will prove to be viable. To the extent that we are able to successfully expand our operations in foreign markets, we will become increasingly subject to risks inherent in foreign trade, including shipping delays, increased collection risks, trade restrictions, export duties and tariffs and international political, regulatory and economic developments, all of which could have an adverse effect on our operating margins and results of operations and exacerbate the risks inherent in our business. We may lose money on foreign currency exchange. We conduct a substantial portion of our business in foreign currency, primarily the Canadian dollar and Indian rupee. To date, fluctuation in foreign currency exchange rates have not had a significant impact on our results of operations. Fluctuations in the exchange rates between the United States dollar and the Canadian dollar or Indian rupee could have an adverse effect on our operating results in the future. The Indian rupee has experienced significant devaluation against the United States dollar and other currencies in recent years. We seek, however, to limit our exposure to the risk of currency fluctuations by engaging in foreign currency transactions that could expose us to substantial risk of loss. There can be no assurance that fluctuations in foreign currency exchange rates will not have a significant impact on our future operating results. Almost all of our manufacturing is performed in India. Substantially all of our manufacturing activities are conducted in a free trade zone in India. As a result, supplies shipped to our manufacturing facility and completed products shipped from the facility are not subject to Indian duties or tariffs or United States trade embargoes. However, in connection therewith, we have been and will continue to be subject to various risks associated with conducting business abroad. India may, from time to time, impose duties, tariffs or quotas or other restrictions on our imports or exports, or otherwise change regulations relating to the conduct of business in the free trade zone. Similarly, the United States or Canada may impose increased duties, tariffs and other restrictions on the import or export of our products or supplies. Any of these possibilities could adversely affect our operations. Our operating results could vary. Our operating results could vary from period to period as a result of several factors, such as: * the length of our sales cycle; * purchasing patterns of potential customers; * the timing and introduction of new products; * product enhancements by us and our competitors; * variations in sales by distribution channels; and * non-recurring system sales to a limited number of customers. There can be no assurance that such factors will not cause significant fluctuations in our operating results in the future. We do not have patents on all of the technology we use. We hold one patent and have filed a number patent applications relating to different aspects of our technology. There can be no assurance, however, that any additional patents will be issued to us. Even if additional patents are issued to us, there can be no assurance as to the breadth or degree of protection that future patents would afford us or that any future patents would not be circumvented or invalidated. We rely upon proprietary know-how and employ various methods to protect the ideas, concepts and documentation of its proprietary technology. These methods include, but are not limited to, nondisclosure agreements with our employees and distributors. Such methods may not, however, afford complete protection and there can be no assurance that competitors or customers will not independently develop such know-how or obtain access to our know-how, ideas, concepts and documentation. In addition, some aspects of the technologies embodied in our products are generally available to other manufacturers. We are not aware of any infringement on the proprietary rights of others and have not received any notice of any claimed infringement. We have not, however, conducted any investigation as to possible infringement. Therefore, there can be no assurance that third parties will not assert infringement claims against us in connection with our products, that any such assertion of infringement will not result in litigation, that we would prevail in such litigation or be able to license any infringed patents of third parties on commercially reasonable terms, or at all. If our technologies were found to infringe another party's rights, we could be required to modify our products or obtain a license. There can be no assurance that we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, or that we would have the financial or other resources necessary to successfully defend a claim or violation of proprietary rights. Failure to do any of the foregoing could have a material adverse effect on our business. Furthermore, if our products or technologies are deemed to infringe patents or proprietary rights of others, we could, under certain circumstances, become liable for damages, which would have a material adverse effect on our business. We hold a registered trademark with the United State Patent and Trademark Office for the WIDEfax(r) name only. We are not aware of any infringement on the proprietary rights of others and have not received any notice of claimed trademark infringement. We have not, however, conducted any investigation as to possible trademark infringement. Therefore, there can be no assurance that third parties will not assert trademark infringement claims against us in connection with our use of any of our marks, that any such assertion of infringement will not result in litigation, or that we would prevail in such litigation. We depend on our President and Vice President. Our success is largely dependent on the personal efforts of Raja S. Tuli, our Chief Executive Officer and President, Suneet S. Tuli, our Executive Vice President of Sales and Marketing, and other key personnel. Although we have entered into five-year employment agreements with Messrs. Raja Tuli and Suneet Tuli, the loss of the services of such persons or other key employees could have a material adverse effect on our business and prospects. We have obtained "key-man" life insurance on the life of Raja Tuli in the amount of CDN $1,500,000 and on the life of Suneet Tuli in the amount of CDN $750,000. Our success may also be dependent upon our ability to hire and retain additional qualified technical, financial, marketing and other personnel. Competition for qualified personnel in the wide format document system industry is intense and there can be no assurance that we will be able to hire or retain additional qualified personnel. Potential Conflicts of Interest. We were organized by Raja, Suneet and Lakhbir Tuli. Lakhbir Tuli is the father of Raja and Suneet Tuli. We have engaged in transactions with entities that are affiliated with our organizers which may involve potential conflicts of interest. For example, Indo Widecom International Ltd., our wholly owned subsidiary, leases our Indian facility from Widecom Fax and Plotters, Ltd., a company controlled by Lakhbir S. Tuli. We have also engaged Widecom Fax as a non-exclusive distributor in India on the same terms and conditions as unaffiliated distributors. Moreover, we engage Lakhbir S. Tuli as an independent consultant and, for the fiscal years ended March 31, 1998 and 1999, we paid him (and certain companies controlled by him) $159,600 and $134,000, respectively, in consideration for such services. In connection with the establishment of NovImage, two companies in which Raja S. Tuli has a beneficial interest each acquired 5% of NovImage solely in exchange for the licensing of their technologies to NovImage. These two companies are 3294412 Canada, Inc. and 3294421 Canada, Inc. Although management believes these transactions have been advantageous to us, there can be no assurance that future transactions or arrangements between us and our affiliates will be advantageous, that conflicts of interest will not arise with respect these transactions or that if conflicts do arise, that they will be resolved entirely in our favor. The Tuli family controls Widecom. At present, Raja, Suneet and Lakhbir Tuli, in the aggregate, beneficially own approximately 37.15% of Widecom's outstanding Common Stock. Accordingly, such persons, acting together, will most likely be in a position to control Widecom. Therefore, they may elect all of our directors, increase the authorized capital, dissolve, merge, or sell our assets and generally direct our affairs. Our outstanding options and warrants may depress our stock price. As of the date of this Registration Statement, there were currently outstanding warrants to purchase 887,191 shares of common stock. The exercise prices of those warrants are as follows: * 25,000 are exercisable at $8.50 per share; * 15,000 are exercisable at a price of $10.00 per share; * 232,441 are exercisable at a price of $5.00 per share for a period of 120 days from the effective date of this registration statement and $10.00 thereafter; * 192,500 are exercisable at $16.00 per share; * 41,250 are exercisable at $33.00 per share; * 106,000 are exercisable at $2.00 per share; * 50,000 are exercisable at $3.00 per share; * 50,000 are exercisable at $1.20 per share; * 25,000 are exercisable at $8.00 per share; and * 150,000 are exercisable at $8.00 per share, but may be exercisable at $2.00 per share upon the occurrence of events specified in the warrant agreement. In addition, debentures in the principal amount of $150,000 are outstanding which are convertible into shares of our common stock at a conversion price equal to 80% of the average closing bid price for the 20 trading days preceding the notice of conversion. If our common stock price materially decreases, the holders of the debentures will be entitled to additional shares of our common stock upon conversion of the debentures. Further, ten convertible notes in the aggregate amount of $200,000 are also outstanding. These notes are convertible at the rate of $4.00 per share into a total of 50,000 shares of our common stock. There can be no assurances that the additional shares would not result in substantial dilution to the shares of common stock held by our other shareholders. Additionally, we have reserved 125,000 shares of common stock for issuance upon the exercise of options which may be granted under our Stock Option Plan. As of March 31, 1999, options to purchase 114,583 shares of common stock were outstanding with exercise prices ranging from $3.28 to $8.50. We have the right to redeem, for $.40 per warrant, 232,441 warrants exercisable at $5.00 per share for a period of 120 days after the effective date of the registration statement and $10.00 thereafter. Although we may choose to do so in light of our current working capital position, heavy downward pressure on our stock price would likely result as warrant holders could exercise their warrants and sell the underlying stock to avoid redemption of their warrants. To the extent that outstanding options and warrants are exercised, dilution to the percentage ownership of our stockholders will occur and any sales in the public market of the shares underlying such options and warrants may adversely affect prevailing market prices for the Shares. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely effected since the holders of outstanding options and warrants can be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than those provided in the outstanding options and warrants. We have sold restricted shares which may depress our stock price. As of the date of this Registration Statement, Widecom has 2,543,541 shares of common stock outstanding. Of the outstanding Shares, 1,066,230 Shares are "restricted securities" under the Securities Act which may only be sold pursuant to an effective registration statement under the Securities Act, or in reliance on the exemption provisions of Rule 144 or pursuant to another exemption under the Act. An additional 114,583 shares of common stock which are issuable upon exercise of certain options, will also be "restricted securities" and, absent an exception, may not be sold without being registered under the Securities Act. There can be no assurances that we will be able to sell these "restricted securities." Even if we are able to sell these "restricted securities," there can be no assurances: (1) that the sales of these shares, or even the availability of those shares for sale, will not have a material adverse effect on the market prices of our common stock prevailing from time to time or (2) of our ability to raise capital through the sale of additional equity securities. We have a significant amount of debt. On May 19, 1997, we conducted a private placement in which we sold five units of our securities. Each unit consisted of (1) one $50,000 convertible debenture with an 8% rate of interest and (2) 2,500 warrants to purchase one share of our common stock at a price of $16.00 per share. The holders of the debentures have the right, at any time commencing on the 121st day following the issuance of the debentures, to convert all of the unpaid balance into shares of our common stock. The conversion price is equal to the lower of: (1) $20.00 or (2) 80% of the average closing bid price of the common stock over the twenty trading days immediately preceding the date we receive the holder's notice to convert. On February 11, 1998, one debenture was converted into 14,742 shares of our common stock. On April 24, 1998 a second debenture was converted into 17,213 shares of our common stock. The holder has requested to convert the three remaining debentures into shares of our common stock or, in the alternative, to repay the principal amount of $50,000 for each of the three remaining debentures. These remaining debentures came due on May 19, 1998. Thus far, we have failed to comply with either request. We have not paid dividends. We have never declared a dividend on our common stock. We anticipate that all of our earnings in the foreseeable future will be retained for the development and expansion of our business. Therefore, we have no current plans to pay cash dividends. Future dividend policy will depend upon our earnings, capital requirements and financial condition as well as on the restrictions that arise from any lines of credit or other lending agreements into which we may enter. In addition, no dividends may be declared or paid until all of the principal and interest on the notes offered in our private offering of units, which commenced in February, 1999 have been paid in full. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C., a registration statement on Form SB-2 under the Securities Act of 1933, with respect to the common stock offered hereby. This prospectus does not contain all of the information in the registration statement and the exhibits and schedules. For further information about us and our common stock, please refer to the registration statement and the exhibits and schedules filed. Statements contained in this prospectus as to the contents of any contract or document filed as an exhibit to the registration statement are qualified to such exhibit as filed. We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and file reports, proxy statements and other information with the Securities and Exchange Commission. In addition to the registration statement, and the exhibits and schedules thereto, our reports, proxy statements and other information filed with the Securities and Exchange Commission may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of the Commission: New York Regional Office, 7 World Trade Center, New York, New York 10048; and Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661. Copies of such material may be obtained from the public reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Website that contains reports, proxy statements and other information regarding issuers that file electronically with the Commission. The address of that Website is: http://www.sec.gov USE OF PROCEEDS Some of the Shares being sold will be acquired from us upon the exercise of currently outstanding Public or Private Warrants. We would receive $2,384,205 in proceeds if all the Public and Private Warrants are exercised within 120 from the effective date of this registration statement and $4,546,410 in proceeds if all the Public and Private Warrants are exercised thereafter. We plan to use all proceeds generated from the exercise of warrants for working capital and general corporate purposes. We will receive none of the proceeds from the sale of the common stock. SELLING SECURITY HOLDERS We have agreed to register the resale of outstanding Shares of common stock and the Shares underlying the Public and Private Warrants under the Securities Act and to pay all expenses in connection therewith. An aggregate of 1,039,441 Shares underlying the Public and Private Warrants and currently outstanding Shares may be offered and sold pursuant to this prospectus by the Selling Shareholders. Except as set forth below, none of the Selling Shareholders has ever held any position or office with us or had any other material relationship with us. SELLING SECURITY HOLDERS AND TRANSACTIONS WITH SELLING SECURITY HOLDERS
Shares/ Warrant Shares/ Shares/ Percentage of Debentures Shares/ Warrant Shares/ Shares Beneficially Warrant Shares/ Debentures Owned After Name and Address of Owned Prior to Debentures Owned After Offering Security Holder Offering Offered Offering (1) ---------------- ------------------- --------------- --------------- ------------- Luis Barros (2) 0/6,180/0 0/6,180/0 0 * Cantella & Co.,Inc. (3) 0/2,190/0 0/2,190/0 0 * Goldstein & DiGioia, LLP (4) 13,500/0/0 13,500/0/0 0 * Timothy J. Flanagan (5) 0/13,530/0 0/13,530/0 0 * Capitol Bay Securities (6) 0/5,820/0 0/5,820/0 0 * George Scritchfield (7) 0/23,280/0 0/23,280/0 0 * Robb Peck McCooey Clearing Corp. (8) 0/5,000/0 0/5,000/0 0 * Diversified Investors Capitol Services of N.A., Inc. (9) 0/100,000/0 0/100,000/0 0 * Harris Shapiro (10) 0/50,000/0 0/50,000/0 0 * Vecchio Consulting, Inc. (11) 0/25,000/0 0/25,000/0 0 * Mitchell Feinsod (12) 12,500/0/0 12,500/0/0 0 * Jack O'Leary (13) 0/150,000/0 0/75,000/0 0/75,000/0 * - ------------------- Percentage is less than 1%. Computed for purposes herein to give effect to the exercise of all Warrants held by such Selling Security Holder and not any other Selling Security Holder. Figures are computed based upon 3,031,982 shares of Common Stock outstanding on the effective date of this Registration Statement. Shares issuable upon exercise of Warrants at an exercise price of $1.20 per share exercisable until February 19, 2004. Shares issuable upon exercise of Warrants at an exercise price of $1.20 per share exercisable until February 19, 2004. Includes 6,075 restricted shares currently held by Victor J. DiGioia, 5,075 restricted Shares currently held by Stanley R. Goldstein, 1,350 restricted shares currently held by Brian C. Daughney and 1,000 restricted shares currently held by Michael Goldstein. Shares issuable upon exercise of Warrants at an exercise price of $1.20 per share exercisable until February 19, 2004. Includes 4,620 Shares issuable upon exercise of Warrants at an exercise price of $1.20 per share exercisable until February 19, 2004 and 1,200 Shares issuable upon exercise of Warrants at an exercise price of $2.00 per share exercisable until August 27, 2004. Includes 18,480 Shares issuable upon exercise of Warrants at an exercise price of $1.20 per share exercisable until February 19, 2004 and 4,800 Shares issuable upon exercise of Warrants at an exercise price of $2.00 per share exercisable until August 27, 2004. Shares issuable upon exercise of Warrants at an exercise price of $1.20 per share exercisable until February 19, 2004. Shares issuable upon exercise of Warrants at an exercise price of $2.00 per share exercisable until July 26, 2004. Shares issuable upon exercise of Warrants at an exercise price of $3.00 per share exercisable until April 12, 2004. Shares issuable upon exercise of Warrants at an exercise price of $8.00 per share exercisable until October 1, 1999. Includes 12,500 restricted Shares. Includes 75,000 Shares, which are being included in this prospectus, issuable upon exercise of Warrants at an exercise price of $8.00 per share exercisable until October 8, 2009 unless specified events occur which would result in an adjustment of the exercise price to $2.00 per share; and includes 75,000 Shares issuable upon exercise of Warrants at an exercise price of $8.00 per share exercisable until October 8, 2009 unless specified events occur which would result in an adjustment of the exercise price to $2.00 per shares, which Shares, however, do not vest until the occurrence of events specified in the warrant agreement and are not covered by this prospectus.
SELECTED FINANCIAL DATA Statement of Earnings Data:
Year Ended March 31, --------------------------------------------- 1997 1998 1999 ---- ---- ---- Total Revenue $ 1,820,713 $ 3,053,804 $ 3,075,609 Product Sales 1,678,933 2,890,443 2,575,935 R & D Grants -- 24,567 479,821 Total Expenses 5,673,672 5,487,826 4,708,600 Earnings (loss) before extraorinary item (4,487,824) (3,335,865) (2,244,351) Net Earnings (loss) (4,487,824) (3,335,865) (2,244,351) Earnings (loss) per share before extraordinary item (3.96) (2.36) (1.28) Net Earnings (loss) per share (3.96) (2.36) (1.28) Weighted average shares outstanding 1,133,396 1,416,047 1,749,386
Balance Sheet Data:
Year Ended March 31, -------------------------------------------- 1997 1998 1999 ---- ---- ---- Working Capital $1,818,883 $1,429,046 $ 229,470 Total Assets 6,925,187 6,925,187 4,278,216 Total Liabilities 1,681,884 1,424,246 1,970,893
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Since our inception, we have generated limited revenues from operations and have not yet achieved significant profitability. Our revenues are primarily derived from product sales that are recognized for accounting purposes when products are shipped. Commercialization of our WC-series copier systems late in fiscal 1998 had only a small material impact on our revenues for the fiscal year 1999. During the year, sales of printers and scanners were $618,224 and $1,957,711, or 24% and 76%, respectively. Our selling, general and administration infrastructure was set up to service our full product line of monochrome and color scanners, monochrome and color printers and monochrome and color copiers. Neither our color printer nor color copier has yet been commercialized and the latest monochrome printers and copiers had only a small material impact on revenues. Although we anticipate a return to profitability upon the introduction of our full extended product line, there is no assurance that we will be able to successfully develop and commercialize these products. We are aware of the potential year 2000 or "Y2K" problem. We have reviewed our computer software and hardware, which are critical to the our operations and preparation of our financial statements, and have made plans for action, as required, prior to the year 2000, to avoid significant errors in our accounting records and any adverse effects on business operations. Government Sponsored Programs During 1997, a change in Canadian Tax legislation substantially reduced the amount of subsidy available on research and development performed by publicly traded companies. Subsidies of this nature have represented a substantial portion of our revenue in the past. Our research and development is conducted by Technologies NovImage, which entitles us to receive grants in excess of 40% of qualified research expenditures. Products derived from the research are then licensed back to us at a nominal royalty of 0.5% of sales of those products. The formation of NovImage allows us to obtain a substantial increase in the amount of research that can be performed. Impact of Currency Exchange Rates We conduct a substantial portion of our business in foreign currency, primarily the Canadian dollar and, to a lesser extent, the Indian rupee. To date, fluctuation in foreign currency exchange rates have not had a significant impact on our results of operations. Fluctuations in the exchange rates between the United States dollar and the Canadian dollar or Indian rupee, however, could have an adverse effect on our operating results in the future. We may seek to limit our exposure to the risk of currency fluctuations by engaging in foreign currency transactions that could, however, expose us to substantial risk of loss. We have limited experience in managing international transactions and have not yet formulated a strategy to protect us against currency fluctuations. There can be no assurance that fluctuations in foreign currency exchange rates will not have a significant impact on our future operating results. Results of Operations Various statements contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. We desire to avail ourself of certain "safe harbor" provisions of the 1995 Reform Act and therefore include this special note to enable us to do so. Forward-looking statements included in this prospectus involve known and unknown risks, uncertainties, and other factors which could cause our actual results, financial and operating performance or achievements to differ from the future results, financial or operating performance or achievements expressed or implied by those forward looking statements. These future results are based upon management's best estimates based upon current conditions and the most recent results of operations. These risks include, but are not limited to, risks associated with the our recent losses, our ability to develop and market our product line, the commercial acceptance of our products, the need for additional capital, the effects of competition and technological changes and dependence upon key personnel. Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of comprehensive income, its components and accumulate balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards are components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be initiated. Because of the recent issuance of this standard management has been unable to fully evaluate the impact, if any the standard may have on future financial statements disclosures. Results of operations and financial position, however, will be unaffected by implementation of this standard. