========================================================================= SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 1997. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to Commission file number 1-13588 THE WIDECOM GROUP INC. (Exact Name of Registrant as specified in Its Charter) ONTARIO, CANADA 98-0139939 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 72 DEVON ROAD, UNIT 17-18, BRAMPTON, ONTARIO, CANADA L6T 5B4 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code (905) 712-0505 267 MATHESON BOULEVARD EAST, MISSISSAUGA, ONTARIO, CANADA, L4Z 1X8 Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report. Indicate by check [x] ( 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 [ ] The number of shares outstanding of registrant's common stock as of February 18,1998, was 5,895,545 shares. 1 of 9 THE WIDECOM GROUP INC. FORM 10-Q INDEX Page No. -------- Part I Financial Information Item 1 - Financial Statements Consolidated Balance Sheets - December 31, 1997 and December 31, 1996 3 Consolidated Statements of Operations - Three and nine months ended December 31, 1997 And December 31, 1996 4 Consolidated Statements of Cash Flows - Nine months ended December 31, 1997 And December 31, 1996 5 Notes to Consolidated Financial Statements 6-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II Other Information Item 2 - Changes in Securities 8 Item 2 - Reports on Form 8 - K 8 Signatures 9 2 of 9 PART I FINANCIAL INFORMATION THE WIDECOM GROUP INC. CONSOLIDATED BALANCE SHEET (in United States dollars) December 31 --------------------------- 1997 1996 ---- ---- (unaudited) (unaudited) Assets Current assets Cash and short term investments $ 946,858 $ 744,136 Accounts receivable 840,954 698,394 Research and development grants receivable 261,737 703,358 Prepaid expenses 75,719 - Receivable from shareholders 31,001 - Advance to related parties 82,373 - Inventory (Note 3) 1,619,445 1,462,211 --------------------------- Total current assets 3,858,087 3,608,099 Capital assets (Note 4) 1,518,233 1,986,253 Investment in Joint Venture 1,361,736 1,786,892 Investment in affiliate - 468,000 --------------------------- Total assets $ 6,738,056 $7,849,244 =========================== Liabilities and Shareholders' Equity Current liabilities Bank indebtedness 319,821 231,051 Accounts payable and accrued liabilities 1,155,484 409,027 8% Convertible debentures (Note 6) 198,094 - Deferred income taxes - 62,659 --------------------------- Total current liabilities 1,673,399 702,737 --------------------------- Shareholders' equity Common shares (Note 5) $12,511,730 9,872,294 Contributed surplus 159,825 159,825 Retained earnings (deficit) (7,311,473) (2,800,464) Cumulative translation adjustment (295,425) (85,148) -------------------------- 5,064,657 7,146,507 -------------------------- Total liabilities and shareholders' equity $ 6,738,056 $7,849,244 ========================== See accompanying notes to the consolidated financial statements. 3 OF 9 THE WIDECOM GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in United States dollars) For the three months ended For the nine months ended --------------------------- ----------------------------- December 31, December 31, December 31, December 31, 1997 1996 1997 1996 (unaudited) (unaudited) (unaudited) (unaudited) ------------ ------------ ------------ ------------ Product sales $ 821,436 $ 364,470 $ 2,552,102 $ 1,210,093 Cost of sales 205,359 91,118 698,980 302,524 ---------------------------------------------------------- Gross profit 616,077 273,352 1,853,122 907,569 Research and development grants - - - - Interest income 16,365 12,391 107,240 118,555 ---------------------------------------------------------- Net revenue 632,442 285,743 1,960,362 1,026,124 ---------------------------------------------------------- Expenses Research and development 18,671 91,828 134,898 501,666 Selling, general and administrative 771,733 911,711 2,567,294 2,001,125 Interest and bank charges 6,282 4,892 20,652 12,007 Management fees 93,091 - 302,941 - Amortization 98,107 171,193 281,858 437,639 ---------------------------------------------------------- Total operating expenses 987,884 1,179,624 3,307,643 2,952,437 ---------------------------------------------------------- Operating income (loss) (355,442) (893,881) (1,347,281) (1,926,313) ---------------------------------------------------------- Equity in earnings (loss) of Joint Venture (117,003) (49,857) (277,073) (49,857) Shareholders lawsuit resolutions (Note 7) - - (375,000) - ---------------------------------------------------------- Earnings (loss) before extraordinary item (472,445) (943,738) (1,999,354) (1,976,170) Extraordinary item, net of tax - - - - ---------------------------------------------------------- Net earnings (loss) for the period $(472,445) $(943,738) $(1,999,354) $(1,976,170) ========================================================== 					 Earnings (loss) per common share before extraordinary item, primary and fully diluted $ (0.08) $ (0.21) $ (0.36) $ (0.43) ========================================================== 							 Earnings (loss) per common share primary and fully diluted $ (0.08) $ (0.21) $ (0.36) $ (0.43) ========================================================== Weighted average number of shares outstanding 5,565,251 4,579,073 5,565,251 4,579,073 ========================================================== See accompanying notes to the consolidated financial statements. 4 of 9 THE WIDECOM GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in United States dollars) For the nine months ended ------------------------------ December 31, December 31, 1997 1996 (Unaudited) (Unaudited) ------------ ------------ Cash provided by (used in) Operating activities Earnings (loss) for the period before extraordinary item $(1,999,354) $(1,976,170) Add (deduct) items not requiring a cash outlay Amortization 281,858 437,639 Equity in earnings (loss) of Joint Venture 277,073 - ----------------------------- (1,440,423) (1,538,531) Net changes in non-cash working capital balances related to operations (Increase) in accounts receivable (112,146) (196,575) Decrease/(Increase) in R & D grants receivable 423,173 - Increase/(decrease) in inventory (470,958) (1,016,617) Increase/ (decrease) in accounts payable (157,106) 67,107 (Increase)/ decrease in prepaid expenses 21,927 - ----------------------------- (1,735,533) (2,684,616) ----------------------------- Investing activities Purchase of capital assets (187,470) (1,093,145) Purchase of equity in Joint Venture - (1,836,750) ----------------------------- (187,470) (2,929,895) ----------------------------- Financing activities Increase (decrease) in bank indebtedness 656 100,593 Shares issued for cash 2,150,499 571,500 Private placements 250,000 - ----------------------------- 2,401,155 672,093 ----------------------------- Effect of exchange rate changes on cash (162,780) 43,063 ----------------------------- Net increase (decrease) in cash during the period 315,372 (4,899,355) Cash and equivalents, beginning of period 631,486 5,643,491 ----------------------------- Cash and equivalents, end of period $ 946,858 $ 744,136 ============================= See accompanying notes to the consolidated financial statements. 5 of 9 THE WIDECOM GROUP INC. Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Presentation of Interim Information In the opinion of Management the accompanying unaudited financial statements include all normal adjustments necessary to present fairly the financial position at December 31, 1997, and the results of operations for the three months ended December 31, 1996 and 1997 and cash flows for the nine months ended December 31, 1997. Interim results are not necessarily indicative of results for full year. The condensed consolidated financial statements and notes are presented as permitted by Form 10Q and do not contain certain information included in the Company's audited consolidated financial statements and notes for the fiscal year March 31, 1997. 2 Financial Statements The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany balances, transactions and stockholdings have been eliminated. 3. Inventories Inventories are summarized as follows:- December December 31, 1997 31, 1996 -------- -------- Raw materials $ 728,751 $ 427,464 Work in progress 631,583 551,362 Finished goods 259,111 483,385 -------------------------- Total inventories $1,619,445 $1,462,211 ========================== 6 of 9 4. Capital Assets Capital assets consist of: December 31, 1997 December 31, 1996 --------------------------- --------------------------- Accumulated Accumulated Cost Amortization Cost Amortization ---- ------------ ---- ------------ Machinery, plant and computer equipment $1,522,895 $ 634,001 $1,670,387 $ 398,505 Furniture and fixtures 108,393 39,113 94,106 27,657 Prototype and jigs 230,858 81,510 440,432 95,923 Land 56,134 - 66,881 - Building under construction 354,577 - 236,532 - ---------------------------------------------------------- $2,272,857 $ 754,624 $2,508,338 $ 522,085 ========================================================== Net book value $1,518,233 $1,986,253 ========== ========== 5. Share Capital During the quarter ended June 30, 1997, 716,833 warrants were exercised in exchange for 716,833 common shares. The proceeds of this issue, net of related expenses of $126,398, was $ 2,024,101. 