SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (D)
of the
SECURITIES AND EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999
JAWS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
<TABLE>
<CAPTION>
<S> <C>
7371 . . . . . . . . . . 98-0167013
(Commission File Number) (IRS Employer Identification Number)
</TABLE>
1013 17TH AVENUE SW T2T 0A7
CALGARY, ALBERTA CANADA
(Address of principal executive offices)
(403) 508-5055
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months or for such shorter period
that the Registrant was required to file such reports, and (2) has been subject
to such filing requirements for the past 90 days.
X Yes No
-
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at December 15, 1999
----- ------------------------------------
Common Stock, $ .001 par value 21,326,945
<PAGE>
Table of Contents
Form 10-Q
Quarterly Report
JAWS Technologies, Inc.
PART 1 Financial Information
JAWS Technologies Inc.
Consolidated Financial Statements
Ending September 30, 1999
Balance Sheet .1
Statement of Loss and Deficit and Comprehensive Loss 2
Statement of Changes in Stockholders Equity 3
Statements of Cash Flows .4
Notes to Consolidated Financials .5-16
Pace Systems Group Inc.
Financial Statement
Ending July 31, 1999 17
Auditors Report 18
Balance Sheets 19
Income (Loss) and Deficit .20
Statement of Cash Flows 21
Notes to Financial Statements 22-26
Pace Systems Group Inc.
Financial Statements
Ending September 30, 1999 .27
Balance Sheet 28
Statement of Income .29
Statements of Cash Flows 30
Notes to Financial Statements .31-35
JAWS Acquisition Corporation
Financial Statements
Ending November 29, 1999 36
Balance Sheet .37
Notes .38
PART 11 Other Information
Item 1 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Corporate and Business Review .39
JAWS Canada . 39
Results of Operations . 41
Assets 41
Liabilities 42
Stockholders Equity 42
Financial condition, liquidity and capital revenue 42
Financing .43
Recent Developments . 43
Financing After September 30, 1999 43
Acquisition of Pace . 44
Pending Offsite Acquisition 45
JAWS Acquisition Corporation . 47
Offsite's Corporate History 47
Benefits to Offsite Acquisition 47
Selected Pro Forma Cosolidated Financial Information 48
Management Change . 49
Risk Factors 49
Item 2 Legal Proceedings 58
Item 3 Changes in Securities and Use of Proceeds . 58
Item 4 Defaults Upon Services Securities 59
Item 5 Submission of Matters to a Vote of Security Holders .59
Item 6 Other Information 60
Item 7 Exhibits and Reports on Forms 8-K 60
Item 8 Financial Data Schedule 63
FORM 10-Q
JAWS TECHNOLOGIES, INC.
PART I - ITEM I. FINANCIAL STATEMENTS - JAWS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(all amounts are expressed in U.S. dollars)
(see basis of presentation - note 1)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
$. . . . . . . . . . . . . . . . . . . . . . . . . . . $ $
(unaudited)
- --------------------------------------------------------
ASSETS
CURRENT
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 664,428 33,732 111
Term deposits [note 4]. . . . . . . . . . . . . . . . . 27,000 - -
Accounts receivable. . . . . . . . . . . . . . . . . . . 421,138 7,243 -
Due from related parties [note 7]. . . . . . . . . . . . - 13,118 -
Prepaid expenses and deposits. . . . . . . . . . . . . . 86,828 140,456 7,500
1,199,394 194,549 7,611
Fixed assets, net of $82,292 (December 31, 1998 -
13,461; December 31, 1997 - $1,160) accumulated
depreciation [note 5]. . . . . . . . . . . . . . . . . . 498,004 78,830 2,320
1,697,398 273,379 9,931
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT
Accounts payable and accrued liabilities . . . . . . . . 897,947 428,600 32,976
Current portion of capital lease obligations payable
[note 12] . . . . . . . . . . . . . . . . . . . . . 14,119 - -
Due to related parties [note 7]. . . . . . . . . . . . . 196,258 197,115 -
Due to stockholders [note 7] . . . . . . . . . . . . . . 2,044 74,717 78,159
1,110,368 700,432 111,135
Capital lease obligations payable [note 12]. . . . . . . 66,989 - -
Convertible debentures [note 8]. . . . . . . . . . . . . 1,091,348 146,606 -
1,158,337 146,606 78,159
COMMITMENTS [NOTE 10]
STOCKHOLDERS' DEFICIENCY
Authorized
95,000,000 common shares at $0.001 par value
5,000,000 preferred shares at $0.001 par value
Common stock issued and paid-up [note 6] . . . . . . . . 15,114 10,612 4,000
Capital in excess of par value [note 6]. . . . . . . . . 5,369,891 2,212,153 31,650
Contributed surplus. . . . . . . . . . . . . . . . . . . 1,241,607 425,559 -
Cumulative translation adjustment. . . . . . . . . . . . (145,643) (8,842) -
Deficit. . . . . . . . . . . . . . . . . . . . . . . . . (7,052,276) (3,213,141) (136,854)
(571,307) (573,659) (101,204)
------------ ------------ ---------
1,697,398 273,379 9,931
------------ ------------ ---------
</TABLE>
See accompanying notes
On behalf of the Board: (signed) Arthur Wong (signed) Riaz
Mamdani
Director Director
<PAGE>
JAWS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
AND COMPREHENSIVE LOSS
(all amounts are expressed in U.S. dollars)
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION
JANUARY 27, TO
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31,
--------------- --------------
<S> <C> <C> <C> <C>
1999 1998 1998 1997
$ . . . . . . . . . . . . . . . . $ $ $
(unaudited)
- -----------------------------------
REVENUE [note 7]. . . . . . . . . . 372,630 28,440 29,068 -
EXPENSES [NOTE 7]
Accounting and legal. . . . . . . . 246,909 105,372 186,128 69,952
Advertising and promotion . . . . . 234,398 194,764 218,574 35,000
Consulting. . . . . . . . . . . . . 438,655 685,375 514,894 30,731
Depreciation and amortization . . . 67,462 8,877 14,041 580
Directors' fees . . . . . . . . . . 97,501 - 33,333 -
Management fees . . . . . . . . . . 147,036 - - -
Amortization of deferred financing
fees [note 8] . . . . . . . . . . . 75,601 - 5,158 -
Foreign exchange loss . . . . . . . 10,248 - (431) -
Non cash interest expense . . . . . 833,115 - 381,688 -
Interest expense and bank charges . 6,197 - 2,869 -
Investor relations. . . . . . . . . 100,255 - 258,016 -
Office and administration . . . . . 110,638 - 83,143 -
Other . . . . . . . . . . . . . . . 291,420 76,649 52,928 591
Rent. . . . . . . . . . . . . . . . 180,840 13,523 29,637 -
Sub-contracting costs . . . . . . . 337,712 - - -
Travel. . . . . . . . . . . . . . . 281,643 120,342 132,646 -
Wages and employee benefits . . . . 752,135 124,599 283,728 -
Software development costs
[note 3] . . . . . . . . . . . . . - 909,003 909,003 -
4,211,765 2,238,504 3,105,355 136,854
LOSS FOR THE PERIOD [NOTE 10] . . . (3,839,135) (2,210,064) (3,076,287) (136,854)
- ----------------------------------- --------------- -------------- ------------ ----------
OTHER COMPREHENSIVE LOSS
Foreign currency translation
adjustment. . . . . . . . . . . . . (136,801) (29,847) (8,842) -
COMPREHENSIVE LOSS. . . . . . . . . (3,975,936) (2,239,911) (3,085,129) (136,854)
DEFICIT, BEGINNING OF PERIOD. . . . (3,213,141) (136,854) (136,854) -
LOSS FOR THE PERIOD . . . . . . . . (3,839,135) (2,210,064) (3,076,287) (136,854)
DEFICIT, END OF PERIOD. . . . . . . (7,052,276) (2,346,918) (3,213,141) (136,854)
Loss per common share [note 9]. . . (0.30) (0.31) (0.42) (0.03)
Weighted average number of shares
outstanding . . . . . . . . . . . . 12,837,302 7,101,869 7,405,421 4,000,000
</TABLE>
See accompanying notes
<PAGE>
JAWS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(all amounts are expressed in U.S. dollars)
<TABLE>
<CAPTION>
CAPITAL IN
--------------
EXCESS OF PAR CONTRIBUTED
SHARES PAR VALUE VALUE SURPLUS
<S> <C> <C> <C> <C>
$ $ $
BALANCE, JANUARY 27, 1997
Issuance of Common Stock for cash . . . . . . 4,000,000 4,000 56,000 -
Less share issue costs. . . . . . . . . . . . - - (24,350) -
BALANCE, DECEMBER 31, 1997. . . . . . . . . . 4,000,000 4,000 31,650 -
- --------------------------------------------- -------------- ------------ ----------- ----------
Issuance of Common Stock for services
[note 6]. . . . . . . . . . . . . . . . . 400,000 400 199,600 -
- --------------------------------------------- -------------- ------------ ----------- ----------
Issuance of Common Stock on acquisition of
subsidiary [note 4] . . . . . . . . . . . . . 1,500,000 1,500 838,248 -
Issuance of Common Stock for cash . . . . . . 2,800,000 2,800 1,017,200 -
Warrants issued with issuance of convertible
debentures [note 8] . . . . . . . . . . . . . - - - 342,857
Equity component of convertible debentures
[note 8]. . . . . . . . . . . . . . . . . . . - - - 118,462
Equity component of financing fees [note 8] . - - - (11,760)
Equity component of financing fees [note 8] . - - - (24,000)
Issue of Common Stock upon conversion of
convertible debentures [note 8] . . . . . . . 1,912,317 1,912 211,886 -
Financing fee associated with converted
debentures [note 8] . . . . . . . . . . . . . - - (21,117) -
Share issue costs . . . . . . . . . . . . . . - - (65,314)
BALANCE, DECEMBER 31, 1998. . . . . . . . . . 10,612,317 10,612 2,212,153 425,559
(UNAUDITED)
- ---------------------------------------------
Issuance of Common Stock for cash . . . . . . 317,188 317 101,183 -
Equity component of convertible debentures
[note 8]. . . . . . . . . . . . . . . . . . . - - - 424,575
Equity component of financing fees [note 8] . - - - (14,000)
Issuance of Common Stock for cash . . . . . . 4,044,761 4,044 2,867,756 -
Equity component of convertible debenture
[note8] . . . . . . . . . . . . . . . . . . . - - - 193,292
Equity component of financing fee [note 8]. . - - - (19,329)
Warrants issued with issuance of convertible
debentures [note 8] . . . . . . . . . . . . . - - - 341,538
Equity component of financing fee [note 8]. . - - - (110,028)
Issuance of Common Stock in settlement of
trade payable . . . . . . . . . . . . . . . . 141,000 141 188,799 -
BALANCE, SEPTEMBER 30, 1999 . . . . . . . . . 15,115,266 15,114 5,369,891 1,241,607
</TABLE>
See accompanying notes
<PAGE>
JAWS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(all amounts are expressed in U.S. dollars)
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION
JANUARY 27, TO
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31,
--------------- --------------
<S> <C> <C> <C> <C>
1999 1998 1998 1997
$. . . . . . . . . . . . . . . . . . . . . $ $ $
(unaudited)
- --------------------------------------------
CASH FLOWS USED IN OPERATING ACTIVITIES
Loss for the period. . . . . . . . . . . . . (3,839,135) (2,210,064) (3,076,287) (136,854)
Adjustments to reconcile loss to cash flows
used in operating activities:
Consulting expense not involving the
payment of cash [note 6] . . . . . . . . . . - 200,000 200,000 -
Depreciation and amortization. . . . . . . . 67,462 8,877 14,041 580
Amortization of deferred financing fees. . . 75,601 - 5,158 -
Software development costs . . . . . . . . . - 909,189 909,003 -
Non-cash interest expense on warrants. . . . - - 257,143 -
Non-cash interest expense on convertible
debentures . . . . . . . . . . . . . . . . . 755,792 - 118,462 -
Non-cash interest expense on convertible
debenture conversion and accrued interest. . 77,323 - 6,083 -
Changes in non-cash working capital
balances [note 13] . . . . . . . . . . . . . 121,341 364,410 439,422 25,476
(2,741,731) (727,588) (1,126,975) (110,798)
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of fixed assets . . . . . . . . . . (542,329) (134,474) (115,584) (2,900)
Purchase of term deposits [note 4] . . . . . (27,000) - - -
(569,329) (134,474) (115,584) (2,900)
--------------- -------------- ------------ ---------
CASH FLOWS GENERATED BY (USED IN)
FINANCING ACTIVITIES
Proceeds from the issuance of Common
Stock, net of issue costs. . . . . . . . . . 3,024,314 954,686 954,686 35,650
Repayment of stockholder advances. . . . . . (72,673) (117,044) (78,159) 78,159
Proceeds from stockholder advances . . . . . - 24,309 20,273 -
Proceeds on issue of convertible debenture . 1,100,000 - 420,000 -
Financing fees on issue of convertible
debenture. . . . . . . . . . . . . . . . . . (110,000) - (42,000) -
3,941,641 861,951 1,274,800 113,809
--------------- -------------- ------------ ---------
INCREASE (DECREASE) IN CASH. . . . . . . . . 630,696 (111) 32,241 111
Cash acquired on acquisition of subsidiary . - - 1,380 -
Cash, beginning of period. . . . . . . . . . 33,732 111 111 -
CASH, END OF PERIOD. . . . . . . . . . . . . 664,428 - 33,732 111
</TABLE>
See accompanying notes
<PAGE>
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
(AMOUNTS AS AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIOD THEN ENDED ARE
UNAUDITED)
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
(AMOUNTS AS AT SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIOD THEN ENDED ARE
UNAUDITED)
1. BASIS OF PRESENTATION
JAWS Technologies, Inc., (the "Company") was incorporated on January 27, 1997
under the laws of the State of Nevada as "E-Biz" Solutions, Inc. On March 27,
1998, "E-Biz" Solutions, Inc. changed its name to JAWS Technologies, Inc. The
business purpose is developing and selling encryption software. These activities
are carried out through the Company's wholly owned Canadian subsidiary.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company has a working capital deficiency of $505,883 at December
31, 1998, a deficit of $3,213,141 at December 31, 1998 and $7,052,276 as at
September 30, 1999 and net operating cash outflows of $2,741,616 for the nine
month period ended September 30, 1999. Although it has a positive working
capital balance of $89,026 at September 30, 1999, the Company's continuation as
a going concern is dependent on its ability to generate sufficient cash flow, to
meet its obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain successful operations. However, no assurance
can be given at this time as to whether the Company will achieve any of these
conditions. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern
for a reasonable period of time.
Management believes that additional funding will be required to finance expected
operations until a market has been developed for the Company's software.
Management intends to seek additional financing through future private or public
offerings of stock and through the exercise of stock options.
The accompanying financial statements reflect all adjustments which are, in the
opinion of management, necessary to reflect a fair presentation for the periods
being presented.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have, in management's opinion, been properly prepared
in accordance with accounting principles generally accepted in the United
States.
USE OF ESTIMATES
Because a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period necessarily
involves the use of estimates which would affect the amount of recorded assets,
liabilities, revenues and expenses. Actual amounts could differ from these
estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, JAWS Technologies, Inc., an Alberta, Canada
corporation ("JAWS Alberta"), and JAWS Technologies (Ontario) Inc. an Ontario
Canada corporation ("JAWS Ontario"), after elimination of intercompany accounts
and transactions.
FIXED ASSETS
Fixed assets are recorded at cost and are depreciated at the following annual
rates which are designed to amortize the cost of the assets over their estimated
useful lives.
Furniture and fixtures - 20% diminishing balance
Computer hardware - 33% straight line
Computer software for internal use - 33% straight line
Leasehold improvements - 20% straight line
SOFTWARE DEVELOPMENT
Software development costs are expensed when technological feasibility has not
yet been established. Subsequent to establishing technological feasibility,
such costs are capitalized until the commencement of commercial sales.
FINANCING FEES
Financing fees associated with that portion of the 10% convertible debentures
classified as debt are deferred and amortized over the life of the debentures.
Financing fees associated with that portion of the convertible debentures
classified as contributed surplus is charged to that account. The pro rata
portion of financing fees associated with converted debentures is charged to
share capital in excess of par value.
REVENUE RECOGNITION
Revenue from selling encryption software is recognized when the software is
delivered. Consulting fees are recognized when the services are rendered or
earned.
ADVERTISING
Advertising costs are expensed as incurred.