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures about segments of an Enterprise and Related Information which supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. SFAS 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about reporting segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas an major customers. SFAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Because of the recent issuance of this standard, management has been unable to fully evaluate the impact, if any, it may have on future financial statement disclosures. Results of operations and financial position, however, will be unaffected by implementation of this standard. Year Ended March 31, 1999 Compared to Year Ended March 31, 1998 Revenues for the year ended March 31, 1999 were $3,075,609, an increase of $21,805 or 0.7%, as compared to $3,053,804 for the year ended March 31, 1998. This increase was attributable to additional research and development grants of $455,254, which were partially offset by a decrease in interest income of $118,941. Operating expenses for the year ended March 31, 1999 were $4,708,600, a decrease of $779,226, or 14.2%, as compared to $5,487,862 for the year ended March 31, 1998. Operating expenses also decreased as a percentage of revenues from 178.8% for the year ended March 31, 1998 to 153.1% for the year ended March 31, 1999. The decrease in operating expenses, both in absolute dollars and as a percentage of revenues, is primarily attributable to decreases in research and development expenditures and selling, general and administrative ("SG&A") costs. The decrease in SG&A cost was primarily due to a leveling off of expenditures and economies undertaken to effect savings as we continued expansion of our distribution channel in the United States. Year Ended March 31, 1998 Compared to Year Ended March 31, 1997 Revenues for the year ended March 31, 1998 were $3,053,804, an increase of $1,233,091, or 67.7%, as compared to $1,820,713.for the year ended March 31, 1997. This increase was attributable to an increase in product sales of $1,211,510 and additional research and development grants of $24,566, which were partially offset by a decrease in interest income of $2,986. The introduction of the SCSI based SLC836 scanner in late March 1998 overcame compatibility problems that had been experienced from January to March, 1998 with the previously proprietary computer interface and with Intel Pentium II processors. This compatibility problem with the SLC 436 series scanners delayed sales in the last quarter of our fiscal year. Operating expenses for the year ended March 31, 1998 were $5,437,962, a decrease of $235,710, or 4.1%, as compared to $5,673,672 for the year ended March 31, 1997. Operating expenses also decreased as a percentage of revenues from 311.6% for the year ended March 31, 1997 to 178.8% for the year ended March 31, 1998. The decrease in operating expenses, both in absolute dollars and as a percentage of revenues, is primarily attributable to decreases in research and development expenditures and selling, general and administrative costs. The decrease in research and development expenses was due to the formation of NovImage. The decrease in SG&A cost was primarily due to a leveling off of expenditures and economies undertaken to effect savings as we completed the establishment of our distribution channel in the United States. The costs of $309,375, incurred in connection with the settlement of a shareholders' lawsuit were costs that continued from the previous year related to the settlement of suits arising from our warrant redemption in February 1997. The increase in the equity loss in the joint venture is offset by the decrease in research and development costs of $515,397. Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998 Revenues for the quarter ended June 30, 1999 were $786,496, an increase of $58,520 or 8.0% as compared to $727,976 for the quarter ended June 30, 1998. Sales for the quarter ended June 30, 1999 were $785,398, an increase of $167,702 as compared to $617,696 for the quarter ended June 30, 1998. Sales of Widecom's SLC 936 and 1036 Series Scanners accounted for a majority of the sales increase. Operating expenses for the quarter ended June 30, 1999 were $636,522, a decrease of $272,639, or 30.0%, as compared to $909,161 for the quarter ended June 30, 1998. Selling, general and administrative expenses for the quarter ended June 30, 1999 decreased by $240,784 and decreased as a percentage of revenues from 98.2% to 60.3%. The decrease in SG&A cost was primarily due to a leveling off of expenditures and economies undertaken to effect savings as we continued expansion of our distribution channel in the United States. We also continue to incur legal, administration and other related costs associated with our warrant call and initial public offering. Our share of the loss incurred by NovImage amounted to $68,246 for the first quarter of fiscal 2000. During the first quarter of fiscal 2000, we earned $1,098 interest on short-term investments compared to $10,393 earned in the same period of 1999. Quarter Ended June 30,1998 Compared to Quarter Ended June 30,1997 Revenues for the quarter ended June 30,1998 were $727,796, a decrease of $221,800 or 23.36% as compared to $949,596 for the quarter ended June 30,1997. Sales for the quarter ended June 30,1998 were $617,696, a decrease of $267,937 as compared to $885,633 for the quarter ended June 30,1997. Operating expenses for the quarter ended June 30,1998 were $909,161, a decrease of $366,177, or 28.71 %, as compared to $1,275,338 for the quarter ended June 30,1997. Research and development expenses decreased from $87,719 for the quarter ended June 30,1997 to $0 for the quarter ended June 30,1998. Selling, general and administrative expenses for the quarter ended June 30,1998, decreased by $254,026 and decreased as a percentage of revenues from 102.0% to 98.23%. We continue to incur legal, administration, and other related costs associated with our warrant call. Our share of the loss incurred by NovImage for the quarter ended June 30,1998, amounted to $131,765 as compared to $92,220 for the quarter ended June 30,1997. Liquidity and Capital Resources Our primary cash requirements have been to fund the acquisition of inventories and to meet operating expenses incurred in connection with the commercialization of our products. Until our initial public offering, we had satisfied our working capital requirements principally through the issuance of debt and equity securities, government sponsored research and development grants and reimbursement and cash flow from operations. At March 31, 1999, we had working capital of $229,470, as compared to $1,429,046 at March 31, 1998. Our cash requirements in connection with manufacturing and marketing will continue to be significant. We do not have any material commitments for capital expenditures. We believe, based on our currently proposed plans and assumptions relating to our operations, projected cash flow from operations will be sufficient to satisfy our contemplated cash requirements for the foreseeable future. In the event that our plans or assumptions change, or prove to be incorrect, or if the projected cash flows otherwise prove to be insufficient to fund operations (due to unanticipated expenses, delays, problems or otherwise), we could be required to seek additional financing sooner than currently anticipated. There can be no assurance that this additional financing will be available to us when needed on commercially reasonable terms, or at all. During fiscal 1999, Widecom's shareholders approved the engagement of Robb Peck McCooey Clearing Corporation, Cantella & Associates and Quantum Resources, Inc., three related financial services companies, to conduct a private offering of our securities to raise funds for investment in Widecom. The securities offered consisted of units, each unit consisting of 10,000 shares of our common stock and a 12% three-year convertible note in the principal amount of $20,000. 9.5 units were sold during fiscal 1999 and the closing for an additional 0.5 units occurred after the fiscal year end. In total, 95,000 shares of common stock were issued through the offering during fiscal 1999 and an additional 5,000 shares of common stock were issued in the first quarter of fiscal 2000. All selling agents are entitled to warrants for the purchase of a total of 50,000 shares of our common stock at an exercise price of $1.20. Subsequently, we conducted an additional private placement of 325,000 shares of our common stock. Under the terms of the offering, each share was offered at $2.00 per share. This offering was fully subscribed at the closing, which took place of July 6, 1999. The selling agent in this offering received warrants for the purchase of 100,000 shares of our common stock at an exercise price of $2.00 per share. DESCRIPTION OF BUSINESS Widecom designs, assembles and markets high-speed, high-performance document systems which transmit, receive, print, copy and/or archive wide format documents, such as blueprints, schematics, newspaper layouts and other mechanical and engineering drawings. Our products include a 36" wide format scanner, a 36" wide format copier and a 36" wide format plotter/printer. We also market a Modular Digital Multi-Function Unit which incorporates a scanner module, a plotter module, optional internal modems and software to permit the unit to interface with a personal computer and combine scanning, printing, facsimile and copying functions in one unit. We design our document management systems in response to perceived market demand for systems which facilitate the efficient management and transmission of wide format documents. Our primary market is for architectural, engineering and construction applications. In addition, we also market our products for use by manufacturers in the garment, woodworking and graphic arts industries, utilities and government agencies and for applications in newspaper and advertising industries. Although our product markets are highly specialized and although we have not conducted any formal market studies as to the potential demand for wide format document systems, we firmly believe that the world-wide market for wide format document systems is emerging as a result of increasing demand for systems which can more efficiently scan, copy, print, transmit, receive and archive wide format documents. Our products provide attractive alternatives to traditional methods used to permit multiple consumers in different locations to view wide format documents. We believe our products are more time and cost-efficient than outmoded methods such as overnight couriers delivering copies of a document or microfiche reproduction. On October 2nd, 1996, Widecom formed a research and development consortium known as 3994340 Canada Inc., operating as Technologies NovImage ("NovImage"), with an economic development agency of the Province of Quebec. All of our primary research and development activities are now conducted through NovImage, which activities are expected to qualify for partial funding from governmental agencies. Products Widecom SLC936-C Color Scanner The SLC936-C is a wide format scanner capable of scanning documents up to 36" wide. Our new 24 bit scanners are available in color and monochrome models and offer SCSI interfacing with personal computers to enable the user to scan images into the personal computer for display, editing and archiving. First generation scanners were able to process monochromatic images only. The second-generation SLC436-C, introduced in May 1996, represented our first low-cost wide format color scanner capable of scanning 36" by 48" documents at a resolution of 400 dpi in under thirty seconds for monochrome images, and under eight minutes for full color images. The new SLC936-C and SLC936+ monochrome scanner were introduced in late 1998 and possess interpolated resolution capabilities of up to 900 dpi. This generation of SLC936 series scanners also provide the industry standard SCSI interface which overcomes compatibility problems with the proprietary interface of the SLC 436 series scanners associated with Intel's Pentium II(tm) processors. These products offer high speed, high quality scanning capacity to GIS, EDMS, Reprographic and graphic arts applications with high fidelity to complex originals. The SLC936 Series offer a four times faster thoroughput speed than the previous SLC436 and SLC836 models. Our scanners incorporate our "single line contact" technology to capture the image of a wide format document. The contact scanner consists of a 36" fiber optic array, 8mm "image sensor chips" aligned to create a 36" length light sensor, a 36" LED array and software designed to enhance the scanned image by removing deteriorations from the document being reproduced and interface the scanner with a personal computer. The fiber optic array acts as a lens and focuses the image on the image sensor chips which read the image. Because our image sensor chips contain pixels larger than those of chips used in other scanners manufactured by other companies, our contact scanners require less light exposure and, therefore, operate faster than other scanners. The software incorporated in the SLC936-C improves scanned images by removing background discoloration and enhancing faded images. This capability improves the image quality of documents which are stained or which have faded over time. Various enabling software packages permits our SLC936-C scanner to interface with a personal computer, as well as permit the user to perform a variety of scanning, editing, viewing and transmission functions. Traditional document scanners employ camera based lenses that are only capable of scanning documents up to 12" wide. Traditional wide format scanners employ multiple camera lenses to capture portions of a document's image and integrate the images to reproduce a wide format document. The reproduced document can be distorted by camera based scanners, particularly at the edges, and misaligned at the center as a result of the use of multiple lenses, thereby limiting the reliability and usefulness of the reproduced document. We believe that our single line contact scanner technology and software enable our products to scan and reproduce such documents with vastly improved clarity and accuracy. SLC1036 We have adopted a vertical orientation in our products to facilitate a greater spectrum of end user preferences and increase our market share. During the last fiscal year, we introduced the SLC1036; a more advanced model of our single line contact color scanner that is marketed along side our SLC936 product. Capable of direct Scan-to-File and Scan-to-Print functions, the SLC1036 has throughput of over 4 inches per second at 400 dpi resolution. At the monochrome setting, the SLC1036 is capable of scanning a 36" x 48" monochrome image in less than 12 seconds. The SLC1036 is twice as fast on scans and output and is available for a 30% premium in price over our 936 models and at less than half of the price of the next fastest competitor's scanner. The SLC1036 offers an interpolated resolution up to 1000 dpi. SLC972 We also recently announced ongoing development of our super wide format scanner, the SLC972, a color and monochrome scanner capable of handling documents up to six feet wide (72 inches)with thicknesses ranging up to 1/2". We anticipate a significant performance and overall document capacity advantage over similar priced competitor models. We are now able to address all of the tiers in the large format market including automotive, aircraft and marine design applications. The SLC972 has scanning resolutions of up to 900 dpi and is capable of direct interfacing with assorted application specific software and functions well with most thermal ink-jet printers/plotters. We expect to begin formal delivery of the SLC972 model no later than the end of this fiscal year. Plotter/Printer (WC 936P) We introduced the WC436P, a plain paper plotter late in fiscal 1998. This product was designed to print an image at a speed of 2 inches per second. This was replaced in January 1999 with the WC936P, which offered a SCSI computer interface. The WC 936P incorporates our new print heads that enable the plotter to print in increments of 400 dpi. This plotter is designed to incorporate a thermal transfer ribbon coated with a wax-like printing substance which, when heated by energy passing through the pixels on the print head, melts onto the paper to reproduce the document's image. The plotter, without the thermal transfer ribbon, would function as a traditional thermal plotter. The WC 936P is a wide format plotter capable of printing a document up to 36" wide x 325' in length. Widecom's Plotter/Printer interfaces with a personal computer to enable the user to print images directly from the personal computer. The Plotter/Printer prints wide format documents on various media including mylar, matte film and bond paper. Modular Digital Multi-Functional Unit (WC 936 C/P) The Widecom WC 936 C/P consists of a scanner module and a plotter/printer module integrated into one unit. Together, these modules perform scanning, printing and copying functions. The user of a Widecom scanner or a Widecom Plotter/Printer can upgrade either machine to the unit by purchasing and connecting the other module. The unit features high speed, high quality printing, copying and scanning at over two inches per second and with resolution at 400 dots per inch. Indirect thermal printing using thermal transfer ribbons saves time and money with increased uptime and productivity. This new unit facilitates practical entry into the digital copier environment for users with lower volume requirements. This new unit is also extremely compact in comparison to similar functioning products from other manufacturers. This Widecom Copier/Printer incorporates original and copy catch trays into its stand-alone set up and uses a single media roll. This product has Windows(tm) and AutoCad(tm) compatible applications enabling digital scanning and storage of color and monochrome images and production of multiple copies, collated sets and image size control including reduction and enlargement capabilities. OEM Components We manufacture our own scan and print heads that possess our proprietary Contact-Sensor-Array technology and we are now making them available to Original Equipment Manufacturers for use in their products. A 12" OEM scan head was custom-developed by us for a specific departmental scanner manufacturer to facilitate automated form processing. We expect to secure additional OEM agreements for other product subassemblies created from all or most of our core-level technologies. Software and Accessories We sell several software drivers for our products that may include third party software libraries. We also sell accessories for use in connection with our complete product line, including various types of paper and film for the plotter/printers and the copiers. Sales of accessories have not been material to date and are not expected to be material in the near future. Acquisition of Diprin, Inc. At our annual shareholders meeting on January 27, 1999, our independent and unrelated shareholders approved the acquisition of Diprin, Inc., an Ontario corporation wholly owned by Widecom's President and Chief Executive Officer, Mr. Raja S. Tuli. Diprin was acquired in exchange for 125,000 shares of Widecom's common stock. Diprin had been actively researching and developing portable photo-printer technology for which a patent application is currently pending. We believe that the cost of this technology is extremely low in comparison to the potential revenues to be derived from potential sales of the portable photo-printer and additional potential revenue from consumables that will be marketed along with the product. Marketing and Sales Our primary marketing strategy is to sell our products in targeted commercial markets in which wide format document systems are believed to have potential for significant applications. We believe that architectural, engineering and construction firms, for which reproduction, archiving and transmission of wide format documents are essential, is our primary market. We also market our products for use by manufacturers in the garment industry, utilities and government agencies and applications in the newspapers and advertising industries. We believe that our products are used by consumers in these markets for a variety of applications, including the transmission of construction plans, architectural drawings, newspaper and advertising layouts and clothing patterns. We have established strategic marketing relationships by engaging independent distributors and dealers to market our products in various regions throughout the United States and in foreign markets. As of March 31, 1999, we had arrangements with approximately 90 distributors, dealers and sales agents, of which roughly 3/4 are pursuant to written agreements. Generally, our distributor agreements are for a term of two to three years and grant the distributor the right to market our products within a specified territory during the term of the agreement. We sell products to distributors at discounts when compared to end user price of the products. These discounts rarely exceed 40% of the list price and rarely approach 25%. For the years ended March 31, 1997, 1998 and 1999, our five largest distributors accounted for approximately 49.9%, 43.1% and 20.3%, respectively, of our overall product sales. No single distributor represented more than 10% of our sales for our fiscal year ended March 31, 1999. During the years ended March 31, 1997, 1998 and 1999, sales by distributors accounted for approximately 96.4%, 93.9% and 94.7%, respectively, of our product sales. We support our U.S. and international distribution channels through four regional sales managers that are all presently located in the U.S and Canada. A substantial portion of our sales has been made to foreign markets, primarily to Europe, the Middle East and Asia. The following table sets forth, for the periods indicated, the amount of our sales by geographic region, expressed as a dollar amount and as a percentage of product sales for such periods: Regional Sales Breakdown
Year Ended March 31, ------------------------------------------------------------------------- 1997 1998 1999 --------------------- --------------------- ------------------- Region Amount % Amount % Amount % - ------ ------ - ------ - ------ - United States $ 467,766 27.9 $1,246,270 43.0 $1,338,704 52 Middle East 346,595 20.6 312,042 11.0 200,711 8 Asia 266,346 15.9 322,685 11.0 583,077 23 Europe 475,552 28.3 686,478 24.0 241,708 9 Canada 122,675 7.3 322,968 11.0 211,735 8 Total $1,678,933 100.0 $2,890,444 100.0 $2,575,935 100%
Warranty, Service and Maintenance We offer a 90-day limited warranty, which can be extended for a term of up to one-year. This limited warranty covers the workmanship and parts. During the term of the warranty of products sold directly by us, we will repair our products and replace parts that become defective due to normal use. During the term of the warranty of products sold by distributors, we will replace parts that become defective due to normal use. The distributor is responsible for servicing the product. We provide a warranty to distributors for a period expiring on the earlier of twelve months following the distributor's purchase of the product and three months following the distributor's sale of the product. We train our in-house service engineers and certain distributors to enable them to service and maintain our products. We also operate a toll-free telephone line during normal business hours to respond to distributors and user inquiries about the operation, service and maintenance of our products. We operate and monitor an "E-mail box" which distributors and users can access to receive such assistance. Manufacturing We subcontract certain manufacturing operations, such as the production of our proprietary printed circuit boards or machine enclosures, to outside suppliers. Off-the-shelf items, such as integrated circuits, modems, rollers, gears and LCD displays, are acquired directly from vendors. We believe that alternative sources of supply for all of our components and custom parts are readily available on commercially reasonable terms. We do not maintain supply agreements with any of our suppliers or subcontractors. We purchase components and custom parts pursuant to purchase orders in the ordinary course of business. Most of the components are acquired in the United States and shipped to our manufacturing facility in a free trade zone in India. Quality control and adjustments are also conducted at our Indian facility. While we assemble our products in-house, we will need to increase our manufacturing capabilities in the event of any increased product demand. There can be no assurance that we will succeed on commercially reasonable terms, in a timely manner, or at all. Competition The markets for document systems are characterized by intense competition. We believe our products compete on the basis of resolution, quality, speed, price and the quality of our distribution channels. We compete with numerous well-established foreign and domestic companies that market or are developing wide format document systems. Our competitors include: * Contex Corporation, Vidar Systems Inc., Oce and Anatech Corporation in the market for wide format scanners; * Calcomp Corporation, Hewlett Packard Company, Oce and Mutoh Corporation in the market for wide format plotters; and * Xerox, Katsuragawa Company and Oce in the wide format printer and copier market. We also suspect that other companies that manufacture and sell standard copiers, scanners and plotters could develop, without significant delay, wide format document systems directly competitive with our products. Many of these companies possess substantially greater financial, technical, marketing and personnel resources than Widecom. In addition, these companies also have established reputations for success in the development and marketing of facsimile machines, plotters, scanners and copiers and have sufficient budgets to permit them to implement extensive advertising and promotional campaigns to respond to competitors and enter new markets. In addition, the markets for our products are characterized by rapidly changing technology and evolving industry standards. This often results in rapid product obsolescence or shortened product lifecycles. As a result, our ability to compete may be dependent upon: (1) our ability to continually enhance and improve our products; (2) to complete development and introduction into the marketplace of our new products in a timely manner; and (3) to successfully develop and market these new products. There can be no assurance: (1) that we will be able to compete successfully; (2) that competitors will not develop technologies or products that could render our products obsolete or less marketable; or (3) that we will be able to successfully enhance our existing products or develop new products to continue to compete. Research and Development In October 1996, Widecom formed a research and development consortium named Technologies NovImage with Innovatech, an economic development agency of the Province of Quebec. We are now conducting all of our research and development activities at that facility. NovImage's activities are expected to continue to qualify for partial funding from governmental agencies. The research and development activities conducted by NovImage on our behalf are primarily focused on plotter, scanner and copier technologies. The plotter research at NovImage is concentrated in two areas: (1) developing a high speed, high quality wide format color plotter/printer and (2) improving printer resolution and developing thermal transfer mechanisms for incorporation into the plain paper plotter, including color printing capabilities. Our scanner research is presently focused on the development of color scanning capabilities and the enhancement of scanner image quality. NovImage has completed development of a color-scan chip intended to be incorporated into a future model scanner to provide color scanning capabilities at speeds of under 30 seconds compared to approximately eight minutes with earlier generation scanners. This new chip is designed to combine four image sensor chips to read the primary colors (magenta, cyan and yellow) and black. As a result, the next generation scanners are expected to be able to function both as a color scanner and as a monochrome scanner. Intellectual Property Widecom relies upon proprietary know-how and employs various methods to protect the ideas, concepts and documentation of our proprietary technology. These methods includes, but are not limited to, nondisclosure agreements with our employees and distributors. However, these methods may not afford complete protection. There can be no assurance that our competitors or customers will not be able to independently develop such know-how or otherwise obtain access to our know-how, ideas, concepts and documentation. We presently hold one patent and have filed several other patent applications relating to various aspects of our technology. There can be no assurance that any further patents will be issued to us or, if issued, that such patents would afford us any competitive advantage. In any event, there can be no assurance that future patents, if any, could not be circumvented or otherwise invalidated. In addition, some aspects of the technologies embodied in our products are generally available to other manufacturers. We are not presently aware of any infringement on the proprietary rights of others in any of our products. We have not, however, conducted any formal investigation as to any possible infringement(s). There can be no assurance that third parties will not assert infringement claims against us in connection with our products, nor that any assertion of infringement will not result in litigation. We are also unable to speculate as to our chances for success in the event of any infringement-related litigation or our potential