-----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, Nn2WrTRSaU7T6+sIJLLgW7Kw4B088H/aC4Re8u0+7QpogaO0I5I0Z8NezPJpHH2K NV8yaF2UE9oKNgN01dCbpQ== 0000950123-97-005824.txt : 19970715 0000950123-97-005824.hdr.sgml : 19970715 ACCESSION NUMBER: 0000950123-97-005824 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970714 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 SEC ACT: 1934 Act SEC FILE NUMBER: 001-13588 FILM NUMBER: 97640301 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 1 FORM 10-K FOR THE WIDECOM GROUP INC. 1 ============================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K 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 Identification No.) incorporation or organization) 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 BOSTON STOCK EXCHANGE WARRANTS TO PURCHASE COMMON STOCK BOSTON STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: Name of each Exchange on Title of each class which Registered ------------------- ---------------- COMMON STOCK, PAR VALUE $.01 PER SHARE NASDAQ SMALLCAP MARKET WARRANTS TO PURCHASE COMMON STOCK NASDAQ SMALLCAP MARKET 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 registrants' common stock on the Nasdaq SmallCap Market as of July 7, 1997 was approximately $9,948,089. The number of shares outstanding of registrant's common stock as of June 30, 1997 was 5,565,251 shares ============================================================================ 2 2 All references to "dollar" or "$" in this Annual Report are to United States dollars. PART I BUSINESS THE COMPANY The Company was incorporated in Ontario, Canada in June 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 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., operating as Technologies NovImage ("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. 3 3 PRODUCTS WIDEfax Scan and SLC436-C Color Scanner WIDEfax Scan and SLC436-C are wide format scanners capable of scanning a document up to 36" wide. The Company's scanners interfaces with a personal computer to enable the user to scan images into the personal computer for display, editing and archiving. The WIDEfax Scan provided the capacity of scanning monochromatic images only. As the next generation of the WIDEfax Scan, the SLC436-C was introduced in May 1996 a low-cost wide format color scanner capable of scanning 36" by 48" documents at a resolution of 400 dpi in under thirty seconds for monochrome images, and under eight minutes for full color images. Deliveries of the SLC436-C 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 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 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 dots per inch ("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. 4 4 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 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 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. 5 5 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 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%, 6 6 respectively, of the Company's product sales. The Imtec Group Ltd. of England represents 27.5% of the Company's sales for 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 27.9 475,552 28.3 Canada ................ 116,666 7.2 56,032 3.4 122,675 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 notable 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. These relationships require 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 notable agreement is with CADigitizing Corporation of Florida, dated February 13, 1997 for the Chinese market. 7 7 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 of products sold by the Company, 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 and 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 an 800 number 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 in a free trade zone in India where the Company's assembly operations are conducted. Quality control and adjustments are also conducted at the Company's facility in India. 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 on commercially reasonable terms in a timely manner or at all. The Company entered into an agreement in October 1993 with WideCom R&D, a Company wholly owned by Lakhbir S. Tuli, a principal stockholder of the Company and the father of Raja S. Tuli and Suneet S. Tuli. Under this agreement, WideCom R&D will seek to identify and recruit licensees that would import components purchased from the Company and manufacture the Company's products in India. The agreement contemplates that the Company will sell component parts to such licensees and receive a royalty payment of 5% on the licensee's sales of finished products. The Company intends to 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. 8 8 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, 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 dated October 2nd 1996, 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 (see "Certain Transactions), which activities are expected to qualify for partial funding from governmental agencies. The research and development activities conducted by NovImage on behalf of the Company are primarily focused on plotter, scanner and facsimile technologies. 9 9 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, NovImage will commence activities relating to the development of a color plotter which uses colored thermal transfer ribbons containing a wax-like printing substance. 