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As filed with the Securities and Exchange Commission on March 24, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..................to.........................
Commission File Number 0-19410
JAWS Technologies, Inc.
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(Exact name of registrant as specified in its charter)
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<S> <C>
Nevada 98-0167013
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1017-17th Avenue, S.W.
Calgary, Alberta
Canada T2T0A7
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (403) 508-5055
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
None None
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</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, par value $.001 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $99,696,366 on January 31, 2000.
Number of shares outstanding of the registrant's class of common stock as of
January 31, 2000: 23,636,571.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 2000 Annual Meeting of Stockholders - Part III
<PAGE> 3
EXPLANATORY NOTE
THIS ANNUAL REPORT ON FORM 10-K CONTAINS PREDICTIONS, PROJECTIONS AND
OTHER STATEMENTS ABOUT THE FUTURE THAT ARE INTENDED TO BE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED (COLLECTIVELY, "FORWARD-LOOKING STATEMENTS"). FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. A NUMBER OF IMPORTANT FACTORS
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE THE INABILITY TO
SUCCESSFULLY DEVELOP AND COMMERCIALIZE PRODUCTS, THE COMPANY'S LIMITED
OPERATING HISTORY AND CONTINUING OPERATING LOSSES, RECENT AND POTENTIAL
DEVELOPMENT STRATEGIC ALLIANCES, THE COMPANY'S LIQUIDITY AND CAPITAL RESOURCES,
SYSTEMS FAILURES, TECHNOLOGICAL CHANGES, VOLATILITY OF SECURITIES MARKETS,
GOVERNMENT REGULATIONS, AND ECONOMIC CONDITIONS AND COMPETITION IN THE
GEOGRAPHIC AND THE BUSINESS AREAS WHERE WE CONDUCT OUR OPERATIONS. IN
ASSESSING FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM
10-K, READERS ARE URGED TO READ CAREFULLY ALL CAUTIONARY STATEMENTS --
INCLUDING THOSE CONTAINED IN OTHER SECTIONS OF THIS ANNUAL REPORT ON FORM 10-K.
<PAGE> 4
PART I
ITEM 1. BUSINESS.
CORPORATE OVERVIEW
JAWS Technologies, Inc. was incorporated as a Nevada corporation on
January 27, 1997 under the name "e-biz" solutions, inc. On February 10, 1998,
"e-biz" solutions, inc. entered into an agreement to purchase all of the
outstanding common shares of JAWS Technologies Inc., an Alberta corporation
("JAWS Alberta"), in exchange for 1,500,000 shares of the restricted common
stock of e-biz solutions, inc., and options to purchase 400,000 shares of such
restricted common stock at $0.50 per share. On March 27, 1998, "e-biz"
solutions, inc. changed its name to JAWS Technologies, Inc. ("JAWS").
JAWS' registered office is located at Paracorp Incorporated, 208, 318
Carson Street, Carson City, Nevada 89701 and its head office is located on the
second floor at 1013-17th Avenue S.W., Calgary, Alberta T2T OA7.
JAWS' shares of common stock, par value $.001 per share (the "Common
Stock"), trade on the OTC Bulletin Board under the symbol "JAWZ".
JAWS is currently the parent corporation of four operating
subsidiaries, JAWS Alberta, Offsite Data Services Ltd., an Alberta corporation
doing business as JAWS Secure Network Storage Division ("Offsite"), Pace
Systems Group, Inc., an Ontario corporation ("Pace"), and JAWS Technologies
(Delaware), Inc., a Delaware corporation ("JAWS Delaware"). The overall
strategic goal for JAWS is to consolidate the highly fragmented information
security industry, achieve increasing economies of scale through the
acquisition of high growth, emerging market firms and integrate such firms
through centralized administration and planning. Through industry and
management expertise, JAWS attempts to ensure that acquired firms receive the
capital and corporate planning necessary to maximize the growth potential
within each information security niche.
JAWS, through its wholly-owned subsidiary, JAWS Alberta, specializes
in the field of high-end information security, providing consulting services
and software solutions to minimize the threats to clients' information and
communications. At its offices in Calgary, Alberta, JAWS develops proprietary
encryption software using what is currently one of the strongest encryption
algorithms, L5, to secure binary data in various forms, including streamlining
or blocking data.
L5 was developed and refined over approximately 15 years by its
inventor Mr. Jim L. A. Morrison, formerly the Chief Programmer at JAWS from
March 1, 1998 to April 20, 1999.
On October 20, 1997, JAWS Software Ltd. (a company controlled by Mr.
Morrison) assigned all of its right, title and interest in L5, and other
miscellaneous intellectual property, to JAWS. In October 1998, during JAWS
patent application process, there was a further assignment of L5, and other
miscellaneous intellectual property, to JAWS by Mr. Morrison personally in
order to fulfill the requirements of the patent application process. L5 itself
is not the software produced and marketed by JAWS but the mathematical process
outlining the detailed steps required to encrypt and decrypt data. L5 can be
incorporated into a variety of software programs requiring encryption of data.
Since the acquisition of L5 by JAWS, a team of JAWS software engineers
has developed and continues to develop numerous applications for L5 on many
different platforms (such as JAWS Data
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Encryption(TM), JAWS Memo(TM), JAWS Xmail(TM)). L5 software, prior to
acquisition, had been developed using the Borland Delphi computer programming
language on a Windows 95/98 platform. The software consisted primarily of L5
and a Windows user interface. Since that time, L5 has been rewritten in the C
language. An in-house JAWS cryptographer, with the co-operation of two
University of Calgary professors, has made several refinements to L5 including
some changes introduced to address speed and security considerations. C
language can be used in a variety of operating systems (e.g. UNIX, OS/2, VMS,
and Windows CE). As L5 is no longer limited to Windows, it and can now be
deployed interoperably on a variety of platforms.
JAWS business plan is to become a full service information security
solution provider. In accordance with this plan, JAWS currently markets both
information security products and professional information security services.
In an attempt to create and maintain a competitive advantage in the
information security industry, JAWS strives to continually differentiate
itself from other industry players and works towards establishing strong brand
loyalty for its products and services through multiple channels of
distribution. The distribution strategy used by JAWS addresses the
requirements of small organizations to large enterprises and matches the
appropriate sales and distribution channels to the software and services
offered.
PRODUCTS AND SERVICES
All of the products currently marketed by JAWS are based on L5. The
products described below have been completed and are currently being marketed.
JAWS Data Encryption(TM) is a software program, targeted towards both
corporate and private users, which allows such users to protect important data
on their workstations and network drives by encrypting such data with a
symmetric algorithm or an asymmetric algorithm. The software also allows the
exchange of secure data when using the public key mode. This software program
has taken approximately 18 man months of research and development effort. The
material features of this product are:
- the encryption and decryption of data files;
- the encryption and decryption of folders, including recursive
folders if desired;
- compatibility with Windows 95/98/NT and 1Citrix;
- symmetric algorithm mode;
- asymmetric algorithm mode;
- a simple easy-to-use interface developed in accordance with
Microsoft standards of user-interface design;
- a relatively fast speed of execution as compared to competitors'
algorithms;
- a relatively small size of executable, as the operational
execution of L5 requires minimal incremental disk space; and
- the strength of a 4096 bit key length.
JAWS Memo(TM) is designed to secure valuable information created and
stored in the platform device of Palm Computing Inc. ("Palm"). This
application can completely replace the existing Memo Pad function in the Palm
Pilot III, V and VII. The material features of this product are:
- the encryption and decryption of memos;
- compatibility with Palm Pilot III, V and VII and other
compatible operating systems;
- symmetric algorithm mode;
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- a relatively small size of executable as the operational
execution of L5 requires minimal incremental disk space;
- the strength of a 4096 bit key length; and
- certified as a Palm Platinum Solution under Palm's Platinum
Solution certification program.
In order to obtain the Palm Platinum Solution certification, a product
must successfully undergo rigorous compatibility testing using standardized
testing products. JAWS Memo(TM) is the only Palm Platinum Solution certified
security related software available to Palm users as listed in the 1999
"Solutions for Your Enterprise" magazine of Palm.
JAWS Xmail(TM) allows the secure exchange of e-mail messages via a
POP3-compatible environment. JAWS Xmail(TM) sits between the user's e-mail
program (e.g. Microsoft Outlook) and the user's mail server and intercepts
incoming and outgoing messages. When receiving encrypted messages, the user is
prompted to enter his private key to decrypt the ciphertext. Conversely,
outgoing messages are automatically encrypted with the recipient's public key.
The JAWS certificate server is a central repository holding user certificates.
The material features of this product are:
- the ability to send and receive secure e-mail messages over
the internet;
- compatibility with Windows 95/98/NT;
- centralized key management;
- compatibility with most POP3-based e-mail servers including
Microsoft Outlook, Microsoft Outlook Express, Eudora,
Pegasus, and Netscape Communicator;
- the encryption and decryption of e-mail messages and
attachments;
- public and private key mode;
- temporary caching of password phrase;
- transparency to the user during operation as the application
works in the background, on-line help;
- the strength of a 4096 bit key length; and
- the self-pollinating nature of the product, as described
below.
JAWS Xmail(TM) is self-pollinating in that an intended recipient of an
e-mail that does not have JAWS Xmail(TM) is sent a notice that indicates that
the sender of the original message is trying to send a secure message but
cannot because the intended recipient is not currently using JAWS Xmail(TM).
The intended recipient is then invited to click on a button that will initiate
the download, through a web-browser, of a decrypt-only version of the product
that will allow the intended recipient to receive the message. The downloaded
version does not allow the sending of secure e-mail messages. To become fully
enabled and registered the user, or the user's organization, must compensate
JAWS. Once payment is received, a registration program is automatically sent to
the user thus fully enabling the downloaded version of the product.
With the rise in computer connectivity and the push to electronic
commerce, organizations are becoming increasingly more exposed to the outside
world via electronic means. Often these organizations lack the skills and time
requirements needed to protect and secure their information assets.
Periodicals and reference material such as Maximum Security, 2nd ed., have
indicated that servers are often set up by non-technical individuals who
inadvertently create numerous viable targets for hackers. As the number of
servers supporting websites increases on a daily basis the security risks
increase as well.
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In response to this need, JAWS has created its Information Systems
Security Group ("ISSG"). The services offered by ISSG to its clients include:
- network security assessments and audits;
- security policy review and development;
- security system architecture, review and development;
- intrusion detection and testing;
- system penetration testing to uncover areas of risk and
weakness;
- mapping of security systems currently in place;
- client data valuation; and
- emergency response following an intrusion.
JAWS has developed its services around the premise of providing full
information security solutions. This means providing services and strong
product offerings to maintain the best possible solution for each client. JAWS
information security services are offered to government agencies, military
agencies, small corporations, large corporations, financial institutions and
industrial clientele.
Once JAWS collects the data during an assessment and fully analyzes
the potential security risks revealed, a client-specific proposal for
information systems security can be developed and presented to the client. At
the option of the client, JAWS can then integrate the appropriate software and
products proposed into a complete solution that meets the client's information
security needs. The proposal generally includes a cost analysis to ensure the
client understands the true cost of security in relationship to its risk and
the value of the information being protected. JAWS also provides training for
the clients' staff to ensure that its employees are able to adopt the
technology, policies and procedures provided by the information security
solution.
As a client's business changes, information technology modifications
are inevitable. With these modifications, potential security risks are created.
JAWS offers clients the option of re-assessing their information systems as
needed or to have regularly scheduled re-assessments in order to maintain
adequate information systems security.
ISSG is product neutral and may therefore offer both JAWS' own suite
of products, competitor's products or a combination of both to meet a client's
specific needs. The goal of JAWS is to provide the best possible solution. It
is anticipated that competitor's products and services will be provided by JAWS
through standard licensing/reseller contracts with other security product
vendors (e.g. Network Associates).
Client support services are currently available to JAWS' clients
through the following methods:
- a 1-800 help desk;
- onsite (as demand grows, it is intended that technicians will
be available through regional JAWS offices);
- frequently asked questions documents on the JAWS website;
- e-mail support; and
- online help built into JAWS products.
A sales and marketing team for L5 data encryption software has been
working since May 1998 towards creating the JAWS brand identity as well as
establishing relationships with public relations companies to provide market
awareness and industry interest in JAWS' products. The sales and marketing
department continues to pursue opportunities with application service providers
and in areas such as smart
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cards, biometrics and security tokens. Further, the sales and marketing
department has implemented e-mail campaigns to raise the public's awareness of
e-mail security, e-commerce and Public Key Infrastructure to a higher level.