ability to license any infringed patents of third parties on commercially reasonable terms, or at all. If our technologies were found to infringe another party's rights, we could be required to modify our products or obtain a license. There can be no assurance that we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all. Further, there can be no assurance that we would have the financial or other resources necessary to successfully defend a claim for the violation of proprietary rights. We have licensed our pending and approved patents, trademarks, copyright material and all of our technology relating to our scanner and plotter manufacturing technology and software (collectively, the "Intellectual Property") to NovImage for research and development purposes. NovImage is attempting to develop improvements, modifications, additions or alterations to that Intellectual Property and to develop new products. In exchange for this license and the payment of a 0.5% royalty fee on net revenue, licensing revenue and net sales to sub-licensees, NovImage granted us an exclusive perpetual worldwide license, except for the Province of Quebec, Canada. This license allows us to use improved scanner and plotter technology and software to manufacture, distribute, market and sell the improved scanner, plotter and software, and any new products developed by NovImage. NovImage retained these rights with respect to the Province of Quebec, Canada. We have no other restrictions on our sales and marketing activities in Quebec. We have not yet formally filed for copyright protection of our software and may not pursue such activities in the future. We hold a registered trademark with the United State Patent and Trademark Office. Employees As of March 31, 1999, our North American operations had 15 full-time employees, including sales staff and administrative personnel. We also employ 162 people at a manufacturing facility in India and work with our wholly owned Indian subsidiary. Neither Widecom nor our subsidiary is a party to any labor agreements and none of our employees are represented by a labor union. At present, we believe our employee relations to be satisfactory. Effect of Government Regulation Compliance with laws and regulations governing our business can be complicated, expensive, and time-consuming and may require significant managerial and legal supervision. Failure to comply with such laws and regulations could have a materially adverse effect on our business. Further, any changes in any of these laws and regulations could materially and adversely affect our business. There is no assurance that we will be able to secure on a timely basis, or at all, necessary regulatory approvals in the future. At present, environmental compliance issues do not have a material effect on the management and earnings of our business, nor is any change anticipated. Enforcement of Civil Liabilities Our headquarters are located in, and our officers, directors and auditors are residents of Canada. Further, a substantial portion of our assets are, or may be, located outside the United States. Accordingly, it may be difficult for investors to effect service of process within the United States upon non-resident officers and directors, or to enforce against them judgments obtained in the United States courts predicated upon the civil liability provision of the Securities Act of 1933, as amended or state securities laws. However, there is doubt as to the enforceability in Canada against us or against any of our directors, controlling persons, officers or the experts named herein, who are not residents of the United States, in original actions or in actions for enforcement of judgments of U.S. courts, of liabilities predicated solely upon U.S. federal securities laws. Service of process may be effected, however, upon our duly appointed agent for service of process. If investors have questions with regard to these issues, they should seek the advice of their individual counsel. Properties In February 1996, we purchased property in the Noida Export Processing Zone, a Free Trade Zone located near New Delhi, India. The purchase price was approximately $67,500 and we are building a manufacturing facility of approximately 24,000 square feet with estimated construction costs of approximately $500,000. Clean-room facilities and other special infrastructure within the building are estimated to cost an additional $200,000 by completion. We expect that the project should be completed in the next fiscal year. We lease (1) 3,000 square feet at 72 Devon Road, Unit #18, Brampton, Ontario, Canada, under a two-year lease entered into in 1998, and (2) 7,000 square feet in the Free Trade Zone, pursuant to a five-year lease entered into in 1994. The current annual rents are $23,357.64 and $15,200, respectively. Upon completion of construction of the Company's new manufacturing facility, we intend to transfer the majority of our manufacturing operations to the new facility. In addition, we currently lease a sales office at a monthly rent of $1,000.00 in Santa Rosa, California and a sales and service facility in Pittsburgh, Pennsylvania, at a monthly rent of $2,300.00. The current annual rental rates of these facilities are approximately $12,000.00 and $27,600.00 respectively and $39,600.00 in the aggregate. Although we believe that our present facilities are adequate for our current level of operations, we will likely need to increase our manufacturing capabilities in the event of any increased demand for our products. LEGAL PROCEEDINGS On December 20, 1996, two individuals, John Keenan and Vincent DiGiulio, filed a lawsuit in the United Stated District Court for the District of Rhode Island, seeking 60,000 shares and 40,000 warrants. This action has been formally dismissed. An additional three shareholders have also commenced related litigation, alleging purchases of our securities from the previously noted two individuals, who are named as co-defendants. We have filed and received default judgments on our cross-claims against the two individual co-defendants. The total number of shares of common stock claimed under these suits is less than 15,000. On or about February 27, 1997, plaintiff Brett Whiton commenced an action on behalf of himself and a class against the Company, Raja S. Tuli and Suneet S. Tuli in the United States District Court for the Southern District of New York. The complaint alleged improper conduct with respect to the arrangement of the redemption of certain warrants. The action was settled, along with two substantially similar class actions. In consideration of the settlement, we agreed to issue one replacement warrant for each warrant held by the class members on February 10th, 1997 and sold by the members prior to the close of business on March 5th, 1997. The number of warrants for this arrangement was 94,677 and have been replaced by the issuance of 109,466 shares of common stock pursuant to the amended settlement agreement approved in the spring quarter of fiscal 1999. Another shareholder's action commenced on or about March 10, 1997, in the Superior Court of the State of California was resolved by an initial transfer of 37,500 shares to the plaintiffs, which was ratified by our board of directors in November, 1997. A final issuance of 18,748 additional shares occurred in May, 1999. In April, 1998, we resolved an assessment proceeding with a former law firm with respect to disputed bills relating to services rendered prior to our initial public offering in December 1995. In July, 1998, we also resolved a lawsuit with a former accounting firm with respect to disputed invoices relating to services rendered prior to our initial public offering in December 1995. In March, 1999, we resolved an outstanding account with an additional former law firm with respect to disputed bills relating to services rendered in furtherance of litigation proceedings arising out of our initial public offering. We have been served with legal papers claiming breach of contract under two specific joint venture and development agreements to use and distribute various iterations of software components, which the claimant alleges is its sole property. The action claims damages for breach of contract and copyright and trademark infringement. The claim seeks a total of $15.85M in damages and is currently pending in the Superior Court of Justice of the Province of Ontario. We believe that our prospects for a successful resolution are strong and that settlement options remain viable. The action is presently scheduled for mediation in the fall of 1999. We are also involved in a number of small litigation matters relating to disagreements with certain of our suppliers, which are currently pending and being handled by our in-house counsel. These matters are neither significant nor material. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS Our directors and executive officers are as follows:
Name Age Position ---- --- -------- Raja S. Tuli 33 President, Chief Executive Officer and Director Willem J. Botha 63 Chief Financial Officer and Treasurer Suneet S. Tuli 31 Executive Vice President, Secretary and Director Lt. Colonel K.C. Sharma 58 Director Dr. Ajit Singh 58 Director Bruce D. Vallillee 78 Director
Raja S. Tuli, our founder, has been President, Chief Executive Officer and a director since Widecom's inception. From June 1990 to August 1993, Mr. Tuli was also our Treasurer. From 1987 to 1990 Mr. Tuli was President of CaCE Ltd. a family-owned architectural/construction business. Mr. Tuli received a bachelor of Science degree in Computer Engineering in 1988 from the University of Alberta. Mr. Tuli is a resident Canadian national. Mr. Tuli is the brother of Suneet S. Tuli. Willem J. Botha has been our Chief Financial Officer and Treasurer since September 1993. From 1989 to September 1993, Mr. Botha was an independent accounting consultant. From 1985 to 1989, Mr. Botha was employed by Motorola Information Systems, a manufacturer of data communications equipment, as its Director of Accounting Services. From 1982 to 1985, Mr. Botha was an independent financial consultant. Mr. Botha was the Secretary and Treasurer and a Director of Alcon Canada Inc., a pharmaceutical company, from 1980 to 1982. From 1976 to 1980, Mr. Botha was the Controller and Chief Financial Officer for Bell & Howell Limited, a manufacturer of electronic photographic products, and from 1969 to 1976 Mr. Botha was the Controller for Wyeth Ltd., a pharmaceutical company. Mr. Botha received a Certificate in Theory of Accounting from the University of South Africa, is a Chartered Accountant and a resident Canadian national. Suneet S. Tuli has been Executive Vice President of Sales and Marketing, Secretary since September 1993, one of our director's since October 1992 and was our Marketing manager from June 1990 to August 1993. Mr. Tuli received a Bachelor of Science degree in Civil Engineering from the University of Toronto in April 1990 and is a resident Canadian national. Mr. Tuli is the brother of Raja S. Tuli. Lieutenant Colonel Kailash Chander Sharma is one of our independent directors. Lieutenant Colonel Sharma is a well-respected citizen of India and possesses a Masters Degree in Political Science from Delhi University. Lt.Col. Sharma has a lengthy military background occupying several senior posts with significant levels of responsibility including strategic planning and public relations. Lt. Col. Sharma is proficient in government organizational and regulatory matters and runs his own consulting company. Dr. Ajit Singh has been a director of Widecom since October 1992. Dr. Singh is the Senior Fellow at Queens' College, University of Cambridge in England, and its Director of Studies in Economics. Since 1987, Dr. Singh has held the Dr. William M. Scholl Visiting Chair in the Department of Economics at the University of Notre Dame in the United States. Dr. Singh has been a senior economic advisor to the governments of Mexico and Tanzania, and is the author of Takeovers, Their Relevance to the Stock Market and the "Theory of the Firm." Dr. Singh is the uncle of Raja and Suneet S. Tuli. Bruce D. Vallillee has been a director of Widecom since September 1995. Since April 1994, Mr. Vallillee has been President of Vallillee Wide Format Products, Ltd., a company engaged in wide format document management and equipment sales. From 1987 to 1994, Mr. Vallillee was the President of Vallillee Electronics, Ltd., a company engaged in the distribution of electronic products. From 1976 to 1987, Mr. Vallillee was Vice President - Sales and Marketing for ITT / Canon Canada, the Canadian joint venture of ITT Corporation and Canon Electronics Corp. Mr. Vallillee is a resident Canadian national. Under Ontario law, a majority of our directors must be resident Canadians. A resident Canadian is defined, generally, to be an individual who is (1) a Canadian citizen ordinarily resident in Canada, (2) a Canadian citizen not ordinarily resident in Canada who is a member of a prescribed class of persons, or (3) a permanent resident within the meaning of the Immigration Act (Canada), and ordinarily resident in Canada. All directors hold office until the next annual meeting of shareholders and the election and qualification of their successors. There is only one currently standing committee of the Board of Directors, that being the Audit Committee chaired by our chief financial officer. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. None of our directors received any compensation for services as a director during our fiscal year ended March 31, 1999. Directors who are Widecom employees receive no compensation for serving on the Board of Directors. Non-employee directors are reimbursed for their out-of-pocket expenses in attending Board meetings and a per diem of $1,000. EXECUTIVE COMPENSATION The following table sets forth the compensation we have paid or accrued for the benefit of those persons earning over $80,000.00 USD and serving as one of our corporate officers for the year ended March 31, 1999: 1999 Summary Compensation Table
Annual Compensation --------------------------------- Salary Other Annual Name And Commissions Compensation Total - ---- --------------- ------------ ----- Raja S. Tuli $ 5,849 9,310(1) $99,289(2) (President & C.E.O.) Suneet S. Tuli $34,551 7,980(1) $94,971(3) Secretary, V.P.- Sales & Marketing) - ------------------- Amounts paid as consulting fees by Widecom to a consulting company owned by our respective officers for the year ended March 31, 1999. Mr. Raja S. Tuli received shares of Widecom common stock in lieu of cash compensation valued at $84,130. Mr. Suneet S. Tuli received shares of Widecom common stock in lieu of cash compensation valued at $52,440.
During the fiscal year ended March 31, 1997, we amended our Employee Stock Option Plan that allows issuance of options to purchase up to 125,000 shares of Widecom's stock. The Plan is designed to attract, retain and motivate persons to provide us with services and to increase the alignment of their interests with those of our Stockholders. The Plan allows the Board, at its discretion, to grant options to purchase shares of our Common Stock at the fair market value of such shares on the date the option was granted. Options may be granted to any "Eligible Person," including any of our directors, officers, employees or those of an affiliate, or any of our consultants or insiders, as defined in the Plan, of any of our affiliates. The Board also has the authority under the Plan to determine the number of shares subject to each option, the expiration date of each option and the extent to which each option is exercisable from time to time during its term. The options will expire ten years after the date they are granted, or at such other date as may be provided for in the Plan. Individual option agreements may allow an optionee who retires or terminates service with the consent of the Board of Directors to exercise his or her option within six months of such retirement or termination. If the optionee is terminated for cause, the optionee may not exercise the option following such termination. The present exercise price of those options is $8.50 USD. An aggregate of 125,000 shares of common stock, subject to adjustment, were available under the Plan and such shares subject to options which terminate unexercised will be available for future option grants. At present, options to purchase 114,583 shares of common stock have been granted. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT The following table sets forth, as of September 28, 1999, information as to (i) the common stock beneficially owned by all directors, nominees and named executive officers, (ii) the common stock beneficially owned by any person who is known by us to be the beneficial owner of more than five percent of our common stock.
Amount and Nature of Percentage of Name and Address Beneficial Outstanding of Beneficial Owner (1) Ownership (2) Shares Owned - ----------------------- ------------- ------------- Raja S. Tuli 493,377(3) 19.40% Lakhbir S. Tuli 243,915(5) 9.59 Suneet S. Tuli 207,649(4) 8.16 Dr. Ajit Singh -- -- Bruce Vallillee -- -- Willem J. Botha -- -- All executive officers and directors as a group (six persons) 944,941(2)(3)(4)(5) 37.15% - ------------------- Unless otherwise indicated, the business address of each beneficial owner is 72 Devon Road, Unit #18, Brampton, Ontario, Canada, L6T 5B4. Except as indicated by footnote, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Each beneficial owner's percentage ownership is determined by assuming that convertible securities, options or warrants that are held by him, but not those held by any other person, and which are exercisable within 60 days of the date hereof have been exercised. Includes (i) 43,750 shares of common stock issuable upon exercise of currently exercisable options at a price of $8.50 per share and 12,500 shares issuable upon exercise of currently exercisable warrant at a price of $8.50 per share, and (ii) 8,125 shares owned by Diversified Investors Capital Services of North America, Inc., a New York corporation, 16,875 shares owned by Pyrotech Limited, a Cayman Islands corporation, and 1,223 shares owned by Donald J. Schattle, respectively, as to which Mr. Tuli has voting rights pursuant to a stock exchange agreement. Includes 18,750 shares of common stock issuable upon exercise of currently exercisable options at a price of $8.50 per share and 12,500 shares issuable upon exercise of currently exercisable warrant at a price of $8.50 per share. Includes 18,750 shares of common stock issuable upon exercise of currently exercisable options at a price of $8.50 per share.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As of January 30, 1997, we announced that we had finalized a joint venture agreement with Societe Innovatech du Grand Montreal, an instrumentality of the Province of Quebec, Canada. Each of Widecom and Innovatech purchased 450 shares of the Class A Common Stock of NovImage Inc., a Quebec corporation, for a purchase price of approximately US $1,875,000 each. The consideration we paid for the stock of NovImage was in cash and was derived from our working capital. In addition, two other corporations, 3294412 Canada Inc., a Quebec corporation and 3294421 Canada Inc., a Quebec corporation, each acquired 50 shares of the Class A Common Stock of NovImage in exchange for the transfer to NovImage of certain patents, patent applications and other technology and intellectual property rights of those companies. These latter two companies are wholly-owned by Raja S.Tuli, our President and Chief Executive Officer, In connection with the transaction, we licensed all of our patents, software and technology relating to our scanner and plotter manufacturing to NovImage for research and development purposes in order to develop improvements, modifications, additions or alterations to the Intellectual Property and to develop new products. In exchange for this license and the payment of a 0.5% royalty fee on net revenue, licensing revenue and net sales to sub-licensees, NovImage granted us an exclusive perpetual worldwide license, except for the Province of Quebec, to use such improved scanner and plotter technology and software to manufacture, distribute, market and sell the improved scanner, plotter and software, and any new products developed by NovImage. NovImage retained such rights with respect to the Province of Quebec, Canada. In the fiscal year ended March 31, 1999, we made loans to NovImage totaling $196,034. In connection with the transaction, we entered into a Stock Exchange Agreement with Innovatech pursuant to which Innovatech would be permitted, under certain circumstances, to exchange its shares of NovImage for up to 63,250 shares of Widecom's common stock. The Stock Exchange Agreement also granted Innovatech demand-registration rights should it acquire shares of our common stock. This amount represents less than 5% of our outstanding shares and is accordingly omitted from the table of beneficial ownership. During fiscal 1999, Raja S. Tuli Consulting loaned us a total of $25,333 in order to relieve cash flow pressure for three specific payroll periods. We have repaid that indebtedness by way of board of directors approval of a transfer of 11,893 of our common shares. During fiscal 1999, we made loans to shareholders aggregating $29,384 and loans to affiliates totaling $64,939. During fiscal 1999, we decided, in consultation with counsel and investment market entities, to add additional technology assets to our portfolio. Specifically, we felt that we would benefit from exposure to a wider spectrum of available computer peripherals outside the wide format niche. Our management decided that it would be in our best interest to acquire a small format photo printer technology developed by a corporation owned by Raja S. Tuli. Management agreed in principle to the acquisition on September 11, 1998 which was subsequently approved by a vote of the independent shareholders on January 27, 1999. This acquisition was financed by the issuance of 125,000 shares of our common stock. In May, 1999, we accepted the surrender of 4,010 shares of common stock from one of our principals in satisfaction of indebtedness owed to us. In April, 1999, we issued a total of 61,618 shares of common stock to two consulting companies run by our affiliates in full satisfaction of indebtedness owned to those entities. In addition, in fiscal 1999, we issued 294,117 shares of common stock to three of our principals in full satisfaction of indebtedness owed to them. Although we believe that the foregoing transactions were on terms no less favorable than would have been available from unaffiliated third parties in arm's length transaction, there can be no assurance that this is the case. All future transaction and loans between us and our officers, directors and 5% shareholders will be on terms no less favorable than could be obtained from independent, third parties and will be approved by a majority of the independent and disinterested members of the Board of Directors. There can be no assurance, however, that future transactions or arrangements between us and our affiliates will be advantageous, that conflicts of interest will not arise with respect thereto or that if conflicts do arise, that they will be resolved in our favor. DESCRIPTION OF SECURITIES We are authorized to issue 5,000,000 shares of common stock, par value $.01 per share. The holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of shareholders and do not have cumulative voting rights. The common stock has no conversion rights and includes no preemptive rights or other rights to subscribe for additional securities. The holders of the common stock will be entitled to receive dividends, if any, as may be declared by the Board of Directors out of legally available funds and to share pro rata in any distribution to the shareholders, including any distribution upon liquidation of Widecom. All outstanding shares of common stock are fully paid and nonassessable. LEGAL MATTERS Certain legal matters relating to our common stock will be passed upon for us by the law firm of Goldstein & DiGioia, LLP, New York, New York. Members of the firm of Goldstein & DiGioia, LLP own Shares of our common stock registered in this prospectus. EXPERTS The financial statements and schedules included in this prospectus have been audited by Schwartz, Lewitsky, Feldman, LLP, independent certified public accountants, to the extent and for the periods indicated in their reports with respect thereto. CHANGES IN ACCOUNTANTS On June 15, 1999, our Board of Directors determined that it would be in the our best interests to cease our relationship with our independent accountant and auditors, BDO Dunwoody, LLP, which acted as our independent accountant and auditors with respect to the our financial statements for the previous two fiscal years ended March 31, 1998. The replacement of BDO Dunwoody, LLP was recommended and approved by our Board of Directors and is not the result of any disagreement with BDO Dunwoody, LLP on any matter of accounting principles or practice, financial statement disclosure or auditing scope or procedure. During the last two fiscal years no report issued by BDO Dunwoody, LLP contained any adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles. In addition, during the last two fiscal years and subsequent periods, there were no disagreements with BDO Dunwoody, LLP regarding accounting principles, or practices, financial statement disclosure, or auditing scope or procedure nor any dispute between Widecom and BDO Dunwoody, LLP with respect to the Company's status as a "going concern." Effective June 15, 1999, our Board of Directors determined that it would be in our best interests to retain the services of Schwartz, Lewitski, Feldman, LLP to replace BDO Dunwoody, LLP as our independent accountant and auditors. The firm has audited our financial statements included our Form 10-KSB for our fiscal year ended March 31, 1999 and filed with the Securities and Exchange Commission. We intend to have Schwartz, Lewitski, Feldman, LLP continue to serve as our accountant and auditors for the fiscal year ending March 31, 2000. During the last two fiscal years and subsequent periods, Widecom did not consult with Schwartz, Lewitsky, Feldman, LLP regarding accounting principles, or practices, financial statement disclosure, or auditing scope or procedure or accounting principles applicable to any specific transaction. DISCLOSURE OF COMMISSION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Indemnification may be permitted to directors, officers, employees and agents of a corporation under certain circumstances and subject to certain limitations pursuant to Part IX of the Ontario Business Corporation Act and the our By-laws. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Widecom, pursuant to the foregoing provisions, we have been informed that in the opinion of the Commission indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Except for the payment by us of expenses incurred or paid by any of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding, in the event that a claim for indemnification against liabilities is asserted by a director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter is settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by final adjudication of the issue. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock and Public Warrants are quoted on the Nasdaq SmallCap Market under the symbols "WIDE" and "WIDWF", respectively, and on the Boston Stock Exchange under the symbols "WDE" and "WDEW," respectively. The table below represents the quarterly high and low closing prices for our common stock and warrants as reported through March 31, 1999 and June 29, 1999. The prices listed in this table reflect quotations without adjustment for retail mark-ups, mark-downs, or commissions. We have not paid any cash dividends since inception, and intend to retain earnings, if any, in the foreseeable future for use in our continued expansion. The approximate number of registered holders of record of our common stock and warrants at March 31, 1999 was 65 and 14. Our advisers firmly believe that the actual number of beneficial holders of our common stock and warrants is in excess of 500.
