SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (D)
of the
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) November 3, 1999
JAWS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
NEVADA
(State or other jurisdiction of incorporation or organization)
<S> <C>
7371 . . . . . . . . . . 98-0167013
(Commission File Number) (IRS Employer Identification Number)
</TABLE>
1013 17TH AVENUE SW T2T 0A7
CALGARY, ALBERTA CANADA
(Address of principal executive offices)
(403) 508-5055
(Registrant's telephone number, including area code)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
- --------------------------------------------------
On November 3, 1999, JAWS Technologies Inc., a Nevada corporation (the
"Company"), entered into an agreement, the effect of which was that the Company
acquired all of the issued and outstanding common shares of the capital stock of
Pace Systems Group Inc., an Ontario Corporation ("Pace") from all the
shareholders of Pace (the "Sellers"). The consideration to be paid by the
Company to the Sellers for the transaction was determined on an arms-length
basis through negotiations between the Sellers, the Company and their respective
advisors. The consideration to be paid by the Company is a maximum issuance of
1,731,932 common shares of the capital stock of the Company, valued at $1.70 USD
per share, to be released over the next two years. The consideration was
determined by using an evaluation method of 2.29 times the gross revenues of
Pace resulting in a purchase price of approximately $2,944,284 USD. When
determining the purchase price for Pace, the Company considered the value of all
the assets of Pace including: physical assets as reported in the audited
financials dated July 31, 1999, historical revenues, customer lists and all
other assets including leases and goodwill. Additionally the value of the key
employees of Pace was considered to be an integral part of the goodwill and
value of Pace. The terms of the purchase, as described in the Share Purchase
Agreement, as amended, include performance revenue targets and also include the
employment of Peter Labrinos, James Wang, Aidan O'Brien and Joseph Iuso.
The Pace assets were acquired indirectly from the Sellers: Peter Labrinos,
President of Pace Systems, James Wang, Aidan O'Brien, Joseph Iuso, Vasiliki
Labrinos, Panagiotis Labrinos, Cindy Wang, Joseph T. Lee and Mam Ling Wang.
Prior to the transactions described above, there was no material
relationship between the Sellers or any other officers, directors or
shareholders and the Company or any of its affiliates, any director or officer
of the Company or any associate of any such director or officer.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
- ----------------------------------------------
Financial Statements
(a) Audited financial statements for Pace at July 31, 1999 and 1998
(filed herewith).
(b) JAWS' third quarter financials ending September 30, 1999 (filed
herewith).
(c) Financial Data Schedule (filed herewith).
(d) Pro forma unaudited financial statements (filed herewith).
(e) Consent of Ernst & Young LLP for JAWS financials (not applicable)
(f) Consent of Ernst & Young LLP for Pace financials (not applicable)
Exhibits
(All Exhibits were previously filed in the original 8-K Current Report)
Exhibit A - Share Purchase Agreement dated November 3, 1999 between JAWS
Technologies Inc. and the Shareholders of Pace Systems Group Inc.
Exhibit B - Amending Agreement dated November 3, 1999 between JAWS
Technologies, Vendors (as defined in the agreement) and Pace Systems Group Inc.
Exhibit C - Escrow Agreement dated November 3, 1999 between JAWS
Technologies Inc. and Pace Systems Group Inc.
Exhibit D - Support Agreement dated November 3, 1999 between JAWS
Technologies Inc. and Pace Systems Group Inc.
Exhibit E - Voting Exchange Trust Agreement dated November 3, 1999 between
JAWS Technologies Inc. and Pace Systems Group Inc.
Exhibit F - Terms and Conditions of JAWS Technologies Inc. Preferred Voting
Stock
Exhibit G - Exchangeable Share Provision
Exhibit H - Press Release dated November 2, 1999
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
JAWS TECHNOLOGIES, INC.
By:/s/Robert J. Kubbernus
------------------------
Robert J. Kubbernus, President
Date: November 15, 1999
<PAGE>
F - 3
INDEPENDENT AUDITORS' REPORT
To the Director
PACE SYSTEMS GROUP
We have audited the accompanying balance sheets of PACE SYSTEMS GROUP as at July
31, 1999 and 1998 and the related statements of income (loss) and comprehensive
income (loss) and deficit and cash flows for the years ended July 31, 1999 and
1998. 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 financial statements referred to above present fairly, in
all material respects, the financial position of the Corporation as at July 31,
1999 and July 31, 1998 and the results of its operations and its cash flows for
the years ended July 31, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States.
Toronto, Canada,
October 1, 1999. Chartered Accountants
<PAGE>
PACE SYSTEMS GROUP
<TABLE>
<CAPTION>
BALANCE SHEETS
[all amounts are expressed in Cdn. dollars]
As at July 31
<S> <C> <C>
1999 1998
$. . . . . . . . . . . . . . . . . . . $
ASSETS
CURRENT
Cash . . . . . . . . . . . . . . . . . . 12,734 236,125
Accounts receivable. . . . . . . . . . . 350,831 193,813
Income taxes recoverable . . . . . . . . - 2,238
TOTAL CURRENT ASSETS . . . . . . . . . . 363,565 432,176
- ----------------------------------------
Fixed assets, net [note 2] . . . . . . . 9,870 6,129
- ----------------------------------------
373,435 438,305
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT
Accounts payable and accrued liabilities 129,045 542,501
Due to related parties [note 4]. . . . . 262,854 605
TOTAL CURRENT LIABILITIES. . . . . . . . 391,899 543,106
- ----------------------------------------
Commitment [note 6]
STOCKHOLDERS' DEFICIENCY
Authorized - 100 common shares
Issued
100 common shares at $1 [note 3] . . . . 100 100
Deficit. . . . . . . . . . . . . . . . . (18,564) (104,901)
TOTAL STOCKHOLDERS' DEFICIENCY . . . . . (18,464) (104,801)
- ----------------------------------------
373,435 438,305
</TABLE>
See accompanying notes
On behalf of the Board:
Director Director
<PAGE>
PACE SYSTEMS GROUP
<TABLE>
<CAPTION>
STATEMENTS OF INCOME (LOSS) AND
COMPHRENSIVE INCOME (LOSS) AND DEFICIT
[all amounts are expressed in Cdn. dollars]
Year ended July 31
<S> <C> <C>
1999 1998
$ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
REVENUE
Consulting fees . . . . . . . . . . . . . . . . . . . . . . . . 1,901,187 1,626,094
Subcontracting [note 4] . . . . . . . . . . . . . . . . . . . . 1,580,883 1,604,394
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . . . 320,354 21,700
- ---------------------------------------------------------------
General and administrative. . . . . . . . . . . . . . . . . . . 232,198 116,392
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . 1,819 1,599
234,017 117,991
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) FOR THE YEAR 86,337 (96,291)
Deficit, beginning of year. . . . . . . . . . . . . . . . . . . (104,901) (8,610)
- ---------------------------------------------------------------
DEFICIT, END OF YEAR. . . . . . . . . . . . . . . . . . . . . . (18,564) (104,901)
- ---------------------------------------------------------------
</TABLE>
See accompanying notes
<PAGE>
PACE SYSTEMS GROUP
STATEMENTS OF CASH FLOWS
[all amounts are expressed in Cdn. dollars]
Year ended July 31
1999 1998
$ $
OPERATING ACTIVITIES
Net income (loss) for the year 86,337 (96,291)
Adjustments to reconcile loss to cash flows used
in operating activities:
Depreciation 1,819 1,599
Net change in non-cash working capital balances
related to operations [note 11] (568,236) 69,284
CASH USED IN OPERATING ACTIVITIES (480,080) (25,408)
- -------------------------------------
INVESTING ACTIVITIES
Purchase of fixed assets (5,560) -
CASH USED IN INVESTING ACTIVITIES (5,560) -
- -------------------------------------
FINANCING ACTIVITIES
Due to related parties 262,249 (2,010)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 262,249 (2,010)
- -----------------------------------------------------
NET DECREASE IN CASH DURING THE YEAR (223,391) (27,418)
Cash, beginning of year 236,125 263,543
- --------------------------
CASH, END OF YEAR 12,734 236,125
- --------------------
See accompanying notes
<PAGE>
F - 27
PACE SYSTEMS GROUP
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICES
Pace Systems Group [the "Corporation"] was incorporated in 1986 under the laws
of Ontario. The Corporation's purpose is providing consulting services to
companies relating to information systems.
