-----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, NkU14gf4ByZzKRMzPzZVVtS1Ud2cHJ7MExsEKLuJh3xPwqfEHiIszXHweQJhQaFO YmQWmATUAyLY/khwc4cTqw== 0000950123-97-007058.txt : 19970819 0000950123-97-007058.hdr.sgml : 19970819 ACCESSION NUMBER: 0000950123-97-007058 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970818 SROS: NONE 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: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13588 FILM NUMBER: 97665814 BUSINESS ADDRESS: STREET 1: 55 CITY CENTER DR STREET 2: STE 500 L5B 1M3 MISSISSAUGA CITY: ONTARIO, CANADA STATE: A6 BUSINESS PHONE: 9057120505 MAIL ADDRESS: STREET 1: 55 CITY CENTRE DRIVE STREET 2: STE 500 MISSISSAUGA L5B 1M3 CITY: ONTARIO, CANADA STATE: A6 10-K/A 1 AMENDMENT #1 TO WIDECOM GROUP, INC. FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO.1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1997 COMMISSION FILE NUMBER 1-13588 THE WIDECOM GROUP INC. (Exact Name of Registrant as specified in its Charter) ONTARIO, CANADA 98-0139939 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 267 MATHESON BOULEVARD EAST, MISSISSAUGA, ONTARIO, CANADA L4Z 1X8 (Address of principal executive offices) (Zip Code) (905) 712-0505 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ---------------- COMMON STOCK, PAR VALUE $.01 PER SHARE NASDAQ SMALL CAP MARKET WARRANTS TO PURCHASE COMMON STOCK BOSTON STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing sale price of the registrant's common stock on the Nasdaq SmallCap Market as of July 7, 1997 was approximately $9,948,089. The number of shares outstanding of registrant's common stock as of June 30, 1997 was 5,565,251 shares 1 2 All references to "dollar" or "$" in this Annual Report are to United States dollars. PART I DESCRIPTION OF BUSINESS THE COMPANY The Widecom Group Inc. (the "Company") was incorporated in Ontario, Canada, June 15, 1990. The Company designs, assembles and recently commenced limited 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. The Company's products include WIDEfax Scan, a 36" wide format scanner, and WIDEfax Plotter, a 36" wide format plotter (printer). The Company also markets a WIDEfax Modular Unit which incorporates a WIDEfax Scan module, a WIDEfax 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. The Company has only recently commenced commercialization activities which, to date, have resulted in only limited product sales. The Company designed its WIDEfax document systems in response to perceived market demand for systems which facilitate the efficient management and transmission of wide format documents, particularly for architectural, engineering and construction applications. The Company also markets its products for use by manufacturers in the garment and graphic arts industries, utilities and government agencies and for applications in newspaper and advertising industries. Although the markets for the Company's products are highly specialized and the Company has not conducted any formal market studies as to the potential demand for wide format document systems, the Company believes that the markets for wide format document systems are emerging as a result of the increasing demand for systems which can more efficiently scan, copy, print, transmit, receive and archive wide format documents. The Company believes that its products provide attractive alternatives to traditional methods employed to permit multiple users to view wide format documents, such as the use of an overnight courier to deliver copies of a document or microfiche reproduction. On October 2nd, 1996, the Company formed a research and development consortium known as 3994340 Canada Inc., doing business as Technologies NovImage, with an economic development agency of the Province of Quebec. The Company is now conducting all of its research and development activities through NovImage, which activities are expected to qualify for partial funding from governmental agencies. PRODUCTS WIDEfax Scan and SLC436-C Color Scanner The WIDEfax Scan and SLC436-C color scanner are wide format scanners capable of scanning a document up to 36" wide. The Company's scanners interface with a personal computer to enable the user to scan images into the personal computer for display, editing and archiving. The WIDEfax Scan provides the capacity of scanning monochromatic images only. As the next generation of the WIDEfax Scan, the SLC436-C was introduced in May of 1996, as a low-cost wide format color scanner capable of scanning 36" by 48" documents at a resolution of 400 dots per square inch ("dpi") in under thirty seconds for monochrome images, and under eight minutes for full color images. Deliveries of the SLC436-C color scanner commenced during the third quarter of 1996. The Company's scanners incorporate the Company's single line contact scanner 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 2 3 light sensor, a 36" light emitting diode ("LED") array and software designed to enhance the scanned image by removing deteriorations from the document being reproduced and to 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 the Company's image sensor chips contain pixels larger than those of chips used in other scanners, the Company's contact scanners require less light exposure and, therefore, operate faster than other scanners. SLC436-C reads an image in increments of 400 dpi, whereas standard format facsimile machines read images in increments of 200 dpi and other wide format scanners read images in increments ranging from 138 dpi to 417 dpi. Higher dpi improves the reliability of the scanned image because the scanner recognizes greater image detail. The software incorporated in the SLC436-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. The Company's enabling software permits SLC436-C 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 capable of scanning up to a 12" width document. 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 as a result of the use of multiple lenses, thereby limiting the reliability and usefulness of the reproduced document. The Company believes that its single line contact scanner technology and software enable its products to scan and reproduce such documents with improved clarity and accuracy. WIDEfax Plotter WIDEfax Plotter is a wide format plotter capable of printing a document up to 36" wide x 200' in length. WIDEfax Plotter interfaces with a personal computer to enable the user to print images directly from the personal computer. WIDEfax Plotter is sold with an optional internal modem which enables WIDEfax Plotter to receive facsimile transmissions of wide format documents. WIDEfax Plotter prints wide format documents on thermal paper or other thermal medium, such as mylar and matte film paper. WIDEfax Plotter incorporates thermal print heads which consist of an array of pixels. When energy passes through a pixel, the pixel heats up and changes the color of the thermal paper in contact with that pixel to reproduce a document's image. WIDEfax Plotter reproduces the image of a standard size wide format document in approximately 30 seconds, in increments of 200 dpi. The Company is currently developing a thermal transfer plain paper plotter which is designed to print an image in increments of 400 dpi. The Company has developed print heads which will enable the proposed plotter to print in increments of 400 dpi. This plotter is being 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 thermal plotter. The Company has developed a prototype of the thermal transfer plain paper plotter and started assembling the first pre-production models during the third quarter of 1996. The Company expects first deliveries of the production models in the third quarter of 1997. WIDEfax Modular Unit WIDEfax Modular Unit consists of a WIDEfax Scan module and WIDEfax Plotter module which are integrated into one unit. Together, these modules perform scanning, printing and copying functions. When these modules are combined with optional internal modems and enabling software to interface with a personal computer, WIDEfax Modular Unit 3 4 performs the functions of each module, as well as those of a wide format copier and facsimile machine. The user of a WIDEfax Scan or a WIDEfax Plotter can upgrade either machine to a WIDEfax Modular Unit by purchasing and connecting the other module. Upon introducing WIDEfax Modular Unit in May 1994, the Company discontinued marketing of its 36" WIDEfax facsimile machine, which accounted for approximately 89.1% of the Company's product sales for the year ended March 31, 1994. For the years ended March 31, 1995, 1996 and 1997 sales of the WIDEfax Modular Unit accounted for approximately 67.0%, 35.2%and 13.9%, respectively, of the Company's product sales. The Company plans to incorporate the thermal transfer plain paper plotter if it is successfully introduced into its WIDEfax Modular Unit, as well as market the plotter as a separate product. The Company believes that incorporating the thermal transfer plain paper plotter into WIDEfax Modular Unit will facilitate the positioning of this product as an attractive entry in the wide format copier market. The Company also plans to sell the 400 dpi print heads as a separate component to other manufacturers upon introduction of this plotter. Software The Company has developed and markets two applications software packages, WIDEView, designed to enhance the user's document imaging capabilities, and SLC-OVLY, which enables the Company's WIDEfax products to interface with personal computers operating certain CAD software. In May 1996, the Company introduced its Image Database File Management System ("IDF/MS"), a software package designed to provide for wide format document distribution across the Internet. The IDF/MS provides architects, engineers and other users remote access to image databases containing wide format images which previously could not be readily distributed on the Internet. The Company believes that IDF/MS will be particularly useful to architects, engineers, and real estate developers in connection with the bidding on proposed projects by allowing immediate access to engineering documents and plans without the cost and delay associated with the copying, packaging and delivery of such documents and plans. Accessories The Company sells several accessories for use in connection with its WIDEfax products, including various types of paper and film. Sales of accessories have not been material to date and are not expected to be material in the future. MARKETING AND SALES The Company's primary marketing strategy is to sell its products in targeted commercial markets in which wide format document systems are believed to have potential for significant applications, principally architectural, engineering and construction firms, for which reproduction, archiving and transmission of wide format documents are essential. The Company also markets its products for use by manufacturers in the garment, and other industries, utilities and government agencies and applications in newspapers and advertising industries. The Company believes that its 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. The Company has established strategic marketing relationships by engaging independent distributors and dealers to market its products in various regions throughout the United States and in foreign markets. As of March 31, 1997, the Company had arrangements with approximately 87 distributors, dealers and sales agents (collectively, "distributors"), of which 72 arrangements are pursuant to written agreements. The Company's agreements with its distributors typically are for a term of two to three years and grant the distributor the right to market the Company's products 4 5 within a specified territory during the term of the Agreement, provided that the distributor satisfies minimum purchase requirements. Most of the Company's distributors have not satisfied the applicable minimum purchase requirements, in many cases because the Company has been unable to fulfill all purchase orders from the distributors. The Company sells products to distributors at discounts ranging from 25% to 40% of the end user price of the products. For the years ended March 31, 1995, 1996 and 1997, the Company's five largest distributors accounted for approximately 41.8% , 32.8% and 49.9%, respectively, of the Company's product sales. The Imtec Group Ltd. of England represents 27.5% of the Company's sales for the fiscal year ended March 31, 1997. During the years ended March 31, 1995, 1996 and 1997, sales by distributors accounted for approximately 82.3%, 83.1% and 96.4% of the Company's product sales. The Company also markets its products in the United States and Canada through its in-house marketing staff of seven persons. The Company has one sales person and one service support engineer at each of its sales offices in Atlanta Georgia, Cleveland Ohio, Pittsburgh Pennsylvania and Big Bear Lake California; in addition to its main sales office in Mississauga, Ontario. The staff in each of these offices is responsible for marketing and servicing the Company's products in its respective region through dealers and distributors. A substantial portion of the Company's sales have been made to foreign markets, primarily the Middle East and Asia. The following table sets forth, for the periods indicated, the amount of the Company's sales by geographic region expressed as a dollar amount and as a percentage of product sales for such periods:
YEAR ENDED MARCH 31, 1995 1996 1997 ---- ---- ---- REGION AMOUNT % AMOUNT % AMOUNT % ------ --- ------ --- ------ --- United States $ 723,064 44.5 $ 730,055 43.8 467,766 27.9 Middle East 394,399 24.3 335,682 20.1 346,595 20.6 Asia 312,233 19.2 80,576 4.8 266,345 15.9 Europe 78,879 4.8 464,000 27.9 475,551 28.3 Canada 116,666 7.2 56,032 3.4 122,676 7.3 ---------- ----- ---------- ----- --------- ----- Total $1,625,241 100.0 $1,666,345 100.0 1,678,933 100.0 ========== ===== ========== ===== ========= =====
The Company has started to aggressively market and advertise its products since the introduction of the SLC436-C color scanner. Within the last year, along with recruitment of additional sales and service staff, the Company has placed advertisements in trade publications and participated in major trade shows. The Company believes that the increased costs of these efforts increase brand awareness, provide credibility with dealers and distributors and are necessary steps towards the commercialization of its products. The Company entered into three distribution relationships during the year for its scanners. The first two are with the Imtec Group Ltd. ("Imtec") of England, dated November 15, 1996 and Scan Group ("SGI") Ltd. of Israel, dated September 8, 1996. Imtec has agreed to an initial purchase order of 500 units of the Company's product to be used in Imtec's products for distribution throughout the World. SGI has agreed to a principal purchase order of 200 Units to be distributed in the European Market. These relationships allow Imtec and SGI to sell products based on WideCom's technology under their own brand names on terms similar to those with other distributors. The third agreement is with CADigitizing, a Florida Corporation, dated February 13, 1997, for the Chinese market, which gives Cadigitizing the exclusive right to distribute the Company's products into the Peoples Republic of China. Cadigitizing has placed an initial purchase order for the Company's products in the amount of $900,000. 5 6 WARRANTY, SERVICE AND MAINTENANCE The Company offers a 90-day limited warranty, which can be extended for a term of up to one-year, covering the workmanship and parts of its products. During the term of the warranty, the Company will make repairs and replace parts which become defective due to normal use. During the term of the warranty of products sold by distributors, the Company will replace parts which become defective due to normal use and the distributor is responsible for the labor component of servicing the product. The Company provides a warranty to distributors for a period expiring on the earlier of twelve months following the distributor's purchase of the product or three months following the distributor's sale of the product. The Company trains its in-house service engineers and certain distributors to enable them to service and maintain the Company's products. The Company operates a toll free telephone line during normal business hours to respond to distributors and user inquiries about the operation, service and maintenance of the Company's products. The Company also has an "E-mail box" which distributors and users can access to receive such assistance from the Company. MANUFACTURING The Company subcontracts certain manufacturing operations, such as the production of Company designed 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. The Company believes that alternative sources of supply for all of its components and custom parts are readily available on commercially reasonable terms. The Company does not maintain supply agreements with any of its suppliers or subcontractors and purchases components and custom parts pursuant to purchase orders in the ordinary course of business. Most of such components are acquired in the United States and shipped to the Company's manufacturing facility, Indo-Widecom International Ltd., a wholly owned subsidiary of Widecom ("Indo-Widecom") in a free trade zone in India where the Company's manufacturing operations are conducted. Quality control and adjustments are also conducted at Indo-Widecom. While the Company conducts its product assembly in-house, the Company will need to increase its manufacturing capabilities in the event of any increased demand for its products. There can be no assurance that the Company can increase its manufacturing capabilities on commercially reasonable terms, in a timely manner or at all. The Company entered into an agreement on August 24, 1993, with WideCom R&D (the "Agreement"). Widecom R&D is wholly owned by Lakhbir S. Tuli, a principal stockholder of the Company and the father of Raja S. Tuli and Suneet S. Tuli who are both officers and directors of the Company. "See Directors and Executive officers of the Company." Under the Agreement, WideCom R&D will identify and recruit on a non-exclusive basis, licensing, sub-contract manufacture and marketing ventures for the Company and its line of products in India. A Licensee or marketing venture will purchase equipment from the Company and manufacture the Company's products in India. Pursuant to the agreement, the Company will sell component parts to licensees and receive a royalty payment of 5% on the licensee's sales of finished products. The Company is allowed to purchase completed units assembled by licensees up to a maximum of 50% of the licensee's production, at a price not exceeding the licensees direct cost and 5% for overhead and profit. The licensee will restrict all resales of the product in India. The Company will monitor the quality of products initially by supervising and training the licensee in the manufacturing process. To date, no agreements have been entered into with such licensees. COMPETITION The markets for document systems are characterized by intense competition. Although the Company is not aware of any other manufacturer of 36" facsimile machines, 6 7 the Company is aware of one manufacturer of 24" facsimile machines and various manufacturers of wide format copiers, scanners and plotters. The Company believes it products compete on the basis of resolution, quality, speed, price and distribution channels. The Company competes with numerous well-established foreign and domestic companies that market or are developing wide format document systems. Competitors include Contex Corporation, Vidar Systems, Inc., and Anatech Corporation in the market for wide format scanners; Calcomp Corporation, Hewlett Packard Company and Mutoh Corporation in the market for wide format plotters; Silver Reed Corporation in the market for wide format facsimile machines; and Xerox, Katsuragawa Company and Oce in the market for wide format copiers. In addition, the Company also expects that companies that manufacture and sell standard facsimile machines, copiers, scanners and plotters could develop, without substantial delay, wide format document systems directly competitive with the Company's products. Many of these companies possess substantially greater financial, technical, marketing, personnel and other resources than the Company and 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 in response to competitors and to enter new markets. In addition, the markets for the Company's products are characterized by rapidly changing technology and evolving industry standards, often resulting in product obsolescence or shortened product lifecycles. As a result, the Company's ability to compete may be dependent upon its ability to continually enhance and improve its products, to complete development of and introduce into the marketplace in a timely manner its proposed products and to successfully develop and market new products. There can be no assurance that the Company will be able to compete successfully, that competitors will not develop technologies or products that render the Company's products obsolete or less marketable or that the Company will be able to enhance successfully its existing products or develop new products. RESEARCH AND DEVELOPMENT The Company incurred costs for research and development of $656,876, $732,457 and $614,663 during the years ended March 31, 1995, 1996 and 1997, respectively. As of March 31, 1997, the Company employed only 2 full-time research and development design engineers in North America and 9 research engineers in India, as it moved the bulk of its research and development efforts to a consortium. "See Certain Relationships and Related Transactions" The Company formed a research and development consortium on October 2, 1996, with an economic development agency of the Province of Quebec, 3994340 Canada Inc., doing business as Technologies NovImage. The Company is now conducting all of its research and development activities through 3994340 Canada Inc., doing business as Technologies Novimage (see "Certain Relationships and Certain Transactions), which activities are expected to qualify for partial funding from governmental agencies. The research and development activities conducted by 3994340 Canada Inc., doing business as Technologies Novimage on behalf of the Company are primarily focused on plotter, scanner and facsimile technologies. The plotter research is concentrated on improving printer resolution and developing thermal transfer mechanisms for incorporation into the plain paper plotter, including color printing capabilities. Scanner research is focused on the development of color scanning capabilities and the enhancement of scanner image. Facsimile research is focused on the development of a standard wide format facsimile communication protocol. The Company anticipates that upon introduction of the proposed thermal transfer plain paper plotter, 3994340 Canada Inc., doing business as Technologies Novimage will commence activities relating to the development of a color plotter which uses colored thermal transfer ribbons containing a wax-like printing substance. 