INCOME TAXES
The Company follows the liability method of accounting for the tax effect of
temporary differences between the carrying amount and the tax basis of the
company's assets and liabilities. Temporary differences arise when the
realization of an asset or the settlement of a liability would give rise to
either an increase or decrease in the Company's income taxes payable for the
year or later period. Deferred income taxes are recorded at the income tax
rates that are expected to apply when the deferred tax liability is settled or
the deferred tax asset is realized. When necessary, valuation allowances are
established to reduce deferred income tax assets to the amount expected to be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred income tax assets and liabilities.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's subsidiaries is the Canadian dollar.
Accordingly, assets and liabilities of the subsidiaries are translated at the
year-end exchange rate and revenues and expenses are translated at average
exchange rates. Gains and losses arising from the translation of the financial
statements of the subsidiaries are recorded in a "Cumulative Translation
Adjustment" account in stockholders' equity.
LOSS PER COMMON SHARE
The loss per common share has been calculated based on the weighted average
number of common shares outstanding during the period. Diluted earnings per
share, assuming all warrants, options and conversion features were exercised,
does not differ from basic earnings per share.
STOCK OPTIONS
The Company applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost is recognized in the accounts as options are granted with
an exercise price that approximates the prevailing market price.
PRIOR YEAR AMOUNTS
Certain prior year amounts have been reclassified to conform to the presentation
adopted in 1999.
3. ACQUISITION
On February 10, 1998 the Company issued 1,500,000 restricted common shares, as
well as options to purchase 400,000 shares of its restricted Common Stock at
$0.50 per share in exchange for all of the outstanding Common Stock of JAWS
Alberta. The options issued in connection with the acquisition have been
ascribed no value. JAWS Alberta was a development stage company which at the
time of acquisition was in the process of creating a new encryption software
product. The acquisition has been accounted for by the purchase method.
The purchase price, and thereby the amounts allocated to software and the shares
issued, net of other assets and liabilities acquired, was determined based on
estimates by management as to the replacement cost for the encryption software
development which had been incurred by JAWS Alberta prior to the acquisition
date. The purchase price has been allocated to the net assets acquired based on
their estimated fair values as follows:
<TABLE>
<CAPTION>
$
---------
<S> <C>
Net assets acquired
Non-cash working capital . . . . . . (5,087)
Software under development . . . . . 909,003
Fixed assets . . . . . . . . . . . . 2,891
Due to stockholders. . . . . . . . . (54,443)
Net assets acquired, excluding cash. 852,364
- ------------------------------------ ---------
Acquisition costs. . . . . . . . . . (13,996)
Cash acquired. . . . . . . . . . . . 1,380
Net assets acquired for Common Stock 839,748
</TABLE>
The amount allocated to software under development relates to encryption
software and its related algorithms, including the "L5" software. This
software, at the time of purchase, was not completely developed, tested or
otherwise available for sale and therefore has been immediately expensed in the
accompanying consolidated statements of loss and deficit. Coding and testing
activities for this software were completed on July 31, 1998.
The operating results of the acquired company are included in the consolidated
statements of loss, deficit and comprehensive loss from the date of acquisition.
Pro forma loss and pro forma loss per common share for the nine month period
ended September 30, 1998, giving effect to the acquisition of JAWS Alberta as at
January 1, 1998 are $2,217,462 and $0.31 respectively (year ended December 31,
1998 - $3,083,685 and $0.42 respectively). Pro forma revenue does not differ
from that recorded for the period to September 30, 1998, being $28,440, or for
the period to December 31, 1998, being $29,068.
4. TERM DEPOSITS
The term deposits are on deposit with a Canadian Chartered Bank. These deposits
have been pledged as security for certain corporate credit cards, and as such
are not available for the Company's general use. These deposits earn interest
at 2.95 percent per annum and mature May 9, 2000.
5. FIXED ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
<S> <C> <C> <C>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $ $
Furniture and fixtures . . . . . . 261,184 29,978 231,206
- ---------------------------------- ------------- ------------- --------
Computer hardware. . . . . . . . . 122,815 27,769 95,046
Computer software for internal use 33,937 6,680 27,257
Leasehold improvements . . . . . . 162,360 17,865 144,495
580,296 82,292 498,004
DECEMBER 31,
1998
-------------
ACCUMULATED. . . . . . . . . . NET BOOK
COST . . . . . . . . . . . . . . DEPRECIATION VALUE
- ----------------------------------
$. . . . . . . . . . . . . . . . $ $
Furniture and fixtures . . . . . . 31,758 6,482 25,276
- ---------------------------------- ------------- ------------- --------
Computer hardware. . . . . . . . . 47,371 5,534 41,837
Computer software for internal use 13,162 1,445 11,717
92,291 13,461 78,830
</TABLE>
6. SHARE CAPITAL
AUTHORIZED
95,000,000 common shares at $0.001 par value (increased from 20,000,000 April 8,
1999)
5,000,000 preferred shares at $0.001 par value
COMMON STOCK ISSUED
During 1998, the 400,000 restricted common shares issued for services provided
by two consultants in relation to the establishment of the capital structure of
the Company. The shares were recorded at their estimated fair value of
$200,000.
COMMON STOCK HELD IN ESCROW
Upon entering into the 10% convertible debenture agreement (see note 8) the
Company placed 9,500,000 shares in escrow relating to the $2 million of
financing. In addition, 1,071,429 shares and 357,143 shares were placed in
escrow relating to the purchasers' and agent's warrants issued in relation to
the 10% convertible debenture agreement.
OPTIONS
As at September 30, 1999, the Company has issued 2,360,600 options to purchase
Common Stock to the Company's directors, officers and employees. Of the total
issued, none have been exercised as at September 30, 1999. Details of the stock
options outstanding at September 30, 1999 are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS EXERCISE PRICE EXPIRY DATE
-------------- -------------------
<C> <C> <S>
200,000 0.15 February 22, 2008
50,000 0.23 June 30, 2008
35,000 0.23 June 30, 2008
31,000 0.33 June 30, 2008
143,000 0.37 June 30, 2008
22,000 0.40 June 30, 2008
400,000 0.48 August 1, 2000
706,500 0.48 June 30, 2008
82,500 0.58 June 30, 2008
71,000 0.62 June 30, 2008
10,000 0.65 June 30, 2008
36,000 0.69 June 30, 2008
20,000 0.71 June 30, 2008
62,000 0.73 June 30, 2008
43,500 0.75 June 30, 2008
75,000 0.77 June 30, 2008
5,000 0.81 June 30, 2008
47,500 0.82 June 30, 2008
250,000 0.87 June 30, 2008
5,600 0.98 June 30, 2008
65,000 2.44 June 30, 2008
2,360,600
- -----------------
</TABLE>
The fair value of each option granted to date is estimated on the date of grant
using the Black Scholes option-pricing model with the following assumptions:
expected volatility of 167%, risk-free interest rate of 4.87%; no payment of
common share dividends; and expected life of 10 years. Had compensation cost
for these plans been determined based upon the fair value at grant date,
consistent with the methodology prescribed in Statement of Financial Accounting
Standards No. 123, "accounting for Stock-Based compensation," the Company's loss
and loss per common share for the nine month period ended September 30, 1999
would have been $4,220,310 and $0.33 respectively (year ended December 31, 1998:
$3,324,618 and $0.45 respectively).
During 1998, the Company had entered into a Put Option agreement with an
investor which allowed the Company to require the investor to purchase up to
25,000,000 shares of the Common Stock of the Company. In addition, the investor
was to be granted warrants to purchase up to 3,000,000 shares of Common Stock.
On April 26, 1999, the Company and the investor agreed to cancel the agreement
in exchange for warrants to the investor to purchase up to 1,000,000 shares of
Common Stock at an exercise price of $0.70 per share. The warrants expire April
15, 2002.
On June 21, 1999, the Company issued 834,000 share purchase warrants, which
entitle the holder to purchase 834,000 common shares at $2.25 per share until
June 20, 2001. On August 26, 1999 the Company issued 141,000 common shares at
$1.34 per common share in settlement of a trade payable.
7. RELATED PARTY TRANSACTIONS
Amounts due to related parties consist of the following amounts:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
$ $ $
- ----------------------------- --------
<S> <C> <C> <C>
DUE FROM RELATED PARTIES
Futurelink Corp.. . . . . . . - 9,073 -
Futurelink/Sysgold Ltd. . . . - 4,045 -
- 13,118 -
DUE TO RELATED PARTIES
Officers and stockholders . . 12,849 43,588 -
Futurelink Corp.. . . . . . . 18,602 32,175 -
Willson Stationers Ltd. . . . 7,304 1,352 -
Directors . . . . . . . . . . 157,503 120,000 -
196,258 197,115 -
DUE TO STOCKHOLDERS
Bankton Financial Corporation - 15,775 -
Cameron Chell . . . . . . . . 2,044 1,957 -
Hampton Park Ltd. . . . . . . - 56,985 -
Other stockholder . . . . . . - - 78,159
2,044 74,717 78,159
</TABLE>
Effective July 31, 1999 the Company entered into an agreement with Pace Systems
Group Inc., a related party (see note 17), whereby Pace assigned certain of its
revenue contracts to the Company. During the period from July 31 to September
30, 1999 the Company earned $337,988 from these contracts, which is included in
revenues on the accompanying financial statements. The Company also incurred
sub-contracting costs in respect of these contracts, in the amount of $337,712
which is included in expenses in the accompanying financial statements.
During the year ended December 31, 1998, the Company incurred $76,612 in fees
associated with computer services provided by Futurelink Corp., an entity of
which certain directors are also directors of the Company. There were $28,289
fees incurred during the period ended September 30, 1999. The Company provided
sales to Futurelink Corp. during the period ended September 30, 1999 in the
amount of $2,925 (December 31, 1998 - $9,073). The fees charged by and sales
provided to Futurelink Corp. are recorded at their exchange amounts.
During the year ended December 31, 1998, the Company provided services of $4,045
to Futurelink/Sysgold Ltd., an entity of which certain directors are also
directors of the Company. This amount was included in due from related parties
at December 31, 1998. These services are provided on normal commercial terms and
conditions. No services were provided to Futurelink/Sysgold Ltd. during the
period ended September 30, 1999.
Office and administration expenses for the nine month period ended September 30,
1999, include $11,858 (December 31, 1998 - $8,035) paid to Willson Stationers
Ltd., an entity of which certain directors are also directors and officers of
the Company. These transactions are recorded at their exchange amounts.
Consulting fees for the year ended December 31, 1998, include $198,168 to
officers and stockholders of the Company for services provided.
Due to stockholders represents advances received by the Company. The amount due
to Hampton Park Ltd., a company owned by a stockholder, bears interest at 8% per
annum and has no set repayment terms. The remaining amounts due to stockholders
do not carry interest and have no set repayment terms. All stockholders have
indicated they do not intend to demand repayment within the next year.
The Company entered into an agreement to lease premises from a stockholder. The
lease began on November 1, 1998 and is for a five year term. The minimum rent
is $9.42 per square foot per annum with 9,920 square feet of net rentable area.
Additional rent is estimated at $4.03 per square foot of net rentable area per
annum. The net rent expense recognized in the nine month period ended September
30, 1999 was $67,870 (year ended December 31, 1998 - $3,991).
8. CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31
1999 1998
$ $
----------- ----------
<S> <C> <C>
PRINCIPAL
Net balance outstanding, beginning of period . . . . . . . . . 146,606 -
Funds advanced to date . . . . . . . . . . . . . . . . . . . . 1,100,000 420,000
Debentures converted during the period . . . . . . . . . . . . - (210,000)
1,246,606 210,000
FINANCING FEES
Fees paid on funds advanced to date. . . . . . . . . . . . . . (110,000) (42,000)
Intrinsic value associated with equity component of debentures 33,329 11,760
Fees paid through issuance of warrants to agent. . . . . . . . (341,538) (85,714)
Intrinsic value associated with equity component of debentures 110,027 24,000
Amortization of financing fees to date . . . . . . . . . . . . 75,601 5,158
Financing fees associated with debentures converted to date. . - 21,117
(232,581) (65,679)
INTEREST EXPENSE
Accrued interest expense . . . . . . . . . . . . . . . . . . . 77,323 2,285
NET BALANCE OUTSTANDING, END OF PERIOD . . . . . . . . . . . . 1,091,348 146,606
</TABLE>
On September 25, 1998 the Company entered into an agreement to issue 10%
convertible debentures in series of $200,000 up to a total of $2,000,000,
subject to the Company meeting certain conditions, which mature on October 31,
2001. The holders have the right to convert the debentures in increments of at
least $100,000, at a price equal to the lower of $0.28 and 78% of the average
closing bid price of the Company's Common Stock for the three trading days
immediately preceding the Notice of Conversion served on the Company. For the
$500,000 of convertible debentures that were issued on January 26, 1999,
$250,000 of debentures can be converted at a fixed price of $0.40 per common
share and the remaining $250,000 can be converted into shares at a fixed rate of
$0.28 per common share. The Company may prepay any or all of the outstanding
principal amounts at any time, upon thirty days' notice, subject to the holders'
right to convert into common shares. A financing fee of 10% is charged on the
principal sum of each convertible debenture issued. Interest is payable on the
maturity date. At the holders' election, interest can be settled in Common
Stock of the Company based on market prices.
On April 16, 1999, the Company drew down an additional $600,000 of financing
under the 10% convertible debenture agreement, which can be converted into
Common Stock at a fixed price of $0.65 per common share.
On April 27, 1999, the debenture agreement was amended to include (among others)
the following changes:
(i) the total amount available under the debenture agreement was increased
from $2,000,000 to $5,000,000.
(ii) the financing fee applicable to the additional $3,000,000 available was
set at 8% of the principal sum issued.
(iii) the balance of the financing not yet drawn, $3,480,000, has a fixed
conversion price of $0.40 per share.
(iv) an additional 923,077 share purchase warrants were issued, which give
the holder the right to purchase one common share for each warrant held, at a
price of $0.65 per warrant.
Through September 30, 1999, the Company has issued convertible debentures
totalling $1,520,000 of which $736,329 was recorded as contributed surplus with
an offsetting amount charged as interest on long term debt. Of the debentures
issued, $210,000 principal plus $3,798 interest was converted into 1,912,317
shares on November 30, 1998, based on a conversion price of $.1118 (being 78% of
the average closing bid price of the Company's Common Stock for the three
trading days preceding the Notice of Conversion). Interest totalling $79,608
has been accrued and included in the convertible debenture balance outstanding
at September 30, 1999. These shares will be formally issued when the Company's
SB-2 Registration Statement has been declared effective.
At the time of the initial funding on October 1, 1998, the Company issued
1,428,572 common share purchase warrants (357,143 to the agent and 1,071,429 to
the ultimate subscriber of the issue). Each warrant gives the holder the right
to purchase one common share of the Company at $0.28 until October 31, 2001. An
amount of $342,857 has been included in contributed surplus as the estimated
value attributed to these warrants as they were exercisable upon issuance. In
addition, the warrants issued to the agent have been treated as a financing fee
in the amount of $85,714. The value of these fees associated with the equity
component of the 10% convertible debentures has been charged to contributed
surplus in the amount of $24,000. The remaining balance is being amortized over
the life of the 10% convertible debentures.
Through September 30, 1999 the Company has paid financing fees on the 10%
convertible debentures totalling $152,000. The fees associated with the equity
component of the 10% convertible debentures, being $45,089, have been charged to
contributed surplus. The remaining amount, which has been recorded as a
reduction of the debenture principal, is being amortized over the life of the
10% convertible debentures, unless the debentures are converted. If converted,
the pro rata portion of the financing fees associated with the converted
debentures is charged to capital in excess of par value. During 1998, $21,117
has been charged to capital in excess of par value relating to $210,000 of
convertible debentures which were converted.
The additional share purchase warrants issued on April 27, 1999 as described in
(iv) above have been recorded as contributed surplus at their estimated value of
$341,538, as they were exercisable upon issuance. An offsetting amount of
$110,027 attributable to the equity portion of the related debentures has been
recorded as a charge against contributed surplus; the remainder has been charged
as a discount to debt and is being amortized over the life of the debt.
The Company is currently in the process of filing a form SB-2 Registration
Statement qualifying the shares to be issued on conversion of the debentures
with the Securities and Exchange Commission. Until such time as the common
shares are registered, a charge of 0.986% per day will apply against the initial
amount funded. Further, as registration did not occur within 120 days of
initial funding, a charge of 0.1644% per day will apply for each day thereafter.
