U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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
(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)
<S> <C> <C>
1013 17TH AVENUE SW T2T 0A7
CALGARY, ALBERTA CANADA
(403) 508-5055 (403) 508-5055
(Address, including zip code, and telephone number
including area code, of registrant's principal executive offices)
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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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13,061,949 shares of common stock, $.001 par value
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TABLE OF CONTENTS
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ITEM 1. . . . . . . . . . . . DESCRIPTION OF BUSINESS 1
ITEM 2. . . . . . . . . . . . MANAGEMENT'S DISCUSSION AND ANALYSIS 5
ITEM 3. . . . . . . . . . . . DESCRIPTION OF PROPERTY 11
ITEM 4. . . . . . . . . . . . SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 11
ITEM 5. . . . . . . . . . . . DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS 13
ITEM 6. . . . . . . . . . . . EXECUTIVE COMPENSATION 15
ITEM 7. . . . . . . . . . . . CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 16
ITEM 8. . . . . . . . . . . . LEGAL PROCEEDINGS 17
ITEM 9. . . . . . . . . . . . MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 17
ITEM 10.. . . . . . . . . . . RECENT SALES OF UNREGISTERED SECURITIES 17
ITEM 11.. . . . . . . . . . . DESCRIPTION OF SECURITIES 19
ITEM 12.. . . . . . . . . . . INDEMNIFICATION OF DIRECTORS AND OFFICERS 20
ITEM 13.. . . . . . . . . . . EXHIBITS 21
INDEX TO FINANCIAL STATEMENTS F-1
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ITEM 1. DESCRIPTION OF BUSINESS
JAWS was incorporated as a Nevada corporation on January 27, 1997 under the
name E-Biz Solutions Inc. On March 27, 1998, E-Biz Solutions Inc. changed its
name to JAWS Technologies, Inc. JAWS owns 100% of the issued and outstanding
capital stock of JAWS Technologies, Inc. a corporation formed under the laws of
the Province of Alberta, Canada. JAWS has offices in Alberta, Canada where it
develops encryption proprietary software using encryption algorithms that secure
binary data in various forms, including streamlining or block based data.
The programming of JAWS' software has been in development for approximately
15 years. The result of these efforts is an easy to use means of implementing a
public key infrastructure, a "strong encryption" tool, to protect sensitive
information. The term "strong encryption" is used to describe codes that are
nearly impossible to break. Currently JAWS' software technology is capable of
encrypting to a bit level of 4,096. JAWS' software operates under Windows 95,
Windows 98, Windows NT, and Windows CE. Other platforms are currently under
development.
A sales and marketing team for the L5 Data Encryption software has been
working since May 1998 to organize collateral sales materials including boxes,
CD cases and stationary, brochures. The creation of the JAWS brand identity, as
well as establishing relationships with public relations companies to provide
market awareness and industry interest in JAWS product, has been the focus of
the sales and marketing team. Presently the focus of the sales and marketing
team is the development of value added reseller agreements and original software
manufacturers channels.
Although there has been much interest in L5, there has not been significant
sales of the product. JAWS believes there are a number of factors affecting the
sales of L5: first, many systems managers are postponing significant security
purchases due to the Y2K issue. This barrier will be removed by January 1,
2000. Second, many potential purchasers are aware of security as an issue and
are educating themselves as to what products and services are available and
identifying their needs. Third, the selling cycle for security software through
reseller and value added reseller programs takes considerable time to conclude.
In December of 1998, JAWS entered into two agreements with ISP's that provide
product for the ISP's to both implement for their own use and products as well
as to market the L5 and JAWS e-mail encryption product to their users. Both
agreements provide for royalties to be paid to JAWS based on the numbers of
their users who download JAWS' products.
E-mail encryption product works with all major email applications including
Netscape Communicator, Microsoft Outlook, Microsoft Outlook Express and Eudora,
Pegasus. It allows users to encrypt an e-mail message from the point of sending
and to keep it secure until the recipient downloads their email and is prompted
to decrypt the message. In order to read the encrypted message, the recipient
can download the decrypt only version from the JAWS website. Also, the complete
JAWS' e-mail product can be downloaded from JAWS website so there is minimal
need for production of software disks, manuals and packaging. JAWS is currently
working on Lotus Notes and Microsoft Exchange versions of e-mail encryption
product and anticipates release by the end of the 3rd quarter, 1999.
JAWS manufactures and produces all software products in JAWS corporate office in
Calgary, Canada. On-line help and manuals may also be downloaded from JAWS'
website.