7 8 3994340 Canada Inc., doing business as Technologies Novimage is completing the development of a color-scan chip intended to be incorporated into a 36" contact scanner to provide color scanning capabilities. This chip is being designed to combine four image sensor chips to read the following primary colors: magenta, cyan, yellow and black. As a result, such a scanner is expected to be able to function both as a color scanner and as a monochrome scanner. The Company expects that a prototype of a color scanner will be introduced by the fourth quarter of 1997. The Company is developing a wide format document "fax-on-demand" system. The Company anticipates that this system would be used for the distribution of engineering and construction plans by bid depositories and tendering document distribution services. The Company anticipates that such services will create a database of documents such as construction plans, and make such documents available to its subscribers who are generally contractors. The system is being designed to enable a subscriber to access a document in the service's database through the subscriber's personal computer and printing the selected document to a WIDEfax Plotter at the subscriber's location. INTELLECTUAL PROPERTY The Company relies upon proprietary know-how and employs various methods to protect the ideas, concepts and documentation of its proprietary technology, which methods include nondisclosure agreements with its employees and distributors; however, such methods may not afford complete protection and there can be no assurance that competitors or customers will not independently develop such know-how or obtain access to the Company's know-how, ideas, concepts and documentation. The Company does not hold any patents, although it has filed patent applications relating to certain aspects of its technology. There can be no assurance, however, that any patents will be issued to the Company or, if issued, that such patents would afford the Company a competitive advantage. In any event, there can be no assurance that future patents, if any, would not be circumvented or invalidated. In addition, certain aspects of the technologies embodied in the Company's products are generally available to other manufacturers. The Company is not aware of any infringement on the proprietary rights of others and has not received any notice of claimed infringement; however, the Company has not conducted any investigation as to possible infringement and there can be no assurance that third parties will not assert infringement claims against the Company in connection with its products, that any such assertion of infringement will not result in litigation, or that the Company would prevail in such litigation or be able to license any infringed patents of third parties on commercially reasonable terms. If the Company's technologies were found to infringe another party's rights, the Company could be required to modify its products or obtain a license. There can be no assurance that the Company would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, or that the Company would have the financial or other resources necessary to successfully defend a claim of violation of proprietary rights. The Company granted an exclusive license to all of its patents and technology relating to its scanner and plotter manufacturing and its WideView TM and SLC-OVLY TM proprietary software (collectively, the "Intellectual Property") to 3994340 Canada Inc., doing business as Technologies 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 exclusive license and the payment of a 0.5% royalty fee on net revenue, licensing revenue and net sales to sub-licensees, 3994340 Canada Inc., doing business as Technologies Novimage granted the Company an exclusive perpetual worldwide (with the exception of the Province of Quebec, Canada) license 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 3994340 Canada Inc., doing business as 8 9 Technologies Novimage. 3994340 Canada Inc., doing business as Technologies Novimage retained such rights with respect to the Province of Quebec, Canada. See "Certain Relationships and Certain Transactions". The Company has neither filed for copyright protection of its proprietary software nor registered the name SLC-OVLY and WideView as a Trademark with the United States Patent and Trademark Office. The Company holds a registered trademark with the United State Patent and Trademark Office for the WIDEfax(R) name only. The Company is not aware of any infringement on the proprietary rights of others and has not received any notice of claimed trademark infringement; however, the Company has not conducted any investigation as to possible trademark infringement and there can be no assurance that third parties will not assert trademark infringement claims against the Company in connection with its use of any of its marks, that any such assertion of infringement will not result in litigation, or that the Company would prevail in such litigation. EMPLOYEES As of March 31, 1997, the Company had 188 full time employees, including 11 research and development engineers, 108 manufacturing employees, 69 sales staff and administrative personnel. One hundred and forty two of such employees are located in India and are employees of the Company's wholly owned Indian subsidiary, Indo-Widecom International, Ltd. Neither the Company nor its subsidiary is a party to any labor agreements and none of their employees are represented by a labor union. The Company believes its employee relations to be satisfactory. DESCRIPTION OF PROPERTY In February 1996, the Company purchased property in the Noida Export Processing Zone near New Delhi, India (the "Free Trade Zone") for approximately $67,500 and is building a manufacturing facility of approximately 24,000 square feet with estimated construction costs of approximately $360,000. Clean-room facilities and other special infrastructure within the building is estimated to cost an additional $240,000 by its completion. The Company expects that the project will be completed shortly. The Company leases 9,000 square feet at 267 Matheson Boulevard, Mississauga, Ontario, Canada, pursuant to a five-year lease entered into in 1993, and 7,000 square feet in the Free Trade Zone, pursuant to a five-year lease entered into in 1994. The current annual rents are $39,375 and $15,200, respectively. Upon completion of construction of the Company's new manufacturing facility the Company will transfer its manufacturing operations to the new facility. In addition, the Company currently leases a sales office on a month-to-month basis in Big Bear Lake, California, the Company has a one year lease for sales offices in Pittsburgh, Pennsylvania, and Cleveland, Ohio, and a two year lease for a sales office in Atlanta, Georgia. The current annual rental rates of these facilities are approximately $28,164 in the aggregate. The Company believes that its present facilities are adequate for the Company's current level of operations; however, the Company will need to increase its manufacturing capabilities in the event of any increased demand for its products. LEGAL PROCEEDINGS From 1992 to July 1993, Raja S. Tuli engaged two individuals, John Keenan and Vincent DiGiulio ("K&D") to provide services relating to the Company's marketing and other activities. In exchange for performing such services, Mr. Tuli transferred 100,000 Common Shares to K&D. Thereafter, K&D attempted to transfer an aggregate of 172,860 Common Shares to third parties, which 172,860 common shares is in excess of the 100,000 common shares transferred by Mr. Tuli. In November 1993, Raja S. Tuli entered into an indemnification agreement with the Company pursuant to which Mr. Tuli agreed 9 10 that in the event the Company is required to issue in excess of 100,000 Common Shares to K&D or any purported transferee of such shares, Mr. Tuli would return to the Company up to 160,000 Common Shares for cancellation to the extent the Company is required to issue any such additional shares. K&D filed a lawsuit on December 20, 1996, in the U.S. District Court for the District Court of Rhode Island, alleging breach of contract and demanding specific performance, claiming 300,000 shares and 200,000 warrants. Giving effect to the 8 for 10 stock reverse split the Company had implemented in 1995, the claim would be for 240,000 shares and 160,000 warrants, of which 100,000 shares have been transferred by Mr. Tuli and the remaining exposure is for an additional 140,000 shares. The Company has filed an answer to the claim, and is in the process of filing an interpleader counterclaim. One of the two above-mentioned individuals has filed for bankruptcy. The Company, along with K&D are also subject to two additional lawsuits filed by the above-mentioned third parties to whom K&D attempted to transfer shares. This claim has been consolidated into the original litigation, and the Company is attempting to also consolidate the claim by the additional claimant. The Company believes that a number of additional third parties could also prosecute in this regard. The Company will continue to attempt the joinder of all such actions arising in the future in to one Federal Court action. The Department of Business Regulation for the State of Rhode Island is also continuing an investigation into these matters. On or about February 27, 1997, plaintiff, Brett Whiton, commenced a class action against the Company, Raja S. Tuli and Suneet S. Tuli. The action is currently pending before the United States District Court for the Southern District of New York. The Complaint is based upon alleged improper conduct with respect to the announcement of the redemption of certain warrants, which announcement was made on February 10, 1997. On or about March 15, 1997, two substantially similar class actions were commenced in the Supreme Court of the State of New York, County of New York; one by Richard Benjamin and the other by Anthony Hand. These actions have also been removed to, and are currently pending before, the United States District Court for the Southern District of New York. The above three actions (collectively, the "New York Class Actions") have been consolidated for all purposes. On or about May 1st, 1997, the court approved the settlement of the New York Class Action. The settlement obligated the Company to reduce the warrant redemption to half of the publicly held warrants, and reduce the exercise price to $3.00 from $4.00. Along with payment of the Plaintiff's legal fees, the settlement further obligated the Company to appoint an independent director to its board of directors and recruit an independent Chief Operating Officer. The Company also agreed to issue one replacement warrant for each warrant held by warrant holders on February 10th, 1997 and sold by such holders prior to the close of business on March 5th, 1997. It is not yet possible to quantify the number of warrants that the Company will be required to issue. The Settlement has been preliminarily approved by the Court on a non opt-out basis and, if finally approved on a non opt-out basis, will resolve all claims (if any) which may be or have been made by class members. Notice to all class members has been provided, and a hearing has been scheduled for August 2, 1997, to determine whether the settlement shall be finally approved. On or about March 10, 1997, an action was commenced in the Superior Court of the State of California or the county of Los Angeles. The action was subsequently removed to, and is currently pending before the United States District Court for the Central District of California. Plaintiffs, Don Johnson, Walter J. Lack, Thomas V. Girardi, Glenn McCusker and Gino Aiello are alleged to be holders of the Company's shares and/or warrants. The complaint in this action, similar to the New York Class Action, is based upon alleged improper conduct with respect to the announcement of the redemption of certain warrants, which announcement was made on February 10, 1997. The complaint includes causes of action for alleged fraud, in the nature of alleged misrepresentation and in the nature of alleged negligent misrepresentation, alleged breach of contract, 10 11 alleged breach of fiduciary duty, and alleged violation of California Corporations Code SS 25400 and 25500. Plaintiffs' seek compensatory and general damages, punitive damages, and injunctive relief. The complaint also demanded an award of pre-judgment and post-judgment interest, attorneys' fees, expert witness fees, and costs. An answer has been filed by the company in the action in which all material allegations in the complaint are denied and numerous affirmative defenses are asserted. 11 12 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Certain matters were submitted to a vote of security holders of the Company during the fourth fiscal quarter of the Company's fiscal year ended March 31, 1997, at the Company's annual meeting held on January 30, 1997 (the "Annual Meeting"). At the Annual Meeting the stockholders approved the following: (1) the election of the Board of Directors at which four directors were elected, each to serve until the next annual meeting of the stockholders;
Name Votes For Votes Against Age - ---- --------- ------------- --- RAJA S. TULI 2,245,846 35,211 31 SUNEET S. TULI 2,245,846 35,211 29 DR. AJIT SINGH 2,245,846 35,211 56 BRUCE D. VALLILLEE 2,245,846 35,211 76 and
(2) an amendment to the Company's 1995 Stock Option Plan (the "Plan") to increase the number of shares of the Company's Common Stock authorized for issuance under the Plan. The amendment to the Plan permits the Company to issue options to purchase up to 500,000 shares of the Company's Common Stock. To date, the Company has issued options to purchase up to 200,000 shares of the Company's Common Stock. The number of votes cast in connection with the Plan were as follows: (i) 2,147,871 votes approved the Plan; (ii) 50,111 votes were against the Plan; and (iii) there were 6,300 abstentions and 76,775 broker non-votes. 12 13 PART II MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock and warrants are quoted on the Nasdaq SmallCap Market under the symbols "WIDEF" and "WIDWF", respectively, and on the Boston Stock Exchange under the symbols "WDE" and "WDEW". The table below represents the quarterly high and low closing prices for the Company's common stock and warrants as reported through July 7, 1997. The prices listed in this table reflect quotations without adjustment for retail mark-ups, mark-downs, or commissions. The Company has not paid any cash dividends since inception, and intends to retain earnings, if any, in the foreseeable future for use in Company expansion. The number of holders of record of the Company's common stock and warrants on June 30, 1997 was 57 and 8, respectively. It is believed that the actual number of beneficial holders of each class of common stock and warrants is in excess of 500. The following sets forth the high and low sales prices for the Company's Common Stock and warrants, respectively, as reported on the NASDAQ Small Cap Market.
COMMON STOCK WARRANTS ------------ -------- HIGH LOW HIGH LOW ---- --- ---- --- 1995 Fourth Quarter (commencing December 18, 1995) $ 6 1/2 $ 5 $3 1/2 $1 1/2 1996 First Quarter (January 1 through March 31, 1996) 12 3/8 4 7/8 9 21/2 Second Quarter (April 1 through June 30, 1996) 13 1/4 7 5/8 9 41/2 Third Quarter (July 1 through September 30, 1996) 11 3/8 8 1/8 7 3 7/8 Fourth Quarter (October 1, through December 31, 1996) 10 61/2 6 1/4 3 3/8 1997 First Quarter (January 1 through March 31, 1997) 11 3/8 3 1/4 7 1/4 Second Quarter (April 1 through June 30, 1997) 4 5/8 2 1 3/4 5/8 Third Quarter (July 1 through July 7, 1997) 2 5/8 2 3/8 3/4 3/4
13 14 SELECTED FINANCIAL DATA STATEMENT OF EARNINGS DATA:
YEAR ENDED MARCH 31, -------------------- 1994 1995 1996 1997 ---- ---- ---- ---- Total Revenue $1,858,414 $2,024,289 $ 2,007,801 $ 1,820,713 Product Sales 1,228,294 1,625,241 1,666,345 1,678,933 Research and development grants 630,120 390,986 262,322 -- Total Expenses 1,445,560 1,723,295 3,116,119 5,673,672 Earnings (loss) before extraordinary item 474,295 64,447 (1,025,631) (4,487,824) Net Earnings (loss) 526,182 64,447 (839,301) (4,487,824) Earnings (loss) per share before extraordinary item .19 .02 (.33) (0.99) Net Earnings (loss) per share .21 .02 (.27) (0.99) Weighted average shares outstanding 2,507,375 2,712,660 3,078,428 4,533,583
BALANCE SHEET DATA:
YEAR ENDED MARCH 31, -------------------- 1995 1996 1997 ---- ---- ---- Working Capital $ 170,968 $ 6,814,289 $ 1,818,883 Total Assets 2,547,681 9,217,514 6,925,187 Total Liabilities 1,419,740 588,908 1,681,884 Retained earnings (deficit) 15,007 (824,294) (5,312,118) Shareholders' equity 1,127,941 8,628,606 5,243,303
14 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS OVERVIEW In 1992, the Company commenced marketing its first 36" wide format facsimile machine on a limited basis, primarily for demonstration purposes, and other wide format document systems in 1994. As a result, the Company has a limited relevant operating history upon which an evaluation of the Company's prospects and performance can be made. Since inception, the Company has generated limited revenues from operations and has not yet achieved profitability. The Company's revenues are derived from product sales and research and development grants and reimbursements from the Canadian government. The Company recognizes revenues from product sales when products are shipped, and from research and development grants and reimbursements when related expenses are incurred. The Canadian government audits the Company's requests for reimbursement for research and development expenses incurred during a calendar year and makes reimbursement payments typically some months after the Company has filed the request. The Company's request for reimbursement for approximately $427,000 attributable to calendar year 1994 (which was filed in September 1995) has been audited and has been received from the Canadian government in May 1997. The Company has filed a request for reimbursement for the year ended December 31, 1995, and the three months ended March 31, 1996 for approximately $255,000 and $123,000 respectively. These requests have not been audited or paid by the Canadian Government. There is no assurance that the requests will be approved in their entirety or at all. Denial of all or a portion of such reimbursement by the Canadian government would result in a change to current period income and denial of a significant portion of such reimbursement would have a material adverse effect on the Company's results of operations for such periods. GOVERNMENT SPONSORED PROGRAMS To date, a substantial portion of the Company'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. Prior to 1993, the Company received reimbursement of a percentage of substantially all of its expenses from the Canadian government, because the Company was classified as a "sole purpose research and development company." Since 1993, reimbursement of the Company's expenses from the Canadian government has been limited to reimbursement of a specified percentage of its research and development expenses and qualified related support expenses. Companies seeking reimbursement must submit applications verifying the amounts and nature of research and development expenditures incurred for audit by the Canadian government. Although the Canadian government reimbursed the Company for substantially all amounts requested in 1991 and 1992, the Company did not receive $43,800 (approximately 9.6%) of its requested reimbursement for the calendar year 1993. As of March 31, 1997, the Company had research and development grants receivable of $696,347 representing amounts for which reimbursement has been requested for calendar 1994, calendar 1995 and, three months, ended March 31, 1996. Of this amount, $420,000 has subsequently been received. Other government sponsored research grants and subsidies have been provided to the Company to fund specific research programs. The majority of such grants and subsidies have been provided under the Industrial Research Assistance Program which is administered by the Canadian National Research Council (the "NRC"). Grants are made on the condition that research and development activities are performed in Canada and with the prior approval by the NRC of the scope, content and objectives of the research to be performed. For the years ended March 31, 1995 and 1996, the Company received payments under such program of approximately, $18,000 and $66,000, respectively. No grants were received for the year ending March 31, 1997; however, the Company together with a branch of the government of the Province of Quebec (Innovatech) became equal 15 16 shareholders in the Research and Development company, 3994340 Canada Inc., doing business as Technologies Novimage. The nature of 3994340 Canada Inc., doing business as Technologies Novimage entitles it to receive grants in excess of 40% of qualified research expenditures. Products derived from the research are then licensed back to the Company at a nominal royalty of 0.5% of sales of those products. The formation of 3994340 Canada Inc., doing business as Technologies Novimage enables the Company to obtain a substantial increase in the amount of research that can be performed. See "Certain Relationships and related Transactions." In 1996, a change in Canadian tax legislation substantially reduced the amount of subsidy available on research and development performed by publicly traded companies. IMPACT OF CURRENCY EXCHANGE RATES The Company conducts a substantial portion of its 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 the Company's 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 the Company's operating results in the future. The Company may seek to limit its exposure to the risk of currency fluctuations by engaging in foreign currency transactions that could expose the Company to substantial risk of loss. The Company has limited experience in managing international transactions and has not yet formulated a strategy to protect the Company against currency fluctuations. There can be no assurance that fluctuations in foreign currency exchange rates will not have a significant impact on the Company's future operating results. RESULTS OF OPERATIONS YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996 Revenues for the year, ended March 31, 1997, were $1,820,713, a decrease of $187,088, or 9.3%, as compared to $2,007,801 for the year, ended March 31, 1996. The decrease was attributable to a decrease in research grants and reimbursement of $262,322, which was partially offset by an increase in product sales of $12,588 and interest income of $62,646. The increase in accounts receivable for the year, ended March 31, 1997 of $650,949, compared to $436,747 for 1996, is attributable to an increase in sales of the Company's Color Scanner during the end of such period. Operating expenses for the year, ended March 31, 1997 were $5,673,672, an increase of $2,557,553, or 82.1%, as compared to $3,116,119 for the year, ended March 31, 1996. Operating expenses also increased as a percentage of revenues from 155.2% for the year, ended March 31, 1996 to 311.6% for the year, ended March 31, 1997. The increase in operating expenses both in absolute dollars and as a percentage of revenues of $2,981,764, $90,322, $115,721 and $113,552, respectively, during the year, ended March 31, 1997, is primarily attributable to an increase in selling, general and administrative ("SG&A") costs, amortization, the write-off of test equipment, an increase in salaries to Raja S. Tuli and Suneet Tuli, and management fees to Lakhbir S. Tuli in connection with the building of a manufacturing facility of approximately 24,000 square feet in India and the management of Indo-Widecom, Ltd. See "Description of Property and Certain Relationships and Related Transactions," respectively. This increase was off set by the decrease in research and development of $117,794 and non re-occurrence of compensation benefit on stock transaction, debt discount and finance fees of $166,974, $255,478, and $167,277 respectively, which had occurred in 1996. The increase in Selling General & Administrative costs from $751,252 in 1996 to $3,733,016 in 1997 was primarily due to expenses associated with increased marketing activities and due to increased legal and public relations fees of approximately $681,353 incurred 16 17 in raising an additional $1,298,090 as of March 31, 1997, of share capital in connection with the Company's redemption of all of its publicly traded warrants relating to its initial public offering. The legal fees were also used to successfully defend against court challenges made regarding the warrant call, and additional public relations costs deemed necessary to disseminate the facts of the warrant call. The increase in amortization expenses was due to the increase in the Company's capital assets. Interest and bank charges for the year ended March 31, 1997, decreased by $24,902. Warranty costs of $6,613 were incurred compared to $ nil in the year, ended March 31, 1996. Additions to the management team together with the implementation of employment contracts at the time of public offering resulted in the increase in the management fees. The Company has written off its carrying value of the goodwill associated with the acquisition in 1996 of a 49% interest in Corporate Acquisitions, Ltd. doing business as DS Corporate Marketing, Ltd. This write off of goodwill amounted to $576,000. The decrease of $117,794 in research and development costs were offset by the Company's $121,971 share of the loss incurred by 3994340 Canada Inc., doing business as Technologies Novimage. YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995. Revenues for the year ended March 31, 1996 were $2,007,801, a decrease of $16,488, or 0.8%, as compared to $2,024,289 for the year, ended March 31, 1995. The decrease was attributable to an decrease in research grants and reimbursement of $128,664, which was partially offset by an increase in product sales of $41,104 and interest income of $71,072. The increase in accounts receivable for the year ended March 31, 1996 of $436,747 compared to $359,368 for 1995, is attributable to an increase in sales of WIDEfax(R) Scan during the end of such period. Operating expenses for the year ended March 31, 1996, were $3,116,119, an increase of $1,392,824, or 80.8%, as compared to $1,723,295 for the year ended March 31, 1995. Operating expenses also increased as a percentage of revenues from 85.1% for the year ended March 31, 1995, to 155.2% for the year ended March 31, 1996. The increase in operating expenses both in absolute dollars and as a percentage of revenues is primarily attributable to an increase in costs of products sold, research and development expenditures, selling, general and administrative ("SG&A") costs, management