Common Stock Warrants ---------------- ------------------ High Low High Low ---- --- ---- --- 1997 First Quarter (Jan.1-Mar.31/97) 45-1/2 13 28 1 Second Quarter (Apr.1-Jun.30/97) 18-1/2 7 7 2-1/2 Third Quarter (Jul.1-Sept.30/97) 15-1/2 7 4 1-3/4 Fourth Quarter(Oct.1-Dec.31/97) 10 3-1/2 3-3/4 1-1/2 1998 First Quarter (Jan.1-Mar.31/98) 7 2-1/2 1-1/2 1/2 Second Quarter (Apr.1-June 30/98) 4-1/2 2-1/2 1/2 1/2 Third Quarter (July 1-Sept.30/98) 2 1/2 Fourth Quarter (Oct.1-Dec.31/98) 1-7/8 15/16 1999 (1:4 Reverse Split-January 29/99) First Quarter (Jan.1-Mar.31/99) 2-3/4 1-1/4 Second Quarter (Apr.1-June 30/99) 10-1/2 1-1/4
PLAN OF DISTRIBUTION The Shares of common stock, including the Shares underlying the Public and Private Warrants, may be offered and sold from time to time by the Selling Shareholders as market conditions permit in the over-the-counter market, or otherwise, at prices and terms then prevailing or at prices related to the then-current market price, or in negotiated transactions. The Shares registered hereby may be sold by one or more of the following methods, without limitation: (1) a block trade in which a broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (2) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (3) ordinary brokerage transactions and transactions in which the broker solicits purchasers; and (4) face-to-face transactions between sellers and purchasers without a broker-dealer. In effecting sales, brokers or dealers engaged by the Selling Shareholders may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions or discounts from the Selling Shareholders in amounts to be negotiated immediately prior to the sale. These brokers and dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, in connection with such sales. FORWARD LOOKING STATEMENTS Certain statements in this Prospectus constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. We desire to avail ourselves of certain "safe harbor" provisions of the 1995 Reform Act and are therefore including this special note to enable us to do so. Forward-looking statements included in this Prospectus or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties, and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) achievements expressed or implied by those forward looking statements. These future results are based upon management's best estimates of current conditions and the most recent results of our operations. The statements appear in a number of places in this Prospectus and include statements regarding our intent, belief or current expectations, and those of our directors or officers with respect to: (i) future revenues,(ii) product development, (iii) the future of the wide format document system industry, and (iv) other matters. Our actual results could differ materially from those anticipated in the forward looking statements as a result of certain factors, including those discussed throughout this Prospectus. These risks include, but are not limited to, risks associated with recent and accumulated losses, competition, conflicts of interest, limited operating history, dependence upon one product line, and other risks detailed in this Prospectus and our Securities and Exchange Commission filings, including our Annual Report on Form 10-KSB, Form 10-QSB as well as recently filed Reports on Form 8-K, if any, each of which could adversely affect our business and the accuracy of the forward looking statements contained herein. INDEX TO FINANCIAL STATEMENTS Unaudited Financial Statements - ------------------------------ Letter of Accountants on Unaudited Financial Statements F-2 Balance Sheets F-3 Statements of Operations F-4 Statements of Cash Flow F-5 Notes to Financial Statements F-6 Audited Financial Statements - ---------------------------- Consent of Accountants on Audited Financial Statements F-7 Report of Accountants F-8 Balance Sheets F-9 Statements of Operations F-10 Statements of Stockholders' Equity F-11 Statements of Cash Flows F-12 Notes to Financial Statements F-13 Schwartz Levitsky Feldman llp Chartered Accountants Toronto, Montreal, Ottawa ADVISORY LETTER IN CONNECTION WITH THE UNAUDITED FINANCIAL STATEMENTS OF THE WIDECOM GROUP INC. FOR THE QUARTER ENDED JUNE 30, 1999 The accompanying consolidated balance sheet of The WideCom Group Inc. ("the Company") as of June 30, 1999, and the consolidated statements of operations, shareholders' equity and cash flows for the quarter ended June 30,1999 were compiled by management and were included in Form 10QSB as filed by the Company and Incorporated in the Registration Statement Form SB2. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited, reviewed or otherwise been associated with the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. Toronto, Ontario October 7, 1999 /s/ Schwartz Levitsky Feldman llp --------------------------------- Chartered Accountants 1167 Caledonia Road Toronto, Ontario M6A 2x1 Tel: 416-785-5353 Fax: 416-785-5663 THE WIDECOM GROUP INC. CONSOLIDATED BALANCE SHEET (in United States dollars)
June 30, 1999 1998 ---- ---- (unaudited) (unaudited) - ------------------------------------------------------------------------------ Assets Current assets Cash and cash equivalents $ 59,236 $ 290,282 Accounts receivable 549,272 601,255 Prepaid expenses 43,426 93,884 Advance to related parties 201,486 175,013 Inventory (Note 3) 1,162,649 1,685,576 Deferred financing costs 54,068 - ---------------------------- Total current assets 2,070,137 2,846,010 Capital assets (Note 4) 1,497,205 1,610,852 Purchased research and development technology 72,876 - Investment in affiliates 491,822 894,096 ---------------------------- Total assets $ 4,132,040 $ 5,350,958 ============================================================================== Liabilities and Shareholders' Equity Current liabilities Bank indebtedness 219,177 271,315 Accounts payable and accrued liabilities 977,592 841,800 Loan from related parties 66,748 - Convertible debentures (Note 5) 350,000 150,000 ---------------------------- Total current liabilities 1,613,517 1,263,115 ---------------------------- Shareholders' equity Common shares $ 13,871,808 $13,252,497 Contributed surplus 159,825 159,825 Deficit (10,981,968) (9,124,622) Cumulative translation adjustment (531,142) (199,857) ---------------------------- 2,518,523 4,087,843 ---------------------------- Total liabilities and shareholders' equity $ 4,132,040 $ 5,350,958 ==============================================================================
See accompanying notes to the consolidated financial statements. THE WIDECOM GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in United States dollars)
For the three months ended June 30, June 30, 1999 1998 (unaudited) (unaudited) - ---------------------------------------------------------------------------- Product sales $ 785,398 $ 617,696 Cost of product sales 171,362 163,689 ------------------------- Gross profit 614,036 454,007 Research and development grants - 99,887 Interest income 1,098 10,393 ------------------------- Net revenue 615,134 564,287 ------------------------- Expenses Selling, general and administrative 474,163 714,947 Interest and bank charges 18,126 9,417 Management fees and salaries 69,686 75,493 Amortization 74,547 88,122 Foreign exchange loss - 21,182 ------------------------- Total operating expenses 636,522 909,161 ------------------------- Operating income (loss) (21,388) (344,874) Equity in earnings (loss) of Joint Venture (68,246) (131,765) ------------------------- Earnings (loss) before extraordinary item (89,634) (476,639) Extraordinary item, net of tax - - ------------------------- Net earnings (loss) for the period $ (89,634) $ (476,639) ============================================================================ Loss per common share before extraordinary item, basic and diluted $ (0.04) $ (0.32) ============================================================================ Loss per common share, basic and diluted $ (0.04) $ (0.32) ============================================================================ Weighted average number of shares outstanding 2,130,290 1,488,795 ============================================================================
See accompanying notes to the consolidated financial statements. THE WIDECOM GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in United States dollars)
For the three months ended June 30, June 30, 1999 1998 ---- ---- (Unaudited) (Unaudited) - ------------------------------------------------------------------------------------------------ Cash provided by (used in) Operating activities Loss for the period before extraordinary item $ (89,634) $(476,639) Add (deduct) items not requiring a cash outlay Amortization 74,547 88,122 Foreign exchange loss - 21,182 Shares issued to settle lawsuits 197,150 - Equity in loss of affiliate 68,246 131,765 Net changes in non-cash working capital balances related to operations Decrease (increase) in accounts receivable 18,971 (41,731) Decrease (increase) in inventory 45,052 (311,505) Increase (decrease) in accounts payable and accrued liabilities (356,847) 194,361 (Decrease) increase in prepaid expenses 1,355 (7,961) ------------------------- (41,160) (402,406) ------------------------- Investing activities Purchase of capital assets (69,194) (5,683) ------------------------- (69,194) (5,683) ------------------------- Financing activities Increase (decrease) in bank indebtedness (52,024) 77,899 Shares issued 124,289 - Issuance of convertible debentures 15,000 - ------------------------- 87,265 77,899 ------------------------- Effect of exchange rate changes on cash (73,868) (72,361) ------------------------- Net increase (decrease) in cash during the period (96,957) (402,551) Cash and equivalents, beginning of period 156,193 692,833 ------------------------- Cash and equivalents, end of period $ 59,236 $ 290,282 ===============================================================================================
See accompanying notes to the consolidated financial statements. THE WIDECOM GROUP INC. Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Presentation of Interim Information In the opinion of Management, the accompanying unaudited financial statements include all normal adjustments necessary to present fairly the financial position at June 30, 1999, and the results of operations for the three months ended June 30, 1999 and 1998 and cash flows for the three months ended June 30, 1999. Interim results are not necessarily indicative of results for full year. The condensed consolidated financial statements and notes are presented as permitted by Form 10QSB and do not contain certain information included in Widecom's audited consolidated financial statements and notes for the fiscal year ended March 31, 1999. 2 Financial Statements The consolidated financial statements include the accounts of Widecom and its wholly owned subsidiary. All significant intercompany balances, transactions and stockholdings have been eliminated. 3. Inventories Inventories are summarized as follows: -
June June 30, 1999 30, 1998 -------- -------- Raw materials $ 684,325 $ 908,884 Work in progress 29,178 158,203 Finished goods 449,146 618,489 ------------------------- Total inventories $1,162,649 $1,685,576 =========================
4. Capital Assets Capital assets consist of:
June 30, 1999 June 30, 1998 --------------------------- --------------------------- Accumulated Accumulated Cost Amortization Cost Amortization Machinery, plant and Computer equipment $1,971,670 $1,176,002 $1,868,227 $ 888,893 Furniture and fixtures 111,076 58,551 111,076 45,939 Prototype and jigs 297,444 142,337 297,444 107,429 Land 57,830 - 57,830 - Building under construction 436,075 - 318,536 - ---------------------------------------------------------- $2,874,095 $1,376,890 $2,653,113 $1,042,261 ========================================================== Net book value $1,497,205 $1,610,852 ========== ==========
5. Convertible Debentures On May 19,1997, the Company completed a private offering of $250,000 of convertible debentures maturing on May 19, 1998. The convertible debentures bear interest of 8% per annum. In addition, 12,500* warrants were also issued in conjunction with these convertible debentures. The holder of the debentures has the right to convert at a conversion price equal to the lower of $5 or 80% of the average closing bid price of the Company's shares over the past 20 trading days. On February 11, 1998, $50,000 principal plus accrued interest was converted into 14,742* common shares. The warrants are exercisable over 3 years at an exercise price of $16 per share. The value attributable to the warrants is not material. Included in accounts payable is accrued interest on the debentures of $ 28,630. On April 24, 1998, the debenture holder converted another $50,000 principal plus interest into 17,213* of common shares. The company is currently in default for the repayment of its remaining $150,000 convertible debentures that came due on May 18, 1998. The company also conducted a private placement of ten specific investment units, each comprising 10,000 common shares and a three- year 12% convertible subordinated note in the amount of $20,000. Interest payments are payable quarterly and conversion is available at an exercise price of $1.00 per share. One-half of the principal amount of the note is exercisable during the 30-day period commencing 180 days from the initial closing on February 19, 1999. The remaining principal amount is convertible at anytime following 360 days after the initial closing. Nine and one-half units closed in our preceding quarter, however, one-half unit closed during the first quarter of fiscal 2000. Included in accounts payable is accrued interest on the debentures of $8,000. 6. Contingent Liabilities (a) Widecom has been served with an action claiming breach of contract regarding Widecom's rights under two specific joint venture and development agreements to use and distribute various iterations of software components allegedly the sole property of the claimant. The action claims damages for breach of contract along with copyright and trademark infringement as a result. The claim, as filed, seeks a total of $15.85 Million in damages and is in progress in the Superior Court of Justice in the Province of Ontario. Resolution options remain open and the action is presently scheduled for mediation in the fall of 1999. (c) In December 1996, two individuals filed a lawsuit seeking 60,000 shares and 40,000 warrants. This action has been formally dismissed. An additional three (3) shareholders have also commenced related litigation, alleging purchase of our securities from the previously noted two individuals, who are named as co-defendants. We have filed and received default judgments on our cross-claims against the two individual co- defendants. The total number of shares of common stock claimed under these suits is less than 15,000. Loss, if any, on the above claims will be recorded when settlement is probable and the amount of the settlement is estimable. Schwartz Levitsky Feldman llp Chartered Accountants Toronto, Montreal, Ottawa CONSENT OF SCHWARTZ LEVITSKY FELDMAN LLP The undersigned, Schwartz Levitsky Feldman llp, Chartered Accountants hereby consent to the use of our name and the use of our opinion dated July 5,1999 on the consolidated financial statements of The WideCom Group Inc. ("the Company") included in the General Form for Registration of Securities- Form SB2 being filed by the Company. Toronto, Ontario October 7, 1999 /s/ Schwartz Levitsky Feldman llp --------------------------------- Chartered Accountants 1167 Caledonia Road Toronto, Ontario M6A 2x1 Tel: 416-785-5353 Fax: 416-785-5663 Schartz Levitsky Feldman llp CHARTERED ACCOUNTANTS TORONTO, MONTREAL, OTTAWA AUDITORS' REPORT To the Shareholders of The WideCom Group Inc. We have audited the consolidated balance sheet of The WideCom Group Inc. as at March 31, 1999 and the consolidated statements of operations, shareholders' equity and cash flows for the year ended March 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 March 31, 1999 and the results of its operations and the changes in its cash flows for the year ended March 31, 1999 in accordance with generally accepted accounting principles in the United States. The consolidated balance sheet of The WideCom Group Inc. as at March 31, 1998 and the consolidated statements of operations, shareholders' equity and cash flows for the years ended March 31, 1998 and 1997 were audited by another firm of Chartered Accountants with an unqualified audit report issued thereon. Toronto, Ontario July 5, 1999 Chartered Accountants 1167 Caledonia Road Toronto, Ontario M6A 2X1 Tel: 416 785 5353 Fax: 416 785 5663 The WideCom Group Inc. Consolidated Balance sheets (in United States dollars)
March 31 1998 1999 - -------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 692,833 $ 156,193 Accounts receivable (Note 1) 579,060 552,901 Inventory (Note 2) 1,301,522 1,175,112 Prepaid expenses 88,947 40,926 Advances to related parties (Note 3) 180,930 225,418 Deferred financing costs - 49,813 ---------------------------- Total current assets 2,843,292 2,200,363 Capital assets (Note 4) 1,749,312 1,453,963 Purchased research and development technology (Note5) - 78,777 Investment in affiliate (Note 6) 1,058,586 545,113 ---------------------------- Total assets $ 5,651,190 $ 4,278,216 ---------------------------- Liabilities and Shareholders' Equity Current Liabilities Bank indebtedness (Note 7) $ 201,114 $ 264,022 Accounts payable and accrued liabilities (Note 8) 1,013,132 1,299,454 Loans from related parties (Note 3) - 64,939 Convertible debentures (Note 9) 200,000 342,478 ---------------------------- Total current liabilities 1,414,246 1,970,893 ---------------------------- Shareholders' equity (Note 10) Common shares 5,000,000* shares authorized of no par value 1,477,320* shares issued and outstanding on March 31,1998 2,068,400* shares issued and outstanding on March 31, 1999 12,982,715 13,577,841 Contributed surplus 159,825 159,825 Deficit (8,647,983) (10,892,334) Accumulated other comprehensive loss (Note 11) (257,613) (538,009) ---------------------------- 4,236,944 2,307,323 ---------------------------- Total liabilities and shareholders' equity $ 5,651,190 $ 4,278,216 ========================================================================== * Adjusted for reverse split of Company's stock (1:4) on January 29,1999.
See accompanying summary of significant accounting policies and notes to these Consolidated Financial Statements The WideCom Group Inc. Consolidated Statements of Operations (in United States dollars)
For the years ended March 31 1997 1998 1999 - ----------------------------------------------------------------------------------------- Revenue Product sales $ 1,678,933 $ 2,890,443 $ 2,575,935 Research and development grants - 24,567 479,821 Interest income 141,780 138,794 19,853 ----------------------------------------- Total revenue 1,820,713 3,053,804 3,075,609 ----------------------------------------- Expenses Cost of product sales 459,026 809,935 726,909 Research and development 614,663 99,266 134,248 Selling, general and administrative 3,733,016 3,604,538 3,112,056 Interest and bank charges 42,399 49,431 51,504 Management fees and salaries 321,209 398,804 333,743 Amortization 503,359 489,733 362,108 Foreign exchange loss (gain) - 36,119 (11,968) ----------------------------------------- Total expenses 5,673,672 5,487,826 4,708,600 ----------------------------------------- Operating loss (3,852,959) (2,434,022) (1,632,991) Legal settlement costs (Note 15(b)) - (309,375) (158,741) Equity in loss of affiliate (121,971) (592,468) (452,619) Writedown of goodwill (576,000) - - ----------------------------------------- Loss before income taxes (4,550,930) (3,335,865) (2,244,351) Provision for (recovery of) income taxes (Note 12) Deferred (63,106) - - ----------------------------------------- Net loss for the year $(4,487,824) $(3,335,865) $(2,244,351) ========================================= Loss per common share, basic and diluted (Note 10(f)) (3.96) (2.36) (1.28) ========================================= Weighted average number of shares outstanding * 1,133,396 1,416,047 1,749,386 ========================================================================================== * Adjusted for reverse split of company's stock (1:4) on January 29,1999.
See accompanying summary of significant accounting policies and notes to these Consolidated Financial Statements The WideCom Group Inc. Consolidated Statements of Shareholders' Equity (in United States dollars) For the years ended March 31, 1997, 1998, 1999
Retained Other Total Common Contributed Earning Comprehensive Shareholders' Shares Surplus (Deficit) Loss Equity - --------------------------------------------------------------------------------------------------------------------- Balance, March 31,1997 10,598,884 159,825 (5,312,118) (203,288) 5,243,303 Exercise of warrants (180,981)* 2,170,179 - - - 2,170,179 Warrant exercise costs (120,470) - - - (120,470) Class action settlement (69,625)* 355,158 - - - 355,158 Conversion of convertible debentures (14,742)* 50,000 - - - 50,000 Share issuance costs (71,036) - - - (71,036) Net loss for year - - (3,335,865) - (3,335,865) Foreign currency translation adjustment - - - (54,325) (54,325) -------------------------------------------------------------------------- Balance, March 31,1998 $12,982,715 $159,825 $(8,647,983) $(257,613) $ 4,236,944 Warrant exercise costs reversal 97,907 - - - 97,907 Shares issued for corporate indebtedness (294,117) 200,000 - - - 200,000 Shares issued for investment in wholly owned subsidiary (125,000)* 93,750 - - - 93,750 Class action settlement (59,751)* 83,457 - - - 83,457 Conversion of convertible debentures (17,213)* 50,000 - - - 50,000 Conversion of convertible debentures (95,000) 95,000 - - - 95,000 Share issuance costs (24,988) - - - (24,988) Net loss for year - - (2,244,351) - (2,244,351) Foreign currency translation adjustment - - - (280,396) (280,396) -------------------------------------------------------------------------- Balance, March 31,1999 $13,577,841 $159,825 $(10,892,334) $(538,009) $ 2,307,323 =================================================================================================================== * Adjusted for reverse slit of Company's Stock (1:4) on January 29,1999.
See accompanying summary of significant accounting policies and notes to these Consolidated Financial Statements The WideCom Group Inc. Consolidated Statements of Cash Flows (in United States dollars)
For the years ended March 31 1997 1998 1999 - --------------------------------------------------------------------------------------------------- Cash provided by (used in) Operating activities Loss for the year $(4,487,824) $(3,335,865) $(2,244,351) Add (deduct) item not requiring a cash outlay Amortization 503,359 489,733 362,108 Foreign exchange loss (gain) - 36,119 (11,968) Deferred income taxes recovery (63,106) - - Shares issued to settle lawsuits - 355,158 158,741 Writedown of goodwill 576,000 - - Equity in loss of affiliate 121,971 592,468 452,619 Net changes in non-cash working capital balances related to operations Decrease (increase) in accounts receivable (333,048) 160,122 7,988 Decrease in research and development grants receivable - 687,307 - Decrease (increase) in inventory (764,646) (133,663) 49,882 Increase (decrease) in accounts payable and accrued liabilities 982,544 (308,983) 551,213 (Decrease) increase in prepaid expenses (31,453) 8,969 (42,920) ------------------------------------------- (3,496,203) (1,448,635) (716,688) ------------------------------------------- Investing activities Purchase of capital assets (1,108,068) (540,022) (153,395) Advances to related parties (32,033) (67,523) (55,330) Purchases of shares in wholly-owned subsidiary - - (93,750) Purchase of equity in joint venture (1,805,836) - - ------------------------------------------- (2,945,937) (607,545) (302,475) ------------------------------------------- Financing activities Increase (decrease) in bank indebtedness 203,456 (121,954) 75,005 Shares and warrants issued 1,298,090 1,978,673 200,000 Loans from related parties - - 64,939 Issuance of convertible debentures - 250,000 285,000 ------------------------------------------- 1,501,546 2,106,719 624,944 ------------------------------------------- Effect of exchange rate change on cash (71,411) 10,808 (142,421) ------------------------------------------- Net increase (decrease) in cash during the year (5,012,005) 61,347 (536,640) Cash and equivalents, beginning of year 5,643,491 631,486 692,833 ------------------------------------------- Cash and equivalents, end of year $ 631,486 $ 692,833 $ 156,193 ===================================================================================================
Note: See note 16 for supplementary information See accompanying summary of significant accounting policies and notes to these Consolidated Financial Statements The WideCom Group Inc. Summary of Significant Accounting Policies (in United States dollars) March 31, 1998, and 1999 - -------------------------------------------------------------------------- Nature of Business The WideCom Group Inc. ("the Company") was incorporated under the laws of Ontario on June 15, 1990. The Company designs, assembles and sells high speed, high performance document systems which transmit, receive, print, copy and/or archive wide format documents. Basis of Financial The accompanying consolidated financial statements Statements are stated in United States dollars, "the reporting currency". The transactions of the Company have been recorded during the year in Canadian dollars, "the functional currency". The translation of Canadian dollars into United States dollars amounts have been made at the year end exchange rates for balance sheet items and the average exchange rate for the year for revenues, expenses, gains an losses. Translation adjustments to reporting currency are included in equity as "accumulated other comprehensive loss". (See Note 11). The consolidated financial statements reflect retroactively a backsplit occurring during 1999 (See Note 10). These consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in the United States. Principles of These consolidated financial statements include the Consolidation accounts of the Company and its wholly-owned subsidiaries Indo WideCom International Ltd and Diprin Inc. All significant inter-company transactions and accounts have been eliminated. Investment in The investment in affiliate is accounted for on the Affiliate equity basis. Accounting Estimates The preparation of consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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 those estimated. Inventory Inventory is valued at the lower of cost, determined on a first-in, first-out basis, and market value. Market value for raw materials is defined as replacement and for finished goods as net realizable value. Long-lived Assets Management reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and, if deemed impaired, measurement and recording of an impairment loss is based on the fair value of the asset. Capital Assets Capital assets are recorded at cost. Amortization is provided annually at rates calculated to amortize the assets over their estimated useful lives as follows: Machinery, plant and computer equipment - 30% declining balance Furniture and fixtures - 20% declining balance Prototype and jigs - 20% declining balance Earning or Loss The Company has adopted SFAS No. 128, Per Share "Earnings Per Share" which requires that the consolidated financial statements reflect "basic" and "diluted" earning (loss) per share. Basic earning (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options and warrants for each period. Stock Based SFAS No. 123, "Accounting for Stock-Based Compensation Compensation" encourages, but does not require, companies to record compensation costs for stock- based employee compensation plans at fair value. The Company chose to continue to account for stock- based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25. "Accounting for Stock Issued to Employees", and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the measurement date over the amount an employee must pay to acquire the stock. See Note 10 (d) for a summary of the pro forma net loss per share determined as if the Company had applied SFAS No. 123. Cash and Equivalents Cash and cash equivalents include all highly liquid investments with original maturities of three months or less. Revenue Recognition Product sales are recognized as revenue upon shipment of the product. Advance sales revenue is deferred until shipment of the product Foreign Currency Balances of the Company denominated in foreign Translation currencies and the accounts of its foreign subsidiary are translated into the functional currency as follow: (i) monetary assets and liabilities at year end rates; (ii) all other assets and liabilities at historical rates; (iii) revenue and expense transactions at the average rate of exchange prevailing during the year; and (iv) changes in cash flow at the average rate of exchange prevailing during the year. Exchange gains or losses arising on these translations are reflected in income in the year. Income Taxes The Company accounts for income taxes under the asset and liability method as required by SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted tax rates applicable to future year to differences between the financial statements carrying amounts and the tax bases of existing assets and liabilities. When tax credits are available, they are recognized as reductions of current year's tax expense. Concentrations of The Company's receivables are unsecured and are Credit Risk and generally due in 30 days. Currently the Company's Business customers are primarily local, national and Concentration international users of wide format document management systems. The company's receivables do not represent significant concentrations of credit risk as at March 31 1999 due to the wide variety of customers, markets and geographic areas to which the Company's products are sold. Fair Value of The carrying amounts of financial instruments of the Financial Instruments Company, including cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable, and convertible debentures approximate fair value because of their short maturity. The fair value of advances to and loans from related parties cannot be readily determined because of the nature of their terms. The WideCom Group Inc. Notes to Consolidated Financial Statements (in United States dollars) March 31, 1998, and 1999 - -------------------------------------------------------------------------- 1. Accounts Receivable Accounts receivable consist of:
1998 1999 ---------------------- Trade Receivable $612,946 $637,097 Less: Allowance for doubtful accounts 33,886 84,196 ---------------------- $579,060 $552,901 ======================
- -------------------------------------------------------------------------- 2. Inventory Inventory consists of:
1998 1999 -------------------------- Raw Materials $ 967,723 $ 689,155 Work-in-progress 56,644 13,587 Finished goods 277,155 472,370 -------------------------- $1,301,522 $1,175,112 ==========================
- -------------------------------------------------------------------------- 3. Advances to/loans from related parties (a) Advances to related parties are non-interest bearing and are expected to be repaid in the next fiscal year as follows:
1998 1999 ---------------------- 3294340 Canada Inc. (i) $149,696 $196,034 Shareholders 31,234 29,384 ---------------------- $180,930 $225,418 ======================
i) 3294340 Canada Inc. Advances were made to a company as referred to in Note 6 to facilitate research and development activities. There is no fixed term of repayment and the balance is due on demand. (b) During the year, the following non-interest bearing advances were made to the company as short-term loans in order to assist in certain working capital requirements: Director and officer $29,655 Shareholder owning more than 5% of the outstanding shares 35,284 ------- $64,939 =======
(c) Transactions with companies controlled by, and fees paid to, executive officers, the principal shareholders and directors during the year were as follows:
1998 1999 ------------------------ Sales $ 127,043 $ 8,790 Management fees and salaries (398,804) (333,743)
The management fees are paid on a month to month basis to executives who comprise senior management of the Company (See also Note 13((c)). - -------------------------------------------------------------------------- 4. Capital Assets Capital assets consist of:
1998 1999 ----------------------- ------------------------ Accumulated Accumulated Cost Amortization Cost Amortization --------------------------------------------------- Machinery, plant and computer equipment $1,941,521 $ 842,076 $1,913,903 $1,088,694 Furniture and fixtures 114,832 44,061 108,065 54,411 Prototype and jigs 307,500 101,569 289,380 131,563 Land 59,785 - 56,262 - Building under construction 313,380 - 361,021 - ---------------------------------------------------- $2,737,018 $ 987,706 $2,728,631 $1,274,668 ---------------------------------------------------- Net book value $1,749,312 $1,453,963 ----------------------------------------------------
- -------------------------------------------------------------------------- 5. Purchased research and development technology During the year, the company acquired the rights to a photo-printer technology, which is in the process of being developed by its President and Chief Executive Officer. A patent application is currently pending. The development of this technology will continue through a wholly- owned subsidiary; Diprin Inc. ("Diprin") that was previously owned by the President and Chief Executive Officer. In consideration for the ownership of this technology, the company issued 125,000* common shares to its President and Chief Executive Officer [See note 10(b)(vii)]. The design of the portable photo-printer is in the latest stages of completion and management estimates that prototyping will commence in the fiscal year ending March 31, 2000. The cost of the technology is being amortized on a straight-line basis over 3 years from September 30,1998. As at March 31, 1999, the unamortized balance amounted to $78,777. - -------------------------------------------------------------------------- 6. Investment in Affiliate
1998 1999 ------------------------ 3294340 Canada Inc $1,058,586 $545,113 ------------------------
In October 1996, the Company entered into a joint venture agreement which resulted in the purchase of a 45% stake in 3294340 Canada Inc., a Quebec based company, for approximately $1,875,000. The investee carries on research and development activities in order to develop improvements, modifications, additions or alteration to the intellectual property and to develop new products. In connection with the transaction, the Company also entered into a Stock Exchange Agreement with Societe Innovatech du Grand Montreal, an economic development agency of the government of the Province of Quebec, pursuant to which Societe Innovatech du Grand Montreal would be permitted, under certain circumstances, to exchange its 45% interest for up to 63,250* common shares of the Company. The Company has a commitment to pay a royalty fee based on net revenue ((See also note 13(b)). The assets, liabilities, revenue and expenses of 3294340 Canada Inc. for the years ended 1998, 1999, are as follows:
1998 1999 ---------------------------- Current assets $ 2,012,857 $ 1,014,554 Capital and other assets 650,534 549,339 ---------------------------- 2,663,391 1,563,893 Current Liabilities 310,977 370,954 ---------------------------- Net assets $ 2,352,414 $ 1,192,939 ---------------------------- Revenue Miscellaneous income $ 139,171 $ 66,287 Research and development 545,613 669,857 ---------------------------- 684,784 736,144 Expenses 2,001,420 1,741,963 ---------------------------- Net loss for the year $(1,316,636) $(1,005,819) ---------------------------- * Adjusted for reverse split of Company stock (1:4) on January 29,1999.