The accompanying financial statements reflect all adjustments which are in the
opinion of management, necessary to reflect a fair presentation for the periods
being presented.
These financial statements have, in management's opinion, been properly prepared
in accordance with accounting principles generally accepted in the United
States. The more significant accounting policies are summarized below:
REVENUE RECOGNITION
Consulting fees are recognized when the service is rendered or earned.
USE OF ESTIMATES
Because a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period necessarily
involves the use of estimates which would affect the amount of recorded assets,
liabilities, revenue and expenses. Actual amounts could differ from these
estimates.
FIXED ASSETS
Fixed assets are recorded at cost less accumulated depreciation. Depreciation
is provided on a declining balance basis at rates which are designed to amortize
the cost of the assets over their estimated useful lives as follows.
Furniture and fixtures 20%
Computer hardware 30%
INCOME TAXES
The Corporation accounts for deferred income tax based on the liability method.
Under the liability method, deferred income taxes are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases measured using the substantially enacted tax rates and laws that will be
in effect when the differences areas reflected reverse.
FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in foreign currencies are translated
into Canadian dollars at the rates of exchange prevailing at the balance sheet
date. Non-monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at historic rates. Revenue and expenses
denominated in foreign currencies are translated into Canadian dollars at the
prevailing rates at the transaction dates. Exchange gains and losses are
included in income.
CASH
Cash comprises of cash on hand and balances with banks.
2. FIXED ASSETS
<TABLE>
<CAPTION>
Fixed assets consist of the following:
<S> <C> <C> <C>
1999
-------------
ACCUMULATED. . . . . . . . . . . . NET BOOK
COST . . . . . . . . . . . . . . . . DEPRECIATION VALUE
$. . . . . . . . . . . . . . . . . . $ $
Furniture and fixtures . . . . . . . . 67,949 58,340 9,609
Computer hardware. . . . . . . . . . . 1,279 1,018 261
- --------------------------------------
69,228 59,358 9,870
1998
-------------
ACCUMULATED. . . . . . . . . . . . NET BOOK
COST . . . . . . . . . . . . . . . . DEPRECIATION VALUE
$. . . . . . . . . . . . . . . . . . $ $
Furniture and fixtures . . . . . . . . 62,388 56,632 5,756
Computer hardware. . . . . . . . . . . 1,279 906 373
- --------------------------------------
63,667 57,538 6,129
</TABLE>
3. SHARE CAPITAL
<TABLE>
<CAPTION>
Share capital consists of the following:
<S> <C> <C>
1999 1998
$. . . . . . . . . . . . . . . . . . . $
AUTHORIZED
Limited to 100 common shares
ISSUED
100 common shares. . . . . . . . . . . . 100 100
- ----------------------------------------
</TABLE>
On August 20, 1999, the Articles of Incorporation were amended to change the
amount of authorized common shares to unlimited.
4. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
As at July 31, the Corporation has outstanding account balances with its
shareholder and related parties as follows:
<S> <C> <C>
1999 1998
$. . . . . . . . . . . . . . . . . . $
1322669 Ontario Inc. . . . . . . . . . 262,395 -
Shareholder. . . . . . . . . . . . . . 459 605
- --------------------------------------
DUE TO SHAREHOLDER AND RELATED PARTIES 262,854 605
- --------------------------------------
</TABLE>
The amount due to the shareholder is unsecured, non-interest bearing and is due
on demand.
1322669 is wholly owned by the Corporation's sole shareholder.
During the year, the Corporation incurred expenses with related parties which
are $369,645.
<TABLE>
<CAPTION>
Included in sub-contractor expenses are amounts incurred with related parties as
follows:
<S> <C> <C>
1999 1998
$. . . . . . . . . $
PAID TO
1322669 Ontario Inc. 413,050 -
Shareholder's spouse 9,800 49,346
- --------------------
422,850 49,346
</TABLE>
5. INCOME TAXES
<TABLE>
<CAPTION>
The income tax benefit differs from the amount computed by applying the Canadian
federal\ statutory tax rates to the income (loss) before income taxes for the
following reasons:
<S> <C> <C>
1999 1998
$. . . . . . . . . . . . . . . . . . . . . $
(22%) (22%)
Income tax (benefit) at Cdn. Statutory rate. 19,000 (22,000)
Increase (decrease) in taxes resulting from:
Deferred tax asset valuation allowance . . . - 22,000
Tax benefit of loss Carryforwards. . . . . . (19,000) -
- --------------------------------------------
- -
</TABLE>
<TABLE>
<CAPTION>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax assets are as follows:
<S> <C> <C>
1999 1998
$. . . . . . . . . . . . . . . . . . $
Deferred tax assets (liabilities):
Tax benefit of loss Carryforwards. . . - 22,000
- --------------------------------------
Deferred tax assets net of liabilities - 22,000
- --------------------------------------
Valuation allowance. . . . . . . . . . - (22,000)
- -------------------------------------- ----- --------
Net deferred tax assets. . . . . . . . - -
</TABLE>
The Company has provided a valuation allowance for the full amount of deferred
tax assets in light of its history of operating losses.
6. COMMITMENT
<TABLE>
<CAPTION>
The Corporation is committed to the following future minimum annual lease
payments for leasing office space:
<S> <C>
$
2000. 74,476
2001. 74,476
2002. 43,445
- -----
Total 192,397
- -----
</TABLE>
Under the operating leases for office space, the Corporation is also required to
pay for operating expenses. These amounts vary from year to year dependent upon
usage and are, therefore, not included in the future minimum annual lease
payments shown above.
7. SEGMENTED INFORMATION
The Company's activities are conducted in one operating segment with all
activities relating to development and sale of encryption software. To date,
all the activities have occurred in Canada, the United States and Europe.
8. FINANCIAL INSTRUMENTS
Financial instruments comprising cash, accounts receivable, accounts payable and
accrued liabilities, approximate their fair value. It is management's opinion
that the Company is not exposed to significant currency or credit risks arising
from these financial instruments.
9. CREDIT RISKS
Accounts receivable are subject to concentration of credit risk. As at the year
end 43% of accounts receivable is outstanding with two customers.
10. RECENT PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", the implementation of which has been delayed one year. The
Company does not acquire derivatives or engage in hedging activities.
11. CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
The net change in non-cash working capital balances related to operations
consists of the following:
<S> <C> <C>
1999 1998
$. . . . . . . . . . . . . . . . . . . $
Accounts receivable. . . . . . . . . . . (157,018) (172,608)
Income taxes recoverable . . . . . . . . 2,238 (2,238)
Accounts payable and accrued liabilities (413,456) 246,368
Income taxes payable . . . . . . . . . . - (2,238)
- ----------------------------------------
Change relating to operating activities. (568,236) 69,284
- ----------------------------------------
</TABLE>
12. ECONOMIC DEPENDENCE
Approximately 29% of the Corporation's sales were made to two customers. These
customers accounted for 24% of the Corporation's accounts receivable balance at
year end.