fees, compensation benefits on stock exchange, amortization and debt discount and finance fees of $128,703, $75,581, $270,444, $93,465, $166,974, $270,915, $255,478, and $167,277, respectively, during the year ended March 31, 1996. The increase in research and development expenses was primarily due to costs associated with the development of color scanning capabilities. The increase in SG&A costs was primarily due to expenses associated with the retention of a financial public relations firm and increased marketing activities. The increase in amortization expenses was primarily due to the substantial increase in the Company's capital assets. The increase in debt discount and finance fees was primarily due to non-recurring expenses associated with the Company's Bridge Financing in October 1995 (see, "Liquidity and Capital Resources") and initial public offering in December 1995. Interest and bank charges for the year ended March 31, 1996, decreased by $32,858 and decreased as a percentage of revenues from 4.9% to 3.3%. LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash requirements have been to fund research and development activities, acquisition of equipment and inventories and marketing expenses incurred in connection with the commercialization of its products. Until the Company's initial public offering, the Company had satisfied its working capital requirements 17 18 principally through the issuance of debt and equity securities, government sponsored research and development grants and reimbursement and cash flow from operations. On March 31, 1997, the Company had working capital of $1,818,883, as compared to $6,814,289 on March 31, 1996. On February 10, 1997, the Company announced that it was calling all 1,187,500 of its publicly traded warrants for redemption. See "Legal Proceedings". On March 6, 1997, the exercise price was reduced to $3.00, and excluded one half of the warrants and the date for redemption was extended to April 4, 1997, after which the exercise price reverted to $4.00 per share for the unredeemed warrants. On March 31, 1997, 244,345 warrants were exercised for which $627,893 was received. The balance of $105,142 was received after March 31, 1997. The remaining 716,833 warrants were exercised between April 1st and April 4th of 1997 for which $2,150,499 was received. The Company's cash requirements in connection with the manufacture and marketing of its products at Indo-Widecom,Ltd. will be significant. Other than in connection with expansion of its manufacturing capacity, the Company does not have any material commitments for capital expenditures. The Company believes, based on its currently proposed plans and assumptions relating to its operations, projected cash flow from operations will be sufficient to satisfy its contemplated cash requirements for the foreseeable future. In the event that the Company's plans change, or its assumptions change or prove to be incorrect, or if the projected cash flow otherwise prove to be insufficient to fund operations (due to unanticipated expenses, delays, problems or otherwise), the Company could be required to seek additional financing sooner than currently anticipated. The Company has no current arrangements with respect to, or sources of, additional financing and it is not anticipated that existing stockholders will provide any portion of the Company's future financing requirements. There can be no assurance that additional financing will be available to the Company when needed on commercially reasonable terms, or at all. PART III DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The directors and executive officers of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Raja S. Tuli 31 President, Chief Executive Officer and Director Willem J. Botha 61 Chief Financial Officer and Treasurer Suneet S. Tuli 29 Executive Vice President, Secretary and Director Mark Maltese 45 Vice President of Sales & Marketing Brig General Baldev Singh 54 Vice President of Manufacturing Operations/India Dr. Ajit Singh 56 Director Bruce D. Vallillee 76 Director
Raja S. Tuli, founder of the Company, has been President, Chief Executive Officer and a director of the Company since its inception. From the Company's inception to August 1993, Mr. Tuli was also Treasurer of the Company. 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 Chief Financial Officer and Treasurer of the Company 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 18 19 Information Systems, a manufacturer of data communications equipment, most recently as its Director of Accounting Services. From 1982 to 1985, Mr. Botha wasan 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 pharmaceuticals company. Mr. Botha received a Certificate in Theory of Accounting from the University of South Africa. Mr. Botha is a Chartered Accountant and a resident Canadian national. Suneet S. Tuli has been Executive Vice President of Sales and Marketing and Secretary since September 1993, and a director of the Company since October 1992, and was the Marketing manager of the Company 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. Mark Maltese has been Vice President of Sales and Marketing for the Company since June 1996. Prior to joining the firm, Mr. Maltese was Vice President of Marketing for SBI, Inc., a start-up company which introduced the first automatic document feeding system for engineering copiers. From 1986 through 1994, Mr. Maltese was employed by Xerox Corporation, a manufacturer of printers, scanners, image processing systems, engineering copiers, document management, and workflow solutions. His last assignment at Xerox was Vice President and General Manager Systems Business Team within Xerox's Engineering Systems Division. From 1982 through 1986 Mr. Maltese was a Director of Marketing for Versatec, a Xerox Company. From 1980 through 1981, Mr. Maltese was a Senior Product Marketing Manager for Calma, a General Electric Company. Mr. Maltese received a Bachelor of Science in Information Management Systems from the University of San Francisco in California. Mr. Maltese is a resident of the Unites States of America. Brigadier General Baldev Singh has been the Company's Vice President of Manufacturing Operations since November 1993 and is responsible for all of the Company's manufacturing operations in India. From 1968 through September 1993, General Singh was a member of the Indian Armed Forces. General Singh received a Bachelor's degree in Inter Science from Pune University in India, and subsequently obtained a Master of Sciences degree in Military Sciences from Allahabad University in India. General Singh is a citizen of India. Dr. Ajit Singh has been a director of the Company 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 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. General Singh and Dr. Singh are not related. Bruce D. Vallillee has been a director of the Company 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 the directors of the Company must be resident Canadians. A resident Canadian is defined, generally, to be an individual who is (i) a Canadian citizen ordinarily resident in Canada, (ii) a Canadian citizen not 19 20 ordinarily resident in Canada who is a member of a prescribed class of persons, or (iii) 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 are currently no standing committees of the Board of Directors. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. No director of the Company has received any compensation for such services as a director. Directors who are employees of the Company 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 $1,000. EXECUTIVE COMPENSATION The following table sets forth the cash compensation paid or accrued by the Company to the Named person serving as chief executive officer during the years ended March 31, 1995, 1996 and 1997:
SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation ------------------- ---------------------- Awards Payouts ------ ------- Other Annual All Other Compen- Compensatioin Name And Principal Position Year Salary Bonus sation(1) Restrict Securiti ($) ($) ($) ($) ed Stock es Awards Under- LTIP ($) Lying Payouts Options/ ($) SARs (#) Raja S. Tuli, President (2) 1997 19,100 -- 79,360 -- -- -- -- Chief Executive Officer 1996 -- -- 79,225 -- -- -- -- 1995 -- -- 31,682 -- -- -- -- 1994 -- -- 28,000 -- -- -- --
(1) Such amounts were paid by the Company to a consulting company owned by Raja S. Tuli during the years ended March 31, 1994, 1995, 1996 and 1997. (2) In July 1995, the Company granted to Raja S. Tuli stock options to purchase 150,000 shares. No other executive officer of the Company received compensation and bonuses which exceed $100,000 during any such year. 20 21 EMPLOYMENT AGREEMENTS On July 17, 1995, the Company entered into a five year employment contract with Raja S. Tuli to serve as President of the Company at an annual base salary of $98,000 per year. Mr. Tuli's compensation will be subject to annual cost-of-living increases, and be eligible to receive bonuses (up to 50% of his then current base salary) provided that the Company achieves certain performance objectives. The Agreement contains a non-disclosure covenant and prohibits Mr. Tuli from competing with the Company during the term of employment agreement and for a period of two years thereafter. In connection with entering in to the Agreement, the Company granted to Mr. Tuli a stock option to purchase 150,000 shares of the Company's Common Stock at an exercise price of $5.00 per share. On July 17, 1995, the Company entered into a five year employment contract with Suneet S. Tuli to serve as Executive Vice President of Sales and Marketing of the Company at an annual base salary of $92,000 per year. Mr. Tuli's compensation will be subject to annual cost-of-living increases, and be eligible to receive bonuses (up to 50% of his then current base salary) provided that the Company achieves certain performance objectives. The Agreement contains a non-disclosure covenant and prohibits Mr. Tuli from competing with the Company during the term of employment agreement and for a period of two years thereafter. In connection with entering in to the Agreement, the Company granted to Mr. Tuli a stock option to purchase 150,000 shares of the Company's Common Stock at an exercise price of $5.00 per share. Amounts paid to the Tulis in 1997 were approximately $173,000 (1996 - $100,000). 21 22 OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table contains information with respect to the named executive officers concerning individual grants of stock options held as of the last fiscal year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR ------------------------------------- Individual Grants Potential Realizable Value Alternative ----------------- At assumed Annual Rates Of to (f) And Stock Price Appreciation (g): Grant For Option Term Date Value Percent Of Number of Total Securities Options/SARs Underlying Granted To Exercise Of Grant Date Option/SARs Employees In Base Price Expiration Present Value Name Granted (#) Fiscal Year ($/sh) Date 5% ($) 10% ($) $ (a) (b) (c) (d) (e) (f) (g) (h) RAJA S. TULI 50,000 50% 8.50 6/12/06 $267,000 $672,500 -- SUNEET S. TULI 50,000 50% 8.50 6/12/06 $267,000 $672,500 --
During the fiscal year ended March 31, 1996, the Company adopted a stock option plan permitting the issuance of options to purchase up to 300,000 shares of the Company's common stock. During that fiscal year, the Company issued 200,000 options under the plan to the senior officers of the Company at an exercise price of $5.00 per share. During the fiscal year ended March 31, 1997, the Company amended the plan permitting the issuance of options to purchase up to 500,000 shares of the Company's stock. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES The following table sets forth certain information concerning the exercise, if any, of stock options made as of the last fiscal year under the Company's 1995 and 1996 stock option plan to each of the named executive officers and the fiscal year - end value of unexercised options of the company.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES -------------------------------------------------------------------------------- Number of Securities Value of Unexercised In- Shares Underlying Unexercised The-Money Options/SARs At Acquired Options/SARs At Fiscal Fiscal Year-End (1) On Value Year-End Exercisable/Unexercisable Exercise Realized Exercisable/Unexercisable Name (a) (b) (c) (d) (e) Raja S. Tuli 0 $ 0 $ 0 200,000 $ 0 $ 0 Suneet S. Tuli 0 $ 0 $ 0 200,000 $ 0 $ 0
(1) Market value at March 31, 1997 was 3-7/8. 22 23 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of July 20, 1997, 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 the Company to be the beneficial owner of more than five percent of the Company's Common Stock.
- -------------------------------------------------------------------------------- Name Amount And Address And Nature of Percent Title of of Beneficial Beneficial Of Class Class Owner Ownership - -------------------------------------------------------------------------------- Common Raja S. Tuli(5) 1,250,223(3) 21.2% Common Lakhbir S. Tuli(5) 515,041 10.6% Common Suneet S. Tuli(5) 490,240(4) 9.9% Common Dr. Ajit Singh --- --- Common Bruce Vallillee --- --- Common Willem J. Botha --- --- Common Mark Maltese --- --- All executive officers and directors as a group (six persons) 2,075,503(2)(3)(4) 40.3%
(1) Unless otherwise indicated, the business address of each beneficial owner is 267 Matheson Boulevard East, Mississauga, Ontario, Canada L4Z 1X8. (2) 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 such person (but not those held by any other person) and which are exercisable within 60 days of the date hereof have been exercised. (3) Includes: (i) 150,000 Common Shares issuable upon exercise of currently exercisable options at a price of $5.00 per share, and 50,000 Common Shares issuable upon exercise of currently exercisable warrant at a price of $8.50 per share, and (ii) 32,500 shares owned by Diversified Investors Capital Services of North America, Inc., a New York corporation, 67,500 shares owned by Pyrotech Limited, a Cayman Islands corporation, and 4,890 shares owned by Donald J. Schattle, and 180,000 by other stockholders (none of which are affiliated with the Company or Mr. Schattle) respectively, as to which Mr. Tuli and the certain other stockholders has voting rights pursuant to a stock exchange agreement. See "Certain Relationships and Related Transactions." (4) Includes 50,000 Common Shares issuable upon exercise of currently exercisable options at a price of $5.00 per share and 50,000 Common Shares issuable upon exercise of currently exercisable warrant at a price of $8.50 per share. (5) Lakhbir S. Tuli is the father of Raja S. and Suneet S. Tuli. The Tulis' disclaim ownership for each others shares of Common Stock. 23 24 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In October 1993, the Company entered into an agreement with WideCom R&D pursuant to which WideCom R&D would seek to identify and recruit distributors and sub-contract manufacturers for the Company's products in India. The agreement provides for WideCom R&D to structure its compensation with any distributor or sub-contractor it engages and WideCom R&D will not receive any compensation from the Company. To date, WideCom R&D has not recruited any distributor or sub-contractor. There can be no assurance that conflicts of interest will not arise as a result of WideCom R&D structuring its compensation with potential licensees or sub-contractors. From 1992 to July 1993, Raja S. Tuli engaged two individuals to provide services relating to the Company's marketing and other activities. In exchange for performing such services, Mr. Tuli transferred 100,000 Common Shares to such individuals. Such individuals have attempted to transfer an aggregate of 172,860 Common Shares to third parties. In November 1993, Raja S. Tuli entered into an indemnification agreement with the Company pursuant to which Mr. Tuli agreed that, in the event the Company is required to issue in excess of 100,000 Common Shares to such individuals or any purported transferee of such shares, Mr. Tuli would return to the Company up to 160,000 Common Shares for cancellation to the extent the Company is required to issue any such additional shares. "See Legal Proceedings" The Company has engaged Lakhbir S. Tuli, the father of Suneet and Raja Tuli as a management consultant, with respect to the Company's operations in India. As consideration for his services, the Company paid to Mr. Tuli $38,000, $47,000, $54,000 and $115,000 during the years ended March 31, 1994, 1995, 1996 and 1997 respectively. In October 1993, Indo-WideCom International Ltd. ("Indo-Widecom"), a wholly owned subsidiary of the Company, entered into a sublease with WideCom Fax (Widecom Fax"). Widecom Fax is 70% owned by Lakhbir Tuli, the father of Suneet and Raji Tuli. WidecomFax sublease is in connection with the Company's manufacturing facility in India. Annual lease payments by Indo WideCom to WideCom Fax have remained the same at 480,000 rupees (approximately $15,200). See "Properties." During the year ended March 31, 1996, the Company purchased approximately $323,000 of products from WideCom Fax pursuant to purchase orders on similar terms as purchases made by unaffiliated third parties. As of March 31, 1996, WideCom Fax owed approximately $86,700 to the Company for purchases from the Company during the year ended March 31, 1995. In March 1995, the Company entered into a three year marketing and consulting agreement with Schattle & Duquette, an executive search and management consulting firm partially owned by Donald J. Schattle, a former director of the Company who resigned effective March 7, 1996, which agreement commenced upon consummation of the Company's initial public offering in December 1995. Pursuant to the agreement, Schattle & Duquette will assist the Company in identifying potential management personnel, acquisition candidates and sales opportunities within the engineering and architectural markets for a monthly fee of $15,000. On April 4, 1995, the Company entered into a stock exchange agreement with the four stockholders of DS Corporate Marketing Ltd. ("DS"). Pursuant to this agreement, the Company acquired a 49% equity interest in DS in exchange for the issuance to DS of 240,000 Common Shares and warrants to purchase 100,000 Common Shares at a price of $4.00 per share. Upon distribution by DS to its stockholders and their designees, Donald J. Schattle, a 25% stockholder of DS, received 60,000 of the 240,000 Common Shares and 25,000 of the warrants to purchase Common Shares at a price of $4.00 per share. The remaining 180,000 Common Shares and 75,000 warrants were distributed to 24 25 the other stockholders, none of which are affiliated with the Company or Mr. Schattle. In connection with the stock exchange agreement, the holders of all of such 300,000 shares granted Raja Tuli a proxy to vote all of such shares at all meetings of the Company's stockholders; however, in 1996, 55,110 of Mr. Schattle's Common Shares were sold by Mr. Schattle. As a result of the foregoing, Raja Tuli now has a proxy to vote 184,890 of those shares granted to Raja Tuli pursuant to the Stock Exchange Agreement. See "Security Ownership of Certain Beneficial Owners and Management." As of January 30, 1997, the Company announced that it had finalized a joint venture agreement with Societe Innovatech du Grand Montreal, an instrumentality of the Province of Quebec, Canada ("Innovatech").The Company and Innovatech purchased 450 shares of the Class A Common Stock of 3994340 Canada Inc., doing business as Technologies NovImage, for a purchase price of approximately US $1,875,000 each. The consideration paid by the Company for the stock of 3994340 Canada Inc., doing business as Technologies Novimage was in cash and was derived from the Company's working capital. In addition, two other corporations, 3294412 Canada Inc., a Quebec corporation and 3294421 Canada Inc., a Quebec corporation, both of which corporations are wholly-owned by Raja S. Tuli, President and Chief Executive Officer of the Company, each acquired 50 shares of the Class A Common Stock of 3994340 Canada Inc., doing business as Technologies Novimage in exchange for the transfer to 3994340 Canada Inc., doing business as Technologies Novimage of certain patents, patent applications and other technology and intellectual property rights of those companies. In connection with the transaction, the Company granted an exclusive license of all of its patents, if any, and technology relating to its scanner and plotter manufacturing and its WideView TM and SLC-OVLY TM software (collectively, the "Intellectual Property") to 3994340 Canada Inc., doing business as Technologies 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 exclusive license and the payment of a 0.5% royalty fee on net revenue, licensing revenue and net sales to sub-licensees, 3994340 Canada Inc., doing business as Technologies Novimage granted the Company an exclusive perpetual worldwide (with the exception of the Province of Quebec, Canada) license 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 3994340 Canada Inc., doing business as Technologies Novimage. 3994340 Canada Inc., doing business as Technologies Novimage retained such rights with respect to the Province of Quebec, Canada. In connection with the transaction, the Company also entered into a Stock Exchange Agreement with Innovatech pursuant to which Innovatech would be permitted, under certain circumstances, to exchange its shares of 3994340 Canada Inc., doing business as Technologies Novimage for up to 253,000 shares of common stock of the Company for which Innovatech would have demand registration rights. Although the Company believes 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 the Company and its 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 the Company and its 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 favor of the Company. 25 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements The following financial statements of The WideCom Group Inc. are included: Report of Independent Accountants Consolidated Balance Sheets as of March 31, 1997, 1996, 1995. Consolidated Statements of Operations for the years ended March 31, 1997, 1996, 1995. Consolidated Statements of Shareholders' Equity for the years ended March 31, 1997, 1996, 1995. Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996, 1995. Summary of Significant Accounting Policies Notes to Consolidated Financial Statements. (2) Other Schedules All other schedules are omitted since the required information is not present or is not present in an amount sufficient to require submission of schedules, or because the information required is included in the financial statements and notes thereto. (3) Exhibits None. (b) Reports on Form 8-K Form 8-K, dated February 3, 1997, with respect to the finalization of a joint venture agreement with Societe Innovatech du Grand Montreal, an instrumentality of the Province of Quebec, Canada ("Innovatech"). The Company and Innovatech purchased 450 Shares of the Class A Common Stock of 3994340 Canada Inc., doing business as Technologies Novimage Inc., a Quebec Corporation for a purchase price of approximately (US) $1,875,000 each. Form 8-K, dated February 10, 1997 with respect to the Company's announcement on February 10, 1997, that it was calling for redemption all of its publicly traded warrants issued in connection with its initial public offering. In addition, notice was given to all registered warrant holders of the Company and to American Stock Transfer and Trust Company that American Stock Transfer and Trust Company had been removed as warrant agent for purposes of warrants being called for redemption, and that the First National Bank of Boston had been appointed to such position. Form 8-K, dated April 30, 1997, relating to the Company's announcement on February 10, 1997, that it was calling for redemption all of its publicly-traded warrants issued in connection with its initial public offering. On April 10, 1997, the Company announced that the warrant redemption was complete, and that more than half of the Warrants had been exercised, and that no warrants would be redeemed. 26 27 (c) Exhibits The following exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION - --- ----------- 10.1 Distributor Agreement between The Widecom Group Inc. and CADigitizing Corporation, dated May 6, 1997. Portions of this exhibit has been omitted pursuant to a request for confidential treatment. 10.2 Distributor Agreement between The Widecom Group Inc. and Scan Group, dated September 8, 1996. Portions of this exhibit has been omitted pursuant to a request for confidential treatment. 10.3 Distributor Agreement between the Widecom Group Inc. and The Imtec Group Limited, dated November 15, 1996. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. 21. List of subsidiaries. 23. Consent of BDO Dunwoody, independent accountants. 27. Financial Data Schedule. (d) Not Applicable.