6. Convertible Debentures During the quarter ended June 30, 1997, the Company issued $250,000 in 8% Convertible Debentures. The proceeds of this issue, net of related expenses of $45,250 was $205,180. 7. Shareholders Lawsuit Resolution As of June 27, 1997 the Company reached a settlement with the plaintiffs Don Johnson, Walter J. Lack, Thomas V. Girardi, Glenn Mc Cusker, and Gino Aiello who initiated an action in Los Angeles Superior Court against the Company, Raja S. Tuli, and unnamed defendant's designated Does 1-100 on or about March 10, 1997, which action was subsequently removed to the United States District Court for the Central District of California in the State of California. 8. Contingent Liabilities Statement of claim was filed against the Company with respect to the following matter in 1993: Claim for non-payment of invoices in the amount of $110,000 relate to invoices for accounting services provided by an accounting firm. The Company has accrued $35,000 for this claim. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company's revenues are derived from product sales, which are recognized when products are shipped. Prior to January 1996 the company was eligible for substantial research and development grants. As of January 1, 1996 grants are made as a reduction of taxes payable. 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 no taxes are payable in the quarter, no grants have been recognized. During the quarter the Company earned $16,365 interest on short-term investments compared to $12,391 earned in the same period of 1996. Results of Operations Quarter Ended December 31, 1997 Compared to Quarter Ended December 31, 1996 Revenues for the quarter ended December 31, 1997 were $837,801, an increase of $460,940 or 122.3% as compared to $376,861 for the quarter ended December 31, 1996. Sales for the quarter ended December 31, 1997 were $821,436, an increase of $456,966 as compared to $364,470 for the quarter ended December 31, 1996. Sales of the Company's SLC 436 Color Scanner accounted for a majority of the sales increase. Operating expenses for the quarter ended December 31, 1997 were $987,884, a decrease of $191,740, or 16.2 %, as compared to $1,179,624 for the quarter ended December 31, 1996. Research and development expenses decreased from $91,828 for the quarter ended December 31, 1996 to $18,671 for the quarter ended December 31, 1997. The Company expects this amount to be substantially reduced in the future because of its investment in the Research & Development Consortium. Selling, general and administrative expenses for the quarter ended December 31,1997, decreased by $139,978 and decreased as a percentage of revenues from 241.9% to 92.1%. The Company continues to incur legal, administration, and other related costs associated with its warrant call. The Company's share of the loss incurred by the research and development consortium (3994340 Canada Inc.) that had been formed on October 2nd. 1996, for the quarter ended December 31, 1997, amounted to $117,003 as compared to $49,857 for the quarter ended December 31, 1996. 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 connections with the commercialization of its products. The Company has historically 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. In June 1997, the Company raised $2,024,101(net) through the conversion of warrants associated with the initial public offering, to common shares, and $205,180, from the proceeds of the issuance of 8% Convertible Debentures. Part II Other Information Item 2. Changes in Securities. The Company issued 3,500 common shares to a certain security holder pursuant to Section 4 (2) of the Securities Act of 1933, as amended, in consideration of certain consulting services rendered by the security holder. Item 6. Reports on Form 8-K. Exhibits 27 - Financial Data Schedule The Company's Form 8-K, dated February 4, 1998, in connection with its change of address of its principal executive offices to 72 Devon Road, Brampton, Ontario, Canada, L6T 5B4. SIGNATURES Pursuant to the requirements 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. THE WIDECOM GROUP INC. February 18, 1998 /s/ Suneet S. Tuli Date Suneet S. Tuli, Executive Vice President /s/ Willem J.Botha Willem J. Botha, Chief Financial Officer