Approximately 31% of the Corporation's subcontracting expenses were provided by
two vendors. These vendors accounted for 23% of the Corporation's accounts
payable balance at year end.
13. SUBSEQUENT EVENTS
In October 1999, the Corporation's sole shareholder agreed to sell all of the
Corporation's issued shares to Jaws Technologies Inc. The Corporation has been
dealing with Jaws Technologies Inc. as a customer in the ordinary course of
business during 1999.
<PAGE>
JAWS TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(all amounts are expressed in U.S. dollars)
(see basis of presentation - note 1)
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
$. . . . . . . . . . . . . . . . . . . . . . . . . . . $ $
- -------------------------------------------------------- ------------ ------------
(unaudited)
ASSETS
CURRENT
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 664,428 33,732 111
Term deposits [note 4]. . . . . . . . . . . . . . . . . 27,000 - -
Accounts receivable. . . . . . . . . . . . . . . . . . . 421,138 7,243 -
Due from related parties [note 7]. . . . . . . . . . . . - 13,118 -
Prepaid expenses and deposits. . . . . . . . . . . . . . 86,828 140,456 7,500
1,199,394 194,549 7,611
Fixed assets, net of $82,292 (December 31, 1998 -
13,461; December 31, 1997 - $1,160) accumulated
depreciation [note 5] . . . . . . . . . . . . . . . . . 498,004 78,830 2,320
1,697,398 273,379 9,931
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT
Accounts payable and accrued liabilities . . . . . . . . 897,947 428,600 32,976
Current portion of capital lease obligations payable
[note 12]. . . . . . . . . . . . . . . . . . . . . . . . 14,119 - -
Due to related parties [note 7]. . . . . . . . . . . . . 196,258 197,115 -
Due to stockholders [note 7] . . . . . . . . . . . . . . 2,044 74,717 78,159
1,110,368 700,432 111,135
Capital lease obligations payable [note 12]. . . . . . . 66,989 - -
Convertible debentures [note 8]. . . . . . . . . . . . . 1,091,348 146,606 -
1,158,337 146,606 78,159
COMMITMENTS AND CONTINGENCIES[NOTE 10]
STOCKHOLDERS' DEFICIENCY
Authorized
95,000,000 common shares at $0.001 par value
5,000,000 preferred shares at $0.001 par value
Common stock issued and paid-up [note 6] . . . . . . . . 15,114 10,612 4,000
Capital in excess of par value . . . . . . . . . . . . . 5,369,891 2,212,153 31,650
Contributed surplus. . . . . . . . . . . . . . . . . . . 1,241,607 425,559 -
Cumulative translation adjustment. . . . . . . . . . . . (145,643) (8,842) -
Deficit. . . . . . . . . . . . . . . . . . . . . . . . . (7,052,276) (3,213,141) (136,854)
(571,307) (573,659) (101,204)
------------ ------------ ---------
1,697,398 273,379 9,931
------------ ------------ ---------
</TABLE>
See accompanying notes
On behalf of the Board:
Director Director
<PAGE>
JAWS TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT AND COMPREHENSIVE LOSS
(all amounts are expressed in U.S. dollars)
PERIOD FROM
INCORPORATION
JANUARY 27, TO
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31,
--------------- --------------
1999 1998 1998 1997
--------------- -------------- ------------
$ $ $
<S> <C> <C> <C> <C>
(unaudited)
REVENUE [note 7] . . . . . . . . . . 372,630 28,440 29,068 -
EXPENSES [NOTE 7]
Accounting and legal . . . . . . . . 246,909 105,372 186,128 69,952
Advertising and promotion. . . . . . 234,398 194,764 218,574 35,000
Consulting . . . . . . . . . . . . . 438,655 685,375 514,894 30,731
Depreciation and amortization. . . . 67,462 8,877 14,041 580
Directors' fees. . . . . . . . . . . 97,501 - 33,333 -
Management fees. . . . . . . . . . . 147,036 - - -
Amortization of deferred financing
fees [note 8]. . . . . . . . . . . . 75,601 - 5,158 -
Foreign exchange loss. . . . . . . . 10,248 - (431) -
Non cash interest expense [note 8] . 833,115 - 381,688 -
Interest expense and bank charges. . 6,197 - 2,869 -
Investor relations . . . . . . . . . 100,255 - 258,016 -
Office and administration. . . . . . 110,638 - 83,143 -
Other. . . . . . . . . . . . . . . . 291,420 76,649 52,928 591
Rent . . . . . . . . . . . . . . . . 180,840 13,523 29,637 -
Sub-contracting costs. . . . . . . . 337,712 - - -
Travel . . . . . . . . . . . . . . . 281,643 120,342 132,646 -
Wages and employee benefits. . . . . 752,135 124,599 283,728 -
Software development costs
[note 3]. . . . . . . . . . . . . . - 909,003 909,003 -
4,211,765 2,238,504 3,105,355 136,854
LOSS FOR THE PERIOD [NOTE 10]. . . . (3,839,135) (2,210,064) (3,076,287) (136,854)
- ------------------------------------ --------------- -------------- ------------ ----------
OTHER COMPREHENSIVE LOSS
Foreign currency translation
adjustment . . . . . . . . . . . . . (136,801) (29,847) (8,842) -
COMPREHENSIVE LOSS . . . . . . . . . (3,975,936) (2,239,911) (3,085,129) (136,854)
DEFICIT, BEGINNING OF PERIOD . . . . (3,213,141) (136,854) (136,854) -
LOSS FOR THE PERIOD. . . . . . . . . (3,839,135) (2,210,064) (3,076,287) (136,854)
DEFICIT, END OF PERIOD . . . . . . . (7,052,276) (2,346,918) (3,213,141) (136,854)
Loss per common share [note 9] . . . (0.30) (0.31) (0.42) (0.03)
Weighted average number of shares
outstanding. . . . . . . . . . . . . 12,837,302 7,101,869 7,405,421 4,000,000
</TABLE>
See accompanying notes
<PAGE>
JAWS TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(all amounts are expressed in U.S. dollars)
CAPITAL IN
-----------
PAR EXCESS OF CONTRIBUTED
SHARES 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 6] . . . . . . . . . . 400,000 400 199,600 -
- ------------------------------------- ----------- ---------- ------------- ----------
Issuance of common stock on
acquisition of subsidiary [note 4]. . 1,500,000 1,500 838,248 -
Issuance of common stock for cash . . 2,800,000 2,800 1,017,200 -
Warrants issued with issuance of
convertible debentures [note 8] . . . - - - 342,857
Equity component of convertible
debentures [note 8] . . . . . . . . . - - - 118,462
Equity component of financing fees
[note 8]. . . . . . . . . . . . . . . - - - (11,760)
Equity component of financing fees
[note 8]. . . . . . . . . . . . . . . - - - (24,000)
Issue of common stock upon
conversion of convertible debentures
[note 8]. . . . . . . . . . . . . . . 1,912,317 1,912 211,886 -
Financing fee associated with
converted debentures [note 8] . . . . - - (21,117) -
Share issue costs . . . . . . . . . . - - (65,314)
BALANCE, DECEMBER 31, 1998. . . . . . 10,612,317 10,612 2,212,153 425,559
(UNAUDITED)
- -------------------------------------
Issuance of common stock for cash . . 317,188 317 101,183 -
Equity component of convertible
debentures [note 8] . . . . . . . . . - - - 424,575
Equity component of financing fees
[note 8]. . . . . . . . . . . . . . . - - - (14,000)
Issuance of common stock for cash . . 4,044,761 4,044 2,867,756 -
Equity component of convertible
debenture [note8] . . . . . . . . . . - - - 193,292
Equity component of financing fee
[note 8]. . . . . . . . . . . . . . . - - - (19,329)
Warrants issued with issuance of
convertible debentures [note 8] . . . - - - 341,538
Equity component of financing fee
[note 8]. . . . . . . . . . . . . . . - - - (110,028)
Issuance of common stock in
settlement of trade payable . . . . . 141,000 141 188,799 -
BALANCE, SEPTEMBER 30, 1999 . . . . . 15,115,266 15,114 5,369,891 1,241,607
</TABLE>
See accompanying notes
<PAGE>
JAWS TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(all amounts are expressed in U.S. dollars)
PERIOD FROM
INCORPORATION
JANUARY 27, TO
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31,
--------------- --------------
1999 1998 1998 1997
--------------- -------------- ------------
$ $ $
(unaudited)
- -----------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Loss for the period . . . . . . . . . . . (3,839,135) (2,210,064) (3,076,287) (136,854)