27 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 18, 1997 THE WIDECOM GROUP INC. By: /s/ RAJA S. TULI ------------------------------------ Raja S. Tuli Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.
NAME TITLE DATE ---- ----- ---- /s/ RAJA S. TULI President, Chief Executive Officer and Raja S. Tuli Director (Principal Executive Officer) August 18, 1997 /s/ WILLEM J. BOTHA Treasurer and Chief Financial Officer August 18, 1997 Willem J. Botha (Principal Financial and Accounting Officer) /s/ SUNEET S. TULI Executive Vice President of Sales and August 18, 1997 Suneet S. Tuli Marketing, Secretary and Director /s/ BRUCE D. VALLILLEE Director August 18, 1997 Bruce D. Vallillee /s/ AJIT SINGH Director August 18, 1997 Ajit Singh
28 29 THE WIDECOM GROUP INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997 (IN UNITED STATES DOLLARS) CONTENTS -------- AUDITORS' REPORT 2 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets 3 Statements of Operations 4 Statements of Shareholders' Equity 5 Statements of Cash Flows 6 Summary of Significant Accounting Policies 7 Notes to Financial Statements 10 29 30 [BDO DUNWOODY LETTERHEAD] AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF THE WIDECOM GROUP INC. We have audited the consolidated balance sheets of The WideCom Group Inc. as at March 31, 1995 1996 and 1997 and the consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards generally accepted in the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 31, 1995, 1996 and 1997 and the results of its operations and the changes in its cash flow for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ BDO Dunwoody Chartered Accountants (Internationally BDO Binder) Toronto, Ontario July 4, 1997 2 30 31 WIDECOM GROUP INC. CONSOLIDATED BALANCE SHEETS (IN UNITED STATES DOLLARS)
MARCH 31, --------- 1995 1996 1997 ---- ---- ---- ASSETS CURRENT ASSETS Cash and short term investments (Note 7) $ 3,528 $ 5,643,491 $ 631,486 Term deposits (Note 7) 95,731 -- -- Accounts receivable (Note 1) 359,368 436,747 650,949 Receivable from exercise of warrants -- -- 105,142 Research and development grants receivable (Note 10(b)) 506,680 709,424 696,347 Inventory (Note 2) 588,393 456,128 1,199,386 Prepaid expenses 15,251 70,692 100,308 Advances to related parties (Note 3) 21,043 86,715 117,149 Deferred income taxes 714 -- -- ----------- ----------- ------------ TOTAL CURRENT ASSETS 1,590,708 7,403,197 3,500,767 CAPITAL ASSETS (Note 4) 362,217 1,238,317 1,738,485 DEFERRED ISSUE COSTS OF PUBLIC OFFERING (Note 5) 594,756 -- -- INVESTMENT IN AFFILIATES (Note 6) -- 576,000 1,685,935 ----------- ----------- ------------ TOTAL ASSETS $ 2,547,681 $ 9,217,514 $ 6,925,187 =========== =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank indebtedness (Note 7) $ 101,708 $ 132,246 $ 329,810 Accounts payable and accrued liabilities (Note 8) 565,441 393,462 1,352,074 IOC loan payable (Note 10) 214,290 -- -- Accrued interest on IOC loan payable 277,953 -- -- Loans from non-management shareholders (Note 9) 259,247 -- -- Deferred income taxes 1,101 63,200 -- ----------- ----------- ------------ TOTAL CURRENT LIABILITIES 1,419,740 588,908 1,681,884 ----------- ----------- ------------ SHAREHOLDERS' EQUITY (Note 11) Preferred shares 23,350 shares authorized on March 31, 1995 and no shares authorized on March 31, 1996 and 1997 23,350 shares issued and outstanding on March 31, 1995 and no shares issued and outstanding on March 31, 1996 and 1997 183,276 -- -- Common shares 20,000,000 shares authorized of no par value 2,111,910 shares issued and outstanding on March 31, 1995 4,434,073 shares issued and outstanding on March 31, 1996 4,848,418 shares issued and outstanding on March 31, 1997 839,074 9,300,794 10,598,884 Contributed surplus 159,825 159,825 159,825 Retained earnings (deficit) 15,007 (824,294) (5,312,118) Cumulative translation adjustment (69,241) (7,719) (203,288) ----------- ----------- ------------ 1,127,941 8,628,606 5,243,303 ----------- ----------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,547,681 $ 9,217,514 $ 6,925,187 =========== =========== ============
See accompanying summary of significant accounting policies and notes to these financial statements. 3 31 32 WIDECOM GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN UNITED STATES DOLLARS)
FOR THE YEARS ENDED MARCH 31, ----------------------------- 1995 1996 1997 ---- ---- ---- REVENUE Product sales $ 1,625,241 $ 1,666,345 $ 1,678,933 Research and development grants (Note 10) 390,986 262,322 -- Interest income 8,062 79,134 141,780 ----------- ----------- ----------- TOTAL REVENUE 2,024,289 2,007,801 1,820,713 ----------- ----------- ----------- EXPENSES Cost of product sales 341,704 470,407 452,413 Research and development 656,876 732,457 614,663 Selling, general and administrative 480,808 751,252 3,733,016 Interest and bank charges 100,159 67,301 42,399 Management fees 114,192 207,657 321,209 Compensation benefit on stock transaction (Note 11(c)) -- 166,974 -- Amortization 26,401 297,316 503,359 Debt discount -- 255,478 -- Finance fees -- 167,277 -- Warranty costs 3,155 -- 6,613 ----------- ----------- ----------- TOTAL EXPENSES 1,723,295 3,116,119 5,673,672 ----------- ----------- ----------- OPERATING INCOME (LOSS) 300,994 (1,108,318) (3,852,959) WRITE OFF OF DEFERRED ISSUE COSTS (Note 5) (216,547) -- -- EQUITY IN EARNINGS (LOSS) OF AFFILIATE -- -- (121,971) WRITEDOWN OF GOODWILL -- -- (576,000) ----------- ----------- ----------- EARNINGS (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 84,447 (1,108,318) (4,550,930) ----------- ----------- ----------- PROVISION FOR (RECOVERY OF) INCOME TAXES (Note 12) Current -- -- -- Deferred 20,000 (82,687) (63,106) ----------- ----------- ----------- 20,000 (82,687) (63,106) ----------- ----------- ----------- EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM 64,447 (1,025,631) (4,487,824) EXTRAORDINARY ITEM, NET OF TAX (Note 10) -- 186,330 -- ----------- ----------- ----------- NET EARNINGS (LOSS) FOR THE YEAR $ 64,447 $ (839,301) $(4,487,824) =========== =========== =========== EARNINGS (LOSS) PER COMMON SHARE BEFORE EXTRAORDINARY ITEM, PRIMARY AND FULLY DILUTED $ 0.02 $ (0.33) $ (0.99) =========== =========== =========== EARNINGS (LOSS) PER COMMON SHARE, PRIMARY AND FULLY DILUTED (Note 11(e)) $ 0.02 $ (0.27) $ (0.99) =========== =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,712,660 3,078,428 4,533,583 =========== =========== ===========
See accompanying summary of significant accounting policies and notes to these financial statements. 4 32 33 WIDECOM GROUP INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN UNITED STATES DOLLARS) FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
RETAINED CUMULATIVE TOTAL PREFERRED COMMON CONTRIBUTED EARNINGS TRANSLATION SHAREHOLDERS' SHARES SHARES SURPLUS (DEFICIT) ADJUSTMENT EQUITY ------ ------ ------- --------- ---------- ------ BALANCE, March 31, 1994 $ 183,276 $ 839,074 $159,825 $ (49,440) $ (59,109) $ 1,073,626 NET EARNINGS FOR THE YEAR -- -- -- 64,447 -- 64,447 FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- -- -- (10,132) (10,132) --------- ------------ -------- ----------- --------- ----------- BALANCE, March 31, 1995 183,276 839,074 159,825 15,007 (69,241) 1,127,941 CONVERSION OF PREFERRED SHARES (116,750)(Note 11(c)) (183,276) 350,250 -- -- -- 166,974 SHARES ISSUED FOR INVESTMENT IN AFFILIATE (240,000) -- 720,000 -- -- -- 720,000 SHARES ISSUED ON INITIAL PUBLIC OFFERING (1,650,000) -- 8,250,000 -- -- -- 8,250,000 WARRANTS ISSUED ON INITIAL PUBLIC OFFERING (1,650,000) -- 165,000 -- -- -- 165,000 SHARES ISSUED TO UNDERWRITER FOR BRIDGE FINANCING (84,000) -- 252,000 -- -- -- 252,000 SHARES ISSUED ON EXERCISE OF UNDERWRITER'S OPTION (247,500) -- 1,237,500 -- -- -- 1,237,500 WARRANTS ISSUED ON EXERCISE OF UNDERWRITER'S OPTION (247,500) -- 24,750 -- -- -- 24,750 PURCHASE OF WARRANTS BY UNDERWRITER (165,000) -- 165 -- -- -- 165 INITIAL PUBLIC OFFERING COSTS -- (2,352,945) -- -- -- (2,352,945) CONTRIBUTION BY SHAREHOLDERS (16,087) -- (185,000) -- -- -- (185,000) NET LOSS FOR THE YEAR -- -- -- (839,301) -- (839,301) FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- -- -- 61,522 61,522 --------- ------------ -------- ----------- --------- ----------- BALANCE, March 31, 1996 $ -- $ 9,300,794 $159,825 $ (824,294) $ (7,719) $ 8,628,606 EXERCISE OF WARRANTS (414,345) -- 1,413,035 -- -- -- 1,413,035 WARRANT EXERCISE COSTS -- (114,945) -- -- -- (114,945) NET LOSS FOR YEAR -- -- -- (4,487,824) -- (4,487,824) FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- -- -- (195,569) (195,569) --------- ------------ -------- ----------- --------- ----------- BALANCE, March 31, 1997 $ -- $ 10,598,884 $159,825 $(5,312,118) $(203,288) $ 5,243,303 ========= ============ ======== =========== ========= ===========
See accompanying summary of significant accounting policies and notes to these financial statements. 5 33 34 THE WIDECOM GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN UNITED STATES DOLLARS)
FOR THE YEARS ENDED MARCH 31, ----------------------------- 1995 1996 1997 ---- ---- ---- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Earnings (loss) for the year before extraordinary item $ 64,447 $(1,025,631) $(4,487,824) Add (deduct) items not requiring a cash outlay Amortization 26,401 297,316 503,359 Compensation benefit on stock transaction -- 166,974 -- Deferred revenue (13,536) -- -- Deferred income taxes 20,000 (82,687) (63,106) Initial public offering costs written off 216,547 -- -- Writedown of goodwill -- -- 576,000 Equity in earnings (loss) of affiliate -- -- 121,971 Accrued interest on IOC loan payable 89,493 56,643 -- Net changes in non-cash working capital balances related to operations Increase in accounts receivable (208,552) (66,333) (333,048) Decrease (increase) in research and development grants receivable 45,580 (186,971) -- Decrease (increase) in inventory 36,245 149,578 (764,646) Increase (decrease) in accounts payable and accrued liabilities 268,488 (188,861) 982,544 Increase in prepaid expenses (10,785) (54,837) (31,453) ----------- ----------- ----------- 534,328 (934,809) (3,496,203) ----------- ----------- ----------- INVESTING ACTIVITIES Decrease in term deposits 763 98,331 -- Purchase of capital assets (311,549) (1,029,416) (1,108,068) Advances (repayment) to related parties 201,947 (64,859) (32,033) Purchase of equity in joint venture -- -- (1,805,836) ----------- ----------- ----------- (108,839) (995,944) (2,945,937) ----------- ----------- ----------- FINANCING ACTIVITIES Increase in bank indebtedness 16,578 27,380 203,456 Shares and warrants issued -- 7,576,470 1,298,090 Shares contributed by shareholders -- (185,000) -- Loan (repayment) from shareholders 9,092 (266,274) -- Repayment of Innovation Ontario loan -- (220,110) -- Deferred issue costs of public offering (531,741) 610,909 -- ----------- ----------- ----------- (506,071) 7,543,375 1,501,546 ----------- ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (5,162) 27,341 (71,411) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH DURING THE YEAR (85,744) 5,639,963 (5,012,005) CASH AND EQUIVALENTS, beginning of year 89,272 3,528 5,643,491 ----------- ----------- ----------- CASH AND EQUIVALENTS, end of year $ 3,528 $ 5,643,491 $ 631,486 =========== =========== ===========
NOTE: SEE NOTE 17 FOR SUPPLEMENTARY INFORMATION See accompanying summary of significant accounting policies and notes to these financial statements. 6 34 35 WIDECOM GROUP INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 NATURE OF BUSINESS The WideCom Group Inc. ("the Company") was incorporated under the laws of Ontario on June 15, 1990 and its first fiscal year ended on March 31, 1991. 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 STATEMENTS The accompanying consolidated financial 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 and losses. Translation adjustments to reporting currency are included in equity. The financial statements reflect retroactively a backsplit occurring during 1996 (see Note 11(b)(ii)). These financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States. PRINCIPLES OF CONSOLIDATION These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Indo WideCom International Ltd. All significant intercompany transactions and accounts have been eliminated. INVESTMENT IN AFFILIATES The investment in affiliates are accounted for on the equity basis. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from 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 The Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" in the fiscal year 1997. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed 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 be based on the fair value of the asset. The adoption of SFAS No. 121 had no impact on the Company's financial statements or operations. 7 35 36 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: Plant, machinery and computer equipment - 30% declining balance Furniture and fixtures - 20% declining balance Prototype and jigs - 20% declining balance EARNINGS OR LOSS PER SHARE Earnings or loss per share is based on the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during each period. Earnings or loss per share is computed using the treasury stock method, under which the number of shares outstanding reflects the assumed repurchase of shares of the Company's common stock with the proceeds from the assumed exercise of dilutive outstanding stock options. All share and per share data are retroactively adjusted for stock dividends and stock splits. The Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share", effective for financial statements for both interim and annual periods ending after December 15, 1997. The Company will adopt this statement in the third quarter of the fiscal year 1998. The adoption of SFAS No. 128 is not expected to have a material impact on earnings per share. STOCK BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based 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 11 (d) for a summary of the pro forma net income and earnings 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 (i) Product sales are recognized as revenue upon shipment of the product. Advance sales revenue is deferred until shipment of the product. (ii) Research and development grants are recognized as revenue as the related expenditures are incurred. WARRANTY COSTS The provision for warranty costs ranges from .25% to 1% of product sales based on the period of time that the products are under warranty. FOREIGN CURRENCY TRANSLATION Balances of the Company denominated in foreign currencies and the accounts of its foreign subsidiary are translated into the functional currency as follows: (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 8 36 37 (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 except for translation gains and losses which arise in connection with the translation of the results of the foreign subsidiary's operations which are included in equity. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged against income in the year of expenditure. 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 years 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 CREDIT RISK AND BUSINESS CONCENTRATION The Company's receivables are unsecured and are generally due in 30 days. Currently the Company's customers are primarily local, national and international users of wide fax document systems. The Company's receivables do not represent significant concentrations of credit risk as at March 31, 1997, due to the wide variety of customers, markets and geographic areas to which the Company's products are sold. VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments of the Company, including cash, accounts receivable, bank indebtedness and accounts payable, approximate fair value because of their short maturity. The fair value of advances to related parties can not be readily determined because of the nature of their terms. 9 37 38 THE WIDECOM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 1. ACCOUNTS RECEIVABLE Accounts receivable consist of:
1995 1996 1997 ---- ---- ---- Trade accounts receivable $364,559 $442,096 $657,046 Less: Allowance for doubtful accounts 5,191 5,349 6,097 -------- -------- -------- $359,368 $436,747 $650,949 ======== ======== ========
2. INVENTORY
1995 1996 1997 ---- ---- ---- Raw materials $218,789 $ 244,524 $1,061,422 Work in progress 298,720 168,823 48,225 Finished goods 70,884 42,781 89,739 -------- ---------- ---------- $588,393 $ 456,128 $1,199,386 ======== ========== ==========
3. ADVANCES TO SHAREHOLDERS AND RELATED PARTIES (a) Advances to related parties are non-interest bearing except as noted and will be repaid follows:
1995 1996 1997 ---- ---- ---- WideCom Fax and Plotters Ltd.(i) $21,043 $ 86,715 $ 85,116 Shareholders -- -- 32,033 ------- -------- -------- 21,043 86,715 117,149 Less: Current portion 21,043 86,715 117,149 ------- -------- -------- $ -- $ -- $ -- ======= ======== ========
(i) WideCom Fax and Plotters Ltd. Loans were made to a company controlled by a principal stockholder to purchase production equipment necessary in the manufacture of the Company's product in India. (b) Transactions with companies controlled by, and fees paid to, executive officers, the principal shareholders and directors during the year were as follows:
1995 1996 1997 ---- ---- ---- Sales $ 23,109 $ 37,306 $ 13,217 Consulting fees (Note 13(a)) -- (45,233) (135,056) Capital assets acquired (224,707) (323,363) -- Purchases (115,891) -- -- Management fees, salaries and commissions (114,192) (207,657) (378,015)
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)). 10 38 39 4. CAPITAL ASSETS Capital assets consist of:
1995 1996 1997 ---- ---- ---- ACCUMULATED ACCUMULATED ACCUMULATED Cost Amortization Cost Amortization Cost Amortization ---- ------------ ---- ------------ ---- ------------ Machinery, plant and computer equipment $284,840 $ 29,045 $ 699,335 $ 143,256 $1,563,728 $ 425,596 Furniture and fixtures 114,935 8,513 99,832 17,589 95,369 29,946 Prototype and jigs -- -- 444,231 35,430 415,094 223,782 Land -- -- 67,457 -- 61,121 -- Building under construction -- -- 123,737 -- 282,497 -- -------- ---------- ---------- ---------- ---------- -------- $399,775 $ 37,558 $1,434,592 $ 196,275 $2,417,809 $ 679,324 ======== ========== ========== ========== ========== ========== Net book value $ 362,217 $1,238,317 $1,738,485 ========== ========== ==========
During 1997, prototypes and jigs were written down by approximately $115,000. 5. DEFERRED ISSUE COSTS OF PUBLIC OFFERING These costs include legal, accounting, advances of the underwriter's expense allowance and other related costs of the public offering. Certain costs related to previous offerings were written off during 1995 and the remaining costs were deducted from the equity raised in the offering during 1996. 6. INVESTMENT IN AFFILIATES Investment in affiliates consists of:
1995 1996 1997 ---- ---- ---- DS Corporate Marketing Ltd. (i) $ -- $ 576,000 $ -- 3994340 Canada Inc. (ii) -- -- $1,685,935 -------- ---------- ---------- $ -- $ 576,000 $1,685,935 ======== ========== ==========