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 primary colors (magenta, cyan and 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, generally contractors. The system is being designed to enable a subscriber to access a document in the service's database via 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 10 10 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 licensed all of its patents and technology relating to its scanner and plotter manufacturing and its WideView[TRADEMARK] and SLC-OVLY[TRADEMARK] software (collectively, the "Intellectual Property") to NovImage for research and development purposes in order to develop improvements, modifications, additions or alterations to the Intellectual Property and to develop new products. In exchange for this license and the payment of a 0.5% royalty fee on net revenue, licensing revenue and net sales to sub-licensees, NovImage granted 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 NovImage. NovImage retained such rights with respect to the Province of Quebec, Canada. Please refer to "Certain Transactions". The Company has not filed for copyright protection of its software. The Company holds a registered trademark with the United State Patent and Trademark Office for the "WIDEfax" trade name. 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. 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. PROPERTIES 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 11 11 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 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. The two individuals, John Keenan and Vincent DiGiulio ("K&D") have 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 these individuals are also subject to two additional lawsuits filed by above mentioned third parties to whom these individuals had attempted to transfer shares. This claim has been consolidated into the original action 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 an action in on behalf of himself and the class 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 12 12 Anthony Hand. These actions, too, have 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 Actions. 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 Complainant'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, United States District Court for the Central district of California. Plaintiffs are alleged to be holders of WideCom shares and/or warrants. The complaint in this action, like the action commenced in the State of New York, 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 violation of California civil code SS 1709 and 1710 in the nature of alleged misrepresentation and in the nature of alleged negligent misrepresentation, alleged breach of contract, alleged breach of fiduciary duty, and alleged violation of California Corporations Code SS 25400 and 25500, and sought 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 in the action, in which all material allegations in the complaint are denied and numerous affirmative defenses are asserted. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No 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 except the Annual General Meeting. The annual meeting of stockholders of the Company, was held on January 30, 1997 at 55 City Centre Drive, Suite 500, Mississauga, Ontario, Canada, at which the stockholders approved: 13 13 (1) The election of the Board of Directors; At the Meeting, four directors were elected, each to serve until the next annual meeting of stockholders: RAJA S. TULI, 31 SUNEET S. TULI, 29 DR. AJIT SINGH, 56 BRUCE D. VALLILLEE, 76 (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. At the Meeting, the stockholders approved an amendment to the Plan. The amendment 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 Company anticipates that it will issue options to purchase more shares of Common Stock than the 300,000 shares that are currently available under the Plan. Any material amendment to the Plan must be approved by a vote of the stockholders. 14 14 PART II MARKET FOR 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 approximate number of registered holders of record of the Company's common stock and warrants at June 30, 1997 was 57 and 8. It is believed that the actual number of beneficial holders of each class of common stock and warrants is in excess of 500.
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 2 1/2 Second Quarter (April 1 through June 30, 1996) 13 1/4 7 5/8 9 4 1/2 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 6 1/2 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
15 15 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: 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS OVERVIEW The Company commenced marking its first 36" wide format facsimile machine on a limited basis, primarily for demonstration purposes, in 1992 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. Accordingly, 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 $420,000 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 16 16 $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. During the year a change in Canadian Tax legislation substantially reduced the amount of subsidy available on Research and Development performed by publicly traded companies. The Company together with a branch of the government of the Province of Quebec (Inovatech) became equal shareholders in a wholly Research and Development company (NovImage). The nature of 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 NovImage 17 17 enables the company to obtain a substantial increase in the amount of research that can be performed. 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 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 is primarily attributable to an increase selling, general and administrative ("SG&A") costs, amortization, the write-off of test equipment and an increase in management fees of $2,981,764, $90,322, $115,721 and $113,552 respectively, during the year ended March 31, 1997. 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 SG&A costs was primarily due to expenses associated with increased marketing activities. 