Adjustments to reconcile loss to cash
flows used in operating activities:
Consulting expense not involving the
payment of cash [note 6]. . . . . . . . . - 200,000 200,000 -
Depreciation and amortization . . . . . . 67,462 8,877 14,041 580
Amortization of deferred financing
fees. . . . . . . . . . . . . . . . . . . 75,601 - 5,158 -
Software development costs. . . . . . . . - 909,189 909,003 -
Non-cash interest expense on warrants . . - - 257,143 -
Non-cash interest expense on
convertible debentures. . . . . . . . . . 755,792 - 118,462 -
Non-cash interest expense on
convertible debenture conversion and
accrued interest . . . . . . . . . . . . 77,323 - 6,083 -
Changes in non-cash working capital
balances [note 13]. . . . . . . . . . . . 121,341 364,410 439,422 25,476
(2,741,731) (727,588) (1,126,975) (110,798)
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of fixed assets. . . . . . . . . (542,329) (134,474) (115,584) (2,900)
Purchase of term deposits [note 4]. . . . (27,000) - - -
(569,329) (134,474) (115,584) (2,900)
--------------- -------------- ------------ ---------
CASH FLOWS GENERATED BY (USED IN)
FINANCING ACTIVITIES
Proceeds from the issuance of common
stock, net of issue costs . . . . . . . . 3,024,314 954,686 954,686 35,650
Repayment of stockholder advances . . . . (72,673) (117,044) (78,159) 78,159
Proceeds from stockholder advances. . . . - 24,309 20,273 -
Proceeds on issue of convertible
debenture . . . . . . . . . . . . . . . . 1,100,000 - 420,000 -
Financing fees on issue of convertible
debenture . . . . . . . . . . . . . . . . (110,000) - (42,000) -
3,941,641 861,951 1,274,800 113,809
--------------- -------------- ------------ ---------
INCREASE (DECREASE) IN CASH . . . . . . . 630,696 (111) 32,241 111
Cash acquired on acquisition of
subsidiary. . . . . . . . . . . . . . . . - - 1,380 -
Cash, beginning of period . . . . . . . . 33,732 111 111 -
CASH, END OF PERIOD . . . . . . . . . . . 664,428 - 33,732 111
</TABLE>
See accompanying notes
<PAGE>
F - 1
JAWS TECHNOLGOIES, 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 $505,883 at December
31, 1998, a deficit of $3,213,141 at December 31, 1998 and $7,052,276 as at
September 30, 1999 and net operating cash outflows of $2,741,731 for the nine
month period ended September 30, 1999. Although it has a positive working
capital balance of $89,026 at September 30, 1999, the Company's continuation as
a going concern is dependent on its ability to generate sufficient cash flow, to
meet its obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain successful operations. However, no assurance
can be given at this time as to whether the Company will achieve any of these
conditions. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern
for a reasonable period of time.
Management believes that additional funding will be required to finance expected
operations until a market has been developed for the Company's software.
Management intends to seek additional financing through future private or public
offerings of stock and through the exercise of stock options.
The accompanying financial statements reflect all adjustments which are, in the
opinion of management, necessary to reflect a fair presentation for the periods
being presented.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have, in management's opinion, been properly prepared
in accordance with accounting principles generally accepted in the United
States.
USE OF ESTIMATES
Because a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period necessarily
involves the use of estimates which would affect the amount of recorded assets,
liabilities, revenues and expenses. Actual amounts could differ from these
estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Jaws Technologies, Inc., an Alberta, Canada
corporation ("Jaws Alberta"), and Jaws Technologies (Ontario) Inc. an Ontario
Canada corporation ("Jaws Ontario"), after elimination of intercompany accounts
and transactions.
FIXED ASSETS
Fixed assets are recorded at cost and are depreciated at the following annual
rates which are designed to amortize the cost of the assets over their estimated
useful lives.
Furniture and fixtures - 20% diminishing balance
Computer hardware - 33% straight line
Computer software for internal use - 33% straight line
Leasehold improvements - 20% straight line
SOFTWARE DEVELOPMENT
Software development costs are expensed when technological feasibility has not
yet been established. Subsequent to establishing technological feasibility,
such costs are capitalized until the commencement of commercial sales.
FINANCING FEES
Financing fees associated with that portion of the 10% convertible debentures
classified as debt are deferred and amortized over the life of the debentures.
Financing fees associated with that portion of the convertible debentures
classified as contributed surplus is charged to that account. The pro rata
portion of financing fees associated with converted debentures is charged to
share capital in excess of par value.
REVENUE RECOGNITION
Revenue from selling encryption software is recognized when the software is
delivered. Consulting fees are recognized when the services are rendered or
earned.
ADVERTISING
Advertising costs are expensed as incurred.
INCOME TAXES
The Company follows the liability method of accounting for the tax effect of
temporary differences between the carrying amount and the tax basis of the
company's assets and liabilities. Temporary differences arise when the
realization of an asset or the settlement of a liability would give rise to
either an increase or decrease in the Company's income taxes payable for the
year or later period. Deferred income taxes are recorded at the income tax
rates that are expected to apply when the deferred tax liability is settled or
the deferred tax asset is realized. When necessary, valuation allowances are
established to reduce deferred income tax assets to the amount expected to be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred income tax assets and liabilities.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's subsidiaries is the Canadian dollar.
Accordingly, assets and liabilities of the subsidiaries are translated at the
year-end exchange rate and revenues and expenses are translated at average
exchange rates. Gains and losses arising from the translation of the financial
statements of the subsidiaries are recorded in a "Cumulative Translation
Adjustment" account in stockholders' equity.
LOSS PER COMMON SHARE
The loss per common share has been calculated based on the weighted average
number of common shares outstanding during the period. Diluted earnings per
share, assuming all warrants, options and conversion features were exercised,
does not differ from basic earnings per share.
STOCK OPTIONS
The Company applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost is recognized in the accounts as options are granted with
an exercise price that approximates the prevailing market price.
PRIOR YEAR AMOUNTS
Certain prior year amounts have been reclassified to conform to the presentation
adopted in 1999.
3. ACQUISITION
On February 10, 1998 the Company issued 1,500,000 restricted common shares, as
well as options to purchase 400,000 shares of its restricted common stock at
$0.50 per share in exchange for all of the outstanding common stock of Jaws
Alberta. The options issued in connection with the acquisition have been
ascribed no value. Jaws Alberta was a development stage company which at the
time of acquisition was in the process of creating a new encryption software
product. The acquisition has been accounted for by the purchase method.