JAWS has also completed a beta release of L5 e-mail encryption software for
Microsoft Outlook usersThe product enables users to protect e-mail and
attachments with a minimum amount of effort required by sender/receiver. JAWS
has also completed the development of L5 Data Encryption PDA Software for Palm
III(TM) connected organizers. This software provides encryption capabilities
securing sensitive information stored in memos on Palm III(TM) organizers. This
is the only Palm Platinum certified security related software available to Palm
users.
JAWS has commenced the provision of information systems security consulting
through its Information Systems Security Group. Information Systems Security
Group provides network security assessment/audits to corporate clients with
LAN/WAN/intranet/internet systems in order to assess risk of compromise and
access to sensitive information. Information Systems Security Group has
completed several contracts and has several proposals for additional contracts
outstanding. This service can create recurring revenue through yearly audits
and reassessments. Further, as systems change, evolve and become obsolete,
Information Systems Security Group performs further reassessments as required.
Numerous markets exist for the JAWS' software. The management of JAWS
believes that value added resellers are a significant potential market for JAWS'
products. The external software developers can use the JAWS' 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 customers include the Smart Card industry,
hand-held computing devices, telecommunications and access control devices.
JAWS products are implemented as a software utility to provide security
enhancements to existing product offerings by other manufacturers. Direct sales
channels include product offerings to ISPs, data warehouses, corporate networks
and personal computer users.
JAWS has distributed 503,463 versions of the L5 software algorithym. The
majority of these placements have been at nominal or no cost.
SERVICES
JAWS' efforts to remain competitive in the marketplace include providing
customers with professional services including security audit practices,
security business plan development including security policy development,
implementation practices and re-audit or validation processes. JAWS has
developed its services around the premise of full information security
solutions. This means professional services followed by strong product
offerings to maintain the best possible solution for the given client. JAWS
believes that the marketplace is not geographically restricted, size restricted,
or sector specific. JAWS' professional services can be offered to government
agencies, military agencies, small corporations, large corporations, financial
institutions, industrial clientele and foreign entities.
JAWS' security audit technology is sold to customers and used by customers
so that they may understand the full magnitude and risks inherent with their
current systems information technology. This is achieved through a number of
practices including intrusion testing, penetration testing, site mapping and
systems testing with specialized software. Once JAWS fully understands the risk
revealed in the audit, its customer-specific business plan for information
technology securities can be developed. At the option of the client, JAWS can
then integrate the appropriate software and products to meet customer needs.
The cost analysis associated with implementation and products is a critical
planning path. This ensures that the customer meets its objectives, and
provides policy guideline development to ensure that JAWS, and the customer,
understand the necessary uses of security. The business plan generally includes
a cost analysis to ensure the customer understands the true cost of security in
relationship to its risk, a critical path schedule to ensure the customer meets
its objectives and policy guidelines development to ensure employees of JAWS
fully understand the security elements. Finally, JAWS provides training for the
customers' staff to ensure that its employees adopt the corporate culture
established by the business plan.
JAWS also offers re-auditing practices to assist the customer in
maintaining its security policies. The re-audit is much like a report card for
the customer to ensure that it is maintaining the policies and procedures
underlying the JAWS software.
The systems security group of JAWS believes that in order to provide
satisfactory solutions for its customers, product offerings must include those
of competitors, and in most cases, suppliers of security software, hardware and
firmware. This is achieved through standard licensing contracts with other
security product vendors including Network Associates, and providers of
intrusion detection products, and other security products.
INFORMATION SECURITY MARKETPLACE
JAWS believes that the marketplace for encryption software is virtually
unrestricted by size and geography. With the ongoing drive of the computer
industry toward open computing, enormous security risks have been revealed.
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. The information industry in the last
ten years has changed from information gathering and information ware-housing,
to information sharing. The information sharing is growing exponentially, with
security being the first component of any solid information system, whether it
is internal or external. More and more, corporations are finding that their
information is their asset and the proprietary information whether it is market
intelligence, corporate planning, corporate development, or client information,
must at all costs remain secure within the organization while at the same time,
be available to strategic partners, employees and management. The only way to
ensure maximum use of all information gathered and deployed is through security.
According to San Jose, CA, based Data Quest, information technology
services now make up 37.5% of all information technology spending. Computer
sales represent 28.8%, software 14.3% and telecommunication equipment 9.3%.
Approximately $262 billion were spent on information technology services in 1996
and it is anticipated that users will spend approximately $413 billion in the
year 2000. A portion of this enormous information technology budget for the
year 2000 will include a significant amount towards system security.
COMPETITION
Products
A number of companies have developed various security products ranging from
encryption software to firewalls to intrusion detection software or hardware
solutions. No one particular product in the marketplace controls market share.