JAWS strives to develop industry specific (health care, financial services,
legal, government, oil and gas, law enforcement and education) marketing
materials for its products and services, develop strategies for the Personal
Data Assistant marketplace (such as the Palm Pilot III, V and VII) and to
identify and implement alliances with complementary organizations.
In relation to product releases, the sales and marketing department
has also developed collateral sales materials including boxes, compact disc
cases, stationery, and brochures. JAWS Data Encryption(TM) first release was in
July, 1998 and the second modified version was released in September, 1998.
JAWS Memo(TM) was released in December, 1998 and the second modified version
was released in June, 1999.
Although the print media coverage of L5 has been positive in at least
34 different articles and requests for information from investors, potential
clients and interested parties have been numerous (approximately 150 inquiries
per week), there has not been significant sales of JAWS' products. From the
client feedback that JAWS has received, it is the opinion of management that
the following factors are affecting the sales of L5 products:
- although potential purchasers are aware of security as an
issue surrounding information systems and may have been
educating themselves as to what products and services are
available, specific needs have not been identified; therefore
purchasers may not be ready to make specific buying decisions;
and
- the selling cycle for security software with reseller and
value added resellers ("VAR") programs takes considerable time
to conclude.
Export restrictions which slow down the flow of trade and the selling
process as well as widespread 128 bit key length security product entrenchment
within existing security products are additional factors which may affect
sales.
DISTRIBUTION
JAWS software is currently distributed through the following channels:
- direct sales to potential clients by employees;
- resellers and VARs;
- online stores;
- the JAWS website; and
- Original Software Manufacturers ("OSM").
The consulting services provided by ISSG are currently marketed
through a direct sales effort although reseller relationships with other
organizations are being explored. Initially the JAWS Data Encryption(TM)
software was distributed in compact disc form. Currently, except for
demonstration disks, the product's distribution is almost completely online
either through third party online stores or via the JAWS website. This approach
has minimized the cost of distribution of the product and provides faster
turnaround on client requests.
JAWS has distributed and agreed to distribute approximately 580,000
copies of L5. In order to develop a user base, the majority of these placements
have been at nominal or no cost. JAWS recently announced the signing of a
licensing agreement with Arrow Communications Systems Inc. doing business
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as ApexMail.Net ("ApexMail.Net") to distribute JAWS Xmail(TM) to 500,000 of
ApexMail.Net's clients across North America. Additionally, approximately 200
copies of JAWS Data Encryption(TM) have been sold at $49.95 per copy and
approximately 245 copies of JAWS Memo(TM) have been sold at $19.95.
With respect to OSMs, external software developers can use L5 software
as a utility embedded in their products to augment or enhance their particular
products. Accounting software programs, database developments, e-mail programs
and communication software are all potential channels for JAWS' software.
Additional potential uses for L5 include use in smart cards, hand-held
computing devices, telecommunications devices and access control devices.
Direct sales channels include internet service providers, data warehouses,
corporate networks and personal computer users. The revenues generated in the
normal course of business by JAWS have come from these various markets. JAWS
is not dependent upon one or a few major clients.
ALLIANCES
The licensing agreement described above with respect to ApexMail.Net
is material to JAWS in that this alliance provides for the distribution of
500,000 copies of JAWS Xmail(TM) to users of ApexMail.Net POP3-based e-mail
accounts. Users of ApexMail.Net will download JAWS Xmail(TM) electronically
from the ApexMail.Net website. There will be no physical distribution of the
JAWS Xmail(TM) product to ApexMail.Net clients. This distribution could produce
revenues equal to $0.333 per month per user or $33,333 per month for 100,000
users. The agreement also provides for the joint marketing of the alliance and
the development by JAWS of a long term strategy that would provide ApexMail.Net
with value-added services such as security audits, data protection systems and
messaging programs. JAWS and ApexMail.Net continue to work towards the
implementation of the terms of this agreement.
JAWS has announced alliances with various other parties in 1999
including the following: OA Group Inc. ("OA"), ServInt Internet Services
("ServInt"), Glentel Inc. ("Glentel"), Thomson Kernaghan & Co. Limited
("Thomson Kernaghan"), Telus Advanced Communications ("TAC"), Proginet
Corporation ("Proginet"), Wimsco, Inc. ("Wimsco") and CobraTech Industries,
Inc. ("CobraTech").
JAWS has entered into a sales and distribution agreement with OA
integrating JAWS products and services with the OA's client networks. OA has
agreed to install a hyperlink on its website that will provide OA's client base
direct access to JAWS Xmail(TM). Additionally, OA has agreed to serve as a VAR
for security assessments and product sales to its business clientele. Until
the hyperlink is installed, JAWS will not receive any sales revenue from this
agreement. JAWS does not know when this will occur or if this will occur. JAWS
may never generate sales revenue from this agreement.
JAWS has entered into a sales and distribution agreement with ServInt.
Pursuant to this agreement, ServInt will support the rollout of JAWS Xmail(TM)
to ServInt's existing base of clients. ServInt has agreed to install a
hyperlink on its website that will provide ServInt's client base direct access
to JAWS Xmail(TM). Additionally, ServInt will serve as a VAR for security
assessments and product sales to its business clientele. Until the hyperlink
is installed, JAWS will not receive any sales revenue from this agreement. JAWS
does not know when this will occur or if this will occur. JAWS may never
generate sales revenue from this agreement.
JAWS has entered into an alliance agreement with Glentel to explore
and develop secure wireless data products that will incorporate JAWS' products
into applications such as mobile two-way radio, satellite, paging, cellular and
personal cellular service. Product development is in the planning phase for
research and development and as such, JAWS has not received any sales revenues
from this agreement. Unless the
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planning phase is successful in generating a plan for research and development,
JAWS may never generate revenues from this agreement.
JAWS has entered into an agreement with Thomson Kernaghan whereby
JAWS' products will be incorporated into Thomson Kernaghan's information
security systems. JAWS will also be involved in training Thomson Kernaghan
employees in the use of JAWS' products. Thomson Kernaghan is a principal
shareholder of JAWS.
TAC has agreed to support the North American distribution of JAWS
Xmail(TM) by providing complete hosting services for the JAWS Xmail(TM)
certificate server. The nature of this hosting relationship is such that TAC
will provide power, back up facilities, firewall security and configuration,
physical security, access control and 24 hour monitoring of the servers. These
servers are used to provide access to the certificates of JAWS used by the
program to encrypt e-mail and attachments. TAC will provide its 200,000 plus
user base with the opportunity to install and use JAWS Xmail(TM). This will be
accomplished by e-mailing the TAC users directly. Additionally, TAC will serve
as a VAR for security assessments and product sales to its business clientele.
JAWS does not know when this will occur or if this will occur. JAWS may never
generate sales revenue from this agreement.
JAWS has entered into a development agreement with Proginet whereby
JAWS and Proginet have agreed to jointly develop, market and sell information
security products for the secure transmission of information across the
internet. Product development is in the planning phase for research and
development and, as such, JAWS has not received any sales revenues from this
agreement. Unless the planning phase is successful in generating a plan for
research and development, JAWS may never generate revenues from this agreement.
JAWS has entered into a development agreement with Wimsco whereby JAWS
and Wimsco will jointly develop plans to introduce products into the market
place and develop products for Wimsco's clients. Product development is in the
planning phase for research and development and, as such, JAWS has not received
any sales revenues from this agreement. Unless the planning phase is
successful in generating a plan for research and development, JAWS may never
generate revenues from this agreement.
JAWS has entered into a memorandum of agreement, dated October 19,
1999, with CobraTech whereby JAWS grants exclusive marketing rights to
CobraTech in Asia with respect to a variety of software including JAWS Data
Encryption(TM), JAWS Xmail(TM) and JAWS Memo(TM). The grant is for a term of
four years provided CobraTech achieves certain revenue targets. In exchange
for these rights, JAWS is to obtain a 25% interest in CobraTech. Further,
CobraTech is to pay JAWS a royalty equal to 25% of the gross sales revenue
generated by CobraTech with respect to the sale of JAWS' products. At this
stage, JAWS has not generated any revenues from this agreement.
In addition to the alliances described above, JAWS has alliance
agreements with the following organizations: A1 Axion Communications, Inc.,
Bridge Technology Group LLC, Care Factor, Cheque Free Corporation, Citrix
Systems, Inc., DBCORP Information Systems Inc., Ernst & Young LLP, Eye
Sciences, i.com productions inc., Net Nanny Software International Inc.,
Network Associates, Offsite, Palm, PSI Net Limited, United Projects, UUNET
Internet Access Services, Secure Computing Corporation, Strategic Profits Inc.,
Telecom Wireless Corporation, and Westcor Mortgage Inc.
COMPETITION
A number of companies have developed various information security
products such as encryption software, firewalls, intrusion detection software
and hardware solutions. A non-exhaustive list of generally
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available competitive cryptographic algorithms includes: DES, TwoFish, Certicom
ECC, RSA, MARS, and PGP. No one particular product in the marketplace controls
market share. Two distinctive competitors, RSA Data Security Inc. ("RSA") and
Network Associates, have been leaders in the sale of encryption software.
L5 currently gives JAWS a competitive advantage over these competitors
because its 4096 bit key length is greater than its competitors. The ability
to make quick changes in L5 programming, in addition to the strength provided
by the 4096 bit key length, allows JAWS to be responsive to clients' demands
for products that require both customization and strength.
More specifically, the current advantages of L5 and the JAWS software
incorporating L5, in contrast to competitive products, are as follows:
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JAWS COMPETITORS
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L5 has an easily varied key length that can be quickly Most competitive algorithms have a limit to the
adapted (greater and lesser) and executed to meet key size or a maximum length key where adding bits
specific client requests. to the key length does not improve security (e.g.
DES and TripleDES).
Software coding based on XOR type operations and Many algorithms include several levels of complex
SBOXs. operations which perform slowly on most computers
and results in slow and difficult implementation
(e.g. MARS).
The small footprint of the algorithm enables it to be Large key sizes and difficult/complex computations
incorporated into small devices such as smart cards. currently make incorporation of some algorithms
into smart cards unreasonable (e.g. RSA).
The relatively large, 4096 bit, key size is greater Currently the key size for DES is 56 bit, for
than its competitors. Triple DES is 168 bit and for Certicom is 156 bit.
Speed of execution of JAWS' software is faster that Currently, DES is much slower because of the
its competitors. complexity of their products' operations.
</TABLE>
The 4,096 bit key length has, to date, been unbroken. In August, 1999,
RSA reported that a 512 bit security code was broken and recommended at least
768 bit keys as the minimum for achieving reliable security. Each bit of key
length is significant in that every time a bit gets added to a key length, the
expected number of guesses someone would have to make to decrypt an encrypted
message doubles. For someone to decrypt JAWS 4096 bit key length, it would
require a number of guesses equal to a number 1,233 digits long.
It is generally accepted ("Moore's Law") that computing power doubles
every two years. With the status of computer power today, and the anticipated
doubling of computing power, JAWS estimates it will be a number of years before
there is enough widespread standard computer power to break the JAWS' 4096 bit
key length software via a brute force attack. In the event that a JAWS 4096
bit system was subjected to
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a brute force attack and L5 was broken, JAWS' software can be modified to
utilize a higher bit version of L5.
There has been some cryptographic industry criticism of proprietary
algorithms like L5. This criticism is based on the assertion that proprietary
algorithms are intrinsically less secure than public domain algorithms in that
they do not have the benefit of increased public scrutiny and cryptanalysis.
JAWS' competitors, who own a proprietary algorithm, are subject to this
criticism as well.
Information auditing services, security business planning, security
plan implementation and security management are relatively new industries. Very
few large size competitors exist and mainly small firms are providing the
services at this time. However, large accounting and information technology
firms represent potential competitive threats due to such firms' existing brand
loyalty and access to resources.
JAWS manufactures and produces all software products in JAWS'
corporate office in Calgary, Alberta. To manufacture and produce JAWS'
software, the only requirements are computer equipment, compact discs, compact
disc burners, and human resources. Packaging is produced by an external
supplier. JAWS takes a simple in-house approach to the production and
packaging of its software. This approach allows JAWS to be very flexible and is
not dependent on any one supplier. All components of JAWS' products are readily
available from a number of suppliers. There is currently an inventory of
packaging in JAWS' head office. The demand for physical packaging has
significantly decreased due to the availability and convenience of online
downloads.
RECENT ACQUISITIONS
Pace Systems Group Inc.