<TABLE>
<CAPTION>
The purchase price, and thereby the amounts allocated to software and the shares
issued, net of other assets and liabilities acquired, was determined based on
estimates by management as to the replacement cost for the encryption software
development which had been incurred by Jaws Alberta prior to the acquisition
date. The purchase price has been allocated to the net assets acquired based on
their estimated fair values as follows:
$
---------
<S> <C>
Net assets acquired
Non-cash working capital . . . . . . (5,087)
Software under development . . . . . 909,003
Fixed assets . . . . . . . . . . . . 2,891
Due to stockholders. . . . . . . . . (54,443)
Net assets acquired, excluding cash. 852,364
- ------------------------------------ ---------
Acquisition costs. . . . . . . . . . (13,996)
Cash acquired. . . . . . . . . . . . 1,380
Net assets acquired for common stock 839,748
</TABLE>
The amount allocated to software under development relates to encryption
software and its related algorithms, including the "L5" software. This
software, at the time of purchase, was not completely developed, tested or
otherwise available for sale and therefore has been immediately expensed in the
accompanying consolidated statements of loss and deficit. Coding and testing
activities for this software were completed on July 31, 1998.
The operating results of the acquired company are included in the consolidated
statements of loss, deficit and comprehensive loss from the date of acquisition.
Pro forma loss and pro forma loss per common share for the nine month period
ended September 30, 1998, giving effect to the acquisition of Jaws Alberta as at
January 1, 1998 are $2,217,462 and $0.31 respectively (year ended December 31,
1998 - $3,083,685 and $0.42 respectively). Pro forma revenue does not differ
from that recorded for the period to September 30, 1998, being $28,440, or for
the period to December 31, 1998, being $29,068.
4. TERM DEPOSITS
The term deposits are on deposit with a Canadian Chartered Bank. These deposits
have been pledged as security for certain corporate credit cards, and as such
are not available for the Company's general use. These deposits earn interest
at 2.95 percent per annum and mature May 9, 2000.
<TABLE>
<CAPTION>
5. FIXED ASSETS
SEPTEMBER 30, 1999
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
-------------
<S> <C> <C> <C>
$ $ $
------------- ------------- --------
Furniture and fixtures . . . . . . 261,184 29,978 231,206
- ---------------------------------- ------------- ------------- --------
Computer hardware. . . . . . . . . 122,815 27,769 95,046
Computer software for internal use 33,937 6,680 27,257
Leasehold improvements . . . . . . 162,360 17,865 144,495
580,296 82,292 498,004
DECEMBER 31,
1998
-------------
ACCUMULATED. . . . . . . . . . NET BOOK
COST . . . . . . . . . . . . . . DEPRECIATION VALUE
- ----------------------------------
$. . . . . . . . . . . . . . . . $ $
Furniture and fixtures . . . . . . 31,758 6,482 25,276
- ---------------------------------- ------------- ------------- --------
Computer hardware. . . . . . . . . 47,371 5,534 41,837
Computer software for internal use 13,162 1,445 11,717
92,291 13,461 78,830
</TABLE>
6. SHARE CAPITAL
AUTHORIZED
95,000,000 common shares at $0.001 par value (increased from 20,000,000 April 8,
1999)
5,000,000 preferred shares at $0.001 par value
COMMON STOCK ISSUED
During 1998, the 400,000 restricted common shares issued for services provided
by two consultants in relation to the establishment of the capital structure of
the Company. The shares were recorded at their estimated fair value of
$200,000.
COMMON STOCK HELD IN ESCROW
Upon entering into the 10% convertible debenture agreement (see note 8) the
Company placed 9,500,000 shares in escrow relating to the $2 million of
financing. In addition, 1,071,429 shares and 357,143 shares were placed in
escrow relating to the purchasers' and agent's warrants issued in relation to
the 10% convertible debenture agreement.
OPTIONS
<TABLE>
<CAPTION>
As at September 30, 1999, the Company has issued 2,360,600 options to purchase
common stock to the Company's directors, officers and employees. Of the total
issued, none have been exercised as at September 30, 1999. Details of the stock
options outstanding at September 30, 1999 are as follows:
NUMBER OF OPTIONS EXERCISE PRICE EXPIRY DATE
- ----------------- -------------- -------------------
<C> <C> <S>
200,000 0.15 February 22, 2008
50,000 0.23 June 30, 2008
35,000 0.23 June 30, 2008
31,000 0.33 June 30, 2008
143,000 0.37 June 30, 2008
22,000 0.40 June 30, 2008
400,000 0.48 August 1, 2000
706,500 0.48 June 30, 2008
82,500 0.58 June 30, 2008
71,000 0.62 June 30, 2008
10,000 0.65 June 30, 2008
36,000 0.69 June 30, 2008
20,000 0.71 June 30, 2008
62,000 0.73 June 30, 2008
43,500 0.75 June 30, 2008
75,000 0.77 June 30, 2008
5,000 0.81 June 30, 2008
47,500 0.82 June 30, 2008
250,000 0.87 June 30, 2008
5,600 0.98 June 30, 2008
65,000 2.44 June 30, 2008
2,360,600
- -----------------
</TABLE>
The fair value of each option granted to date is estimated on the date of grant
using the Black Scholes option-pricing model with the following assumptions:
expected volatility of 167%, risk-free interest rate of 4.87%; no payment of
common share dividends; and expected life of 10 years. Had compensation cost
for these plans been determined based upon the fair value at grant date,
consistent with the methodology prescribed in Statement of Financial Accounting
Standards No. 123, "accounting for Stock-Based compensation," the Company's loss
and loss per common share for the nine month period ended September 30, 1999
would have been $4,220,310 and $0.33 respectively (year ended December 31, 1998:
$3,324,618 and $0.45 respectively).
During 1998, the Company had entered into a Put Option agreement with an
investor which allowed the Company to require the investor to purchase up to
25,000,000 shares of the common stock of the Company. In addition, the investor
was to be granted warrants to purchase up to 3,000,000 shares of common stock.
On April 26, 1999, the Company and the investor agreed to cancel the agreement
in exchange for warrants to the investor to purchase up to 1,000,000 shares of
common stock at an exercise price of $0.70 per share. The warrants expire April
15, 2002.
On June 21, 1999, the Company issued 834,000 share purchase warrants, which
entitle the holder to purchase 834,000 common shares at $2.25 per share until
June 20, 2001. On August 26, 1999 the Company issued 141,000 common shares at
$1.34 per common share in settlement of a trade payable.
7. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
Amounts due to related parties consist of the following amounts:
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
$ $ $
- ----------------------------- --------
<S> <C> <C> <C>
DUE FROM RELATED PARTIES
Futurelink Corp.. . . . . . . - 9,073 -
Futurelink/Sysgold Ltd. . . . - 4,045 -
- 13,118 -
DUE TO RELATED PARTIES
Officers and stockholders . . 12,849 43,588 -
Futurelink Corp.. . . . . . . 18,602 32,175 -
Willson Stationers Ltd. . . . 7,304 1,352 -
Directors . . . . . . . . . . 157,503 120,000 -
196,258 197,115 -
DUE TO STOCKHOLDERS
Bankton Financial Corporation - 15,775 -
Cameron Chell . . . . . . . . 2,044 1,957 -
Hampton Park Ltd. . . . . . . - 56,985 -
Other stockholder . . . . . . - - 78,159
2,044 74,717 78,159
</TABLE>
Effective July 31, 1999 the Company entered into an agreement with Pace Systems
Group Inc., a related party (see note 17), whereby Pace assigned certain of its
revenue contracts to the Company. During the period from July 31 to September
30, 1999 the Company earned $337,988 from these contracts, which is included in
revenues on the accompanying financial statements. The Company also incurred
sub-contracting costs in respect of these contracts, in the amount of $337,712
which is included in expenses in the accompanying financial statements.