The initial amount funded on October 1, 1998 was $200,000. An amount of $82,200
for the penalty of late filing of the Registration Statement, and has been
included in accounts payable.
9. LOSS PER SHARE
Loss per common share is loss for the period divided by the weighted average
number of common shares outstanding. The effect on earnings per share of the
exercise of options and warrants, and the conversion of the convertible
debentures is anti-dilutive.
10. INCOME TAXES
The income tax benefit differs from the amount computed by applying the U.S.
federal statutory tax rates to the loss before income taxes for the following
reasons:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
$ $ $ $
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
(34%) (35%) (34%) (34%)
Income tax benefit at U.S. statutory rate. . (1,305,306) (773,522) (1,045,938) (46,530)
Increase (decrease) in taxes resulting from:
Change in deferred tax asset valuation
allowance. . . . . . . . . . . . . . . . . . 1,200,985 968,663 1,106,172 46,530
Non-deductible expenses. . . . . . . . . . . 338,887 - 128,162 -
Foreign tax rate differences . . . . . . . . (234,566) (195,141) (188,396) -
Income tax benefit . . . . . . . . . . . . . - - - -
</TABLE>
For financial reporting purposes, loss before income taxes includes the
following components:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
$ $ $ $
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Pre-tax loss:
United States (1,740,449) (258,650) (1,302,313) (136,854)
Foreign. . . . (2,098,686) (1,951,414) (1,773,974) -
(3,839,135) (2,210,064) (3,076,287) (136,854)
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
$ $ $
- ---------------------------------- ------------ ------------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Net operating loss
carryforwards. . . . . . . . . . . 1,884,932 697,768 -
Start-up costs . . . . . . . . . . 30,859 37,999 46,333
Depreciation . . . . . . . . . . . 35,714 5,807 -
Organization costs . . . . . . . 361 394 197
Debt issue costs . . . . . . . . (3,776) 5,137 -
Software costs . . . . . . . . . 405,597 405,597 -
Net deferred tax assets. . . . . . 2,353,687 1,152,702 46,530
- ---------------------------------- ------------ ------------ --------
Valuation allowance. . . . . . . . (2,353,687) (1,152,702) (46,530)
Net deferred tax assets. . . . . . - - -
</TABLE>
The Company has provided a valuation allowance for the full amount of deferred
tax assets in light of its history of operating losses since its inception.
The Company has U.S. operating losses carried forward of $1,705,000 which expire
as follows:
<TABLE>
<CAPTION>
$
--------
<S> <C>
2018 880,000
2019 825,000
</TABLE>
The availability of these loss carryforwards to reduce future taxable income
could be subject to limitations under the Internal Revenue Code of 1986, as
amended. Certain ownership changes can significantly limit the utilization of
net operating loss carryforwards in the period following the ownership change.
The Company has not determined whether such changes have occurred and the effect
such changes could have on its ability to carry forward all or some of the U.S.
net operating losses.
The Company has non-capital losses carried forward for Canadian income tax
purposes of $3,022,000. These losses expire as follows:
<TABLE>
<CAPTION>
$
<S> <C>
2003 45,000
2004 7,000
2005 895,000
2006 2,075,000
</TABLE>
11. COMMITMENTS
The Company is committed to the following minimum lease payments under operating
leases for premises and equipment:
<TABLE>
<CAPTION>
$
<S> <C> <C>
Remainder of 1999 28,236
2000 112,943
2001 94,932
2002 94,641
2003 78,867
-------
Total . . . . . . 409,619
--------
</TABLE>
12. CAPITAL LEASE OBLIGATIONS PAYABLE
The future minimum lease payments at September 30, 1999 under capital leases are
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Remainder of 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,965
2000 22,344
2001 22,344
2002 21,486
2003 20,627
2004 11,868
Total future minimum lease payments. . . . . . . . . . . . . . . . . . . . 106,634
Less: imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . (25,526)
Balance of obligations under capital leases. . . . . . . . . . . . . . . . 81,108
- -------------------------------------------------------------------------- --------
Less: current portion included in accounts payable and accrued liabilities (14,119)
Long term obligation under capital leases. . . . . . . . . . . . . . . . . 66,989
</TABLE>
13. NET CHANGE IN NON-CASH WORKING CAPITAL
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
----------
<S> <C> <C> <C> <C>
$ . . . . . . . . . . . . . $ $ $
Accounts receivable . . . . . (413,895) (20,088) (7,243) -
Due from related parties. . . 13,118 - (13,118) -
Prepaid expenses and deposits 53,628 (19,612) (132,956) (7,500)
Accounts payable and accrued
liabilities . . . . . . . . . 469,347 404,110 395,624 32,976
Due to related parties. . . . (857) - 197,115 -
Change relating to operating
activities. . . . . . . . . . 121,341 364,410 439,422 25,476
</TABLE>
14. SEGMENTED INFORMATION
The Company's activities are conducted in one operating segment with all
activities relating to the development and sale of encryption software. These
activities are planned to be carried out in Canada and the United States. To
date, all the activities have occurred in Canada.
15. FINANCIAL INSTRUMENTS
Financial instruments comprising cash, accounts receivable, amounts due from
related parties, deposits, accounts payable and accrued liabilities, amounts due
to related parties, capital lease obligations, and amounts due to stockholders
approximate their fair value. It is management's opinion that the Company is
not exposed to significant currency or credit risks arising from these financial
instruments.
The estimated fair value as at September 30, 1999 of the 10% convertible
debentures is $864,934 (December 31, 1998 - $189,000). This is based on the
estimated present value of the principal and interest of the debenture.
The Company is subject to cash flow risk to the extent of the fixed 10% simple
interest rate being charged on the convertible debentures. The effective annual
interest rate realized by the Company, exclusive of the amounts relating to the
conversion feature of the 10% convertible debentures and the warrants, was 10%
(December 31, 1998 - 10%).
16. RECENT PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", which will be effective for fiscal years beginning after
June 15, 2000. The Company does not acquire derivatives or engage in hedging
activities.
17. SUBSEQUENT EVENTS
a) Effective on November 3, 1999, the Company acquired all of the
outstanding common shares of Pace Systems Group Inc. ("Pace"). As consideration
for this purchase, the Company will issue 1,731,932 common shares, valued at
$1.70 per share, representing total consideration of $2,944,284.
b) On November 2, 1999 and as amended December 2, 1999, the Company entered
into a pre-acquisition agreement with Offsite Data Services Ltd. (Offsite), a
company incorporated in the Province of Alberta and listed on the Alberta Stock
Exchange, whereby the companies have agreed to combine their business interests
through an offer by the Company to purchase all of the outstanding shares of
Offsite. The offer is expected to be mailed on December 10, 1999.
18. CANADIAN GAAP RECONCILIATION
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ("US GAAP") which,
in most respects, conform to accounting principles generally accepted in Canada
("Canadian GAAP"). Significant differences between Canadian and US GAAP are as
follows.
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION
NINE MONTHS ENDED YEAR ENDED JANUARY 27, TO
U.S. DOLLARS FOR THE PERIOD ENDED SEPTEMBER 30 DECEMBER 31, DECEMBER 31,
- ----------------------------------- ------------------- -------------- ----------------
<S> <C> <C> <C> <C>
1999 1998 1998 1997
$ . . . . . . . . . . . . . . . . $ $ $
Loss for the period - US GAAP . . . 3,389,135 2,210,064 3,076,287 136,854
- ----------------------------------- ------------------- -------------- ---------------- --------
Software development costs. . . . . (909,003) (909,003) -
Depreciation and amortization . . . 366,126 - 63,125 -
Net loss for the period - Canadian
GAAP. . . . . . . . . . . . . . . . 3,755,261 1,301,061 2,230,409 136,854
Loss per common share -
Canadian GAAP (U.S.$/share) . . . . (0.31) (0.18) (0.30) (0.03)
</TABLE>
Stock options outstanding are antidilutive
In accordance with U.S. GAAP, costs associated with the development of software,
whether incurred directly or otherwise purchased are to be expensed. The
software was acquired from the original developer of the encryption algorithms
and was assigned a value based on its fair market value. Under Canadian GAAP,
the $909,003 is capitalized. For income tax purposes, future tax assets would
change by the following amounts with an equal and offsetting amount being
recorded as valuation allowance.
For income tax purposes, future tax assets would increase or decrease with an
equal and offsetting amount being recorded as a valuation allowance as follows:
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
---------- ---------- ---------- ----
$ $ $
Increase (decrease) in future tax
assets 163,365 (405,597) (377,430) -
- ---------------------------------- ---------- ---------- ---------- ----
(Increase) decrease in valuation
allowance (163,365) 405,597 377,430 -
- - - -
If Canadian GAAP had been followed, the balance sheet would have differed as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
U.S. DOLLARS AT PERIOD END 1999 1998 1997
- -------------------------- --------------- -------------- ------------
<S> <C> <C> <C>
$. . . . . . . . . . . . $ $
Capital assets . . . . . . 1,040,881 924,708 -
- -------------------------- --------------- -------------- ------------
Deficit. . . . . . . . . . (6,572,524) (2,367,263) -
</TABLE>
Under Canadian GAAP the following disclosure would be provided with respect to
Year 2000 Uncertainty:
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect a company's ability to conduct normal business operations.
Management has developed and is implementing a plan designed to identify and
address the expected effects of the Year 2000 Issue on the Company. An
assessment of the readiness of third parties such as customers, suppliers and
others is ongoing. It is not possible to be certain that all aspects of the
Year 2000 Issue affecting the Company, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
<PAGE>
FINANCIAL STATEMENTS
PACE SYSTEMS GROUP INC.
JULY 31, 1999 AND 1998
<PAGE>
AUDITORS' REPORT
To the Directors of
PACE SYSTEMS GROUP INC.
We have audited the balance sheets of PACE SYSTEMS GROUP INC. as at July 31,
1999 and 1998 and the statements of income (loss) and deficit and cash flows for
the years then ended. These financial statements are the responsibility of the
Corporation'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. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Corporation as at July 31, 1999 and 1998
and the results of its operations and its cash flows for the years then ended in
accordance with generally accepted accounting principles.
Toronto, Canada, (signed) Ernst & Young LLP
October 1, 1999. Chartered Accountants
<PAGE>
PACE SYSTEMS GROUP
BALANCE SHEETS
As at July 31
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents. . . . . . . . . . 12,734 236,125
Accounts receivable. . . . . . . . . . . . . 350,831 193,813
Income taxes recoverable . . . . . . . . . . - 2,238
TOTAL CURRENT ASSETS . . . . . . . . . . . . 363,565 432,176
- --------------------------------------------
Fixed assets, net [note 2] . . . . . . . . . 9,870 6,129
- --------------------------------------------
373,435 438,305
LIABILITIES AND SHAREHOLDER'S DEFICIENCY
CURRENT
Accounts payable and accrued liabilities . . 129,045 542,501
Due to related parties [note 4]. . . . . . . 262,854 605
TOTAL CURRENT LIABILITIES. . . . . . . . . . 391,899 543,106
- --------------------------------------------
Commitment and contingency [notes 6 and 11]
SHAREHOLDER'S DEFICIENCY
Share capital [note 3] . . . . . . . . . . . 100 100
Deficit. . . . . . . . . . . . . . . . . . . (18,564) (104,901)
TOTAL SHAREHOLDER'S DEFICIENCY . . . . . . . (18,464) (104,801)
- --------------------------------------------
373,435 438,305
</TABLE>
See accompanying notes
<PAGE>
PACE SYSTEMS GROUP
STATEMENTS OF INCOME (LOSS) AND DEFICIT
Years ended July 31
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
REVENUE
Consulting fees . . . . . . . . 1,901,187 1,626,094
Subcontracting [note 4] . . . . 1,580,833 1,604,394
320,354 21,700
EXPENSES
General and administrative. . . 232,198 116,392
Depreciation. . . . . . . . . . 1,819 1,599
234,017 117,991
NET INCOME (LOSS) FOR THE YEAR. 86,337 (96,291)
Deficit, beginning of year. . . (104,901) (8,610)
- -------------------------------
DEFICIT, END OF YEAR. . . . . . (18,564) (104,901)
- -------------------------------
</TABLE>
See accompanying notes
<PAGE>
PACE SYSTEMS GROUP
STATEMENTS OF CASH FLOWS
Years ended July 31
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) for the year . . . . . . . . . 86,337 (96,291)
Add item not affecting cash
Depreciation . . . . . . . . . . . . . . . . . . 1,819 1,599
- ------------------------------------------------
88,156 (94,692)
Net change in non-cash working capital balances
related to operations [note 9] . . . . . . . . . (568,236) 69,284
CASH USED IN OPERATING ACTIVITIES. . . . . . . . (480,080) (25,408)
- ------------------------------------------------
INVESTING ACTIVITIES
Purchase of fixed assets . . . . . . . . . . . . (5,560) -
CASH USED IN INVESTING ACTIVITIES. . . . . . . . (5,560) -
- ------------------------------------------------
FINANCING ACTIVITIES
Due to related parties . . . . . . . . . . . . . 262,249 (2,010)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. 262,249 (2,010)
- ------------------------------------------------
NET DECREASE IN CASH DURING THE YEAR . . . . . . (223,391) (27,418)
Cash and cash equivalents, beginning of year . . 236,125 263,543
- ------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . 12,734 236,125
- ------------------------------------------------
</TABLE>
See accompanying notes
<PAGE>
PACE SYSTEMS GROUP
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
PACE SYSTEMS GROUP
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
Pace Systems Group [the "Corporation"] was incorporated in 1986 under the laws
of Ontario. The Corporation's purpose is providing consulting services to
companies relating to information systems.
The accompanying financial statements reflect all adjustments which are, in the
opinion of management, necessary to reflect a fair presentation for the years
being presented.
These financial statements have, in management's opinion, been properly prepared
in accordance with Canadian generally accepted accounting principles. The more
significant accounting policies are summarized below:
REVENUE RECOGNITION
Consulting fees are recognized when the services are rendered or earned.
USE OF ESTIMATES
Because a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period necessarily
involves the use of estimates which would affect the amount of recorded assets,
liabilities, revenue and expenses. Actual amounts could differ from these
estimates.
FIXED ASSETS
Fixed assets are recorded at cost less accumulated depreciation. Depreciation
is provided on a declining balance basis at rates which are designed to amortize
the cost of the assets over their estimated useful lives as follows:
Furniture and fixtures 20%
Computer hardware 30%
INCOME TAXES
The Corporation accounts for deferred income taxes based on the liability
method. Under the liability method, deferred income taxes are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases measured using the substantially enacted tax rates and laws
that will be in effect when the difference as reflected reverse.
FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in foreign currencies are translated
into Canadian dollars at the rates of exchange prevailing at the balance sheet
dates. Non-monetary assets and liabilities denominated in foreign currencies
are translated into Canadian dollars at historic rates. Revenue and expenses
denominated in foreign currencies are translated into Canadian dollars at the
rates prevailing at the transaction dates. Exchange gains and losses are
included in net income (loss) for the year.
CASH EQUIVALENTS
Cash equivalents comprise only highly liquid investments with original
maturities of less than ninety days.
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
1999
-------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $
<S> <C> <C> <C>
Furniture and fixtures. 67,949 58,340 9,609
Computer hardware . . . 1,279 1,018 261
- -----------------------
69,228 59,358 9,870
1998
-------------
ACCUMULATED . . . . NET BOOK
COST. . . . . . . . . DEPRECIATION VALUE
$ . . . . . . . . . . $ $
Furniture and fixtures. 62,388 56,632 5,756
Computer hardware . . . 1,279 906 373
- -----------------------
63,667 57,538 6,129
</TABLE>
3. SHARE CAPITAL
Share capital consists of the following:
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
AUTHORIZED
100 common shares
ISSUED
100 common shares. 100 100
- ------------------
</TABLE>
On August 20, 1999, the Articles of Incorporation were amended to change the
amount of authorized common shares to unlimited.
4. RELATED PARTY TRANSACTIONS
As at July 31, the Corporation has outstanding account balances with its
shareholder and related party as follows:
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
1322669 Ontario Inc.. 262,395 -
Shareholder . . . . . 459 605
- ---------------------
262,854 605
</TABLE>
The amount due to the shareholder is unsecured, non-interest bearing and is due
on demand. 1322669 Ontario Inc. is wholly-owned by the Corporation's sole
shareholder.