(i) During 1996 the Company acquired a 49% interest in DS Corporate Marketing Ltd. and the original excess of $720,000 over the purchase price of the underlying value of the assets was attributed to goodwill. Management periodically assesses the carrying value of the goodwill based on the expected benefits from this investee and, accordingly, during 1997 this investment was written down to $ nil. The Company's 49% share of assets, liabilities and operating income is not significant. (ii) In October 1996, the Company entered into a joint venture agreement which resulted in the purchase of a 45% stake in 3994340 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 alterations 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 Province of Quebec pursuant to which they would be permitted, under certain circumstances, to exchange its 45% interest for up to 253,000 common shares of the Company. The Company has a commitment to pay a royalty fee based on net revenue (See also Note 13(d)). The other two companies that each own 5% of the investee are controlled by a member of the executive of the Company. 39 40 The assets, liabilities, revenue and expenses of 3994340 Canada Inc. for the period ended March 31, 1997 are as follows: Current assets $ 3,400,046 Capital assets 431,048 3,831,094 Current liabilities 84,750 Net assets $ 3,746,344 Revenue Other Income $ 92,243 Research and development grants 265,677 ----------- 357,920 Expenses 628,965 ----------- Net loss for the period $ (271,045) ===========
7. BANK INDEBTEDNESS In 1995 the Company had a line of credit of approximately $125,000 plus accrued interest income on specified term deposits. This line bore interest at bank prime plus one and one half percent, collateralized by specified term deposits and is payable on demand. At March 31, 1995 approximately $101,708 was utilized. During 1996 this indebtedness was repaid in full and the Company canceled the line. During 1997 the Company obtained an operating line of credit which bears interest at prime + 0.75%, is due on demand, and is secured by inventory, accounts receivable, and equipment for up to five years as well as a general security agreement over all company assets. At March 31, 1997, approximately $110,000 was utilized. The Company's 1996 bank indebtedness is the result of a bank overdraft in the Company's subsidiary. The Company's 1997 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:
1995 1996 1997 ---- ---- ---- Trade accounts payable $137,276 $ 260,897 $ 487,763 Wages and employee deductions payable 93,533 9,125 200,011 Accrued liabilities 10,719 123,440 664,300 Costs of public offering 265,123 -- -- Interest payable (see Note 9) 58,790 -- -- -------- ---------- ---------- $565,441 $ 393,462 $1,352,074 ======== ========== ==========
9. LOANS FROM NON-MANAGEMENT SHAREHOLDERS
1995 1996 1997 ---- ---- ---- Promissory notes payable, interest at 8% and 12% per annum, repaid from the proceed of the initial public offering (see Note 11 (b)) $259,247 $ -- $ -- ======== ========== ==========
Included in accounts payable at March 31, 1995 was interest of $58,790 (see Note 8). 40 41 10. GOVERNMENT ASSISTANCE (a) On December 19, 1991, the Company entered into an agreement with Innovation Ontario Corporation ("IOC") whereby IOC granted Cdn.$300,000 (U.S. $223,590) to the Company for purposes of funding research and development. This amount was recorded as a loan payable. Under the IOC agreement, the Company had agreed to pay an amount equal to 10% of gross revenues, as defined, commencing May 1, 1992. The Company could not advance amounts to affiliates or shareholders, repay amounts owing to shareholders, declare dividends or redeem shares without the consent of IOC. The agreement had been collateralized by a security interest covering all the assets of the Company. The Company had the option to terminate the agreement at any time by making a payment calculated in accordance with an agreed upon formula. In October, 1995 the Company settled all amounts outstanding including accrued interest of $334,596 for the repayment of principal of Cdn.$300,000. Upon such payment all obligations to IOC and IOC's security interest in the Company's assets were terminated. The settlement resulted in a gain, which has been recorded as an extraordinary item, of $186,330 ($334,596 net of tax of $148,266) during 1996.
1995 1996 1997 ---- ---- ---- (b) Grants Research and development (1) $360,140 $186,971 $ -- National Research Council 18,088 66,033 -- Other government agencies 12,758 9,318 -- -------- -------- ----- $390,986 $262,322 $ -- ======== ======== =====
(1) Research and development grants are cash payments and credits against taxes payable received or receivable from the Federal government as an incentive to conduct research and development in Canada. As at March 31, 1997, research and development grants receivable amounted to $696,347. This amount represents management's best estimate of grants based on its interpretation of current legislation. However, Revenue Canada has not yet assessed all claims and therefore the amount ultimately received could be materially different than the amount recorded. 11. SHARE CAPITAL (a) Authorized 20 million common shares 23,350 preferred shares on March 31, 1995 and no shares on March 31, 1996 and 1997. Of the 4,848,418 shares issued on March 31, 1997, 51,063 of these shares have not been registered by the Company's stock transfer agent. (b) Changes to Issued Share Capital (i) In April 1995, the Company acquired a minority interest in a U.S. based marketing company in exchange for 240,000 shares of the Company's common stock and 100,000 warrants to purchase common shares at $4.00. For the purposes of this acquisition the Company's shares were valued at $3.00 per share. (ii) On September 18, 1995, the outstanding common shares of the Company were backsplit 8 for 10. The number of authorized common shares were changed from unlimited to 20 million. These changes have been treated retroactive to all prior period share information and earnings per share calculations. 41 42 (iii) On October 13, 1995 the Company consummated a bridge financing for which it issued an aggregate of 84,000 common shares and warrants to purchase 840,000 common shares exercisable during the four year period commencing one year from the date of the initial public offering at a purchase price of $4.00 per share. (iv) On December 15, 1995 the Company completed an initial public offering whereby 1,650,000 common shares were sold for $5 per share and 1,650,000 redeemable warrants for $0.10 per warrant exercisable. The proceeds of this issue, net of underwriting and other issue expenses totaling $2,352,945, was $6,062,055. (v) In January 1996 the underwriter exercised the option granted to them in the terms of the initial public offering to purchase an additional 247,500 common shares and 247,500 warrants at $5.00 and $0.10 each respectively for the purposes of covering over allotments. (vi) During 1996, the underwriter purchased 165,000 warrants at a price of $.001 each for an aggregate of $165, which entitles the underwriter to purchase 165,000 common shares at a purchase price of $8.25 per share and also entitles the underwriter to purchase an additional 165,000 of warrants at a purchase price of $0.165 per warrant. The warrants purchased during 1996 are exercisable during the four year period commencing December 15, 1996. (vii) During 1996, the Company settled a lawsuit for $185,000 which the controlling shareholders had jointly and severally agreed to indemnify and hold harmless the Company. The controlling shareholders surrendered to the Company, 16,087 common shares of the Company with a fair market value equal to the amount of the settlement. (viii) During 1997, 414,345 warrants were exercised in exchange for 414,345 common shares. The proceeds of this issue, net of related expenses of $114,945, was $1,298,090. This amount includes warrants exercised under the Company's warrant call (see Note 16 (b) and (c)). (c) Preferred Shares The preferred shares provided for one-vote per share with increases in the votes per share should certain performance criteria be met. In June 1995, these shares were converted to 116,750 common shares. For the purposes of this exchange, the Company's shares were valued at $3.00 which resulted in a compensation expense of $166,974. On November 14, 1995, the shareholders approved the cancellation of the authorized preferred shares. (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, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. In July 1995, the board of directors approved an employee stock option plan covering options to purchase 300,000 common shares , increased in January 1997 to 500,000, which have been issued as follows: (i) Options to purchase 200,000 common shares at an exercise price of $5.00 per share have been issued to two members of management in exchange for the cancellation of previously issued warrants to purchase 200,000 common shares. These options are exercisable commencing one year from the consummation of a public offering and expire in July 2005. (ii) Options to purchase 100,000 common shares at an exercise price of $8.50 were issued to the President and Vice-President in June 1996. Pro forma information regarding net income and earnings 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 42 43 value of these options was estimated at the date of grant using a Black-Scholees option pricing model with the following weighted-average assumptions for March 31, 1997 and 1996, respectively: risk-free interest rate of approximately 6.0%; dividend yield of 0.0%; volatility factors of the expected market price of the Company's common stock of approximately 11.0 % and a weighted-average expected life of the option of 5 years. The Company's pro forma information follows:
YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 1995 1996 1997 ---- ---- ---- Net earnings (loss) As reported $ 64,447 $ (839,301) $ (4,487,824) Pro forma 64,447 (1,099,301) (5,177,824) Net loss per share As reported 0.02 (0.27) (0.99) Pro forma 0.02 (0.36) (1.14)
The activity of the Company's stock option plan is as follows:
AVERAGE PRICE PER SHARE OPTIONS --------- ------- Balance, April 1, 1995 $ -- -- Granted to management 5.00 200,000 ----------- ------- Balance, March 31, 1996 (outstanding and exercisable) 200,000 Granted to management 8.50 100,000 ----------- ------- Balance, March 31, 1997 300,000 =======
(e) Earnings (Loss) per Common Share The computation of earnings per common share and common equivalent share is based on the weighted average number of common shares outstanding during the year except as noted below plus (in years which they have a dilutive effect) the effect of common shares contingently issuable pursuant to outstanding warrants. Pursuant to SEC requirements, shares issued within a one year period prior to the filing of a registration statement relative to an initial public offering ("IPO") at a price below the IPO price should be treated as outstanding for all reported years. 43 44 The weighted average number of common shares used in calculating earnings per common share after retroactive application of the backsplit is as follows:
1995 1996 1997 ---- ---- ---- Shares outstanding at year end 2,111,910 4,434,073 4,848,418 Weighted average shares outstanding 2,712,660 3,078,428 4,533,583
12. INCOME TAXES (a) The components of the provision for income taxes on earnings before income taxes are as follows:
1995 1996 1997 ---- ---- ---- Current $ -- $ -- $ -- Deferred provision 25,000 (176,000) (63,200) Ontario research and development super allowance (5,000) (20,000) -- Change in valuation adjustment -- 113,313 -- -------- --------- -------- $ 20,000 $ (82,687) $(63,200) ======== ========= ========
The extraordinary item during 1996 is net of taxes of $148,266. (b) The reconciliation of income taxes calculated at the statutory rate of 44.6% to the total tax provision is as follows:
1995 1996 1997 ---- ---- ---- Income taxes (recovery) at statutory rate $ 38,000 $(495,000) $(2,030,000) Small business deduction (13,000) -- -- Items not subject to income tax -- 172,000 210,000 Permanent difference resulting from the Ontario research and development incentive deduction (5,000) (20,000) (21,000) Adjustment to valuation adjustment -- 260,313 1,777,800 -------- --------- ----------- $ 20,000 $ (82,687) $ 63,200 ======== ========= ===========
Income tax provision and recovery is related solely to domestic operations. Foreign operations are not subject to taxes (see Note 14). 44 45 (c) Deferred tax liabilities (assets) Deferred tax liabilities (assets) have been recorded at current rates as follows:
1995 1996 1997 ---- ---- ---- LIABILITIES: Research and development costs included in inventory, deductible as expense for tax purposes $ (43,387) $ (52,000) $ -- Deferred financing costs, deductible as expense for tax purposes (19,000) -- -- Deferred development costs, deductible as expense for tax purposes (17,000) -- -- Excess of amortization on capital assets for tax purposes over amortization recorded for accounting purposes (74,000) (31,000) -- ----------- ----------- ----------- (153,387) (83,000) -- ----------- ----------- ----------- ASSETS: Financing costs -- 59,000 44,000 Balance of pool of Scientific Research & Development available to reduce taxable income for future years -- 339,000 615,000 IOC loan interest, not deductible for tax purposes 153,000 -- -- Tax losses available to reduce taxable income of future years 258,000 209,000 1,364,000 Share issue costs -- 633,000 686,000 Excess of amortization on capital assets for accounting purposes over amortization recorded for tax purposes -- -- 197,000 ----------- ----------- ----------- 411,000 1,240,000 2,906,000 ----------- ----------- ----------- Less: Deferred tax asset valuation allowance (258,000) (1,093,800) (2,906,000) ----------- ----------- ----------- Net tax asset (liability) $ (387) $ (63,200) $ -- =========== =========== ===========
The Company has net operating loss carry forwards to reduce federal taxable income of approximately $3,268,000 which expire 2004. The Company has net operating loss carry forwards available to reduce Ontario taxable income of approximately $4,735,000 which expire during the years 1999 through 2004. The Company has share issue costs amounting to $2,600,000 which gives rise to a tax benefit of $686,000. A portion of these costs are included in the net operating losses carry forwards disclosed above. When realized the benefit will be recorded as a capital transaction. 13. COMMITMENTS (a) The Company has entered into a 3 year management and consulting agreement for management, marketing, planning and related services with a related company controlled by one of the directors to December 1998. The Company will pay $180,000 per year, for three consecutive years, for a total of $540,000. (b) The Company leases premises, office equipment and motor vehicles under operating leases expiring in 2001. The approximate annual rental commitments during the lease terms are as follows: 45 46 Year ended March 31, 1998 $ 63,000 Year ended March 31, 1999 49,000 Year ended March 31, 2000 27,000 Year ended March 31, 2001 6,000 -------- $145,000
Approximate rental expense incurred under operating leases is as follows: Year ended March 31, 1995 $135,000 Year ended March 31, 1996 128,000 Year ended March 31, 1997 68,000
(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 a 50% bonus of base salary provided certain performance objectives are met. Amounts paid in 1997 were approximately $173,000 (1996 - $100,000). (d) The Company is committed to its affiliate, 3994340 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 affiliate on behalf of the Company (See also Note 6). 14. SEGMENTED INFORMATION (a) The Company operates 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, 1995 Revenue $ 1,920,849 $ 103,440 $ -- $ 2,024,289 Operating profit 64,027 420 -- 64,447 Identifiable assets 2,412,511 593,527 (458,357) 2,547,681 For the year ended March 31, 1996 Revenue $ 1,430,918 $ 576,883 $ -- $ 2,007,801 Operating profit (849,219) 9,918 -- (839,301) Identifiable assets 8,933,132 1,627,339 (1,342,957) 9,217,514 For the year ended March 31, 1997 Revenue 1,329,446 1,357,171 (865,904) 1,820,713 Operating profit (4,364,854) (628,877) 505,907 (4,487,824) Identifiable assets 6,719,782 2,872,586 (2,667,181) 6,925,187
(b) The breakdown of sales by geographic area is as follows:
1995 1996 1997 ---- ---- ---- Canada $ 116,666 $ 56,032 $ 122,676 United States 723,064 730,055 467,766 Middle East 394,399 335,682 346,595 Asia 312,233 80,576 266,345 Europe 78,879 464,000 475,551 ---------- ---------- ---------- $1,625,241 $1,666,345 $1,678,933 ========== ========== ==========
(c) For the year ended 1997 and 1996 no end user accounted for more than 5% of the Company's product sales. In 1997, approximately 49.9% of the Company's product sales were made through five distributors, with the largest representing approximately 27.5%. For the year ended March 31, 1996 sales to one major distributor amounted to approximately 9% of total product sales. 15. CONTINGENT LIABILITIES (a) A statement of claim has been filed against the Company with respect to claims for non-payment of invoices in the amount of $110,000 for accounting services provided by an accounting firm. The Company has accrued $ 35,000 for this claim. 46 47 (b) Statement of claims have been filed against the Company alleging breach of contract and demanding specific performance, claiming 240,000 shares and 160,000 warrants (after the stock back-split). The President had transferred 100,000 common shares issued to individuals who provided marketing and related services in 1992 and 1993. The individuals had attempted to transfer 172,860 common shares to third parties. The Company's President has entered into an indemnification agreement with the Company whereby he would return up to 160,000 common shares for cancellation to the extent the Company is required to issue any such additional shares. (c) In February 1997 the Company was served with a class action lawsuit in the State of New York by shareholders in connection with potential losses that would be suffered on a warrant call (see also Note 16(c)). In addition the Company was subsequently served with a lawsuit by 5 shareholders in the State of California for similar reasons. Settlement, if any, on the claims in paragraph (b) and (c) will be recorded when settlement is probable and the amount of the settlement is estimable. 16. SUBSEQUENT EVENTS (a) On May 1, 1997, the courts gave preliminary approval to a March 7, 1997 informal agreement to settle, subject to approval of the class, the class action lawsuit. The settlement required that the Company change certain terms of the warrant redemption, undertake to appoint an independent addition to the Board of Directors, hire an independent Chief Operating Officer and cover legal costs of the complainant. (b) In April 1997, warrants to purchase 716,833 common shares were exercised at an exercise price of $ 3 per share. (c) In June 1997, the Company received $130,000 which is held in escrow in connection with a proposed financing in the amount of $250,000. 17. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year:
1995 1996 1997 ---- ---- ---- Interest $ 7,126 $ 56,289 $32,442 Non monetary transaction during the year Shares issued for investment in affiliate $ -- $ 720,000 $ -- Shares issued in exchange for preferred shares -- 350,250 -- ---------- ---------- ------- $ -- $1,070,250 $ -- ========== ========== =======
47 48 EXHIBIT INDEX -------------
EXHIBIT NO. DESCRIPTION - --- ----------- 10.1 Distributor Agreement between The Widecom Group Inc. and CADigitizing Corporation, dated May 6, 1997. Portions of this exhibit has been omitted pursuant to a request for confidential treatment. 10.2 Distributor Agreement between The Widecom Group Inc. and Scan Group, dated September 8, 1996. Portions of this exhibit has been omitted pursuant to a request for confidential treatment. 10.3 Distributor Agreement between the Widecom Group Inc. and The Imtec Group Limited, dated November 15, 1996. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. 21. List of subsidiaries. 23. Consent of BDO Dunwoody, independent accountants. 27. Financial Data Schedule.