Effective as of November 3, 1999, JAWS acquired 100% of the issued and
outstanding shares of common stock of Pace in exchange for a maximum issuance
of 1,731,932 shares of JAWS common stock, valued at $1.70 per share. The
purchase price was paid by delivering 1,731,932 Pace exchangeable shares having
the right to exchange one Pace exchangeable share for one share of JAWS common
stock. According to the terms of the applicable share purchase agreements,
1,385,544 Pace exchangeable shares were to be delivered into escrow for release
to the selling shareholders over a period of two years, with the number of Pace
exchangeable shares to be released dependent upon certain performance and
revenue targets of four key Pace employees over that period.
In determining the value of all of the assets of Pace, JAWS considered
the physical assets reported on the audited financial statements of Pace, dated
July 31, 1999, historical revenues, customer lists, goodwill, leases, key
employees and other assets and determined the value of Pace to be approximately
$2,945,000. Such a valuation represents an amount equal to 2.29 times the
gross revenues of Pace for the fiscal year ended July 31, 1999.
Pursuant to the terms of the applicable share purchase agreements,
Peter Labrinos, James Wang, Aidan O'Brien and Joseph Iuso have entered into
employment agreements with JAWS Alberta for a period of 24 months. Prior to
the transaction, there were no material relationships between Pace's selling
shareholders or any officer or director of Pace and JAWS.
Pace is a private company incorporated in 1986 with a history of
providing financial information technology security solutions to retailers and
large financial organizations in North America. More specifically, Pace offers
services in the area of payment systems, including point of sale/automated
business
-9-
<PAGE> 13
machines, electronic funds transfer, switch implementation, point of sale
application and device integration, network architecture and design, system
integration and project management. With the acquisition of Pace, JAWS
retained several highly qualified financial information and technology
specialists who have developed relationships with clients.
Pace has worked with several financial institutions in Canada with
respect to the development of retail banking systems, including, without
limitation, with respect to the electronic payment technology currently in
place in Canada. Pace has specialized knowledge with respect to Interac, and
Pace currently offers implementation and business expertise to retailers,
financial institutions and third party processors with respect to the
connection of such companies to their banks or similar service providers or as
a Direct Connector to the Interac network.
Other services which Pace provides include pre-sales support to assist
with the customization of sales efforts for prospective clients, software
development, device certification (primarily with respect to the certification
of "Secure PIN Entry Devices," as defined in the regulations of Interac) and
testing, hardware and software vendor proposal evaluation, creation of requests
for information or proposals to be distributed by the client to prospective
hardware and software vendors, systems implementation, facilities management,
post implementation support, user and technical documentation, user training,
general consulting and year 2000 conversion and testing.
JAWS is currently in the process of transferring the Pace business to
its operating subsidiary, JAWS Ontario.
Secure Data Technologies Corporation
On December 31, 1999, JAWS, through JAWS Delaware, purchased
substantially all of the assets of Secure Data, which provides numerous
information security services, including consulting, policy development, risk
assessment, penetration testing, firewall management, certificate authority
services, incident response, high-tech crime investigations, computer forensics
and training. The purchase price included the payment of approximately
$250,000 in cash at closing and a deferred payment of up to approximately
47,587 shares of JAWS common stock (shares equivalent in value to $185,000 to
be priced at the five-day closing trading price of JAWS common stock on the OTC
Bulletin Board immediately prior to December 31, 1999 and shares equivalent in
value to $150,016, valued at $7.04 per share).
Offsite Data Services Ltd.
On December 9, 1999, JAWS, through JAC, made an offer to purchase all
of the shares of common stock and warrants of Offsite on the basis of 0.3524 of
an exchangeable share of JAC for each common share of Offsite and one
exchangeable share purchase B warrant of JAC for each common share purchase B
warrant of Offsite. Each JAC exchangeable share will be exchangeable for one
share of JAWS common stock following the effective date of an SEC registration
statement to be filed by JAWS under the Securities Act of 1933 to register its
shares of common stock issuable upon the exchange of the JAC exchangeable
shares. Each JAC warrant will have substantially the same terms and conditions
as the corresponding Offsite warrant exchanged therefor, except that instead of
receiving an Offsite share upon exercise, the holder will receive 0.3524 of an
exchangeable share. On January 28, 2000, the JAC offer expired and JAC
acquired approximately 96% of the outstanding shares of common stock of Offsite
and approximately 93% of the outstanding Offsite warrants. JAC intends to
acquire the remaining Offsite shares of common stock and warrants not tendered,
pursuant to the compulsory acquisition provisions under Alberta corporate law.
-10-
<PAGE> 14
Offsite, a Calgary based company incorporated in 1995, provides
management services for automated Internet based back up, storage and recovery
of computer data. Using Offsite's software, a customer's selected computer
files are scanned for changed data. The client data is then compressed and
transmitted to a mainframe data centre in Calgary. Client data is transmitted
to the data centre over a variety of networks depending on the client's needs
including the public switched telephone network, the Internet, cable services
and fibre optic networks. Managed data centre facility services are provided
by SHL Systemhouse Inc. of Ottawa, Ontario.
Data back-up is facilitated through the use of HARBOR(TM) back-up and
protection for distributed data software from HARBOR Systems Management Ltd.
that is installed at the client site on each server and desktop computer that
is to be backed up or serviced. Pursuant to a software licensing agreement,
dated August 16, 1998, between Offsite and HARBOR, Offsite has exclusive rights
for a period of five years from the date thereof to install/sell the HARBOR(TM)
software to non-MVS based small businesses in Alberta using a MVS (mainframe)
host with a CPU and data storage facilities based in Calgary, Alberta. Thus,
Offsite has the exclusive right to provide back-up services to businesses that
are PC-based. Offsite does not provide back-up services to businesses that are
mainframe-based. Pursuant to the software licensing agreement, Offsite also
has the non-exclusive right to distribute the HARBOR(TM) software in Canada and
in the United States. The term of the license is five years and began on
August 16, 1998. During the term of the licence, HARBOR(TM) has agreed not to
appoint a competing distributor in Alberta. Offsite is not a product or
technology developer and has no proprietary protection beyond its licensing
arrangement with HARBOR.
Offsite currently markets its services to small to mid-size businesses
in Calgary, Alberta using a direct sales approach and a team of two full time
sales professionals. Offsite intends to expand its market to other Canadian
and North American centres by seeking distributors and value added re-sellers
(VARs) to sell its services.
Offsite competes with business which have existing storage systems
such as tape systems which have become more sophisticated, and new software
that allows for automated predetermined back-up and easier retrieval of
individual files as well as full system recovery. There are other enterprise
storage management software packages similar to HARBOR(TM) such as IBM
Corporation's ADSM, Computer Associates' Enterprise Storage Manager and
Cheyenne's ARCserve, which can be utilized by other service providers who wish
to offer a competing service to the Corporation. These software packages can
be used by organizations to back-up their networks to various storage media
such as tape or disk. Both Windows NT Server and Novell's NetWare have basic,
built in, back up and restore functions. There are also a number of new
services emerging which offer desktop back-up over the Internet, however, many
of these support only disk to disk transfer (i.e. not networks) in a Windows
operating environment and are aimed at single users with smaller data needs.
Many of these also offer or are about to offer dial up access and reduced
introductory storage rates.
INTELLECTUAL PROPERTY MATTERS
JAWS has applied for patent protection of L5 in the United States. The
United States patent office has confirmed receipt of the application and JAWS
has qualified to have its patent application reviewed and evaluated. To date,
JAWS has applied for but not successfully registered any of its trademarks,
trade names or service marks. However, JAWS has acquired the Xmail tradename
from British Telecom PLC. JAWS owns the copyright in all the software created
by its employees and the copyrights which it has contractually acquired. JAWS
maintains strict confidentiality practices with its employees including
contractual obligations by the employees. JAWS' business is not dependent on a
single license or group of licenses.
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<PAGE> 15
GOVERNMENT REGULATION
Export restrictions on encryption technology above 64 bits are tightly
controlled through the provisions of the Wassenaar Arrangement. The Wassenaar
Arrangement is a 26 country agreement, including Canada and the United States,
controlling the export of encryption technology to any destination outside of
continental North America. This arrangement requires exporters of encryption
technology to make an application prior to exportation. Applications for export
under the agreement are evaluated on a case by case basis and considerable
evaluation is done by both countries involved in the export review. The
application process slows down the selling cycle and flow of trade of JAWS'
products by requiring compliance with the terms of the Wassenaar Arrangement.
ENVIRONMENTAL LAW
No specific environmental laws are applicable to JAWS' products or
business activity other than general environmental controls related to
non-hazardous waste disposal. JAWS does not have any specific environmental
costs and all costs related to waste disposal are accounted for under general
operating costs. Current environmental laws have no direct costs or effect on
JAWS' business activities. Environmental costs related to non-hazardous waste
disposal are incurred in the ordinary course of business.
EMPLOYEES
As of February 8, 2000, JAWS employs approximately 85 full time
staff. None of JAWS' employees are represented by any type of labor
organization and JAWS is not aware of any activity by employees seeking
organization. JAWS considers its relationships with it employees to be
satisfactory. JAWS has, in its early stages, developed strong human resources
practices with the belief that the growth of JAWS is heavily reliant on its
human resources.
INSURANCE
JAWS maintains insurance coverage including key man life insurance,
policies, business interruption insurance, asset protection and public
liability insurance. Further, FutureLink Distribution Corporation
("FutureLink") secures JAWS data through back-up procedures and data recovery
procedures.
DESCRIPTION OF PROPERTY
JAWS entered into an agreement to lease premises from Shelbourne Place
Holding Corp. ("Shelbourne"), pursuant to which JAWS is renting approximately
10,000 square feet of commercial space and is obligated to pay Shelbourne
$95,600 per annum, plus operating costs of approximately $42,000 per annum, for
a five-year term commencing November 1, 1998. Riaz Mamdani, director and Chief
Financial Officer of JAWS, owns a majority of the shares of Shelbourne. JAWS
is also the lessee in a lease for approximately 3,000 sq. ft. with
Manufacturers Life under a lease which JAWS entered into prior to entering into
its lease with Shelbourne. JAWS vacated these premises in 1998 when it moved
into the Shelbourne premises. JAWS pays approximately $31,000 per annum for
these premises and has sub-leased some of this space to offset approximately
$13,000 per annum of the rental expense associated therewith for the remainder
of the lease term.
-12-
<PAGE> 16
ITEM 2. PROPERTIES.
JAWS entered into an agreement to lease premises from Shelbourne Place
Holding Corp. ("Shelbourne"), pursuant to which JAWS is renting approximately
10,000 square feet of commercial space and is obligated to pay Shelbourne
$95,600 per annum, plus operating costs of approximately $42,000 per annum, for
a five-year term commencing November 1, 1998. Riaz Mamdani, director and Chief
Financial Officer of JAWS, owns a majority of the shares of Shelbourne. JAWS
is also the lessee in a lease for approximately 3,000 sq. ft. with
Manufacturers Life under a lease which JAWS entered into prior to entering into
its lease with Shelbourne. JAWS vacated these premises in 1998 when it moved
into the Shelbourne premises. JAWS pays approximately $31,000 per annum for
these premises and has sub-leased some of this space to offset approximately
$13,000 per annum of the rental expense associated therewith for the remainder
of the lease term. See Item 1, "Business- Description of Properties."
ITEM 3. LEGAL PROCEEDINGS.
JAWS is not a party to any material pending legal proceedings other
than ordinary routine litigation incidental to the business of JAWS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the
Company, through solicitation of proxies or otherwise, during the last quarter
of the year ended December 31, 1999.
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<PAGE> 17
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
current executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert J. Kubbernus . . . . . . . . . . . 40 Chairman of the Board, Chief
Executive Officer, President and
Director
Tej Minhas . . . . . . . . . . . . 39 (1)
Riaz Mamdani . . . . . . . . . . . . 31 Chief Financial Officer and Director
Vera Gmitter . . . . . . . . . . . . 41 (1)
</TABLE>
- -------------------------
(1) Mr. Minhas and Ms. Gmitter are neither directors nor officers of JAWS,
but are included in this table because, as senior officers of JAWS
Alberta, they have performed policy-making functions in respect of
JAWS. Mr. Minhas is the President and Chief Operating Officer of JAWS
Alberta and Ms. Gmitter is Vice President, Administration of JAWS
Alberta.
