U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO.1
TO FORM 10-SB
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(B) or (G)
of the
SECURITIES AND EXCHANGE ACT OF 1934
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JAWS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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NEVADA . . . . . . . . . . . . . 7371 98-0167013
(State or other jurisdiction of. (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) . Classification Code Number) Identification Number)
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ROBERT KUBBERNUS, CEO
JAWS TECHNOLOGIES, INC.
1013 17TH AVENUE SW T2T 0A7 . . . . . . . . . . . . . . . . . . . 1013 17TH AVENUE SW T2T 0A7
CALGARY, ALBERTA CANADA . . . . . . . . . . . . . . . . . . . . . CALGARY, ALBERTA CANADA
(403) 508-5055 (403) 508-5055
(Address, including zip code, and telephone number. . . . . . . . (Name, address, including zip code, and telephone
including area code, of registrant's principal executive offices) number including area code, of agent for service)
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Copies to:
ROBERT L. SONFIELD, JR., ESQ.
SONFIELD & SONFIELD
770 S. POST OAK LANE
HOUSTON, TEXAS 77056
(713) 877-8333
FACSIMILE: (713) 877-1547
Securities to be registered under Section 12(g) of the Act:
Class
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13,202,949 shares of common stock, $.001 par value
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TABLE OF CONTENTS
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GLOSSARY OF TERMS . . . . . . 2
ITEM 1. DESCRIPTION OF BUSINESS 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 8
ITEM 3. DESCRIPTION OF PROPERTY 17
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 18
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS 20
ITEM 6. EXECUTIVE COMPENSATION 22
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
ITEM 8. LEGAL PROCEEDINGS 24
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 24
ITEM 10. RECENT SALE OF UNREGISTERED SECURITIES 25
ITEM 11. DESCRIPTION OF SECURITIES 27
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS 28
ITEM 13. EXHIBITS 28
INDEX TO FINANCIAL STATEMENTS F - 1
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GLOSSARY OF TERMSGlossary of Terms
'C' LANGUAGE - A programming language that enables, as compared to most other
languages, programmers to generate faster running programs, smaller application
size and the ability for porting to more than one platform. (e.g. Windows 95,
NT, etc.)
ALGORITHM - A mathematical function or set of rules used in the process of
encryption and decryption
ASYMMETRIC ALGORITHM - A two (2) key system using a complementary pair of keys:
a private key and a public key. The public key is used to encrypt or verify
messages and the private key is used to decrypt or sign messages.
AUTHENTICATION - A systematic method for establishing the proof of identity
between two or more entities.
BIT - A single digit number which is either a 1 or a zero. The smallest unit of
computerized data. Bandwidth is usually measured in bits-per-second.
BOOLEAN - A conditional variable that only has two values; true or false.
BRUTE FORCE - The process of exhausting all possible permutations to obtain the
private key to decrypt a piece of encrypted information.
CACHING - Storage within the computer's memory.
CRYPTANALYSIS - The branch of cryptography concerned with decoding encrypted
messages.
CERTIFICATE - An electronic file bound to an individual or entity's public key.
CERTIFICATE SERVER - A server that assists in the process of certifying public
keys.
CIPHERTEXT - Plaintext converted into an encrypted format through the use of an
encryption algorithm. An encryption key can unlock the original plaintext from
the ciphertext.
DECRYPTION - The opposite of encryption; the process of converting ciphertext
into plaintext.
DES (DATA ENCRYPTION STANDARD) - Adopted by the U.S. government in 1977 as the
federal standard for the encryption of commercial and sensitive, yet
unclassified, government computer data.
DELPHI BORLAND - a computer language that helps corporate and independent
developers build distributed applications faster (particularly for
object-oriented applications that must communicate across multiple platforms,
including Windows, Unix and legacy systems).
ENCRYPTION - The process of converting data from an easily understandable format
(plaintext) into what would appear to be random gibberish (ciphertext).
KEY MANAGEMENT - The process of storing and distributing cryptographic keys to
authorized recipients.
LAN (LOCAL AREA NETWORK) - A communications network connecting computers and
peripheral devices that spans small geographical areas (usually within an office
environment).
PLAINTEXT - Message text that is freely readable and understandable by anyone;
the opposite of ciphertext.
POP3 (Post Office Protocol, version 3) - An email protocol primarily used to
transfer messages between a central mail server and users workstations.
PRIVATE KEY - The secret half of a users' key-pair in an asymmetric system. The
private key should only be known by the user.
PUBLIC KEY - The published half of a users' key-pair in an asymmetric system.
The public key is used by others to encrypt information for viewing by the user.
USER INTERFACE - The portion of the application that is displayed to the user.
Interaction with the program, hardware, other software applications and other
computer systems are completed through the user interface. This would include:
a window, buttons, fields, graphical objects, menus, etc.
SBOX - A function that replaces a byte of information with another byte of
information.
SYMMETRIC ALGORITHM - A single key system where the same key is used to encrypt
and decrypt information.
XOR - Known as the exclusive OR operator, a Boolean operator that returns a
value of TRUE only if just one of its operands is TRUE. In contrast, an
inclusive OR operator returns a value of TRUE if either or both of its operands
are TRUE.
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24
ITEM 1. DESCRIPTION OF BUSINESSItem 1. Description of Business
BUSINESS DEVELOPMENT
JAWS was incorporated as a Nevada corporation on January 27, 1997
under the name E-Biz Solutions Inc. On February 10, 1998, E-Biz Solutions Inc.,
entered into an agreement to purchase all the outstanding common shares of Jaws
Technologies, Inc., an Alberta, Canada corporation, incorporated on September
18, 1997, in exchange for 1,500,000 shares of the restricted common stock of
E-Biz Solutions Inc., and options to purchase 400,000 shares of restricted
common stock at $0.50 per share. On March 27, 1998, E-Biz Solutions Inc. changed
its name to JAWS Technologies, Inc., ("JAWS").
BUSINESS OF THE ISSUER
JAWS has offices in Calgary, Alberta, Canada where it provides complete
information security solutions to its clients. These solutions include the
development of proprietary encryption software using the JAWS L5 encryption
algorithm. The algorithm secures binary data in various forms, including
streamlining or block based data.
The L5 encryption algorithm was developed and refined over approximately 15
years by its inventor Jim Morrison. Jim Morrison was Chief Programmer at JAWS
from March 1, 1998 to April 20, 1999.
On October 20, 1997, JAWS Software Ltd. (a company controlled by Jim
Morrison) resolved to assign and assigned all of the right, title and interest
in the L5 algorithm, and other miscellaneous intellectual property, to JAWS
Technologies, Inc. (the Alberta corporation) (see Item 13 - Exhibit 10.1.10). In
October 1998, during JAWS patent application process, there was a further
assignment of the L5 algorithm, and other miscellaneous intellectual property,
to JAWS by Jim Morrison personally (see Item 13 - Exhibit 10.1.11) in order to
fulfill the requirements of the patent application process.
The L5 algorithm itself is not the software produced and marketed by JAWS but
the mathematical process outlining the detailed steps required to encrypt and
decrypt data. The algorithm can be incorporated into a variety of software
programs requiring encryption of data.
Since the acquisition of the L5 algorithm by JAWS, a team of JAWS software
engineers has developed and continues to develop numerous applications for the
L5 on many different platforms (JAWS L5 Desktop, JAWS XMAIL, JAWS MEMO). The
original 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 the L5 encryption algorithm and a Windows user interface.
Since that time the algorithm has been rewritten in the C language. An in-house
JAWS cryptographer, with the co-operation of two University of Calgary
professors, has made several refinements to the JAWS L5 algorithm 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)
and the algorithm is no longer limited to Windows and can now be deployed
interoperably on a variety of platforms.
JAWS PRODUCTS & SERVICES
JAWS business plan is to become a full service information security
solution provider. In accordance with this plan, JAWS currently markets both
information security products and professional information security services.
PRODUCTS
All of the JAWS products currently marketed by JAWS are based on the JAWS
L5 algorithm. The following products are complete and are currently being
marketed:
JAWS L5 Desktop
This product is a software program that is targeted towards individual
users either within a corporation or privately, to allow them to protect
important data on their workstations and/or network drives by encrypting with a
symmetric or an asymmetric (public/private) key. The software also allows the
exchange of secure documents/data when using the public key mode. This software
program has taken approximately 18 man months of research and development
("R&D") effort. The costs associated with this effort have been accounted for
under "Expenses" in the Consolidated Statements of Loss and Deficit and
Comprehensive Loss (See - Financial Statements.) The material features of this
product are:
- - Encryption/decryption of data files
- - Encryption/decryption of folders, including recursive folders if desired.
- - Compatible with Windows 95/98/NT/Citrix
- - Symmetric key mode
- - Asymmetric (Public/Private) Key mode
- - Simple easy-to-use interface developed in accordance with Microsoft
standards of user-interface design.
- - Speed of execution as compared to competitors' algorithms
- - Size of executable - operational execution of the L5 algorithm requires
minimal incremental disk space
- - Strength: Key length (4096 bit)
JAWS L5 Memo
JAWS MEMO is designed to secure valuable information created and stored in
the Palm Computing platform device Memo Application. This application can
completely replace the existing Memo Pad function in the Palm Pilot III, V and
VII. The material features of this product are:
- - Encryption/decryption of memos
- - Compatible with Palm III/V/VII and other compatible operating systems
- - Symmetric key mode
- - Size of executable - operational execution of the L5 algorithm requires
minimal incremental disk space
- - Strength: Key length (4096 bit)
- - Palm Computing Inc., as part of its marketing scheme for Palm products,
has implemented a certification program (the "Platinum Solutions" program). In
order to achieve the Palm Platinum Solution certification, products must
successfully undergo rigorous compatibility testing using some standard Palm
testing products. JAWS MEMO is the only Platinum Solution certified security
related software available to Palm users as listed in 1999 "Solutions for Your
Enterprise" Palm magazine.
JAWS XMAIL
This software program allows the secure exchange of email messages being
sent in a POP3-compatible environment. JAWS XMAIL sits between the user's email
program (e.g. Microsoft Outlook) and the user's mail server and intercepts
incoming and outgoing messages. When receiving encrypted messages, the user is
prompted to enter their private key to decrypt the ciphertext. Conversely,
outgoing messages are automatically encrypted with the recipient's public key.
The JAWS Certificate Server is a central repository holding user certificates.
The material features of this product are:
- - Ability to send and receive secure email messages over the Internet
- - Compatible with Windows 95/98/NT
- - Centralized key management
- - Compatible with most POP3-based email servers including Microsoft Outlook,
Microsoft Outlook Express, Eudora, Pegasus, and Netscape Communicator
- - Encryption/decryption of email messages and attachments
- - Public/Private Key mode
- - Temporary Caching of password phrase
- - Transparent to the user during operation - the application works in the
background
- - On-line help
- - Strength: Key length (4096 bit)
- - Self-pollinating: if the intended recipient of the email does not have
JAWS XMAIL then a notice is sent to the intended recipient. This notice
indicates that the sender is trying to send a secure message but cannot because
the intended recipient is not currently using JAWS XMAIL. The intended
recipient is then invited to click on a button that will initiate the download
through a web-browser of a 'decrypt-only' version that will allow the intended
recipient to receive the message. This version does not allow the sending of
secure email messages. To become fully enabled/registered the user, or the
user's organization, must compensate JAWS. Once payment is received, a
registration program is automatically sent to the user thus fully enabling
his/her application.
SERVICES
With the rise in computer connectivity and the push to electronic commerce,
organizations are increasingly becoming more exposed to the outside world via
electronic means. Often these organizations lack the skills and time
requirements needed to protect and secure their information assets. Periodicals
and reference material such as Maximum Security, 2nd ed., have indicated that
servers are often set up by non-technical individuals who inadvertently create
numerous viable targets for hackers. As the number of servers supporting
websites increases on a daily basis the security risks increase as well. Ken
Cutler, Managing Director of the Information Security Institute, has praised the
value of third party audits for the objectivity and expertise they bring to an
organization.
In response to this need in the marketplace, JAWS has created its
Information Systems Security Group ("ISSG"). The services offered by JAWS' ISSG
to its clients include:
- - network security assessment/audit
- - security policy review/development
- - security architecture review/development
- - intrusion detection/testing
- - penetration testing
- - site mapping
- - client data valuation
- - emergency response following an intrusion
JAWS has developed its services around the premise of providing full
information security solutions. This means providing professional services and
strong product offerings to maintain the best possible solution for each client.
JAWS' professional services can be offered to government agencies, military
agencies, small corporations, large corporations, financial institutions and
industrial clientele.
Once JAWS collects the data during an assessment and fully analyzes the
potential security risks revealed, a client-specific proposal for information
technology security can be developed and presented to the client. At the option
of the client, JAWS can then integrate the appropriate software and products
proposed into a complete solution to meet the client's information security
needs. The proposal generally includes a cost analysis to ensure the client
understands the true cost of security in relationship to its risk and the value
of the information assets being protected. JAWS also provides training for the
clients' staff to ensure that its employees are able to adopt the technology,
policies and procedures presented in the information security solution.
As a JAWS client's business changes, information technology modifications
are inevitable. With these modifications potential security risks are created.
JAWS offers clients the option of re-assessing the information systems in such
situations as needed or to have regularly scheduled re-assessments in order to
maintain adequate information systems security.
ISSG is product neutral and may therefore offer both JAWS'own suite of
products, competitor's products, or a combination of both to meet a client's
specific needs. The goal of JAWS is provide the best possible solution. It is
anticipated that competitor's products and services will be provided by JAWS
through standard licensing/ reseller contracts with other security product
vendors e.g. Network Associates.
ISSG has completed several contracts and has several proposals for
outstanding contracts. This service can create recurring revenue through yearly
audits and reassessments. While these early contracts and proposals may provide
early validation of the market opportunity, none of them has been deemed to be
material to JAWS and have been entered into in the ordinary course of JAWS'
business.
Client Support
Support is currently available to JAWS clients through the following
methods:
- - 1-800 help desk
- - Onsite (as demand grows technicians would be available through regional
JAWS offices)
- - FAQ (frequently Asked Questions documents) on the website
- - Email support
- - Online help built into JAWS software products
SALES
A sales and marketing team for the L5 Data Encryption software has been
working since May 1998 towards creating the JAWS brand identity, as well as
establishing relationships with public relations companies to provide market
awareness and industry interest in JAWS products. The JAWS sales and marketing
departments continue to pursue opportunities with Application Service Providers
("ASP") and in areas such as: smart cards, biometrics and security tokens.
Further sales and marketing has implemented e-mail campaigns to raise the
public's awareness of e-mail security, e-commerce and Public Key Infrastructure
to a higher level. JAWS efforts to develop industry specific (Health Care,
Financial Services, Legal, Government, Oil & Gas, Law Enforcement and Education)
marketing materials for JAWS products and services, develop strategies for the
Personal Data Assistant ("PDA") marketplace, such as the Palm III, V and VII,
and to identify and implement alliances with complementary organizations are
also being developed and implemented.
In relation to product releases, the sales & marketing organization has also
developed collateral sales materials including boxes, CD cases, stationary, and
brochures. JAWS L5 Desktop's first release was in July, 1998; the second
modified version was released in September, 1998. JAWS MEMO was released in
December, 1998; the second modified version was released in June, 1999.
Although the print media coverage of the L5 has been positive in at least
34 different articles, and requests for information from investors, potential
clients and interested parties have been numerous (approximately 150 inquiries
per week), there has not been significant sales of the product. From client
feedback that JAWS has received, it is the opinion of management that there are
a number of factors affecting the sales of L5:
(1) many systems managers are postponing significant security purchases due
to issues surrounding year 2000. This barrier will be removed by January 1,
2000;
(2) although potential purchasers are aware of security as an issue
surrounding information systems, and may have been educating themselves as to
what products and services are available, specific needs have not been
identified and therefore purchasers may not be ready to make specific buying
decisions.
(3) the selling cycle for security software with reseller and VAR programs
takes considerable time to conclude.
Additional considerations may be that:
- - laborious export restrictions slow down the flow of trade and the selling
process; and
- - 128-bit key length security product entrenchment within existing security
products is widespread.
DISTRIBUTION
JAWS software is currently distributed using the following methods:
- - Direct sales to potential clients by JAWS employees
- - Resellers/VAR's - other companies sell JAWS products and services
- - Online Stores - Internet software "retailers"
- - JAWS Internet Website for direct downloads (for demos and freeware)
- - Original Software Manufacturer ("OSM")
The JAWS consulting services provided by ISSG are currently a direct sales
effort although reseller relationships with other organizations are being
explored.
Initially the JAWS L5 Desktop software was distributed in CD form.
Currently, except for demonstration disks, the product's distribution is almost
completely online either through third party online stores or via the JAWS
website. This approach has minimized the cost of distribution and provides
faster turnaround on client requests.
JAWS has distributed and agreed to distribute 503,463 copies of the L5
encryption algorithm. In order to develop a user base, the majority of these
placements have been at nominal or no cost. JAWS recently announced the signing
of a licensing agreement with ApexMail.Net to distribute JAWS XMAIL to 500,000
of ApexMail's clients across North America. Additionally, 197 copies of JAWS L5
Desktop have been sold at $49.95 per copy and 236 copies of JAWS MEMO have been
sold at 19.95.