During the year ended December 31, 1998, the Company incurred $76,612 in fees
associated with computer services provided by Futurelink Corp., an entity of
which certain directors are also directors of the Company. There were $28,289
fees incurred during the period ended September 30, 1999. The Company provided
sales to Futurelink Corp. during the period ended September 30, 1999 in the
amount of $2,925 (December 31, 1998 - $9,073). The fees charged by and sales
provided to Futurelink Corp. are recorded at their exchange amounts.
During the year ended December 31, 1998, the Company provided services of $4,045
to Futurelink/Sysgold Ltd., an entity of which certain directors are also
directors of the Company. This amount was included in due from related parties
at December 31, 1998. These services are provided on normal commercial terms and
conditions. No services were provided to Futurelink/Sysgold Ltd. during the
period ended September 30, 1999.
Office and administration expenses for the nine month period ended September 30,
1999, include $11,858 (December 31, 1998 - $8,035) paid to Willson Stationers
Ltd., an entity of which certain directors are also directors and officers of
the Company. These transactions are recorded at their exchange amounts.
Consulting fees for the year ended December 31, 1998, include $198,168 to
officers and stockholders of the Company for services provided.
Due to stockholders represents advances received by the Company. The amount due
to Hampton Park Ltd., a company owned by a stockholder, bears interest at 8% per
annum and has no set repayment terms. The remaining amounts due to stockholders
do not carry interest and have no set repayment terms. All stockholders have
indicated they do not intend to demand repayment within the next year.
The Company entered into an agreement to lease premises from a stockholder. The
lease began on November 1, 1998 and is for a five year term. The minimum rent
is $9.42 per square foot per annum with 9,920 square feet of net rentable area.
Additional rent is estimated at $4.03 per square foot of net rentable area per
annum. The net rent expense recognized in the nine month period ended September
30, 1999 was $67,870 (year ended December 31, 1998 - $3,991).
<TABLE>
<CAPTION>
8. CONVERTIBLE DEBENTURES
SEPTEMBER 30, DECEMBER 31
1999 1998
$ $
----------- ----------
<S> <C> <C>
PRINCIPAL
Net balance outstanding, beginning of period . . . . . . . . . 146,606 -
Funds advanced to date . . . . . . . . . . . . . . . . . . . . 1,100,000 420,000
Debentures converted during the period . . . . . . . . . . . . - (210,000)
1,246,606 210,000
FINANCING FEES
Fees paid on funds advanced to date. . . . . . . . . . . . . . (110,000) (42,000)
Intrinsic value associated with equity component of debentures 33,329 11,760
Fees paid through issuance of warrants to agent. . . . . . . . (341,538) (85,714)
Intrinsic value associated with equity component of debentures 110,027 24,000
Amortization of financing fees to date . . . . . . . . . . . . 75,601 5,158
Financing fees associated with debentures converted to date. . - 21,117
(232,581) (65,679)
INTEREST EXPENSE
Accrued interest expense . . . . . . . . . . . . . . . . . . . 77,323 2,285
NET BALANCE OUTSTANDING, END OF PERIOD . . . . . . . . . . . . 1,091,348 146,606
</TABLE>
On September 25, 1998 the Company entered into an agreement to issue 10%
convertible debentures in series of $200,000 up to a total of $2,000,000,
subject to the Company meeting certain conditions, which mature on October 31,
2001. The holders have the right to convert the debentures in increments of at
least $100,000, at a price equal to the lower of $0.28 and 78% of the average
closing bid price of the Company's common stock for the three trading days
immediately preceding the Notice of Conversion served on the Company. For the
$500,000 of convertible debentures that were issued on January 26, 1999,
$250,000 of debentures can be converted at a fixed price of $0.40 per common
share and the remaining $250,000 can be converted into shares at a fixed rate of
$0.28 per common share. The Company may prepay any or all of the outstanding
principal amounts at any time, upon thirty days' notice, subject to the holders'
right to convert into common shares. A financing fee of 10% is charged on the
principal sum of each convertible debenture issued. Interest is payable on the
maturity date. At the holders' election, interest can be settled in common
stock of the Company based on market prices.
On April 16, 1999, the Company drew down an additional $600,000 of financing
under the 10% convertible debenture agreement, which can be converted into
common stock at a fixed price of $0.65 per common share.
On April 27, 1999, the debenture agreement was amended to include (among others)
the following changes:
(i) the total amount available under the debenture agreement was increased
from $2,000,000 to $5,000,000.
(ii) the financing fee applicable to the additional $3,000,000 available was
set at 8% of the principal sum issued.
(iii) the balance of the financing not yet drawn, $3,480,000, has a fixed
conversion price of $0.40 per share.
(iv) an additional 923,077 share purchase warrants were issued, which give
the holder the right to purchase one common share for each warrant held, at a
price of $0.65 per warrant.
Through September 30, 1999, the Company has issued convertible debentures
totalling $1,520,000 of which $736,329 was recorded as contributed surplus with
an offsetting amount charged as interest on long term debt. Of the debentures
issued, $210,000 principal plus $3,798 interest was converted into 1,912,317
shares on November 30, 1998, based on a conversion price of $.1118 (being 78% of
the average closing bid price of the Company's common stock for the three
trading days preceding the Notice of Conversion). Interest totalling $79,608
has been accrued and included in the convertible debenture balance outstanding
at September 30, 1999. These shares will be formally issued when the Company's
SB-2 Registration Statement has been declared effective.
At the time of the initial funding on October 1, 1998, the Company issued
1,428,572 common share purchase warrants (357,143 to the agent and 1,071,429 to
the ultimate subscriber of the issue). Each warrant gives the holder the right
to purchase one common share of the Company at $0.28 until October 31, 2001. An
amount of $342,857 has been included in contributed surplus as the estimated
value attributed to these warrants as they were exercisable upon issuance. In
addition, the warrants issued to the agent have been treated as a financing fee
in the amount of $85,714. The value of these fees associated with the equity
component of the 10% convertible debentures has been charged to contributed
surplus in the amount of $24,000. The remaining balance is being amortized over
the life of the 10% convertible debentures.
Through September 30, 1999 the Company has paid financing fees on the 10%
convertible debentures totalling $152,000. The fees associated with the equity
component of the 10% convertible debentures, being $45,089, have been charged to
contributed surplus. The remaining amount, which has been recorded as a
reduction of the debenture principal, is being amortized over the life of the
10% convertible debentures, unless the debentures are converted. If converted,
the pro rata portion of the financing fees associated with the converted
debentures is charged to capital in excess of par value. During 1998, $21,117
has been charged to capital in excess of par value relating to $210,000 of
convertible debentures which were converted.
The additional share purchase warrants issued on April 27, 1999 as described in
(iv) above have been recorded as contributed surplus at their estimated value of
$341,538, as they were exercisable upon issuance. An offsetting amount of
$110,027 attributable to the equity portion of the related debentures has been
recorded as a charge against contributed surplus; the remainder has been charged
as a discount to debt and is being amortized over the life of the debt.
The Company is currently in the process of filing a form SB-2 Registration
Statement qualifying the shares to be issued on conversion of the debentures
with the Securities and Exchange Commission. Until such time as the common
shares are registered, a charge of 0.986% per day will apply against the initial
amount funded. Further, as registration did not occur within 120 days of
initial funding, a charge of 0.1644% per day will apply for each day thereafter.