ROBERT J. KUBBERNUS. Mr. Kubbernus has served as Chairman of the
Board, Chief Executive Officer and President of JAWS Alberta since October 1997
and of Bankton Financial since February 1998. Mr. Kubbernus resigned as
President of JAWS Alberta in July 1999 upon Minhas' appointment to that
position. Mr. Kubbernus' primary responsibilities have been to oversee
security product developers, provide executive direction and develop key
contacts with governmental authorities, investors, clients, insurance
underwriters and the investment community. From October 1992 to September
1997, Mr. Kubbernus held the position of President and Chief Executive Officer
of Bankton Financial Corporation, a company which provides business and lending
advisory services, where he led a team of corporate financial consultants who
specialized in the placement of debt instruments with institutional and private
lenders.
TEJ MINHAS. Mr. Minhas has served as President and Chief Operating
Officer of JAWS Alberta since July 1999. Mr. Minhas is responsible for
developing and implementing strategic and tactical plans for each department,
key alliance development, managing marketing projects, implementing the
corporate vision and maintaining and improving corporate culture. From August
1998 to June 1999, he was the Vice President of Technology for JAWS Alberta
where his primary responsibilities were to oversee all aspects of the
Technology Department including strategic planning, software engineering,
business systems infrastructure management, technology vendor relations,
security consulting and technical support. From April 1996 to July 1998, Mr.
Minhas was the Vice President of Technology for AgriTech International
Corporation, a creator of global information systems for the agricultural
sector, where he was involved with strategic IT planning, human resource
planning, marketing support management, executive reporting, vendor relations,
industry alliances and IS Business development. From April 1992 to March 1996,
he was the Canadian District Manager, Professional Services for Sybase Canada,
an international database and tools company, where his responsibilities
included the profitability of Canadian operations. The Canadian District was
comprised of offices in Toronto, Ottawa, and Calgary. In this role, Mr. Minhas
duties included marketing strategy development and execution, sales force
management, staff & consultant recruiting, and the operation of a certification
and
-14-
<PAGE> 18
training centre. Mr. Minhas graduated with a Bachelor of Science, Computer
Science Specialty, from the University of Toronto in 1985.
RIAZ MAMDANI. Mr. Mamdani has been Chief Financial Officer of JAWS
since July 1999. Previous to this appointment, he was Director of Corporate
Finance from March 1999 to July 1999. Mr. Mamdani is responsible for the
development of operational financing including securities issuances, the
documentation needed to close these issuances, establishing and implementing
professional relationships and assisting in matters of corporate compliance as
well as company structure. From May 1996 to August 1998, Mr. Mamdani was a
Barrister and Solicitor with Beaumont Church, a Calgary-based law firm, where
his practice focused in the areas of Corporate, Commercial and Securities law.
From May 1992 to April 1996, he was a Pharmacist at the Foothills Hospital in
Calgary while attending law school at the University of Calgary, from September
1993 to May 1996. Since 1992, Mr. Mamdani graduated with a Bachelor of Law
degree from the University of Calgary in 1996. He also graduated from the
University of Manitoba with a Bachelor of Science degree in Pharmacy in 1992.
VERA GMITTER. Ms. Gmitter has served as Vice President,
Administration of JAWS Alberta since February 1998. Her current
responsibilities at JAWS include developing policies and procedures, government
regulation, export, trademark, finance, accounting, legal, public compliance
and human resources as well as managing over the day to day operations of JAWS
Alberta. From July 1997 to June 1998, Ms. Gmitter held the position of General
Manager for Bankton Financial Corporation. In this position she directed daily
operations for the corporation, which specialized in custom finance solutions.
From September 1987 to July 1997 Ms. Gmitter was the owner of 396406 Alberta
Ltd., a holding company for a restaurant, concession contracts, retail store
and a sign and graphics business, for which she was President. Ms. Gmitter
graduated with a Bachelor of Arts degree in Political Science and Economics
from Augustana University in 1995.
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<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
As of March 16, 2000, there were approximately 130 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. It should be noted that such
over-the-counter quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transaction
prices.
<TABLE>
<CAPTION>
PRICE RANGE
-----------
HIGH LOW
---- ---
<S> <C> <C>
Fourth Quarter 1999 10.75 1.32
Third Quarter 1999 2.78 1.13
Second Quarter 1999 4.25 0.59
First Quarter 1999 1.19 0.38
Fourth Quarter 1998 0.66 0.13
Third Quarter 1998 0.84 0.28
Second Quarter 1998 1.50 0.50
First Quarter 1998 (beginning 1.06 0.48
February 1, 1998)
</TABLE>
On March 22, 2000, the last reported sales price for shares of JAWS
common stock was $8.22 per share.
JAWS has not paid any dividends on its common stock to date. JAWS
does not currently intend to declare or pay any dividends on its common stock
in the foreseeable future, but plans to retain earnings, if any, for
development and expansion of its business operations.
-16-
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------- -----------
<S> <C> <C> <C>
Revenue $592 $29 --
Loss for the period (7,168) (3,076) (137)
Loss for the period per
share common stock (0.50) (0.42) (0.03)
Total assets 12,606 273 10
Long-term debt 68 147 --
Shareholder's equity 11,162 (574) (101)
(deficiency)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
OVERVIEW
JAWS is currently the parent corporation of three operating
subsidiaries, JAWS Alberta, JAWS Delaware and JAWS Ontario. The overall
strategic goal for Jaws is to consolidate the highly fragmented information
security industry, achieve increasing economies of scale through the
acquisition of high growth, emerging market firms and integrate such firms
through centralized administration and planning. Through industry and
management expertise, JAWS attempts to ensure that acquired firms receive the
capital and corporate planning necessary to maximize the growth potential
within each information system niche.
The shares of JAWS common stock trade on the over-the-counter bulletin
board under the symbol "JAWZ".
JAWS Alberta specializes in the field of high-end information
security, providing consulting services and software solutions to minimize the
threats to clients' information and communications. At its offices in Calgary,
Alberta, JAWS Alberta develops proprietary encryption software using what is
currently one of the world's strongest encryption algorithms, L5, to secure
binary data in various forms, including streamlining or blocking data.
JAWS Alberta's business plan is to become a full service information
security solution provider. In accordance with this plan, JAWS Alberta
currently markets both information security products and professional
information security services.
JAWS' financial information technology security solutions services
are provided through its wholly-owned subsidiary, JAWS Ontario, and include
services in the area of payment systems, including POS/ABM EFT switch
implementation, point of sale application and device integration, network
architecture and design, system integration and project management.
-17-
<PAGE> 21
In addition, JAWS, through its wholly-owned subsidiary JAC, has
purchased all of the outstanding shares of common stock of Offsite. Offsite
offers secure, fully automated on-line backup, retrieval and storage services
through the internet from its data centre in Calgary.
RESULTS OF OPERATIONS
Year ended December 31, 1999 compared with the Year ended December 31,
1998
JAWS' revenue increased by $562,978 (1,937%) for the year ended
December 31, 1999 from $29,068 in the year ended December 1998. This increase
is primarily due to the acquisition of Pace on November 3, 1999.
Selling, general and administrative expenses increased 254% to
$5,577,447 for the year ended December 31, 1999 from $1,574,022 in the year
ended December 31, 1998. This increase was primarily due to the continued
growth of Jaws' operations, moving Jaws products toward and into the
commercialization stage and the expenses related to acquisitions including,
without limitation, 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.
Advertising and promotion expenses increased 66% to $363,916 for the
year ended December 31, 1999 from $218,574 in the year ended December 31, 1998.
This increase was directly attributable to increased sales and marketing
activities related to moving Jaws products toward and into the
commercialization stage.
Interest expense, financing fees and amortization of deferred
financing fees/debt discount increased by approximately 307% to $1,587,237 for
the year ended December 31, 1999 from $389,715 for the year ended December 31,
1998. The increase was due almost entirely to the retirement of the
convertible debentures and the associated accelerated amortizations of the
deferred financing fees and debt discount.
Depreciation and amortization expense increased by approximately
1,547% to $231,222 for the year ended December 31, 1999 from approximately
$14,041 for the year ended December 31, 1998. This increase was primarily due
to the amortization of goodwill associated with the PACE acquisition and to the
increase in fixed assets consistent with the expansion of Jaws' operations.
The 1998 depreciation and amortization number is exclusive of the one-time
write off of the software development costs of $909,003.
The Company's net loss for the year ended December 31, 1999 was
$7,167,776 as compared with $3,076,287 ending December 31, 1998. The increase
in the net loss is primarily due to the retirement of the convertible
debentures and by the continued growth of Jaws' operations, moving Jaws
products toward and into the commercialization stage and the expenses related
to acquisitions including, without limitation, 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.
Year ended December 31, 1998 compared with inception (January 27,
1997) to December 31, 1997
JAWS' revenue increased $29,068 for the year ended December 31, 1998
from $0 in the 1997 period. This increase is primarily due to the transition
from product and corporate development stages to beginning the sales cycle.
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<PAGE> 22
and materials, wages and benefits, requirements for office space, supplies and
other office related expenses. A one-time write-off of software development
costs of $909,003 was also a key factor for this increase.
Depreciation and amortization expense increased to $14,041 for the
year ended December 31, 1998 from $580 for the period ended December 31, 1997.
This increase was primarily due to a growing fixed asset base to support
operational growth. Selling, general and administrative expenses increased
2,148% to $3,076,287 for the year ended December 31, 1998 from $136,854 in the
period ended December 31, 1997. This increase was primarily due to the
continued growth of JAWS' operations, moving JAWS products toward and into the
commercialization stage and the expenses related to acquisitions including,
without limitation, expenses related to the preparation of various marketing
and sales documents
The Company's net loss for the year ended December 31, 1998 was
$3,076,287 as compared with $136,854 for the period ended December 31, 1997.
The increase in the net loss is primarily due to JAWS incurring significant
development costs, including, but not limited to, a one-time write-off of
software development costs to bring the product from development to
commercialization stage.
LITIGATION
JAWS is not a party to any material pending legal proceedings other
than ordinary routine litigation incidental to the business of JAWS which the
Company does not believe is material.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations for the year ended December 31, 1999 was
$4,170,626 as compared with $1,126,975 for the year ended December 31, 1998.
These increases are a result of the increased expenses incurred as noted above.
As at December 31, 1999 Jaws had raised $13,648,043 in additional working
capital for operations.
Cash on hand of $8,430,701 at December 31, 1999, is an increase from
$33,732 at December 31, 1998. This increase is as a result of a series of
stock issuances, including the Private Placement Transaction, and funds
advanced under a convertible debenture agreement. A net amount of $13,648,043
was raised from financings during the year ended December 31, 1999. These
funds will be deployed primarily to fund operations.
Accounts payable and accrued liabilities have increased 175% to
$1,177,278 for the year ended December 31, 1999 from $428,600 for the year
ended December 31, 1998. These increases are a result of the efforts of
management to increase sales revenue and grow Jaws' operations and are
consistent with the other expense increases in 1999. Jaws has anticipated and
budgeted for these increases to provide for the organizations' shift from R&D
to commercialization and to provide for the growth of operations. Management
has budgeted for this trend and expects the trend will continue until cash flow
from sales is realized allowing Jaws to reduce the trade accounts in a more
timely fashion.
Jaws has not established any lines of credit outside of trade accounts
and will not be in a position to negotiate any lines of credit until sales
contracts have been validated and matured. Jaws has not used any debt
instruments to date due to its early stage of operations, other than long-term
capital leases and Thomson Kernaghan's convertible debentures which have
recently been converted to equity.
On September 25, 1998, JAWS entered into a $2,000,000, 10% Convertible
Debenture Agreement with Thomson Kernaghan and 1,428,572 warrants to purchase
1,428,572 common shares at $0.28 per
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<PAGE> 23
common share. These Thomson Kernaghan warrants were to expire on October 31,
2002 and were to be exercised in whole or in part, from time to time, prior to
October 31, 2002 in accordance with the terms of the Thomson Kernaghan warrants
and the amended debenture agreement. The Thomson Kernaghan warrants are
assignable, and non-callable.
Around this time Jaws also entered into an agreement with Bristol
Asset Management LLC ("Bristol") whereby Jaws was given the right to obligate
Bristol to buy up to 25,000,000 shares of common stock for up to $7,000,000 in
"put" options.
On April 26, 1999, Jaws signed a settlement agreement with and in
consideration of the cancellation of the previous financing arrangement Jaws
has granted warrants to Bristol to purchase 1,000,000 shares of the common
stock of Jaws at $0.70 USD, expiring April 15, 2002. The cancellation of this
financing did not have an immediate impact on Jaws' plan of operation.