- -------------------------------------------------------------------------- 7. Bank Indebtedness During 1998 the Company renewed an operating line of credit available for approximately $250,000 which bears interest at prime plus 0.75%, is due on demand, and is secured by a general security agreement over all company assets except real property. At March 31, 1999, approximately $249,000 (1998-$112,000) was utilized. The Company's 1999 and 1998 bank indebtedness is the result of a bank overdraft in the Company's subsidiary as well as a revolving operating loan in the Company. The indebtedness of the subsidiary is secured by a pledge of fixed deposits with the local bank. - -------------------------------------------------------------------------- 8. Accounts Payable and accrued liabilities Accounts payable and accrued liabilities consist of:
1998 1999 ------------------------- Trade accounts payable $ 300,268 $ 546,586 Wages and employee deduction payable 73,338 191,382 Accrued liabilities 423,418 371,921 Accrued litigation costs (Note 10(b)) 121,871 189,565 Accrued warrant exercise costs 94,237 - ------------------------- $1,013,132 $1,299,454 -------------------------
- -------------------------------------------------------------------------- 9. Convertible Debentures On May 19,1997, the Company completed a private offering of $250,000 of convertible debentures maturing on May 19, 1998. The convertible debentures bear interest of 8% per annum. In addition, 12,500* warrants were also issued in conjunction with these convertible debentures. The holder of the debentures has the right to convert at a conversion price equal to the lower of $5 or 80% of the average closing bid price of the Company's shares over the past 20 trading days. On February 11, 1998, $50,000 principal plus accrued interest was converted into 14,742* common shares. The warrants are exercisable over 3 years at an exercise price of $16 per share. The value attributable to the warrants is not material. Included in accounts payable is accrued interest on the debentures of $25,658. On April 24, 1998, the debenture holder converted another $50,000 principal plus interest into 17,213* of common shares. The company is currently in default for the repayment of its remaining $150,000 convertible debentures that came due on May 18, 1998. The company also conducted a private placement of ten specific investment units, each comprising 10,000 common shares (see Note 10(b)(x)) and a three-year 12% convertible subordinated note in the amount of $20,000. Interest payments are payable quarterly and conversion is available at an exercise price of $1.00 per share. One- half of the principal amount of the note is exercisable during the 30 day period commencing 180 days from the initial closing on February 19, 1999. The remaining principal amount is convertible at anytime following 360 days after the initial closing. - -------------------------------------------------------------------------- 10. Share Capital (a) Authorized 5,000,000 common shares pursuant to shareholder approval of a 1:4 reverse split of the common shares of the Company effective January 29, 1999. Of the 2,068,400* shares outstanding as of March 31, 1999, 128,463* shares have not been registered by the Company's stock transfer agent. (b) Changes to Issued Share Capital (i) During 1998, 180,981* warrants were exercised in exchange for 180,981* common shares. The proceeds of this issue, net of related expenses of $120,470, was $2,049,709. This amount includes warrants exercised under the Company's warrant call. * Adjusted for reverse split of Company's common stock (1:4) on January 29, 1999. (ii) During 1998, 69,625* shares were issued for the full settlement and legal costs of a class action lawsuit filed in the State of New York and a partial settlement of another class action lawsuit filed in the State of California. Both lawsuits were in connection with potential losses that would be suffered on the warrant call. The Company is required to issue an additional 18,750* shares in connection with the State of California suit and accordingly the Company has accrued approximately $122,000 for the cost of these shares representing the fair value of the shares on February 2, 1998. The Company has also agreed to issue 96,927* replacement warrants for each warrant held by warrant holders on February 10, 1997 and sold by such holders prior to March 5, 1997. (iii) During 1998, $50,000 of convertible debentures (see Note 9) were converted into 14,742* common shares. The debentures were converted based on a conversion price of $0.8479 that represents the average of the closing bid share price of 20 days prior to the conversion. The Company also incurred $10,000 of issuance cost relating to the conversion of the debentures. (iv) In April, 1998, an additional $50,000 of convertible debentures (see Note 9) were converted into 17,213* common shares. The debentures were converted based on a conversion price of $0.7262 that represents the average of the closing bid share price for the twenty days preceding the conversion. The Company incurred $15,000 in further issuance costs related to this conversion of the debenture. (v) In fall 1998, the Company issued an aggregate of 294,117* common shares (73,529, 110,294* and 110,294*) to three principals of the Company in full satisfaction of corporate indebtedness to those parties as approved by the Board of Directors. (vi) Effective January 29, 1999, the Company's shareholders approved a 1: 4 reverse stock split resulting in 1,788,649* common shares outstanding as of that date. (vii) During the fourth quarter of fiscal, 1999, the Company's shareholders also approved the acquisition of Diprin Inc., a corporate entity wholly owned by a principal of the Company in exchange for the issuance of 125,000* common shares. (see Note 5) (viii) During the fourth quarter of fiscal 1999, the Company and its legal counsel approved an amendment to a legal resolution (see note (ii) above). The amendment converted the warrant entitlements under the settlement into common shares that were subject to the 1:4 reverse stock split. An aggregate of 109,466* common shares were issued pursuant to two separate issuances effected pursuant to Company instructions dated February 17, 1999 and May 21, 1999 (54,751* and 54,715* respectively). (ix) During the fourth quarter of fiscal 1999, the Company and its legal counsel approved a legal resolution of a lawsuit in the state of Rhode Island between the Company and three individual litigants. The resolution approved by the Board of Directors of the Corporation comprised a transfer of 5,000* of the Company's common shares. (x) During fiscal 1999, the Company engaged the services of Robb Peck McGooey Clearing Corporation, Cantella & Associates and Quantum Resources Inc., three related financial services companies to conduct a private offering to raise funds for investment in the Company. The units in the offering granted 10,000 shares to each purchaser. In total, ten units were sold with 1/20.5 unit closing after the Company's year end. 95,000* shares were issued pursuant to the placement between February, 1999 and year-end on March 31, 1999. The remaining 5,000* shares were issued in the first quarter of fiscal 2000. The three companies are also entitled to a grant of 50,000* warrants to purchase 50,000 common shares at an exercise price of $1.20. (xi) On March 15, 1999, the Company approved a transfer of 8,000* shares by a principal of the corporation to satisfy an outstanding account with a professional service provider. The Company has yet to finalize the terms of repayment, if any, with respect to this equity transfer. (xii) In April, 1999, the Company issued an aggregate of 61,618* common shares (40,810* and 20,808*) to two consulting companies independently run by an individual principal of the Company in full satisfaction of corporate indebtedness to those parties as approved by the Board of Directors. (xiii) In May, 1999, the Company approved a surrender of 4,010* shares from a principal of the Company in full satisfaction of an indebtedness to the company pursuant to an indemnification agreement as approved by the Board of Directors. (xiv) On May 26, 1999, the Company and its legal counsel, with the approval of the Board of Directors, issued an additional aggregate of 19,748* common shares as the final stage of a settlement agreement with the Company ((see note 10(b)(ii) above)). (c) Warrants As at March 31, 1999, the Company had 556,911* issued and outstanding warrants. The warrants are exercisable at prices ranging from $1.20 to $34.00 with expiry dates between 1999 and 2009. (d) Employee Stock Option Plan The Company has elected to follow Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its employee stock options. Under APB 25, compensation expense is not recognized if the exercise price equals or exceeds the market price on the date of grant. The exercise price of the Company's employees stock option equals the market price of the underlying stock on the date of grant, therefore no compensation expense is recognized. In July 1996, the board of directors approved an employee stock option plan covering options to purchase 75,000* common shares that was increased in January 1997 to 125,000*. As of March 31, 1998, 115,625* employee stock options granted to management and employees were outstanding with an exercise price of $8.50. Only 16,683 of these options remain unvested but will vest before the fourth quarter of fiscal 2000. These options expire 10 years after the grant date. In fiscal 1999, 8,625* employee stock options were granted with exercise prices ranging from $3.28 to $4.00. Pro forma information regarding net income and earning per share is required by SFAS No. 123, and has been determined as if the company had accounted for its employee stock options under the fair value method of that statement. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of approximately 5.5%; dividend yield of 0.0%; volatility factors of the expected market price of the Company's common stock of approximately 122% (1998 - 200%) and weighted-average expected life of the option of 8.5 years. The Company's pro forma information follows:
Year Ended Year Ended Year Ended March 31, March 31, March 31, 1997 1998 1999 ------------------------------------------ Net loss As reported $(4,487,824) $(3,335,865) $(2,244,351) Pro forma (5,177,824) (3,840,790) (2,350,607) Net loss per share As reported (3.96) (2.36) (1.28) Pro forma (4.56) (2.72) (1.34)
(e) The activity of the Company's stock option plan is as follows:
Options Outstanding Options Exercisable ---------------------------- ---------------------------- Weighted Weighted Average Price Options Average Price Options Per Share Outstanding Per Share Exercisable ------------------------------------------------------------ Balance, March 31,1997 $24.64 75,000 24.64 75,000 Granted 8.50 115,625 Cancelled 34.00 (25,000) Cancelled 20.00 (50,000) ------- Balance, March 31, 1998 8.50 115,625 8.50 98,942 Granted 4.00 7,500 Granted 3.28 1,125 Cancelled 8.50 (9,667) ------- Balance, March 31, 1999 8.15 114,583 8.15 104,958
(f) At March 31, 1999, there were 10,417 options available for future grants. As at March 31, 1999, the options have a weighted average contractual life of 8.5 years. The weighted average number of common shares used in calculating earnings per common share (after retroactive application of the back split in 1999) is as follows:
1997 1998 1999 ----------------------------------- Shares outstanding at year-end 1,212,105 1,477,320 2,068,400 ----------------------------------- Weighted average shares outstanding 1,133,396 1,416,047 1,749,386 ----------------------------------- * Adjusted for reverse split of Company's common stock (1:4) on January 29, 1999.
- -------------------------------------------------------------------------- 11. Accumulated other comprehensive loss The Company has adopted SFAS No.130 "Reporting comprehensive income" which requires new standards for reporting and display of comprehensive income and its components in the consolidated financial statements. However it does not affect net income or total shareholders' equity. The components of comprehensive loss are as follows:
1997 1998 1999 ----------------------------------------------- Net loss $(4,487,824) $(3,335,865) $(2,244,351) Other comprehensive income loss Foreign currency translation adjustments (195,569) (54,325) (280,396) ----------------------------------------------- Comprehensive loss $(4,683,393) $(3,390,190) $(2,524,747) -----------------------------------------------
The components of accumulated other comprehensive loss are as follows: Accumulated other comprehensive loss, March 31, 1996 $ (7,719) Foreign currency translation adjustment for the year ended March 31, 1997 (195,569) --------- Accumulated other comprehensive loss, March 31, 1997 (203,288) Foreign currency translation adjustment for the year ended March 31, 1998 (54,325) --------- Accumulated other comprehensive loss, March 31, 1998 (257,613) Foreign currency translation adjustment for the year ended March 31, 1999 (280,396) --------- Accumulated other comprehensive loss, March 31, 1999 $(538,009) =========
- -------------------------------------------------------------------------- 12. Income Taxes a) The components of the provision for income taxes on earning before income taxes are as follows:
1997 1998 1999 ------------------------------- Deferred recovery $(63,106) $ - $ - ===============================
b) The reconciliation of income taxes calculated at the statutory rate of 44.6% to the total tax provision is as follows:
1997 1998 1999 ----------------------------------------------- Income taxes recovery $(2,030,000) $(1,488,000) $(1,001,000) Items not subject to income tax 210,000 309,000 406,000 Permanent difference resulting from the Ontario research and development incentive deduction (21,000) - - Adjustment to valuation adjustment 1,777,800 1,179,000 595,000 ----------------------------------------------- $ (63,200) $ - $ - ===============================================
Income tax provision and recovery is related solely to domestic operations. Foreign operations are not subject to taxes (see Note 14). (c) Deferred Taxes Deferred tax assets have been recorded at current rates as follows:
1997 1998 1999 --------------------------------------------- Assets: Financing costs $ 44,000 $ 28,000 $ 44,000 Balance of pool of Scientific Research & Development available to reduce taxable income for future years 615,000 582,000 582,000 Tax losses available to reduce taxable income of future years 1,364,000 2,440,000 2,989,000 Share issue costs 686,000 743,000 743,000 Excess of amortization on capital assets for accounting purposes over amortization recorded for tax purposes 197,000 259,000 289,000 --------------------------------------------- 2,906,000 4,052,000 4,647,000 --------------------------------------------- Less Deferred tax asset valuation allowance (2,906,000) (4,052,000) (4,647,000) --------------------------------------------- $ - $ - $ - =============================================
The Company has net operating loss carryforwards to reduce federal taxable income of approximately $7,565,000 which expire from 2004 to 2006. The Company has net operating loss carryforwards available to reduce Ontario taxable income of approximately $8,912,000 which expire during the years 2000 through 2006. The Company has share issue costs amounting to $2,800,000, which gives rise to a tax benefit of $743,000 ($743,000 - 1998). A portion of these costs are included in the net operating losses carryforwards disclosed above. When realized, the benefit will be recorded as a capital transaction. 13. Commitments (a) The Company leases premises, office equipment and motor vehicles under operating leases expiring in 2003. The approximate annual rental commitments during the lease terms are as follows: Year ended March 31 2000 106,000 Year ended March 31, 2001 51,000 Year ended March 31, 2002 16,000 Year ended March 31 2003 1,000 Approximate rental expense incurred under operating leases is as follows: Year ended March 31 1997 176,000 Year ended March 31, 1998 169,000 Year ended March 31, 1999 177,243 (b) The Company is committed to its affiliate, 3294340 Canada Inc., to pay a 0.5% royalty fee on net revenue, licensing revenue and net sales to sub-licensees on scanner and plotter technology created by the affiliate on behalf of the Company (See also Note 6). (c) The company has entered into employment contracts with two members of management for a total of up to $190,000 in base salary per annum plus up to 50% bonus of base salary provided certain performance objectives are met. Amounts paid in 1999 were approximately $194,000 ($239,000 in 1998). - -------------------------------------------------------------------------- 14. Segmented Information The Company has adopted SFAS No. 131 " Disclosures about segments of a enterprise" which establishes standards for reporting operating segments in annual consolidated financial statements. Description of type of product The Company operates through one segment, which is, wide format document management systems, comprising two major products - wide format scanners and plotters. Measurement of Segment profit and loss As the products (noted above) are regarded as one segment the statements of operations and balance sheets are deemed by management to be wholly attributable to that segment. (a) The Company operated in Canada and India in one industry segment. The Company's operations and identifiable assets by geographic region are as follows:
Canada India Intercompany Total --------------------------------------------------------------- For the year ended March 31,1997 Revenue $ 1,329,446 $ 1,357,171 $ (865,904) $ 1,820,713 Net loss (4,364,854) (628,877) 505,907 (4,487,824) Identifiable assets 6,719,782 2,872,586 (2,667,181) 6,925,187 For the year ended March 31, 1998 Revenue $ 2,913,259 $ 1,556,141 $(1,415,596) $ 3,053,804 Net loss (3,321,531) (244,027) 229,693 (3,335,865) Identifiable assets 6,677,495 2,442,435 (3,468,740) 5,651,190 For the year ended March 31, 1999 Revenue $ 2,726,807 $ 1,694,131 $(1,345,329) $ 3,075,609 Net loss (2,357,707) (111,715) 225,071 (2,244,351) Identifiable assets 4,547,514 2,066,306 (2,335,604) 4,278,216
(b) The breakdown of product sales by geographic area is as follows:
1997 1998 1999 ------------------------------------------ Canada $ 122,676 $ 322,968 $ 211,735 United States 467,766 1,246,270 1,338,704 Middle East 346,595 312,042 200,711 Asia 266,345 322,685 583,077 Europe 475,551 686,478 241,708 ------------------------------------------ $1,678,933 $2,890,443 $2,575,935 ==========================================
(c) In the years ended March 31, 1999, 1998 and 1997 no end user accounted for more than 5% of the Company's product sales. In 1999, approximately 20.3% of the company's product sales were made through five distributors, with the largest representing approximately 8 %. For the year ended March 31, 1998, approximately 43% of the Company's product sales were made through five distributors, with the largest representing approximately 23.7%. For the year ended March 31, 1997, sales to one major distributor amounted to approximately 27.5% of total product sales. - -------------------------------------------------------------------------- 15. Contingent Liabilities (a) The Company has been served with an action claiming breach of contract regarding the Company's rights under two specific joint venture and development agreements to use and distribute various iterations of software components allegedly the sole property of the claimant. The action claims damages for breach of contract along with copyright and trademark infringement as a result. The claim, as filed, seeks a total of $15.85 Million in damages and is in progress in the Province of Ontario. Resolution options remain open and the action is presently scheduled for mediation in the fall of 1999. Loss, if any, on the above claim will be recorded when settlement is probable and the amount of the settlement is estimable. (b) During the year, the company settled claims which resulted in additional expenses of $158,741 ($309,375 in 1998). (c) In December, 1996, two individuals filed a lawsuit seeking 60,000 shares and 40,000 warrants. This action has been formally dismissed. An additional three (3) shareholders have also commenced related litigation, alleging purchase of our securities from the previously noted two individuals, who are named as co-defendants. We have filed and received default judgments on our cross-claims against the two individual co- defendants. The total number of shares of common stock claimed under these suits is less than 15,000. - -------------------------------------------------------------------------- 16. Supplemental Disclosure of Cash Flow Information Cash Paid during the year:
1998 1999 ---------------------- Interest $ 41,488 $ 42,711 ---------------------- Non monetary transactions during the year: Shares issued for investment in subsidiary $ - $ 93,750 Shares issued to settle lawsuits 355,158 83,457 Shares issued for conversion of debentures 50,000 50,000 ---------------------- $405,158 $227,207 ======================
- -------------------------------------------------------------------------- 17. Subsequent Event The company is in the process of closing a private placement approved by the Company's board of directors wherein 325,000 common shares of the Company were offered at $2.00 per share. The offering was fully subscribed with duly executed subscription documentation provided by accredited investors. - -------------------------------------------------------------------------- 18. Uncertainty Due to the Year 2000 Issue The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect a company's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the company, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. See accompanying summary of significant accounting policies and notes to these Consolidated Financial Statements 1,039,441 SHARES THE WIDECOM GROUP, INC. COMMON STOCK PROSPECTUS _____________, 1999 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS Item 24. Indemnification of Directors and Officers. Article 6 of our By-Laws limits the personal liability of directors and officers to us or our shareholders for monetary damages arising from a breach of their fiduciary duty in certain circumstances. Article 6 of our By-Laws also provides that we may indemnify our officers and directors to the fullest extent permitted by the Ontario Business Corporations Act from any liability and all costs, charges and expenses that such officer or director sustains in respect to any action, suit or proceeding that is proposed or commenced against him or her for or in respect the execution of the duties of his or her office. Part IX of the Ontario Business Corporations Act authorizes a corporation to indemnify directors and officers unless such party has been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation. The effect of these provisions is to permit such indemnification by us for liabilities arising under the Securities Act. Item 25. Other Expenses of Issuance and Distribution We will bear all expenses in connection with the issuance and distribution of the Shares, including those set forth below. None of these expenses will be borne by the Selling Shareholders. Items Amounts ----- ------- Securities and Exchange Commission Registration Fee $1,751.85 Printing and Engraving Expenses $_____ Accounting Fees and Expenses $_____* Legal Fees and Expenses $_____ Blue Sky Fees and Expenses $_____* Transfer Agent and Registrar Fees $_____* Miscellaneous Fees and Expenses $_____* ------ Total $_____* ====== - ------------------- * Estimated Item 26. Recent Sales of Unregistered Securities During fiscal 1999, our shareholders approved the engagement of Robb Peck McCooey Clearing Corporation, Cantella & Associates and Quantum Resources, Inc., three related financial services companies, to conduct a private offering of our securities to raise funds for investment in Widecom. The securities offered consisted of units, each unit consisting of 10,000 shares of our common stock and a 12% three-year convertible note in the principal amount of $20,000. 9.5 units were sold during fiscal 1999 and the closing for an additional 0.5 units occurred after the fiscal year end. In total, 95,000 shares of common stock were issued through the offering during fiscal 1999 and an additional 5,000 shares of common stock were issued in the first quarter of fiscal 2000. All placement agents were granted warrants to purchase a total of 50,000 shares of our common stock at an exercise price of $1.20. Subsequently, we conducted an additional private placement of 325,000 shares of our common stock. Under the terms of the offering, each share was offered at $2.00 per share. This offering was fully subscribed at the closing, which took place of July 6, 1999. The selling agent in this offering received warrants for the purchase of 100,000 shares of our common stock at an exercise price of $2.00 per share. In May, 1997, we completed a private offering pursuant to Regulation D promulgated under the Securities Act, wherein we raised $250,000 in gross proceeds in connection with the sale to a single investor of five units of our securities. Each unit was comprised of the following: (1) one $50,000 principal amount convertible debenture and (2) a common stock purchase warrant to purchase 2,500 shares. Under the debentures, the investor has the right, at any time prior to the payment in full of the debentures, to convert all or part of the unpaid balance of the debentures into shares of our common stock. The conversion price is the lower of $20 or 80% of the average closing bid price of Widecom's Common Stock as quoted on Nasdaq system over the twenty trading days immediately preceding the date of the our receipt of notice requesting conversion. In February, 1998, $50,000 of the outstanding debentures were converted into 14,742 shares of common stock. In April, 1998, an additional $50,000 of the debentures were converted into 17,213 shares of common stock. The remaining $150,000 principal amount of debentures are convertible into an aggregate of 89,818 shares of common stock based on a conversion price of $.79 for the first $50,000; $.63 for the second $50,000 and $.29 for the final $50,000. The warrants noted above are exercisable over five years and have an exercise price of $16.00 per share, subject to adjustment in certain circumstances. We previously registered the shares of common stock underlying the debentures and warrants in a registration statement which was declared effective by the SEC in March, 1998. On September 9, 1998, Raja S. Tuli, President and Chief Executive Officer, Suneet S. Tuli, our Executive Vice President and Secretary, and Lakhbir S.Tuli, an independent consultant for us and the father of Raja and Suneet Tuli, purchased an aggregate of 294,117 shares of our common stock at $.68 cents per share in a private transaction in order to provide us with funds for working capital. Item 27. Exhibits. The following exhibits are filed herewith. Exhibit No. Description - ------- ----------- 3.1 Articles of Incorporation (Exhibit 3.1 to Form F-1 Registration Number 33-78004, filed May 6, 1994) 3.2 Bylaws (Exhibit 3.1 to Form F-1 Registration Number 33-78004, filed May 6, 1994) 4.1 Form of Common Stock Certificate (Exhibit 4.1 to Form F-1 Registration Number 33-78004, filed November 21, 1994) 4.2 Form of Warrant Issued in Widecom's Initial Public Offering (Exhibit ___ to Form F-1 Registration Number 33-78004, filed November 21, 1994) 4.3 Form of Warrant Issued to Selling Shareholders 4.4 Form of Convertible Notes issued in 1999 private placement of Units 5. Opinion of Goldstein & DiGioia, LLP., re: legality of shares.* 10.1 Financial Consulting Agreement, dated February 1, 1998, by and between The Widecom Group Inc. and Quantum Resources of New York, Inc. 10.2 Financial Consulting Agreement, dated August 1998, by and between The Widecom Group Inc. and Robb Peck McCooey Clearing Corporation. 10.3 Agreement, dated September 9, 1998, by and between The Widecom Group, Inc. and Cantella & Co. 15. Letter on Unaudited Interim Financials from Schwartz Levitsky Feldman, LLP 16. Letter from BDO Dunwoody, LLP on change in Certifying Accountant (Exhibit 16.1 to Form 8-K, filed June 21, 1999) 22. Subsidiaries of Registrant (Exhibit 22.1 to Form F-1 Registration Number 33-78004, filed April 21, 1994) 23.1 Consent of Schwartz Lewitski Feldman, LLP, independent accountants. 23.2 Consent of Goldstein & DiGoia, LLP, contained in Exhibit 5. - ------------------- * To be filed by amendment. Item 28. Undertakings (a) We hereby undertake: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement; (i) To include any prospectus required by Section 10 (a) (3) of the Securities Act of 1933; (ii) To reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of a prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a twenty percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; provided, however, that paragraphs (a) (1) (i) and (a) (1) (ii) above do not apply if the Registration Statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post- effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by Widecom pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, we certify that we have reasonable grounds to believe that we meet all of the requirements for filing on Form SB-2 and have duly caused this Registration Statement to be signed on our behalf by the undersigned, thereunto duly authorized, in the City of Montreal, Quebec, Canada, on October 14, 1999. THE WIDECOM GROUP INC. By: /s/ RAJA S. TULI -------------------------------- Raja S. Tuli Chief Executive Officer and President KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below substitutes and appoints Raja S. Tuli his true and lawful attorney-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be don in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1933, this registration statement has been signed below by the following persons on our behalf and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ RAJA S. TULI President, Chief Executive Officer and October 14, 1999 Raja S. Tuli Director (Principal Executive Officer) /s/ WILLEM J. BOTHA Treasurer and Chief Financial Officer October 14, 1999 Willem J. Botha (Principal Financial and Accounting Officer) /s/ SUNEET S. TULI Executive Vice President of Sales and October 14, 1999 Suneet S. Tuli Marketing, Secretary and Director /s/ BRUCE D. VALLILLEE Director October 14, 1999 Bruce D. Vallillee /s/ AJIT SINGH Director October 14, 1999 Ajit Singh