Included in subcontracting expenses are expenses incurred with related parties
as follows:
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
1322669 Ontario Inc.. 413,050 -
Shareholder's spouse. 9,800 49,346
- ---------------------
422,850 49,346
</TABLE>
5. INCOME TAXES
The income tax benefit differs from the amount computed by applying the Canadian
combined statutory tax rates to the income (loss) before income taxes for the
following reasons:
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
Provision for (recovery of) income taxes at Canadian statutory rate. 19,000 (22,000)
Increase (decrease) in income taxes resulting from
Deferred tax asset valuation allowance . . . . . . . . . . . . . . . - 22,000
Tax benefit of loss carryforwards. . . . . . . . . . . . . . . . . . (19,000) -
- --------------------------------------------------------------------
- -
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Corporation's deferred tax assets are as follows:
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
Deferred tax assets (liabilities)
Tax benefit of loss carryforwards . . . . - 22,000
- -----------------------------------------
Deferred tax assets, net of liabilities . - 22,000
Valuation allowance . . . . . . . . . . . - (22,000)
- -----------------------------------------
NET DEFERRED TAX ASSETS . . . . . . . . . - -
- -----------------------------------------
</TABLE>
The Corporation has provided a valuation allowance for the full amount of
deferred tax assets in light of its history of operating losses.
6. LEASE COMMITMENTS
The Corporation is committed to the following future minimum annual lease
payments for office space:
<TABLE>
<CAPTION>
$
<S> <C>
2000. . 74,476
2001. . 74,476
2002. . 43,445
- -------
192,397
</TABLE>
Under the operating leases for office space, the Corporation is also required to
pay for operating expenses. These amounts vary from year to year depending on
usage and are, therefore, not included in the above amounts.
7. SEGMENTED INFORMATION
The Corporation's activities are conducted in one operating segment with all
activities relating to development and sale of encryption software. To date,
all the activities have occurred in Canada.
8. FINANCIAL INSTRUMENTS
Financial instruments comprising cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate their fair value. It is
management's opinion that the Corporation is not exposed to significant currency
or credit risks arising from these financial instruments.
CREDIT RISK
Accounts receivable are subject to concentration of credit risk. As at July 31,
1999, 43% of accounts receivable is outstanding with two customers.
There is no allowance for doubtful accounts recorded for the years ended July
31, 1999 and 1998.
9. STATEMENTS OF CASH FLOWS
The net change in non-cash working capital balances related to operations
consists of the following:
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Accounts receivable. . . . . . . . . . . (157,018) (172,608)
Income taxes recoverable . . . . . . . . 2,238 (2,238)
Accounts payable and accrued liabilities (413,456) 246,368
Income taxes payable . . . . . . . . . . - (2,238)
- ----------------------------------------
(568,236) 69,284
</TABLE>
10. ECONOMIC DEPENDENCE
Approximately 29% of the Corporation's sales were made to two customers. These
customers accounted for 24% of the Corporation's accounts receivable balance at
July 31, 1999.
Approximately 31% of the Corporation's subcontracting expenses were provided by
two vendors. These vendors accounted for 23% of the Corporation's accounts
payable and accrued liabilities balance at July 31, 1999.
11. YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect an entity's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 Issue
affecting the Corporation, including those related to the efforts of suppliers,
customers, or other third parties, will be fully resolved.
12. SUBSEQUENT EVENT
In October 1999, the Corporation's sole shareholder agreed to sell all of the
Corporation's issued shares to JAWS Technologies Inc. The Corporation has been
dealing with JAWS Technologies Inc. as a customer in the ordinary course of
business during 1999.
<PAGE>
FINANCIAL STATEMENTS
PACE SYSTEMS GROUP INC.
Unaudited
SEPTEMBER 30, 1999 AND 1998
<PAGE>
PACE SYSTEMS GROUP
BALANCE SHEETS
As at September 30 Unaudited
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents. . . . . . . . . . . . . 117,377 533,272
Accounts receivable. . . . . . . . . . . . . . . . 60,636 165,762
Income taxes recoverable . . . . . . . . . . . . . 24,546 -
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . 202,559 699,034
- --------------------------------------------------
Fixed assets, net [note 2] . . . . . . . . . . . . 9,289 8,681
- --------------------------------------------------
211,848 707,715
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY)
CURRENT
Accounts payable and accrued liabilities . . . . . 108,940 564,798
Income taxes payable . . . . . . . . . . . . . . . - 64,762
Due to related parties [note 4]. . . . . . . . . . 158,407 605
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . 267,347 630,165
- --------------------------------------------------
Commitments and contingencies [notes 6 and 11]
SHAREHOLDER'S EQUITY (DEFICIENCY)
Share capital [note 3] . . . . . . . . . . . . . . 100 100
Retained earnings (deficit). . . . . . . . . . . . (55,599) 77,450
TOTAL SHAREHOLDER'S EQUITY (DEFICIENCY). . . . . . (55,499) 77,550
- --------------------------------------------------
211,848 707,715
</TABLE>
See accompanying notes
<PAGE>
PACE SYSTEMS GROUP
STATEMENTS OF INCOME (LOSS) AND
RETAINED EARNINGS (DEFICIT)
Two-month periods ended September 30 Unaudited
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
REVENUE
Consulting fees. . . . . . . . . . . . . . . . . . 24,240 450,662
Subcontracting [note 4]. . . . . . . . . . . . . . 75,385 181,871
(51,145) 268,791
EXPENSES
General and administrative . . . . . . . . . . . . 9,855 19,188
Depreciation . . . . . . . . . . . . . . . . . . . 581 252
10,436 19,440
Income (loss) before income taxes. . . . . . . . . (61,581) 249,351
Provision for (recovery of) income taxes [note 5]. (24,546) 67,000
- --------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD . . . . . . . . . (37,035) 182,351
Deficit, beginning of period . . . . . . . . . . . (18,564) (104,901)
- --------------------------------------------------
RETAINED EARNINGS (DEFICIT), END OF PERIOD . . . . (55,599) 77,450
- --------------------------------------------------
</TABLE>
See accompanying notes
<PAGE>
PACE SYSTEMS GROUP
STATEMENTS OF CASH FLOWS
Two-month periods ended September 30 Unaudited
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) for the period . . . . . . . . (37,035) 182,351
Item not requiring an outlay of cash
Depreciation . . . . . . . . . . . . . . . . . . 581 252
Net change in non-cash working capital balances
related to operations [note 10]. . . . . . . . . 245,544 117,348
CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . 209,090 299,951
- ------------------------------------------------
INVESTING ACTIVITIES
Purchase of fixed assets . . . . . . . . . . . . - (2,804)
CASH USED IN INVESTING ACTIVITIES. . . . . . . . - (2,804)
- ------------------------------------------------
FINANCING ACTIVITIES
Due to related parties . . . . . . . . . . . . . (104,447) -
CASH USED IN FINANCING ACTIVITIES. . . . . . . . (104,447) -
- ------------------------------------------------
NET INCREASE IN CASH DURING THE PERIOD . . . . . 104,643 297,147
Cash, beginning of period. . . . . . . . . . . . 12,734 236,125
- ------------------------------------------------
CASH, END OF PERIOD. . . . . . . . . . . . . . . 117,377 533,272
- ------------------------------------------------
</TABLE>
See accompanying notes
<PAGE>
PACE SYSTEMS GROUP
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 Unaudited
PACE SYSTEMS GROUP
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 Unaudited
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
Pace Systems Group [the "Corporation"] was incorporated in 1986 under the laws
of Ontario. The Corporation's purpose is providing consulting services to
companies relating to information systems.
The accompanying financial statements reflect all adjustments which are, in the
opinion of management, necessary to reflect a fair presentation for the periods
being presented.
These financial statements have, in management's opinion, been properly prepared
in accordance with generally accepted accounting principles. The more
significant accounting policies are summarized below:
REVENUE RECOGNITION
Consulting fees are recognized when the services are rendered or earned.
USE OF ESTIMATES
Because a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period necessarily
involves the use of estimates which would affect the amount of recorded assets,
liabilities, revenue and expenses. Actual amounts could differ from these
estimates.
FIXED ASSETS
Fixed assets are recorded at cost less accumulated depreciation. Depreciation
is provided on a declining balance basis at rates which are designed to amortize
the cost of the assets over their estimated useful lives as follows:
Furniture and fixtures 20%
Computer hardware 30%
INCOME TAXES
The Corporation accounts for deferred income taxes based on the liability
method. Under the liability method, deferred income taxes are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases measured using the substantially enacted tax rates and laws
that will be in effect when the differences as reflected reverse.
<PAGE>
FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in foreign currencies are translated
into Canadian dollars at the rates of exchange prevailing at the balance sheet
dates. Non-monetary assets and liabilities denominated in foreign currencies
are translated into Canadian dollars at historic rates. Revenue and expenses
denominated in foreign currencies are translated into Canadian dollars at the
rates prevailing at the transaction dates. Exchange gains and losses are
included in income (loss) for the period.
CASH
Cash consists of cash on hand and balances with banks.
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
1999
-------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $
<S> <C> <C> <C>
Furniture and fixtures. 67,949 58,660 9,289
Computer hardware . . . 1,279 1,279 -
- -----------------------
69,228 59,939 9,289
1998
-------------
ACCUMULATED . . . . NET BOOK
COST. . . . . . . . . DEPRECIATION VALUE
$ . . . . . . . . . . $ $
Furniture and fixtures. 65,192 56,871 8,321
Computer hardware . . . 1,279 919 360
- -----------------------
66,471 57,790 8,681
</TABLE>
3. SHARE CAPITAL
Share capital consists of the following:
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
AUTHORIZED
100 common shares
ISSUED
100 common shares. 100 100
- ------------------
</TABLE>
On August 20, 1999, the Articles of Incorporation were amended to change the
amount of authorized common shares to unlimited.
4. RELATED PARTY TRANSACTIONS
As at September 30, the Corporation has outstanding account balances with its
shareholder and related party as follows:
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
1322669 Ontario Inc.. 157,948 -
Shareholder . . . . . 459 605
- ---------------------
158,407 605
</TABLE>
The amount due to the shareholder is unsecured, non-interest bearing and is due
on demand. 1322669 Ontario Inc. is wholly-owned by the Corporation's sole
shareholder.
Effective August 1, 1999 the Corporation assigned the contracts which earned
consulting fees to JAWS Technologies Inc. [note 12]
5. INCOME TAXES
The income tax benefit differs from the amount computed by applying the Canadian
combined statutory tax rates to the income (loss) before income taxes for the
following reasons:
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
Income tax benefit at Canadian statutory rate. (24,546) 67,000
Increase (decrease) in taxes resulting from:
Deferred tax asset valuation allowance . . . . - -
Tax benefit of loss carryforwards. . . . . . . - -
- ----------------------------------------------
(24,546) 67,000
</TABLE>
At the end of the period, no deferred tax asset or deferred tax liability had
been recorded.
6. LEASE COMMITMENTS
The Corporation is committed to the following future minimum annual lease
payments for leasing office space:
<TABLE>
<CAPTION>
$
<S> <C>
2000. . 62,063
2001. . 74,476
2002. . 55,858
- -------
192,397
</TABLE>
Under the operating leases for office space, the Corporation is also required to
pay for operating expenses. These amounts vary from year to year depending on
usage and are therefore not included in the above lease payments.
7. SEGMENTED INFORMATION
The Corporation's activities are conducted in one operating segment with all
activities relating to development and sale of encryption software. To date,
all the activities have occurred in Canada.
8. FINANCIAL INSTRUMENTS
Financial instruments comprising cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value. It is management's opinion
that the Corporation is not exposed to significant currency or credit risks
arising from these financial instruments.
CREDIT RISK
Accounts receivable are subject to concentration of credit risk. As at period
end, 87% of accounts receivable is outstanding with three customers.
There is no allowance for doubtful accounts recorded for the two-month periods
ended September 30, 1999 and 1998.
9. ECONOMIC DEPENDENCE
100% of the Corporation's sales were made to three customers. These customers
accounted for 47% of the Corporation's accounts receivable balance at period
end.
Approximately 99% of the Corporation's subcontracting expenses were provided by
seven vendors. These vendors accounted for 16% of the Corporation's accounts
payable and accrued liabilities balance at period end.
10. STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998
$
<S> <C> <C>
Accounts receivable . . . . . . . . . . . 290,195 28,051
Income taxes recoverable. . . . . . . . . (24,546) 2,238
Accounts payable and accrued liabilities. (20,105) 22,297
- -----------------------------------------
Income taxes payable. . . . . . . . . . . - 64,762
245,544 117,348
</TABLE>
11. YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect an entity's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 Issue
affecting the Corporation, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
12. SUBSEQUENT EVENT
In October 1999, the Corporation's sole shareholder agreed to sell all of the
Corporation's issued shares to JAWS Technologies Inc. The Corporation has been
dealing with JAWS Technologies Inc. as a customer in the ordinary course of
business during 1999.
<PAGE>
S:\C4\604\42604\20\0055-13-takeover circular (compilation).doc C-36
JAC FINANCIAL STATEMENTS
AUDITORS' REPORT
To the Directors of
JAWS Acquisition Corp.
We have audited the balance sheet of JAWS Acquisition Corp. as at November 29,
1999. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the balance sheet is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Company as at November 29, 1999
in accordance with accounting principles generally accepted in Canada.
Calgary, Canada (signed) Ernst & Young LLP
November 29, 1999 Chartered Accountants
(except for Note 5 which is
as at December 9, 1999)
<PAGE>
JAWS ACQUISITION CORP.
(Incorporated under the Alberta Business Corporations Act)
BALANCE SHEET
(all amounts stated in U.S. dollars)
<TABLE>
<CAPTION>
AS AT
NOVEMBER 29,
1999
$
--
<S> <C>
ASSETS
CURRENT
Cash . . . . . . . . . 1
SHAREHOLDER'S EQUITY
Share capital [note 3] 1
</TABLE>
See accompanying notes
On behalf of the Board:
(signed) Arthur Wong (signed) Riaz Mamdani
Director [Director]
<PAGE>
1. INCORPORATION
The Company was incorporated on November 24, 1999 and has been inactive from the
date of incorporation to November 29, 1999.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statement of the Company has been prepared in accordance with
accounting principles generally accepted in Canada. This financial statement
has, in management's opinion, been properly prepared within reasonable limits of
materiality.
3. SHARE CAPITAL
<TABLE>
<CAPTION>
<S> <C>
AUTHORIZED
Unlimited number of exchangeable shares
Unlimited number of common shares
$
ISSUED AND OUTSTANDING
1 common share. . . . . . . . . . . . . 1
</TABLE>
4. YEAR 2000
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect a company's ability to conduct normal business operations.
Management has developed and is implementing a plan designed to identify and
address the expected effects of the Year 2000 Issue on the Company. An
assessment of the readiness of third parties such as customers, suppliers and
others is ongoing. It is not possible to be certain that all aspects of the
Year 2000 Issue affecting the Company, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
5. SUBSEQUENT EVENT
On November 2, 1999 and as amended December 2, 1999, JAWS Technologies, Inc.,
the Company's parent, entered into a pre-acquisition agreement with Offsite Data
Services Ltd. ("Offsite"), a company incorporated in the Province of Alberta and
listed on the Alberta Stock Exchange, whereby the companies have agreed to
combine their business interests through an offer by JAWS Technologies, Inc.,
through its wholly-owned subsidiary, JAWS Acquisition Corp., to purchase all the
outstanding shares of Offsite. The offer is expected to be mailed on December
10, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and other similar expressions or variations of
such words are intended to identify these forward-looking statements.
Additionally, statements concerning future matters such as the development of
new products, enhancements or technologies, possible changes in legislation and
other statements regarding matters that are not historical fact are
forward-looking statements. Forward-looking statements involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, availability of financial resources
adequate for short-,medium- and long-term needs, demand for our products and
services and market acceptance, as well as those factors discussed in this "ITEM
2. Management's Discussion and Analysis of Financial Condition and Operating
Results" and elsewhere in this Report.
CORPORATE AND BUSINESS OVERVIEW
JAWS Technologies, Inc. ("JAWS") was incorporated as a Nevada corporation
on January 27, 1997 under the name "e-biz" solutions, inc. ("e-biz"). On
February 10, 1998, e-biz entered into an agreement to purchase all the
outstanding common shares of JAWS Canada in exchange for 1,500,000 shares of the
restricted common stock of e-biz and options to purchase 400,000 shares of such
restricted common stock at $0.50 per share. On March 27, 1998, e-biz changed
its name to JAWS Technologies, Inc.
The registered office of JAWS is located at Paracorp Incorporated, 208, 318
Carson Street, Carson City, Nevada 89701 and its head office is located on the
second floor at 1013 - 17th Avenue S.W., Calgary, Alberta T2T OA7.