Two distinctive competitors, RSA and Pretty Good Privacy, Network Associates,
have led in the sale of encryption software. JAWS believes that this lead is a
result of being first to the marketplace and commercializing a product specific
to individual users rather than government agencies. With only two strong
competitors in the marketplace, JAWS believes that there is room for additional
products, specifically those products that provide stronger, faster, and easier
to use solutions for the consumer.
An added enhancement of the opportunity for new players in the marketplace
is the typical customer's unwillingness to turn over all security to a specific
product or corpora-tion. JAWS engages in market study and competitive study
research to ensure that JAWS remains aware of other competing product
development. Although other products have entered the marketplace, due to the
size of the market, plus the constantly changing atmosphere, JAWS believes it
can penetrate the market with its products. JAWS also believes that healthy
competition has aided in the development of the marketplace through customer
awareness that information security is critical.
Services
Information auditing services, security business planning, implementation,
and security management are relatively new industries, very few large size
competitors exist and only small firms are providing the services at this time.
The growth is anticipated to be exponential over the next number of years. JAWS
is positioning itself to be one of the dominant market players in these areas of
professional services. It will achieve this through both internal growth, and
external growth through acquisitions. JAWS is aggressively pursuing a number of
the small operators in this field in order to maintain its high sales
expectations.
BUSINESS STRATEGY
The blend of both product and services offered by JAWS is its strategy for
ensuring that it is well positioned in the customer's mind as being the number
one source for information security solutions. JAWS has developed specific
business processes and marketing strategies that will ensure that it meets and
exceeds the market expectations. Reaching the marketplace is achieved through
conventional marketing tactics but also through educational processes, such as
seminar delivery through accounting and legal firms to their client base, value
added reselling programs and a strong channel marketing strategy. JAWS believes
it can grow its practices, deliver services and products in a cost-effective
manner, but yet be able to handle superior volumes through exceptional business
processes developed by JAWS.
Customer support
JAWS provides a high degree of initial and continuing customer service, and
support at a level JAWS believes generally exceeds industry standards. JAWS
believes that its focus on customer service will be a key factor in its high
level of customer retention and growth in revenues. Support is available to the
customer through a help desk process and eventually regional technicians.
Technological change
Although JAWS is not aware of any pending or perspective technological
change that would adversely affect its business, new development in technology
could have material effect on the development or sale on some or all of JAWS'
services or could render its services not competitive or obsolete. There can be
no assurance that JAWS will be able to develop or acquire new or improved
services or systems, which may be required in order to remain competitive. JAWS
believes however, that technological change does not present a material risk to
JAWS' business but enhances its business opportunities. Each technological
change reveals new security issues which must be addressed by professional
services and results in new products.
Intellectual property matters
JAWS is in the process of applying for a U.S. patent. JAWS maintains
strict confidentiality practices with its employees including contractual
obligations by the employees. JAWS has not registered any of its trademarks,
trade names or service marks. JAWS owns the copyright in all the software
created by its employees and the copyrights which it has contractually acquired.
JAWS also believes that because of the rapid pace of technological change in the
computer industry, copyright and other forms of intellectual property protection
are of less significance within its services division. JAWS' business is not
dependent on a single license or group of licenses. JAWS is experienced in
handling confidential and sensitive client information that is intrinsic or
critical to a client's corporate culture.
ENVIRONMENTAL LAWS
JAWS endeavors to follow all recycling programs and maintains its awareness
of the changing environmental laws.
EMPLOYEES
As of August 6, 1999, JAWS employs approximately 40 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 belief that the growth
of JAWS is completely reliant on its human resources and pays great detail and
attention to human resource factors.
INSURANCE
JAWS maintains insurance coverage that management believes is reasonable,
including key man life insurance policies, business interruption insurance,
asset protection and public liability insurance. JAWS also maintains extensive
data backup procedures to protect both client and JAWS data.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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' 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 amortizes previously capitalized product
development costs by using:
the revenue curve method; or
the straight-line method over the estimated economic life of the
product, which typically ranges from six months to two years.
JAWS has experienced significant losses since its inception from overhead
and other costs incurred in the development and growth of JAWS. JAWS continues
to incur substantial up-front expenditures and operating costs in connection
with the expansion of its growth and marketing efforts. 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 continue to increase in the future, or that JAWS
will be able to achieve or sustain profitable operations.
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.