On April 27, 1999, Jaws and Thomson Kernaghan amended the debenture
agreement, increasing the amount available to $5,000,000. $1,520,000 of the $5
million available under the amended debenture agreement was advanced in
accordance with the terms of debentures issued by Jaws.
Effective November 1, 1999, Jaws executed a Debenture Acquisition
Agreement Amendment and Settlement Agreement with Thomson Kernaghan, (the
"Settlement Agreement") in order to settle the outstanding obligations of the
parties relating to the $5,000,000 Debenture Acquisition Agreement dated
September 25, 1998, as amended on April 27, 1999. The Settlement Agreement
settles the conversion terms of the $1,520,000 advanced under Debenture
Agreement and the exercise of outstanding warrants issued under the Debenture
Agreement and terminates all further obligations related to the Debenture
Agreement. Debentures issued pursuant to the Debenture Agreement have been
converted to 5,127,672 restricted shares. Thomson Kernaghan has exercised all
of the outstanding warrants issued pursuant to the Debenture Agreement for the
issuance of 2,180,220 shares in the common stock of Jaws. The parties have
signed a mutual release.
YEAR 2000 ISSUES
By the end of 1999, JAWS completed a ten phase year 2000 plan which
addressed the year 2000 readiness of all of our internal and external systems,
including software, network equipment, bandwidth providers and suppliers. We
have not, to date, experienced any year 2000 disruptions in these systems.
JAWS continues to assess all of our internal systems for operational
effectiveness and efficiency beyond year 2000 concerns.
JAWS believes that our significant suppliers and customer are year
2000 compliant and have not, to date, been made aware that any significant
suppliers or customers have suffered year 2000 disruptions in their systems.
In the event JAWS discovers year 2000 problems in any of these
systems, we will endeavor to resolve these problems by making modifications to
our systems or purchasing new systems on a timely basis. Although we are not
aware of any material operational issues associated with preparing these
systems for the year 2000 we will not experience material, unanticipated,
negative consequences and/or material costs caused by undetected errors or
defects in such systems or by our failure to adequately prepare for the results
of such errors or defects, including costs of related litigation, if any. The
impact of such consequences could have a material and adverse effect on our
business, financial condition and results of operations. Our costs
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<PAGE> 24
of year 2000 compliance, to date, are approximately $10,000 and we do not
anticipate material year 2000 compliance costs in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements filed as part of this Annual Report on Form
10-K are provided under Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
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<PAGE> 25
PART III
ITEMS 10-13.
The information required for Part III in this Annual Report on Form
10-K is incorporated by reference from the Company's definitive proxy statement
for the Company's 2000 Annual Meeting of Stockholders. Such information will
be contained in the sections of such proxy statement captioned "Stock Ownership
of Certain Beneficial Owners and Management," "Election of Directors," "Board
and Committee Meetings," "Compensation for Directors," "Compensation for
Executive Officers" and "Certain Relationships and Related Transactions."
Information regarding executive officers of the Company is also furnished in
Part I of this Annual Report on Form 10-K under the heading "Executive Officers
of the Registrant."
-22-
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
<TABLE>
<S> <C>
a (1) Financial Statements
JAWS' Consolidated Financial Statements as of December 31, 1999 and for each of the
three years in the period ended December 31, 1999. See pages F-1 through F-29,
which are included herein.
a (2) Financial Statement Schedules
All schedules are omitted because they are inapplicable, not required or the
information is included in the consolidated financial statements or the notes
thereto.
a (3) Exhibits
The exhibits listed in the Exhibit Index immediately preceding the exhibits are
filed as part of this Annual Report on Form 10-K.
(b) The following Current Reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report:
(1) Current Report on Form 8-K, filed with the Securities and Exchange
Commission on November 15, 1999;
(2) Current Report on Form 8-K, filed with the Securities and Exchange
Commission on November 15, 1999;
(3) Current Report on Form 8-K, filed with the Securities and Exchange
Commission on December 2, 1999; and
(4) Current Report on Form 8-K, filed with the Securities and Exchange
Commission on December 7, 1999.
</TABLE>
-23-
<PAGE> 27
JAWS' Technologies, Inc.
<TABLE>
<CAPTION>
Index to Financial Statements Page
----------------------------- ----
<S> <C>
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as at December 31, 1999 and 1998. . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Loss and Deficit and Comprehensive Loss for the years ended December
31, 1999 and 1998 and for the period from the date of inception (January 27, 1997) to December 31,
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999 and 1998 and for the period from the date of inception (January, 27, 1997)
to December 31, 1997 u. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998 and
for the period from the date of inception (January, 27, 1997) to December 31, 1997
and (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Jaws Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Jaws
Technologies, Inc. (and subsidiaries) as at December 31, 1999, 1998 and 1997
and the related consolidated statements of loss and deficit and comprehensive
loss, changes in stockholders' equity and cash flows for the years ended
December 31, 1999, and 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 auditing standards generally
accepted in the United States. 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 consolidated financial position of Jaws
Technologies, Inc. (and subsidiaries) as at December 31, 1999, 1998 and 1997
and the consolidated results of their operations and their cash flows for the
years ended December 31, 1999, and 1998 and for the period from the date of
incorporation on January 27, 1997 to December 31, 1997, in accordance with
accounting principles generally accepted in the United States.
Calgary, Canada /s/ Ernst & Young LLP
February 25, 2000 Chartered Accountants
F-2
<PAGE> 29
JAWS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(all amounts are expressed in U.S. dollars)
<TABLE>
<CAPTION>
As at December 31
1999 1998 1997
$ $ $
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT
Cash 8,430,701 33,732 111
Term deposits [note 4] 431,729 -- --
Accounts receivable 338,825 7,243 --
Due from related parties [note 8] 1,777 13,118 --
Prepaid expenses and deposits 75,144 140,456 7,500
- -------------------------------------------------------------------------------------------------------------
9,278,176 194,549 7,611
Equipment and leasehold improvements [note 5] 699,235 78,830 2,320
Intangible assets [note 6] 2,629,000 -- --
- -------------------------------------------------------------------------------------------------------------
12,606,411 273,379 9,931
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable and accrued liabilities 1,177,278 428,600 32,976
Current portion of capital lease obligations payable
[note 12] 25,235 -- --
Due to related parties [note 8] 172,093 197,115 --
Due to stockholders [note 8] 2,066 74,717 78,159
- -------------------------------------------------------------------------------------------------------------
1,376,672 700,432 111,135
- -------------------------------------------------------------------------------------------------------------
Capital lease obligations payable [note 12] 68,227 -- --
Convertible debentures [note 9] -- 146,606 --
- -------------------------------------------------------------------------------------------------------------
68,227 146,606 --
- -------------------------------------------------------------------------------------------------------------
COMMITMENTS [NOTE 12]
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 7] 25,040 10,612 4,000
Additional paid in capital 21,699,106 2,637,712 31,650
Cumulative translation adjustment (181,717) (8,842) --
Deficit (10,380,917) (3,213,141)) (136,854)
- -------------------------------------------------------------------------------------------------------------
11,161,512 (573,659) (101,204)
- -------------------------------------------------------------------------------------------------------------
12,606,411 273,379 9,931
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
<TABLE>
<S> <C> <C>
On behalf of the Board:
Director Director
</TABLE>
F-3
<PAGE> 30
JAWS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF LOSS AND
DEFICIT AND COMPREHENSIVE LOSS
(all amounts are expressed in U.S. dollars)
<TABLE>
<CAPTION>
PERIOD FROM
THE DATE OF
INCORPORATION
ON JANUARY
YEAR ENDED YEAR ENDED 27, TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------------------------------------
1999 1998 1997
$ $ $
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE 592,046 29,068 --
- --------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Advertising and promotion 363,916 218,574 35,000
General and administration [note 8] 5,577,447 1,574,022 101,274
Software development costs -- 909,003 --
- --------------------------------------------------------------------------------------------------
Loss before interest, financing fees, depreciation
and amortization (5,349,317) (2,672,531) (136,274)
Interest expense and amortization of deferred
financing fees and debt discount 1,140,050 389,715 --
Financing fees 447,187 -- --
Depreciation and amortization 231,222 14,041 580
- --------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD (7,167,776) (3,076,287) (136,854)
OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustment (172,875) (8,842) --
- --------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS (7,340,651) (3,085,129) (136,854)
- --------------------------------------------------------------------------------------------------
DEFICIT, BEGINNING OF PERIOD (3,213,141) (136,854) --
NET LOSS FOR THE PERIOD (7,167,776) (3,076,287) (136,854)
- --------------------------------------------------------------------------------------------------
DEFICIT, END OF PERIOD (10,380,917) (3,213,141) (136,854)
==================================================================================================
NET LOSS PER COMMON SHARE [NOTE 10] (0.50) (0.42) (0.03)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 14,342,053 7,405,421 4,000,000
==================================================================================================
</TABLE>
See accompanying notes
F-4
<PAGE> 31
JAWS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(all amounts are expressed in U.S. dollars)
<TABLE>
<CAPTION>
PAR VALUE ADDITIONAL PAID
SHARES IN CAPITAL
$ $
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 27, 1997:
Issuance of common stock for cash 4,000,000 4,000 56,000
Share issue costs -- -- (24,350)
- ----------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 4,000,000 4,000 31,650
==========================================================================================================
Issuance of common stock for services
[note 7] 400,000 400 199,600
Issuance of common stock on acquisition of 1,500,000 1,500 838,248
subsidiary [note 3(a)]
Issuance of common stock for cash 2,800,000 2,800 1,017,200
Warrants issued with issuance of convertible
debentures [note 9] -- -- 342,857
Equity component of convertible debentures
[note 9] -- -- 118,462
Equity component of financing fees [note 9] -- -- (35,760)
Issue of common stock upon conversion of
convertible debentures [note 9] 1,912,317 1,912 211,886
Financing fees associated with converted (21,117)
debentures [note 9] -- --
Share issue costs -- -- (65,314)
- ----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 10,612,317 10,612 2,637,712
- ----------------------------------------------------------------------------------------------------------
Issuance of common stock for cash 7,233,132 7,233 13,340,344
Share issue costs -- -- (988,477)
Equity component of convertible debentures
[note 9] -- -- 617,867
Equity component of financing fees
[note 9] -- -- (143,356)
Warrants issued with issuance of convertible
debentures [note 9] -- -- 341,538
Issuance of common stock for services 360,547 360 309,379
Exercise of employee stock options 15,000 15 2,235
Issuance of stock options recorded as
compensation [note 7] -- -- 810,000
Issuance of common stock for settlement of debt
[note 9] 3,215,355 3,215 1,493,076
Issuance of common stock for cash as a result of
exercise of warrants [note 9] 1,428,572 1,429 398,571
Issuance of common stock for settlement of
warrants [note 9] 751,648 752 258,193
Issuance of common stock on acquisition of
subsidiary [note 3(b)] 1,385,546 1,386 2,354,042
Issuance of common stock on acquisition of assets
[note 3(c)] 38,071 38 267,982
- ----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 25,040,188 25,040 21,699,106
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-5
<PAGE> 32
JAWS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(all amounts are expressed in U.S. dollars)
<TABLE>
<CAPTION>
PERIOD FROM
THE DATE OF
INCORPORATION
ON JANUARY
YEAR ENDED YEAR 27, TO
DECEMBER 31 ENDEDDECEMBER DECEMBER 31,
31,
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997
$ $ $
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss for the period (7,167,776) (3,076,287) (136,854)
Adjustments to reconcile loss to cash flows used in
operating activities:
General and administration expense not involving the
payment of cash 99,839 200,000 --
Depreciation and amortization 231,222 14,041 580
Non cash compensation expense [note 7] 810,000 -- --
Non-cash interest expense and amortization of
deferred financing fees and debt discount 1,129,709 386,846 --
Software development costs -- 909,003 --
Non-cash financing fees 447,187 -- --
Changes in non-cash working capital balances
[note 13] 279,193 439,422 25,476
- -----------------------------------------------------------------------------------------------------------------
(4,170,626) (1,126,975) (110,798)
=================================================================================================================
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (648,719) (115,584) (2,900)
Purchase of term deposits (431,729) -- --
- -----------------------------------------------------------------------------------------------------------------
(1,080,448) (115,584) (2,900)
=================================================================================================================
CASH FLOWS GENERATED BY FINANCING ACTIVITIES
Proceeds from the issuance of common stock, net of
issue costs 12,761,350 954,686 35,650
Repayment of stockholder advances (72,651) (78,159) --
Proceeds from stockholder advances -- 20,273 78,159
Proceeds on issue of convertible debenture 1,100,000 420,000 --
Financing fees on issue of convertible debenture (110,000) (42,000) --
Acquisition costs on purchase of subsidiary (30,656) -- --
- -----------------------------------------------------------------------------------------------------------------
13,648,043 1,274,800 113,809
=================================================================================================================
INCREASE IN CASH 8,396,969 32,241 111
Cash acquired on acquisition of subsidiary -- 1,380 --
Cash, beginning of period 33,732 111 --
- -----------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD 8,430,701 33,732 111
=================================================================================================================
</TABLE>
See accompanying notes
F-6
<PAGE> 33
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
1. BASIS OF PRESENTATION
Jaws Technologies, Inc., (the "Company") was incorporated on January 27, 1997
under the laws of the State of Nevada as "E-Biz" Solutions, Inc. On March 27,
1998, "E-Biz" Solutions, Inc. changed its name to Jaws Technologies, Inc. The
Company's business purpose is to continue to develop as a provider of secure
information management solutions. This is accomplished through offering
proprietary security software products, consulting services and secure Internet
and remote data storage services for key client groups including governments,
law enforcement, healthcare, legal and accounting, financial services,
e-commerce, internet service providers and application service providers.