JAWS is currently the parent corporation of two operating subsidiaries, JAWS
Canada and Pace. The overall strategic goal for JAWS is to consolidate the
highly fragmented information security industry, achieve increasing economies of
scale through the acquisition of high growth, emerging market firms and
integrate such firms through centralized administration and planning. Through
industry and management expertise, JAWS attempts to ensure that acquired firms
receive the capital and corporate planning necessary to maximize the growth
potential within each information system niche.
The shares of JAWS Common Stock trade on the OTC Bulletin Board under the symbol
"JAWZ". For a description of the OTC Bulletin Board, see "The OTC Bulletin
Board" in this Circular.
JAWS CANADA
JAWS currently owns 100% of the shares of JAWS Canada. JAWS Canada was
incorporated under the laws of the Province of Alberta on September 18, 1997.
The registered office of JAWS Canada is located at 4500, Bankers Hall East, 855
- - 2nd Street S.W., Calgary, Alberta T2P 4K7 and its head office is located on
the second floor at 1013 - 17th Avenue S.W., Calgary, Alberta T2T OA7.
JAWS Canada specializes in the field of high-end information security, providing
consulting services and software solutions to minimize the threats to clients'
information and communications. At its offices in Calgary, Alberta, JAWS Canada
develops proprietary encryption software using what is currently one of the
world's strongest encryption algorithms, L5 , to secure binary data in various
forms, including streamlining or blocking data.
L5 was developed and refined over approximately 15 years by its inventor Mr.
James L. A. Morrison. Mr. Morrison was Chief Programmer at JAWS Canada from
March 1, 1998 to April 20, 1999.
On October 20, 1997, JAWS Canada Software Ltd. (a company controlled by Mr.
Morrison) assigned all of its right, title and interest in L5 , and other
miscellaneous intellectual property, to JAWS Canada. In October 1998, during
JAWS Canada's patent application process, there was a further assignment of L5 ,
and other miscellaneous intellectual property, to JAWS Canada by Mr. Morrison
personally in order to fulfill the requirements of the patent application
process. L5 itself is not the software produced and marketed by JAWS Canada
but the mathematical process outlining the detailed steps required to encrypt
and decrypt data. L5 can be incorporated into a variety of software programs
requiring encryption of data.
Since the acquisition of L5 by JAWS Canada, a team of JAWS Canada software
engineers has developed and continues to develop numerous applications for L5
on many different platforms (such as JAWS Desktop , JAWS Xmail , and JAWS Memo ,
all of which have withstood in-depth scrutiny from hacking experts). L5
software, prior to acquisition, had been developed using the Borland Delphi
computer programming language on a Windows 95/98 platform. The software
consisted primarily of L5 and a Windows user interface. Since that time, L5
has been rewritten in the C language. An in-house JAWS Canada cryptographer,
with the co-operation of two University of Calgary professors, has made several
refinements to L5 including some changes introduced to address speed and
security considerations. C language can be used in a variety of operating
systems (e.g. UNIX, OS/2, VMS, and Windows CE). As L5 is no longer limited to
Windows, it can now be deployed interoperably on a variety of platforms.
JAWS Canada's business plan is to become a full service information security
solution provider. In accordance with this plan, JAWS Canada currently markets
both information security products and professional information security
services.
In an attempt to create and maintain a competitive advantage in the information
security industry, JAWS Canada strives to continually differentiate itself from
other industry players and works towards establishing strong brand loyalty for
its products and services through multiple channels of distribution. The
distribution strategy used by JAWS Canada addresses the requirements of small
organizations to large enterprises and matches the appropriate sales and
distribution channels to the software and services offered.
Further information with respect to JAWS Canada is set forth under the heading
"JAWS Canada" in Appendix B, which is incorporated into and forms part of this
Circular.
RESULTS OF OPERATIONS
FINANCIAL POSITION
SEPTEMBER 30, 1999 V. DECEMBER 31, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
($USD) ($USD)
---------- ---------
<S> <C> <C>
CURRENT ASSETS. . . . 1,199,394 194,549
LONG TERM ASSETS. . . 498,004 78,830
- --------------------- ---------- ---------
TOTAL ASSETS. . . . . 1,697,398 273,379
- --------------------- ---------- ---------
CURRENT LIABILITIES . 1,110,368 700,432
- --------------------- ---------- ---------
LONG TERM LIABILITIES 1,158,337 146,606
- --------------------- ---------- ---------
TOTAL LIABILITIES . . 2,268,705 847,038
- --------------------- ---------- ---------
TOTAL EQUITY. . . . . (571,307) (101,204)
- --------------------- ---------- ---------
</TABLE>
Revenue for the nine months ending September 30, 1999 was $ 372,630 as
compared with $29,068 ending December 31, 1999. Subsequent to September 30,
1999, JAWS completed the acquisition of Pace Systems Group Inc ("Pace"). The
results for operations of this entity will be consolidated with JAWS' results in
the fourth quarter. During the period of July 31, 1999 to September 30, 1999,
JAWS earned $337,988 from Pace contracts which revenue is included in the
September 30, 1999 financial statements.
The loss for the period ending September 30, 1999 was $ 3,839,135 as
compared with $ 2,210,064 ending September 30, 1998.
Expenses in all categories have increased significantly as a result of the
continued growth of operations, moving JAWS products toward and into the
commercialization stage and the expenses related to acquisitions. These include
expenses related to the preparation of various marketing and sales documents and
materials, wages and benefits, requirements for office space, supplies and other
office related expenses. For example, JAWS spent $ 234,398 on advertising and
promotion for the period ending September 30, 1998 as compared with $194,764 in
1998. Expenditures on rent and wages and employee benefits also reflect growth
of operations; for the period ending September 30, 1999 JAWS spent $752,135 on
wages and benefits and $ 180,840 on rent. For the period ending December 31,
1998 JAWS spent $283,728 on wages and benefits and $29,637 on rent. All of
these increases relate to the growth of the business, operations and
administration of JAWS.
JAWS anticipates that all JAWS' operating, and general and administrative
expenses will continue to increase as JAWS' operations grow and the marketing
and sales initiatives expand. It is expected that the costs associated with
these initiatives will continue to increase before revenues are realized.
Given the trend of JAWS increasing expenses related to operations,
management has forecasted that expenses will continue to increase and revenues
for the next year will not be sufficient to support growing expenses. JAWS will
continue to require equity investment for at least the next year to support
these expenses, even though the gap between revenue and expenses lessens
slightly as sales revenues begin to be realized.
ASSETS
Current assets increased to $1,199,394 at September 30, 1999 from $194,549
at December 31, 1998. This increase is primarily due to the issuance of
convertible debentures to Thomson Kernaghan & Co. Limited. ("Thomson Kernaghan")
that put the company in a positive cash position. Fixed assets increased from
$92,291 to $580,296 during this period.
LIABILITIES
Current liabilities increased to $1,110,368 from $700,432. This increase
is primarily due to the growth of JAWS operations and the proportionate growth
in the accounts payable to suppliers and contractors.
Long Term liabilities increased by $1,421,667 between December 31, 1998 and
September 30, 1999. This increase is attributable to the issuance of
convertible debentures.
STOCKHOLDERS' EQUITY
Overall the balance in shareholders equity has not changed materially from
December 31, 1998 to September 30, 1999 ($573,659 versus $571,307 respectively)
as equity injections offset operating losses. However, the individual
components of shareholders equity have changed significantly. As a direct
reflection JAWS increasing availability of and access to capital, capital in
excess of par value (and correspondingly share captial) increased dramatically
from $2,212,153 to $5,369,891 ($10,612 to $15,114 for share capital), as JAWS
issued shares to finance the continuing growth of operations. Contributed
surplus increased (proportionately to share capital and capital in excess of par
value) from $425,559 to $1,241,607 due to the issuances of warrants associated
with the share offerings. Shares were primarily issued for cash in private
placements. As expected and illustrated in the Income Statement, expenditures
outpaced revenue by a large margin. Correspondingly, shareholders deficit
increased in size from -$3,213,141 to -$7,052,276 due to JAWS expected and
ongoing operating losses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations for the period ending September 30, 1999, was $
2,741,731 as compared with $ 727,588 for the fiscal period ended September 30,
1998. These increases are a result of the increased expenses incurred as noted
above. Management plans to raise additional capital in 2000 and is working
toward arranging the appropriate equity investments to maintain reasonable
levels of working capital. As at September 30, 1999 JAWS had raised $ 3,941,641
in additional working capital for operations.
Cash on hand of $ 664,428 at September 30, 1999, is an increase from $ 0 at
September 30, 1998. This increase is as a result of a series of stock issuances
and funds advanced under a convertible debenture agreement. A net amount of
$3,941,641 was raised from financing during the nine month period January 1,
1999 to September 30, 1999 and these funds will be deployed primarily to fund
operations.
Accounts payable and accrued liabilities have increased from $ 428,600 at
December 31, 1998 to $897,947 in September 30, 1999. These increases are a
result of the efforts of management to increase sales revenue and grow JAWS'
operations and are consistent with the other expense increases in 1999. JAWS has
anticipated and budgeted for these increases to provide for the organizations'
shift from R & D to commercialization and to provide for the growth of
operations. Management has budgeted for this trend and expects the trend will
continue until cash flow from sales is realized allowing JAWS to reduce the
trade accounts in a more timely fashion.
JAWS has not established any lines of credit outside of trade accounts and
will not be in a position to negotiate any lines of credit until sales contracts
have been validated and matured. JAWS has not used any debt instruments to date
due to its early stage of operations, other than long term capital leases and
convertible debentures which have recently been converted to equity. (See Form
8K dated December 2, 1999 and the 8K amendment filed December 7, 1999 for
additional information on the conversion of the convertible debentures).
FINANCING
On September 25, 1998, JAWS entered into a $2,000,000, 10% Convertible
Debenture Agreement with Thomson Kernaghan and 1,428,572 warrants to purchase
1,428,572 common shares at $0.28 per common share. The Thomson Kernaghan
warrants expire on October 31, 2002 and may be exercised in whole or in part,
from time to time, prior to October 31, 2002 in accordance with the terms of the
Thomson Kernaghan warrants and the amended debenture agreement. The Thomson
Kernaghan warrants are assignable, and non-callable. Around this time JAWS also
entered into an agreement with Bristol Asset Management LLC ("Bristol") whereby
JAWS was given the right to obligate Bristol to buy up to 25,000,000 shares of
Common Stock for up to $7,000,000 in "put" options.
On April 20, 1999, JAWS signed a settlement agreement with and in
consideration of the cancellation of the previous financing arrangement JAWS has
granted warrants to Bristol to purchase 1,000,000 shares of the common stock of
JAWS at $0.70 USD, expiring April 15, 2002. The cancellation of this financing
will not have an immediate impact on JAWS' plan of operation.
On April 27, 1999, JAWS and Thomson Kernaghan amended the debenture
agreement, increasing the amount available to $5,000,000. $1,520,000 of the $5
million available under the amended debenture agreement was advanced in
accordance with the terms of debentures issued by JAWS.
On November 17, 1999, JAWS executed a Debenture Acquisition Agreement Amendment
and Settlement Agreement with Thomson Kernaghan, (the "Settlement Agreement") in
order to settle the outstanding obligations of the parties relating to the
$5,000,000 Debenture Acquisition Agreement dated September 25, 1998, as amended
on April 27, 1999.
The Settlement Agreement settles the conversion terms of the $1,520,000
advanced under Debenture Agreement and the exercise of outstanding warrants
issued under the Debenture Agreement and terminates all further obligations
related to the Debenture Agreement.
Debentures issued pursuant to the Debenture Agreement have been converted
to 5,127,672 restricted shares.
Thomson Kernaghan has exercised all of the outstanding warrants issued pursuant
to the Debenture Agreement for the issuance of 2,180,220 shares in the common
stock of JAWS.
The parties have signed a mutual release.
RECENT DEVELOPMENTS
FINANCING AFTER SEPTEMBER 30, 1999
On October 28, 1999, JAWS sold 283,000 shares of JAWS Common Stock at
U.S.$1.50 per share for an aggregate investment of U.S.$424,500 to Striker
Capital, in a private placement.
On November 24, 1999, JAWS sold 411,765 shares of JAWS Common Stock at
U.S.$1.70 per share to Heronwood, Ltd. for an aggregate investment of
U.S.$700,000 in a private placement. Further, the sale included 411,765
warrants to purchase 411,765 shares of JAWS Common Stock at U.S.$1.70 per share
until November 1, 2002.
It is anticipated that on or about December 15, 1999, JAWS will sign a
placement agency agreement with Smallcaps Online LLC and Thomson Kernaghan with
respect to a private placements of units for an aggregate of between
U.S.$8,500,000 and U.S.$10,625,000. Under the provisions of this agreement,
units consisting of one share of JAWS Common Stock and a warrant to purchase
of one share of JAWS Common Stock at a price of U.S.$6.50 per share, which
warrants expire upon the third anniversary of the effective date of the JAWS
registration statement relating to these securities. The units are to be sold,
on a best efforts basis, at a price of U.S.$4.25 per unit. The private
placement is expected to close on December 17, 1999, unless otherwise extended
by JAWS. The warrants are callable after the effective date of the applicable
JAWS registration statement at U.S.$0.001 upon 30 days notice if the closing
price of shares of JAWS Common Stock exceeds U.S.$9.75 for 30 consecutive
trading days. The exercise price of the warrants is to be discounted in the
event that the applicable JAWS registration statement is not declared effective
within certain time periods.
Further, on the closing date, JAWS will issue warrants to Smallcaps Online
LLC and Thomson Kernaghan entitling the holders thereof to acquire shares of
JAWS Common Stock at U.S.$4.25 per share for a period of three years from the
effective date of the JAWS registration statement. The number of warrants to be
issued is to be 10% of the total number of units sold pursuant to the private
placement.
JAWS believes, based on its current operating plan, that its current
available cash balances, and additional funds expected to be raised through the
Private Placement Memorandum to be sufficient to fund its operations through the
next 12 months.
No assurance can be given, however, that JAWS will be successful in
obtaining financing on terms acceptable to the Company, if at all. Should the
Company fail to obtain any such financing, or to obtain such financing on terms
favorable to JAWS, JAWS may be unable to continue with its business plan, to
commercialize its products or continue its current operations as presently
conducted, if at all, beyond December 31, 2000. JAWS' cash requirements may
vary materially from those now planned because of factors such as acquisitions,
product development, geographical expansion, and costs related to the growth of
operations.
ACQUISITION OF PACE
Effective as of November 3, 1999, JAWS acquired 100% of the issued and
outstanding common shares of Pace Systems Group Inc. ("Pace") in exchange for a
maximum issuance of 1,731,932 shares of JAWS Common Stock, valued at U.S.$1.70
per share, to be released over a period of two years. JAWS, considering the
value of all of the assets of Pace, including the physical assets reported on
the audited financial statements of Pace dated July 31, 1999, historical
revenues, customer lists, goodwill, leases, key employees and other assets,
determined the value of Pace to be U.S.$2,944,284. Such a valuation represents
an amount equal to 2.29 times the gross revenues of Pace for the fiscal year
ended July 31, 1999. However, according to the applicable share purchase
agreements, the final purchase price for the Pace common shares is dependent
upon certain performance and revenue targets of four key employees.
Pace was incorporated under the laws of the Province of Ontario on August 15,
1986 under the name of Pace Systems Group Inc. The registered office and head
office of Pace is located at 307, 1 Concord Gate, Don Mills, Ontario M3C 3N9.
Pace is a private company with a history of providing financial information
technology security solutions to retailers and large financial organizations in
North America and Europe. More specifically, Pace offers services in the area
of payment systems, including point of sale automated banking machine electronic
funds transfer switch implementation, point of sale application and device
integration, network architecture and design, system integration and project
management. With the acquisition of Pace, JAWS retained several highly
qualified financial information and technology specialists who have developed
relationships with clients including several large Canadian banks and
international banks, Sun Life Trust, Interac, ING Direct, SNS Assure, Future
Shop and Grand & Toy. Four key specialists have agreed to continue their
employment with Pace for a period of at least 24 months while the other
specialists are engaged by Pace as consultants. The total number of specialists
varies between 10 and 20 individuals.