Another distribution channel is through OSM's. External software
developers can use the JAWS L5 encryption algorithm software as a utility
embedded in their products to augment or enhance their particular product
offerings. Accounting software programs, database developments, e-mail programs
and communication software are all potential channels for JAWS' software.
Additional potential clients include the Smart Card industry, hand-held
computing devices, telecommunications and access control devices.
Direct sales channels include product offerings to ISPs, data warehouses,
corporate networks and personal computer users. Revenues generated in the
normal course of business by JAWS products and services have come from these
various markets. JAWS is not dependent upon one or a few major clients.
RECENT ANNOUNCEMENT
The recently signed ApexMail agreement and license is a material agreement
to JAWS in that this alliance provides for the distribution of 500,000 copies of
JAWS XMAIL to users of ApexMail POP3-based email accounts. Users of ApexMail
will download JAWS XMAIL electronically from the ApexMail website. There will
be no physical distribution of the JAWS XMAIL product to ApexMail clients. This
distribution could produce revenues equal to $0.333 per month per user or
$33,333 per month for 100,000 users. The agreement also provides for the joint
marketing of the alliance and the development by JAWS of a long term strategy
that would provide Arrow Communications Ltd., the parent company of
ApexMail.net, with value-added services such as security audits, data protection
systems and messaging programs. JAWS and ApexMail continue to work towards the
implementation of the terms of this agreement and have recently signed an
addendum to the agreement refining its terms.
COMPETITION
Products
A number of companies have developed various information security products
such as: encryption software, firewalls, intrusion detection software and
hardware solutions. A non-exhaustive list of generally available competitive
cryptographic algorithms is: DES, TwoFish, Certicom ECC, RSA, MARS, and PGP. No
one particular product in the marketplace controls market share. Two
distinctive competitors, RSA and Network Associates, have led in the sale of
encryption software.
The JAWS L5 encryption algorithm gives JAWS a competitive advantage over
these competitors because:
(1) programming modifications can take less than one day to implement; and
(2) its larger bit size.
The ability to make quick changes in the L5 algorithm's programming in
addition to the strength provided by the 4096 bit key length being greater than
offered by the competition (e.g. DES 56 bit, TripleDES 168 bit, Certicom
156-bit) allows JAWS to be responsive to client's demands for products that
offer both:
(1) customization; and
(2) greater strength.
The 4,096 bit key length has, to date, been unbroken. In August, 1999, RSA
Data Security Inc. reported that a 512 bit security code was broken and
recommended at least 768 bit keys as the minimum for achieving reliable
security. It is important to note that there is an exponential power increase
with each additional bit added to an encryption algorithm.
In the event that a JAWS 4096 bit system was brute forced and the algorithm was
broken, then JAWS software can be modified to utilize a higher bit version of
the JAWS L5 encryption algorithm.
In summary, the advantages of the JAWS L5 algorithm and the JAWS software
incorporating the algorithm, in contrast to competitive products, are that:
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JAWS COMPETITORS
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Most competitive algorithms have a limit to the key
JAWS L5 algorithm has an easily varied key length . . size, or a maximum length key where adding bits to
that can be quickly adapted (greater and lesser) and. the key length does not improve security (eg. DEJ,
executed to meet specific client requests.. . . . . . TripleDES)
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Many algorithms include several levels of complex
operations which perform slowly on most computers
Software coding based on XOR type operations and. . . and results in slow and difficult implementation (eg.
SBOXs . . . . . . . . . . . . . . . . . . . . . . . . MARS)
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Large key sizes and difficult/ complex computations
The small footprint of the algorithm enables it to be make incorporation of some algorihms into smart
incorporated into small devices such as smart cards . card unreasonable (eg. RSA)
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DES 56 bit
The large key size (4096 bit) is greater than its . . TripleDES 168 bit
competitors . . . . . . . . . . . . . . . . . . . . . Certicom 156-bit
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Speed of execution, performance of JAWS software is . DES is much slower because of the complexity of
faster. . . . . . . . . . . . . . . . . . . . . . . . their products operations.
- ----------------------------------------------------- ------------------------------------------------------
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It is generally accepted ("Moore's Law") that computing power doubles every
2 years. With the status of computer power today, and the doubling of computing
power, JAWS estimates it will be a number of years before there is enough
widespread standard computer power to break the JAWS 4096-bit key length
software via a brute-force attack.
Disadvantages
There has been some cryptographic industry criticism of proprietary algorithm's
like JAWS L5. This criticism is based on the assertion that proprietary
algorithms are intrinsically less secure than public domain algorithms in that
they do not have the benefit of increased public scrutiny and cryptanalysis.
JAWS competitors, who own a proprietary algorithm, are subject to this criticism
as well.
Services
Information auditing services, security business planning, security plan
implementation, and security management are relatively new industries. Very few
large size competitors exist and mainly small firms are providing the services
at this time.
MANUFACTURING
JAWS manufactures and produces all software products in JAWS' corporate
office in Calgary, Canada. To manufacture and produce JAWS software the only
requirements are computer equipment, CD ROMS, CD Burners, and human resources.
Packaging is produced by an external supplier. JAWS takes a simple in-house
approach to the production and packaging of its software. This approach allows
JAWS to be very flexible and JAWS is not dependent on any one supplier. All
components of JAWS products are readily available from a number of suppliers.
There is currently an inventory of packaging in the JAWS head office. The
demand for physical packaging has significantly decreased due to the
availability and convenience of online downloads utilizing a web browser.
INTELLECTUAL PROPERTY MATTERS
JAWS has applied for patent protection in the United States. The US Patent
Office has confirmed receipt of the application and JAWS has qualified to have
its patent application reviewed and evaluated. JAWS has not registered any of
its trademarks, trade names or service marks but has acquired the XMAIL
tradename from British Telecom PLC. JAWS owns the copyright in all the software
created by its employees and the copyrights which it has contractually acquired.
JAWS maintains strict confidentiality practices with its employees including
contractual obligations by the employees. JAWS' business is not dependent on a
single license or group of licenses.
GOVERNMENT REGULATION
Export restrictions on encryption technology above 64 bits are tightly
controlled through the provisions of the Wassenaar Arrangement. The Wassenaar
Arrangement is a 26 country agreement, including Canada and the United States,
controlling the export of encryption technology to any destination outside of
continental North America. This arrangement requires exporters of encryption
technology to make an application prior to exporting. Applications for export
under the agreement are evaluated on a case by case basis and considerable
evaluation is done by both countries involved in the export review. The
application process slows down the selling cycle and flow of trade by requiring
compliance with the terms of the Wassenaar Arrangement.
RESEARCH AND DEVELOPMENT EXPENDITURES
In 1998, the loss from operations included a one-time write-off of JAWS'
acquired software development costs. JAWS' policy of expensing software
development costs, as incurred, until technological feasibility has been
established, is consistent with generally accepted accounting principles;
however, the write-off in the year ending 1998, of $909,003, was a non cash item
and therefore did not result in any cash flow impact for JAWS. These costs, to
the extent possible, will be included in the products and services of JAWS and
will be bourne directly by clients over time.
ENVIRONMENTAL LAWS
No specific environmental laws are applicable to JAWS products or business
activity other than general environmental controls related to non-hazardous
waste disposal. JAWS does not have any specific environmental costs; all costs
related to waste disposal are accounted for under general operating costs.
Current environmental laws have no direct costs or effect on JAWS business
activities. Environmental costs related to non-hazardous waste disposal are
incurred in the ordinary course of business.
EMPLOYEES
As of September 30, 1999, JAWS employs approximately 42 full time staff.
None of JAWS' employees are represented by any type of labor organization and
JAWS is not aware of any activity by employees seeking organization. JAWS
considers its relationships with it employees to be satisfactory. JAWS has, in
its early stages, developed strong human resources practices with the belief
that the growth of JAWS is heavily reliant on its human resources.
REPORTS TO SECURITY HOLDERS
JAWS is not a reporting company and is not required to file or deliver
annual reports to security holders. When JAWS sells unregistered securities, it
files a Notice of Sale of Securities Form D, pursuant to Regulation D of the
Securities Act, 1933.
The public may read and copy any materials JAWS files with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC and state the address of
that site (http://www.sec.gov). Additional information regarding JAWS may be
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obtained on the JAWS website at www.jawstech.com.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSISITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS
INFORMATION SECURITY MARKETPLACE
With the present trend of the computer industry toward open computing,
enormous security risks have been revealed. According to Price Waterhouse in
their 1999 Technology Forecast the information security market is expected to
reach $2.75 billion by 2001 from it's current $1.35 billion. Corporations,
government, institutions and foreign entities are all faced with security
questions, and as these organizations grow, their network security will
constantly be faced with new challenges. Price Waterhouse has indicated that
the increasing use of the Internet has raised concerns about the need for
network and computer security. Enterprise networks are less often defined by
the physical boundaries of single company location but often encompass remote
sites with mobile users and/or telecommuters. Companies have also come to rely
upon shared public networks versus private lines of communication for electronic
commerce and the sharing of data. Corporate information systems become more
vulnerable then as the underlying data is no longer centralized and the Internet
and company Intranets provide new avenues for intrusion and compromise.
According to a March 1997 report by the Computer Security Institute and the
Federal Bureau of Investigation ("FBI"), 47% of U.S. organizations surveyed had
been attacked through the Internet.
JAWS OVERVIEW
JAWS develops software using encryption algorithms to secure binary data in
various forms. JAWS has been primarily engaged in recruiting personnel,
establishing corporate headquarters, and developing software and licensing
software from external developers for integration into JAWS proprietary
software. JAWS ISSG is also in the business of providing professional
information security services to its clients. These services include:
- - network security assessment/audit
- - security policy review/development
- - security architecture review/development
- - intrusion detection/testing
- - penetration testing
- - site mapping
- - client data valuation; and
- - emergency response following an intrusion
The blend of both product and services offered by JAWS is its strategy for
ensuring that it is well positioned to be a complete source for information
security solutions. Reaching the marketplace is achieved through conventional
marketing tactics but also through educational processes, such as seminar
delivery with accounting and legal firms to their client base, VAR programs and
strong channel marketing strategies.
JAWS' internal product development costs, incurred prior to establishing
technological feasibility, are expensed in accordance with the Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. In accordance with Statement of Financial Accounting Standards No.
86, JAWS capitalizes product development costs, subsequent to establishing
technological feasibility, and these will be amortized upon commencement of
commercial sales.
JAWS has experienced significant losses since its inception from overhead
and other costs incurred in the development and growth of JAWS. These costs may
result in significant losses for the foreseeable future. There can be no
assurance that JAWS will be able to successfully implement its growth and
business strategies, that revenues will increase in the future, or that JAWS
will be able to achieve or sustain profitable operations.
PLAN OF OPERATION
Management of JAWS originally planned its expenditures around the funds
available under the amended debenture agreement with Thomson Kernaghan & Co.
Limited ("Thompson Kernaghan") (See Financing - Pg. 13). JAWS' expenditures have
been designed to work within this capital allotment in order to meet the growing
financial needs of JAWS. Since the amended debenture agreement requires
registration of the shares underlying the convertible debentures and the
registration process is not yet effective, JAWS cannot depend upon this
financing. JAWS will actively pursue alternative financing in the next twelve
months in order to meet its capital requirements in the absence of the funding
under the amended debenture agreement.
On April 20, 1999, JAWS signed a settlement agreement with Bristol Asset
Management LLP ("Bristol") 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, expiring April 15, 2002.
The cancellation of this financing will not have an immediate impact on JAWS'
plan of operation.
JAWS continues to expend resources researching and developing complementary
technology for JAWS' current L5 products. The technology groups plans for
Research and Development in the next 12 months are as follows:
- - complete the software development and testing of JAWS XMAIL for Microsoft
Exchange and for Lotus Notes
- - convert the XMAIL key server to a Microsoft Certificate Server and X.509
certificates
- - convert all cryptographic products in order to utilize industry standards
- - implement JAWS L5 algorithm on Palm clones and for Windows CE
- - complete the implementation of JAWS Encrypted Disk; and
- - continue to research new products, maintain all software and debug
products as problems arise.
JAWS' equipment costs have increased in relation to the increase in the number
of employees. To accommodate this growth, JAWS has moved to a larger facility
and has incurred expenses related to relocating JAWS' corporate office.
The number of JAWS employees has grown to approximately 42 and is expected to
reach 80 in the next year. The number of JAWS employees continues to grow as
JAWS markets and sells its products and services. Sales and marketing efforts
create the need for additional technological, operational and administrative
support. Additionally, as JAWS develops client relationships around North
America, it will require personnel to support those relationships and may
require satellite offices in regional centers.
JAWS ISSG continues to grow and position itself within the marketplace. ISSG
presently plans to hire 8 additional consultants in the next year to participate
and assist with training, the development of and refinement of methodology and
information security protocols and to act as consultants to assist third parties
with information security systems.
The JAWS sales and marketing departments continue to pursue opportunities with
ASP's and in areas such as: smart cards, biometrics and security tokens.
Further sales and marketing has implemented e-mail campaigns to raise the
public's awareness of e-mail security, e-commerce and Public Key Infrastructure
to a higher level. JAWS' efforts to develop industry specific (Health Care,
Financial Services, Legal, Government, Oil & Gas, Law Enforcement and Education)
marketing materials for JAWS products and services, to develop strategies for
the Personal Data Assistant ("PDA") marketplace, such as the Palm III, V and
VII, and to identify and implement alliances with complementary organizations,
are also being developed and implemented.
JAWS anticipates revenues to be realized through its marketing and direct sales
efforts, and by developing strategic alliances and a strong VAR program, typical
of the software industry. Cash flow will also be supplemented by revenues
generated by the ISSG.
RESEARCH & DEVELOPMENT
The following is a list of enhancements and innovations that are currently
in the R&D process:
JAWS XMAIL for Lotus Notes
Lotus Notes has captured a significant size of the corporate email market.
According to International Data Corporation ("IDC") Lotus Notes has over 21.9
million users. Lotus Notes encrypts local email through its built-in encryption
but cannot provide any encryption for Internet email. JAWS is working to
produce and distribute JAWS XMAIL for Lotus Notes. The material features of
this product will be its ability to encrypt/decrypt, at the server level, email
communications between a Lotus Notes Server and the Internet. Because this
product is server-based, administration is centralized. Centralized
administration is more efficient in managing public and private keys than having
system administrators maintain keys at an individual user level.
JAWS is currently researching and developing this product and expects the
JAWS XMAIL for Lotus Notes to be ready for sale by January 1, 2000. The system
design has been completed and software development is underway. The software
development phase has 3 man months of remaining work.
JAWS XMAIL
While this product is complete and currently being marketed, some
enhancements are currently underway to improve its internal software structure.
Future enchancements may include:
- - Implementation of industry standard certificates
- - Conversion to a certificate server
- - The improved performance of multiple-recipient based email messages
- - The improved notification for receipt of encrypted messages via JAWS
XMAIL.
A new version is anticipated to be complete by January 1, 1999 and
represents a total of approximately 12 man months of software development
effort.
JAWS XMAIL for Microsoft Exchange
Similar to Lotus Notes, the Microsoft Exchange Server has a significant
portion of the corporate email user base. This user base is approximately 13.5
million users (according to PC Week). JAWS has recognized this opportunity and
has undertaken to create a software program called JAWS XMAIL for Microsoft
Exchange. The material feature of this product is its ability to
encrypt/decrypt, at the server level, email communications between a Microsoft
Exchange Server and the Internet. Because this product is server-based
administration is centralized. Centralized administration is more efficient in
managing public and private keys.
JAWS R & D for this product is almost complete and JAWS expects the product
to be ready for sale in the late 1999. The system design has been completed and
final software development is underway. The software development phase for this
product has 3 man months of remaining work.
JAWS L5 Desktop
While this product is already complete and currently being marketed,
further enhancements and changes are contemplated such as:
- - providing the user with the ability to select the strength of encryption.
Multiple algorithm (e.g. DES, TripleDES, Blowfish)
- - Compliance with Microsoft's CryptoAPI standard (CryptoAPI is built into
Microsoft's operating system)
- - Enhanced key management
- - security policy engine
- - Integration with JAWS Certificate Server
While these features are being considered, as of the date of this filing,
no specific projects have been commenced by JAWS to pursue these changes.
JAWS L5 Memo
The product is already complete and being actively marketed, primarily
through online stores such as: palmgear h.q., beyond.com, ebarn, netsales,
palmcentral.com, egghead.com. While no specific R & D projects have been
undertaken recently, the following enhancements are being considered:
- - Encrypting other Palm applications such as the Address Book and Calendar
- - Making the Memo and L5 Desktop files interoperate
COMPARATIVE AMOUNTS
JAWS was incorporated on January 27, 1997, but did not commence operations
until October, 1997. Accordingly, the following discussion and analysis
compares the financial position of JAWS as at December 31, 1998, after 12 months
of operations, with that as at December 31, 1997 after 11 months of existence
but only 3 months of operations. Further discussion will include a comparison
of the six month second quarter results ending June 30, 1999 with the six month
second quarter results ending June 30, 1998.
RESULTS OF OPERATIONS
The following discussion is for the year ended December 31, 1998, compared
to fiscal period ended December 31, 1997, and is also a comparison of the second
quarter results ending June 30, 1999, with the second quarter results ending
June 30, 1998.