PLAN OF OPERATION
Management of JAWS has planned its 12 month budget around the amended
Debenture Agreement with Thomson Kernaghan. The JAWS' budget has been designed
to work within this capital allotment and should fulfill the growing needs of
JAWS. It is also within the budget plan for JAWS to reduce its dependency on
the financing by Thomson Kernaghan. Management plans to control growth in this
period and remain within the total financing formula. JAWS believes it will not
need any further financing during this period. However, management of JAWS
continues to search for alternative forms of financing to be prepared in the
event Thomson Kernaghan fails to meet their financing obligations.
Through its marketing and direct sales efforts and by developing strategic
alliances and a strong value added reseller program, typical of the software
industry, JAWS plans to supplement cash flow requirements. The capital proposed
in this registration statement will be used to meet JAWS' business objectives.
JAWS continues to expend resources in researching and developing
complimentary technology for JAWS' current L5 products. JAWS anticipates that
it will have enough financing to continue funding research and development for
the next 12 months.
JAWS is experiencing rapid growth and consequently, the number of employees
has grown to approximately 40 and is expected to reach 80 in the next year.
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 significant expenses related to relocating JAWS' corporate
office. The expansion of JAWS' staff and facilities was planned and accounted
for in JAWS' 12 month business plan.
JAWS has settled with Bristol and the Bristol financing is no longer a
component of the JAWS plan of operations. The JAWS plan of operation presently
encompasses the Thomson Kernaghan financing and JAWS may, in accordance with the
Amended Debenture Agreement, sell convertible debentures equal to $5,000,000 USD
to Thomson Kernaghan; however, because JAWS is not obligated to continue to draw
on the Thomson Kernaghan financing, if more favorable terms become available to
JAWS, JAWS can re-negotiate the conversion terms.
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 first 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 were $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, 1999. 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, 1999. 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 rise as JAWS' operations grows and the markets for its
products and sales opportunities expand.
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.
JAWS believes 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 the next period to support these
expenses, with the gap between revenue and expenses lessening slightly as sales
revenues are accounted for.
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. In addition, 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 research and development to commercialization.
Management also believes this 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.
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. The 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 customers, delays in
shipment, 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. JAWS
believes that period to period comparisons of operating results should not be
relied upon as indicative of future results.
FINANCING
JAWS entered into the Debenture Agreement on September 25, 1998 with
Thomson Kernaghan & Co. Limited. This agreement allowed Thomson Kernaghan & Co.
Limited to purchase from JAWS up to two million dollars ($2,000,000) of a 10%
convertible debenture and 1,428,572 warrants to purchase 1,428,572 common shares
at $0.28 per common share. The warrants expire 3 years after the date of issue
an dare callable. On April 27, 1999, JAWS amended the debenture agreement in
order to increase the purchasable amount of the underlying debentures to five
million dollars (US$5,000,000) and in order to set a fixed price for the share
conversion provisions of the debentures.
The Thomson Kernaghan warrants expire after 5:00 p.m Alberta Time, 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.
As of the date of this prospectus, $1,520,000 of the $5,000,000 available
under the debenture agreement has been advanced. Of this amount, $210,000 plus
interest in the amount of $3,798, has been noticed for conversion at $0.1118 per
common share and will result in the issuance of 1,912,317 common shares. Of the
remaining balance, $210,000 may be converted at a fixed price of $0.28 per
common share, $250,000 may be converted at a fixed price of $0.28 per common
share, $250,000 may converted at a fixed price of $0.40 per common share and
$600,000 may be converted at a fixed price of $0.65 per common share.
The balance of the financing, $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 with a fixed minimum conversion price of $0.40 per common
share. In each instance, JAWS need not call the financing if it does not deem
market conditions favorable, or alternatively, the parties may, upon the mutual
consent of JAWS and Thomson Kernaghan & Co. Limited, renegotiate for a higher
conversion price. JAWS will draw down the amounts necessary to support the
established plan of operation.
In connection with the amended debenture agreement, Thomson Kernaghan & Co.
Limited received warrants to purchase 923,077 common shares at $0.65 per share,
which may result in the issuance of 923,077 common shares. There will be a
finance fee of 10% of the amount funded through the purchase of debentures, up
to $2,000,000, 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.
The Thomson Kernaghan & Co. Limited warrants were negotiated to be 20% of
the first $2,000,000,which resulted in the issuance of 1,428,572 warrants
exercisable at $0.28 per common share and 20% of the additional $3,000,000 for
the issuance of 923,077 warrants exercisable at $0.65 per common share.
In connection with the Debenture Agreement, JAWS has undertaken to
register, on Form SB-2, one hundred percent (100%) of the common shares
underlying the debentures and the warrants.
Thomson Kernaghan is acquiring the debentures under the amended debenture
agreement in a transaction that is exempt from registration requirements under
Regulation S. Thomson Kernaghan & Co. Limited is a purchaser who is not defined
as US persons, as defined by Rule 902(o) of Regulation S.