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 18 18 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 management fees. Selling general and administrative costs include an amount of approximately $681,353 in legal and other costs incurred in raising an additional $1,298,090 as at March 31, 1997 of share capital through the calling of the Company's warrants. These costs include legal fees necessary to successfully defend against court challenges made to the warrant call and additional public relations costs necessary to disseminate the facts of the warrant call. The Company decided to write off its carrying value of the goodwill associated with the acquisition of 49% interest in the affiliated company because, although the affiliate remains a viable enterprise, the Company does not expect to gain substantial benefits from the investment in the immediate future. This write off amounted to $576,000. Certain test jigs, although still valuable and being used, will become less useful with the introduction of the color scanners and plain paper plotters. The decrease of $117,794 in research and development costs were offset by the Company's $121,971 share of the loss incurred by 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 is attributable to an increase in sales of WIDEfax 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 19 19 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 principally through the issuance of debt and equity securities, government sponsored research and development grants and reimbursement and cash flow from operations. At March 31, 1997, the Company had working capital of $1,818,883, as compared to $6,814,289 at 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 or to be exercised to purchase a common share of stock for $4.00. See "Legal Proceedings". On March 6, 1997 the exercise price was reduced to $3.00, excluded one half of the warrants and the date for redemption extended to April 4, 1997, after which the exercise price reverted to $4.00 per share for the unredeemed warrants. At March 31st, 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 for which $2,150,499 was received. The Company's cash requirements in connection with the manufacture and marketing of its products 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 20 20 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 REGISTRANT 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 Information Systems, a manufacturer of data communications equipment, most recently as its Director of Accounting Services. From 1982 to 1985, Mr. Botha was an independent financial consultant. Mr. Botha was the Secretary and Treasurer and a Director of Alcon Canada Inc., a pharmaceutical company, from 1980 to 1982. From 1976 to 1980, Mr. Botha was the Controller and Chief Financial Officer for Bell & Howell Limited, a manufacturer of electronic photographic products, and from 1969 to 1976 Mr. Botha was the Controller for Wyeth Ltd., a pharmaceuticals company. Mr. Botha received a Certificate in Theory of Accounting from the University of South Africa, is a Chartered Accountant and a resident Canadian national. 21 21 Suneet S. Tuli has been Executive Vice President of Sales and Marketing, 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 ordinarily resident in Canada who is a member of a prescribed class of persons, or (iii) a permanent resident within 22 22 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 received any compensation for such services as a director during the Company's year ended March 31, 1997. 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 $1,000. EXECUTIVE COMPENSATION The following table sets forth the cash compensation paid or accrued by the Company to the person serving as chief executive officer during the years ended March 31, 1995, 1996 and 1997: SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------------------------------------------ ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------------- ------------------------------------------------ Other Securities Year Annual Restricted Underlying All other Ended Compen- Stock Options/ LTIP Compen- Name and Principal March Salary Bonus sation (1) Awards (2) SARs Payouts sation Position 31, ($) ($) ($) ($) (#) ($) ($) - ----------- ----- ------ ----- --------- ---------- ----------- ------- --------- Raja S. Tuli, President 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. No other executive officer of the Company received compensation and bonuses which exceed $100,000 during any such year. 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. 23 23 In July of 1995, the Company adopted the 1995 Stock Option Plan (the "Plan"). The Plan is designed to attract, retain and motivate persons to provide services to the Company, and to increase the alignment of their interests with the interests of the Company's Stockholders. The Plan allows the Board, at its discretion, to grant options to purchase shares of Common Stock of the Company at the fair market value of such shares on the date the option was granted. Options may be granted to any "Eligible Person," including directors, officers, employees of the Company or an affiliate of the Company, or any consultant or insider (as defined in the Plan) of the Company or any affiliate of the Company. The Board also has the authority under the Plan to determine the number of shares subject to each option, the expiration date of each option and the extent to which each option is exercisable from time to time during its term. The options will expire ten years after the date they are granted, or at such other date as may be provided for in the Plan. Individual option agreements may allow an optionee who retires or terminates service with the consent of the Board of Directors to exercise his or her option within six months of such retirement or termination. If the optionee is terminated for cause, the optionee may not exercise the option following such termination. An aggregate of 300,000 shares of Common stock (subject to adjustment as provided in the Plan) are currently available under the Plan. Shares subject to options which terminate unexercised will be available for future option grants. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS The following table sets forth, as of March 31, 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.