JAWS did not earn any revenues during 1997 since it was in the initial
stages of development. Revenues earned during the year ended December 31, 1998
were $29,068. Revenue for the six months ending June 30, 1999 was $10,180.
Expenses in all categories have increased significantly as a result of
establishing operations and moving JAWS products toward and into the
commercialization stage. 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 $218,574 on advertising and promotion in 1998 as compared
with $35,000 in 1997. For the six months ending June 30, 1999, JAWS spent
$184,767 on advertising and promotion as compared with $170,684 for the six
months ending June 30, 1998. Expenditures on rent and wages and employee
benefits also reflect growth of operations; in 1998 JAWS had spent $29,637 on
rent, in 1997 no rent was paid. At June 30, 1999, JAWS spent $82,099 on rent as
compared with $8,787 at June 30, 1998. In 1998, JAWS spent $283,728 on wages
and employee benefits as compared with $0 in 1997. At June 30, 1999, JAWS had
spent $378,115 on wages and employee benefits as compared with $23,124 in June
30, 1998. 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.
In 1998, the loss from operations includes a one-time write-off of JAWS'
acquired software development costs. JAWS' policy of expensing software
development costs, as incurred, until technological feasibility has been
established, is consistent with generally accepted accounting principles;
however, the write-off in the year ending 1998, of $909,003, was a non cash item
and therefore did not result in any cash flow impact for JAWS.
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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations for the year ended December 31, 1998, was
$1,126,975 as compared with $110,798 for the fiscal period ended December 31,
1997 and $1,442,297 for the six month period ending June 30, 1999 as compared
with $420,204 for the six month period ending June 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.
Cash on hand of $2,054,125, at June 30, 1999, is an increase from $33,732
at December 31, 1998, and an increase from $111 at December 31, 1997, this
increase is as a result of a series of stock issuances and funds advanced under
the Debenture Agreement. A net amount of $3,903,804 was raised from financing
during the six month period January 1, 1999 to June 30, 1999 and these funds
will be deployed primarily to fund working capital. In 1998, a net amount of
$1,274,800 was raised as a result of issuing equity, compared to only $35,650
during 1997. Additionally, in the second quarter of 1999, JAWS acquired
approximately $441,114 of fixed assets as part of building the necessary
infrastructure and systems it needs to support the additional staff hired during
the period. During 1998, JAWS acquired approximately $115,584 of fixed assets.
These increases are consistent with JAWS's increase in business, operations and
administration. Management estimates that for each new position created in
JAWS, approximately $7,200 will be expended in infrastructure costs (i.e.
furniture, software licensing, technology and general office and stationery
requirements).
Prepaid expenses, consisting of premises deposits and legal fee retainers,
were $111,623 at June 30, 1999. Prepaid expenses, consisting of premises
deposits and legal fee retainers increased from $7,500 at December 31, 1997, and
decreased from $140,456 at December 31, 1998.
Accounts payable have increased from $32,976 at December 31, 1997 to
$379,720 in December 31, 1998 and to $486,021 in June 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 1998.
Accrued liabilities have also grown from $0 at December 31, 1997, to $48,880 at
December 31, 1998, and $191,357 for the six months ending June 30, 1999. JAWS
has anticipated and budgeted for these increases to provide for the
organizations' shift from R & D to commercialization. Management has budgeted
for this trend and expects the trend will continue until cash flow from sales
are 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 the convertible debentures
described below under the caption "Financing".
FLUCTUATIONS IN OPERATING RESULTS
JAWS' quarterly operating results have fluctuated significantly in the past
and will likely continue to fluctuate significantly in the future depending on a
variety of factors, several of which are not in JAWS' control. Theses factors
include:
- - the demand for JAWS' products and the products of its competitors
- - development and promotional expenses related to the introduction of
products or enhancements
- - the degree of market acceptance for JAWS' products and enhancements
- - the timing of orders from significant clients,
- - delays in shipments
- - the level of price competition
- - changes in computing platforms
- - the nature and magnitude of product returns
- - order cancellations, software defects and other quality problems
- - the length of product life cycles
- - the percentage of JAWS' sales related to international sales; and
- - changes in personnel.
Because of the current position of JAWS in its business cycle , period to
period comparisons of operating results should not be relied upon as indicative
of future results.
FINANCING
When JAWS was in the start-up stage of development, the company's main
source of funding was a number of private placements. Between February 1997 and
September 1998, JAWS received an aggregate investment of $1,060,000, which
resulted in the issuance of 6,800,000 shares at a price per share between $0.015
and $0.50. (See Item 10 - Recent Sales of Unregistered Securities)
On September 25, JAWS entered into a $2,000,000, 10% Convertible Debenture
Agreement with Thomson Kernaghan & Co. Limited ("Thompson 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. However, on April 20, 1999 JAWS and Bristol mutually terminated
the agreement and Bristol received, in consideration for the termination,
1,000,000 warrants to purchase 1,000,000 shares of common stock at $0.70 per
share until April 15, 2002.
On April 27, 1999, JAWS and Thomson Kernaghan amended the debenture
agreement, increasing the amount available to $5,000,000. To date, $1,520,000
of the $5 million available under the amended debenture agreement has been
advanced in accordance with the terms of debentures issued by JAWS, as follows:
<TABLE>
<CAPTION>
ADVANCE DATE DEBENTURE ISSUED CONVERSION RATE
- ------------------------ -----------------
<S> <C> <C>
September 25, 1998 . . . $ 200,000 $0.1118 per share
- ------------------------ ----------------- -----------------
November 10, 1998. . . . $ 10,000 $0.1118 per share
- ------------------------ ----------------- -----------------
November 10, 1998. . . . $ 110,000 $ 0.28 per share
- ------------------------ ----------------- -----------------
December 12, 1998. . . . $ 100,000 $ 0.28 per share
- ------------------------ ----------------- -----------------
January 26, 1999 . . . . $ 250,000 $ 0.28 per share
- ------------------------ ----------------- -----------------
January 26, 1999 . . . . $ 250,000 $ 0.40 per share
- ------------------------ ----------------- -----------------
April 16, 1999 . . . . . $ 600,000 $ 0.65 per share
- ------------------------ ----------------- -----------------
</TABLE>
Prior to the amendment of the debenture agreement, JAWS received a notice to
convert $210,000 plus interest in the amount of $3,798, at $0.1118, which will
result in the issuance of 1,912,317 shares. $10,000 of the notice to convert
relates to funds advanced on November 10, 1998. The balance of the funds
advanced on November 10, 1998 ($110,000) will be converted at $0.28. All funds
have been allocated toward working capital.
There have been subsequent private placements between December 1998 and
June 1999 (See Item 10 - Recent Sales of Unregistered Securities) whereby JAWS
has received an aggregate investment of $2,973,300 which resulted in the
issuance of 4,361,949 shares at a price per share between $0.32 and $1.50.
Included in these numbers is a material private placement by Glentel Inc.,
resulting in JAWS issuing 1,000,000 shares of common stock at a price of $1.50
per share. The proceeds from these private placements have been allocated
toward the working capital of JAWS. The Glentel private placement also included
834,000 warrants to purchase 834,000 common shares at $2.25 per share until June
30, 2001.
JAWS'earlier attempts to register the shares underlying the debentures to
be issued in accordance with the amended debenture agreement have been
unsuccessful and the Securities Exchange Commission has taken the view that
Thomson Kernaghan is the underwriter of an indirect primary offering of the
common stock acquired through the convertible debentures. Therefore, until and
unless the common stock underlying the convertible debentures issued, and to be
issued, in accordance with the amended debenture agreement are registered
through a NASD member firm, Thomson Kernaghan is not obligated to fund under
the amended debenture agreement. If registration is effected, the balance of
the financing equal to $3,480,000 may, at the option of JAWS, be taken down
within a reasonable period from the date of effectiveness of the registration
statement. The $3,480,000, if drawn down, may be converted with a fixed minimum
conversion price of $0.40 per common share.
In connection with the amended debenture agreement, Thomson Kernaghan received
warrants to purchase 1,428,572 warrants exercisable at $0.28 per common share
and warrants to purchase 923,077 common shares at $0.65 per share.
Additionally, there is a finance fee of 10% of the first $2,000,000 amount
funded through the purchase of debentures and 8% of the proceeds funded in
excess of $2,000,000. The finance fee may be paid in cash or funded on a
combination of cash and unregistered common stock. At the option of JAWS, 37.5%
of the finance fee may be paid by the issuance of the unregistered common stock.
In connection with the amended debenture agreement, JAWS has undertaken to
register and will continue in its efforts to register on Form SB-2 one hundred
percent (100%) of the common shares underlying the debentures and the warrants
upon entering into an underwriting agreement with an NASD member firm.
Thomson Kernaghan has acquired and, in the future, upon requirements of
the Securities Exchange Commission being fulfilled by JAWS, Thomson Kernaghan
will acquire, the debentures under the amended debenture agreement in a
transaction that is exempt from registration requirements under Regulation S.
Thomson Kernaghan is a purchaser who is not a U.S. person, as defined by Rule
902(k) of Regulation S.
On April 20, 1999, JAWS signed a settlement agreement with Bristol Asset
Management LLP ("Bristol") 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.
YEAR 2000 COMPUTER ISSUES
JAWS, its clients, suppliers, financial institu-tions and governmental
entities with which it deals, utilize information systems that will be affected
by the date change to the year 2000. Many of these systems, if not modified or
replaced, will be unable to properly recognize and process date-sensitive
information before, on and after January 1, 2000.
STATE OF READINESS
In order to address operational and systems issues surrounding year 2000,
JAWS organized a year 2000 project team to address the issue and implement
compliance. The project team developed a company-wide, year 2000 remediation
plan consisting of a ten-step process. This process was designed to examine and
evaluate JAWS' own systems and those systems which, in JAWS estimation, might
adversely affect JAWS' as follows:
(1) In-house computer equipment:
JAWS has insisted that all new equipment purchased be certified to be year 2000
compliant. JAWS has not dealt with legacy equipment for internal use and will
only purchase computer equipment produced by year 2000 compliant manufacturers.
(2) Outside supported network equipment:
JAWS has limited its outside resource affiliations to one company.
FutureLink Distribution Corporation maintains JAWS' network system. JAWS has
received a report from Futurelink, in response to its request, and Futurelink is
of the opinion that despite their best efforts to have critical equipment and
systems ready for the year 2000, the complexity and magnitude of the year 2000
issue could result in unpredictable results.
(3) Bandwidth providers:
JAWS has limited its bandwidth provider to FutureLink Distribution
Corporation.
(4) In-house software:
JAWS' own products have been carefully scrutinized for compliance to verify
that all in-house software products developed by JAWS are year 2000 compliant.
(5) Outside support network software:
JAWS relies on FutureLink Distribution Corporation for all outside software
needs with the strict mandate to only supply year 2000 compliant support
software. JAWS has received a report from Futurelink, in response to its
request, and Futurelink is of the opinion that despite their best efforts to
have critical equipment and systems ready for the year 2000, the complexity and
magnitude of the year 2000 issue could result in unpredictable results.
(6) Contractors:
No contractors have been engaged to perform programming work. Due to the nature
of JAWS' product line, strict controls are followed to ensure no outside
contractors have access to JAWS' systems, designs and programming.
(7) In-house auxiliary equipment:
All auxiliary equipment used and owned by JAWS is less than 12 months old,
including phone systems, printers and photocopiers. JAWS has requested year
2000 compliance certificates from each manufacturer.
(8) Physical plant:
JAWS currently leases office space in Calgary, Alberta. A notice
requesting year 2000 compliance has been delivered to the landlord.
(9) Suppliers:
All critical stock items will be in stock prior to the beginning for the
year 2000 thus eliminating inventory pressure for the first quarter of 2000.
(10) Liability:
JAWS has received definitive answers from all insurance carriers with the common
consensus that no liability is covered under JAWS' current policies. JAWS has
taken reasonable steps to reduce its risk to levels that they do not warrant
additional or special insurance at this time.
Similar to most other organizations, JAWS is continuing to work on year
2000 readiness. Given that all of the core technology of JAWS has been
developed recently using year 2000 compliant equipment, tools and processes,
then we have concluded that our products present low year 2000 risk.
ESTIMATED COST OF REMEDIATION
JAWS currently estimates total year 2000 expenditures at approximately
$10,000 - $15,000. Approximately $10,000 has been expended as of June 30, 1999,
to make the required year 2000 modifications and replacements to JAWS own
systems. All modification and maintenance costs, including costs to replace
embedded technology that does not significantly extend the life or improve the
performance of the related asset are expensed as incurred. Costs to purchase
new hardware and software and to replace embedded technology that does not
significantly extend the life or improve the performance of the related asset
are capitalized and depreciated over the assets' useful lives. All of these
costs are being funded through internal cash flow. The estimated total
remediation cost does not include any expenditures that may be incurred in
connection with the implementation of the contingency plans, discussed below.
MOST REASONABLY LIKELY WORST-CASE SCENARIO
JAWS is currently taking all reasonable steps to modify or replace its own
affected systems in a timely fashion and minimize detrimental effects on its
operations; however, JAWS' ability is subject to timely assistance by the
vendors of the process-control systems. JAWS has received written assurances
from some, but not all, third parties with respect to their own systems year
2000 issues and is not in a position to reliably predict whether third parties
will experience remediation problems. If JAWS or major third parties fail to
successfully address the year 2000 issue, there could be a material adverse
impact on the business and results of operations of JAWS.
JAWS has not determined the most reasonable worst-case scenario that could
result from any failure by JAWS or third parties to resolve the year 2000 issue.
JAWS will consider this matter in connection with its development of contingency
plans, discussed below. However, the scenario could include a temporary
curtailment or cessation of operations at JAWS' facilities, and a resulting loss
of production, safety, environmental exposure and a temporary inability on the
part of JAWS to process orders and deliver finished software products to clients
on a timely basis are also concerns relating to a worst case scenario.
CONTINGENCY PLANS
JAWS' year 2000 efforts have been devoted primarily to the readiness
program described above. JAWS has not yet developed contingency plans to
address and mitigate the potential risks associated with the most reasonable
worst-case scenario. JAWS' year 2000 program is an ongoing process of
evaluation and planning. Estimates of remediation costs, completion dates as
well as projections of the possible effects of any non-compliance, are subject
to change.
JAWS has not conducted a systematic evaluation of the year 2000 compliance
of its vendors and clients. As a result, it is possible that JAWS' future
performance may be adversely impacted by payment and financial difficulties
experienced by clients, and/or by shipping fulfillment and accounting
difficulties experienced by vendors. JAWS presently has sufficient resources,
including cash reserves and inventory supplies, to maintain operations during
delays in payments or supplies of inventories. JAWS is aware that extended
difficulties by larger vendors may have a significant impact; however, it is
unable at this time to anticipate the extent of any impact were it to occur.
INSURANCE
JAWS maintains insurance coverage , including key man life insurance
policies, business interruption insurance, asset protection and public liability
insurance. Further, both FutureLink and Offsidedata.com secure JAWS data
through back-up procedures and data recovery procedures.
RECENT ACCOUNTING PRONOUNCEMENTS
In February, 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers Disclosures about Pensions and other Post
Retirement Benefits." JAWS does not have any plans for its employees.
In June 1998, the FASB issued Statement #133, "Accounting for Derivative
Instruments and Hedging Activities." JAWS does not acquire derivatives or engage
in hedging activities.
ITEM 3. DESCRIPTION OF PROPERTY ITEM 3. DESCRIPTION OF PROPERTY
JAWS maintains its offices, and computer center, in a Calgary, Alberta,
Canada, a facility of approximately 10,000 square feet. In the past, JAWS has
purchased most of its equipment, and is now considering leasing all future
equipment. JAWS' current and proposed facilities are in good condition.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT Item 4. Security Ownership of Certain
Beneficial Owners and Management
The following table describes the information regarding the individuals who
beneficially owned JAWS common stock on September 30, 1999 both before and after
exercise and conversion of warrants held by Thomson Kernaghan. In general, a
person is considered a "beneficial owner" of a security if that person has, or
shares, the power to vote or direct the voting of security, or the power to
dispose of such security. A person is also considered to be a beneficial owner
of any securities of which the person has the right to acquire beneficial
ownership within (60) days.
The individuals included in the following table are:
(1) people who JAWS knows beneficially own or exercise voting or
control over 5% or more of JAWS common stock,
(2) each of JAWS directors, and
(3) all JAWS executive officers and directors as a group.
<TABLE>
<CAPTION>
At September 30, 1999, JAWS had 13,202,949 shares of common stock issued and
outstanding.