Pace has worked with most of the major financial institutions of Canada with
respect to the development of retail banking systems. As a result, it has
extensive knowledge of the electronic payment technology currently in place in
Canada. Pace also has a broad familiarity with most electronic payment
technologies and has strategic, formal and informal, working relationships with
Compaq/Tandem, Oracle, ACI and others. Such relationships are based upon Pace
gaining knowledge of the products of these companies and assisting clients in
implementing solutions. As a result, Pace is currently one of the few Canadian
companies with the capability to evaluate, recommend, integrate, implement,
source and operate a variety of technologies and assist clients in delivering
improved electronic commerce products and services to their clients.
Pace has specialized knowledge with respect to Interac and currently offers
implementation and business expertise to retailers, financial institutions and
third party processors with respect to the connection of such companies to
their banks or similar service providers or as a Direct Connector to the Interac
network.
Other services which Pace provides include pre-sales support to assist with
the customization of sales efforts for prospective clients, software
development, device certification (primarily with respect to the certification
of "Secure PIN Entry Devices", as defined in the regulations of Interac) and
testing, hardware and software vendor proposal evaluation, creation of requests
for information or proposals to be distributed by the client to prospective
hardware and software vendors, systems implementation, facilities management,
post implementation support, user and technical documentation, user training,
general consulting and year 2000 conversion and testing.
PENDING OFFSITE ACQUISITION
JAWS, through its wholly-owned subsidiary JAWS Acquisition Corp. (the
"JAC"), is offering to purchase all of the outstanding common shares of
("Offsite Shares") and common share purchase B warrants of Offsite ("Offsite
Warrants") upon the terms and subject to the conditions described in an Offer to
Purchase (the "Offer") dated December 9, 1999. The Offer is made on the basis
of 0.3524 of an exchangeable share in the capital of JAC (an "Exchangeable
Share") for each Offsite Share and one Exchangeable Share purchase warrant of
JAC (a "JAC Warrant") for each Offsite Warrant. Each whole Exchangeable Share
will be exchangeable for one share of the common stock of JAWS ("JAWS Common
Stock"). Each JAC Warrant will have substantially the same terms and conditions
as the corresponding Offsite Warrant except that instead of receiving an Offsite
Share upon exercise, the holder will receive 0.3524 of an Exchangeable Share.
The JAC Warrants may not be exercised in the United States or by or on behalf of
U.S. Persons. The Exchangeable Shares and the JAC Warrants may be resold
provided that no offer of the Exchangeable Shares is made to a person in the
United States and such sale is not accompanied by any directed selling efforts
in the United states, and either (a) at the time the buy order is originated,
the buyer is outside the United States and the seller or any person acting on
the seller's behalf reasonably believe the buyer is outside the United States,
or (b) the transaction is executed through the facilities of a Canadian stock
exchange and neither the seller nor any person acting on its behalf knows that
the transaction has be prearranged with or on behalf of a buyer in the United
States. Jaws does not expect that the Exchangeable Shares will be listed on any
stock exchange in Canada or elsewhere. Persons who hold both Offsite Shares and
Offsite Warrants will be treated for the purpose of the Offer as having
exchanged their Offsite Shares and Offsite Warrants for a combination of
Exchangeable Shares and JAC Warrants as a single exchange rather than two
separate exchanges.
According to the securityholders lists of Offsite, as at November 22, 1999
there were 13,285,728 Offsite Shares and 1,818,550 Offsite Warrants outstanding.
Each Offsite Warrant entitles the holder to acquire one Offsite Share at a
purchase price of $0.40n CDN per share. As of December 15, 1999, there are
21,326,945 shares of JAWS Common Stock outstanding and one common share of JAC
outstanding. Assuming that all of the outstanding Offsite Shares (including
Offsite Shares issuable upon exercise of all outstanding options, warrants or
other rights) are tendered in acceptance of the Offer and JAC takes up and pays
for such Offsite Shares, JAC will issue approximately 6,012,769 Exchangeable
Shares. Assuming that all of the holders of Exchangeable Shares exchange their
Exchangeable Shares for shares of JAWS Common Stock, JAWS will issue
approximately 6,012,769 shares of JAWS Common Stock.
The holders of Exchangeable Shares will be entitled to dividends and other
economic rights equivalent to those of shares of JAWS Common Stock and will be
entitled, through a voting trust, to vote at meetings of the shareholders of
JAWS. Each holder of the Exchangeable Shares and JAC Warrants may resell their
Exchangeable Shares or JAC Warrants only in accordance with Regulation S, or
pursuant to an applicable securities law exemption. Pursuant to the resale
provisions of Regulation S, a holder (other than a holder who is an affiliate of
JAC by virtue of a relationship other than as a director or officer thereof) of
Exchangeable Shares or JAC Warrants may resell such shares through the
facilities of a recognized Canadian stock exchange provided that (a) such sale
is not accompanied by any directed selling efforts in the United States and (b)
neither the seller nor any person acting on its behalf knows that the
transaction has been prearranged with or on behalf of a buyer in the United
States (with additional conditions imposed upon directors and officers of JAC).
Jaws does not expect that the Exchangeable Shares will be listed on any stock
exchange in Canada or elsewhere. The Exchangeable Shares issued in connection
with the Offer and upon exercise of the JAC Warrants may not be exchanged for
shares of JAWS Common Stock until a registration statement registering the
issuance of the JAWS Common Stock upon the exchange is effective. JAWS has
agreed that it will file a registration statement with the United States
Securities and Exchange Commission (the "SEC") no later than 30 days after the
first anniversary of the completion of the acquisition of any of the remaining
Offsite Shares not tendered pursuant to the Offer. The JAC Warrants may not be
exercised in the United States or by or on behalf of the U.S. Person.
The Exchangeable Shares are designed to provide an opportunity for holders of
Offsite Shares and Offsite Warrants to achieve a Canadian tax deferral in
certain circumstances provided a joint tax election is filed on a timely basis.
Persons who only hold Offsite Warrants and exchange their Offsite Warrants for
JAC Warrants as part of the Offer will not be eligible to make such a joint tax
election. Such persons may consider exercising their Offsite Warrants and
tendering their Offsite Shares to the Offer so that they become eligible for a
Canadian tax deferral upon filing a joint tax election with the Offeror.
Each of the founders and principal shareholders of Offsite, has agreed to tender
his Offsite Shares (representing approximately 40% of the outstanding Offsite
Shares) and Offsite Warrants in acceptance of the Offer. Under the terms of the
agreements with these individuals, these securities may not be withdrawn from
the Offer.
The Offer to purchase Offsite Shares and Offsite Warrants is subject to certain
conditions, including but not limited to, that no change occurs in the business,
capitalization or financial condition of Offsite that is materially adverse and
that there are validly deposited under the Offer and not withdrawn at least 90%
of the outstanding Offsite Shares (calculated on a diluted basis) and 90% of the
outstanding Offsite Warrants.
JAC reserves the right to withdraw or terminate the Offer and not take up
and pay for, or to extend the period of time during which the Offer is open and
postpone taking up and paying for, any Offsite Shares or Offsite Warrants
deposited under the Offer unless all of the conditions contained in the Offer
are satisfied or waived by JAC.
JAWS ACQUISITION CORP ("JAC")
JAC is a wholly-owned subsidiary of JAWS and was incorporated under the
Business Corporations Act (Alberta) on November 24, 1999 for the purpose of
making the Offer. JAC has no material assets, capital or liabilities and no
operating history. JAC's registered office is located at 4500, Bankers Hall
East, 855 - 2nd Street S.W., Calgary, Alberta T2P 4K7 and its head office is
located on the second floor at 1013 - 17th Avenue S.W., Calgary, Alberta T2T
0A7.
OFFSITE'S CORPORATE HISTORY
Offsite was incorporated on January 10, 1995 under the name of 638279
Alberta Ltd. By articles of amendment dated June 1, 1995, the name of the
corporation was changed to Offsite Data Services Ltd. The registered office of
Offsite is located at 1600, 407 - 2nd Street S.W., Calgary, Alberta T2P 2Y3 and
its principal business office is located at 301, 630 - 8th Avenue S.W., Calgary,
Alberta T2P 1G6.
Offsite is a Calgary-based company in the internet based data storage
management industry. It is a service provider of on-line data storage
management. For a monthly fee, Offsite offers secure, fully automated on-line
backup, retrieval and storage services through the internet from its data centre
in Calgary.
Offsite has entered an international software license distribution
agreement with Beta Systems of Canada Ltd. (formerly Harbor Systems Management
Ltd.) for HarborTM back-up and protection for distributed data software, version
5.0 (the "HarborTM Software") for a five-year period commencing August 16, 1998,
with a five-year renewal option. The HarborTM Software consists of four
components:
(a) HarborTM Backup Host, which provides overall control and management of
all the back-up and archive activities of the client, is located on a centrally
located mainframe (MVS) computer;
(b) HarborTM Client, which resides on the client's computer and communicates
with the back-up host at the mainframe (MVS) computer and coordinates back-up
and archiving of data service requests;
(c) HarborTM Distributed Storage Services, which allow local area networks
or multiple networked personal computers the ability to back-up and restore
data; and
(d) HarborTM Transport Gateway, which provides high-speed communication
among a wide variety of local area network and wide area network protocols.
Offsite Shares trade on the Canadian Venture Exchange ("CDNX") under the
symbol "OS" and the Offsite Warrants trade on the CDNX under the symbol "OS.WT".
BENEFITS TO OFFSITE ACQUISITION
The integration of the two companies will increase the competitive
advantages of both JAWS and Offsite through consolidation of skills, resources
and technologies. The combination of the Company's current and future security
products with Offsite's vaulting technology will allow the Company's
shareholders to participate in the innovation of market-lead data vaulting and
security software, thus increasing the market share within the Company's
targeted market verticals, increasing the brand loyalty for the Company's
products and services, and adding value for current and future Company and
Offsite clientele.
SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table sets out certain consolidated financial information for
JAWS, Pace and Offsite as well as certain pro forma consolidated financial
information after giving effect to the Offer and certain other adjustments. THE
FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS OF JAWS SET FORTH IN APPENDIX A TO THE
CIRCULAR. THE INFORMATION PRESENTED BELOW AND IN APPENDIX A ASSUMES ALL THE
OFFSITE SHARES (INCLUDING OFFSITE SHARES ISSUABLE UPON EXERCISE OF ALL
OUTSTANDING COMMON SHARE PURCHASE A WARRANTS OF OFFSITE) ARE TENDERED IN
ACCEPTANCE OF THE OFFER, JAC TAKES UP AND PAYS FOR SUCH OFFSITE SHARES AND ALL
EXCHANGEABLE SHARES ARE EXCHANGED FOR SHARES OF JAWS COMMON STOCK.
<TABLE>
<CAPTION>
JAWS PACE OFFSITE PRO FORMA
(As at or for the (As at or for the (As at or for the CONSOLIDATED
nine month period nine month period nine month period (As at or for
the nine
ended September ended September ended September month period ended
30, 1999 30, 1999 30, 1999) September 30, 1999)
(unaudited) (unaudited) (unaudited) (unaudited)
----------- -----------
<S> <C> <C> <C> <C>
(U.S.$000s)
Revenue . . . . . . . . . . . . . 373 667 160 1,200
Net loss for the period . . . . . (4,205) (361) (446) (7,994)
Total assets. . . . . . . . . . . 2,177 127 399 18,314
Long-term debt. . . . . . . . . . 1,172 - 1 82
Shareholders' equity (deficiency) (92) (54) 313 15,865
</TABLE>
MANAGEMENT CHANGES
Effective November 30, 1999, Cameron Chell submitted his resignation to
JAWS which was accepted by the Company's board. As at November 30, 1999, JAWS
has four board members: Robert Kubbernus, Julia Johnson, Arthur Wong and Riaz
Mamdani.
RISK FACTORS
In addition to the risk factors set out below, please see risk factors as
set forth in it Form 10-SB effective November 1, 1999 previously filed.
NO ASSURANCE OF COMPLETION OF OFFSITE ACQUISITION
The agreement to acquire Offsite provides a number of conditions precedent
to closing the transaction, including, but not limited to, regulatory approval
from regulatory bodies, at least 90% of the outstanding Offsite Warrants and
Offsite shares being tendered and other conditions. There can be no assurance
that JAWS or Offsite will be able to meet all of these conditions precedent, or
even if the companies meet such obligations, that other unforeseen circumstance
might obstruct the closing of the proposed transaction.
RISKS ASSOCIATED WITH RECENT AND PROPOSED ACQUISITIONS
With the recent acquisition of Pace, and if the Offsite acquisition is
successfully concluded, there can be no assurance that JAWS will be able to
profitably manage or successfully integrate the acquired assets and personnel
without substantial expenses, delays or other operational or financial problems.
The acquisitions will involve the recognition of goodwill which will be
amortized as a charge to operations over the next 3 years. Furthermore, these
acquisitions may involve additional risks or effects, including diversion of
management's attention, failure to retain key acquired personnel, unanticipated
events or circumstances, legal liabilities and other one-time or ongoing
acquisition related expenses, some or all of which could have a material adverse
effect on the Company's business, operating results and financial condition.
Client satisfaction or performance problems of the acquired businesses, if any,
could have a material adverse impact on the reputation of JAWS as a whole.
These acquisitions involve JAWS adding offices in other geographical locations
which will add further responsibilities to JAWS' existing management structure.
There is no assurance that JAWS' acquisition of Pace, and the proposed
acquisition of Offsite, if successful, will result in the generation of
anticipated revenues and earnings.
JAWS AND ITS SUBSIDIARIES HAVE LIMITED OPERATING HISTORIES AND CONTINUED
OPERATING LOSSES
With the exception of newly acquired Pace, JAWS and its subsidiaries have
short operating histories, a limited number of sales and operating revenues
which are not significant. For example, JAWS Canada was incorporated on
September 19, 1997, did not begin producing software until October 1997 and did
not begin marketing software until May 1998. Investors of Units will have little
meaningful information about JAWS or its subsidiaries to assist in evaluating
whether JAWS or its subsidiaries will ever be able to successfully produce and
market its software or whether an investment in JAWS will be profitable or
unprofitable.
Because of JAWS Canada's short operating history and limited sales, it
faces all the risks and problems associated with a new business, including the
existence of operating losses. For example, between the time of the
incorporation of JAWS and September 30, 1999, JAWS and JAWS Canada have, on a
consolidated basis, incurred cumulative losses of US$7,052,276. JAWS anticipate
that losses with respect to JAWS Canada will continue in the future unless JAWS
Canada it is able to produce revenue from sales of its software.
With respect to Pace, although Pace began operations in 1986, it has only
achieved profitability over the past year. JAWS cannot be certain that Pace can
sustain such profitability in any future period. Potential Investors should be
aware that Pace operates in a new and rapidly evolving market and must respond
to competitive developments, continue to upgrade and expand the services it
offers and continue to attract, retain and motivate employees in order to
maintain its profitability.
JAWS cannot predict future revenues and operating results of Pace nor can it
predict Pace's operating expenses based on previous results for a number of
reasons including the factors described below. The revenues associated with a
particular sale may vary significantly depending upon the number of products
licensed by a client, the number of devices used by the client and the client's
relative need for Pace's services. Large individual sales or even small delays
in customer orders can cause significant variation in licensing revenues and
results of operations for a particular period. In addition, JAWS expects Pace
to increasingly focus its efforts on the sale of enterprise-wide security
solutions, including JAWS Canada's entire product suite and Pace's related
services, as opposed to the sale of component products. As a result, JAWS
anticipates that each sale made by Pace may require additional time and effort
from sales staff. Further, JAWS expects Pace to expand upon the services it
provides as well as its sales and marketing operations and to improve its
internal operating and financial systems. Finally, to enhance Pace's market
share and the services it offers, JAWS intends to seek additional candidates for
acquisition. As a result, spending levels for Pace will be established by JAWS
based, in large part, on expected future revenues. If Pace's actual results in
any future period fall below the expectations of JAWS and Pace, the operating
results of JAWS and Pace will be adversely affected. Due to these factors, JAWS
anticipates that Pace's quarterly and annual revenues, expenses and operating
results will vary significantly in the future.
AUDITORS HAVE ISSUED A GOING CONCERN OPINION
The consolidated audited financial statements of JAWS include a statement
that the recurring losses of JAWS from operations and net capital deficiency
raise substantial doubts about the ability of JAWS to continue as a going
concern. While JAWS continues to pursue funding to continue its subsidiaries'
operations, the financing terms may not be favorable for JAWS; further, there is
no guarantee that JAWS will cease to have recurring losses from operations or
cease to have a net capital deficiency in the near future.