Amount and Nature of Percentage of Beneficial Outstanding Name and Address of Beneficial Owner (1) Ownership (2) Shares Owned - ---------------------------------------- ------------- ------------ Raja S. Tuli............................... 1,070,222 (3) 21.2% Lakhbir S. Tuli............................ 515,041 10.6 Suneet S. Tuli............................. 490,240 (4) 9.9 Dr. Ajit Singh............................. --- --- Bruce Vallillee............................ --- --- Willem J. Botha............................ --- --- Mark Maltese............................... --- ---
24 24 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, respectively, as to which Mr. Tuli has voting rights pursuant to a stock exchange agreement. (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. 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. "Please see Legal Proceedings" 25 25 The Company has engaged Lakhbir S. Tuli as a management consultant, primarily 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, a company 70% owned by Lakhbir Tuli ("WideCom Fax"), for the Company's manufacturing facility in India. Annual lease payments by Indo WideCom to WideCom Fax equal 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 indentifying potential management personnel, acquisition candidates and sales opportunities within the engineering and architectural markets for a monthly fee of $15,000. In April 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 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 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 240,000 shares granted Raja Tuli a proxy to vote all of such shares at all meetings of the Company's stockholders. In May and June 1995, the Company borrowed $25,000 and $15,000, respectively, from Mr. Schattle. The loans were represented by promissory notes (the "Schattle Notes") bearing interest at 8% per annum payable in full upon the earlier of (a) a $5,000,000 public offering by the Company, (b) the sale of the assets of the Company, (c) the acquisition of the Company, or (d) one year from the date of the Schattle Notes. The proceeds of the Schattle Notes were used to pay certain expenses associated with proceeding with preparations for the initial public offering. The Schattle Notes were repaid with the proceeds of the Bridge Financing. 26 26 In October 1995, the Company borrowed an additional $75,000 from Mr. Schattle together with $150,000 from two other individuals who purchased Units in the Bridge Financing. The proceeds of these loans were used to terminate the Company's obligations under the IOC Agreement. These promissory notes were retired by the issuance to the holders thereof of an aggregate of 4.5 units in the Bridge Financing. In October 1995, in connection with the Bridge Financing, Mr. Schattle purchased from the Company 2.3 units, each unit consisting of a $50,000 principal amount Bridge Note, 5,000 Common Shares and 50,000 Bridge Warrants, for an aggregate consideration of $115,000, on the same terms and conditions as the other investors in the Bridge Financing. In November 1995, the Company entered into an indemnification agreement with Raja Tuli, Suneet Tuli, Lakhbir Tuli and the Whale Securities Co., L.P., the underwriter of the Company's initial public offering ("Whale") pursuant to which: (i) the Company, Raja Tuli, Suneet Tuli and Lakhbir Tuli, jointly and severally, agreed to indemnify and hold Whale harmless for any and all losses, claims, damages, expenses or liabilities it may suffer (including reasonable legal fees and expenses) as a result of any claim (a "Claim") by Mr. Debs arising out of or based upon or related to a claim asserted by Mr. Debs (see, "Legal Proceedings"), (ii) Raja Tuli, Suneet Tuli and Lakhbir Tuli, jointly and severally, agreed to indemnify the Company for any losses, claims, damages, expenses or liabilities it may suffer (including legal fees and expenses) as a result of a Claim, which indemnity may be made in cash or Common Shares, and (iii) in the event the Company issues any Common Shares or other equity securities to Mr. Debs or any person or entity claiming through, or designated by, Mr. Debs, Raja Tuli, Suneet Tuli and Lakhbir Tuli agreed to deliver to the Company, for cancellation, an equivalent number of Common Shares, each in proportion to his respective current beneficial ownership interest in the Company. In February 1996, the Company settled the Debs litigation for $185,000. In connection therewith Raja Tuli, Suneet Tuli and Lakhbir Tuli each contributed 7,368, 3,760 and 4,959 shares to the Company to be held by the Company as treasury stock. As of January 30, 1997, the Registrant announced that it has finalized a joint venture agreement with Societe Innovatech du Grand Montreal, an instrumentality of the Province of Quebec, Canada ("Innovatech"). Each of the Registrant and Innovatech purchased 450 shares of the Class A Common Stock of NovImage Inc., a Quebec corporation ("NovImage") for a purchase price of approximately US $1,875,000 each. The consideration paid by the Registrant for the stock of NovImage was in cash and was derived from the Registrant'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. , President and Chief Executive Officer of the Registrant, each acquired 50 shares of the Class A Common Stock of NovImage in exchange for the transfer to NovImage of certain patents, patent applications and other technology and intellectual property rights of those companies. In connection with the transaction, the Registrant licensed all of its patents and technology relating to its scanner and plotter manufacturing and its WideView[TRADEMARK] and SLC-OVLY[TRADEMARK] software (collectively, the "Intellectual Property") to NovImage for research and development purposes in order to develop improvements, modifications, additions or alterations to the Intellectual Property and to develop new products. 