PERCENT OF CLASS (9)
---------------------
AMOUNT AND NATURE OF BEFORE AFTER
NAME AND OFFICE OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP CONVERSION CONVERSION
<S> <C> <C> <C>
Robert J. Kubbernus (4) . . . . . . . . 1,187,000 9.00% 5.75%
- --------------------------------------- --------------------- ----------- -----------
Cameron B. Chell (5). . . . . . . . . . 377,673 2.86% 1.83%
- --------------------------------------- --------------------- ----------- -----------
Vera Gmitter (6). . . . . . . . . . . . 18,500 0.14% 0.09%
- --------------------------------------- --------------------- ----------- -----------
Julia Johnson (2) . . . . . . . . . . . 313,208 2.37% 1.52%
- --------------------------------------- --------------------- ----------- -----------
Tej Minhas (7). . . . . . . . . . . . . 29,333 0.22% 0.14%
- --------------------------------------- --------------------- ----------- -----------
Arthur Wong (3) . . . . . . . . . . . . 313,208 2.37% 1.52%
- --------------------------------------- --------------------- ----------- -----------
Riaz Mamdani (8). . . . . . . . . . . . 856,000 6.48% 4.14%
- --------------------------------------- --------------------- ----------- -----------
Thomson Kernaghan & Co. Limited (10)
365 Bay Street, 10th floor
Toronto, Ontario M5H 2V2
Canada. . . . . . . . . . . . . . . . . 7,454,899 0% 36.09%
- --------------------------------------- --------------------- ----------- -----------
Bristol Asset Management (11)
1801 Century Park East
Los Angeles, California
1132 LA 90067
United States . . . . . . . . . . . . . 1,000,000 7.57% 4.84%
- --------------------------------------- --------------------- ----------- -----------
Glentel Inc. (12)
Suite 2700, 4710 Kingsway
Burnaby, British Columbia V5H 4M2
Canada. . . . . . . . . . . . . . . . . 1,834,000 13.90% 8.88%
- --------------------------------------- --------------------- ----------- -----------
ALL DIRECTORS AND OFFICERS AS A GROUP
(7 PERSONS) . . . . . . . . . . . . . . 3,094,922 23.44% 14.98%
- --------------------------------------- --------------------- ----------- -----------
</TABLE>
1. Unless otherwise stated, the business address of each of the stockholders
named in the table is C/O JAWS at 1013 17th Avenue SW, Calgary, Alberta, Canada,
T2T 0A7. Except as otherwise indicated and subject to applicable community
property and similar laws, JAWS assumes that each named person has the sole
voting and investment power with respect to that person's shares.
2. Represents 200,000 shares of common stock issuable upon the exercise of
the options at $0.48 per share until August 1, 2000 and represents 113,208
shares of common stock issuable for Ms. Johnson's $60,000 director's fee.
3. Represents 200,000 shares of common stock issuable upon the exercise of
options at $0.48 per share until August 1, 2000 and represents 113,208 shares of
common stock issuable for Mr. Wong's $60,000 director's fee.
4. Includes 200,000 options to purchase common shares at $0.50 per share
under the share purchase agreement between JAWS U.S and JAWS Canada dated
February 10, 1998. Includes 350,000 shares issuable upon the exercise of
options exercisable at $0.48 until June 30, 2008.
5. Includes 200,000 options to purchase common shares at $0.50 per share
under the share purchase agreement between JAWS U.S and JAWS Canada dated
February 10, 1998. Includes 83,333 shares issuable upon the exercise of options
exercisable at $0.48 until June 30, 2008. Includes 94,340 shares of common
stock issuable for Mr. Chell's $50,000 director's fee.
6. Includes 16,500 options to purchase common shares at $0.48 per share
until June 30, 2008.
7. Represents shares of common stock issuable upon the exercise of options
exercisable at $0.37 per share until June 30, 2008.
8. Includes 100,000 options to purchase common shares at $0.15 per share
until June 30, 2008.
9. Represents percentages before and after exercise and conversion of
outstanding warrants and debentures held by Thomson Kernaghan & Co. Limited.
10. Represents 5,103,250 shares of common stock issuable upon conversion of
$1,520,000 principal amount of debentures and 2,351,649 shares of common stock
issuable upon exercise of outstanding warrants. Shares owned by Thomson
Kernaghan & Co. Limited are attributed to numerous shareholders. The only
shareholder with position greater than 10% is Mr. Mark Valentine with 25% of the
shares issued and outstanding.
11. Represents shares of common stock issuable upon the exercise of
warrants. Shares issuable upon exercise of the warrants are attributed to Paul
Kessler.
12. Includes 834,000 shares of common stock issuable upon the exercise of
warrants. 65.2% of the outstanding shares of Glentel are controlled by TCG
International, Inc.
1998 STOCK OPTION PLAN
In July 1998, JAWS adopted the 1998 stock option plan which provides for
the grant of incentive and restricted stock options to purchase up to 20% of the
shares of common stock issued and outstanding from time to time.
The purpose of the stock option plan is to enable JAWS to attract and
retain qualified persons as employees, officers and directors and to motivate
the persons by providing them with an equity participation in JAWS. The options
granted, which are intended to qualify as Incentive Stock Options under Section
422 of the amended U.S. Internal Revenue Code of 1986, is designed to afford
qualified optionees the tax benefits available under the U.S. Internal Revenue
Code of 1986.
The stock option plan is administered by the Board who is authorized to
appoint a stock option committee to determine the persons entitled to receive
options.
The maximum number of shares which an option may grant to any employee or
director, in any one calendar year, is 500,000 shares. The purchase price for
the common shares subject to the stock option plan is determined by the plan
administrator at the time of the grant, but shall not be less than the par value
per common share. The purchase price for shares subject to any Incentive Stock
Option shall not be less than 100% of the fair market value of the shares of
common stock of JAWS on the date the option is granted. In the case of an
Incentive Stock Option granted to an employee who owns stock possessing more
than 10% of the total combined voting power of all classes of stock of JAWS or
its subsidiaries, the exercise price shall not be less than 110% of the fair
market value per share of the common stock JAWS on the date the option is
granted.
As of August 30, 1999 JAWS had granted options under the stock option plan
to purchase a total of 2,492,600 shares of common stock at exercise prices
ranging from $.15 to $2.44 per share. Of the options, 1,620,500 options were
granted to officers and directors and expire in July, 2008 and 400,000 options
expire August 1, 2000. The balance of options outstanding have been issued to
employees.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONSITEM 5.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS
The following table includes the names, positions and ages of the Executive
Officers and Directors of JAWS. Directors are elected at JAWS annual meeting of
shareholders and serve for one year or until their successors are elected. The
board elects the Officers and Officer's terms of office are, unless governed by
employment contract, at the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- --------------------- --- -------------------------------------------------
<S> <C> <C>
Robert J. Kubbernus 39 Chairman of the Board and Chief Executive Officer
Riaz Mamdani. . . . 31 Chief Financial Officer
Tej Minhas. . . . . 39 President, Chief Operating Officer
Vera Gmitter. . . . 41 Vice President Administration
Cameron B. Chell. . 31 Director
Julia L. Johnson. . 34 Director
Arthur Wong . . . . 30 Director
</TABLE>
ROBERT J. KUBBERNUS. Since joining JAWS in 1997 as CEO and Chairman, Mr.
Kubbernus's primary responsibilities have been to oversee JAWS' security product
developers, provide executive direction and develop key contacts within
government, corporations, investors, clients, insurance underwriters and the
investment community. From 1992 to 1997, Mr. Kubbernus held the position of
President and CEO at Bankton Financial Corporation. He headed up a team of
corporate financial consultants who specialize in the placement of debt
instruments with institutional and private lenders. Before 1992, he was the
Chief Financial Officer as well as the Chief Development Officer at Bankers
Capital Group, where he developed new products and markets as well as overseeing
the financial controls of the organization.
RIAZ MAMDANI. As Chief Financial Officer, Mr. Mamdani is responsible for
the development of operational financing including: securities issuances, the
documentation needed to close these issuances , establishing and implementing
professional relationships on behalf of JAWS, and assisting in matters of
corporate compliance as well as company structure. Mr. Mamdani has been active
in the growth of JAWS from its inception. He has assisted with numerous
financings and all significant legal matters pertinent to JAWS. From May 1996
to August 1998, Mr. Mamdani was a Barrister and Solicitor with the Beaumont
Church, a Calgary-based law firm, where his practice focused in the areas of
Corporate, Commercial and Securities law. Since 1992, Mr. Mamdani has been
actively involved in a number of real estate developments in the Calgary area
where he has participated as both an investor and developer. Mr. Mamdani has a
Bachelor of Law degree from the University of Calgary. He also holds a Bachelor
of Sciences degree in Pharmacy from the University of Manitoba. Mr. Mamdani is
also serving as a Director of FAS Group, Inc., the parent company of FAS Wealth
Management Services, Inc., a registered broker-dealer and member of the National
Association of Securities Dealers, Inc.
TEJ MINHAS, President, Chief Operating Officer, is an information
technology executive with extensive entrepreneurial and corporate exposure. He
has more than 20 years of experience in the information technology industry and
has held a variety of senior positions. As an expert information technology
strategist, he has helped foster the growth of the information technology
industry from keypunches and card readers to the explosion of the Internet. His
technology skills include most major commercial hardware, software, operating
system and network platforms. He has a proven track record of adding value to
organizations by providing creative solutions, integrating products, services
and alliance partners, to difficult problems. Mr. Minhas has worked and has
expertise in a number of industries including: financial services, insurance,
telecommunications, oil & gas, retail, manufacturing, and agriculture and has
previously held overall profit and loss responsibility for multi-branch
information technology operations. Mr. Minhas holds a Bachelor of Science,
Computer Science Specialty, from the University of Toronto.
VERA GMITTER, Vice President, Administration. Ms. Gmitter has been a key
contributor to all aspects of JAWS development since inception. Her past 20
years of successful business development has provided a wealth of resource in
handling JAWS development in the areas of policies and procedures, government
regulation, export, trademark, finance, accounting, legal, public compliance and
human resources. Before joining JAWS, Ms. Gmitter held the position of General
Manager for Bankton Financial Corporation for one year. In this position she
directed daily operations for the corporation, which specialized in custom
finance solutions. Previous to her position with Bankton, Ms. Gmitter created
and developed successful private enterprises in the retail and service sector
for her own company. Because of her entrepreneurial achievements, Ms. Gmitter
is committed the implementation of competent and aggressive management
strategies. Ms. Gmitter holds a Bachelor of Arts degree in Political Science
and Economics from Augustana University.
CAMERON B. CHELL. Mr. Chell serves as Director and has several years of
experience in developing financing solutions for high-tech organizations. As a
registered broker, he has aided corporations through their initial financing and
start-up phases. Mr. Chell was the Chief Executive Officer and Chairman of
FutureLink Distribution Corp. In 1997, in partnership with Mr. Chris McNeill,
an investor relations specialist, Mr. Chell opened an investment banking firm,
Chell McNeill Inc. The firm was established to assist high-tech companies, like
JAWS, FutureLink, and others, in acquiring market and investor relations
support. On November 6, 1998, Mr. Chell entered into a Settlement Agreement
with the Alberta Stock Exchange to resolve a pending investigation into alleged
breaches by Mr. Chell of Alberta Stock Exchange rules and bylaws. As part of
the Settlement Agreement,
Mr. Chell acknowledged that he had breached the duties of supervision,
disclosure, or compliance in connection with various offers and sales of
securities,
Mr. Chell was prohibited from receiving Alberta Stock Exchange approval for
a five-year period; and
Mr. Chell has been fined CDN$25,000 and a three-year period of enhanced
supervision has been imposed.
JULIA L. JOHNSON serves as Director and is a nationally-recognized
authority on utility regulation in the U.S. She currently serves as Chairman of
the Florida Public Service Commission, state Chair person of the Federal/State
Joint Board on Universal Service, Vice Chairman of the Communications Committee
of the National Association of Regulatory Utility Commissioners, and is a board
member for the Markle Foundation, a project that encourages the use of new
communications technologies for socially beneficial purposes. Before being
appointed to the Florida Public Service Commission, Ms. Johnson served as the
Director of Legislative Affairs and senior land use attorney for the Department
of Community Affairs. She was the chief lobbyist representing the agency before
the Florida Legislature on land use issues. In 1997, Ms. Johnson received the
Dollars & $ense Magazine's Best and Brightest Business & Professional Men and
Women award. In 1996, she received the University of Florida Association of
Black Alumni's Outstanding Leadership Award. Ms. Johnson holds a Juris
Doctorate, with a concentration in corporate and real estate transactions, from
the University of Florida School of Law, as well as a Bachelor of Science in
Business Administration from the University of Florida.
ARTHUR WONG serves as Director and provides strategic direction to JAWS in
the area of channel development. In the past seven years Mr. Wong has founded
one oil and gas company and three technology companies. Mr. Wong has taken two
of those companies public. As a Fellow for Network Associates Inc. of Santa
Clara, California, Mr. Wong headed up Active Security issues and spearheaded the
adoption of new security infrastructures for global enterprises and integrators.
He also developed standards for new security infrastructures and works on its
integration and adaptation internationally. In 1996, Mr. Wong founded and
managed Secure Networks Inc., an organization that developed Internet security
tools and offered security consulting before it was acquired by Network
Associates Inc. for approximately $25 million. He is the Managing Director and
Founder of H2O Entertainment Corp., a Calgary-based organization that develops
products for Nintendo and its N64 game platform. Mr. Wong also founded
Millennium Systems Canada Inc., a wholesale distributor of high-end computer
equipment. Mr. Wong holds a Bachelor of Science in Communication from the
University of Calgary.
BOARD OF DIRECTORS AND COMMITTEES
The board of directors has nominated a Compensation Committee consisting of
three outside directors. Any and all compensation plans for the executive
members are reviewed on an annual basis. JAWS has a stock option plan that it
uses to compensate executives as well as an incentive for executive efforts to
add value to JAWS.
The Compensation Committee currently consists of Julia L. Johnson, Arthur
Wong and Cameron B. Chell. The Compensation Committee establishes salaries,
incentives and other forms of compensation for officers of JAWS. The Audit
Committee consists of Julia L. Johnson, Arthur Wong and Cameron B. Chell.
COMPENSATION OF BOARD OF DIRECTORS
Out of pocket expenses of JAWS directors, related to their attendance at
meetings of the board of directors, are paid by JAWS. JAWS may reimburse
expenses incurred by directors related to board of directors meetings. Each of
Ms. Johnson and Mr. Wong are to be compensated in 1998 for their directors'
services rendered to JAWS in an amount equal to US$60,000 payable at JAWS's sole
discretion, in stock or in cash. In addition, the directors are eligible to
receive stock options under the JAWS 1998 Stock Option Plan. No other payments
have been made to the directors.
DIRECTORS' AGREEMENT
Each of Ms. Julia Johnson and Mr. Arthur Wong have entered into agreements
with JAWS to act as a director of JAWS. In consideration of their services, the
agreement grants each of the directors a fee of stock or cash equal to $60,000US
per annum. In addition, these directors have been granted options to purchase
200,000 shares of JAWS at a price per common share equal to $0.48, exercisable
until August 1, 2000.
ITEM 6. EXECUTIVE COMPENSATIONITEM 6. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
The following table sets forth information concerning compensation of the seven senior officers and
directors of JAWS, for the fiscal year from January 1 to December 31, 1999.
SECURITIES
----------
NAME AND UNDERLYING
- --------------------- -------------
PRINCIPAL OTHER ANNUAL OPTIONS ALL OTHER
- --------------------- ------------- ------------ ----------
POSITION YEAR ENDED SALARY($) BONUS($) COMPENSATION($) GRANTED(#) COMPENSATION($)
- --------------------- ------------- ------------ ---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Per Year (1)
CEO - Robert
Kubbernus . . . . . . 1999 180,000 US$ Nil Nil 350,000 0
Director - Cameron
Chell . . . . . . . . 1999 50,000 US$ Nil Nil 250,000 0
Director - Julia
Johnson . . . . . . . 1999 60,000 US$ Nil Nil 200,000 0
Director - Arthur
Wong. . . . . . . . . 1999 60,000 US$ Nil Nil 200,000 0
V.P. Operations -
Vera Gmitter. . . . . 1999 50,000 US$ Nil Nil 82,500 0
President, COO - Tej
Minhas. . . . . . . . 1999 106,667 US$ Nil Nil 88,000 0
106,667 US$
CFO - Riaz Mamdani. . 1999 Nil Nil 350,000 0
</TABLE>
(1) All salaries are paid in Canadian Dollars. 1.5:1 Exchange rate to
calculate US$.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSItem 7. Certain
Relationships and Related Transactions
The following paragraphs describe the relationships and transactions of
JAWS in the last two years with a director, executive officer, promoter of JAWS
or a person who JAWS knows beneficially own or exercise voting or control over
5% or more of JAWS common stock.
PROMOTERS
Bankton Financial Corporation and Robert Kubbernus are the promoters of
JAWS. Bankton Financial Corporation was a founding shareholder in JAWS and
beneficial ownership of any JAWS shares owned by Bankton Financial Corporation
are attributed to Mr. Kubbernus. Mr. Kubbernus is the Chairman and CEO of JAWS
and his company Bankton Financial Corporation receives $180,000 per year for his
services.
PURCHASE OF JAWS TECHNOLOGIES INC. (ALBERTA)
<TABLE>
<CAPTION>
On February 10, 1998, when JAWS was still known as E-Biz Solutions, Inc.
("E-Biz"), E-Biz entered into an agreement with the shareholders of JAWS
Technologies Inc. (Alberta) ("JAWS Alberta") to purchase all the issued and
outstanding shares of JAWS Alberta for 1,500,000 restricted shares of E-Biz.
Pursuant to this agreement, the following people received common stock of E-Biz,
in consideration for their shares of JAWS Alberta, as follows:
JAWS ALBERTA SHAREHOLDER NUMBER OF E-BIZ SHARES RECEIVED
<S> <C>
Robert Kubbernus. . . . . . . . . 315,000
- --------------------------------- -------------------------------
Bankton Financial Corporation (1) 322,000
- --------------------------------- -------------------------------
Chell McNeill, Inc.(2). . . . . . 637,000
- --------------------------------- -------------------------------
</TABLE>
- ---------------------------------
(1) Robert Kubbernus is the controlling shareholder of Bankton Financial
Corporation. Robert Kubbernus was also granted 200,000 options to purchase
shares of the common stock at $0.50 per share.