These activities are carried out through the Company's wholly-owned Canadian
subsidiaries and U.S. subsidiary.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Jaws Technologies, Inc., an Alberta, Canada
corporation ("Jaws Alberta"), Jaws Technologies (Ontario) Inc. an Ontario,
Canada corporation ("Jaws Ontario"), and Jaws Technologies (Delaware) Inc., a
Delaware corporation ("Jaws Delaware"), after elimination of intercompany
accounts and transactions.
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.
F-7
<PAGE> 34
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements 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.
<TABLE>
<S> <C>
Security equipment - 20% straight line
Furniture and fixtures - 20% declining balance
Computer hardware - 33% straight line
Computer software for internal use - 33% straight line
Leasehold improvements - 20% straight line
</TABLE>
CAPITAL LEASES
Leases in which substantially all the benefits and risks of ownership are
transferred to the Company are capitalized with an offsetting amount recorded
as a liability.
LONG-LIVED ASSETS
The Company follows financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be disposed of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present.
INTANGIBLE ASSETS
Employee and Consultants Base
The employee and consultants base recorded on the acquisition of Pace and of
SDTC are recorded at cost and are being amortized on a straight-line basis over
three years.
Goodwill
Goodwill is recorded at cost and is being amortized on a straight-line basis
over three years. The recoverability of goodwill is assessed periodically
based on management estimates of undiscounted future operating income from each
of the acquired businesses to which the goodwill relates.
F-8
<PAGE> 35
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
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.
REVENUE RECOGNITION
Product Revenue
Revenue from selling encryption software is recognized when the software is
delivered.
Consulting Revenue
Revenue from information technology services and outsourcing contracts is
recognized when the service is rendered or earned.
ADVERTISING
Advertising costs are expensed as incurred.
Financing fees
Financing fees associated with that portion of the convertible debentures
classified as debt are deferred and amortized straight-line over the life of
the debentures. Financing fees associated with that portion of the convertible
debentures classified as additional paid in capital is charged to that account.
INCOME TAXES
The Company follows the liability method of accounting for the tax effect of
temporary differences between the carrying amount and the tax basis of the
company's assets and liabilities. Temporary differences arise when the
realization of an asset or the settlement of a liability would give rise to
either an increase or decrease in the Company's income taxes payable for the
year or later period. Future income taxes are recorded at the income tax rates
that are expected to apply when the future tax liability is settled or the
future tax asset is realized. When necessary, valuation allowances are
established to reduce future income tax assets to the amount expected to be
realized. Income tax expense is the tax payable for the period and the change
during the period in future income tax assets and liabilities.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's Canadian subsidiaries is the Canadian
dollar. Accordingly, assets and liabilities of the Canadian 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.
F-9
<PAGE> 36
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share has been calculated based on the
weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per common share is calculated by adjusting outstanding
shares, assuming any dilutive effects of options, warrants, and convertible
securities.
STOCK BASED COMPENSATION
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 period amounts
Certain prior period amounts have been reclassified to conform to the
presentation adopted in 1999.
3. ACQUISITION
A. JAWS ALBERTA
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.
F-10
<PAGE> 37
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
The purchase price and the amounts allocated to software under development and
the common shares issued, net of other assets and liabilities acquired, was
determined based on estimates by management as to the replacement cost for the
encryption software development which had been incurred by Jaws Alberta prior
to the acquisition date. The purchase price has been allocated to the net
assets acquired based on their estimated fair values as follows:
<TABLE>
<CAPTION>
$
- ---------------------------------------------------------------------------------------------
<S> <C>
NET ASSETS ACQUIRED
Non-cash working capital (5,087)
Software under development 909,003
Equipment 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 year ended December
31, 1998, giving effect to the acquisition of Jaws Alberta as though it had
occurred as at January 1, 1998 do not differ materially from that recorded.
F-11
<PAGE> 38
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
B. PACE SYSTEMS GROUP INC. ("PACE")
Effective November 3, 1999, the Company noticed for issuance 1,385,546
exchangeable common shares at $1.70 per share, which are exchangeable into
1,385,546 common shares of the Company, in exchange for all of the outstanding
common stock of Pace. In addition, there is contingent consideration payable
of 346,386 exchangeable common shares subject to the achievement of certain
targets. Fifty percent of the additional share consideration will be released
if on the 12 month anniversary date of the effective date, actual gross
revenues equal or exceed $2,000,000 CDN. ($1,377,505 USD). The remaining
additional share consideration will be released if, on the 24 month anniversary
date of the effective date, actual revenues for the previous twelve months
equal or exceed $2,000,000 CDN. ($1,377,505 USD). The additional consideration
has not been reflected in these consolidated financial statements, as the
outcome of the contingent share consideration cannot be reasonably determined
at this time. The additional share consideration will be recorded as goodwill
as it becomes payable.
The acquisition was accounted for using the purchase method. The purchase
price has been allocated to the net assets based on their estimated fair values
as follows:
<TABLE>
<CAPTION>
$
- -----------------------------------------------------------------------------------------------------
<S> <C>
Employee and consultants base 1,193,042
Goodwill 1,193,042
- -----------------------------------------------------------------------------------------------------
NET ASSETS ACQUIRED 2,386,084
=====================================================================================================
Consideration:
1,385,546 common stock 2,355,428
Acquisition costs 30,656
- -----------------------------------------------------------------------------------------------------
Total Consideration 2,386,084
=====================================================================================================
</TABLE>
The operating results of the acquired company are included in the consolidated
statements of loss, deficit and comprehensive loss from the date of
acquisition.
F-12
<PAGE> 39
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
The following proforma results of operations give effect to the acquisition of
Pace as if the transaction had occurred January 1, 1999, and includes the
amortization of goodwill and employee and consultants base calculated on a
straight-line basis over a period of 3 years:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
$ $
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE 1,259,515 1,655,162
- ---------------------------------------------------------------------------------------------
Sub-contracting costs 1,328,942 1,604,394
Other costs and expenses 8,128,253 3,223,346
- ---------------------------------------------------------------------------------------------
9,457,195 4,827,740
- ---------------------------------------------------------------------------------------------
NET LOSS (8,197,680) (3,172,578)
=============================================================================================
NET LOSS PER COMMON SHARE (0.57) (0.43)
=============================================================================================
</TABLE>
C. SECURE DATA TECHNOLOGIES CORPORATION ("SDTC")
Effective December 31, 1999 the Company purchased substantially all of the
assets of SDTC through the Company's wholly-owned subsidiary Jaws Delaware.
SDTC was incorporated in December 1998 and had no material operations prior to
January 1, 1999. The purchase price provided for a promissory note of $257,214
and 38,071 common shares, noticed for issuance, at $7.04 per share, as well as
contingent consideration of additional 9,516 common shares subject to the
achievement of certain targets. The issuance of 9,516 common stock is
dependent achieving revenues equal to the greater of $200,000 per fiscal year
per employee, or a minimum of $1,200,000 for the fiscal year 2000 only. The
additional consideration has not been reflected in these consolidated financial
statements, as the outcome of the contingent share consideration cannot be
reasonably determined at this time. The additional share consideration will be
recorded as goodwill as it becomes payable.
F-13
<PAGE> 40
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
The acquisition was accounted for using the purchase method. The purchase price
has been allocated to the assets based on their estimated fair values as
follows:
<TABLE>
<CAPTION>
$
- ------------------------------------------------------------------------------------------
<S> <C>
Equipment 155,932
Employee and consultants base 184,651
Goodwill 184,651
- ------------------------------------------------------------------------------------------
NET ASSETS ACQUIRED 525,234
==========================================================================================
Consideration:
38,071 common stock 268,020
Promissory note 257,214
- ------------------------------------------------------------------------------------------
TOTAL CONSIDERATION 525,234
==========================================================================================
</TABLE>
The operating results of the acquired company are included in the consolidated
statements of loss, deficit and comprehensive loss from the effective date of
acquisition. The following proforma results of operations give effect to the
acquisition of the SDTC assets as if the transaction had occurred January 1,
1999 and includes the amortization of goodwill and employee and consultants
base calculated on a straight-line basis over a period of 3 years:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
$
- --------------------------------------------------------------------------------------------
<S> <C>
REVENUE 954,083
- --------------------------------------------------------------------------------------------
Sub-contracting expense 1,311,501
Other costs and expenses 7,307,681
- --------------------------------------------------------------------------------------------
8,619,182
- --------------------------------------------------------------------------------------------
Loss before income taxes (7,665,099)
Income tax benefit 144,000
- --------------------------------------------------------------------------------------------
NET LOSS (7,521,099)
============================================================================================
NET LOSS PER COMMON SHARE (0.53)
============================================================================================
</TABLE>
4. TERM DEPOSITS
The term deposits are on deposit with a Canadian Chartered Bank. Of the
deposits, $24,923 have been pledged as collateral for certain corporate credit
cards, and as such are not available for the Company's general use. The term
deposits earn interest at 2.95 percent per annum and mature May 29, 2000.
F-14
<PAGE> 41
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
COST
DECEMBER 31
-------------------------------------------------
1999 1998 1997
$ $ $
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Security equipment 26,106 -- --
Furniture and fixtures 206,785 31,758 3,480
Computer hardware 367,301 47,371 --
Computer software for internal use 32,703 13,162 --
Leasehold improvements 184,637 -- --
- ------------------------------------------------------------------------------------
817,532 92,291 3,480
- ------------------------------------------------------------------------------------
Less accumulated depreciation 118,297 13,461 1,160
- ------------------------------------------------------------------------------------
NET BOOK VALUE 699,235 78,830 2,320
====================================================================================
</TABLE>
Assets under capital leases at December 31. 1999 include security equipment of
$26,106 (1998 - $nil; 1997 - $nil) and computer hardware of $75,584 (1998 -
$nil; 1997 - $nil), with related accumulated depreciation of $3,613 (1998 -
$nil; 1997 - $nil) and $25,195 (1998 - $nil; 1997 - $nil) respectively.
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-------------------------------------------------
ACCUMULATED NET BOOK VALUE
COST AMORTIZATION
$ $ $
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee and consultants base 1,377,693 63,193 1,314,500
Goodwill 1,377,693 63,193 1,314,500
- ------------------------------------------------------------------------------------
2,755,386 126,386 2,629,000
====================================================================================
</TABLE>
F-15
<PAGE> 42
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
7. 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, 400,000 restricted common shares were 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.
During 1999, the Company issued 141,000 and 11,999 common shares at $1.34 and
$0.90 per common share respectively in settlement of trade payables.
During 1999, the Company issued 207,548 common shares as per the contracted
terms, at $0.53 per common share for settlement of amounts outstanding to two
directors for services provided. The expense has been included in general and
administration expense [See note 8].
COMMON STOCK HELD IN ESCROW
Upon entering into the 10% convertible debenture agreement [see note 9] the
Company placed 9,500,000 common shares in escrow relating to the $2 million of
financing. In addition, 1,071,429 shares and 357,143 common shares were placed
in escrow relating to the purchasers' and agent's warrants issued in relation
to the 10% convertible debenture agreement. Upon settlement of the convertible
debentures November 1, 1999, all of these common shares were released from
escrow [see note 9].