27 27 In exchange for this license and the payment of a 0.5% royalty fee on net revenue, licensing revenue and net sales to sub-licensees, NovImage granted the Registrant 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 NovImage. NovImage retained such rights with respect to the Province of Quebec, Canada. In connection with the transaction, the Registrant also entered into a Stock Exchange Agreement with Innovatech pursuant to which Innovatech would be permitted, under certain circumstances, to exchange its shares of NovImage for up to 253,000 shares of common stock of the Registrant 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. 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 Certified Public 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 28 28 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 10, 1997, with respect to the Company's announcement 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, 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 February 3, 1997, with respect to the finalization of a joint venture agreement with Societe Innovatech du Grand Montreal. Form 8-K, dated May 1, 1997, in connection with the Company's announcement that the Warrant Redemption referred to in the Company's 8-K dated February 10, 1997, was complete, that more than half of the Warrants had been exercised, and that no warrants would be redeemed. (c) EXHIBITS See Exhibit Index. (d) Not Applicable. 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: July 14, 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 to be signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated 29 29
NAME TITLE DATE - ---- ----- ---- /s/ RAJA S. TULI President, Chief Executive Officer and ______________________________ Director (Principal Executive Officer) July 14, 1997 Raja S. Tuli /s/ WILLEM J. BOTHA Treasurer and Chief Financial Officer July 14, 1997 ______________________________ (Principal Financial and Accounting Willem J. Botha Officer) /s/ SUNEET S. TULI Executive Vice President of Sales and July 14, 1997 ______________________________ Marketing, Secretary and Director Suneet S. Tuli /s/ BRUCE D. VALLILLEE Director July 14, 1997 ______________________________ Bruce D. Vallillee /s/ AJIT SINGH Director July 14, 1997 ______________________________ Ajit Singh
EXHIBIT INDEX
EXHIBIT SEQUENT NO. DESCRIPTION PAGE NO. - ------- ----------- -------- 4. Distributor Agreement with CADigitizing Corporation 21. List of subsidiaries 23. Consent of BDO Dunwoody, independent accountants 27. Financial Data Schedule
30 30 THE WIDECOM GROUP INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997 (IN UNITED STATES DOLLARS) 31 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 32 ================================================================================ 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. Chartered Accountants (Internationally BDO Binder) Toronto, Ontario July 4, 1997 2 33 ================================================================================ THE 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 34 ================================================================================ THE 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 35 ================================================================================ THE 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 36 ================================================================================ 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) 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 37 ================================================================================ THE 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. 7 38 ================================================================================ THE WIDECOM GROUP INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 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. 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. 8 39 ================================================================================ THE WIDECOM GROUP INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 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 (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 40 ================================================================================ 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 ------------------------------------ $ -- $ -- $ -- ====================================
10 41 ================================================================================ THE WIDECOM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 3. ADVANCES TO SHAREHOLDERS AND RELATED PARTIES (CONTINUED) (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)). - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 11 42 ================================================================================ THE WIDECOM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - ------------------------------------------------------------------------------- 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, a instummentality of the Province of Quebec, Canada, 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 memeber of the executive of the Company. The assets, liabilities, revenue and expenses of 3994340 Canada Inc. for the period ended March 31, 1997 are as follows: Current assets $4,707,249 Capital assets 596,771 ---------- 5,304,020 Current liabilities 117,333 ---------- Net assets $5,186,687 ========== Revenue Sales $ 125,535 Research and development grants 361,564 ---------- 487,099 Expenses 855,968 ---------- Net loss for the period $(368,869) =========