(2) Cameron Chell is the controlling shareholder of Chell McNeill, Inc.
Cameron Chell was also granted 200,000 options to purchase shares of the common
stock of E-Biz at $0.50 per share.
TRANSACTIONS WITH THOMSON KERNAGHAN & CO. LIMITED
JAWS has received notice of conversion from Thomson Kernaghan for
conversion of $210,000, plus interest of $3,798, of Thomson Kernaghan
debentures. These conversions will result in the issuance of 1,912,317 shares.
Thomson Kernghan also holds warrants to puchase 2,351,649 shares of common stock
of JAWS. Pursuant to Exhibit C of the amended debenture agreement, Thomson
Kernaghan & Co. Limited is the registered holder of 10,928,572 common shares of
JAWS that, during the term of the Escrow Agreement and so long as any of the
shares are in escrow, cannot be voted. These share are held as security for the
funds advanced and to be advanced. JAWS has no other relationship with Thomson
Kernaghan & Co. Limited other than the amended debenture agreement. (See
"Management's Discussion and Analysis-Financing.) Shares owned by Thomson
Kernaghan & Co. Limited are attributed to numerous shareholders. The only
shareholder of Thomson Kernaghan with an ownership position greater than 10% is
Mr. Mark Valentine. Mr. Valentine owns 25% of the shares of Thomson Kernaghan.
CONSULTING FEES
For the services of Robert Kubbernus, who acts as CEO and Chairman of the
Company, JAWS pays Bankton Financial Corporation a company controlled by Mr.
Kubbernus. Compensation for Mr. Kubbernus, as approved by the Board of
Directors of JAWS, is $180,000 USD per annum and as at June 30, 1999, JAWS has
paid $90,000 for Mr. Kubbernus's 1999 services. Mr. Kubbernus and Bankton
Financial Corporation are shareholders and promoters of JAWS and continue to
direct and promote the company's future development. (See - Financial
Statements-Footnote 6.)
LEASE OF PREMISES
JAWS entered into an agreement to lease premises from Shelbourne Place
Holding Corp. Riaz Mamdani, the Chief Financial Officer of JAWS, owns a
majority of the shares of this corporation. The lease began on November 1, 1998
and is for a five year term.
TRANSACTIONS WITH FUTURELINK
Mr. Chell has resigned as CEO and director of FutureLink. Robert Kubbernus
is a director of FutureLink. FutureLink is an ASP and supplies services to
JAWS. These services are provided to JAWS on normal commercial terms consistent
with the terms FutureLink has with other clients. There are no written
contracts between FutureLink and JAWS, the services are provided on a month to
month basis.
PROVISION OF STATIONARY AND OFFICE SUPPLIES
Mr. Mamdani was a director of Willsons Stationers, a stationary and office
supplies company, until August 13, 1999. JAWS purchases all of its stationary
and office supplies from Willsons at prices paid by non-relatate parties in arms
legnth transactions.
ITEM 8. LEGAL PROCEEDINGS.ITEM 8. LEGAL PROCEEDINGS
JAWS is not a party to any litigation or pending litigation outside of
routine litigation incidental to the business of JAWS.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERSITEM 9.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
<TABLE>
<CAPTION>
As of September 30, 1999, there were approximately 86 shareholders of
record of JAWS' common stock. JAWS' common stock is currently listed for
trading on the over-the-counter bulletin board under the symbol "JAWZ." The
following table sets forth, the high and low bid prices for JAWS' common stock
as reported by the OTC Bulletin Board since February 1, 1998.
PRICE RANGE TRADING VOLUME
----------- --------------
HIGH LOW
----------- --------------
<S> <C> <C> <C>
February 1998. 1.00 0.59 333,800
March 1998 . . 1.06 0.88 693,200
April 1998 . . 1.22 0.94 2,480,000
May 1998 . . . 0.88 0.75 869,700
June 1998. . . 0.85 0.55 1,740,000
July 1998. . . 0.75 0.45 2,621,500
August 1998. . 0.76 0.40 2,282,900
September 1998 0.45 0.28 1,608,800
October 1998 . 0.33 0.16 4,070,500
November 1998. 0.26 0.15 3,905,100
December 1998. 0.52 0.35 8,489,200
January 1999 . 0.68 0.40 3,836,000
February 1999. 1.12 0.55 5,862,100
March 1999 . . 0.88 0.65 4,224,800
April 1999 . . 0.98 0.62 4,293,700
May 1999 . . . 3.53 0.71 15,160,300
June 1999. . . 3.12 2.12 4,731,000
July 1999. . . 2.78 1.88 2,841,700
August 1999. . 2.25 1.53 1,614,200
September 1999 1.81 1.34 2,204,900
</TABLE>
ITEM 10. RECENT SALE OF UNREGISTERED SECURITIES.Item 10. Recent Sale of
Unregistered Securities
The following securities have been sold by JAWS since incorporation in
1997.
1. Offering memorandum dated February 14, 1997 with a Sticker Update dated
April 1, 1997 which JAWS sold 4,000,000 shares of Common Stock at $0.015 per
share for an aggregate investment of $60,000. The sales were made in a
transaction in reliance on the exemption provided by Rule 504 of Regulation D
promulgated under Section 3 (b) of the Securities Act of 1933., as amended (the
"Act"). The sale of shares was to 14 accredited investors in the state of
Nevada. Additionally, sales were made to 27 investors all of whom are not U. S.
citizens or residents.
2. Sales to two consultants to JAWS for an aggregate of 300,000 shares of
common stock. 250,000 shares of common stock were issued to C.J Weinstein in
December 1997 for remuneration for his services as Director, and as incentive to
join the company. In February 1998, 50,000 shares of common stock were issued
to Joseph Lynch in consideration for services rendered to JAWS in relation to
the establishment of the capital structure of the company and vetting of public
relations firms. The sales were 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 Act.
3. Share Exchange Agreement between JAWS and shareholders of JAWS dated
February 10, 1998 which JAWS issued 1,500,000 shares of common stock and options
to purchase 400,000 shares of Common Stock at $0.50 per share to the
shareholders of JAWS Canada in exchange for all of the issued and outstanding
shares of JAWS Canada. The sales were 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 Act.
4. Offering Memorandum dated February 18, 1998 which JAWS sold 600,000
shares of common stock at $0.50 per share for an aggregate investment of
$300,000. The sales were made in a transaction in reliance on the exemption
provided by Rule 504 of Regulation D promulgated under Section 3 (b) of the Act.
The sale of shares was to 26 accredited investors. All investors are not
residents or citizens of the U.S.
5. Sale on July 24, 1998 of 100,000 shares of common stock of JAWS to
Bonanza Management Ltd. in consideration of investor relations and consulting
services rendered, including the distribution of the JAWS business plan to the
investment community. 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 Act.
6. Offering memorandum dated February 18, 1998 of 1,250,000 shares of common
stock of JAWS at $0.40 per share for an aggregate investment of $500,000 to
Bristol Asset Management LLC, an accredited investor. The sale was made in a
transaction in reliance on the exemption provided by Rule 504 of Regulation D
promulgated under Section 3 (b) of the Act.
7. Sales made in accordance with the February OM of 900,000 shares of common
stock of JAWS at $0.20 per share for an aggregate investment of $180,000 to two
accredited investors (450,000 shares each) Hampton Park Ltd. and Linear
Strategies Ltd. These sales were made in a transaction in reliance on the
exemption provided by Rule 504 of Regulation D promulgated under Section 3 (b)
of the Act.
8. Sales by the offering memorandum dated April 1998 of 50,000 shares of
common stock of JAWS at $0.40 per share for an aggregate investment of $20,000
to Riaz Mamdani, an accredited investor. The offering was made by exemption in
Rule 504 of Regulation D promulgated under the Act. This sale was made in a
transaction in reliance on the exemption provided by Rule 504 of Regulation D
promulgated under Section 3 (b) of the Act.
9. 10% Convertible Debenture issued to Thomson Kernaghan in connection with
the amended debenture purchase agreement dated April 27, 1999. To date, JAWS
has issued debentures for $1,520,000. Of such issuance only $210,000 plus
interest has been noticed for conversion at $0.1118 into 1,912,317 shares of
common stock. The sale of the debenture was made by exemption in Regulation S
promulgated under the Act. TK warranted in the debenture purchase agreement
that it is 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 United States
persons for a period of one year from the date of closing of all debentures
offered pursuant to the agreement.
10. Sale on December 15, 1998 of 1,182,188 shares of common stock of JAWS at
$0.32 per share for an aggregate investment of $378,300. Further, the sale
included 391,094 warrants to purchase 391,094 common shares of JAWS at $1.00 per
share until March 30, 2000, and 391,094 warrants to purchase 391,094 common
shares of JAWS at $2.00 per share until March 30, 2000. The sale of shares was
to 9 accredited investors. The sales were 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 Act. All investors are not U.S. citizens
or residents.
11. Sale on April 6, 1999 made in accordance with the Offering Memorandum
dated February 18, 1998 of 1,571,428 common shares of JAWS at $0.35 per share
for an aggregate investment of $550,000 to Hampton Park Ltd. ($300,000) and
Global Equity Fund Ltd. ($250,000), both accredited investors. The sales were
made in a transaction in reliance on the exemption provided by Rule 504 of
Regulation D promulgated under Section 3 (b) of the Act. The purchasers are
contractually prohibited from reselling the securities for a six-month period.
12. Sale on June 9, 1999 of 408,333 shares of common stock of JAWS at $0.60
per share for an aggregate investment of $245,000 to Royale Crown Limited, an
accredited investor. The sale was made in a transaction in reliance on the
exemption provided by Rule 504 of Regulation D promulgated under Section 3 (b)
of the Act.
13. Sale to Glentel Inc., on June 21, 1999, of 1,000,000 shares of common
stock of JAWS at $1.50 per share for an aggregate investment of $1,500,000.
This sale included 834,000 warrants to purchase 834,000 common shares at $2.25
per share until June 30, 2001. 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 Act. A finder fee of $105,000 was paid to
Mr. Joe Dobosz.
14. Sale on June 21, 1999 of 200,000 shares of common stock of JAWS at $1.50
per share for an aggregate investment of $300,000. This sale included 166,000
warrants to purchase 166,000 common shares at $2.25 per share until June 30,
2001, to 10 accredited investors, all of whom are not U.S. Citizens or
residents. 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 Act.
15. Sale on September 15, 1999 of 141,000 shares of common stock of JAWS 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 Act.
ITEM 11. DESCRIPTION OF SECURITIESITEM 11. DESCRIPTION OF SECURITIES
In April 1999, JAWS increased its authorized shares from 20,000,000 shares
of common stock to 95,000,000 shares of common stock, with a par value $.001 per
share. Authorized preferred stock remains at 5,000,000 shares, with a par value
$.001 per share. As of September 30, 1999 there were 13,202,949 shares of
common stock issued and outstanding and no shares of preferred stock issued or
outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to the holders of outstanding shares of preferred stock, if any,
the holders of common stock are entitled to receive ratably dividends, if any,
as may be declared from time to time by the board of directors, out of funds
legally available therefore. In the event of liquidation, dissolution or
winding up of JAWS, and subject to the prior distribution rights of the holders
of outstanding shares of preferred stock, if any, the holders of shares of
common stock shall be entitled to receive, pro rata, all of the remaining assets
of JAWS available for distribution to its stockholders. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
The board of directors is authorized, subject to any limitations prescribed
by the laws of the State of Nevada, with approval by JAWS's stockholders, to
provide for the issuance of up to 5,000,000 shares of preferred stock in one or
more series, to establish from time to time the number of shares to be included
in each series, to fix the designations, powers, preferences and rights of the
shares of each series and any qualifications, limitations or restrictions, and
to increase or decrease the number of shares of any series, but not below the
number of shares of series then outstanding without any further vote or action
by the stockholders. The board of directors may authorize and issue preferred
stock with voting or conversion rights that could adversely affect the voting
power or other rights of the holders of shares.
NEVADA ANTI-TAKEOVER LEGISLATION
Nevada law includes the provisions, which prevent third parties from taking
over Nevada corporations. The Nevada Control Share Act generally provides that
shares acquired in excess of the specified thresholds will not possess any
voting rights unless the voting rights are approved by a majority of a
corporation's disinterested shareholders. The Nevada Affiliated Transactions
Act generally requires super majority approval by disinterested shareholders of
the specified transactions between a public corporation and holders of more than
10% of the outstanding voting shares of the corporation, or their affiliates.
Nevada law and JAWS articles and bylaws also authorize us to indemnify JAWS
Directors, Officers, employees and agents. In addition, JAWS articles and
Nevada law presently limit the personal liability of corporate Directors for
monetary damages, except where the directors
breach their fiduciary duties, and
the breach constitutes or includes the violations of criminal law, a
transaction from which the Directors derived an improper personal benefit, the
unlawful distributions or the other reckless, wanton or willful acts or
misconduct.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF JAWS ARTICLES OF INCORPORATION AND BYLAWS
The provisions of the articles and bylaws of JAWS summarized in the
following paragraphs, and above under the section entitled "preferred stock,"
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt, including attempts that might result in a
premium being paid over the market price for the shares held by shareholders.
The following provisions may not be amended in JAWS articles or bylaws without
the affirmative vote of the holders of at least two-thirds of the outstanding
shares of JAWS common stock. The articles and bylaws provide that special
meetings of shareholders of JAWS may be called only by JAWS board of directors,
or holders of not less than 10% of JAWS' outstanding voting stock entitled to
vote at the special meeting.
Despite the belief of JAWS as to the benefits to shareholders of these
provisions of JAWS articles of incorporation, these provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
JAWS Board, but from which the shareholders may receive a substantial premium
for their shares over then current market prices. As a result, shareholders who
might desire to participate in the transaction may not have any opportunity to
do so. The provisions will also render the removal of the JAWS board of
directors and management more difficult and may tend to stabilize JAWS stock
price, thus limiting gains which might otherwise be reflected in price increases
due to a potential merger or acquisition. The board of directors, however, has
concluded that the potential benefits of these provisions outweigh the possible
disadvantages. Under applicable regulations, at any annual or special meeting
of its shareholders, JAWS may adopt additional articles of incorporation
provisions regarding the acquisition of its equity securities that would be
permitted to a Nevada corporation.
TRANSFER AGENT
JAWS transfer agent for its common stock is U.S. Stock Transfer
Corporation, 1745 Gardena Avenue, Glendale, California 91204-2991.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERSITEM 12.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
JAWS' articles of incorporation and By-Laws provide for indemnification of
JAWS' officers and directors, to the fullest extent permitted by Nevada Law. In
addition, the Restated articles of incorporation provide, under Nevada Law, that
no director shall be personally liable to JAWS, or its shareholders, for
monetary damages because of any breach of fiduciary duty by the director as a
director. However, the directors shall be liable to the extent provided by
applicable law for
breach of the director's duty of loyalty to JAWS or its shareholders, or
acts or missions not in good faith or which involve intentional misconduct
or willful violation of law.
At present, there is no pending litigation or proceeding involving a
director, officer, employee, or other agent of JAWS. Insofar as indemnification
for liability arising under the Securities Act may be permitted to directors,
officers, and controlling persons, JAWS is aware that, in the opinion of the
Securities and Exchange Commission, the indemnification is against public policy
as expressed in the Securities Act and is unenforceable.
ITEM 13. EXHIBITSITEM 13. 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.(3)
3.1.2 Articles of Incorporation of JAWS Technology Inc., an Alberta
corporation, dated September 18, 1997.(3)
3.1.3 Certificate of Amendment of Articles of Incorporation , dated March
30, 1998, changing the name of E-Biz to Jaws Technologies, Inc.(3)
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.(3)
3.2.1 Bylaws of E-Biz Solutions Inc. (now Jaws US) dated January 27,
1997.(3)
3.2.2 Bylaws No. 1 of JAWS Canada dated October 20, 1997 and Bylaw No. 2 of
JAWS Canada dated October 20, 1997.(3)
4.1.1 Amendment No. 1 to Debenture Purchase Agreement by and between JAWS
and Thompson Kernaghan dated April 27, 1999.(3)
4.1.2 Investment Agreement by and between JAWS and Bristol Asset Management
V, LLC dated August 27, 1998 and letter of termination.(3)
4.1.3 Warrant to purchase 1,000,000 shares of common stock of JAWS issued to
Bristol Asset Management, LLC.(3)
4.1.4 Debenture Acquisition Agreement by and between JAWS and Thomson
Kernaghan & Co. Ltd. dated September 25, 1998.(3)
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.(3)
10.1.3 Director's Agreement between JAWS and Julia Johnson dated July 30,
1998.(3)
10.1.4 Incentive and Non-Qualified Stock Option Plan for JAWS.(3)
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 Letter Agreement between JAWS and Arrow Communications (ApexMail)
dated August 10, 1999. (1)
10.1.9 Addendum to the Letter Agreement between JAWS and ApexMail.net, dated
September 28, 1999. (1)
10.1.10 Resolution and Assignment of JAWS Software Ltd. to JAWS Technologies
Inc, dated October 20, 1997. (1)
10.1.11 Assignment from James L. A. Morrison to JAWS Technologies Inc.,
dated October 9, 1998. (1)
10.1.12 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.(3)
10.1.14 Indemnity Agreements by and between JAWS and Ms. Julia L.
Johnson.(3)
10.1.15 Indemnity Agreements by and between JAWS and Mr. Arthur Wong.(3)
21 Subsidiaries of JAWS: JAWS Technologies, Inc., an Alberta corporation.(3)
23.1 Consent of Sonfield & Sonfield.(included in exhibit 5.1)
23.2 Consent of Ernst & Young LLP.(3)
27 Financial Data Schedule(1)
- -------------------------
(1) Filed herewith.