EX-10.1 2 DISTRIBUTOR AGREEMENT 1 EXHIBIT 10.1 REDACTED COPY The full unredacted copy of this Agreement is subject to a request for confidential treatment. Confidential portions have been omitted and the full unredacted copy of this agreement has been filed separately with the Securities and Exchange Commission. THE WIDECOM GROUP, INC. DISTRIBUTOR AGREEMENT An Agreement made and entered into on May 6, 1997 between (1) The WideCom Group Incorporated, having its principal place of business at 267 Matheson Blvd. East, Mississauga, Ontario, Canada L4Z 1X8, hereinafter referred to as "WideCom", and (2) CADigitizing Corporation, having its principal place of business at 5712 Bridgeton Ct., Palm Harbor, Florida 34685, hereinafter referred to as "CADigitizing". Whereas (A) WideCom has designed and produces two document scanners known as the WideCom SLC436Color and the WideCom SLC436+ (B) CADigitizing is engaged in the international distribution of equipment and supplies for the engineering document market (C) CADigitizing is desirous of having a source of supply of document scanners and WideCom is willing to supply such scanners to CADigitizing 1.0 DEFINITIONS 1.1 "Product" shall mean the WideCom SLC436Color Scanner & the WideCom SLC436+ B & W Scanner. 1.2 "Territory" shall be exclusive for the Products and defined as the Peoples Republic of China. 2.0 AGREEMENT 2.1 PURCHASE/SUPPLY. CADigitizing agrees to purchase from WideCom and WideCom agrees to supply Product to CADigitizing on a continuous basis on the terms and conditions set forth in this Agreement. 2.2 APPOINTMENT. WideCom agrees to appoint CADigitizing as the exclusive distributor for Product in the Territory and further shall allow CADigitizing to appoint sub-distributors and dealers for Product in the Territory as it sees fit. 2.3 TERM. The initial term of this Agreement shall be twenty-four (24) months and will automatically renew for subsequent twelve (12) month periods unless either party notifies the other party in writing sixty (60) days before the renewal date that they do not intent to renew the Agreement. 2.4 MARKETING. CADigitizing agrees to represent, demonstrate, quote, and sell Product in an active marketing and sales program. 48 2 2.5 PRESS RELEASE. CADigitizing and WideCom agree to issue a joint press release, announcing this Agreement. The date for this press release is May 2, 1997. CADigitizing and WideCom will mutually agree on the wording of the press release prior to its issuance. 2.6 PRODUCT LAUNCH EVENT. CADigitizing and WideCom agree to jointly launch Product in Beijing, China at an event to be organized by CADigitizing. CADigitizing will arrange a suitable meeting location and invite approximately two hundred key government and engineering managers to participate in a Product seminar and capabilities demonstration. WideCom will provide key WideCom company executives, equipment and Customer Service Representatives to support this major launch event. The Product launch will occur May 30, 1997. 2.7 PRODUCT LAUNCH SERVICE TRAINING. WideCom will provide service training to CADigitizing selected personnel in Beijing, China in CADigitizing facilities. WideCom will support two weeks of training courses for a minimum of ten (10) CADigitizing Customer Service Representatives. CADigitizing Customer Service Representatives will subsequently be directed to train CADigitizing sub-distributors, dealers and customers as required. 2.8 SERVICE, INSTALLATION & CUSTOMER TRAINING. CADigitizing will be solely responsible for insuring proper installation, service and customer training for the Product. 2.9 TECHNICAL SUPPORT TO DISTRIBUTOR. WideCom agrees to provide technical support to CADigitizing for Product. WideCom support to CADigitizing will be provided by WideCom via telephone and on-site visits to China by WideCom personnel a minimum of three times a year. Based upon business performance and need, as mutually determined by WideCom and CADigitizing, WideCom will consider placing WideCom personnel on local assignment in China to support CADigitizing. 2.10 SERVICE TRAINING. CADigitizing will be solely responsible for, and will bear all costs of, providing technical support to their customers for Product. 2.11 DOCUMENTATION. WideCom agrees to provide to CADigitizing one set of WideCom customer, service, and service training documentation, in English, covering Product, at no cost. 2.12 PURCHASE ORDERS. Purchase of Product and/or spare parts by CADigitizing shall be made solely by the issuance of a written purchase order. Each purchase order shall identify the specific configuration of Product and/or spare part number, quantity ordered, mode of shipment, requested delivery date, price, purchase order number, ship to address, and authorized signature. 2.13 * 2.14 PURCHASE ORDER NON-ACCEPTANCE WideCom will provide CADigitizing written notice if WideCom is unable to accept any CADigitizing purchase order within five (5) workdays following WideCom's receipt of said purchase order. 2.15 PURCHASE PRICE. The purchase price to CADigitizing with respect to each unit of Product during the term of this Agreement is set forth in Exhibit 2. All prices are stated in United States dollars. 2.16 PRICE CHANGES. WideCom retains the right to adjust prices set forth in Exhibit 2 with ninety (90) days written notification to CADigitizing. *THIS ITEM HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION FOR CONFIDENTIAL TREATMENT 49 3 2.17 SHIPPING, DUTIES AND INSURANCE COSTS. All prices set forth Exhibit 2, are exclusive of shipping, duties and insurance costs. All shipping, duties and insurance costs will appear as an additional item on WideCom's invoice and are the responsibility of CADigitizing. 2.18 TAXES. All prices set forth in Exhibit 2, are exclusive of all country, state, and local excise, sales, value-added, use, and similar taxes. Such taxes, when applicable, will appear as separate additional items on WideCom's invoice and are the responsibility of CADigitizing. 2.19 DELIVERY, TITLE AND RISK OF LOSS. Product shipped to CADigitizing pursuant to this Agreement shall be F.O.B. Noida, India. Title shall pass to CADigitizing upon such delivery to the carrier. CADigitizing shall assume all risk of loss following such delivery except for loss resulting from the fault or negligence of WideCom. WideCom shall assist CADigitizing, in a timely manner, with any claims against the carrier for damage or loss. CADigitizing shall designate mode of shipping in its demand order, otherwise, WideCom shall ship by best method, as it determines. 2.20 PAYMENT. CADigitizing shall submit cash wire payment to WideCom prior to shipment of Product and/or spare parts. 2.21 SPARE PARTS. WideCom agrees to produce and ship to CADigitizing such quantities of spare parts required by CADigitizing to maintain all Products pursuant to this Agreement for a period of five (5) years after the last shipment of Product purchased under this Agreement. 2.22 TRADEMARKS AND LOGOS. WideCom trademarks and trade names under which CADigitizing markets Products will remain the exclusive property of WideCom. This Agreement gives CADigitizing no rights therein except that during the term of this Agreement WideCom grants to CADigitizing a restricted license to reproduce such WideCom trademarks and trade names in publications and under written terms and conditions as may hereafter be approved in writing by WideCom. 2.23 CONFIDENTIAL INFORMATION. Any confidential information exchanged between the parties during the term of this Agreement or extension thereof and which is designated in writing as confidential shall be held in confidence by the receiving party for at least three years after expiration or termination of this Agreement. THE PARTIES UNDERSTAND AND AGREE THAT INFORMATION CONCERNING ANY OF THE TERMS HEREOF IS CONFIDENTIAL TO EACH OF THEM AND SHALL ONLY BE DISCLOSED TO THIRD PARTIES, IN WRITING OR ORALLY, UPON THE SPECIFIC PRIOR WRITTEN AGREEMENT OF THE PARTIES. 3.0 WARRANTY 3.1 WARRANTY. WideCom warrants that all Product sold to CADigitizing hereunder, all parts contained in such Product, and all spare or replacement parts purchased by CADigitizing from WideCom therefor shall be free from defects in workmanship and materials. THE DURATION OF THIS PRODUCT WARRANTY SHALL BE LIMITED TO NINETY (90) DAYS AFTER EACH SUCH UNIT OF DERIVED PRODUCT HAS BEEN DELIVERED TO CADIGITIZING'S CUSTOMER AND IN NO EVENT SHALL THE WARRANTY CONTINUE IN EFFECT AFTER TWELVE (12) MONTHS FROM THE DATE OF SHIPMENT OF PRODUCT FROM WIDECOM TO CADIGITIZING. 3.2 DISTRIBUTOR WARRANTY OBLIGATIONS. CADigitizing will be responsible for all warranty service. 3.3 REMEDY. In the event the Product (or any parts contained therein) or spare 50 4 parts or replacement parts shipped to CADigitizing are found to be defective within the warranty period, CADigitizing shall promptly notify WideCom of the defect and WideCom shall authorize the return of the defective Product (or any parts contained therein) or defective spare part to WideCom's factory for repair or replacement. The shipping and handling charges from CADigitizing's facility for such returned Products or parts shall be the responsibility of WideCom. CADigitizing shall use best efforts to fully cooperate with WideCom and to follow WideCom's instructions in resolving warranty claims. In the event that the Product (or any parts contained therein) or spare parts or replacement parts returned by CADigitizing are found not to be defective, CADigitizing will be charged for all shipping costs and a restocking charge equal to the cost paid for the item by the CADigitizing shall be charged to CADigitizing. WIDECOM'S UNDERTAKING TO REPLACE SUCH DEFECTIVE PRODUCTS (OR ANY PARTS CONTAINED THEREIN), AND/OR SPARE PARTS HEREIN IS EXCLUSIVE AND IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING ANY IMPLIED WARRANTY OR MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE. 3.4 LIMITATIONS ON WARRANTY. THE WARRANTY IN SECTION 3.1 ABOVE IS IN LIEU OF ALL OTHER WARRANTIES AND REPRESENTATIONS, EXPRESSED OR IMPLIED, AND ALL OTHER OBLIGATIONS OR LIABILITIES OF WIDECOM WITH RESPECT TO THE PRODUCT AND ANY SPARE PARTS. OTHER THAN THE WARRANTY IN SECTION 3.1 ABOVE, WIDECOM MAKES NO OTHER WARRANTIES REGARDING QUALITY, PERFORMANCE, DEFECTS, REPAIRS, DELIVERY AND/OR REPLACEMENT OF THE PRODUCT AND/OR ANY SPARE PARTS. WIDECOM'S WARRANTY FOR THE PRODUCT AND/OR ANY SPARE PARTS ALSO WILL NOT APPLY TO: DEFECTS RESULTING FROM NEGLIGENCE OR MISUSE OF THE PRODUCTS AND/OR SPARE PARTS BY CADIGITIZING, CADIGITIZING'S AUTHORIZED AGENT OR REPRESENTATIVE, OR CADIGITIZING'S CUSTOMER; IMPROPER INSTALLATION OR REPAIR OF PRODUCTS AND/OR SPARE PARTS BY CADIGITIZING, CADIGITIZING'S AUTHORIZED AGENT OR REPRESENTATIVE, OR CADIGITIZING'S CUSTOMER; THE USE OF ANY PARTS ACQUIRED FROM THIRD PARTIES; OR PRODUCT OR SPARE PART ALTERATION DONE WITHOUT WIDECOM'S CONSENT. 3.5 MARKETABLE TITLE. WideCom warrants that it will pass to CADigitizing good and marketable title to all Product or spare parts therefor shipped to CADigitizing under this Agreement, free from any security interest or other lien, mortgage or encumbrances. 4.0 TERMINATION 4.1 TERMINATION FOR CAUSE. Either party may terminate this Agreement upon written notice of termination to the other party in any of the following events: (a) the other party materially breaches this Agreement and such breach remains uncured for sixty (60) days following written notice of breach by the terminating party; provided, however, that in the case of a repeat of a material breach earlier cured, the new cure period will be thirty (30) days; or (b) a petition for relief under any bankruptcy legislation is filed by or against the other party, or the other party makes an assignment for the benefit of creditors, or a receiver is appointed for all or a substantial part of the other party's assets, and such petition, assignment or appointment is not dismissed or vacated within thirty (30) days. 4.2 FAILURE TO ACHIEVE PERFORMANCE GOALS. Performance goals for this Agreement are detailed in Exhibit 1. If CADigitizing is unable to achieve the performance goals, either party may terminate this Agreement. Either party terminating under this provision will provide sixty (60) days written notice to the other party. 4.3 FAILURE TO ADEQUATELY PERFORM DISTRIBUTOR'S RESPONSIBILITIES. If 51 5 CADigitizing (a) does not properly represent, demonstrate, quote, and sell Product in an acceptable and active marketing and sales program; or (b) does not properly install and service Product and/or provide adequate customer training; or (c) does not perform proper warranty service; as determined by WideCom, or (d) sells Product outside of their Territory, WideCom may, at its sole discretion, cancel this Agreement. WideCom will provide sixty (60) days written notice to CADigitizing to terminate this Agreement under this provision. 4.4 SURVIVAL. The provisions of this Agreement will, to the extent applicable, survive the expiration or any termination hereof. 5.0 GENERAL PROVISIONS 5.1 LIMITATION OF LIABILITY. WIDECOM'S LIABILITY ARISING OUT OF THE SALE, USE OR OPERATION OF THE PRODUCT AND/OR SPARE PARTS BY CADIGITIZING OR ANY CUSTOMER, WHETHER ON WARRANTY, CONTRACT, NEGLIGENCE OR OTHERWISE (INCLUDING CLAIMS FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES) SHALL NOT IN ANY EVENT EXCEED THE COST OF FURNISHING A REPLACEMENT FOR THE DEFECTIVE PRODUCT AND/OR SPARE PART. THE FOREGOING SHALL CONSTITUTE WIDECOM'S SOLE LIABILITY TO CADIGITIZING AND/OR CADIGITIZING'S CUSTOMERS. 5.2 RELATIONSHIP OF THE PARTIES. CADigitizing and WideCom agree that each are independent parties and neither is authorized to make any commitment or representation on the other's behalf. 5.3 GOVERNMENT COMPLIANCE. Each party will comply fully with all federal, state and local laws and regulations relating to its obligations under this Agreement. 5.4 FORCE MAJEURE. Except as otherwise provided herein, WideCom will not be liable to CADigitizing or CADigitizing's customers for its failure to perform any of its obligations hereunder during any period in which such performance is delayed by circumstances beyond WideCom's reasonable control, provided that WideCom promptly notifies CADigitizing of the delay. 5.5 HEADINGS. Except for Article I, Definitions, the headings and titles of the Articles of this Agreement are inserted for convenience only and do not affect the construction or interpretation of any provision. 5.6 AMENDMENTS. Except price changes as described in section 2.16, this Agreement may be amended only by a written agreement duly signed by authorized representatives of both parties. 5.7 ASSIGNMENT. CADigitizing cannot assign this Agreement or any rights and obligations thereunder to any third party without the express written permission of WideCom. 5.8 SEVERABILITY. If any provision of this Agreement is held invalid by any law, rule, order or regulation of any government, or by the final determination of any state or federal court, such invalidity will not effect the enforceability of any other provisions not held to be invalid. 5.9 WAIVER. Any delay by WideCom to exercise any right or remedy under this Agreement will not be construed to be a waiver of any other right or remedy hereunder. All of WideCom's rights under this Agreement will be cumulative and may be exercised separately or concurrently. 5.10 PUBLICITY. Neither party, WideCom or CADigitizing, will publicly disclose any information concerning this Agreement without prior written consent of 52 6 the other party. 5.11 CONTROLLING LAW. This Agreement will be construed under and governed by the law of the Province of Ontario, Canada. 5.12 NOTICES. Any notice that may be or is required to be given under this Agreement will be written. Any written notices will be sent by registered mail or certified mail, postage prepaid, return receipt requested. All such notices will be deemed to have been given when received, properly addressed pursuant to the addresses below: CADIGITIZING CORPORATION THE WIDECOM GROUP, INC. 5712 Bridgeton Ct. 267 Matheson Blvd. East Palm Harbor, Florida 34685 1X8 Mississauga, Ontario, Canada L4Z Attention: Charles W. Doane Attention: Suneet Tuli 5.13 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties as to the subject matter hereof and supersedes any and all prior or written memoranda, understandings and agreements as to such subject matter. THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AGREEMENT AND ITS ATTACHMENTS AND AGREE TO BE BOUND BY ALL OF ITS TERMS AND CONDITIONS. CADIGITIZING CORPORATION THE WIDECOM GROUP, INC. By /s/ By /s/ ----------------------------- ------------------------------- Charles W. Doane Suneet Tuli Printed Name Printed Name Executive Vice President - ------------------------------- ---------------------------------- Title Title - ------------------------------- ---------------------------------- Date Date 5712 Bridgeton Ct. 267 Matheson Blvd. East Mailing Address Mailing Address Palm Harbor, Florida 34685 Mississauga, Ontario, Canada L4Z 1X8 - ------------------------------- ---------------------------------- - ------------------------------- ---------------------------------- Mailing Address Mailing Address 813-781-6283 813-781-7973 905-712-0505 905-712-0506 - ------------------------------- ---------------------------------- Phone Fax Phone Fax 53 7 OMITTED IN ITS ENTIRETY EXHIBIT 1 This exhibit is filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 54 8 OMITTED IN ITS ENTIRETY EXHIBIT 2 This exhibit is filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 55 EX-10.2 3 DISTRIBUTOR AGREEMENT: WIDECOM & SCAN GROUP 1 EXHIBIT 10.2 The full unredacted copy of this Agreement is subject to a request for confidential treatment. Confidential portions have been omitted and the full unredacted copy of this agreement has been filed separately with the Securities and Exchange Commission. THE WIDECOM GROUP INC. 55 CITY CENTRE DRIVE, SUITE 500 MISSISSAUGA, ONTARIO, CANADA L5B 1M3 PH: (905) 712 0505 FAX: (905) 712 0506 PRIVATE-LABEL / OEM AGREEMENT THIS AGREEMENT is made on the 8th day of September, 1996 between The WideCom Group Incorporated, a company incorporated under the laws of the Province of Ontario, Canada whose registered office is at 55 City Centre Drive, Suite 500, Mississauga, Ontario, Canada, L5B 1M3 (hereinafter called "WideCom"), and Scan Group (1991) Ltd. whose registered office is at P.O.Box 10525, Haifa Bay 26114, Israel, Hereinafter called "SGI". Whereas (A) SGI manufactures high end wide-format color scanners. (B) Widecom manufactures low cost wide-format monochrome and color scanners. (C) SGI is desirous of reselling Widecom color scanners under its own brand name, and incorporating Widecom color-scanner engine in a product to be created by SGI. (D) Both firms wish to co-operate in joint marketing efforts, and joint promotions, as necessary. 1. Definitions 1.1 In this agreement: (a) "Product or Base Product" means the SLC436-Color Scanner hereto as manufactured and marketed by WideCom from time to time or as may be amended from time to time by agreement in writing. (b) "Pure Direct Competition" means products based on Widecom's scan engine, that have no difference, or no real value differentiation, over Widecom's stand alone scanner. 56 2 (c) "Applications" shall mean the applications of the Production for purposes other than that of a stand alone scanner. (d) "OEM" shall mean private labeling or branding of equipment. 