The initial amount funded on October 1, 1998 was $200,000. An amount of $82,200
for the penalty of late filing of the Registration Statement, and has been
included in accounts payable.
9. LOSS PER SHARE
Loss per common share is loss for the period divided by the weighted average
number of common shares outstanding. The effect on earnings per share of the
exercise of options and warrants, and the conversion of the convertible
debentures is anti-dilutive.
10. INCOME TAXES
<TABLE>
<CAPTION>
The income tax benefit differs from the amount computed by applying the U.S. federal
statutory tax rates to the loss before income taxes for the following reasons:
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER
1999 1998 1998 31, 1997
$ $ $ $
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
(34%) (35%) (34%) (34%)
Income tax benefit at U.S. statutory rate (1,305,306) (773,522) (1,045,938) (46,530)
Increase (decrease) in taxes resulting
from:
Deferred tax asset valuation
allowance . . . . . . . . . . . . . . . . 1200,985 968,663 1,106,172 46,530
Non-deductible expenses . . . . . . . . . 338,887 - 128,162 -
Foreign tax rate differences. . . . . . . (234,566) (195,141) (188,396) -
Income tax benefit. . . . . . . . . . . . - - - -
</TABLE>
<TABLE>
<CAPTION>
For financial reporting purposes, loss before income taxes includes the
following components:
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
$ $ $ $
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Pre-tax loss:
United States (1,740,449) (258,650) (1,302,313) (136,854)
Foreign . . . . (2,098,686) (951,414) (1,773,974) -
(3,839,135) (2,210,064) (3,076,287) (136,854)
</TABLE>
<TABLE>
<CAPTION>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax assets are as follows:
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
$ $ $
------------ ------------ ---------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Net operating loss
carryforwards. . . . . . . . . . . . . 1,884,932 697,768 -
Start-up costs . . . . . . . . . . . . 30,859 37,999 46,333
Depreciation . . . . . . . . . . . . . 36,075 6,201 197
Debt issue costs. . . . . . . . . . (3,776) 5,137 -
Software costs. . . . . . . . . . . 405,597 405,597 -
Deferred tax assets net of liabilities 2,811,102 1,152,702 46,530
- -------------------------------------- ------------ ------------ ---------
Valuation allowance. . . . . . . . . . (2,811,102) (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 $1,705,000 which expire
as follows:
$
--------
<S> <C>
2018 880,000
2019 825,000
</TABLE>
The availability of these loss carryforwards to reduce future taxable income
could be subject to limitations under the Internal Revenue Code of 1986, as
amended. Certain ownership changes can significantly limit the utilization of
net operating loss carryforwards in the period following the ownership change.
The Company has not determined whether such changes have occurred and the effect
such changes could have on its ability to carry forward all or some of the U.S.
net operating losses.
<TABLE>
<CAPTION>
The Company has non-capital losses carried forward for Canadian income tax
purposes of $3,022,000. These losses expire as follows:
$
<S> <C>
2003 45,000
2004 7,000
2005 895,000
2006 2,075,000
</TABLE>
11. 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 28,236
2000 112,943
2001 94,932
2002 94,641
2003 78,867
</TABLE>
12. CAPITAL LEASE OBLIGATIONS PAYABLE
<TABLE>
<CAPTION>
The future minimum lease payments at September 30, 1999 under capital leases are
as follows:
<S> <C> <C>
Remainder of 1999. . . . . . . . . . . . . . . . . 7,965
2000 22,344
2001 22,344
2002 21,486
2003 20,627
2004 11,868
Total future minimum lease payments. . . . . . . . 106,634
Less: imputed interest . . . . . . . . . . . . . . (25,526)
Balance of obligations under capital leases. . . . 81,108
- -------------------------------------------------- --------
Less: current portion included in accounts payable
and accrued liabilities. . . . . . . . . . . . . . (14,119)
Long term obligation under capital leases. . . . . 66,989
</TABLE>
<TABLE>
<CAPTION>
13. NET CHANGE IN NON-CASH WORKING CAPITAL
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
----------
<S> <C> <C> <C> <C>
$ . . . . . . . . . . . . . $
- ----------------------------- ----------
Accounts receivable . . . . . (413,895) (20,088) (7,243) -
Due from related parties. . . 13,118 - (13,118) -
Prepaid expenses and deposits 53,628 (19,612) (132,956) (7,500)
Accounts payable and accrued
liabilities . . . . . . . . . 469,347 404,110 395,624 2,976
Due to related parties. . . . (857) - 197,115 -
Change relating to operating
activities. . . . . . . . . . 121,341 364,410 439,422 25,476
</TABLE>
14. SEGMENTED INFORMATION
The Company's activities are conducted in one operating segment with all
activities relating to the development and sale of encryption software. These
activities are planned to be carried out in Canada and the United States. To
date, all the activities have occurred in Canada.
15. FINANCIAL INSTRUMENTS
Financial instruments comprising cash, accounts receivable, amounts due from
related parties, deposits, accounts payable and accrued liabilities, amounts due
to related parties, capital lease obligations, and amounts due to stockholders
approximate their fair value. It is management's opinion that the Company is
not exposed to significant currency or credit risks arising from these financial
instruments.
The estimated fair value as at September 30, 1999 of the 10% convertible
debentures is $864,934 (December 31, 1998 - $189,000). This is based on the
estimated present value of the principal and interest of the debenture.
The Company is subject to cash flow risk to the extent of the fixed 10% simple
interest rate being charged on the convertible debentures. The effective annual
interest rate realized by the Company, exclusive of the amounts relating to the
conversion feature of the 10% convertible debentures and the warrants, was 10%
(December 31, 1998 - 10%).
16. RECENT PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", which will be effective for fiscal years beginning after
June 15, 2000. The Company does not acquire derivatives or engage in hedging
activities.
17. SUBSEQUENT EVENTS
a) Effective on November 3, 1999, the Company acquired all of the
outstanding common shares of Pace Systems Group Inc. ("Pace"). As consideration
for this purchase, the Company will issue 1,731,932 common shares, valued at
$1.70 per share, representing total consideration of $2,944,284.
b) On November 2, 1999 the Company entered into a pre-acquisition agreement
with Offsite Data Services Ltd. (Offsite), a company incorporated in the
Province of Alberta and listed on the Alberta Stock Exchange, whereby the
companies have agreed to combine their business interests through an offer by
the Company to purchase all of the outstanding shares of Offsite. The offer is
expected to be mailed before November 30, 1999.
<PAGE>
JAWS TECHNOLOGIES, INC.
FINANCIAL DATA SCHEDULE
<TABLE>
<CAPTION>
This schedule contains summary financial information extracted from the financial
statements as of and for the six months ended September 30, 1999. You should read the
financial statements in their entirety for a full explanation of this summary
financial information. (In thousands, except EPS.)