(1) Previously filed.
(2) Incorporated by reference to registration statement on Form SB-2, File
No. 333-65583.
<PAGE>
F - 29
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTSINDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
JAWS TECHNOLOGIES, INC.
JUNE 30, 1999 (UNAUDITED), DECEMBER 31, 1998 AND 1997
June 30, 1999 (unaudited)
- -----------------------------------------------------------------------------
<S> <C>
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . . . . . . . F - 2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . F - 3
Consolidated Statements of Loss and Deficit and Comprehensive Loss. . . . . . F - 4
Consolidated Statement of Changes in Stockholders' Equity . . . . . . . . . . F - 5
Consolidated Statements of Cash Flow. . . . . . . . . . . . . . . . . . . . . F - 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . F - 7-17
December 31, 1997
- -----------------------------------------------------------------------------
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . . . . . . . F - 18
Comments by Auditors for U.S. Readers on Canada - U.S. Reporting Differences. F - 19
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 20
Statements of Loss and Deficit and Comprehensive Loss . . . . . . . . . . . . F - 21
Statements of Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 22
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . F - 23-26
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
JAWS TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheets of JAWS
TECHNOLOGIES, INC. as at December 31, 1998 and 1997 and the related consolidated
statements of loss and deficit and comprehensive loss, changes in stockholders'
equity and cash flows for the year ended December 31, 1998, for the six months
ended June 30, 1998, and for the period from the date of incorporation on
January 27, 1997 to December 31, 1997. 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 United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Jaws
Technologies, Inc. as at December 31, 1998 and December 31, 1997 and the
consolidated results of its operations and its consolidated cash flows for the
year ended December 31, 1998, for the six months ended June 30, 1998, and for
the period from the date of incorporation on January 27, 1997 to December 31,
1997, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and working capital deficiency raise substantial doubts
about its ability to continue as a going concern. Management's plans as to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Calgary, Canada signed: Ernst & Young LLP
March 22, 1999 Chartered Accountants
<PAGE>
JAWS TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(all amounts are expressed in U.S. dollars)
(see basis of presentation - note 1)
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
$ $
<S> <C> <C> <C>
(unaudited)
ASSETS
CURRENT
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 2,054,125 33,732 111
Accounts receivable. . . . . . . . . . . . . . . . . . . 42,536 7,243 -
Due from related parties [note 6]. . . . . . . . . . . . - 13,118 -
Prepaid expenses and deposits. . . . . . . . . . . . . . 111,623 140,456 7,500
2,208,284 194,549 7,611
Fixed assets, net of $50,579 (December 31, 1998 -
13,461; December 31, 1997 - $1,160)
accumulated depreciation [note 4]. . . . . . . . . . . . 420,148 78,830 2,320
2,628,432 273,379 9,931
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT
Accounts payable . . . . . . . . . . . . . . . . . . . . 486,026 379,720 32,976
Accrued liabilities. . . . . . . . . . . . . . . . . . . 191,357 48,880 -
Current portion of capital lease obligations payable
[note 11]. . . . . . . . . . . . . . . . . . . . . . . . 14,130 - -
Due to related parties [note 6]. . . . . . . . . . . . . 193,583 197,115 -
885,096 625,715 32,976
Capital lease obligations payable [note 11]. . . . . . . 41,889 - -
Due to stockholders [note 6] . . . . . . . . . . . . . . 15,221 74,717 78,159
Convertible debentures [note 7]. . . . . . . . . . . . . 1,022,343 146,606 -
1,079,453 221,323 78,159
COMMITMENTS AND CONTINGENCIES [NOTES 10 AND 16]
STOCKHOLDERS' EQUITY (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 5] . . . . . . . . 14,973 10,612 4,000
Capital in excess of par value . . . . . . . . . . . . . 5,181,092 2,212,153 31,650
Contributed surplus. . . . . . . . . . . . . . . . . . . 1,241,607 425,559 -
Foreign currency translation adjustment. . . . . . . . . (127,538) (8,842) -
Deficit. . . . . . . . . . . . . . . . . . . . . . . . . (5,646,251) (3,213,141) (136,854)
663,883 (573,659) (101,204)
------------ ------------ ---------
2,628,432 273,379 9,931
------------ ------------ ---------
</TABLE>
See accompanying notes
On behalf of the Board:
Director Director
<PAGE>
JAWS TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT AND COMPREHENSIVE LOSS
(all amounts are expressed in U.S. dollars)
PERIOD FROM
INCORPORATION
SIX MONTHS ENDED YEAR ENDED JANUARY 27, TO
JUNE 30, DECEMBER 31, DECEMBER 31,
------------ -------------- --------------
<S> <C> <C> <C> <C>
1999 1998 1998 1997
$ . . . . . . . . . . . . . . . . $ $ $
(unaudited)
- -----------------------------------
REVENUE . . . . . . . . . . . . . . 10,180 1,938 29,068 -
EXPENSES [NOTE 6]
Accounting and legal. . . . . . . . 136,589 59,862 186,128 69,952
Advertising and promotion . . . . . 184,767 170,684 218,574 35,000
Consulting. . . . . . . . . . . . . 226,275 340,908 514,894 30,731
Depreciation and amortization . . . 37,118 4,912 14,041 580
Directors' fees . . . . . . . . . . 65,000 - 33,333 -
Management fees . . . . . . . . . . 105,728 - - -
Amortization of deferred financing
fees [note 7] . . . . . . . . . . . 39,615 - 5,158 -
Foreign exchange loss . . . . . . . 12,997 - (431) -
Non cash interest expense . . . . . 662,171 - 381,688 -
Interest expense and bank charges . 4,028 - 2,869 -
Investor relations. . . . . . . . . 54,630 - 258,016 -
Office and administration . . . . . 55,896 - 83,143 -
Other . . . . . . . . . . . . . . . 164,180 33,214 52,928 591
Rent. . . . . . . . . . . . . . . . 82,099 8,787 29,637 -
Travel. . . . . . . . . . . . . . . 234,082 43,377 132,646 -
Wages and employee benefits . . . . 378,115 23,124 283,728 -
Software development costs
[note 3] . . . . . . . . . . . . . - 909,003 909,003 -
2,443,290 1,593,871 3,105,355 136,854
LOSS FOR THE PERIOD [NOTE 8]. . . . (2,433,110) (1,591,933) (3,076,287) (136,854)
- ----------------------------------- ------------ -------------- -------------- ----------
OTHER COMPREHENSIVE LOSS
Foreign currency translation
adjustment. . . . . . . . . . . . . (118,696) 848 (8,842) -
COMPREHENSIVE LOSS. . . . . . . . . (2,551,806) (1,591,085) (3,085,129) (136,854)
DEFICIT, BEGINNING OF PERIOD. . . . (3,213,141) (136,854) (136,854) -
LOSS FOR THE PERIOD . . . . . . . . (2,433,110) (1,591,085) (3,076,287) (136,854)
DEFICIT, END OF PERIOD. . . . . . . (5,646,251) (1,728,787) (3,213,141) (136,854)
Loss per common share . . . . . . . (0.21) (0.24) (0.42) (0.03)
Weighted average number of shares
outstanding . . . . . . . . . . . . 11,428,319 6,516,851 7,405,421 4,000,000
</TABLE>
See accompanying notes
<PAGE>
JAWS TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(all amounts are expressed in U.S. dollars)
CAPITAL IN
-----------
EXCESS OF CONTRIBUTED
SHARES PAR VALUE PAR VALUE SURPLUS
<S> <C> <C> <C> <C> <C>
$ $ $
----------- ------------ -----------
BALANCE, JANUARY 27, 1997
Issuance of common stock for cash . . . . 4,000,000 4,000 56,000 60,000
Less share issue costs. . . . . . . . . . - - (24,350) (24,350)
BALANCE, DECEMBER 31, 1997. . . . . . . . 4,000,000 4,000 31,650 -
- ----------------------------------------- ----------- ------------ ----------- ----------
Issuance of common stock for services
[note 5] . . . . . . . . . . . . . . . 400,000 400 199,600 -
- ----------------------------------------- ----------- ------------ ----------- ----------
Issuance of common stock on acquisition
of subsidiary [note 3] . . . . . . . . 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 7]. . . . - - - 342,857
Equity component of convertible
debentures [note 7]. . . . . . . . . . - - - 118,462
Equity component of financing fees [note
7] - - - (11,760)
Equity component of financing fees [note
7] - - - (24,000)
Issue of common stock upon conversion
of convertible debentures [note 7] . . 1,912,317 1,912 211,886 -
Financing fee associated with converted
debentures [note 7]. . . . . . . . . . - - (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 7]. . . . . . . . . . - - - 424,575
Equity component of financing fees [note
7] - - - (14,000)
Issuance of common stock for cash . . . . 4,044,761 4,044 2,867,756 -
Equity component of convertible
debenture [note 7] . . . . . . . . . . - - - 193,292
Equity component of financing fee [note
7] - - - (19,329)
Warrants issued with issuance of
convertible debentures [note 7]. . . . - - - 341,538
Equity component of financing fee [note
7] - - - (110,028)
BALANCE, JUNE 30, 1999. . . . . . . . . . 14,974,266 14,973 5,181,092 1,241,607
</TABLE>
See accompanying notes
<PAGE>
JAWS TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(all amounts are expressed in U.S. dollars)
PERIOD FROM
INCORPORATION
SIX MONTHS ENDED YEAR ENDED JANUARY 27, TO
JUNE 30, DECEMBER 31, DECEMBER 31,
------------ -------------- --------------
<S> <C> <C> <C> <C>
1999 1998 1998 1997
$. . . . . . . . . . . . . . . . . . . . . $ $ $
(unaudited)
- --------------------------------------------
CASH FLOWS USED IN OPERATING ACTIVITIES
Loss for the period. . . . . . . . . . . . . (2,433,110) (1,591,933) (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 5]. . . . . . . . . - 150,000 200,000 -
Depreciation and amortization. . . . . . . . 37,118 4,912 14,041 580
Amortization of deferred financing fees. . . 39,615 - 5,158 -
Software development costs . . . . . . . . . - 909,003 909,003 -
Non-cash interest expense on warrants. . . . - - 257,143 -
Non-cash interest expense on convertible
debentures . . . . . . . . . . . . . . . . . 617,867 - 118,462 -
Non-cash interest expense on convertible
debenture conversion and accrued
interest. . . . . . . . . . . . . . . . . 44,304 - 6,083 -
Changes in non-cash working capital
balances [note 12]. . . . . . . . . . . . 251,909 107,814 439,422 25,476
(1,442,297) (420,204) (1,126,975) (110,798)
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of fixed assets . . . . . . . . . . (441,114) (78,198) (115,584) (2,900)
(441,114) (78,198) (115,584) (2,900)
CASH FLOWS GENERATED BY (USED IN)
FINANCING ACTIVITIES
Proceeds from the issuance of common stock,
net of issue costs. . . . . . . . . . . . 2,973,300 754,686 954,686 35,650
Repayment of stockholder loans . . . . . . . (59,496) (116,437) (78,159) 78,159
Proceeds from advances . . . . . . . . . . . - - 20,273 -
Proceeds received on issue of convertible
debenture . . . . . . . . . . . . . . . . 1,100,000 - 420,000 -
Financing fees on issue of convertible
debenture . . . . . . . . . . . . . . . . (110,000) - (42,000) -
3,903,804 638,249 1,274,800 113,809
------------ -------------- -------------- ---------
INCREASE IN CASH . . . . . . . . . . . . . . 2,020,393 139,847 32,241 111
Cash acquired on acquisition of subsidiary . - - 1,380 -
Cash, beginning of period. . . . . . . . . . 33,732 111 111 -
CASH, END OF PERIOD. . . . . . . . . . . . . 2,054,125 139,958 33,732 111
</TABLE>
See accompanying notes
<PAGE>
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS AS AT JUNE 30, 1999 AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999,
ARE UNAUDITED)
(ALL AMOUNTS ARE EXPRESSED IN U.S. DOLLARS)
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 $431,166 at December
31, 1998, a deficit of $3,213,141 at December 31, 1998 and $5,646,251 as at June
30, 1999 and net operating cash outflows of $1,442,297 for the six month period
ended June 30, 1999. Although it has a positive working capital balance of
$1,323,188 at June 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 subsidiary, Jaws Technologies, Inc., an Alberta, Canada
corporation, 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
Revenue from selling encryption software is recognized when the software is
delivered.
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 subsidiary is the Canadian dollar.
Accordingly, assets and liabilities of the subsidiary 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 subsidiary are recorded in a "Foreign Currency 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
Technologies, Inc., an Alberta, Canada corporation ("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.
<TABLE>
<CAPTION>
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:
$
---------
<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 six month period
ended June 30, 1998, giving effect to the acquisition of Jaws Alberta as at
January 1, 1998 are $1,599,901 and $0.25 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 June 30, 1998, being $1,938, or for the
period to December 31, 1998, being $29,068.
<PAGE>
<TABLE>
<CAPTION>
4. FIXED ASSETS
JUNE 30, 1999
<S> <C> <C> <C>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $ $
Furniture and fixtures . . . . . . 196,030 18,991 177,039
- ---------------------------------- ------------- ------------- --------
Computer hardware. . . . . . . . . 104,331 18,259 86,072
Computer software for internal use 31,666 3,864 27,802
Leasehold improvements . . . . . . 138,700 9,465 129,235
470,727 50,579 420,148
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>
5. 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 relate to
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 7) 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
<TABLE>
<CAPTION>
As at June 30, 1999, the Company has issued 2,327,600 options to purchase common
stock to the Company's directors, officers and employees. Of the total issued,
none have been exercised as at June 30, 1999. Details of the stock options
outstanding at June 30, 1999 are as follows:
NUMBER OF OPTIONS EXERCISE PRICE EXPIRY DATE
-------------- -------------------
<C> <C> <S>
200,000 0.15 February 22, 2008
32,000 0.15 June 30, 2008
50,000 0.23 June 30, 2008
35,000 0.32 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
62,000 0.73 June 30, 2008
20,000 0.71 June 30, 2008
43,500 0.75 June 30, 2008
5,000 0.81 June 30, 2008
47,500 0.82 June 30, 2008
250,000 0.87 June 30, 2008
75,000 0.77 June 30, 2008
5,600 0.98 June 30, 2008
2,327,600
- -----------------
</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 153%; risk-free interest rate of 4.0%; 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 six month period ended June 30, 1999 would
have been $1,303,187 and $0.12 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
entitling the holder to purchase common shares at $2.25 per share until June 20,
2001.
6. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
Amounts due to related parties consist of the following amounts:
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
$ $ $
- ----------------------------- ---------
<S> <C> <C> <C>
DUE FROM RELATED PARTIES
Futurelink Distribution Corp. - 9,073 -
Futurelink/Sysgold Ltd. . . . - 4,045 -
- 13,118 -
DUE TO RELATED PARTIES
Officers and stockholders . . 44,619 43,588 -
Futurelink Distribution Corp. - 32,175 -
Willson Stationers Ltd. . . . 3,961 1,352 -
Directors . . . . . . . . . . 120,000 120,000 -
168,580 197,115 -
DUE TO STOCKHOLDERS
Bankton Financial Corporation 18,101 15,775 -
Cameron Chell . . . . . . . . 27,035 1,957 -
Hampton Park Ltd. . . . . . . (4,913) 56,985 -
Other stockholder . . . . . . - - 78,159
40,223 74,717 78,159
</TABLE>
During the year ended December 31, 1998, the Company incurred $76,612 in fees
associated with computer services provided by Futurelink Distribution Corp., an
entity of which certain directors are also directors of the Company. There were
no similar fees incurred during the period ended June 30, 1999. The Company
provided sales to Futurelink Distribution Corp. during the period ended June 30,
1999 in the amount of $1,175 (December 31, 1998 - $9,073), all of which is
included in the amounts due from related parties at June 30, 1999. The fees
charged by and sales provided to Futurelink Distribution 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, 1999. These services are provided on normal commercial terms and
conditions. No services were provided to Futurelink/Sysgold Ltd. during the
period ended June 30, 1999.
Office and administration expenses for the six month period ended June 30, 1999,
include $2,563 (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 $9.27 per square foot per annum with 9,920 square feet of net rentable area.
Additional rent is estimated at $3.97 per square foot of net rentable area per
annum. The net rent expense rate recognized in the six month period ended June
30, 1999 was $5,986, (year ended December 31, 1998 - $3,991).