EX-4 2 EXHIBIT 4.3 NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THE TRANSFERABILITY OF THIS WARRANT IS RESTRICTED AS PROVIDED IN SECTION 2 Warrant No. ___ ________, l999 THE WIDECOM GROUP, INC. COMMON STOCK PURCHASE WARRANT For good and valuable consideration, the receipt of which is hereby acknowledged by THE WIDECOM GROUP, INC., an Ontario corporation (the "Company"),____________________________________ is hereby granted the right to purchase, at any time from the date hereof until 5:00 P.M., New York City time, on ________, 2004 (the "Warrant Exercise Term"), up to Twenty Thousand (20,000) paid and non-assessable shares of the Company's Common Stock, $.00l par value per share ("Common Stock"). This Warrant is exercisable at a per share price of $1.20 (the "Exercise Price"), subject to adjustment as provided in Section l hereof, payable in cash or by certified or official bank check in New York Clearing House funds, or by cashless exercise as provided in paragraph 1.6. Upon surrender of this warrant certificate with the annexed Subscription Form duly executed, together with payment of the Exercise Price for the shares of Common Stock purchased at the Company's principal executive offices (presently located at 72 Devon Road, Brampton, Ontario L6T 5B4 Canada), the registered Holder of the Warrant ("Holder") shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased (the "Warrant Shares"). l. Exercise of Warrant l.l The purchase rights represented by this Warrant are exercisable at the option of the Holder hereof, in whole or in part (but not as to fractional shares of the Common Stock) during any period in which this Warrant may be exercised as set forth above. In the case of the purchase of less than all the shares of Common Stock purchasable under this Warrant, the Company shall cancel this Warrant upon the surrender thereof and shall execute and deliver a new Warrant of like tenor for the balance of the shares of Common Stock purchasable hereunder. l.2 The issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Holder hereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall be issued in the name of, or in such names as may be directed by, the Holder hereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of such certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. l.3 In case at any time or from time to time the Company shall subdivide as a whole, split its Common Stock or issue a dividend payable in shares or otherwise, the number of shares of Common Stock then outstanding into a greater or lesser number of shares, the Warrant Price then in effect shall be increased or reduced proportionately, and the number of shares issuable upon exercise of this Warrant shall accordingly be increased or reduced proportionately. l.4 In case of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of this Warrant (other than change in par value, or from par value to no par value, or from no par value to par value, or as a result or a subdivision or combination), or in case of any consolidation or merger of the Company with or into another corporation (other than a merger in which the Company is the continuing corporation and which does not result in any reclassification or change of outstanding shares of Common Stock, other than a change in number of the shares issuable upon exercise of the Warrant) or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the Holder of this Warrant shall have the right thereafter to exercise this Warrant into the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a Holder of the number of shares of Common Stock of the Company for which the Warrant might have been exercised immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. The above provisions of this Section l.4 shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. l.5 The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issuance upon exercise of this Warrant as herein provided, such number of shares of Common Stock as shall then be issuable upon the exercise of this Warrant. The Company covenants that all shares of Common Stock which shall be so issuable shall be duly and validly issued and fully-paid and non- assessable. 1.6 Cashless Exercise. At any time during the Warrant Exercise Term, the Holder may, at its option, exchange the Warrants represented by such Holder's Warrant Certificate, in whole or in part (a "Warrant Exchange"), into the number of fully paid and non-assessable Warrant Shares determined in accordance with this Section 1.6, by surrendering such Warrant Certificate at the principal office of the Company or at the office of its transfer agent, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Warrants (the "Total Share Number") to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange, or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the Warrant Shares issuable upon such Warrant Exchange and, if applicable, a new Warrant Certificate of like tenor evidencing the balance of the Warrant Shares remaining subject to the Holder's Warrant certificate, shall be issued as of the Exchange Date and delivered to the Holder within three (3) days following the Exchange Date. In connection with any Warrant Exchange, the Holder's Warrant certificate shall represent the right to subscribe for and acquire (I) the number of Warrant Shares (rounded to the next highest integer) equal to (A) the Total Share Number less (B) the number of Warrant Shares equal to the quotient obtained by dividing (i) the product of the Total Share Number and the then current Exercise Price per Warrant Share by (ii) the current Market Price (as hereafter defined) of a share of Common Stock. As used herein, the phrase "Market Price" at any date shall be deemed to be the last reported sale price, or, in case no such reported sale takes place on such day, the average of the last reported sale prices for the preceding three trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or as reported in the Nasdaq National Market System, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on the Nasdaq National Market System, the last reported sale price as furnished by the National Association of Securities Dealers, Inc. through Nasdaq or similar organization if Nasdaq is no longer reporting such information, or if the Common Stock is not quoted on Nasdaq, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it for the two days immediately preceding the Exchange Date. 2. Restrictions on Transfer The Holder acknowledges that he has been advised by the Company that this Warrant and the shares of Common Stock (the "Warrant Shares") issuable upon exercise thereof (collectively the "Securities") have not been registered under the Securities Act of l933, as amended (the "Securities Act"), that the Warrant is being issued, and the shares issuable upon exercise of the Warrant will be issued, on the basis of the statutory exemption provided by section 4(2) of the Securities Act relating to transactions by an issuer not involving any public offering, and that the Company's reliance upon this statutory exemption is based in part upon the representations made by the Holder contained herein. The Holder acknowledges that he has been informed by the Company of, or is otherwise familiar with, the nature of the limitations imposed by the Securities Act and the rules and regulations thereunder on the transfer of securities. In particular, the Holder agrees that no sale, assignment or transfer of the Securities shall be valid or effective, and the Company shall not be required to give any effect to any such sale, assignment or transfer, unless (i) the sale, assignment or transfer of the Securities is registered under the Securities Act, and the Company has no obligations or intention to so register the Securities except as may otherwise be provided herein, or (ii) the Securities are sold, assigned or transferred in accordance with all the requirements and limitations of Rule l44 under the Securities Act or such sale, assignment, or transfer is otherwise exempt from registration under the Securities Act. The Holder represents and warrants that he has acquired this Warrant and will acquire the Securities for his own account for investment and not with a view to the sale or distribution thereof or the granting of any participation therein, and that he has no present intention of distributing or selling to others any of such interest or granting any participation therein. The Holder acknowledges that the securities shall bear the following legend: "These securities have not been registered under the Securities Act of l933. Such securities may not be sold or offered for sale, transferred, hypothecated or otherwise assigned in the absence of an effective registration statement with respect thereto under such Act or an opinion of counsel to the Company that an exemption from registration for such sale, offer, transfer, hypothecation or other assignment is available under such Act." 3. Registration Rights 3.1 The Company shall advise the Holder of this Warrant or of the Warrant Shares or any then Holder of Warrants or Warrant Shares (such persons being collectively referred to herein as "Holders") by written notice at least 30 days prior to the filing by the Company with the Securities and Exchange Commission of any registration statement under the Securities Act of l933 (the "Act") covering securities of the Company, except on Forms S-4 or S-8 (or similar successor form), and upon the request of any such Holder within ten days after the date of such invoice, include in any such registration statement such information as may be required to permit a public offering of the Warrant Shares. The Company shall supply such number of prospectuses and other documents as the Holder may reasonably request in order to facilitate the public sale or other disposition of the Warrant Shares, qualify the Warrant Shares for sale in such states as any such Holder reasonably designates and do any and all other acts and things which may be necessary or desirable to enable such Holders to consummate the public sale or other disposition of the Warrant Shares, and furnish indemnification in the manner as set forth in Subsection 3.2 of this Section 3. Such Holders shall furnish information and indemnification as set forth in Subsection 3.2 of this Section 3. For the purpose of the foregoing, inclusion of the Warrant Shares by the Holder in a Registration Statement pursuant to this sub-paragraph 3.l under a condition that the offer and/or sale of such Warrant Shares not commence until a date not to exceed 90 days from the effective date of such registration statement shall be deemed to be in compliance with this sub-paragraph 3.l. 3.2 The following provisions of this Section 3 shall also be applicable to the exercise of the registration rights granted under this Section 3.l: (A) The foregoing registration rights shall be contingent on the Holders furnishing the Company with such appropriate information (relating to the intentions of such Holders) as the Company shall reasonably request in writing. Following the effective date of such registration, the Company shall upon the request of any owner of Warrants and/or Warrant Shares forthwith supply such number of prospectuses meeting the requirements of the Act as shall be requested by such owner to permit such Holder to make a public offering of all Warrant Shares from time to time offered or sold to such Holder, provided that such Holder shall from time to time furnish the Company with such appropriate information (relating to the intentions of such Holder) as the Company shall request in writing. The Company shall also use its best efforts to qualify the Warrant Shares for sale in such states as such Holder shall reasonably designate. (B) The Company shall bear the entire cost and expense of any registration of securities initiated by it under Subsection 3.l of this Section 3 notwithstanding that Warrant Shares subject to this Warrant may be included in any such registration. Any Holder whose Warrant Shares are included in any such registration statement pursuant to this Section 3 shall, however, bear the fees of his own counsel and any registration fees, transfer taxes or underwriting discounts or commissions applicable to the Warrant Shares sold by him pursuant thereto. (C) The Company shall indemnify and hold harmless each such Holder and each underwriter, if any, within the meaning of the Act, who may purchase from or sell for any such Holder any Warrant Shares from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post- effective amendment thereto or any registration statement under the Act or any prospectus included therein required to be filed or furnished by reason of this Section 3 or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished or required to be furnished in writing to the Company by such Holder or underwriter expressly for use therein, which indemnification shall include each person, if any, who controls any such underwriter within the meaning of such Act; provided, however, that the Company shall not be obliged so to indemnify any such Holder or underwriter or controlling person unless such Holder or underwriter shall at the same time agree to indemnify the Company, its directors, each officer signing the related registration statement and each person, if any, who controls the Company within the meaning of such Act, from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or any prospectus required to be filed or furnished by reason of this Section 3 or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading insofar as such losses, claims, damages or liabilities are caused by any untrue statement or alleged untrue statement or omission based upon information furnished in writing to the Company by any such Holder or underwriter expressly for use therein. (D) The Company may withdraw the registration at any time. 4. Miscellaneous. 4.l All the covenants and agreements made by the Company in this Warrant shall bind its successors and assigns. 4.2 No recourse shall be had for any claim based hereon or otherwise in any manner in respect hereof, against any incorporator, stockholder, officer or director, past, present or future, of the Company or of any predecessor corporation, whether by virtue of any constitutional provision or statute or rule of law, or by the enforcement of any assessment or penalty or in any other manner, all such liability being expressly waived and released by the acceptance hereof and as part of the consideration for the issue hereof. 4.3 No course of dealing between the Company and the Holder hereof shall operate as a waiver of any right of any Holder hereof, and no delay on the part of the Holder in exercising any right hereunder shall so operate. 4.4 This Warrant may be amended only by a written instrument executed by the Company and the Holder hereof. Any amendment shall be endorsed upon this Warrant, and all future Holders shall be bound thereby. 4.5 All communications provided for herein shall be sent, except as may be otherwise specifically provided, by registered or certified mail: if to the Holder of this Warrant, to the address shown on the books of the Company; and if to the Company, to 72 Devon Road, Brampton, Ontario L6T 5B4 Canada, Attention: Office of the President, or to such other address as the Company may advise the Holder of this Warrant in writing. Notices shall be deemed given when mailed. 4.6 The provisions of this Warrant shall in all respects be constructed according to, and the rights and liabilities of the parties hereto shall in all respects be governed by, the laws of the Province of Ontario. This Warrant shall be deemed a contract made under the laws of the Province of Ontario and the validity of this Warrant and all rights and liabilities hereunder shall be determined under the laws of said Province. 4.7 The headings of the Sections of this Warrant are inserted for convenience only and shall not be deemed to constitute a part of this Warrant. IN WITNESS WHEREOF, THE WIDECOM GROUP, INC. has caused this Warrant to be executed in its corporate name by its officer, and its seal to be affixed hereto. Dated: , 1999 Ontario, Canada THE WIDECOM GROUP, INC. By:_____________________________ Raja Tuli President SUBSCRIPTION FORM TO: THE WIDECOM GROUP, INC. 72 Devon Road Brampton Road Ontario L6T 5B4 CANADA The undersigned Holder hereby irrevocably elects to exercise the right to purchase shares of Common Stock covered by this Warrant according to the conditions hereof and herewith makes full payment of the Exercise Price of such shares. Kindly deliver to the undersigned a certificate representing the Shares. INSTRUCTIONS FOR DELIVERY Name: _____________________________________________________________ (please typewrite or print in block letters) Address: __________________________________________________________ Dated: _________________________ Signature _________________________________________________________ EX-4 3 EXHIBIT 4.4 NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK INTO WHICH THIS NOTE IS CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THIS NOTE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN SUBSCRIPTION AGREEMENT OF EVEN DATE (THE "SUBSCRIPTION AGREEMENT"). 12% Three-Year Convertible Secured Subordinated Promissory Note Due February 19, 2002 February 19, 1999 $_______ The Widecom Group Inc., a corporation formed under the laws of the province of Ontario, Canada (hereinafter called the "Company"), for value received, hereby promises to pay to ____________________, or registered assigns (the "Payee"), on the 19th day of February, 2002, or sooner set forth in paragraph 3(a) herein (the "Due Date") the principal amount of_______________ on the Due Date. Interest on the unpaid portion of said principal amount shall be payable from the date hereof at the rate of 12% per annum and be payable quarterly (computed on the basis of a 360 day year of twelve 30 day months) commencing on June 30, 1999 and thereafter on September 30, and December 31, and March 31, of each year until the Due Date. Both the principal hereof and interest hereon are payable at the principal office of the Company in Ontario, Canada in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. 1. Authorized Issue. This Note is one of a duly authorized issue of 12% Three-Year Convertible Secured Subordinated Promissory Notes due February 19, 2002 (herein called the "Notes") made or to be made by the Company in aggregate amount of up to $1,500,000 in original authorized principal amount, similar in terms except for dates, principal amounts and named payees, offered by the Company in a private placement of securities (the "Offering") pursuant to an Offering Memorandum dated November 12, 1998, as supplemented (the "Memorandum"). All capitalized terms not otherwise defined herein shall have the meaning ascribed to such terms in the Memorandum. 2. Conversion. ----------- (a) Unless redeemed as provided in Paragraph 3(a), up to one half of the unpaid principal amount of this Note may, at the election of the holder, be converted into shares of Common Stock, at any time during the 30 day period commencing 180 days following the Initial Closing Date and the balance of the Note at any time 360 days after the Initial Closing Date, provided, however, the Notes may be converted in full at the option of the holder at any time following the receipt of the Notice of Redemption by the Company. The principal amount of the Note may be converted at the Conversion Price of $4.00, subject to adjustment in certain circumstances to prevent dilution. No fractional shares will be issued and a cash adjustment will be made in lieu thereof. No adjustment for interest will be made on conversion of any Note. Accordingly, accrued interest will not be paid on a Note if it is converted between an interest payment date and the next record date for interest payments. However, any unpaid interest accruing prior to the interest payment due immediately preceding the conversion will be paid by the Company. A holder who converts his Note will be deemed to have waived as of the date of conversion, any default existing under the Note prior to conversion except the payment of accrued interest. (b) (i) Any Note may be converted in full or in part by the holder thereof by surrender of such Note with the notice of conversion thereon duly executed by such holder (specifying the portion of the principal amount thereof to be converted in the case of a partial conversion) to the Company at its principal office. Upon any partial conversion of a Note, the Company at its expense will forthwith issue and deliver to or upon the order of the holder thereof a new Note or Notes in principal amount equal to the unpaid and unconverted principal amount of such surrendered Note, such new Note or Notes to be dated and to bear interest from the date to which interest has been paid on such surrendered Note. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which such Note shall have been so surrendered to the Company or such agency; and at such time the rights of the holder of such Note as such shall, to the extent of the principal amount thereof, and accrued interest thereon, converted, cease, and the person or persons in whose name or names any certificate or certificates for Shares shall be issuable upon such conversion shall be deemed to have become the holder or holders of record thereof. (ii) No payment or adjustment of dividends shall be made upon the conversion of any Note or Notes. (c) As promptly as practicable after the conversion of any Note in full or in part, and in any event within 15 calendar days thereafter, the Company at its expense (including the payment by it or any applicable issue taxes) will issue and deliver to the holder of such Note, or as such holder (upon payment of such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of full Shares issuable upon such conversion, plus, in lieu of any fractional Shares to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the market value determined in good faith by the Board of Directors of the Company of one full share as of the close of business on the date of such conversion. (d) Adjustments to Conversion Price and Number of Securities. (i) In case at any time or from time to time, the Company shall subdivide as a whole, split its Common Stock or issue a dividend payable in Shares or otherwise, the number of Shares then outstanding into a greater or lesser number of Shares, the Conversion Price then in effect shall be increased or reduced proportionately, and the number of Shares issuable upon conversion of this Note shall accordingly be increased or reduced proportionately. (ii) In case of any reclassification or change of outstanding Shares issuable upon conversion of this Note (other than change in par value, or from par value to no par value, or from no par value to par value, or as a result or a subdivision or combination), or in case of any consolidation or merger of the Company with or into another corporation (other than a merger in which the Company is the continuing corporation and which does not result in any reclassification or change of outstanding Shares, other than a change in number of the Shares issuable upon conversion of the Note) or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the holder of this Note shall have the right thereafter to convert this Note into the kind and amount of Shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of Shares of the Company for which the Note might have been converted immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. The above provisions of this Paragraph 2 shall similarly apply to successive reclassifications and changes of Share sand to successive consolidations, mergers, sales or conveyances. (e) The Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion of the Notes, all Shares from time to time issuable upon the conversion of the Notes. All Shares issuable upon conversion of the Notes shall be duly authorized and, when issued, validly issued, fully paid and nonassessable with no liability on the part of the holders thereof. 3. Redemption. ----------- (a) Subject to the provisions of paragraph 3(e) hereof, the Notes are redeemable, in whole or in part, at the option of the Company provided that: (i) the Shares underlying the Notes are registered for resale under the Act; (ii) during the 20 consecutive trading days ending within 10 days of the date of the written Notice of Redemption (as defined below), the closing bid price of the Common Stock is not less than 150% of the Conversion Price, and (iii) the trading volume of the Common Stock is not less than 30,000 Shares per day. The redemption price shall be equal to the principal amount of the Note then outstanding plus all accrued and unpaid interest (the "Redemption Price"). No such notice will be given until there is a current Registration Statement and a prospectus on file with the Securities and Exchange Commission at the time such notice is given to the Note holders. (b) If the conditions set forth in Section 3(a) are met, and the Company desires to exercise its right to redeem the Notes, it shall mail a notice of redemption ("Notice of Redemption") to each of the Note holders to be redeemed, first class, postage prepaid, not later than the 45th day before the date fixed for redemption, at their last address as it appears on the records maintained by the Company. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Note holder receives such Notice of Redemption. (c) The Notice of Redemption shall specify (i) the redemption price, (ii) the date fixed for redemption, (iii) the place where the Notes shall be delivered and the redemption price paid, and (iv) that the right to convert the Note shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the date fixed for redemption. The date fixed for the redemption of the Note shall be the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Note holder (a) to whom notice was not mailed or (b) whose notice was defective and then only to the extent that the Note holder is prejudiced thereby. An affidavit of the Secretary or an Assistant Secretary of the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) Any right to convert a Note shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the Redemption Date. On and after the Redemption Date, Note holders shall have no further rights except to receive, upon surrender of the Note, the Redemption Price. (e) From and after the Redemption Date specified for, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Note holder thereof of one or more Notes evidencing the Notes to be redeemed, deliver or cause to be delivered to or upon the written order of such Holder a sum in cash equal to the redemption price of each such Note. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Notes called for redemption, such Notes shall expire and become void and all rights hereunder and under the Notes, except the right to receive payment of the Redemption Price, shall cease. 4. Restrictions on Transfer. (a)(i) Unless a Registration Statement with respect thereto under the Securities Act is at the time in effect, this Note or the Shares into which the Note may be converted shall not be transferred (such term to include any disposition which would constitute a sale within the meaning of the Securities Act), except upon compliance with the conditions specified in this subsection 4(a) and unless such Registration Statement with respect to this Note or the Shares has been filed and is declared effective. The Company may issue or cause to be issued stop orders preventing any transfer that the Company believes to be in violation of applicable securities laws. (ii) The holder of this Note by the acceptance thereof agrees, prior to any transfer or attempted transfer of this Note, that it shall not transfer this Note unless a Registration Statement under the Securities Act is in effect with respect to such transfer or, prior to such transfer, it shall have delivered to the Company an opinion of counsel experienced in Securities Act matters reasonably acceptable to the Company and counsel to the Company in a form reasonably acceptable to the Company, or a "no action" letter from the Securities and Exchange Commission, to the effect that the proposed transfer may be effected without registration under the Securities Act. The legend set forth on the facing page of this Note shall be removed from any such Note to be disposed of in accordance with this clause (ii) unless, in the opinion of counsel for the Company, such legend is required by the applicable provisions of the Securities Act. (b) The holder of this Note and/or the Shares issuable upon conversion of this Note have certain registration rights as provided in the Subscription Agreement of even date herewith. 5. Transfer and Exchange. Provided the Note holder otherwise complies with the restrictions in paragraph 4 hereof, this Note is transferable on the note register of the Company at the expense of the Company (except for any stamp tax or other governmental charge with respect to any transfer) upon surrender of this Note for transfer at the principal office of the Company, accompanied by a written instrument of transfer in form reasonably satisfactory to the Company duly executed by the holder of this Note or his attorney duly authorized in writing, and thereupon one or more new Notes, each in the denominations of $10,000 or an integral multiples thereof and for the same aggregate principal amount as the Note surrendered, and dated the date to which interest has been paid on the Notes, will be issued to the designated transferee or transferees. This Note is exchangeable for a like aggregate principal amount of Notes of different denominations, as requested by the holder or his attorney surrendering the same. The Company and its agents may treat the holder of this Note as the owner for purposes of receiving payment as herein provided and for all other purposes, whether or not this Note be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. Any new Note or Notes to be delivered to the Note holder or upon the Note holder's order, pursuant to this Section 5, in substitution for or in lieu of any Note held by the Note holder, will be delivered to the Note holder at his address as shown on the records of the Company, or at such other address as the Note holder may request, without any expense to Note holder in connection with such delivery and insured to the Note holders satisfaction. 