YEAR 2000 COMPUTER ISSUES
JAWS, as well as its customers and suppliers and the 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 July, 1998, JAWS organized a year 2000 project team to assess the impact
of the year 2000 issue on its operations, develop plans to address the issue and
implement compliance. The project team developed a company-wide, year 2000
remediation plan which consists of a ten-step process to examine JAWS' own
system and those which JAWS estimated may adversely affect JAWS' systems:
in-house computer equipment;
outside supported network equipment;
bandwidth providers;
in-house software;
outside supported network software;
contractors;
in-house auxiliary equipment;
physical plant;
suppliers; and
liability.
For each of the above-listed systems, JAWS' approach toward becoming year
2000 compliant has been as follows:
(1) In-house computer equipment:
Since inception, 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
requested a full report from this company relative to their compliance.
(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. JAWS
believes that all in-house software products developed by JAWS meet 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. A full report has been requested from FutureLink.
(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 the downtown core of 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
believes that it has reduced its risk to levels that they do not warrant
additional or special insurance at this time.
ESTIMATED COST OF REMEDIATION
JAWS currently estimates total year 2000 expenditures at approximately
$25,000 of which approximately $5,000 has been expended as of September 30,
1998, to make the required year 2000 modifications and replacements to its 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
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 currently believes that it will be able 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 and environmental exposure and a temporary inability on
the part of JAWS to process orders and deliver finished software products to
customers 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 customers. As a result, it is possible that JAWS' future
performance may be adversely impacted by payment and financial difficulties
experienced by customers, and/or by shipping fulfillment and accounting
difficulties experienced by vendors. JAWS believes that it 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.
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
JAWS maintains its offices, and computer center, in a Calgary, Alberta,
Canada 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 believes that its current and proposed facilities are in good
condition.
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 August 30, 1999. 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 August 30, 1999, JAWS had 13,061,949 shares of common stock outstanding.
PERCENT OF CLASS(9)
---------------------
BEFORE AFTER
------------------------------------------
CONVERSION CONVERSION
------------------------------------------
NAME AND OFFICE OF BENEFICIAL OWNER(1) AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
- ------------------------------------------------- ------------------------------------------
<S> <C> <C> <C>
Robert J. Kubbernus(4). . . . . . . . . . . . . . 953,667 7.3% 4.65%
Cameron B. Chell(5) . . . . . . . . . . . . . . . 283,333 2.17% 1.38%
Vera Gmitter(6) . . . . . . . . . . . . . . . . . 18,500 0.14% 0.09%
Julia Johnson(2). . . . . . . . . . . . . . . . . 200,000 1.53% 0.97%
Tej Minhas(7) . . . . . . . . . . . . . . . . . . 29,333 0.22% 0.14%
0.97%
Arthur Wong(3). . . . . . . . . . . . . . . . . . 200,000 1.53% 4.17%
Riaz Mamdani(8) . . . . . . . . . . . . . . . . . 856,000 6.55%
Thomson Kernaghan & Co. Limited . . . . . . . . . 7,454,899 0% 36.34%
ALL DIRECTORS AND OFFICERS AS A GROUP (7 PERSONS) 2,540,833 18.44 8.04%
</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 T2T 0A7,
Calgary, Alberta, Canada. 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 shares of common stock issuable upon the exercise of the
options at $0.48 per share until August 1, 2000.
(3) Represents shares of common stock issuable upon the exercise of the
options at $.048 per share until August 1, 2000.
(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 116,667 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
(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 Mr. Mark Valentine.
1998 STOCK OPTION PLAN
In July 1998, JAWS adopted the 1998 stock option plan which reserves
2,612,389 shares of common stock for issuance and provides for the grant of
incentive and restricted stock options to purchase up to 20% of the shares of
common stock 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 2,392,600 shares of common stock at exercise prices
ranging from $.15 to $2.44 per share. Of the options, 920,500 options to were
granted to officers and directors that 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 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 Operations
Cameron B. Chell. . 30 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: security funds, the
documentation needed to close the funding, 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. 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 Associated of Securities
Dealers, Inc.