12 43 ================================================================================ THE WIDECOM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 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 cancelled 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). 13 44 ================================================================================ THE WIDECOM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 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. 14 45 ================================================================================ THE WIDECOM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 11. SHARE CAPITAL (CONTINUED) (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. (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 totalling $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 idemnify 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. 15 46 ================================================================================ THE WIDECOM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 11. SHARE CAPITAL (CONTINUED) (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 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 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 (1,649,301) (4,867,824) Net loss per share As reported 0.02 (0.27) (0.99) Pro forma 0.02 (0.54) (1.07)
The activity of the Company's stock option plan is as follows:
AVERAGE PRICE PER SHARE OPTIONS -------------------------------- Balance, April 1, 1995 $ -- -- Granted to management 4.06 200,000 -------------------------------- Balance, March 31, 1996 (outstanding and exercisable) 200,000 Granted 3.81 100,000 -------------------------------- Balance, March 31, 1997 300,000 ================================
16 47 ================================================================================ THE WIDECOM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 11. SHARE CAPITAL (CONTINUED) (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. 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. During 1996, the Company applied issue costs related to the initial public offering in the amount of $2,352,945 to reduce shareholders' equity. This amount gives rise to a tax benefit of $633,000, however a valuation allowance has been recorded for the full amount. 17 48 ================================================================================ THE WIDECOM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 12. INCOME TAXES (CONTINUED) (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 1,841,000 $ 20,000 $ (82,687) $ -- ============================================
Income tax provision and recovery is related solely to domestic operations. Foreign operations are not subject to taxes (see Note 14). (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 Provincial taxable income of future years 258,000 209,000 1,712,000 Share issue costs -- 633,000 338,000 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 carryforwards to reduce federal taxable income of approximately $3,268,000 which expire 2004. The Company has net operating loss carryforwards available to reduce Ontario taxable income of approximately $4,735,000 which expire during the years 1999 through 2004. The net valuation allowance for 1996 is related to the tax benefit of the losses and net operating losses carryforward. The allowance was increased in 1997 for the tax benefit of additional losses and deductible temporary differences. 18 49 ================================================================================ THE WIDECOM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 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: 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 commited 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
19 50 ================================================================================ THE WIDECOM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 14. SEGMENTED INFORMATION (CONTINUED) (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. (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. 20 51 ================================================================================ THE WIDECOM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN UNITED STATES DOLLARS) MARCH 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 16. SUBSEQUENT EVENTS (CONTINUED) (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 $ -- =====================================
21 52 EXHIBIT INDEX
EXHIBIT SEQUENT NO. DESCRIPTION PAGE NO. - ------- ----------- -------- 4. Distributor Agreement with CADigitizing Corporation 21. List of subsidiaries 23. Consent of BDO Dunwoody, independent accountants 27. Financial Data Schedule
EX-4 2 DISTRIBUTOR AGREEMENT 1 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. 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. 1 2 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. 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 2 3 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 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, 3 4 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 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 the other party. 5.11 CONTROLLING LAW. This Agreement will be construed under and governed by the law of the Province of Ontario, Canada. 4 5 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 Mississauga, Ontario, Canada L4Z 1X8 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. _______________________________ /s/__________________________________ By By __________________________________ 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 5 EX-21 3 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARY 1. Indo-Widecom International, Ltd. EX-23 4 CONSENT OF BDO DUNWOODY 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 EX-27 5 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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