PROCEEDS FROM AVAILABLE FINANCING MAY NOT BE SUFFICIENT
Developing, manufacturing and marketing software and information security
solutions and the plans of JAWS for expansion of its subsidiaries, as mentioned
above, will require significant amounts of capital. Since JAWS and its
subsidiaries have no significant internal revenues to finance the subsidiaries'
continuing operations and plans for expansion, JAWS and its subsidiaries are
dependent upon the proceeds from sales of JAWS securities to satisfy its capital
requirements. JAWS believes that it has adequate financing to satisfy its
subsidiaries' capital requirements for 12 months. After 12 months, JAWS will
have to arrange for additional financing, unless its subsidiaries are generating
revenues from their products and services, to finance the subsidiaries'
manufacturing and marketing operations at a sufficient level. Financing options
could include, but will not be limited to, additional sales of JAWS securities
or an operating line of credit. If JAWS is unable to obtain additional
financing on satisfactory terms when needed, JAWS' subsidiaries may have to
suspend their operations or terminate their operations altogether.
JAWS NEEDS TO CONSTANTLY MAINTAIN ITS SOFTWARE AND RELATED PRODUCTS AND
TECHNOLOGY IN ORDER TO REMAIN COMPETITIVE
The success of JAWS and its subsidiaries depends upon, amongst other
things, its proprietary encryption technology. JAWS and its subsidiaries rely on
a combination of contractual rights, copyright, trade secrets, know-how,
trademarks, non-disclosure agreements and technical measures to establish and
protect these rights. JAWS cannot assure Investors that it can protect its
rights and prevent third parties from using or copying its subsidiaries'
technology or intellectual property.
JAWS and its subsidiaries do not presently own any patents or copyright
registrations but it has filed a U.S. patent application for L5TM. However,
there is no guarantee JAWS will be successful and receive a patent.
JAWS believes that its subsidiaries' technologies have been independently
developed and that its subsidiaries do not infringe on the proprietary rights or
trade secrets of others. However, JAWS cannot assure Investors that its
subsidiaries have not infringed on the technologies of third parties or that
third parties will not make infringement violation claims against JAWS or its
subsidiaries. Any infringement claims against JAWS or its subsidiaries may have
a negative effect on JAWS and on its subsidiaries' abilities to produce
software.
International companies currently use all or a portion of the name "JAWS" in
connection with products or services in industries the same as and different
from that of JAWS and its subsidiaries.
THE MARKET MAY NOT ACCEPT THE PRODUCTS AND SERVICES OF JAWS' SUBSIDIARIES
The success of JAWS and its subsidiaries depends on whether or not its
subsidiaries' products and services are accepted in the marketplace. Investors
should be aware that companies introducing new products into the market are
subject to a high level of uncertainty and risk. Because the market for its
subsidiaries' software and services is new and evolving, JAWS cannot predict the
size and future growth rate, if any, of the market. JAWS cannot assure
Investors that the market for its subsidiaries' products and services will
develop or that demand for such products and services will emerge or become
economically sustainable. Market acceptance of its subsidiaries' products and
services depends on its subsidiaries' abilities to establish brand images and
reputations for high quality and to differentiate their products and services
from competitors. There can be no assurance that the products and services will
be perceived as being of high quality or better than products and services of
others, or that the subsidiaries will be successful in establishing their brand
image. Additionally, the management teams of JAWS and its subsidiaries have no
experience manufacturing or marketing software or providing services on a large
scale. This lack of experience could result in the failure of the subsidiaries
to sell their products and services.
JAWS MAY NOT BE ABLE TO KEEP PRODUCTS, SERVICES AND TECHNOLOGY CURRENT AND
COMPETITIVE
Rapid advances in technology cause significant risks that JAWS and its
subsidiaries cannot control or influence the forces behind such changes. In
addition to emerging competition, evolving requirements and needs of clients and
the extent to which hackers and others seek to compromise secure systems, JAWS
and its subsidiaries must adapt to changing computer hardware and software
standards as well as to frequently introduce new products and enhancements to
existing products. The success of JAWS will depend on its subsidiaries' ability
to create, develop, adapt and improve information technology solutions in
response to these and other changes.
JAWS cannot assure Investors that it and its subsidiaries will be able to
successfully identify new opportunities and develop and bring new products and
services to market in a timely manner, nor can JAWS guarantee Investors that
products and services developed by the competitors of its subsidiaries will not
make it or its subsidiaries' products and services noncompetitive or obsolete.
Further, the techniques used by hackers to compromise the security of networks
and intranets are constantly evolving and are increasingly sophisticated.
Because new hacking techniques are usually not recognized until utilized against
one or more targets, JAWS and its subsidiaries are not able to anticipate such
techniques. To the extent that new hacking techniques result in the compromise
of the security systems of JAWS and its subsidiaries, affected clients may
believe that the products and services of the subsidiaries are ineffective and
may affect the business, operating results and financial condition of JAWS and
its subsidiaries.
Because the products and services of JAWS and its subsidiaries involve complex
technology, major new products and product enhancements require a long time to
develop and test before going to market. JAWS cannot assure Investors that its
subsidiaries will have the capital resources or the ability to implement any new
technology or service. In addition, because it is difficult to estimate the
amount of time which is required to develop new products and product
enhancements, JAWS Canada has had to delay the scheduled introduction of new and
enhanced products in the past and the subsidiaries of JAWS may have to delay the
introduction of new products, enhancements and services in the future. Any
failure by the subsidiaries to timely develop and introduce new products and
services or enhance current products and services could adversely affect the
business, operating results and financial condition of JAWS and its
subsidiaries.
DEFECTS COULD MATERIALLY AND ADVERSELY EFFECT JAWS' BUSINESS
Many organizations use the products and services of the subsidiaries of
JAWS for critical functions of monitoring and enhancing network security. As a
result, JAWS' subsidiaries risk product liability and related claims for
products and services if they do not adequately perform this function. The
subsidiaries of JAWS typically seek to limit liability for special,
consequential or incidental damages in their licensing agreement but these
provisions may not in all cases be enforceable under applicable laws. A product
liability claim, to the extent not covered by insurance, could materially and
adversely affect the business, operating results and financial condition of JAWS
and its subsidiaries.
In addition, complex software products, such as those developed by JAWS
Canada and Pace, may contain undetected "bugs" that, despite testing, are
discovered only after installation and use by clients. Such bugs could result in
adverse publicity, loss of or delay in market acceptance or claims by clients
against JAWS and its subsidiaries, any of which could have a material adverse
effect upon the business, operating results and financial condition of JAWS and
its subsidiaries. Clients who deploy or use products improperly or incompletely
may experience temporary disruptions to their computer networking systems, which
could damage the reputation of JAWS and its subsidiaries of JAWS and the
relationship of such subsidiaries with clients. Current products may not be
error-free and it is extremely doubtful that the future products of JAWS'
subsidiaries will be error-free. Furthermore, computers are manufactured in a
variety of different configurations with different operating systems, such as
Windows, Unix, Macintosh and OS/2, and embedded software. As a result, it is
very difficult to comprehensively test software products for programming or
compatibility errors. Errors in the performance of the products of JAWS'
subsidiaries, whether due to design or their compatibility with products of
other companies, could hinder the acceptance of such products, and thus the
subsidiaries' ability to implement those products.
THE YEAR 2000 MAY ADVERSELY AFFECT OUR COMPUTER SYSTEMS AND THIRD PARTY COMPUTER
SYSTEMS
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the year 2000. Some older computer systems
store dates with only a two-digit year with an assumed prefix of "19", which
limits those older systems to dates between 1900 and 1999. If not corrected,
many computer systems and applications could fail or create erroneous results by
or at the year 2000.
JAWS and its subsidiaries have assessed the scope of their risks related to
the problems these computer systems may have related to the year 2000 and
management of the subsidiaries believe that such risks are not significant. In
addition, JAWS and its subsidiaries are in the process of questioning their
vendors and business partners about their progress in identifying and addressing
problems related to the year 2000. However, no assurance can be given that all
of these third party systems or the computer systems of JAWS or its subsidiaries
will be year 2000 compliant. (For more year 2000 disclosure see JAWS 10-SB
registered November 1, 1999)
The principal software products of the subsidiaries of JAWS are year 2000
compliant. However, because these products are designed to work with other
software products developed and sold by third parties, any failure of these
third party software products to be year 2000 compliant could result in the
failure of the software products of the subsidiaries to effectively operate.
Any such failure could harm the reputation of JAWS and its subsidiaries in the
market and could have an adverse effect on sales of their products and financial
performance.
JAWS CANADA MAY NOT BE ABLE TO COMPETE
The market for the type of encryption software JAWS Canada has designed is
extremely competitive and management expects that competition will increase in
the future. JAWS Canada's competitors include many large companies that have
substantially greater market presence and financial resources than JAWS Canada
or JAWS. For example, JAWS Canada will compete with RSA Data Security Inc. and
Network Associates, national accounting firms, systems consulting and
implementation firms, application software firms, service groups of computer
equipment companies, facilities management companies, general management
consulting firms and programming companies and other national, regional and
local companies, for a greater share of the encryption software market. The
ability of JAWS Canada to compete successfully depends on a number of factors
including:
(a) the design of high performance and quality encryption software;
(b) the development of a market presence;
(c) the timely delivery of JAWS Canada's encryption software;
(d) the establishment of competitive pricing policies for its products and
services;
(e) the timing and introduction of JAWS Canada's products and services into
the market; and
(f) JAWS Canada's ability to keep up with existing and emerging industry
trends.
Current or increased competition may either prevent JAWS Canada from entering,
or maintaining, a place in the encryption software production market. JAWS
cannot guarantee that JAWS Canada will have the financial resources or marketing
and manufacturing capabilities to compete successfully in the encryption
software production market. If JAWS Canada cannot successfully compete, JAWS
will probably be forced to terminate JAWS Canada's operations.
PACE MAY NOT BE ABLE TO COMPETE
The market for network security monitoring, detection and response
solutions is intensely competitive and Pace expects competition to increase in
the future. JAWS cannot guarantee that Pace will compete successfully against
current or potential competitors, especially those with significantly greater
financial resources or brand name recognition. Increased competition may result
in price reductions, reduced gross margins and loss of market share for Pace.
The competitors of Pace generally fall within one of four following categories:
(a) internal information technology departments of clients and the
consulting firms that assist them in formulating security systems;
(b) relatively small software companies offering relatively limited
applications for network and internet security;
(c) large companies, including Axent Technologies and Network Associates,
that currently sell competitive products and services as well as other large
software companies that have the technical capability and resources to develop
competitive products; and
(d) software or hardware companies that could integrate features that are
similar to the products of Pace into their own products.
Mergers or consolidations among these competitors, or acquisitions of small
competitors by larger companies, would make such combined entities more
formidable competitors to Pace. Large companies may have advantages over Pace
because of their longer operating histories, greater name recognition, larger
customer bases or greater financial, technical and marketing resources. As a
result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. Such companies can also devote greater
resources than Pace to the promotion and sale of their products.
JAWS' MARKETING STRATEGIES MAY BE UNSUCCESSFUL
JAWS expects JAWS Canada and Pace to derive some of their sales revenue
through independent third parties who will either resell or use JAWS Canada's
products to enhance their own products. JAWS is unable to determine how
successful these providers will be in selling JAWS Canada's software.
Furthermore, JAWS Canada and Pace do not have any history or experience in
establishing or maintaining such third party support, and there can be no
assurance that they will be able to successfully support their reseller
networks. If JAWS Canada and Pace are unable to provide such support, they may
lose resellers and, consequently, distribution of JAWS Canada's products would
be adversely affected. Additionally, most resellers will offer competitive
products manufactured by third parties. There can be no assurance that
resellers will give priority to JAWS Canada's products and services over
competitors' products and services. Finally, if JAWS Canada and Pace are unable
to support a reseller, they will need to attract additional or replacement
resellers to sell JAWS Canada's products and services. There can be no
assurance that JAWS Canada and Pace will be able to convince a sufficient number
of additional or replacement resellers in order to assure that their products
and services will be successfully marketed and distributed at a profit or that
such additional or replacement resellers will be successful in selling their
products and services. Any reduction or delay in sales of products and services
of JAWS Canada and Pace, their resellers will have a material adverse effect on
the business, operating results and financial condition of JAWS and its
subsidiaries.
JAWS AND ITS SUBSIDIARIES MAY NOT SUCCESSFULLY EXPAND PRODUCTION AND
DISTRIBUTION CAPACITIES
JAWS Canada must increase its software production capacity and expand its
marketing network to sell its software before it will have a chance to compete
in the marketplace. Increasing JAWS Canada's manufacturing, service and
marketing capacity will involve hiring additional personnel, purchasing
additional manufacturing equipment and spending significant funds on
advertising. The foregoing will require significant capital expenditures, which
will most likely increase JAWS Canada's and JAWS' operating losses for an
indefinite period of time. JAWS Canada's expansion plans will also place a
great deal of strain on its management team, most of whom have not had
experience managing large complex business operations. JAWS cannot guarantee
that JAWS Canada will be able to expand its software production, service and
marketing capabilities as planned. If any of these obstacles prevent JAWS
Canada from expanding its software production, service and marketing business,
JAWS may be forced to terminate JAWS Canada's operations.
Although direct sales have accounted for a majority of Pace's revenues in
1999, Pace's future performance will depend, in part, upon its ability to
attract new partners and develop additional distribution channels to effectively
market and support its services and the products of JAWS Canada. JAWS cannot
guarantee that Pace will be able to attract such partners or develop additional
distribution channels.
JAWS AND ITS SUBSIDIARIES DEPEND ON KEY PERSONNEL
The success of JAWS and its subsidiaries depends on the efforts of its
management team. JAWS and its subsidiaries have one-year employment agreements
with their respective key employees, but JAWS cannot guarantee that these
persons will continue their employment. The loss of the services of one or more
of the key people may have a negative effect on the ability of JAWS and its
subsidiaries' ability to conduct their operations.
The success of JAWS and its subsidiaries also depends on their ability to
attract and retain highly qualified engineers, managers, marketers and sales and
service personnel. The competition for employees at all levels of the
information security industry, especially those with experience in the
relatively new discipline of security software, is increasingly intense and
JAWS cannot assure that it, and its subsidiaries, will be able to hire or retain
necessary personnel.
THE MARKET FOR JAWS SECURITIES IS LIMITED
There is currently only a limited trading market for JAWS' Common Stock.
JAWS' Common Stock trades on the OTC Bulletin Board under the symbol "JAWZ,"
which is a limited market in comparison to the Nasdaq system or the American
Stock Exchange.
JAWS cannot assure Investors that JAWS Common Stock will ever qualify for
inclusion for quotation on the Nasdaq Small Cap Stock Market or that more than a
limited market will ever develop for JAWS Common Stock.
STOCK PRICE FLUCTUATIONS CAN BE VOLATILE
Stock markets are subject to significant price fluctuations which may be
unrelated to the operating performance of particular companies and the market
price of JAWS' Common Stock may frequently change. The market price of JAWS'
Common Stock could also fluctuate substantially due to a variety of other
factors, including: quarterly fluctuations in results of operations of JAWS and
its subsidiaries, JAWS' ability to meet analysts' expectations, adverse
circumstances affecting the introduction of market acceptance of new products
and services offered by the subsidiaries of JAWS, announcements of new products
and services by competitors, changes in the information technology environment,
changes in earnings estimates by analysts, changes in accounting principles,
sales of JAWS Common Stock by existing holders and loss of key personnel.
PENNY STOCK RULES MAY LIMIT THE LIQUIDITY OF JAWS COMMON STOCK
JAWS' Common Stock has recently traded on the OTC Bulletin Board at a price
greater than US$5.00 per share but may now and in the future be subject to the
penny stock rules under the Exchange Act. These rules regulate broker-dealer
practices for transactions in "penny stocks". Penny stocks generally are equity
securities with a price of less than US$5.00. The penny stock rules require
broker-dealers to deliver a standardized risk disclosure document prepared by
the Securities and Exchange Commission that provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson and monthly account statements showing the market value of each
penny stock held in the customer's account. The bid and offer quotations, and
the broker dealer and salesperson compensation information, must be given to the
customer orally or in writing prior to completing the transaction and must be
given to the customer in writing before or with the customer's confirmation.
In addition, the penny stock rules require that prior to a transaction, the
broker and/or dealer must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These additional penny stock disclosure
requirements are burdensome and may reduce purchases of this Offering and reduce
the trading activity in the market for JAWS' Common Stock. As long as JAWS'
Common Stock is subject to the penny stock rules, holders of JAWS' Common Stock
may find it more difficult to sell their securities.