TEJ MINHAS, President, Chief Operating Officer, is a seasoned 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 serves as Vice President of Operations. Ms. Gmitter is
responsible for day to day operations of JAWS including financing, government
regulation, policies and procedures. Ms. Gmitter has owned and operated
numerous businesses in the service and retail industries. Before joining JAWS,
Ms. Gmitter held the position of General Manager at Bankton Financial
Corporation. Through Continuing Education, she has helped women entrepreneurs
retraining to enter the workforce. She has also taught Junior Achievement, a
North America-wide business program aimed at educating Elementary school aged
children. Ms. Gmitter holds a Bachelor of Arts in Political Science and
Economics from the 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 is also 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. In his current role of Fellow for Network Associates
Inc. of Santa Clara, California, Mr. Wong heads up Active Security issues and
spearheads the adoption of new security infrastructures for global enterprises
and integrators. He also develops 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
two outside directors and one internal director. 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 (CDN$87,000) payable
in 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 the 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 $0.48, exercisable
until August 1, 2000.
ITEM 6. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
The following table sets forth information concerning compensation of the seven senior officers
and directors of JAWS, for the fiscal year from January 1 to December 31, 1998.
<S> <C> <C> <C> <C> <C> <C>
SECURITIES
------------
NAME AND . . . . UNDERLYING
- ---------------- ------------
PRINCIPAL. . . . OTHER ANNUAL OPTIONS ALL OTHER
- ---------------- ------------ ------------ ----------
POSITION . . . . YEAR ENDED SALARY($) BONUS($) COMPENSATION($) GRANTED(#) COMPENSATION($)
- ---------------- ------------ ------------ ---------- --------------- ---------- ---------------
Per Year
CEO - Robert
Kubbernus. . . . 1998 180,000U.S$ Nil Nil 350,000 CDN$135,000
Director -
Cameron Chell. . 1998 50,000U.S$ Nil Nil 250,000 CDN$47,986
Director - Julia
Johnson. . . . . 1998 60,000US$ Nil Nil 200,000 CDN$0
Director -
Arthur Wong. . . 1998 60,000 US$ Nil Nil 200,000 CDN$0
Feb 1, 1999. . 45,000CDN$
V.P.
Operations - . . Beginning
Vera Gmitter . . Mar 1, 1999 75,000CDN$ Nil Nil 82,500 CDN$0
President,
Chief. . . . . . Feb 1, 1999 80,000CDN$
Operating
Officer Tej. . . Beginning
Minhas . . . . . Mar 1, 1999 160,000CDN$ Nil Nil 88,000 CDN$0
$160,000CDN
per year,
CFO. . . . . . . beginning CDN$0
Riaz Mamdani . . 1999 Mar.1, 1999 Nil Nil 350,000
</TABLE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH THOMSON KERNAGHAN & CO. LIMITED
JAWS has received notice of conversion of the Thomson Kernaghan & Co.
Limited debentures. These conversions will result in the issuance of 1,912,317
shares. Pursuant to Exhibit C of the amended debenture agreement, Thomson
Kernaghan & Co. Limited holds 11,642,857 common shares of JAWS 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."
CONSULTING FEES
Since inception in 1997, JAWS has paid consulting fees in an amount of
$120,486 to Robert Kubbernus, and $14,514 was paid to Bankton Financial Corp., a
corporation managed by Robert Kubbernus. 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 51% of
Shelbourne. The lease began on November 1, 1998 and is for a five year term.
TRANSACTIONS WITH FUTURELINK
Mr. Chell has resigned as a 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 month to month.
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 MATTERS
<TABLE>
<CAPTION>
As of August 30, 1999, there were approximately 83 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
</TABLE>
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The following securities have been sold by JAWS since JAWS' 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 Offering was made by the
exemption in Rule 504 of Regulation D promulgated under the amended Securities
Act of 1933. The sale of shares was to 14 investors in the state of Nevada and
27 additional investors, all of which purchases took place outside the United
States.
2. Issuances to two consultants to JAWS for an aggregate of 400,000 shares
of common stock issued in consideration for consulting services rendered to
JAWS. The issuances were made by the exemption in Rule 506 of Regulation D
under the Act.
3. Share Exchange Agreement between JAWS and shareholders of JAWS Canada
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 .
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 offering was made by the exemption in Rule 504 of Regulation D
promulgated under the Act. The sale of shares was to 26 investors.
5. Sales by the 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. The offering was made by the
exemption in Rule 504 of Regulation D promulgated under the Act.
6. Sales by the offering memorandum dated February 18, 1998 of 900,000
shares of common stock of JAWS at $0.20 per share for an aggregate investment of
$180,000 to two investors (450,000 shares each) Hampton Park Ltd. and Linear
Strategies Ltd. The offering was made by the exemption in Rule 504 of
Regulation D promulgated under the Act.
7. 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.
The offering was made by the exemption in Rule 504 of Regulation D promulgated
under the Act.
8. Issuance on July 24, 1998 of 100,000 shares of common stock of JAWS to
Bonanza Management Ltd. in consideration of services rendered. The issuance was
made by the exemption in Rule 506 of Regulation D under the Act.