<TABLE>
<CAPTION>
7. CONVERTIBLE DEBENTURES
JUNE 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 . . . . . . . . . . . . 39,615 5,158
Financing fees associated with debentures converted to date. . - 21,117
(268,567) (65,679)
INTEREST EXPENSE
Accrued interest expense . . . . . . . . . . . . . . . . . . . 44,304 2,285
NET BALANCE OUTSTANDING, END OF PERIOD . . . . . . . . . . . . 1,022,343 146,606
</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 June 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 $46,589
has been accrued and included in the convertible debenture balance outstanding
at June 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 June 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. Should the Registration Statement
not be declared effective within 90 days of initial funding, a charge of 0.986%
per day will apply against the initial amount funded. Should successful
registration not occur within 120 days of initial funding, a charge of 0.1644%
per day will apply for each day thereafter. As of June 30, 1999, the
Registration Statement has not been declared effective. The initial amount
funded on October 1, 1998 was $200,000. An amount of $51,949 has been accrued
for the penalty of late filing of the Registration Statement.
8. 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.
9. INCOME TAXES
<TABLE>
<CAPTION>
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:
JUNE 30, JUNE 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 (864,667) (557,177) (1,045,938) (46,530)
Increase (decrease) in taxes resulting
from:
Deferred tax asset valuation
allowance . . . . . . . . . . . . . . . . 752,810 695,520 1,106,172 46,530
Non-deductible expenses . . . . . . . . . 251,141 - 128,162 -
Foreign tax rate differences. . . . . . . (139,284) (138,343) (188,396) -
Income tax benefit. . . . . . . . . . . . - - - -
</TABLE>
<TABLE>
<CAPTION>
For financial reporting purposes, loss before income taxes includes the
following components:
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
$ $ $ $
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Pre-tax loss:
United States (1,231,615) (208,505) (1,302,313) (136,854)
Foreign . . . . (1,311,523) (1,383,428) (1,773,974) -
(2,543,138) (1,591,933) (3,076,287) (136,854)
</TABLE>
<TABLE>
<CAPTION>
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:
JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
$ $ $
------------ ------------ ---------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards . . 1,445,540 697,768 -
Start-up costs . . . . . . . . . . . . 33,347 37,999 46,333
Depreciation . . . . . . . . . . . . . 22,733 6,201 197
Debt issue costs . . . . . . . . . . (1,705) 5,137 -
Software costs . . . . . . . . . . . 405,597 405,597 -
Deferred tax assets net of liabilities 1,905,512 1,152,702 46,530
- -------------------------------------- ------------ ------------ ---------
Valuation allowance. . . . . . . . . . (1,905,512) (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.
<TABLE>
<CAPTION>
The Company has U.S. operating losses carried forward of $1,434,000 which expire
as follows:
$
--------
<S> <C>
2018 936,000
2019 498,000
</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.
<PAGE>
<TABLE>
<CAPTION>
The Company has non-capital losses carried forward for Canadian income tax
purposes of $2,177,000. These losses expire as follows:
$
<S> <C>
2003 45,000
2004 7,000
2005 918,000
2006 1,207,000
</TABLE>
10. COMMITMENTS
<TABLE>
<CAPTION>
The Company is committed to the following minimum lease payments under operating
leases for premises and equipment:
$
<S> <C> <C>
Remainder of 1999 56,641
2000 113,282
2001 95,217
2002 94,926
2003 79,105
</TABLE>
11. CAPITAL LEASE OBLIGATIONS PAYABLE
<TABLE>
<CAPTION>
The future minimum lease payments at June 30, 1999 under capital leases are as
follows:
<S> <C> <C>
Remainder of 1999. . . . . . . . . . . . . . . . . 7,065
2000 14,130
2001 14,130
2002 14,130
2003 14,130
2004 8,601
Total future minimum lease payments. . . . . . . . 72,186
Less: imputed interest . . . . . . . . . . . . . . (16,167)
Balance of obligations under capital leases. . . . 56,019
- -------------------------------------------------- --------
Less: current portion included in accounts payable
and accrued liabilities . . . . . . . . . . . . (14,130)
Long term obligation under capital leases. . . . . 41,889
</TABLE>
<TABLE>
<CAPTION>
12. NET CHANGE IN NON-CASH WORKING CAPITAL
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
---------
<S> <C> <C> <C> <C>
$ . . . . . . . . . . . . . $
- ----------------------------- ---------
Accounts receivable . . . . . (35,293) - (7,243) -
Due from related parties. . . 13,118 - (13,118) -
Prepaid expenses and deposits 28,833 (21,535) (132,956) (7,500)
Accounts payable. . . . . . . 106,306 129,349 346,744 32,976
Accrued liabilities . . . . . 142,477 - 48,880 -
Due to related parties. . . . (3,532) - 197,115 -
Change relating to operating
activities. . . . . . . . . . 251,909 107,814 439,422 25,476
</TABLE>
13. 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.
14. 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 June 30, 1999 of the 10% convertible debentures
is $789,502 (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%).
15. RECENT PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", the implementation of which has been delayed one year. The
Company does not acquire derivatives or engage in hedging activities.
16. CONTINGENCIES
During the six month period ended June 30, 1999, a statement of claim has been
filed against the Company in the amount of approximately $27,529 ($41,580
Canadian) plus costs. The statement of claim seeks loss of compensation
relating to services provided to the Company. Management has placed $14,566
($22,000 Canadian) in trust with legal counsel to cover the claim. These
financial statements contain a provision for loss of $14,566 ($22,000 Canadian)
related to the claim.
<PAGE>
AUDITORS' REPORT
To the Shareholders
JAWS TECHNOLOGIES INC. (AN ALBERTA CORPORATION)
We have audited the balance sheet of JAWS TECHNOLOGIES INC. (AN ALBERTA
CORPORATION) as at December 31, 1997 and the statements of loss and deficit and
cash flows for the period from the date of incorporation on September 18, 1997
to December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit 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 Company as at December 31, 1997 and the
results of its operations and its cash flows for the period from the date of
incorporation on September 18, 1997 to December 31, 1997 in accordance with
accounting principles generally accepted in Canada.
Calgary, Canada Ernst & Young LLP
July 9, 1998 Chartered Accountants
<PAGE>
COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA - U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the company's ability to continue as a going concern, such as those described in
Note 1 to the financial statements. Our report to the shareholders dated July
9, 1998 is expressed in accordance with Canadian reporting standards which do
not permit a reference to such events and conditions in the auditors' report
when these are adequately disclosed in the financial statements.
Calgary, Canada Ernst & Young LLP
July 9, 1998
Chartered Accountants
<PAGE>
JAWS TECHNOLOGIES INC. (AN ALBERTA CORPORATION)
<TABLE>
<CAPTION>
BALANCE SHEETS
(ALL AMOUNTS ARE EXPRESSED IN CANADIAN DOLLARS)
(SEE BASIS OF PRESENTATION - NOTE 1)
As at December 31
1997
----------
<S> <C>
$
- ----------------------------------------------
ASSETS
CURRENT
Cash . . . . . . . . . . . . . . . . . . . . . 275
Prepaid expenses and deposits. . . . . . . . . 1,900
2,175
Capital assets [note 3]. . . . . . . . . . . . 2,746
Software [note 4]. . . . . . . . . . . . . . . 1,200,000
1,204,921
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities . . . 7,761
DUE TO RELATED PARTIES [NOTE 6]. . . . . . . . 65,300
COMMITMENTS AND CONTINGENCIES [NOTES 1 AND 10]
SHAREHOLDERS' EQUITY
Share capital [note 5] . . . . . . . . . . . . 1,200,000
Deficit. . . . . . . . . . . . . . . . . . . . (68,140)
1,131,860
----------
1,204,921
</TABLE>
See accompanying notes
On behalf of the Board:
Director Director
<PAGE>
JAWS TECHNOLOGIES INC. (AN ALBERTA CORPORATION)
<TABLE>
<CAPTION>
STATEMENTS OF LOSS AND DEFICIT
(ALL AMOUNTS ARE EXPRESSED IN CANADIAN DOLLARS)
For the period from the date of incorporation on September 18, 1997 to December
31, 1997
1997
($)
--------
<S> <C>
EXPENSES
Accounting and legal. . . . . . . . . . . . . . . . . . . . 4,000
Consulting. . . . . . . . . . . . . . . . . . . . . . . . . 2,750
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . 687
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,703
NET LOSS FOR THE PERIOD AND DEFICIT, END OF PERIOD [NOTE 7] (68,140)
</TABLE>
See accompanying notes
<PAGE>
JAWS TECHNOLOGIES INC. (AN ALBERTA CORPORATION)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(ALL AMOUNTS ARE EXPRESSED IN CANADIAN DOLLARS)
For the period from the date of incorporation on September 18, 1997 to December
31, 1997
1997
--------
<S> <C>
$
- ------------------------------------------------------------
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Loss for the period. . . . . . . . . . . . . . . . . . . . . (68,140)
Items not requiring cash
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 687
Funds from operations. . . . . . . . . . . . . . . . . . . . (67,453)
Net change in non-cash working capital related to operating
activities [note 8] . . . . . . . . . . . . . . . . . . . . 5,861
(61,592)
INVESTING ACTIVITIES
Purchase of capital assets . . . . . . . . . . . . . . . . . (3,433)
(3,433)
FINANCING ACTIVITIES
Loan from related party. . . . . . . . . . . . . . . . . . . 65,300
65,300
INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . 275
Cash, beginning of period. . . . . . . . . . . . . . . . . . -
CASH, END OF PERIOD. . . . . . . . . . . . . . . . . . . . . 275
</TABLE>
See accompanying notes
<PAGE>
JAWS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Jaws Technologies Inc. (the "Company") was incorporated under the laws of
Alberta on September 18, 1997 and is engaged in the business of developing and
selling encryption software. The business comprises one segment for financial
reporting purposes.
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 accumulated losses from operations amounting to
$68,140 and has a working capital deficiency of $5,586 as at December 31, 1997.
Additional funding will be required to finance expected operations until a
market has been developed for the Company's software. 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.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Company have been prepared in accordance with
Canadian generally accepted accounting principles. The effects of differences
between accounting principles generally accepted in Canada and the United States
are described in Note 9. 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 and
approximations which have been made using careful judgment. The financial
statements have, in management's opinion, been properly prepared within
reasonable limits of materiality and within the framework of the significant
accounting policies summarized below:
FINANCIAL INSTRUMENTS
The carrying values of financial instruments, including cash, deposits, accounts
payable and accrued liabilities, and amounts due to related parties approximate
their fair values.
CAPITAL ASSETS
Capital 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
- ------------------------ ----------------------------
SOFTWARE
The cost of acquired software under development has been capitalized.
Subsequent expenditures required to establish that the product is
technologically and commercially feasible are expensed as incurred.
Amortization of acquired software costs will commence when the software is
available for general release to clients.
STATEMENT OF CASH FLOWS
The Company has adopted the new accounting recommendation of the Canadian
Institute of Chartered Accountants on cash flow statements, issued in June,
1998.
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. Future income taxes are recorded at the income tax rates
that are expected to apply when the future tax liability is settled or the
future tax asset is realized. When necessary, valuation allowances are
established to reduce future 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 future income tax assets and liabilities.
<TABLE>
<CAPTION>
3. CAPITAL ASSETS
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
<S> <C> <C> <C>
$ $ $
Furniture and fixtures 3,433 687 2,746
</TABLE>
4. SOFTWARE
The Company develops encryption software. The Company expects to complete all
coding and testing activities by July 31, 1998. Amortization of the software
will commence when the software is available for general release to clients.
5. SHARE CAPITAL
A) AUTHORIZED
Unlimited Class "A, B, C" common shares
Unlimited Class "D and E" non-voting common shares
Unlimited Class "F and G" preferred shares, voting, non-cumulative redeemable
and retractable
Unlimited Class "H" preferred shares, non-voting, non-cumulative, redeemable and
retractable
<TABLE>
<CAPTION>
SHARES $
------ ----------
<S> <C> <C>
B) ISSUED
CLASS A COMMON SHARES
Founders shares. . . . . . . . . . . . 835 -
Shares issued in exchange for software 165 1,200,000
Balance, December 31, 1997 . . . . . . 1,000 1,200,000
</TABLE>
On October 20, 1997 the Company purchased from Jaws Software Ltd. encryption
software and technology in consideration of the issuance of 165 Class A common
shares of the Company valued at $1,200,000.
6. RELATED PARTY TRANSACTIONS
At December 31, 1997 the Company had amounts due to a shareholder of $65,300.
The amounts do not carry interest and have no set repayment terms.
<PAGE>
7. INCOME TAXES
<TABLE>
<CAPTION>
The income tax benefit differs from the amount computed by applying the Canadian
federal statutory tax rates to loss before income taxes for the following
reasons:
$
---------
<S> <C>
Tax benefit at Canadian statutory rate (44.62%) (30,404)
Increase in taxes resulting from:
Future tax asset valuation allowance. . . . . 30,404
Income tax benefit. . . . . . . . . . . . . . . -
</TABLE>
<TABLE>
<CAPTION>
Future 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
future tax assets are as follows:
$
---------
<S> <C>
Future tax assets:
Loss carryforwards. . 30,175
Depreciation. . . . . 229
Total future tax assets 30,404
Valuation allowance . . (30,404)
Net future tax assets . -
- ----------------------- ---------
</TABLE>
The Company has provided a valuation allowance for the full amount of future tax
assets in light of its history of operating losses since its inception.
The Company has non-capital loss carry forwards for income tax purposes of
$67,000 which expire in 2003.
<TABLE>
<CAPTION>
8. NET CHANGE IN NON-CASH WORKING CAPITAL RELATED TO OPERATING ACTIVITIES
$
--------
<S> <C>
Prepaid expenses and deposits. . . . . . (1,900)
Accounts payable and accrued liabilities 7,761
5,861
</TABLE>
9. UNITED STATES ACCOUNTING PRINCIPLES
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP"). These
principles, as they pertain to the Company's financial statements, differ from
United States' generally accepted accounting principles ("U.S. GAAP") as
follows:
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 $1,200,000 is capitalized and amortized over its estimated useful life.
Under U.S. GAAP, the $1,200,000 would be expensed. For income tax purposes,
future tax assets would increase by $498,257 with an equal and offsetting amount
being recorded as a valuation allowance.
<TABLE>
<CAPTION>
If U.S. GAAP had been followed, the income statement would have been as follows:
$
------------
<S> <C>
Loss as reported. . . . . . . . . . . (68,140)
Adjustments:
Write-off of capitalized software (1,200,000)
Loss for the period . . . . . . . . . (1,268,140)
</TABLE>
<TABLE>
<CAPTION>
If U.S. GAAP had been followed, the balance sheet would have differed as
follows:
CANADIAN
GAAP US GAAP
---------- -----------
<S> <C> <C>
SOFTWARE. 1,200,000 -
Deficit (68,140) (1,268,140)
</TABLE>
10. 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 system failure
which could affect the Company's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 Issue
affecting the Company, including those related to the efforts of clients,
suppliers, or other third parties, will be fully resolved.
<PAGE>
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
JAWS TECHNOLOGIES, INC.
By: /s/Robert Kubbernus
--------------------
Robert Kubbernus, Chief Executive Officer
Date: October 4, 1999
-----------------
<PAGE>
Exhibit 5.1 and 23.1 - Page 1
EXHIBIT 5.1 AND 23.1
<TABLE>
<CAPTION>
S O N F I E L D & S O N F I E L D
A PROFESSIONAL CORPORATION
<S> <C> <C>
LEON SONFIELD (1865-1934). . . . . . . ATTORNEYS AT LAW
GEORGE M. SONFIELD (1899-1967)
ROBERT L. SONFIELD (1893-1972) . . . . 770 SOUTH POST OAK LANE
____________________ . . . . . . . . . HOUSTON, TEXAS 77056
[email protected]
FRANKLIN D. ROOSEVELT, JR. (1914-1988)
TELECOPIER (713) 877-1547. . . . . . NEW YORK
____ . . . . . . . . . . . . . . . . LOS ANGELES
ROBERT L. SONFIELD, JR.. . . . . . . . TELEPHONE (713) 877-8333 WASHINGTON, D.C.
MANAGING DIRECTOR
</TABLE>
October 4, 1999
Board of Directors
JAWS Technologies, Inc.
1013 17th Avenue S.W.
Calgary, Alberta
Canada T2T 0A7
Dear Gentlemen:
In our capacity as counsel for JAWS Technologies, Inc. (the "Company"), we
have participated in the corporate proceedings relative to the registration by
the Company of 13,202,949 shares of common stock all as set out and described in
the Company's Pre-Effective Amendment No. 1 to Registration Statement on Form
10-SB (File No. 0-24963) under the Securities Act of 1933 (the "Registration
Statement"). We have also participated in the preparation and filing of the
Registration Statement.
Based upon the foregoing and upon our examination of originals (or copies
certified to our satisfaction) of such corporate records of the Company and
other documents as we have deemed necessary as a basis for the opinions
hereinafter expressed, and assuming the accuracy and completeness of all
information supplied us by the Company, having regard for the legal
considerations which we deem relevant, we are of the opinion that:
(1) The Company is a corporation duly organized and validly existing
under the laws of the State of Nevada;
(2) The Company has taken all requisite corporate action and all action
required by the laws of the State of Nevada with respect to the authorization,
issuance and sale of common stock covered by the Registration Statement;
(3) The 13,202,949 shares of common stock are validly issued, fully
paid and nonassessable;
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the references to our firm in the Registration
Statement.