6. Subordination of Indebtedness/Security Interest. ------------------------------------------------ (a) This Note is issued subject to the provisions of this Section 6; and each person taking or holding this Note, accepts and agrees to be bound by these provisions. (b) This Note is an obligation of the Company fully subordinated to all "senior indebtedness" except to the extent of the Collateral (as defined in the Subscription Agreement). "Senior Indebtedness" is all indebtedness, liabilities and obligations of the Company for money borrowed from banks, savings and loan associations, the Small Business Administration and other financial institutions, and their affiliates, or any deferrals, renewals or extensions of any such senior indebtedness and notes or other instruments or evidences of indebtedness issued in respect of or in exchange for any such senior indebtedness or any funding to pay or replace any such senior indebtedness or credit, unless in the instrument creating or evidencing the same, or pursuant to which it is outstanding, it is provided that such indebtedness or such deferral, renewal or extension thereof is not senior in right of payment to this Note. No payment or distribution of any kind or character on account of principal, premium, if any, or interest on this Note shall be permitted during the continuance of any default in the payment of principal, premium, if any, or interest on any senior indebtedness. 7. Default. -------- If one or more of the following events (herein called "Events of Default") shall occur for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), and the holder of any Note shall have given fifteen (15) days prior written notice to the Company by certified or registered mail, return receipt requested, and the Company shall not have cured the default within such period: (i) default in the due and punctual payment of the principal of, or interest on, any Note when and as the same shall become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or otherwise; (ii) breach by the Company of any covenant contained in this Note and/or any provision of the Subscription Agreement executed in connection with the sale and purchase of the Notes; (iii) the Company makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due; (iv) an order, judgment or decree is entered adjudicating the Company or any subsidiary bankrupt or insolvent; (v) the Company petitions or applies to any tribunal for the appointment of a trustee or receiver of the Company, or of any substantial part of the assets of the Company, or commences any proceedings (other than proceedings for the voluntary liquidation and dissolution of a subsidiary) relating to the Company or a subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction whether now or hereafter in effect; (vi) any such petition or application is filed, or any such proceedings are commenced, against the Company, and the Company by any act indicates its approval thereof, consent or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee or receiver, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 60 days; (vii) any order, judgment or decree is entered in any proceedings against the Company or any subsidiary decreeing the dissolution of the Company and such order, judgment or decree remains unstayed and in effect for more than 60 days; (viii) any order, judgment or decree is entered in any proceedings against the Company or any subsidiary decreeing a split-up of the Company which requires the divestiture of a substantial part of the consolidated assets of the Company and its subsidiaries, or the divestiture of the stock of a subsidiary and such order, judgment or decree remains unstayed and in effect for more than 60 days, then and in each and every such case, so long as such Event of Default shall not have been remedied (i) the holder of any Note, by notice in writing to the Company, may declare the principal of this Note then outstanding and the interest accrued thereon if not already due and payable, to be due and payable immediately, or convertible pursuant to paragraph 2 hereof, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Note contained to the contrary notwithstanding. 8. Miscellaneous. (a) To the extent permitted by applicable law, the Company hereby agrees to waive, and does hereby absolutely and irrevocably waive and relinquish, the benefit and advantage of any valuation, stay, appraisement, extension or redemption law now existing or which may hereafter exist, which, but for this provision, might be applicable to any sale made under the judgment, order or decree of any court, or otherwise, based on the Notes or on any claim for principal or interest on the Notes. (b) Each Note is issued upon the express condition, to which each successive holder expressly assents and by receiving the same agrees, that no recourse under or upon any obligation, covenant or agreement of the Notes, or for the payment of the principal of, or premium, if any, or the interest on, a Note, or for any claim based on a Note, or otherwise in respect hereof, shall be had against any incorporator or any past, present or future stockholder, officer or director, as such, of the Company or of any successor corporation, whether by virtue of the constitution, statute or rule of law or by any assessment or penalty or otherwise, all such individual liability being hereby expressly waived and released as a condition of and as a part of the consideration for the execution and issue of the Notes; provided, however, that nothing herein shall prevent enforcement of the liability, if any, of any stockholder or subscriber to capital stock upon or in respect of capital stock not fully paid. (c) Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of any Note and of indemnity reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of any such Note if mutilated, the Company will make and deliver a new Note of like tenor in lieu of any such Note so lost, stolen, destroyed or mutilated. Any new Note made and delivered in accordance with the provisions of this subsection 9(c) shall be dated as of the date from which unpaid interest has then accrued on the Note so lost, stolen, destroyed or mutilated. (d) No course of dealing between the Company and the holder of any Note or any delay on the part of the holder in exercising any rights under a Note shall operate as a waiver of any rights of any holder of the Note. (e) Any and all covenants or events of default under the Notes, except for the due and punctual payment of principal and interest, may be waived by the Holders of the majority in interest of the principal amount of outstanding Notes. 10. Binding Effect. The Company agrees that the provisions of this Note shall bind and shall inure to the benefit of the parties hereto and their successors and assigns. 11. Amendment and Waiver. Except as otherwise provided herein, this Note may be amended, and the performance and observance of any term of this Note may be waived, with (and only with) the written consent of the Company and such Note purchaser as to whom performance is to be waived. 12. Interest Rate. If any interest rate specified herein is held by applicable law to be impermissible, then the rate charged on the indebtedness represented hereby shall be reduced to the highest rate then permitted by law. 13. Communications. All notices and other communications provided for hereunder or under the Notes shall be in writing, and, if to a Note holder, shall be delivered or mailed by registered mail addressed to the Note holder at the Note holders address as shown in the records of the Company in this Note hereto or to such other address as the Note holder may designate to the Company in writing and, if to the Company, shall be delivered or mailed by registered mail to the Company at 72 Devon Road, Unit #18, Brampton, Ontario, Canada, L6T 5B4, or to such other address as the Company may designate to the Note holder in writing. 14. Governing Law. This Note shall be construed in accordance with and governed by the laws of the State of New York without regard to principles of conflicts of law, and cannot be changed, discharged or terminated orally but only by an instrument in writing signed by the party against whom enforcement of any change, discharge or termination is sought. 15. Headings. The headings of the sections of this Note are inserted for convenience only and do not affect the meaning of such section. IN WITNESS WHEREOF, THE WIDECOM GROUP INC. has caused this Note to be signed in its corporate name by a duly authorized officer and to be dated the date and year first above written. THE WIDECOM GROUP INC. By ------------------------- RAJA S. TULI Chief Executive Officer SUBSCRIPTION FORM To Be executed by the Registered Holder to Convert Note The undersigned Registered Note holder hereby irrevocably elects to convert $ ________ principal amount and accrued interest represented by this Note, and to purchase the Shares issuable upon the conversion of such Note, and requests that certificates for such Shares shall be issued in the name of: _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ (please print or type name and address) PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER _________________________________________________________________ and be delivered to _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ (please print or type name and address) and if the so amount converted shall not represent the entire unpaid principal amount due and owing on this Note, the Company shall deliver a new Note for the unpaid and unconverted principal amount of such surrendered Note registered in the name of, and delivered, to, the Note holder at the address stated below, such new Note or Notes to be dated and to bear interest from the date to which interest has been paid on such surrendered Note. Dated:________________________ X______________________________ Signature _________________________ ______________________________ Taxpayer Identification # ______________________________ Address EX-10 4 EXHIBIT 10.1 Quantum Resources of NY, Inc. 37 Saw Mill River Road Hawthorne, New York 10532 Voice: 914-347-4800 Fax: 914-347-3927 E-mail qrny1@aol.com February 1, 1998 Mr. Raja Tuli WideCom Inc. 72 Devon Rd, Unit 18 Brampton, Ontario Canada L67 5B4 Dear Mr. Raja Tuli, This Agreement, when executed by the parties hereto, will constitute an agreement between WideCom, Inc. (the "Company") and Quantum Resources of NY, Inc. ("Quantum") pursuant to which the Company agrees to retain Quantum and Quantum agrees to be retained by the Company under the terms and conditions set forth below. 1) The Company hereby retains Quantum to perform consulting services related to the business structure and communications of the company. In this regard, subject to the terms set forth below, Quantum shall furnish to the Company advice and recommendations with respect to such aspects of the business communication, sales and marketing affairs of the Company as the Company shall, from time to time, reasonably request upon reasonable notice. In addition, Quantum shall hold itself ready to assist the Company in evaluating and negotiating particular contacts with personnel the Company wishes to employ, if requested to do so by the Company, upon reasonable notice. 2) As compensation for the services outlined in paragraph one above and as an inducement to enter into this agreement, the Company agrees to pay to Quantum a consulting fee of $5,000 a month beginning February 1, 1999, payable monthly in advance. In addition, the Company shall issue to Quantum a five year warrant to purchase 37,500 shares of common stock at $ 1.20 a share, post split for its prior advisory work and for its role in the recruiting and hiring of an Sales Executive Vice President. The warrant shall be in the form acceptable to Quantum, shall include piggyback registration rights, and shall have a provision for cash-less execution. 3) The company and Quantum acknowledge and agree that Quantum will act as a finder or financial consultant in various business transactions in which the Company may be involved, such as mergers, acquisitions or joint ventures. The Company hereby agrees that in the event Quantum shall first introduce to the Company another party or entity, and that as a result of such introduction, a transaction ("Transaction") is consummated, the Company shall pay to Quantum a fee equal to: 5% of the first two million dollars 4% of the second two million dollars 3% of the third two million dollars 2% of the fourth two million dollars 1% of the balance of the consideration (the "Consideration") received and/or paid in such Transaction. Such fee shall be paid in cash unless the seller in the contemplated transaction receives securities, in which case the fee shall be paid in cash and securities in the same percentage of cash and securities and at the same time as the consideration is paid to the seller. In addition, if the Company shall, within 12 months immediately following the termination of this Agreement, consummate a transaction with any party first introduced by Quantum to the Company prior to such termination, the Company shall pay to Quantum a fee with respect to such transaction calculated in accordance with this paragraph. 4) For purposes hereof, "Consideration" shall mean the value of all cash, securities and other property or other assets paid, received, payable or receivable, including debt assumed, in connection with a Transaction, including, without limitation: (a) any distributions made to shareholders in anticipation of the closing; (b) any employment contract enhancements or non competition payments (other than ordinary and customary compensation in connection with bona fide employment agreements); (c) any payments in connection with any separate transactions affecting another business entity or any of its assets or securities (e.g., purchase or lease of any real estate or other assets, but in the case of a lease, Consideration shall include only sums in excess of current rentals paid to unrelated or unaffiliated third parties); (d) any indebtedness for money borrowed, including receivables, pension liabilities and guarantees, which are assumed; and (e) other business considerations (e.g. business discounts and/or credits for services and/or products). For purposes of determining Consideration, the value of any securities (whether debt or equity) shall be deemed to be the greater of: (i) the fair market value thereof as of the day the definitive agreement is executed by all parties; or (ii) the average of the last reported sales prices of the securities on the twenty (20) consecutive business days prior to the consummation of the Strategic Transaction as reported on the principal exchange on which the security is listed, or, as the case may be, the NASDAQ National Market System; provided that the value of securities that are not freely tradable or have no established public market shall be the fair market value thereof as reasonably agreed upon by the parties hereto. If any part of the Consideration shall be deferred or contingent upon future earnings or other contingencies, then Quantum shall be entitled to a Transaction Fee on such additional Consideration, and the term Consideration shall include such additional compensation which shall be payable on the basis of the payment when made by the payor. The Transaction Fee for such Consideration paid or received in the future shall be payable when such Consideration is paid and shall be calculated using the formula set forth above by adding this subsequent Consideration to all other Consideration previously paid. 5) All obligations of Quantum contained herein shall be subject to reasonable notice. Quantum shall devote such time and effort to the performance of its duties hereunder as Quantum shall determine is reasonably necessary for such performance. Quantum may look to such others for such factual information, investment recommendations, economic advice and/or research, upon which to base its advice to the Company hereunder, as it shall deem appropriate. The Company shall furnish to Quantum all information reasonably relevant to the performance by Quantum of its obligations under this Agreement, or particular projects as to which Quantum is acting as advisor, which will permit Quantum to know all facts material to the advice to be rendered, and all material or information reasonably requested by Quantum, In the event that the Company fails or refuses to furnish any such material or information reasonably requested by Quantum, and thus prevents or impedes Quantum's performance hereunder, any inability of Quantum to perform shall not be a breach of its obligations hereunder, Nothing contained in this Agreement shall limit or restrict the right of Quantum or of any partner, employee, agent or representatives of Quantum, to be a partner, director, officer, employee, agent or representative of, or to engage in, any other business, whether of a similar nature or not, nor to limit or restrict the right of Quantum to render services of any kind to any other corporation, firm, individual or association. 6) Quantum shall hold in confidence any confidential information, which the Company provided to Quantum pursuant to this Agreement unless the Company gives Quantum permission to in writing to disclose such confidential information to a specific third party. Notwithstanding the foregoing, Quantum shall not be required to maintain confidentiality with the respect to information (i) which is or becomes part of the public domain; (ii) of which it had independent knowledge prior to disclosure; (iii) which comes into the possession of Quantum in the normal routine course of its own business from and through independent non-confidential sources; or (iv) which is required to be disclosed by Quantum by governmental requirements. If Quantum is requested or required (by oral questions, interrogatories, requests for information or document subpoenas, civil investigative demands, or similar process) to disclose any confidential information supplied to it by the Company, or the existence of other negotiations in the course of its dealings with the Company or its representatives, Quantum shall, unless prohibited by law, promptly notify the Company of such request(s) so that the Company may seek an appropriate protective order. 7) Each party agrees to indemnity and hold harmless the other, their employees, agents, representatives and controlling persons (and the officers, directors, employees, agents, representatives and controlling persons of each of them) from and against any and all losses, claims, damages, liabilities, cost and expenses (and all actions, suits, proceeding or claims in respect thereof) and any legal or other expenses in giving testimony or furnishing documents in response to a subpoena or otherwise, as and when incurred, directly or indirectly, caused by, relating to, based upon or arising out of the services pursuant to this Agreement. The Company further agree that Quantum shall incur no liability to the Company or any other party on account of this Agreement or any acts or omissions arising out of or related to the actions of Quantum relating to this Agreement or the performance or failure to perform any services under this Agreement except for Quantum's intentional or willful misconduct. This paragraph shall survive the termination of this Agreement. 8) This Agreement may not be transferred, assigned or delegated by any of the parties hereto without the prior written consent of the other party hereto. 9) The failure or neglect of the parties hereto to insist in any one or more instances, upon the strict performance of any of the terms and conditions of this Agreement, or their waiver of strict performance of any of the terms and conditions of this agreement, shall be construed as a waiver of strict performance of any of the terms or conditions of this Agreement, shall not be construed as a waiver or relinquishment in the future of such term and condition, but the same shall continue in full force and effect. 10) The term of this Agreement is for 12 months. Either party may terminate the agreement after Quantum has received three months of consecutive payments and by giving 30 days written notice. 11) Any notices hereunder shall be sent to the Company and Quantum at their respective addresses set forth above. Any notice shall be given by registered or certified mail, postage prepaid, and shall be deemed to have been given when deposited in the United States mail. Either party may designate any other address to which notice shall be given, by giving written notice to the other of such change of address in the matter herein provided. 12) This Agreement has been made in the State of New York and shall be construed and governed in accordance with the laws thereof without giving effect to principles governing conflicts of law. 13) This Agreement contains the entire agreement between the parties, may not be altered or modified, except in writing, signed by the party to be changed thereby, and supersedes any and all previous agreements between the parties relating to the subject or matter hereof. WideCom Corporation Quantum Resources of NY, Inc. By: By: ___________________________________ ____________________________________ Raja Tuli, President Timothy J. Flanagan, President EX-10 5 EXHIBIT 10.2 ROBB, PECK, McCOOEY CLEARING CORPORATION INVESTMENT DIVISION 55 BROADWAY NEW YORK, N.Y. 10006 (800) 300-6861 FAX (212) 482-3558 MEMBERS: NEW YORK STOCK EXCHANGE, INC AND OTHER PRINCIPAL EXCHANGES SECURITIES INVESTORS PROTECTION CORPORATION (SIPC) August , 1998 Raja Tuli, President WideCom Group Inc. 72 Devon Road, Unit 18 Brampton, Ontario Canada L6T 534 You have advised us that WideCom Group Inc. ("WIDE") desires to retain Robb, Peck, McCooey Clearing Corporation ("ROBB") as a nonexclusive external investment banking advisor in connection with the identification, evaluation and potential closing of an acquisition, merger, joint venture or other like transactions. This letter, when executed by the parties hereto, will constitute an agreement between WIDE and ROBB pursuant to which WIDE hereby retains Robb under the terms and conditions set forth below. 1. WIDE retains ROBB to perform consulting services related to corporate finance and other financial service matters. In this regard ROBB shall furnish to WIDE advice and recommendations with respect to such aspects of the business and affairs of WIDE as WIDE shall, from time to time, reasonably request upon written notice. 2. In addition, ROBB shall hold itself ready to assist WIDE in evaluating and negotiating particular contracts or transactions, if requested to do so by WIDE, upon reasonable written notice, and will undertake such evaluations and negotiations upon prior written agreement as to additional compensation to be paid by WIDE to ROBB with respect to such evaluations and negotiations. Nothing herein shall require WIDE to utilize ROBB's services in any particular transactions. 3. As compensation for the services described in paragraph 1 above and as an inducement for ROBB to enter into this agreement, WIDE shall issue and deliver to ROBB a five-year warrant to purchase 50,000 common shares at $.75 per share. The warrant shall be prepared in a form acceptable to ROBB. WIDE shall use its best efforts to register the shares underlying the warrants in conjunction with the registration statement filed to register the shares sold in a certain private offering of August 1998 (the "Offering'). In addition, WIDE shall deliver to ROBB, at the time it executes this agreement, its check for five thousand dollars, $5,000.00, (US). This amount shall be a non-refundable payment as an inducement to enter into this agreement. However such payment shall be applied against any compensation earned by ROBB under this agreement. WIDE will reimburse ROBB for any and all reasonable out of pocket expenses incurred by ROBB in the performance of its duties hereunder, and ROBB shall account for such expenses to WIDE; provided, however, that any expenses in excess of $1,000 shall require the prior written approval of WIDE, which will not be unreasonably withheld. Such reimbursement shall accumulate and be offset or paid monthly. 4. Wide agrees that if the Offering is consummated, Robb shall have an irrevocable preferential right for a period of three (3) years from the date the Offering is completed to purchase for its account or to sell for the account of Wide, or any subsidiary of or successor to Wide, or any of its directors or officers, any securities of Wide or any such subsidiary or successor which Wide, any such subsidiary or successor may seek to sell through an underwriter, placement agent or broker-dealer whether pursuant to registration under the Act or otherwise. Wide, any such subsidiary or successor will consult Robb with regard to any such offering and will offer Robb the opportunity to purchase or sell any such securities on terms not more favorable to Wide, any such subsidiary or successor than it or they can secure elsewhere. If Robb fails to accept such offer within 15 business days after the mailing of a notice containing such offer by registered mail addressed to Robb, then Robb shall have no further claim or right with respect to the financing proposal contained in such notice. If, however, the terms of such proposal are subsequently modified in any material respect, the preferential right referred to herein shall apply to such modified proposal as if the original proposal had not been made. Robb's failure to exercise its preferential right with respect to any particular proposal shall not affect its preferential rights relative to future proposals. 5. WIDE agrees that in the event ROBB shall first introduce to WIDE another party or entity, and that as a result of such introduction, a transaction (a "Transaction") is consummated, WIDE shall pay to ROBB a Transaction fee equal to five percent of the amount of the consideration paid in such transaction up to $5 million and two and one half percent of the excess, if any, over $5 million. For purposes hereof, "Transaction" shall mean a merger, acquisition, business, combination, joint venture or similar transaction, and "Consideration" shall mean the value of all cash, securities and other property or other assets paid, received, payable or receivable, including debt assumed, in connection with a Transaction, including, without limitation: (a) any distributions made to shareholders in anticipation of the closing, (b) any employment contract enhancements or non-competition payments (other than ordinary and customary compensation in connection with bona fide employment agreements), (c) any payments in connection with any separate transactions affecting another business entity or any of its assets or securities (e.g., purchase or lease of any real estate or other assets, but in the case of a lease, Consideration shall include only sums in excess of current rentals paid to unrelated or unaffiliated third parties), (d) any indebtedness for money borrowed, including receivables, pension liabilities and guarantees, which are assumed, and (e) other business considerations (e.g. business discounts and/or credits for services and/or products). For purposes of determining Consideration, the value of any securities (whether debt or equity) shall be deemed to be the greater of : (I) the fair market value thereof as of the day the definitive agreement is executed by all parties, or (ii) the average of the last reported sales prices of the securities on the twenty (20) consecutive business days prior to the consummation of the Transaction as reported on the principal exchange on which the security is listed, or, as the case may be, the NASDAQ National Market System, provided that the value of securities that are not freely tradable or have no established public market shall be the fair market value thereof as reasonably agreed-upon by the parties hereto. If any part of the Consideration shall be deferred or contingent upon future earnings or other contingencies, then ROBB shall be entitled to a Transaction Fee on such additional Consideration, and the term Consideration shall include such additional compensation which shall be payable on the basis of the payment when made by the payor. The Transaction Fee for such Consideration paid or received in the future shall be payable when such Consideration is paid and shall be calculated using the formula set forth in Section B (3) by adding this subsequent Consideration to all other Consideration previously paid. 6. All obligations of ROBB contained herein shall be subject to ROBB's reasonable availability for such performance, in view of the nature of the requested service and the amount of notice received. ROBB shall devote such time and effort to the performance of its duties hereunder as ROBB shall determine is reasonably necessary for such performance. ROBB may look to such others for such factual information, investment recommendations, economic advice and/or research, upon which to base its advice to WIDE hereunder, as it shall deem appropriate. WIDE shall furnish to ROBB all information reasonably relevant to the performance by ROBB of its obligations under this Agreement, or particular projects as to which ROBB is acting as advisor, which will permit ROBB to know all facts material to the advice to be rendered, and all material or information reasonably requested by ROBB. In the event that WIDE fails or refuses to furnish any such material or information reasonably requested by ROBB, and thus prevents or impedes ROBB's performance hereunder, any inability of ROBB to perform shall not be a breach of its obligations hereunder. 7. Nothing contained in this Agreement shall limit or restrict the right of ROBB or of any partner, employee, agent or representative of ROBB, to be a partner, director, officer, employee, agent or representative of, or to engage in, any other business, whether of a similar nature or not, nor to limit or restrict the right of ROBB to render services of any kind to any other corporation, firm individual or association. 