9. 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 stock of JAWS at $1.00 per
share until March 30, 2000, and 391,094 warrants to purchase 391,094 common
shares at $2.00 per share until March 30, 2000. The offering was made by
exemption in Rule 506 of Regulation D promulgated under the Act. The sale of
shares was to 9 investors. All investors are not "U.S. Persons" as the term is
defined in Rule 902(o) of Regulation S.
10. 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 the 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 the term is defined in Rule 902(o) 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 under the agreement.
11. Sale on April 6, 1999 pursuant to the Offering memorandum dated February
18, 1998 of 1,571,428 of common stock 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). The offering was made by the exemption in Rule
504 of Regulation D promulgated under the Act. The purchasers are contractually
prohibited from transferring 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. The
sale was made by exemption in Rule 506 of Regulation D promulgated under 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 by exemption in Rule 506 of
Regulation D, promulgated under the Act and all investors are not "U.S. Persons"
as the term is defined in Rule 902(o) of Regulation S.
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 until June 30, 2001, to 10
investors. All investors are not "U.S. Persons" as the term is defined in Rule
902(o) of Regulation S. The sale was made by exemption in Rule 506 of
Regulation D promulgated under the Act.
ITEM 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 August 30, 1999 there were 13,061,949 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 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. EXHIBITS
3.1.1 Articles of Incorporation of "E-Biz" Solutions, Inc. (now JAWS US), a
Nevada Corporation was amended on March 11, 1998 and on February 4, 1999.(2)
3.1.2 Articles of Incorporation of JAWS Canada dated September 17, 1997.(2)
3.1.3 Certificate of Amendment of Articles of Incorporation , dated March
30, 1998, changing the name of E-Biz to Jaws Technologies, Inc.(2)
3.1.4 Certificate of Amendment of Articles of Incorporation of JAWS
increasing the total number of common stock which JAWS is allowed to issue from
20,000,000 to 95,000,000.(2)
3.2.1 Bylaws of E-Biz Solutions Inc. (now Jaws US) dated January 27,
1997.(2)
3.2.2 Bylaws No. 1 of JAWS Canada dated October 20, 1997 and Bylaw No. 2 of
JAWS Canada dated October 20, 1997.(2)
4.1.1 Amendment No. 1 to Debenture Purchase Agreement by and between JAWS
and Thompson Kernaghan dated April 27, 1999.(2)
4.1.2 Investment Agreement by and between JAWS and Bristol Asset Management
V, LLC dated August 27, 1998 and letter of termination.(2)
4.1.3 Warrant to purchase 1,000,000 shares of common stock of JAWS issued to
Bristol Asset Management, LLC.(2)
4.1.4 Debenture Acquisition Agreement by and between JAWS and Thomson
Kernaghan & Co. Ltd. dated September 25, 1998.(2)
5.1.1 Opinion of Sonfield & Sonfield.(2)
10.1.1 Lease Agreement by and between JAWS and The Manufacturer of Life
Insurance Company dated December 15, 1997.(Deleted)
10.1.2 Director's Agreement between JAWS and Arthur Wong dated July 1998.(2)
10.1.3 Director's Agreement between JAWS and Julia Johnson dated July 30,
1998.(2)
10.1.4 Incentive and Non-Qualified Stock Option Plan for JAWS.(2)
10.1.5 Master Agreement by and between JAWS and A.I. Axion Internet
Communications, Inc. dated November 24, 1998.(2)
10.1.6 Master Agreement by and between JAWS and Calgary On-Line dated
December 1998.(2)
10.1.7 Master Agreement by and between JAWS and ABC Internet Inc. dated
December 7, 1998.(2)
10.1.8 Written Consent of the Board of Directors authorizing payment of
consulting fees to officers of JAWS and their affiliates.(2)
10.1.9 Indemnity Agreements by and between JAWS and Ms. Julia L.
Johnson.(2)
10.1.10 Indemnity Agreements by and between JAWS and Mr. Arthur Wong.(2)
21 Subsidiaries of JAWS: JAWS Technologies, Inc., an Alberta corporation.(2)
23.1 Consent of Sonfield & Sonfield.(2)
23.2 Consent of Ernst & Young LLP.(2)
27 Financial Data Schedule(1)
- -------------------------
(1) Filed herewith.
(2) Incorporated by reference to registration statement on Form SB-2, File
No. 333-65583.
<PAGE>
F - 1
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTSINDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
JAWS TECHNOLOGIES, INC.