Yours very truly,
/s/SONFIELD & SONFIELD
- ------------------------
SONFIELD & SONFIELD
<PAGE>
Exhibit 10.1.8 - Page 1
EXHIBIT 10.1.8
[JAWS TECHNOLOGIES, INC. LETTERHEAD]
August 10, 1999
Letter of intent
Arrow Communications
#204 34314 Marshall Road
Abbotsford, BC
V2S 1L9
Attention: Mr. Gilles Lepage
In response to our conversation on August 10, 1999I am forwarding to you our
formal considerations towards our arrangements to work with, and contribute to
your proposed Web box sales promotions. JAWS Technologies Inc. references this
account as OSM project (OSM990810mtdr).
Following is a statement of the terms agreed upon in our last meeting and your
signature below will formalize this document to be the first contractual step in
our partnering arrangement.
(1) Develop a long-term strategy that would provide Arrow
Communications with value-added services (auditing services, personal or
corporate data protection systems and messaging programs )to offer / distribute
to their client base. I.e. Var. opportunities
(2) For the first half million users of Apexmail web-boxes, Jaws
Technologies Inc. will provide the xmail solution free of charge as a value
added relationship offer. For each user added above that JAWS Technologies Inc.
would receive 1.5 cents per month per user from Arrow Communications. Jaws
Technologies Inc. will account the user base by measurement of the keys count as
they are registered on the JAWS key server.
This document outlines the structured process as discussed with you, as well it
is our undertaking to further explore the potential alliance avenues available
to Arrow Communications and Jaws Technologies Inc. and to ensure both parties
benefit from and create the best possible synergy. JAWS Technologies Inc. is
committed to developing with all of our business partners a business case that
allows clear understanding of all relevant offers and requirements so as to
serve as the foundation of a profitable and lasting relationship for both
organizations. In this circumstance joint or promotional marketing efforts are
to be developed to the mutual benefit of both organizations and this plan can be
developed over the next 90 days as the relationship evolves.
Please indicate acceptance with your signature in the appropriate areas below.
Best Regards,
/s/Mitch Tarr
- --------------
Mitch Tarr
VP of Alliances
JAWS TECHNOLOGIES INC.
ARROW COMMUNICATIONS INC. JAWS TECHNOLOGIES INC.
Gilles Lepage President / CEO Tej Minhas
President/COO
/s/Gilles Lepage /s/Tej Minhas
- ----------------- --------------
Date: _______________ Date: ______________
<PAGE>
Exhibit 10.1.9 - Page 2
EXHIBIT 10.1.9
September 28, 1999
Apexmail.net
#204 34314 Marshall Road
Abbotsford, BC
V2S 1L9
Attention: Mr. Gilles Lepage
Within is the addendum information to our Letter of Intent as already agreed
upon for your perusal. Please sign and acknowledge agreement with the
information as laid our within the addendum and we will proceed.
Apexmail.Net agrees to the following:
Joint marketing of this solution
1) To integrate all current corporate users to the advanced version
upon completion of implementation.
2) To issue a payout monthly from Apexmail.net to Jaws Technologies
Inc. a royalty free of $.50 per Corporate user account as calculated by the key
residence on the JAWS server.
3) To permit a Jaws assessment on the Web based server so that JAWS can
certify the said server.
4) To host a jaws certified logo on the Apexmail.net homepage that also
services as a free download link for Jaws Download Page.
5) To provide to Jaws Technologies Inc. an Apexmail.net media kit for
JAWS marketing purposes.
Jaws Technologies Inc. agrees to the following:
1) To perform Joint marketing of the Corporate Webmail Solution through
its present & future client base where a solution of its type is required.
2) To provide an Xmail technology solution and required support with
implementation on or by November 15,1999.
3) To give an exclusive technology time stamp for 6 months
internationally on the Corporate Web based solution model. *This condition is
valid only for this time frame and only on the condition that Apexmail.net shows
ongoing due diligence in its marketing efforts and abilities as deemed by user
numbers.
4) To provide Apexmail.net with all available or relevant marketing
info or statistics on web based or secure email in the Jaw's knowledge banks.
5) To co-train the JAWS marketing & sales force on the benefits and
technology of this joint solution.
6) To provide Apexmail.net with a FAQ on Jaw's Xmail to be hosted on the
Apexmail.net site.
Please acknowledge below that this agreement between Jaws Technologies Inc. and
Apexmail.net is as agreed upon. We will continue to explore the potential
alliance avenues available to Apexmail.net and Jaws Technologies Inc. and to
ensure both parties benefit from and create the best possible synergy. JAWS
Technologies Inc. is committed to developing with all of our business partners a
business case that allows clear understanding of all relevant offers and
requirements so as to serve as the foundation of a profitable and lasting
relationship for both organizations. In this circumstance joint or promotional
marketing efforts are to be developed to the mutual benefit of both
organizations.
Acknowledgement and Acceptance is indicated with your signature in the
appropriate areas below.
Best Regards,
/s/Donna Rougeau
- -----------------
Ms. Donna Rougeau
Director of Biometrics and Tokens
JAWS Technologies Inc.
APEXMAIL.NET JAWS TECHNOLOGIES INC.
Gilles Lepage President / CEO Tej Minhas
President/COO
/s/Gilles Lepage /s/Tej Minhas
- ----------------- --------------
Date: _______________ Date: ______________
<PAGE>
Exhibit 10.1.10 - Page 3
EXHIBIT 10.1.10
RESOLUTION OF THE DIRECTORS OF
JAWS SOFTWARE LTD.
ENACTED AT A MEETING OF ALL OF THE DIRECTORS
OF THE COMPANY HELD AT CALGARY, ALBERTA, ON
MONDAY, OCTOBER 20, 1997
WHEREAS the Company has been offered management, marketing and financial
assistance byRobert Kubbernus, businessman of Calgary, Alberta, for the
development and sale of its software and technology through a corporation
created by him for that purpose known as Jaws Technologies Inc.;
AND WHEREAS the Robert Kubbernus has requested that, as a term of the said
offer, the software and technology owned by the Company be transferred and
assigned to Jaws Technologies Inc. in exchange for shares;
AND WHEREAS the Company finds it expedient to accept the offer and to transfer
its software and technology to Jaws Technologies Inc.;
BE IT RESOLVED that the Company transfer and assign to Jaws
Technologies Inc. all of its right, title and interest in its software and
technology, a list of which is attached as Appendix "A", in return for 16.5% of
the issued shares of Jaws Technology Inc. Further, that both Directors together
be and are hereby authorized to accept the offer from Robert Kubbernus and to
execute such other documents as may be required to effect the transaction,
including, without limitation, the Shareholders Agreement with Robert Kubbernus
and others and the subscription for shares of Jaws Technologies Inc.
The foregoing Resolution is signed by all the Directors of the Company
pursuant to S. 112(1) of the Business Corporations Act.
/s/Wes Fairburn
----------------
WES FAIRBAIRN - DIRECTOR
/s/Jim Morrison____________
----------------
JIM MORRISON - DIRECTOR
<PAGE>
Appendix "A" to the Resolution of the Directors JSL,
Dated Oct. ______, 1997.
WINDOWS 3.1 + (WIN 1995 AVAIL)
-----------------------------------
WORD PROCESSORS:
- -----------------
MORHTML (v3.0) Not For Sale
- -HTML editor. Used as an editor for creating Web Pages
MORPHONE (v3.0)
- -Database for Phone Numbers, Names and comments
MULTI-DOC (v1.0)
- -Multiple page word processor (simple and easy)
NETPAD (v1.0)
- -Scratch Pad database word processor. Pages can be accessed over network.
SCRATCH PAD (v6.11)
- -Quick easy editor. Unlimited pages
SCRIPTER (v1.0)
- -Split Screen Word Processor. Useful for scriptwriters, T.V. production,
in-house video productions, ect.
STICKY NOTE (v1.0)
- -Notes can be "stuck" to screen. Can be used as messaging system, Password
Protected
UTILITIES:
- ----------
DAD (POP) (v1.10)
- -Tool Bar for Windows. User definable buttons can be used to replace Program
Manager
TASKLIST PLUS (v1.0)
- -Replaces taskman with advanced and multiple features
TOOLBAR 95 (v1.0)
- -Shareware version of DAD.
SECURITY:
- ---------
BASS (v1.11)
- -Public Broadcast announcement software. Plays automated messages at specific
schedule. Robbery prevention version available. (BASS)
L5 (v.3.00)
- -Encryption software with unbreakable code. 256 Bit, 1024Bit &4096Bit versions
avail.
Propreitary versions available.
SCREENSAVERS:
- -------------
SCREEN SAVER BONUS DISK (v1.0)
SCREEN SAVER PLUS (v1.0)
UNAUTHORIZED (v1.0) Not For Sale
UNAUTHORIZED II (v1.0) Not For Sale
DATABASES:
MAGIC: THE DATABASE (v1.0)
- -Used for cataloguing cards from "Magic: The Gathering"
CURRENT SOFTWARE TITLES:
------------------------
DOS 3.3+
--------
DOS UTILITIES (V1.0)
CCD
- -Quick directory change for nested directories
CRYPT (v2.56)
- -Encrypt any data file from a DOS PROMPT
DISKFILE (v1.0)
- -Catalog Disks for ling term storage
MICROLOG (v1.0)
- -Log original system configuration for technicians to "reset" system after
"crashing"
MORPHONE (v3.1)
- -Database for Phone Numbers, Names and comments
SDIR (v1.0)
- -Super Directory Menuing program
SELECT (v1.0)
- -Menuing system for startup/sub menus
SHRED (v.3.21)
- -Used as a service. Overwrites files for data destruction. Cannot be "undeleled"
or "unformatted" (Useful for trade in - etc.)
ASSIGNMENT
We, the undersigned, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, do hereby assign all of our right,
title and interest to the computer software and technology listed in Appendix
"A" hereto.
DATED at Calgary, Alberta this 20th day of October, 1997.
JAWS SOFTWARE LTD.
Per: /s/Wesley Fairbairn"
---------------------
.
WESLEY FAIRBAIRN - Director
Per: /s/Jim Morrison"
-----------------
.
JIM MORRISON - Director
<PAGE>
Exhibit 10.1.11 - Page 2
EXHIBIT 10.1.11
ASSIGNMENT
WHEREAS, the undersigned, JAMES L. A. MORRISON, having an address of 1625
11th Avenue SW, Unit #101, Calgary, Alberta T3C 0N3, Canada (hereinafter termed
Assignor) has invented certain new and useful improvements in an invention
entitled DATA ENCRYPTION AND DECRYPTION SOFTWARE; the undersigned Assignor
hereby authorizes and requests that the serial number and filing date of said
patent application be entered herein by the attorney in charge of the
application, as soon as such information is known:
Serial No. 09/169,377
Filed: October 9, 1998
WHEREAS, JAWS TECHNOLOGIES INC., a corporation of Alberta, having an
address of 603-7 Avenue SW, Suite 380, Calgary, Alberta T2P 2T5, Canada
(hereinafter termed Assignee) is desirous of acquiring the entire right, title
and interest in and to said application and said inventions and improvements
thereon, and in and to Letters Patent thereon when granted in the Unites States
and foreign countries;
NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) and for
other good and valuable consideration received by said Assignor from said
Assignee, the receipt and sufficiency of which in full are hereby acknowledged
by said Assignor:
1. Said Assignor does hereby sell, assign, transfer and convey unto said
Assignee, the entire right, title and interest in and to said application and
said invention and in and to any and all improvements on said invention
heretofore or hereafter made of acquired by said Assignor; and in and to any and
all Letters Patent on said invention and/or said improvements that may be
granted in the United States of any foreign country, including each and every
Letters Patent granted n any application which is a division,
continuation-in-part of any of said application specifically identified herein,
and in and to each and every reissue or extension of said Letters Patent
2. Said Assignor hereby covenants and agrees to cooperate with said Assignee
whereby said Assignee may enjoy to the fullest extent the right, title and
interest herein conveyed. Such cooperation shall include (a) prompt execution
of all papers (prepared at the expense of Assignee) which are deemed necessary
or desirable by Assignee to perfect in it the right, title and interest herein
conveyed; (b) prompt execution of all petitions, oaths, specifications or other
papers (prepared at the expense of Assignee) which are deemed necessary or
desirable by Assignee for prosecuting said application, for filing and
prosecuting divisional, continuation, substitution, renewal,
continuation-in-part, or additional applications in the United States and/or
foreign countries covering said invention and/or said improvements, for filing
and prosecuting applications for reissuance of Letters Patent included herein,
or for interference proceedings involving said invention and/or said
improvements; (c) prompt assistance and cooperation in the prosecution of
interference proceedings involving said invention and/or said improvements and
in the adjudication of said Letters Patent, particularly by the disclosure of
facts and the production of evidence relating to said invention and/or said
improvements, provided the expenses which may be incurred by said Assignor in
lending such assistance and cooperation shall be paid by the Assignee.
3. The terms, covenants and conditions of this assignment shall inure to the
benefit of said Assignee, its successors, assigns and/or other legal
representatives, and shall be binding upon said Assignor, his heirs, legal
representatives and assigns.
4. Said Assignor hereby warrants and represents that he has not entered into
any assignment, contract or understanding in conflict herewith.
<PAGE>
IN WITNESS WHEREOF, this said Assignor has executed and delivered this
instrument this 8th day of October 1998.
/s/James L.A. Morrison
- ------------------------
JAMES L. A. MORRISON
<PAGE>
Exhibit 10.1.12 - Page 1
EXHIBIT 10.1.12
UNITED STATES DEPARTMENT OF COMMERCE
Patent and Trademark Office
Assistant Secretary and Commissioner
OF PATENTS AND TRADEMARKS
Washington, D.C. 20231
Code Number: *100908317A
MARCH 15, 1999
LAW OFFICES OF THOMAS SCHNECK
THOMAS SCHNECK
P.O. BOX 2-E
SAN JOSE, CALIFORNIA 95109 -0005
UNITED STATES PATENT AND TRADEMARK OFFICE
NOTICE OF RECORDATION OF ASSIGNMENT DOCUMENT
THE ENCLOSED DOCUMENT HAS BEEN RECORDED BY THE ASSIGNMENT DIVISION OF THE U.S.
PATENT AND TRADEMARK OFFICE. A COMPLETE MICROFILM COPY IS AVAILABLE AT THE
ASSIGNMENT SEARCH ROOM ON THE REEL AND FRAME NUMBER REFERENCED BELOW.
PLEASE REVIEW ALL INFORMATION CONTAINED ON THIS NOTICE. THE INFORMATION
CONTAINED ON THIS RECORDATION NOTICE REFLECTS THE DATA PRESENT IN THE PATENT
AND TRADEMARK ASSIGNMENT SYSTEM. IF YOU SHOULD CONTACT THE EMPLOYEE WHOSE NAME
APPEARS ON THIS NOTICE AT 703 - 308 - 9723. PLEASE SEND REQUEST FOR CORRECTION
TO : U.S. PATENT AND TRADEMARK OFFICE, ASSIGNMENT DIVISION, BOX ASSIGNMENTS, CG
- - 4, 1213 JEFFERSON DAVIS HWY, SUITE 320, WASHINGTON, D.C. 20231.
RECORDATION DATE: 11/16/1998 REEL/FRAME: 9595/ 0813
NUMBER OF PAGES: 5
BRIEF: ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE DOCUMENT FOR DETAILS).
ASSIGNOR:
MORRISON, JAMES L.A. DOC DATE: 10/08/1998
ASSIGNEE:
JAWS TECHNOLOGIES INC.
603 - 7 AVENUE SW, SUITE 380
CALGARY, ALBERTA T2P 2T5, CANADA
SERIAL NUMBER: 09169377 FILIING DATE: 10/09/1998
PATENT NUMBER: ISSUE DATE:
SEDLEY PYNE, PARALEGAL
ASSIGNMENT DIVISION
OFFICE OF PUBLIC RECORDS
<PAGE>
Exhibit 27 - Page 1
EXHIBIT 27
FINANCIAL DATA SCHEDULE
<TABLE>
<CAPTION>
This schedule contains summary financial information extracted from the financial
statements as of and for the six months ended June 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. $ 2,054
5-02(2) . . . Marketable securities 0
5-02(3)(a)(1) Notes and interest receivable-trade accts 43
5-02(4) . . . Allowances for doubtful accounts 0
5-02(6) . . . Inventory 0
5-02(9) . . . Total current assets 2,208
5-02(13). . . Property, plant and equipment 471
5-02(14). . . Accumulated depreciation (51)
5-02(18). . . Total assets 2,628
5-02(21). . . Total current liabilities 885
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 6,422
5-02(32). . . Total liabilities and stockholder's equity 664
5-03(b)1(a) . Net sales tangible products 10
5-03(b)1. . . Total revenues 10
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 2,443
5-03(b)5. . . Provision for doubtful accounts and notes 0
5-03(b)(8). . Interest and amortization of debt discount 706
5-03(b)(10) . Income before taxes and other items (2,433)
5-03(b)(11) . Income tax expense 0
5-03(b)(14) . Income/loss continuing operations (2,433)
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 (2,433)
5-03(b)(20) . Earnings per share-primary (0.21)
5-03(b)(20) . Earnings per share-fully diluted anti-dilutive
</TABLE>