F-16
<PAGE> 43
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
OPTIONS
The Company is authorized to grant employees options to purchase up to an
aggregate of common stock not in excess of 20% of the common stock issued and
outstanding, at prices based on the market price of the shares as determined on
the date of grant.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF PRICE PER EXERCISE PRICE
OPTIONS SHARE
$ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OUTSTANDING AT DECEMBER 31, 1997 -- -- --
Granted 1,667,000 0.15 - 0.69 0.41
- -------------------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1998 1,667,000 0.15 - 0.69 0.41
- -------------------------------------------------------------------------------------------------
Granted 2,071,590 0.37 - 7.56 1.74
Exercised (15,000) 0.15 0.15
Cancelled (78,267) 0.15 - 0.98 0.41
- -------------------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1999 3,645,323 0.15 - 7.56 1.18
=================================================================================================
</TABLE>
The weighted average remaining contractual life and weighted average exercise
price of options outstanding and of options exercisable as of December 31, 1999
were as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
$ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0.15 - 0.40 444,333 6.15 0.26 293,666 0.21
0.44 - 0.87 1,810,000 4.63 0.59 1,321,333 0.56
1.44 - 2.72 1,267,660 4.34 1.71 1,075,000 1.74
4.81 - 7.56 123,330 3.02 7.49 -- --
- -------------------------------------------------------------------------------------------------
</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 151%, risk-free interest rate of 4.87%; no payment of
common share dividends; and expected life of 3 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 net
loss and net loss per common share for the year ended December 31, 1999 would
have been $9,121,253 and $0.64 respectively (December 31, 1998 - $3,324,618 and
$0.45 respectively).
F-17
<PAGE> 44
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
During 1999 the Company granted a total of 500,000 options to two officers of
the Company at an exercise price of $1.88 per share which was calculated based
on the previous three month's average price. The difference between the
exercise price and the trading price on the day prior to the grant date, has
been recognized as compensation expense for the year ended December 31, 1999.
The weighted average fair value of options granted during 1999 and 1998 was
$1.34.
WARRANTS ISSUED
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 1,000,000 share purchase warrants, which
entitle the holder to purchase 1,000,000 common shares at $2.25 per share until
June 20, 2001.
On November 1, 1999, the Company issued 411,765 share purchase warrants, which
entitle the holder to purchase 411,765 common shares at $1.70 per share until
November 30, 2002.
On December 31, 1999, the Company issued 2,176,418 share purchase warrants in
connection with an issuance of 2,176,418 shares of common stock, which entitle
the holder to purchase one-half of one share of common stock of the Company at
an exercise price of $6.50 per share. As a financing fee, the Company issued
217,642 warrants to the placement agent, which entitle the agent to purchase
one share of common stock at an exercise price of $4.25 per share. Each
warrant will expire on the third anniversary date of the effective date of the
S-1 Registration Statement. On February 1, 2000, the Company filed an S-1
Registration Statement to register all of the common shares issuable upon
exercise of the warrants. If the S-1 Registration Statement is not declared
effective between March 30, 2000 and June 29, 2000, the exercise price shall be
reduced by $0.25 per month. Until the S-1 Registration Statement is declared
effective after June 30, 2000, the exercise price shall be reduced each month
but will not be reduced to lower than $3.75 per common stock. However, at any
time after the S-1 Registration Statement is declared effective and the share
price of the Company exceeds $9.75 for 30 consecutive days, the Company, with
30 days notice, may repurchase these warrants at a price of $0.001 per warrant.
F-18
<PAGE> 45
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
8. RELATED PARTY TRANSACTIONS
Unless otherwise noted, all related party transactions have been recognized at
their exchange amounts. Amounts due to/from related parties consist of the
following amounts:
<TABLE>
<CAPTION>
DECEMBER DECEMBER 31, DECEMBER 31,
31, 1999 1998 1997
$ $ $
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DUE FROM RELATED PARTIES
Futurelink Corp. 1,777 13,118 --
- ------------------------------------------------------------------------------------------
1,777 13,118 --
- ------------------------------------------------------------------------------------------
DUE TO RELATED PARTIES
Officers and stockholders 4,821 43,588 --
Futurelink Corp. 42,888 32,175 --
Willson Stationers Ltd. -- 1,352 --
Directors 124,384 120,000 --
- ------------------------------------------------------------------------------------------
172,093 197,115 --
- ------------------------------------------------------------------------------------------
DUE TO STOCKHOLDERS
Bankton Financial Corporation -- 15,775 --
Cameron Chell 2,066 1,957 --
Hampton Park Ltd. -- 56,985 --
Other stockholder -- -- 78,159
- ------------------------------------------------------------------------------------------
2,066 74,717 78,159
- ------------------------------------------------------------------------------------------
</TABLE>
General and administration expense for the year ended December 31, 1999,
includes $84,420 (December 31, 1998 - $76,612; December 31, 1997 - $nil) in
fees associated with computer services provided by Futurelink Corp., an entity
of which certain directors were also directors of the Company. The Company
provided sales to Futurelink Corp. during the year ended December 31, 1999 in
the amount of $1,777 (December 31, 1998 - $13,118; December 31, 1997 - $nil).
General and administration expenses for the year ended December 31, 1999,
include $20,508 (December 31, 1998 - $8,035; December 31, 1997 - $nil) paid to
Willson Stationers Ltd., an entity of which certain directors were also
directors and officers of the Company.
During the year ended December 31, 1999, the Company expensed fees of $22,714
paid to IT Florida.com, the chairman of the government sponsored taskforce is
also a director of the Company.
F-19
<PAGE> 46
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
For the year ended December 31, 1999, general and administration expense
includes $233,643 (December 31, 1998 - $198,168; December 31, 1997 - $nil) of
management fees to officers and stockholders of the Company for services
provided. General and administration for the year ended December 31, 1999
includes $124,384 (December 31, 1998 - $33,333; December 31, 1997 - $nil) of
directors fees.
Due to stockholders represents advances received by the Company. The amount
due to Hampton Park Ltd., a company owned by a stockholder, incurred interest
at 8% per annum and was repaid in 1999. The remaining amount due to
stockholders does not bear interest and has no set repayment terms.
The Company entered into an agreement to lease premises from a stockholder,
commencing on November 1, 1998, 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 for year ended December 31, 1999, that
has been included in general and administration expense, was $129,611 (December
31, 1998 - $3,991; December 31, 1997 - $nil).
F-20
<PAGE> 47
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
9. CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31 1998
$ $
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRINCIPAL
Net balance outstanding, beginning of year 146,606 --
Funds advanced to date 1,100,000 420,000
Debentures converted during the year (1,246,606) (210,000)
- -----------------------------------------------------------------------------------------------------------
-- 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
Amortization of financing fees on settlement of debt (232,581) --
- -----------------------------------------------------------------------------------------------------------
-- (65,679)
- -----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Accrued interest expense 77,323 2,285
Interest expense converted on settlement of debt (77,323) --
- -----------------------------------------------------------------------------------------------------------
NET BALANCE OUTSTANDING, END OF YEAR -- 146,606
- -----------------------------------------------------------------------------------------------------------
</TABLE>
In September, 1998 the Company entered into a debenture agreement to issue 10%
convertible debentures up to a total of $2,000,000 which mature on October 31,
2001. The debentures were convertible, at the holders' option, into common
shares of the Company at various prices as outlined in the agreement. The
Company could prepay any or all of the outstanding principal amounts at any
time, subject to the holders' right to convert into common shares. A financing
fee of 10% was charged on the principal sum of each convertible debenture
issued. Interest was payable in cash or common shares at maturity.
The agreement was amended in April, 1999 to include, among others, an increase
in the amount available from $2,000,000 to $5,000,000 and a reduction of the
financing fee to 8% on the additional amount available.
F-21
<PAGE> 48
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
The Company issued $420,000 of debentures in 1998, and an additional $1,100,000
during 1999. Amounts of $118,462 and $617,867, in 1998 and 1999 respectively,
representing the intrinsic value of the conversion option, were recorded as
additional paid in capital with an offsetting charge to interest expense. The
portion of $152,000 of financing fees associated with the equity component of
the debentures were recorded as a reduction to paid in capital. The remainder,
which were recorded as a reduction of the debenture principal, were being
amortized on a straight-line basis over the life of the debentures.
At the time of initial funding in 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 granted the holder the right to
purchase one common share of the Company at $0.28 until October 31, 2001. The
estimated value of the subscriber warrants, in the amount of $342,857, was
recorded as additional paid in capital as they were exercisable upon issuance.
The warrants issued to the agent, with an estimated value of $85,714, were
treated as a financing fee; the portion thereof associated with the equity
component of the debenture ($24,000) was charged to additional paid in capital.
The remainder was being amortized on a straight-line basis over the life of the
debentures. The debenture amendment in April, 1999 included the issuance of an
additional 923,077 warrants which granted the holder the right to purchase one
common share of the Company at $0.65. The estimated value of these warrants,
in the amount of $341,538 were recorded as additional paid in capital, reduced
by an offsetting amount of $110,027 attributable to the equity component of the
debenture. The remainder was charged as a discount to debt and was being
amortized on a straight-line basis over the life of the debentures.
During 1998, $210,000 principal amount of debentures, together with $3,798
interest, was converted into 1,912,317 common shares.
Effective November 1, 1999 the Company settled the entire outstanding principal
amount of the debentures in exchange for 3,157,712 common shares, at a
recognized value of $1,091,348. Accrued interest and penalties were settled in
exchange for 57,643 common shares valued at $404,943. As part of the
settlement of the debt, the Company issued 1,428,572 common shares upon
exercise of the 1,428,572 common stock purchase warrants, which were granted at
the time of the initial funding of the debt. The warrants were exercised at
the stated price of $0.28 per warrant. The Company also issued 751,648 shares
of common stock upon exercise of the 923,077 common share purchase warrants,
which were granted at the time of the amendment in April 1999. In exchange for
issuing 171,429 fewer shares as per the exercise agreement terms, the warrant
holders were not required to pay cash on the exercise of these warrants;
accordingly, the original amount recognized as additional paid in capital has
been reversed and $258,945 was recognized as financing expense.
F-22
<PAGE> 49
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
10. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is net loss for the period divided by
the weighted average number of common shares outstanding. The effect on
earnings (loss) per share of the exercise of options and warrants, and the
conversion of the convertible debentures is anti-dilutive.
The following table sets forth the computation of earnings (loss) per common
share:
<TABLE>
<CAPTION>
DECEMBER DECEMBER DECEMBER
31, 1999 31, 1998 31, 1997
$ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET LOSS (7,167,776) (3,076,287) (136,854)
- -------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER COMMON SHARE:
Weighted average number of common shares
outstanding 14,342,053 7,405,421 4,000,000
- -------------------------------------------------------------------------------------------------
Loss per common share - basic and diluted (0.50) (0.42) (0.03)
=================================================================================================
</TABLE>
11. INCOME TAXES
The income tax benefit differs from the amount computed by applying the U.S.
federal statutory tax rates to the loss before income taxes for the following
reasons:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
$ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(34%) (34%) (34%)
Income tax benefit at U.S. statutory rate (2,437,044) (1,045,938) (46,530)
Increase (decrease) in taxes resulting from:
Change in deferred tax asset valuation
allowance 2,500,670 1,106,172 46,530
Non-deductible expenses 322,810 128,162 --
Foreign tax rate differences (368,588) (188,396) --
State tax rate differences 1,508 -- --
Income not previously recognized 2,439 -- --
Foreign exchange (21,795) -- --
- -------------------------------------------------------------------------------------------------
Income tax benefit -- -- --
=================================================================================================
</TABLE>
F-23
<PAGE> 50
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
For financial reporting purposes, loss before income taxes includes the
following components:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
$ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pre-tax loss:
United States (3,697,076) (1,302,313) (136,854)
Foreign (3,470,700) (1,773,974) -
- -------------------------------------------------------------------------------------------------
(7,167,776) (3,076,287) (136,854)
=================================================================================================
</TABLE>
Future income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's future tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
$ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Future tax assets:
Net operating loss carryforwards 3,209,318 697,768 --
Start-up costs 28,694 37,999 46,333
Depreciation 45,549 5,807 --
Organization costs 591 394 197
Debt issue costs -- 5,137 --
Donations 435 -- --
Software costs 368,785 405,597 --
- -------------------------------------------------------------------------------------------------
Net future tax assets 3,653,372 1,152,702 46,530
Valuation allowance (3,653,372) (1,152,702) (46,530)
- -------------------------------------------------------------------------------------------------
Net future tax assets -- -- --
=================================================================================================
</TABLE>
The Company has provided a valuation allowance for the full amount of future
tax assets in light of its history of operating losses since its inception.