AN INVESTMENT IN JAWS MAY BE DILUTED
JAWS may issue a substantial number of shares of JAWS' Common Stock or
preferred stock without Investor approval. Any such issuance of JAWS securities
in the future could reduce an Investor's ownership percentage and voting rights
in JAWS and further dilute the value of his or her investment.
PROTECTING DIRECTORS AND OFFICERS FROM LIABILITY MAY ADVERSELY AFFECT JAWS
The JAWS' articles of incorporation allow it to reimburse its officers and
directors for damages which such directors or officers may be subject to,
including those which result from a breach of fiduciary duties to JAWS
shareholders. The JAWS' Articles also require JAWS to advance money to any
officer or director if the law does not prevent it from doing so. JAWS may
experience significant cash flow problems if JAWS is required to either
reimburse, or advance money to, JAWS officers or directors for such purposes.
JAWS DOES NOT PAY DIVIDENDS
JAWS does not anticipate generating cash flows from its subsidiaries' operations
in the near future. If the subsidiaries generate positive cash flows from
operations, JAWS intends to use those positive cash flows to finance further
growth of the business of its subsidiaries and does not anticipate paying
dividends to JAWS' shareholders. Accordingly, Investors who are interested in
receiving distributions as an investment objective should carefully consider
JAWS' established dividend policy.
JAWS MAY NOT SUCCESSFULLY ADOPT INTERNET NETWORKS
In order for us to be successful, Internet networks must be widely adopted
as a means of trusted and secure communications and commerce within an adequate
time frame. Because trusted and secure communications and commerce over Internet
networks is new and evolving, it is difficult to predict with any assurance the
size of this market and its growth rate, if any. To date, many businesses and
consumers have been deterred from utilizing Internet networks for a number of
reasons, including, but not limited to, potentially inadequate development of
network infrastructure, security concerns, inconsistent quality of service, lack
of availability of cost-effective, high-speed service, limited numbers of local
access points for corporate users, inability to integrate business applications
on Internet networks, the need to interoperate with multiple and frequently
incompatible products, inadequate protection of the confidentiality of stored
data and information moving across Internet networks and a lack of tools to
simplify access to and use of Internet networks. The adoption of Internet
networks, for trusted and secure communications and commerce, particularly by
individuals and entities that historically have relied upon traditional means of
communications and commerce, will require a broad acceptance of new methods of
conducting business and exchanging information. Companies and government
agencies that already have invested substantial resources in other methods of
conducting business may be reluctant to adopt a new strategy that may limit or
compete with their existing efforts. Furthermore, individuals with established
patterns of purchasing goods and services and effecting payments may be
reluctant to alter those patterns. There can be no assurance that Internet
networks will be widely adopted or adopted by enough people to make our products
successful.
The use of Internet networks for trusted and secure communications and
commerce may not increase or may increase more slowly than expected because the
infrastructure required to support widespread trusted and secure communications
and commerce on such networks may not develop. For example, the Internet has
experienced, and may continue to experience, significant growth in its number of
users and amount of traffic. There can be no assurance that the Internet
infrastructure will continue to support the demands placed on it by this
continued growth or that the performance or reliability of the Internet will not
be adversely affected by this continued growth. In addition, Internet networks
could lose their viability due to delays in the development or adoption of new
standards and protocols to handle increased levels of activity or due to
increased governmental regulation. Changes in or insufficient availability of
communications services to support Internet networks could result in slower
response times and also adversely affect usage of Internet networks. If the
market for trusted and secure communications and commerce over Internet networks
fails to develop or develops more slowly than expected, or if the Internet
infrastructure does not adequately support any continued growth, our business,
operating results and financial condition would be materially adversely
affected.
POTENTIAL ACQUISITIONS INCLUDE INHERENT RISKS
JAWS may acquire or invest in businesses, technologies and product lines
from time to time that are complementary to our business and JAWS currently has
one pending acquisition. Any such acquisitions would be accompanied by the risks
commonly encountered in such transactions, including, among others, the
difficulty of assimilating the operations and personnel of the acquired
businesses, the potential disruption of our ongoing business, the diversion of
our management from our day-to-day operations, our inability to incorporate
acquired technologies successfully into our products and services, the
additional expense associated with amortization of acquired intangible assets,
the potential impairment of our relationships with our employees, customers and
strategic partners, our inability to retain key technical and managerial
personnel of the acquired business and our inability to maintain uniform
standards, controls, procedures and policies. Because of these and other
factors, any such acquisitions, if consummated, could have a material adverse
affect on our business, operating results and financial condition.
EXCHANGE RATE RISKS
JAWS records it transactions and prepares its financial statements in
United States dollars. Any change in the value of, the United States dollar
against the Canadian dollar will affect United States revenues and earnings of
the Company when translated into Canadian dollars.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
1. On September 15, 1999, Jaws sold 141,000 shares of Jaws Common Stock to
Richard H. Langley Jr., an accredited investor, for consulting services
including investor relations, communication and public relations services. The
sale was made in a transaction not involving any public offering in reliance on
the exemption provided by Rule 506 of Regulation D and section 4 (2) of the
Securities Act. The purchaser represented that he was an accredited investor as
defined in Rule 501 of Regulation D and that the securities were acquired for
investment only and not with a view to resale or redistribution.
2. On October 28, 1999, Jaws sold 283,000 shares of Jaws Common Stock at
U.S.$1.50 per share for an aggregate investment of U.S.$424,500 to Striker
Capital, an accredited investor. The sale was made in a transaction in reliance
on the exemption from registration provided by section 3(b) of the Securities
Act and the provisions of Regulation D Rule 504 promulgated under the Securities
Act as well as the exemption from registration in section 109.3 of the Texas
Administrative Code that permits general solicitation and general advertising so
long as sales are made only to "accredited investors" as defined in Rule 501(a).
The investor represented that it was an institutional "accredited investor" as
defined in Rule 501(a)(1),(2),(3) and (7) of Regulation D under the Securities
Act purchasing in the State of Texas for its own account and for investment
purposes and not with a view to or for offer or sale in connection with any
distribution.
3. On November 18, 1999, Jaws issued 94,340 shares of Jaws Common Stock at
U.S.$0.53 per share to Cameron Chell in satisfaction of the U.S.$50,000 fee
payable to Mr. Chell for serving as a director of Jaws in 1998. The issuance
was made in a transaction not involving any public offering in reliance on the
exemption provided by Rule 506 of Regulation D, section 4 (2) of the 1993
Securities Act and Regulation S. Mr. Chell represented that he was not a "U.S.
Person", as such term is defined in Rule 902(k) of Regulation S, that the
securities have not been offered to him in the United States and that offers of
securities of Jaws shall not be made to "U.S. Persons" for a period of one year
from the date of closing.
4. On November 18, 1999, Jaws issued 11,999 shares of Jaws Common Stock at
U.S.$0.53 per share to GROVEJOHNSONWOOD in consideration of services rendered
and in satisfaction of a fee of U.S.$6,298.75 payable to GROVEJOHNSONWOOD
related to interior design services. The issuance was made in a transaction not
involving any public offering in reliance on the exemption provided by Rule 506
of Regulation D, section 4 (2) of the 1993 Securities Act and Regulation S.
GROVEJOHNSONWOOD represented that it was not a "U.S. Person", as such term is
defined in Rule 902(k) of Regulation S, that the securities have not been
offered to it in the United States and that offers of securities of Jaws shall
not be made to "U.S. Persons" for a period of one year from the date of closing.
5. On November 24, 1999, Jaws sold 411,765 shares of Jaws Common Stock at
U.S.$1.70 per share to Heronwood, Ltd. for an aggregate investment of
U.S.$700,000. Further, the sale included 411,765 warrants to purchase 411,765
shares of Jaws Common Stock at U.S.$1.70 per share until November 1, 2002. The
sale was made in a transaction not involving any public offering in reliance on
the exemption provided by Rule 506 of Regulation D, section 4 (2) of the 1993
Securities Act and Regulation S. Heronwood, Ltd. represented that it was not a
"U.S. Person", as such term is defined in Rule 902(k) of Regulation S, that the
securities have not been offered to it in the United States and that offers of
securities of Jaws shall not be made to "U.S. Persons" for a period of one year
from the date of closing.
6. On November 22, 1999 JAWS entered into a private placement agency
memorandum with Thomson Kernaghan and SmallCaps Online LLC ("SmallCaps") to
raise between $8,500,000 and $10,625,000 USD on a best efforts basis, through
the offering of 2,000,000 - 2,500,000 units (the "Units"). The Units are being
sold at $4.25 per Unit and consist of one common share and one warrant to
purchase share of common stock at an exercise price of $6.50. JAWS expects
the Private Placement Memorandum for this offering to be ready for accredited
investor review on December 15, 1999. The offering of the Units is being made
by virtue of Section 4(2) of the 1933 Securities Act and the provisions of Rule
506 of Regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) List of Exhibits
3.1.1 Articles of Incorporation of "E-Biz" Solutions, Inc. (now JAWS US), a
Nevada Corporation was amended on March 11, 1998 and on February 4, 1999.(2)
3.1.2 Articles of Incorporation of JAWS Technology Inc., an Alberta
corporation, dated September 18, 1997.(2)
3.1.3 Certificate of Amendment of Articles of Incorporation , dated March
30, 1998, changing the name of E-Biz to Jaws Technologies, Inc.(2)
3.1.4 Certificate of Amendment of Articles of Incorporation of JAWS
increasing the total number of common stock which JAWS is allowed to issue from
20,000,000 to 95,000,000.(2)
3.2.1 Bylaws of E-Biz Solutions Inc. (now Jaws US) dated January 27,
1997.(2)
3.2.2 Bylaws No. 1 of JAWS Canada dated October 20, 1997 and Bylaw No. 2 of
JAWS Canada dated October 20, 1997.(2)
4.1.1 Amendment No. 1 to Debenture Purchase Agreement by and between JAWS
and Thompson Kernaghan dated April 27, 1999.(2)
4.1.2 Investment Agreement by and between JAWS and Bristol Asset Management
V, LLC dated August 27, 1998 and letter of termination.(2)
4.1.3 Warrant to purchase 1,000,000 shares of common stock of JAWS issued to
Bristol Asset Management, LLC.(2)
4.1.4 Debenture Acquisition Agreement by and between JAWS and Thomson
Kernaghan & Co. Ltd. dated September 25, 1998.(2)
5.1 Opinion of Sonfield & Sonfield.(1)
10.1.1 Lease Agreement by and between JAWS and The Manufacturer of Life
Insurance Company dated December 15, 1997.(Deleted)
10.1.2 Director's Agreement between JAWS and Arthur Wong dated July 1998.(2)
10.1.3 Director's Agreement between JAWS and Julia Johnson dated July 30,
1998.(1)
10.1.4 Incentive and Non-Qualified Stock Option Plan for JAWS.(2)
10.1.5 Master Agreement by and between JAWS and A.I. Axion Internet
Communications, Inc. dated November 24, 1998. - Deleted
10.1.6 Master Agreement by and between JAWS and Calgary On-Line dated
December 1998. - Deleted
10.1.7 Master Agreement by and between JAWS and ABC Internet Inc. dated
December 7, 1998. - Deleted
10.1.8 Alliance Agreement with Glentel Inc. (1)
10.1.9 Letter Agreement between JAWS and Arrow Communications (ApexMail)
dated August 10, 1999. (1)
10.1.10 Addendum to the Letter Agreement between JAWS and ApexMail.net,
dated September 28, 1999. (1)
10.1.11 Resolution and Assignment of JAWS Software Ltd. to JAWS Technologies
Inc, dated October 20, 1997. (1)
10.1.12 Assignment from James L. A. Morrison to JAWS Technologies Inc.,
dated October 9, 1998. (1)
10.1.13 Notification of Assignment from United States Department of
Commerce, Patent and Trademark Office, dated March 15, 1999 (1)
10.1.13 Written Consent of the Board of Directors authorizing payment of
consulting fees to officers of JAWS and their affiliates.(2)
10.1.14 Indemnity Agreements by and between JAWS and Ms. Julia L.
Johnson.(2)
10.1.15 Indemnity Agreements by and between JAWS and Mr. Arthur Wong.(2)
21 Subsidiaries of JAWS: JAWS Technologies, Inc., an Alberta corporation.(2)
23.1 Consent of Sonfield & Sonfield.(included in exhibit 5.1)
23.2 Consent of Ernst & Young LLP.(2)
27 Financial Data Schedule(1)
- -------------------------
(1) Incorporated by reference to Form 10-SB, File No. 000-24963
(2) Incorporated by reference to registration statement on Form SB-2, File
No. 333-65583.
(B) Reports on Form 8-K
JAWS filed a Current Report on Form 8-K on November 15, 1999 to report the
execution of an agreement to acquire all of the outstanding common shares of
Pace Systems Group Inc.
JAWS filed a Current Report on Form 8-K on November 15, 1999 to report the
execution of an agreement to acquire, through JAWS Canada, all of the
outstanding common shares, options and warrants of Offsite Data Services Ltd.
JAWS filed a Current Report on Form 8-K on December 2, 1999 to report the
execution of an a debenture acquisition amendment agreement with Thomson
Kernaghan & Co. Ltd., in order to settle the outstanding obligations of the
parties relating to the $5,000,000 debenture acquisition agreement dated
September 25, 1998, as amended on April 27, 1999.
JAWS filed an Amendment to the Current Report on Form 8-K on December 7, 1999
amending the 8-K filed on December 2, 1999, in order to attach the necessary
exhibits in accordance with Item 601 of Regulation S-K.
JAWS filed an amendment to the Current Report on Form 8-K on December 13, 1999
amending the 8-K filed on November 15, 1999 relating to the offsite acquisition,
in order to report that on December 2, 1999, JAWS Technologies, Inc., entered
into an agreement (the "amendment agreement") with JAWS Acquisition Corp., an
Alberta corporation ("JAC"), JAWS Technologies Inc., an Alberta corporation
("JAWS Canada") and Offsite Data Services Ltd., an Alberta corporation
("Offsite") ("collectively, the "parties") to amend the pre-acquisition
agreement dated November 2, 1999 between JAWS, JAWS Canada, and Offsite dated
November 2, 1999 (the "pre-acquisition agreement").
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.
JAWS TECHNOLOGIES, INC.
By:
Robert J. Kubbernus, Chief Executive Officer
and Chairman of the Board
Date: December ___, 1999
<PAGE>
FINANCIAL DATA SCHEDULE
<TABLE>
<CAPTION>
This schedule contains summary financial information extracted from the financial
statements as of and for the six months ended September 30, 1999. You should read the
financial statements in their entirety for a full explanation of this summary financial
information. (In thousands, except EPS.)
<S> <C> <C>
ITEM NUMBER . ITEM DESCRIPTION AMOUNT
- ------------- --------------------------------------------------------- --------------
5-02(1) . . . Cash and cash items. $ 664
5-02(2) . . . Marketable securities 0
5-02(3)(a)(1) Notes and interest receivable-trade accts 421
5-02(4) . . . Allowances for doubtful accounts 0
5-02(6) . . . Inventory 0
5-02(9) . . . Total current assets 1,199
5-02(13). . . Property, plant and equipment 580
5-02(14). . . Accumulated depreciation 82
5-02(18). . . Total assets 1,697
5-02(21). . . Total current liabilities 1,110
5-02(22). . . Bonds, mortgages and similar debt 0
5-02(28). . . Preferred stock-mandatory redemption 0
5-02(29). . . Preferred stock-no mandatory redemption 0
5-02(30). . . Common stock 15
5-02(31). . . Other stockholder's equity 6,611
5-02(32). . . Total liabilities and stockholder's equity 2,628
5-03(b)1(a) . Net sales tangible products 373
5-03(b)1. . . Total revenues 373
5-03(b)2(a) . Cost of tangible goods sold 0
5-03(b)2. . . Total costs and expenses applicable to sales and revenues 0
5-03(b)3. . . Other costs expenses 3,297
5-03(b)5. . . Provision for doubtful accounts and notes 0
5-03(b)(8). . Interest and amortization of debt discount 915
5-03(b)(10) . Income before taxes and other items 0
5-03(b)(11) . Income tax expense 0
5-03(b)(14) . Income/loss continuing operations 0
5-03(b)(15) . Discontinued operations 0
5-03(b)(17) . Extraordinary items 0
5-03(b)(18) . Cumulative effect-changes in accounting principles 0
5-03(b)(19) . Net income or loss 3,839
5-03(b)(20) . Earnings per share-primary <0.30>
5-03(b)(20) . Earnings per share-fully diluted anti-dilutive
</TABLE>