JUNE 30, 1999 (UNAUDITED), DECEMBER 31, 1998 AND 1997
<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 - 7-19
</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>
<TABLE>
<CAPTION>
JAWS TECHNOLOGIES, INC.
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. . . . . . . . . . . . . . . . . . 1,351,635 425,559 -
Foreign currency translation adjustment. . . . . . . . (127,538) (8,842) -
Deficit. . . . . . . . . . . . . . . . . . . . . . . . (5,756,279) (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>
<TABLE>
<CAPTION>
JAWS TECHNOLOGIES, INC.
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 . . . . . 772,199 - 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 -
2,553,318 1,593,871 3,105,355 136,854
LOSS FOR THE PERIOD [NOTE 8]. . . . (2,543,138) (1,591,933) (3,076,287) (136,854)
- ----------------------------------- ------------ -------------- -------------- ----------
OTHER COMPREHENSIVE LOSS
Foreign currency translation
adjustment. . . . . . . . . . . (118,696) 848 (8,842) -
COMPREHENSIVE LOSS. . . . . . . . . (2,661,834) (1,591,085) (3,085,129) (136,854)
DEFICIT, BEGINNING OF PERIOD. . . . (3,213,141) (136,854) (136,854) -
LOSS FOR THE PERIOD . . . . . . . . (2,543,138) (1,591,085) (3,076,287) (136,854)
DEFICIT, END OF PERIOD. . . . . . . (5,756,279) (1,728,787) (3,213,141) (136,854)
Loss per common share . . . . . . . (0.22) (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>
<TABLE>
<CAPTION>
JAWS TECHNOLOGIES, INC.
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>
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
BALANCE, JUNE 30, 1999. . . . . . . . . . . . . 14,974,266 14,973 5,181,092 1,351,635
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
JAWS TECHNOLOGIES, INC.
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,
------------ -------------- --------------
1999 1998 1998 1997
------------ -------------- --------------
$ $ $
<S> <C> <C> <C> <C>
(unaudited)
CASH FLOWS USED IN OPERATING ACTIVITIES
Loss for the period. . . . . . . . . . . . . . . . (2,543,138) (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. . . . . . . 617,867 - 257,143 -
Non-cash interest expense on convertible
debentures . . . . . . . . . . . . . . . . . . 110,028 - 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
Proceeds from (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
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 $431,116 at December
31, 1998, a deficit of $3,213,141 at December 31, 1998 and $5,756,279 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.
<PAGE>
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 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.
<TABLE>
<CAPTION>
4. FIXED ASSETS
JUNE 30, 1999
COST ACCUMULATED DEPRECIATION NET BOOK VALUE
-------------------------
$ $ $
<S> <C> <C> <C>
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
-------------------------
COST . . . . . . . . . . . . . . ACCUMULATED DEPRECIATION NET BOOK 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.
<TABLE>
<CAPTION>
OPTIONS
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.
<TABLE>
<CAPTION>
6. RELATED PARTY TRANSACTIONS
Amounts due to related parties consist of the following amounts:
JUNE 30, DECEMBER 31,
1999 1998 DECEMBER 31, 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
DECEMBER 31,
JUNE 30, 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. . . . . . . . (231,511) (85,714)
Intrinsic value associated with equity component of debentures 23,607 24,000
Amortization of financing fees to date . . . . . . . . . . . . 16,008 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. 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 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.
<TABLE>
<CAPTION>
9. INCOME TAXES
The income tax benefit differs from the amount computed by applying the U.S. federal
statutory tax rates to the loss before income taxes for the following reasons:
JUNE 30, JUNE 30, DECEMBER 31,
1999 1998 1998 DECEMBER 31, 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>
For financial reporting purposes, loss before income taxes includes the
following components:
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
$ $ $ $
------------ ------------ ------------ ----------
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>
<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,
1999 1998 DECEMBER 31, 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 amended Internal Revenue Code of 1986.
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 the changes have occurred and the effect the
changes could have on its ability to carry forward all or some of the U.S. net
operating losses.
<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:
CAPITAL LEASES
<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 Statement of Financial Accounting Standards 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>
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: August 31, 1999
-----------------
<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 0
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 6,532
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 0
5-03(b)5. . . Provision for doubtful accounts and notes 2,553
5-03(b)(8). . Interest and amortization of debt discount 0
5-03(b)(10) . Income before taxes and other items 816
5-03(b)(11) . Income tax expense <2,543>
5-03(b)(14) . Income/loss continuing operations 0
5-03(b)(15) . Discontinued operations <2,543>
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 <2,543>
5-03(b)(20) . Earnings per share-primary <0.22>
5-03(b)(20) . Earnings per share-fully diluted anti-dilutive
</TABLE>