2. Product Scope SGI will take Widecom's base product and create products for the following applications: (a) Color separation card and or software, for Windows and Unix Platforms, as a primary function of the unit. (b) SCSI interface card and software for Windows and UNIX Platforms. Note: Widecom will not develop a competitive SCSI/UNIX interface for at least 3 years, and will resell this interface to its customers, and offer it to its other OEMs. (c) Vectorisation on the fly Software and Hardware for Windows and UNIX Platforms. SGI may use ATIL to do these product developments, but will insure that ATIL signs and abides to the non-disclosure and non-compete agreements. 3. Prospect Protection Both parties agree not to encroach upon or undermine the other party's efforts in recruiting specific dealers, distributors or OEMs. In this regard, Widecom recognizes that SGI has had an ongoing relationship with the following firms, and that SGI wishes to approach such firms with products created from Widecom's base scan-engine technology, and Widecom will support these actions within the term defined hereunder USA: * Europe: * - Germany - Germany - Germany - Austria - Slovakia SGI must show progress in its efforts to recruit these firms as resellers on a bi-monthly basis, to maintain such protection. The protection will be for a period of a maximum of 6 months if SGI has not been able to finalize an agreement with the above noted firms within that period. Extended protection beyond the six months will require bi-monthly updates that show real progress is being made to Widecom's satisfaction. If any of these firms approach Widecom directly, and an agreement is entered upon within 5 years of this date then Widecom will provide SGI an override commission for purchases by that firm from Widecom. This commission will be $40.00 per unit. 4. Mutual Marketing Actions 4.1(a) Widecom offers SGI access to one of its U.S. offices (Atlanta, Chicago or other), where SGI may at its option establish its primary U.S. *THIS ITEM HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION FOR CONFIDENTIAL TREATMENT. 57 3 facility. Widecom will allow SGI staff temporary access to its showrooms and meeting rooms in its other facilities, based on mutual convenience. 4.1(b) If needed, SGI may at its own cost install call forwarding or call answering services at other offices. 4.1(c) The only costs that Widecom will be responsible for is provision of space for the primary SGI office, whereas SGI will be responsible for the rest of its costs (e.x. telephone, e.t.c.). 4.1(d) Widecom will not be obligated to maintain an office for more than one year, or provide this service beyond this period, unless mutually agreed. 4.2(a) Widecom intends to participate at the following tradeshows over the next six months: Show: Dates Location Booth Size GovCAD'96 September 23 to 25 Virginia 20x30 A/E/C Systems Fall October 29 to 31 Florida 20x20 AutoFact November 12 to 14 Detroit 20x20 GIS/LIS'96 November 19 to 21 Colorado 10x20 Widecom invites SGI to participate in these tradeshows at Widecom booth. 4.2(b) Widecom will allow SGI one overhead sign on the channel joining two columns (as depicted in appendix-A). Along with the overhead sign, SGI can put up two posters on the columns of size 3'x4'. All signage must be pre-approved by Widecom, to insure no conflicting message is portrayed. It is understood that the product that SGI will display can be competitive to other Widecom products in the booth, as long as such product incorporates Widecom's scan-engine. Widecom will not be able to provide overhead signage if the booth is less than 20'x20'. 4.2(c) For the show participation, SGI will be responsible for its own shipping, drayage or staff costs. Widecom will only be responsible for providing the space on the booth, carpet, and its standard booth. All other costs will be borne by SGI. Joint participation in tradeshows other than the above, will be mutually agreed upon by both parties, as necessary, on an ongoing basis. 4.2(d) SGI will inform Widecom in writing at least 60 days prior to each tradeshow, of its intent to participate. If SGI fails to attend at a tradeshow, after confirming its intent to participate, Widecom may withdraw its invitation to participate in future trade shows. 4.3 Lead sharing: Both parties agree to share leads that are more suited to the other party's Widecom-based product. That is, for the products that are in pure direct competition, neither party is obligated to share leads. Both parties agree to share leads for Widecom- technology-based products that either party has developed that can better meet the specific demands of a customer. For example, if the SGI labeled product contains a special vectorization boards or other related imaging enhancements, that are not offered by Widecom, and are required by the customer, then Widecom will pass this lead to SGI. 4.4 SGI agrees to the use of its name and reference in Widecom advertising and testimonial literature. That is, Widecom wishes to use advertising and testimonial literature that conceptually says that SGI provides the best & highest quality color scanner on the market, and uses that to enhance its credibility, since SGI has chosen the Widecom technology for its low cost product. This will be created in a manner 58 4 that enhances both SGI & Widecom's stature in the market, and does not take away or hinder anything from SGI's products that are in pure-competition with Widecom. Widecom will use this to promote its technology, and no specific finished product. Each one the advertisements or literature will have to be approved by SGI. 5. Non-disclosure/Non-compete Both parties have entered into a mutual non-disclosure agreement, which is attached as appendix-B. SGI affirms that other than with respect to the proposed business relationship between the parties, it is neither engaged in nor intends to be engaged in either directly or in directly any business involving single line contact scanning module technology. SGI agrees not to enter any such business during the 5 (five) year period following the date of this agreement. 6. Production/Sub-contract Widecom will consider favorably the possibility of producing the new SGI scanner (based on Widecom technology) at their plant in India. SGI will provide all documentation needed for this production. The new scanner developed by SGI will be owned solely by SGI and its production rights will not be allowed to be handed to a third party. 7. Territory, Commitment, Price & Quality Assurance 7.1 Territory: For the European market, the basic unit that Widecom supplies is limited in the form of a Color-Separation-Scanner or SCSI/UNIX-Scanner or Vectorisation-Scanner unit. For the first 12 months, the stand-alone scanner base-unit will not be sold by SGI in the European market, except for the above noted application/configuration. 7.2 * 7.3 * 7.4 Product Updates: In case that Widecom will change the specifications of the scanner in the future, they will update SGI with the full hardware and software documentation prior to introducing the new product to the market. 7.5 * 7.5 Quality Assurance: Widecom undertakes to provide to SGI units that will show image that resolves the test chart created by both parties, and attached in appendix-C. The scanner specifications will be as follows: a. The scanner should support scanning in RGB mode of at least 24 bit per pixel. b. The scanner should be able to produce consistent colors. c. Scanning area of at least A0 for every color mode. d. The scanner should scan in true 400 dpi resolution. 8. Termination 8.1 Either party may terminate this agreement forthwith by notice in writing sent thirty (30) days in advance: *THIS ITEM HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION FOR CONFIDENTIAL TREATMENT. 59 5 (a) upon bankruptcy, insolvency of liquidation of either party (except for voluntary liquidation to effect a reconstruction on terms to which the other party has previously consented to in writing); (b) upon any material change to the ownership or management of either party which the other party considers detrimental to its interest; (c) if either party commits a irremediable breach of the terms of this agreement. 8.2 Notwithstanding termination of this agreement SGI and ATIL shall remain bound by the obligations to respect WideCom's confidential information, non-competition and industrial property rights. 9. Applicable Law: This agreement shall be construed under and governed by the law of the Province of Ontario, Canada. Further, the parties hereto agree that any claims or controversy arising between them our of, or in conjunction with the provisions of this agreement shall be finally settled in accordance with the rules of conciliation arbitration of the International Chamber of Commerce. In addition, the parties agree to comply with the applicable laws of Canada and the territory regarding disclosure requirements and limitations of payments imposed by subject territories. IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day and year first above written. /s/ - --------------------------------------- -------------------------------- On Behalf Of The Scan Group (1991) Ltd. Refoel Moshe /s/ - --------------------------------------- -------------------------------- On Behalf Of The WideCom Group Inc. Suneet Tuli 60 6 APPENDIX A Picture of an overhead sign to be used by SGI in connection with certain tradeshows which the Company has invited SGI to participate in with the use of the Company's booth. 61 7 APPENDIX B NON-DISCLOSURE AGREEMENT Made this 11th day of July 1996 By and among SCAN GROUP LTD., having a place of business at 22 Humusshim St. P.O. Box 0425 Halfa 26114, Israel; and THE WIDECOM GROUP INC., having a place of business at 55 City Centre Drive, Suite 500, Mississauga Ontario, Canada. 1. RECITALS. The parties hereto acknowledge that from time to time, Widecom may make known to Recipient certain confidential information in furtherance of mutual business interests which is deemed to be confidential, secret and/or proprietary to Widecom. 2. DEFINITION. "Confidential Information" shall mean all information designated as "Confidential Information", (as provided in Paragraph 3) and disclosed by Widecom to Recipient, including, but not limited to, any electronic configurations, component specification, logic diagrams and equipment designs associated with the Scanner/Plotter/Facsimile Project. The term "Confidential Information" shall not include any information which: 2.1 Is now generally known or available or which hereinafter through no act or failure on the part of Recipient becomes generally known or available; and provided that the term "generally known" shall not include piecemeal reconstruction or reverse engineering of the "Confidential Information"; 2.2 Is hereafter fumished to Recipient by a third party without restriction on disclosure, where such third party legally obtained such information and the right to disclose it to Recipient or 2.3 is independently developed by Recipient without violation of any legal rights which Widecom may have in such information. 3. DISCLOSURE and PROTECTION. As to any information provided to Recipient by Widecom, such disclosure shall be deemed "Confidential Information" if: a) The confidential information in written or other tangible form is marked "Confidential" or b) Information disclosed orally is identified as confidential in writing to Recipient within 72 hours of meeting and may not be disclosed in any part prior to said Letter of Identification. 4. Recipient shall use "Confidential Information" for the purpose of this Agreement only and shall not disclose "Confidential Information" or any part thereof to any other person, corporation or other organization without prior written authorization of an officer of Widecom. 62 8 5. This Agreement shall remain in force and effect for two (2) years from the date of the last transfer of "Confidential Information" between the parties. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. SCAN GROUP LTD. THE WIDECOM GROUP INC. By: /s/ By: /s/ -------------------------------- -------------------------------- Rofoel Moshe Suneet Tuli TITLE: President TITLE: Executive Vice President Date: 11/7/96 Date: 11/7/96 63 9 APPENDIX C It is agreed that units of SLC 436-Color Scanner will be tested by both companies using the test chart as follow: Test Chart # .83.001 Test Chart maid by: EDMUND SCINTIFIC Barlington New Jersey 08607 USA - ---------------------------- ------------------------- Scan Group Ltd. Widecom 64 10 OEM PURCHASE AND SALE AGREEMENT An Agreement made and entered into on 15 November 1996 between (1) THE WideCom GROUP INCORPORATED, having its principal place of business at 55 City Centre Drive, Suite 500, Mississauga, Ontario, Canada L5B 1M3, hereinafter referred to as "WideCom" and (2) THE IMTEC GROUP LIMITED, having its principal place of business at 168 Honeypot Lane, Stanmore, Middlesex HA7 lLB, England, hereinafter referred to as "Imtec" Whereas (A) WideCom has designed and produced a Document Scanner known as the WideCom SLC436 (B) WideCom is engaged in the development of further document scanning devices, particularly an enhanced version of the SLC436 sensor array for 400 dots per inch scanning (C) Imtec is engaged in the manufacture and distribution of equipment and supplies for the engineering document market (D) Imtec is desirous of having a source of supply of document scanners and WideCom is willing to supply such scanners to Imtec (E) Imtec is desirous of having a source of supply of components and knowhow related to document scanning devices for incorporation into machines of Imtec design and manufacture and WideCom is willing to supply such components and knowhow to Imtec 1. Definitions (A) "Product" shall mean complete SLC436 scanner, or derivative and related scanning machines, or a set of the major components used in the machines, as defined in Appendix 1 (B) "Components" shall mean elements of the 5LC436 scanner, its derivative and related products, such as the image sensing components, printed circuit boards, drive motor ,illumination components and software code as defined in, but not limited to, the list in Appendix 1 of this Agreement. (C) "Parent machine" shall mean the WideCom machine such as the SLC436 which uses the parts defined as the "Components" 66 11 (D) "Derived Product" shall mean any Imtec machine which is built using Components supplied by WideCom under this Agreement. (E) "Exclusive Territory" mean shall those countries listed in Appendix 2, paragraph 1 (F) "Non-Exclusive Territory" shall mean the World, save for the Exclusive Territory. (G) "Territory" shall mean the Exclusive and the Non-Exclusive Territory. (H) "Intellectual Property" shall mean patents, trade marks (or applications therefor) copyright, design rights, know-how an d confidential information. (I) "Applications" shall mean the applications of the Product for the purposes of stand alone scanning, and for integration of the Product into a device which combines electronic document capture with microfilm document capture 2. SALES PURCHASE AND DISTRIBUTION 2.1 Imtec agrees to purchase from WideCom and WideCom agrees -to supply the Products to Imtec on a continuous basis on the terms and conditions set forth-in this Agreement. 2.2 Widecom agrees to appoint Imtec as its sole and exclusive distributor for the Product, subject to the Applications and the ordering requirements pursuant to paragraph 3.1, in the Exclusive Territory subject to clause 2.3 below. Furthermore WideCom shall grant Imtec non-exclusive distribution rights for other territories as defined in Appendix 2, paragraph 2. WideCom agrees to allow Imtec to promote itself as the appointed distributor in the Territory and further shall allow Imtec to appoint sub-distributors and dealers as it sees fit. Imtec shall be free to sell the Product to OEM distributors for purposes other than the Applications, subject to giving notice of contact with any such OEM distributors to WideCom, and subject to the approval of WideCom which shall not be unreasonably withheld. 2.3 WideCom shall be free to appoint further distributors to operate within the Territory subject to the following conditions: 2.3.1 The price of the Product to Imtec shall be no more than the price of the Product to any other distributor, even if this means that the price to Imtec must be reduced to meet this condition. 67 12 2.3.2 The performance specification of the Product supplied to any other distributor shall not exceed the performance specification of the Product supplied to Imtec, unless the improved specification offered by WideCom is declined by Imtec. 2.3.3 If WideCom grant distribution rights to a third party over territory that includes the Exclusive Territory then this other distributor must have its own worldwide marketing organization and shall be granted rights to the rest of the world in addition to the aforementioned Exclusive Territory. 2.3.4 WideCom shall notify Imtec of any discussions with third parties which reach agreement of intent to appoint the third party as a distributor within the Exclusive Territory. Any discussions with third parties shall be held confidential until there is formal written agreement to proceed with distribution of the Product. WideCom shall require any third party to agree such confidentiality in writing. 2.3.5 Where possible WideCom shall give at least six (6) months notice of the commencement of supply to any other distributor which may operate in the Exclusive Territory. In the case that a price reduction to Imtec will result, pursuant to paragraph 2.3.1, then this price reduction shall take effect from the time at which notice is served. If the period of notice given by WideCom is less than six (6) months, then Imtec shall be free to adjust any outstanding purchase orders, notwithstanding the conditions of paragraphs 3 and 4. 2.3.6 WideCom shall be free to appoint further distributors for sale of the Product for any express purpose not included in the Applications, subject to the conditions set out above in this clause save for 2.3.3 WideCom agrees to allow Imtec to freely distribute the Imtec Derived Products without restriction. WideCom agrees to supply the Components to Imtec on an exclusive basis for the purposes of integration into Imtec scanner and scanner/microfilm camera products, and shall not supply the Components to any third party for the purposes of construction of machines of similar function or application, except under the conditions set out above. 3. Order Procedures 3.1 * This order quantity and delivery schedule shall be dependent on the specification, performance and manufacturing quality of the Mark 2 *THIS ITEM HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION FOR CONFIDENTIAL TREATMENT. 