8. ROBB will hold in confidence any confidential information which WIDE provides to ROBB pursuant to this Agreement unless WIDE gives ROBB permission in writing to disclose such confidential information to a specific third party. Notwithstanding the foregoing, ROBB shall not be required to maintain confidentiality with respect to information (I) which is or becomes part of the public domain; (ii) of which it had independent knowledge prior to disclosure; (iii) which comes into the possession of ROBB in the normal and routine course of its own business from and through independent non-confidential sources; or (iv) which is required to be disclosed by ROBB by governmental requirements. If ROBB is requested or required (by oral question, interrogatories, requests for information or document subpoenas, civil investigative demands, or similar process) to disclose any confidential information supplied to it by WIDE, or the existence of other negotiations in the course of its dealings with WIDE or its representatives, ROBB shall, unless prohibited by law, promptly notify WIDE of such request (s) so that WIDE may seek an appropriate protective order. 9. In consideration of ROBB signing this Agreement and agreeing to perform services as WIDE's financial advisor under this Agreement, WIDE agrees to indemnify and hold harmless ROBB and each of its directors, officers, agents, employees and controlling person (within the meaning of the Securities Act of 1933, as amended) to the extent and as provided in Exhibit A attached hereto and incorporated herein by reference. 10. WIDE further agrees that ROBB shall incur no liability to WIDE or any other party on account of this Agreement for any acts or omissions arising out of or related to the actions of ROBB relating to this Agreement or the performance or failure to perform any services under this Agreement except for ROBB's intentional or willful misconduct as provided for in Exhibit A. Neither termination nor completion of the engagement of ROBB referred to above shall affect these indemnification provisions which shall remain operative and in full force and effect and this paragraph and Exhibit A shall survive the termination of this Agreement. 11. This Agreement may not be transferred, assigned or delegated by any of the parties hereto without the prior written consent of the other party hereto. 12. The failure or neglect of the parties hereto to insist, in any one or more instances, upon the strict performance of any of the terms or conditions of this Agreement, or their waiver of strict performance of any of the terms or conditions of this Agreement, shall not be construed as a waiver or relinquishment in the future of such term or condition, but the same shall continue in full force and effect. 13. This Agreement is for a term of 12 months and may be terminated by WIDE or by ROBB at any time upon 30 days' notice. Paragraphs 4, 7 and 8 shall survive the expiration or termination of this Agreement under all circumstances. 14. Any notices hereunder shall be sent to WIDE and to ROBB at their respective addresses set forth above. Any notice shall be given by registered or certified mail, postage prepaid, and shall be deemed to have been given when deposited in the United States mail. Either party may designate any other address to which notice shall be given, by giving written notice to the other of such change of address in the manner herein provided. 15. This Agreement has been made in the State of New York and shall be construed and governed in accordance with the laws thereof without giving effect to principles governing conflicts of law. 16. This Agreement contains the entire agreement between the parties, may not be altered or modified, except in writing and signed by the party to be charged thereby, and supersedes any and all previous agreements between the parties relating to the subject matter hereof. 17. This Agreement shall be binding upon the parties hereto, the indemnified parties referred to in Section 8, and their respective heirs, administrators, successors and permitted assigns. If you are in agreement with the foregoing, please execute two copies of this letter in the space provided below and return to the undersigned. Very truly yours, ROBB, PECK, MCCOOEY CLEARING CORPORATION By:_________________________________ An Authorized Representative ACCEPTED AND AGREED TO AS OF THE DATE FIRST ABOVE WRITTEN WIDECOM GROUP INC. By:________________________________ Name: EXHIBIT A WIDE agrees to indemnify and hold harmless ROBB, its officers, directors, partners, employees, agents, and counsel, and each person, if any, who controls ROBB within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any and all losses, claims, damages, obligation, penalties, judgments, awards, liabilities, costs expenses and disbursements (and any and all actions, suits, proceedings and investigations in respect hereof and any and all legal and other costs, expenses and disbursements in giving testimony or furnishing documents in response to a subpoena or otherwise), including, without limitation, the costs, expenses and disbursements, as and when incurred, of investigating, preparing or defending any such action, suit, proceeding or investigation (whether or not in connection with litigation in which ROBB is a party), directly or indirectly, caused by, relating to, based upon, arising out of, or in connection with (a) any untrue statement or alleged untrue statement of a material fact contained in, or omissions from any offering document, including any amendment thereof or supplement thereto, or similar statements or omissions in or from any other information furnished by WIDE to ROBB or any prospective participant in a Transaction or purchaser of the WIDE's securities; (b) violation or breaches of any representation, warranty, covenant or agreement contained or incorporated in the Agreement or in any instrument, document, agreement or certificate delivered by WIDE to ROBB or any prospective participant in a Transaction or purchaser or the WIDE's securities; (c) ROBB's acting for WIDE, including, without limitation, any act or omission by ROBB in connection with its acceptance of or the performance or non-performance of its obligations under the agreement to which this exhibit is attached (the "Agreement"), and (d) any offering of any security of WIDE by ROBB. WIDE also agrees that ROBB shall not have any liability (whether direct or indirect, in contract or tort or otherwise) to WIDE for or in connection with the engagement of ROBB or the Agreement, except where such loss has been judicially determined to be solely due to ROBB's gross negligence or willful misconduct. These indemnification provisions shall be in addition to any liability which WIDE may otherwise have to ROBB or the persons indemnified below in this sentence and shall extend to the following: ROBB, its affiliated entities, partners, employees, legal counsel, agents and controlling persons (within the meaning of the federal securities laws), and the officer, directors, employees, legal counsel, agents and controlling persons of any of them. All references to ROBB in these indemnification provisions shall be understood to include any and all of the foregoing. If any action, suit, proceeding or investigation is commenced, as to which ROBB proposes to demand indemnification, it shall notify WIDE with reasonable promptness (provided, however, that any failure by ROBB to notify WIDE shall not relieve WIDE from its obligations hereunder), and WIDE shall have the right to assume the defense of such action. ROBB shall have the right to retain counsel of its own choice to represent it, but the fees and expenses of such counsel shall be at its expense unless the employment of such counsel shall have been authorized in writing by WIDE in connection with the defense of such action or WIDE shall not have promptly employed counsel reasonably satisfactory to ROBB to have charge of the defense of such action or ROBB shall have reasonably concluded that there may be one or more legal defenses available to it which are different from or additional to those available to WIDE, in any of which events such fees and expenses shall be borne by WIDE. Any such counsel of ROBB shall, to the extent consistent with its professional responsibilities, cooperate with WIDE and any counsel designated by WIDE. WIDE shall be liable for any settlement of any claim against ROBB made with WIDE's written consent, which consent shall not be unreasonably withheld. WIDE shall not, without the prior written consent of ROBB, settle or compromise any claim, or permit a default or consent to the entry of any judgment in respect thereof, unless such settlement, compromise or consent includes, as a unconditional term thereof, the giving by the claimant to ROBB of an unconditional release from all liability in respect of such claim. In order to provide for just and equitable contribution, if a claim for indemnification pursuant to these indemnification provisions is made but it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that such indemnification may not be enforced in such case, even though the express provisions hereof provide for indemnification in such case, then WIDE, on the one hand, and ROBB, on the other hand, shall contribute to the losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs expenses and disbursements to which the indemnified person may be subject in accordance with the relative benefits received by WIDE, on the one hand, ROBB, on the other hand, and also the relative fault of WIDE, on the one hand, and ROBB, on the other hand, in connection with the statements, acts or omissions which resulted in such losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses or disbursements and the relevant equitable considerations shall also be considered. No person found liable for a fraudulent misrepresentation shall be entitled to contribution from any person who is not also found liable for such fraudulent misrepresentation. Notwithstanding the foregoing, ROBB, shall not be obligated to contribute any amount hereunder that exceeds the amount of fees previously received by ROBB pursuant to the Agreement. Neither termination nor completion of the engagement of ROBB referred to above shall affect these indemnification provisions which shall remain operative and in full force and effect and this paragraph shall survive the termination of this agreement. WIDE further agrees that ROBB shall incur no liability to WIDE or any other party on account of this Agreement for any acts or omissions arising out of or related to the actions of ROBB relating to this Agreement or the performance or failure to perform any services under this Agreement except for ROBB's intentional or willful misconduct. EX-10 6 EXHIBIT 10.3 Cantella & Co., Inc. - ----------------------------------------------------------------------- 37 SAW MILL RIVER ROAD Telephone: (914) 347-4800 HAWTHORNE, NY 10532 Fax: (914)347-3927 July 9, 1998 Raja Tuli, President The WideCom Group 72 Devon Road, Unit 18 Brampton, Ontario Canada L6T 5B4 Re: US$2,000,000 Private Placement Dear Raja: The purpose of this letter agreement (the "Agreement") is to confirm the engagement of Cantella & Co., Inc, as placement agent and arranger in connection with the WideCom Group's ("the Company") offer and sale of 50 units (each unit consisting of 15,625 shares of WideCom Group's shares of common stock and a $30,000 convertible note), (the "Offering"). The Offering is expected to take the form of a private offering of the Securities to accredited investors within the meaning of Rule 501(A) (1), (2), (3) or (D) of Regulation D under the U.S. Securities Act of 1933, as amended (the "Act"). As placement agent and arranger of the Offering, the Placement Agent's role will involve various aspects of the Offering including: working with the Company to (a) prepare the offering attachments thereto (the "Private Placement Memorandum"), (b) assess market conditions in connection with the Offering, and (c) market the Offering to accredited investors in the United States, all in accordance with applicable law. The Placement Agent will use its best efforts to sell the Securities. The Placement Agent's engagement hereunder does not constitute any commitment by it to purchase all or any part of the Securities. The Company shall pay to Placement Agent a fee equal to ten percent (10%) of the gross proceeds of the Offering. The company shall also pay to the Placement Agent, a non-accountable expense allowance of 3% of the gross proceeds of the Offering. Upon execution of this letter the Company will deliver to the Placement Agent a check in the amount of $15,000 which shall be applied against the Placement Agent's non-accountable expense allowance. Additionally, the Company shall, at the closing of the Offering, grant to the Placement Agent certain warrants to purchase up to 298,550 shares of the Company's common stock under the terms and conditions set forth on a term sheet agreed upon by the Company, attached hereto as Schedule I. The Company represents and warrants to the Placement Agent that at all times prior to and at the time of the consummation of the Offering or termination of the Placement Agent's engagement hereunder, the Private Placement Memorandum will not contain any untrue statement of a material fact or omit to state any material fact to make the statements contained therein in light of the circumstances under which they were made, not misleading. In consideration for the Placement Agent's agreeing to provide the services referred to herein, the Company agrees to fully indemnify to hold harmless the Placement Agent in accordance with the terms of Annex 1. This Agreement shall automatically terminate in one (1) month from the date hereof unless on or prior thereto the Company has in writing agreed to the terms and conditions proposed herein. In addition, the Placement Agent's engagement hereunder may be terminated by the Company or by the Placement Agent at any time prior to execution of the Placement Agent Agreement, upon written notice to the other party without any liability of continuing obligation of any party to any other party, provided that, if the Company terminates this Agreement the Placement Agent shall be entitled to retain all of the fees paid to it under this Agreement and if the Placement Agent at any time prior to the expiration of four (4) months after any such termination by the Company of this Agreement, the Company consummates any financing of the type contemplated in the Agreement, the Placement Agent will be entitled to payment of an amount equal to the fees set forth in Schedule I of this Agreement less the amount of any fees previously paid to the Placement Agent hereunder. The representations and expense reimbursement and indemnity obligation of the Company hereunder shall survive any termination of the Placement Agent's engagement hereunder and any consummation of the Offering. The Placement Agent's commitment to this process will be subject to the following standard requirements: (a) satisfactory due diligence process, (b) satisfactory finalization of all standard documentation, including presentation in the Private Placement Memorandum of information sufficient to meet the standards of accredited investors (c) the absence of a material adverse change in the current financial, political or economic conditions that would in the Placement Agent's view, be likely to prejudice the success of the offering and distribution of the securities or dealings of the securities in the secondary market. In connection with this engagement, the Company has given, or will be giving to the Placement Agent certain written information concerning the Company (all such information being referred to herein as the "confidential material"). The term "confidential material" does not include information which (i) prior to the delivery of such information to the Placement Agent was already in its possession on a non-confidential basis, (ii) was or becomes generally available to the public other than as a result of disclosures by the Placement Agent, (iii) becomes available to the Placement Agent on a non-confidential basis from a source other than the Company or its respective affiliates, provided that such source is not bound by a confidentiality agreement with an obligation of secrecy to the Company and such disclosure does not constitute a breach of any fiduciary obligation or privilege, (iv) is disclosed in the offering materials relating to the Offering, or (v) was or is independently developed by the Placement Agent. Except as otherwise required by law or regulation confidential material which is given to the Placement Agent will be treated confidentially by it so long as it remains non-public and the Placement Agent will not disclose such material to a third party other than its attorneys, accountants or other advisors or agents without the prior written consent of the Company, or use such confidential material for any other purpose other than the engagement contemplated hereunder provided that, notwithstanding the foregoing, the Placement Agent's obligation to maintain such confidentiality shall expire five (5) years from the date hereof unless the information sooner becomes public. Each of the parties hereto irrevocable submits to the non-exclusive jurisdiction of any New York or Federal court sitting in the City of New York or any Suit, action or proceeding arising out of or relating to this Agreement and irrevocably waives to the fullest extent permitted by law, any objection to the laying of venue on the grounds that such suit, action or proceeding has been brought in an inconvenient forum. The Company hereby consents to the service of any and all process which may be reserved in any suit, action or proceeding arising out of or relating to this Agreement by means of personal delivery of courier service, addressed to it at its address provided above and to the attention of any secretary or any other officer, director, managing agent or general agent of the Company and the Company hereby irrevocably waives, to the fullest extent permitted by law, any objection it may now or hereafter have under New York law or any law of any state of the United States or any other jurisdiction or otherwise to service of process in such manner. Nothing in this paragraph shall affect or limit any right to serve process in any manner permitted by law, to begin proceedings in the courts of any jurisdiction or to enforce in any lawful manner a judgement obtained in one jurisdiction in any other jurisdiction. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute the same agreement. This Agreement shall be governed by and consumed in accordance with the laws of the State of New York without regards to the conflicts of laws provisions thereof. If the foregoing correctly sets forth the agreement by and between the Company of the Placement Agent, please sign and return the enclosed copy of this Agreement to the undersigned. Sincerely, CANTELLA & CO., INC. /S/ Jim Freeman --------------- Name: Jim Freeman Title: President Accepted and Agreed to as of the date set forth above. The WideCom Group Inc. /s/ Raja Tuli ------------- Name: Raja Tuli Title: President Annex 1 In consideration for the Placement Agent agreeing to provide the services referred to herein, the Company agrees to fully indemnify and hold harmless the Placement Agent, its officers, directors, partners, employees, agents and counsel, its affiliates and each other entity or person, if any, controlling, controlled by or under common control with the placement agent or any of its affiliates within the meaning of the federal securities laws and their respective directors, officers, agents and employees (the Placement Agent and each such entity or person being referred to as an "Indemnified Person"), from and against any claim by any third party for any losses, claims, damages, or liabilities (or actions in respect thereof) relating to or arising out of the services performed pursuant to this Agreement or the Placement Agent's role in connection therewith and to reimburse any Indemnified Person on a current basis for all expenses (including without limitation, fees and disbursements of counsel) incurred in connection therewith. The Company shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgement for the Plaintiff, the Company agrees to indemnify the Indemnified Person from and against any loss or liability by reason for such settlement or judgment. The Company shall not without the prior written consent of any indemnified person, effect any settlement of any pending or threatened proceeding in respect of which such Indemnified Person is or could have been a party and indemnification could have been sought thereunder by such Indemnified Person, unless such settlement includes an unconditional release of such Indemnified Person from all liability or claims that are the subject matter of such proceeding. If any action, suit, proceeding or investigation is commenced, as to which the Placement Agent proposes to demand indemnification, it shall notify the Company with reasonable promptness (provided, however, that any failure by the Placement Agent to notify the Company shall not relieve the Company from its obligations hereunder), and the company shall have the right to assume the defense of such action. The Placement Agent shall have the right to retain counsel of its own choice to represent it, but the fees and expenses of such counsel shall be at its expense unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have promptly employed counsel reasonably satisfactory to the Placement Agent to have charge of the defense of such action or the Placement Agent shall have reasonably concluded that there may be one or more legal defenses available to the Company, in any of which events such fees and expenses shall be borne by the Company. Any such counsel of the Placement Agent shall, to the extent consistent with its professional responsibilities, cooperate with the Company and any counsel designated by the Company. In no event shall the Company be liable for fees and expenses of more than one counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. Anything in this paragraph 12 to the contrary notwithstanding, the Company shall not be liable for any settlement of any claim or action effected without its written consent; provided however, that such consent was not unreasonably withheld. The Placement Agent, agrees to indemnify and hold harmless the Company, its officers, directors, partners, employees, agents, and counsel, and each person, if any, who control the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Placement Agent, but only with respect to statements, if any, made in the Confidential Offering Memorandum, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by the Placement Agent concerning the Placement Agent expressly for inclusion in the Confidential Offering Memorandum, or any amendment or supplement thereof, provided, however, that the Placement Agent's obligations to provide indemnification hereunder shall be limited to the fees actually received by the Placement Agent pursuant to this Agreement. If any action shall be brought against the Company, in respect of which indemnification may be sought against the Placement Agent pursuant hereto, the Placement Agent shall have the rights and duties given to the Company above, and the Company shall have the rights and duties so given to the Placement Agent. Schedule I Below are the terms for the private offering for WideCom Group (the Company and Cantella & Co., Inc. 1. Cantella & Co., Inc. ("Cantella") will use its best efforts to raise $2,000,000 in gross proceeds for the Company in a private offering (the "Offering") on a $1,000,000 minimum--$2,000,000 maximum basis. 2. Cantella proposes that the Offering will be made to Accredited investors within the meaning of Rule 501(A) (1), (2), (3) or (D) of Regulation D under the U.S. Securities Act of 1933, as amended (the "Act") and will consist of 50 Units (the "Unit"), at an offering price of $40,000 per Unit, each Unit consisting of 15,625 shares of the Company's common stock and a $30,000 convertible note (the "Note"), which may be convertible into 13,338 shares of the Company's Common Stock. The Notes will be redeemable by the Company at any time after the Company's common stock underlying the Notes is registered under the Securities Act of 1933, as amended, provided, that during the 20 consecutive trading days ending within 10 days of the date or the notice of redemption the closing bid price of the Company's Common Stock is not less than 150% of the conversion price, and the trading volume of the Company's common stock is not less than 30,000 shares per day. The redemption price shall be equal to par value plus accrued and unpaid Interest. One-half units will be issued if agreed to by the Company and Cantella. The notes will mature three (3) years from the date of issue. The Note will carry interest of 12% paid quarterly. The Company will immediately, upon the closing of the Offering, undertake to register the Unit(s) shares, the shares underlying the Notes and the shares underlying the Agent warrants. 3. For acting as placement agent in connection with the Offering Cantella shall be entitled to receive upon closing, a fee equal to 10% of the gross proceeds of all the units sold. In addition, Cantella shall be entitled to receive a non-accountable expense allowance of 3% of the gross proceeds. Upon execution of an engagement letter, the Company shall deliver to Cantella a check in the sum of $15,000 which said amount shall be applied against Cantella's non-accountable expense allowance. 4. At the closing of the Offering the Company shall deliver to Cantella, (or its designated affiliates or assignees) common stock purchase warrants, ("Cantella Warrants"), to purchase 5,791 shares per Unit sold or part thereof pro rata. The purchase price of the Cantella Warrants shall be $.001 each. Such Cantella Warrants will expire five (5) years from the date of the Closing and will have an exercise price of $0.75 per share. Cantella shall have certain anti-dilution rights, providing for adjustment in (i) the number of such shares, and (ii) the exercise price of the warrants. Cantella will also have certain registration rights for the underlying shares. 5. The Company shall prepare a Confidential Offering Memorandum. The Company shall pay all fees, charges, expenses and disbursements in connection with (i) the preparation, printing, filing, distribution and mailing of the Confidential Offering Memorandum all other documents relating to the Offering including the cost of all copies; (ii) the issuance, sale, transfer and delivery of Units, including any transfer or other taxes payable thereon and the fees of any escrow agent, transfer agent or registrar; and (iii) the registration or qualification of the Units for offer and sale under the securities laws of such states and other jurisdictions as the Company and Cantella may designate. 6. The Company shall also prepare or cause to be prepared, at its own cost and expense such subscription agreements and other documentation (including, without limitation, warrant agreements, escrow agreements, warrants stock certificates and registration right agreements) in connection with the Offering, all of which shall be in form and content as shall be reasonably satisfactory to Cantella. 7. The Company agrees to have no more than 8,924,754 shares issued or reserved on a "fully diluted" basis immediately prior to the closing, except for shares issued in connection with the acquisition of the photo printer business. In addition, the Company will have no more than $200,000 in long term debt issued. 8. The Company agrees that subsequent to the Offering it will not issue any additional debt for borrowed money except (i) bank and institutional debt financing; or (ii) debt which is subordinated to the Notes sold in the offering, without the written permission of Cantella until 80% of the debt issued in the offering is either repaid or converted. 9. This letter is conditioned on the execution of a mutually agreeable financial consulting agreement between the Company and Robb Peck McCooey ("Robb Peck"), under which Robb Peck will receive warrants to purchase 50,000 shares or the Company's common stock in return for financial consulting services including assistance in the completion of this offering. The Company will deliver a check to Robb Peck for $5,000 and a non-refundable advance against expenses. The agreement will contain a right of first refusal by Robb Peck to act as underwriter or Placement Agent for future offerings by the Company. EX-15 7 EXHIBIT 15 Exhibit 15 Schwartz Levitsky Feldman llp Chartered Accountants Toronto, Montreal, Ottawa ADVISORY LETTER IN CONNECTION WITH THE UNAUDITED FINANCIAL STATEMENTS OF THE WIDECOM GROUP INC. FOR THE QUARTER ENDED JUNE 30, 1999 The accompanying consolidated balance sheet of The WideCom Group Inc. ("the Company") as of June 30, 1999, and the consolidated statements of operations, shareholders' equity and cash flows for the quarter ended June 30,1999 were compiled by management and were included in Form 10QSB as filed by the Company and Incorporated in the Registration Statement Form SB2. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited, reviewed or otherwise been associated with the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. Toronto, Ontario October 7, 1999 /s/ Schwartz Levitsky Feldman llp --------------------------------- Chartered Accountants 1167 Caledonia Road Toronto, Ontario M6A 2x1 Tel: 416-785-5353 Fax: 416-785-5663 EX-23 8 EXHIBIT 23.1 Exhibit 23.1 Schwartz Levitsky Feldman llp Chartered Accountants Toronto, Montreal, Ottawa CONSENT OF SCHWARTZ LEVITSKY FELDMAN LLP The undersigned, Schwartz Levitsky Feldman llp, Chartered Accountants hereby consent to the use of our name and the use of our opinion dated July 5,1999 on the consolidated financial statements of The WideCom Group Inc. ("the Company") included in the General Form for Registration of Securities- Form SB2 being filed by the Company. Toronto, Ontario October 7, 1999 /s/ Schwartz Levitsky Feldman llp --------------------------------- Chartered Accountants 1167 Caledonia Road Toronto, Ontario M6A 2x1 Tel: 416-785-5353 Fax: 416-785-5663 -----END PRIVACY-ENHANCED MESSAGE-----