<S> <C> <C>
ITEM NUMBER . ITEM DESCRIPTION AMOUNT
- ------------- --------------------------------------------------------- ------------
5-02(1) . . . Cash and cash items. $ 664,428
5-02(2) . . . Marketable securities 27,000
5-02(3)(a)(1) Notes and interest receivable-trade accts 421,138
5-02(4) . . . Allowances for doubtful accounts 0
5-02(6) . . . Inventory 0
5-02(9) . . . Total current assets 1,199,394
5-02(13). . . Property, plant and equipment 580,296
5-02(14). . . Accumulated depreciation 82,292
5-02(18). . . Total assets 1,697,398
5-02(21). . . Total current liabilities 1,110,368
5-02(22). . . Bonds, mortgages and similar debt 1,091,348
5-02(28). . . Preferred stock-mandatory redemption 0
5-02(29). . . Preferred stock-no mandatory redemption 0
5-02(30). . . Common stock 15,114
5-02(31). . . Other stockholder's equity (586,421)
5-02(32). . . Total liabilities and stockholder's equity 1,697,398
5-03(b)1(a) . Net sales tangible products 372,630
5-03(b)1. . . Total revenues 372,630
5-03(b)2(a) . Cost of tangible goods sold 0
5-03(b)2. . . Total costs and expenses applicable to sales and revenues 337,712
5-03(b)3. . . Other costs expenses 2,959,140
5-03(b)5. . . Provision for doubtful accounts and notes 0
5-03(b)(8). . Interest and amortization of debt discount 7914,913
5-03(b)(10) . Income before taxes and other items (3,839,135)
5-03(b)(11) . Income tax expense 0
5-03(b)(14) . Income/loss continuing operations (3,839,135)
5-03(b)(15) . Discontinued operations 0
5-03(b)(17) . Extraordinary items 0
5-03(b)(18) . Cumulative effect-changes in accounting principles 0
5-03(b)(19) . Net income or loss (3,839,135)
5-03(b)(20) . Earnings per share-primary (0.30)
5-03(b)(20) . Earnings per share-fully diluted N/A
</TABLE>
<PAGE>
JAWS TECHNOLOGIES INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(All amounts stated in $U.S.)
[GRAPHIC OMITED]
[GRAPHIC OMITED]
See accompanying notes to the unaudited pro forma consolidated financial
statements.
<PAGE>
JAWS TECHNOLOGIES INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(All amounts stated in $U.S.)
[GRAPHIC OMITED]
[GRAPHIC OMITED]
See accompanying notes to the unaudited pro forma consolidated financial
statements
<PAGE>
1. The accompanying unaudited pro forma consolidated financial statements
have been prepared by management from the unaudited financial statements as at
September 30, 1999 and for the nine month period then ended of Jaws
Technologies, Inc. (a Nevada corporation) ("Jaws") and Pace Systems Group Inc.
("Pace"), and Offsite Data Services Ltd. ("Offsite), together with other
information available to the companies. In the opinion of the management of
Jaws, these unaudited pro forma consolidated financial statements include all
adjustments necessary for fair presentation in accordance with generally
accepted accounting principles in the United States. These pro forma
consolidated financial statements may not be indicative of the financial
position or the results of operations that actually would have occurred if the
events reflected therein had been in effect on the dates indicated nor of the
financial position or the results of operations which may be obtained in the
future.
These unaudited pro forma consolidated financial statements should be read
in conjunction with the audited and unaudited financial statements of the
companies included elsewhere in this Form 8K Amendment #1.
2. The pro forma consolidated balance sheet as at September 30, 1999 gives
effect to the following assumptions and transactions outlined in the Circular as
if the effective dates of those transactions were September 30, 1999:
2.1 The acquisition of all of the outstanding common shares of Pace in
exchange for 1,385,546 common shares of Jaws valued at $2,355,428.
Additional contingent consideration payable on the acquisition of Pace has not
been reflected in the pro forma consolidated capitalization as the outcome of
the contingency cannot be reasonably determined at this time. The additional
consideration, which will be recorded as additional common share capital if and
when it becomes payable, is based upon the achievement of certain performance
and revenue targets over the twenty-four months following the close date. The
maximum additional consideration related to the Pace acquisition, assuming all
the performance and revenue targets established in the applicable share purchase
agreement are met would result in the issuance of an additional 346,386 common
shares of Jaws.
The acquisition has been accounted for in these pro forma financial statements
using the purchase method. The aggregate purchase price of $2,455,428 has been
allocated to the net assets acquired based on their estimated fair values, as
follows:
Purchase Price Allocation
<PAGE>
$
Net liabilities acquired (54,452)
--------
Goodwill 2,509,880
Purchase price 2,455,428
Consideration:
Common shares of Jaws 2,355,428
Acquisition costs 100,000
Total 2,455,428
---------
<PAGE>
2.2 The acquisition of all of the outstanding common shares of Offsite
(including common shares of Offsite issuable on the exercise of all of the
outstanding Offsite A warrants) for 4,874,822 exchangeable shares of Jaws with
an ascribed value of $13,113,271.
Pursuant to this Offer, Jaws issued 2,318,550 warrants in exchange for the
outstanding Offsite warrants. 1,818,550 of these warrants entitle the holder
thereof to acquire .3524 of a Jaws common share upon payment of Cdn $0.40 up to
March 15, 2000; the remaining 500,000 warrants entitle the holder to acquire
.3524 of a Jaws common share for prices ranging from Cdn $0.50 to Cdn $0.55 up
to September 29, 2001.
Pursuant to this Offer, 910,584 stock options of Offsite for stock options of
Jaws, which entitle the holder of each to purchase .3524 of an exchangeable
share of Jaws, at a price of Cdn$0.25 which expire on March 15, 2004.
The acquisition has been accounted for in these pro forma consolidated financial
statements using the purchase method. The aggregate purchase price of
$13,363,271 has been allocated to the net assets acquired based on their
estimated fair values, as follows:
Purchase Price Allocation
$
-
Net assets acquired 313,041
-------
Goodwill 13,050,230
Purchase price 13,363,271
Consideration:
Common shares of Jaws 13,113,271
Acquisition costs 250,000
Total consideration 13,363,271
3. The pro forma consolidated statement of income for the nine month period
ended September 30, 1999 gives effect to the acquisitions by Jaws as described
in 2.1 and 2.2 above as if the transactions had occurred January 1, 1999. The
following adjustments are reflected:
3.1 The amortization of goodwill attributable to the allocation of the
purchase price of Pace in excess of the carrying value of the net assets
acquired (see 2.1 and 2.2 above) calculated on a straight-line basis over a
period of three years.
3.2 The amortization of goodwill attributable to the allocation of the
purchase price of Offsite in excess of the carrying value of the net assets
acquired, (see 2.3 and 2.4 above) calculated on a straight-line basis over a
period of three years.
<PAGE>
4. Effective on November 1, 1999 Jaws entered into a debenture amendment and
settlement agreement (the "Agreement") with Thomson Kernaghan & Co. Limited
("Thomson Kernaghan"), which resulted in the settlement of all outstanding
obligations of the convertible debentures and related warrants, and the issuance
by Jaws of common shares to Thomson Kernaghan on November 23, 1999.
The pro forma consolidated balance sheet as at September 30, 1999 gives effect
to the following assumptions and transactions as if the effective date of the
Agreement was September 30, 1999:
4.1 Issuance of 7,307,892 common shares relating to the conversion of all
the outstanding debentures, the exchange of certain warrants for shares, and the
exercise of certain warrants for cash, resulting in a reduction on convertible
debenture of $1,091,348 an increase to share capital in the amount of
$1,910,551, an increase to cash in the amount of $400,000, and an increase to
the deficit in the amount of $331,003, representing the reduction of unamortized
financing fees and related interest and penalty amounts, and a reduction to
accounts payable of $88,200 for penalties accrued.
The pro forma consolidated income statement for the nine month period ended
September 30, 1999 gives effect to the following assumptions and transactions as
if the effective date of the Agreement was January 1, 1999:
4.2 Interest expense of $833,115 and amortization of deferred financing fees
of $75,601 relating to the convertible debentures would not have been incurred.
5. The amounts shown in these pro forma consolidated financial statements
for Pace and for Offsite have been translated into United States dollars from
Canadian dollars at the period end rate for the balance sheet and the period
average rate for the income statement.