68 13 version of the SLC 436 being judged by Imtec to be of satisfactory standard for the market in the Exclusive Territory, and to there being no appointment of any third party distributors pursuant to paragraph 2.3. The order shall also be subject to amendment following discussions between the parties in the case of substantial changes in the general market volumes and selling prices within the Exclusive Territory. To facilitate the efficient continuing supply of the Products by WideCom, Imtec will place a firm purchase order for the Products which covers the shipments to be made in the fourth calendar month following the calendar month in which the order is placed. Orders will specify the following items: a) Order Number and order date b) Description and Quantity of the Products c) Unit Price and total price d) Means of shipment and required delivery time e) Shipping destination f) Month of shipping A purchase order placed by Imtec with WideCom may by agreement in writing be altered in respect of means of shipment and shipping destination at any time prior to shipment. Each purchase order shall be treated as a separate contract between the parties, and failure to perform any such separate contract shall not alone be reason to determine performance under this Agreement as a whole. Imtec shall place further purchase orders for the supply of the Product to follow on a continuous basis from the initial purchase order. Imtec shall be the sole and exclusive distributor in the exclusive Territory, save for the conditions of paragraph 2.3, 50 long as the annual order quantities shall be sufficient to give Imtec a market share within the Exclusive Territory which is approximately equal to the market share of WideCom in the North American market for the same annual periods. 3.2 WideCom shall, without unreasonable delay but in any case within one (I) month of receipt of a firm purchase order, inform Imtec that WideCom accepts the order so long as it is in accordance with Section 3.1 and previous reservation orders as defined in Section 4. WideCom shall not refuse any order from Imtec which is in accordance with this Agreement. 3.3 In the case of a firm purchase order which includes material terms or conditions which deviate from those stipulated in this agreement, WideCom may, at its discretion, either refuse to accept the order or propose to Imtec that the particular terms or conditions are amended or deleted. 69 14 4. Reservations and forecast Imtec shall provide WideCom with Reservation orders and a purchase forecast as follows: 4.1 Imtec shall each month place a reservation order for the Products, which covers shipments to be made in the fifth calendar month following the calendar month in which the reservation order is placed. Such reservation orders shall be subject to agreement by WideCom. 4.2 Imtec may alter the quantity of Products in a reservation order before converting it to a firm purchase order. This quantity alteration may be an increase or decrease, but shall not exceed 25% of the original reserved quantity 4.3 Imtec shall each month place a forecast for the purchase of Products, which will cover the shipments to be made in the six (6) months period commencing with the sixth (6) month following the month in which the forecast is placed. Such forecasts are indicative only and do not create an offer to purchase the Products. 5. Prices and Payment 5.1 The Prices for the Products are defined in Appendix 1. These Prices are FOB Noida, and shall include adequate protective packing for shipping by normal methods. These Prices shall be maintained for the first eighteen (18)months following the date of signing of this Agreement. Imtec and WideCom will discuss and agree the prices which will take effect eighteen (18) months from the date of this Agreement and thereafter at eighteen (18) month intervals. The price of the Product shall not be increased by more than the percentage change of the UK Retail Price index during the preceding eighteen (18) month period. 5.2 The Prices defined in Appendix 1 are based on an exchange rate of 1.55 US Dollars to one Pound Sterling. If the rate of exchange moves outside the range of 1.45 to 1.65 US Dollars to one pound sterling, then the loss or gain to Imtec of the exchange rate being outside the range shall be equally shared with WideCom, such losses or gains being calculated from the upper and lower limits of the range. The exchange rate used in computing any losses or gains shall be the spot exchange rate prevailing in London at the time that transfer payments are made. The parties should issue invoices at quarterly intervals for any payments due pursuant to the above. Such invoices should be paid by the other party within thirty (30) days. 70 15 5.3 Payment will be made by Telegraphic Transfer to a bank nominated by WideCom, within ninety (90) days of receipt of the shipment. 5.4 Payment shall be made in United States Dollars. 6. Delivery Shipment of the Products shall be made FOB Noida in accordance with the Incoterms in effect at the date of shipment. Subject to satisfactory inspection as set out in Section 7, WideCom shall deliver the Products in accordance with the necessary instructions from Imtec. Any item shall be deemed to have been delivered to Imtec when title to and risk of such item pass on the basis of Section 6.2 below. WideCom shall advise Imtec about the specifics of shipment immediately the information is available. 6.2 Title and risk to any Products to be purchased will pass to Imtec when the Products are placed on board at FOB port of export in Noida, suitably packed and marked for delivery as mutually agreed. 7. Quality and Inspection 7.1 The Products to be shipped to Imtec will meet the specific quality requirements as detailed in Appendix 3. In addition to these requirements all items shipped shall function correctly, be free from defects such as external scratches, corrosion, paint defects, and meet normal engineering standards of workmanship for build quality and finish. 7.2 WideCom will inspect Products prior to shipment to Imtec. Imtec may, at their discretion, give concessions on quality, but only if the concession is requested in writing by WideCom and accepted by Imtec in writing prior to shipment. Products received by Imtec shall be subject to inspection pursuant to the terms of Section 7.1 within a reasonable time of arrival at their destination. WideCom will be notified in writing within fifteen (15) days of arrival of any Products which do not meet satisfactory quality levels, and these Products will be rejected back to WideCom for replacement, at no cost to Imtec. 7.3 In the event that the Product delivered is consistently not of merchantable quality, then Imtec reserves the right to cancel any outstanding orders until quality problems are resolved to their satisfaction. If the problems cannot be resolved to the satisfaction of Imtec then Imtec may terminate the agreement pursuant to paragraph 17. 71 16 8. Continuity of Supply In the event that WideCom is unwilling or unable to supply the Products within the period of this Agreement, then WideCom shall supply to IIrLtec all the information and data necessary to allow Imtec to produce the Products. This information and data shall be supplied free of charge, within 14 days of request by Imtec, and shall include but not be limited to all documents, drawings, patent licences, manufacturing rights, supplier information and know how necessary for the manufacture of the Products. 9. Spare Parts WideCom shall continue ~o supply reasonable quantities of Components for use as spare parts for at least five (5) years after the expiry or termination of the Agreement. 10. Documentation and Training WideCom shall provide Imtec with all necessary documentation needed for the integration of the Components into Imtec Derived Products and allow Imtec to repair, service and maintain the Products. This documentation shall include dimension mechanical drawings detailing mounting holes and fixing points, electrical schematic diagrams of individual circuit boards (with the exception of the specifications relating to the FPGA circuits, and of the Averaging PCB for the Colour scanner only), electrical interconnections and all other relevant data concerning the successful installation of the Components in the Derived Products. WideCom shall, before the first delivery of Products, provide a training course for up to four (4) Imtec engineers regarding the operation, maintenance and repair of the Products. The training course may be held in either England or Canada, and at WideCom's expense except for any travel and subsistence expenses for either WideCom or Imtec staff which will be borne by Imtec. All documentation and training shall be in the English language. 11. Developments, Improvements and Modifications 11.1 WideCom shall keep Imtec informed of Product developments within the scope of Section 1 (A) of this Agreement, and shall offer such developments to Imtec under the terms of this Agreement. 11.2 WideCom shall only introduce modifications to the Products supplied under this Agreement if these modifications are considered by WideCom and Imtec to be improvements. All proposed modifications must be formally accepted in writing by Imtec prior to introduction. All modifications which affect performance, compatibility with other parts and physical changes which affect fitting to Imtec Derive& Products must be notified in writing by WideCom at least four (4) months before delivery. No price increase as a result of a modification will be accepted by Imtec unless the increase has been accepted by Imtec in writing. 72 17 12. Warranties 12.1 WideCom shall warrant the quality of material and workmanship of the Products for a period of twelve (12) months from date of the Bill of Lading of the shipment. WideCom will within a reasonable period replace any defective Products free of charge, and send the replacements on a CIF basis, provided that Imtec has a) sent a written notice of the defect to WideCom, together with a technical description thereof promptly after the defect is found, or in any case within twelve months of the shipment of the Component b) Sent the allegedly defective component to WideCom for inspection, if so requested by WideCom 12.2 WideCom shall not be responsible for any defects caused by transportation or storage conditions after loading at the FOB port, or for inadequate installation or maintenance by Imtec. 13. Intellectual Property If any third party should bring a suit or any other form of legal claim against Imtec resulting from an alleged infringement of Intellectual Property as a result of the use or sale of the Products then Imtec shall inform WideCom of this action in writing without delay and in any case within thirty (30) days of receipt. WideCom shall hold Imtec harmless in the case of any claim or suit brought by a third party concerning infringement of Intellectual Property provided that: a) The Products have not been altered by Imtec in such a way as t~ have caused the infringement b) The alleged infringement relates to the Products supplied by WideCom and not the configuration of these Components in the Imtec designed Derived Product 14. Trade Marks Imtec shall be allowed to sell the Products under the Imtec trade mark, and to sub-license such right to sub-distributors. The Components supplied to Imtec shall be built into Derived Products manufactured by Imtec, and sold under the Imtec trade mark or any other trade mark allowed by Imtec under their terms of distribution of the Derived Product. 15. Confidentiality and Non-Competition 15.1 Each party will hold confidential any information or data from the other party which relates to the Product and the business between the parties in connection with this Agreement. The information shall include, but not be limited to, any design drawings, data, process technology, technical and market know how, pricing and sales data, and ideas and suggestions related to the Product or the business. Each party shall hold such information confidential, and shall not disclose it to any third party without the written permission of the supplying party, except when the information is required for the maintenance and repair of the Product by third 73 18 party distributors. Each party shall ensure that confidential information is only disclosed to those employees who need this information for the business between the two parties. 15.2 Neither party shall be restricted from disclosing information which becomes generally known to the public by no fault of either party, or which was known to a party prior to this Agreement, or which is independently obtained or developed by one of the parties. 15.3 Imtec affirms that other than with respect to the proposed business relationship between the two parties, it is neither engaged in nor intends to be engaged in, either directly or indirectly, any business involving single line contact scanner technology which involves products which are in direct competition to the Products, either existing or known to Imtec to be in development. Subject to Imtec continuing to be the sole and exclusive distributor in the Exclusive Territory for the Products pursuant to paragraph 2.2, Imtec agrees not to enter any such business during the five (5) year period following the date of this Agreement unless Imtec gives WideCom sixty (60) days notice thereof and proves to WideCom's reasonable satisfaction, prior to such entry, that Imtec is not utilizing any of the Confidential Information in connection with this Agreement. 16. Product promotion Imtec shall promote the Products by means of exhibitions, advertising, press editorial features and other methods. For each six (6) month period thereafter Imtec shall agree a programme of marketing promotion with WideCom. WideCom agrees to assist Imtec with subsidies 50% of the cost the floor space of the agreed trade shows, and 50% of the insertion costs of the agreed advertising expenditure. Other items of promotional expenditure may also be subsidized, subject to case by case agreement by WideCom. Imtec will issue invoices for the agreed subsidies to WideCom at quarterly intervals. Such invoices shall be payable by WideCom within thirty (30) days. 17. Term This Agreement shall take effect on the day it is signed by authorized representatives of both parties. This Agreement shall remain in force for a period of eight (8) years for the date of signing, unless earlier terminated pursuant to Section 19. Imtec shall be the sole and exclusive distributor for the Products, pursuant to paragraph 2, for an initial period of three (3) years, subject to the provisions of paragraph 2.3. Imtec and WideCom shall meet at least six (6) months before the end of this period to discuss the renewal of these sole and exclusive marketing rights, which renewal shall not be withheld if Imtec is marketing the Product effectively. An extension to the Agreement may be negotiated at the request of either party provided that such negotiation shall start not later than nine (9) months prior to the expiry of this Agreement. 74 19 18. Force majeure Neither party shall be liable for delays in or failure of performance due to causes beyond such party's reasonable control, or Acts of God, strike, lockout or other interference with work, war declared or undeclared, blockade, disturbance, fire, legal acts of public authorities, unavailability or delay of transportation or any other causes beyond the reasonable control of either party. In the event of any delay or failure the affected party shall promptly give notice to the other party giving details of the force majeure, and shall make its best efforts to remove the force majeure as soon as possible. The performance of the affected party shall be deemed suspended so long as and to the extent that any force majeure continues, provided however that after one hundred and twenty (120) consecutive or cumulative days the other party, at its sole discretion, may terminate the Agreement without liability. 19. Early termination If any party hereto fails or refuses to perform any of its obligations under the prime terms of this Agreement and shall continue such failure or refusal for a period of sixty (60) days after having received written notice thereof , then the party giving such notice may terminate the Agreement forthwith by sending written notice to the defaulting party. Written notices will be sent pursuant to Section 21. 20. Non-Assignability Neither party may, in whole or in part, assign, transfer, pledge, encumber or otherwise dispose of this Agreement or any interest, right or obligation created thereunder to any third party, without the prior consent of the other party to this Agreement. 21. Notice All notices specifically required by this Agreement shall be in writing in the English language and shall be sent by registered airmail or by telex or facsimile subject to confirmation within 15 days of receipt of such telex or facsimile, unless otherwise instructed by written notice of the other party: If to WideCom: WideCom Group Incorporated 55 City Centre Drive, Suite 500, Mississauga, Ontario, Canada L5B 1M3, Attention : S. Tuli, Director Facsimile: 001 416 566 0181 If to Imtec: The Imtec Group Limited 168 Honeypot Lane Stanmore Middlesex HA7 lLB England Attention : S. Brewster, Director Facsimile : UK 181 204 9496 Telex : UK 924574 Imtec G 75 20 The notices shall be deemed to have been duly served, and made unless otherwise specifically provided for in this Agreement, i) when registered airmail shall have been deposited in. the mail, postage pre-paid, or ii) when such telex or facsimile shall have been received by the other party, subject to receipt by such other party of the confirmation thereof by registered mail, postage pre-paid, within fifteen (15) days. 22. Disputes This Agreement shall be governed by the laws of England and both parties submit to the non-exclusive jurisdiction of English courts, and the rights and obligations of the parties shall be enforceable accordingly. In witness whereof, the parties hereto have caused their duly authorized representatives to execute this Agreement as of the date first above written. The Imtec Group Ltd Widecom Group Inc /s/_________________________ /s/________________________ Signed by Starr Brewster Signed by: Suneet S. Tuli Title: Managing Director Title: Executive Vice President 76 21 APPENDIX 1 This exhibit is filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 77 22 APPENDIX 2 1 EXCLUSIVE TERRITORIES: United Kingdom Spain France Portuga1 Holland Sweden Belgium Denmark Germany Finland Italy Norway Switzerland Greece Austria Cyprus Poland Turkey Czech Republic Malta Hungary Serbia Bosnia Eire Croatia 2 NON EXCLUSIVE TERRITORIES: All countries not listed in Paragraph 1. 78 23 APPENDIX 3 This exhibit is filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 79 EX-21 4 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARY 1. Indo-Widecom International, Ltd., a corporation formed under the laws of India. 80 EX-23 5 CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS 1 EXHIBIT 23 Consent of Independent Chartered Accountants We hereby consent to the inclusion in The WideCom Group Inc. Annual Report on Form 10-K for the year ended March 31, 1997, of our auditors' report dated July 4, 1997, and to the references to us in such Form 10-K. /s/ BDO DUNWOODY Chartered Accountants (Internationally BDO Binder) Toronto, Ontario July 4, 1997 81 EX-27 6 FINANCIAL DATA SCHEDULE
5 YEAR MAR-31-1997 APR-01-1997 MAR-31-1997 631,486 0 650,949 6,097 1,199,386 3,500,767 2,417,809 679,324 6,925,187 1,681,884 0 0 0 4,848,418 0 6,925,187 1,678,933 1,820,713 452,413 5,673,672 697,971 0 49,399 (4,550,930) (63,106) (4,487,824) 0 0 0 (4,487,824) (.99) (.99)
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