The Company has U.S. operating losses carried forward of $3,630,000 which
expire as follows:
<TABLE>
<CAPTION>
$
------------
<S> <C>
2018 880,000
2019 2,750,000
</TABLE>
F-24
<PAGE> 51
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
The availability of these loss carryforwards to reduce future taxable income
could be subject to limitations under the Internal Revenue Code of 1986, as
amended. Certain ownership changes can significantly limit the utilization of
net operating loss carryforwards in the period following the ownership change.
The Company has not determined whether such changes have occurred and the
effect such changes could have on its ability to carry forward all or some of
the U.S. net operating losses.
The Company has non-capital losses carried forward for Canadian income tax
purposes of $4,393,000. These losses expire as follows:
<TABLE>
<CAPTION>
$
----------
<S> <C>
2003 45,000
2004 7,000
2005 884,000
2006 3,457,000
</TABLE>
12. CAPITAL AND OPERATING LEASE OBLIGATIONS PAYABLE
The future minimum lease payments at December 31, 1999 under capital and
operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
- ----------------------------------------------------------------------------------------
<S> <C> <C>
2000 27,041 327,029
2001 27,041 318,408
2002 26,173 235,927
2003 25,306 172,693
2004 13,852 92,982
- ----------------------------------------------------------------------------------------
Total future minimum lease payments 119,413 1,147,039
Less: imputed interest (25,951) -----------------------
- --------------------------------------------------------------
Balance of obligations under capital leases 93,462
Less: current portion (25,235)
- --------------------------------------------------------------
Long term obligation under capital leases 68,227
- --------------------------------------------------------------
</TABLE>
Rent expense was $269,004 for the year ended December 31, 1999 (December 31,
1998 - $29,637; December 31, 1997 - $nil).
F-25
<PAGE> 52
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
13. NET CHANGE IN NON-CASH WORKING CAPITAL
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
$ $ $
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts receivable (331,582) (7,243) --
Due from related parties 11,341 (13,118) --
Prepaid expenses and deposits 81,979 (132,956) (7,500)
Accounts payable and accrued liabilities 799,691 395,624 32,976
Due to related parties (25,022) 197,115 --
- -------------------------------------------------------------------------------------------------------------------------
536,407 439,422 25,476
Attributable to investing activities 257,214 -- --
- -------------------------------------------------------------------------------------------------------------------------
Attributable to operating activities 279,193 439,422 25,476
=========================================================================================================================
</TABLE>
F-26
<PAGE> 53
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
14. SEGMENTED INFORMATION
The Company's activities include selling encryption software and providing
consulting services. The activities are conducted in one operating segment and
are carried out in three geographic segments as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------------
ALBERTA, ONTARIO,
CANADA CANADA U.S. TOTAL
$ $ $ $
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOSS INFORMATION
Revenue 85,675 469,001 37,370 592,046
Expenses 3,414,558 610,966 11,098 4,036,622
- ---------------------------------------------------------------------------------------------------------
(3,328,883) (141,965) 26,272 (3,444,576)
Corporate overheads 3,723,200
Net loss (7,167,776)
- ---------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET
INFORMATION
Equipment and
leasehold
improvements 520,507 27,379 151,349 699,235
Goodwill and employee
and consultants base -- 2,259,698 369,302 2,629,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
F-27
<PAGE> 54
JAWS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts are expressed in U.S. dollars)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------------------
ALBERTA, ONTARIO,
CANADA CANADA U.S. TOTAL
$ $ $ $
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOSS INFORMATION
Revenue 29,068 -- -- 29,068
Expenses 1,835,561 -- -- 1,835,561
- --------------------------------------------------------------------------------------------------------------
(1,809,493) -- (1,806,493)
Corporate overheads (1,269,794)
Net loss (3,076,287)
- --------------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET
INFORMATION
Equipment and
leasehold
improvements 77,090 -- 1,740 78,830
- --------------------------------------------------------------------------------------------------------------
</TABLE>
During 1997, all activities were carried out in Canada.
15. FINANCIAL INSTRUMENTS
Financial instruments comprising cash, term deposits, accounts receivable,
amounts due to and from related parties, accounts payable and accrued
liabilities, capital lease obligations, amounts due to related parties 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 December 31, 1999 of the 10% convertible
debentures is $nil (December 31, 1998 - $189,000). This was based on the
estimated present value of the principal and interest of the debenture.
Until November 1, 1999, the Company was 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% for the year ended December
31, 1999 (December 31, 1998 - 10%).
F-28
<PAGE> 55
Jaws Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
(all amounts are expressed in U.S. dollars)
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
I. On January 28, 2000, the Company finalized the acquisition of Offsite
Data Services Ltd. (Offsite), a company incorporated in the Province of
Alberta, Canada. The Company purchased all of the outstanding shares of
Offsite in exchange for 4,874,822 exchangeable shares of the Company with
an ascribed value of $13,113,271 and 2,318,550 warrants in exchange for
the outstanding Offsite warrants. 1,818,550 of these warrants entitle
the holder to acquire 0.3524 of one of the Company's common shares at
$0.40 CDN. ($0.28 USD) up to March 15, 2000. The remaining 500,000
warrants entitle the holder to acquire 0.3524 of one of the Company's
common shares for prices ranging from $0.50 CDN. ($0.34 USD) to $0.55
CDN. ($0.38 USD) up to September 29, 2001. In addition, 910,584 stock
options to purchase shares of Offsite have been exchanged for 910,584
stock options to purchase shares of the Company. The options entitle the
holder to purchase 0.3524 of an exchangeable share of the Company, at a
price of $0.25 CDN. ($0.17 USD) which expire on March 15, 2004.
The acquisition will be accounted for using the purchase method. The aggregate
purchase price of $13,363,271 will be allocated to the net assets
acquired based on their estimated fair values, as follows:
<TABLE>
<CAPTION> $
- --------------------------------------------------------------------
<S> <C>
Net assets acquired 313,041
Goodwill 13,050,230
- --------------------------------------------------------------------
NET ASSETS ACQUIRED 13,363,271
====================================================================
Consideration:
4,874,822 common stock 13,113,271
Acquisition costs 250,000
- --------------------------------------------------------------------
TOTAL CONSIDERATION 13,363,271
====================================================================
</TABLE>
2. On January 6, 2000, the Company exercised their option to purchase
2,000,000 of Cobra Tech Industries Inc. ("Cobra Tech") common shares (25%
of Cobra Tech) for $20,000, and granted Cobra Tech the exclusive right to
market and sell the Company's products in Asia for a four year period
commencing October 19, 1999. the Company will receive a 25% royalty on all
products sold by Cobra Tech. No royalties have been received to date.
3. On February 23, 2000, the Company closed a private placement agreement to
issue 588,238 common stock at $4.25 per share. The Company received
$2,500,012 less share issue costs of $265,501. The proforma loss and
proforma loss per common share for the year ended December 31, 1999 giving
effect to the private placement as though it had occurred as at January 1,
1999 would have been $6,281,921 and ($0.43) respectively.
F-29
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
24th day of March, 2000.
JAWS TECHNOLOGIES, INC.
Date: March 24, 2000 By: /s/ Robert J. Kubbernus
-------------------------------------------------
Robert J. Kubbernus, Chairman of the Board, Chief
Executive Officer, President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Rogert J. Kubbernus Chairman of the Board, Chief March 24,2000
- --------------------------- Executive Officer, President
Robert J. Kubbernus and Director
(Principal Executive Officer)
/s/ Riaz Mamdani Chief Financial Officer and March 24,2000
- --------------------------- Director
Riaz Mamdani (Principal Financial Officer)
/s/ Julia L. Johnson Director March 24,2000
- ---------------------------
Julia L. Johnson
/s/ Arthur Wong Director March 24,2000
- ---------------------------
Arthur Wong
S-1
<PAGE> 57
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on
Form 10-K.
3.1* Articles of Incorporation of "e-biz" solutions, inc. (now JAWS
Technologies, Inc., a Nevada corporation), dated January 27, 1997.
3.2* Certificate of Amendment of Articles of Incorporation of JAWS
Technologies, Inc., a Nevada corporation, dated March 30, 1998,
changing the name of E-Biz to JAWS Technologies, Inc.
3.3* Certificate of Amendment of Articles of Incorporation of JAWS
Technologies, Inc., a Nevada corporation, increasing the total number
of common stock which JAWS is allowed to issue from 20,000,000 to
95,000,000.
3.4* Bylaws of "e-biz" solutions, inc. (now JAWS Technologies, Inc., a
Nevada corporation), dated January 27, 1997.
4.1* Investment Agreement by and between JAWS Technologies, Inc., a Nevada
corporation, and Bristol Asset Management LLC dated August 27, 1998
and letter of termination.
4.2* Debenture Acquisition Agreement by and between JAWS Technologies,
Inc., a Nevada corporation, and Thomson Kernaghan & Co. Limited,
dated September 25, 1998.
4.3* Amendment No. 1 to Debenture Purchase Agreement by and between JAWS
and Thomson Kernaghan, dated April 27, 1999.
4.4* Warrant to purchase 1,000,000 shares of common stock of JAWS
Technologies, Inc., a Nevada corporation, issued to Bristol Asset
Management LLC, dated April 20, 1999.
4.5* Form of Warrant to purchase 834,000 shares of common stock of JAWS
Technologies, Inc., a Nevada corporation, issued to Glentel Inc.,
dated June 21, 1999.
4.6* Schedule of Warrant holders which received the Form of Warrant set
forth in 4.5 above.
4.7* Form of Warrant issued by JAWS in connection with the Private
Placement Transaction.
4.8* Schedule of Warrant holders which received the Form of Warrant set
forth in 4.9 above.
4.9* Warrant to purchase 217,642 shares of common stock of JAWS
Technologies, Inc., a Nevada corporation, issued to Thomson Kernaghan
& Co. Limited, dated December 31, 1999.
4.10* Certificate of the Designation, Voting Power, Preference and
Relative, Participating, optional and other Special Rights and
Qualifications, Limitations or Restrictions of the Special Series &
Preferred Voting Stock of JAWS Technologies, Inc., dated November 30,
1999.
<PAGE> 58
4.11* Incentive and Non-Qualified Stock Option Plan of JAWS Technologies,
Inc., a Nevada corporation.
4.12* Placement Agency Agreement by and between JAWS Technologies, Inc., a
Nevada corporation, and Thomson Kernaghan & Co. Limited, dated
December 31, 1999.
4.13 Placement Agency Agreement by and between JAWS Technologies, Inc., a
Nevada corporation, and Thomson Kernaghan & Co. Limited, dated
February 15, 2000.
4.14 Placement Agency Agreement by and between JAWS Technologies, Inc., a
Nevada corporation, and SmallCaps Online LLC, dated February 15,
2000.
4.15* Form of Subscription Agreement to purchase 235,295 Units of JAWS
Technologies, Inc., a Nevada corporation, by and between JAWS
Technologies, Inc., a Nevada corporation, and BPI Canadian Small
Companies Fund, dated December 20, 1999.
4.16 Schedule of Subscribers that purchased subscriptions pursuant to the
Form of Subscription Agreement set forth above in 10.14.
10.1* Director's Agreement between JAWS Technologies, Inc., a Nevada
corporation, and Arthur Wong dated July 1998.
10.2* Director's Agreement between JAWS Technologies, Inc., a Nevada
corporation, and Julia Johnson, dated July 30, 1998.
10.3* Letter Agreement between JAWS Technologies, Inc., a Nevada
corporation, and Arrow Communications (ApexMail), dated August 10,
1999.
10.4* Addendum to the Letter Agreement between JAWS Technologies, Inc., a
Nevada corporation, and ApexMail.net, dated September 28, 1999.
10.5* Assignment from James L. A. Morrison to JAWS Technologies Inc., a
Nevada corporation, dated October 9, 1998.
10.6* Notification of Assignment from United States Department of Commerce,
Patent and Trademark Office, dated March 15, 1999.
10.7* Indemnity Agreements by and between JAWS Technologies, Inc., a Nevada
corporation, and Ms. Julia L. Johnson.
10.8* Indemnity Agreements by and between JAWS Technologies, Inc., a Nevada
corporation, and Mr. Arthur Wong.
10.9* Form of Stock Purchase Agreement to purchase 1,000,000 shares of
common stock and warrants to purchase 834,000 shares of common stock
by and between JAWS Technologies, Inc., a Nevada corporation, and
Glentel Inc., dated June 21, 1999.
10.10* Schedule of purchasers which purchased shares of common stock
pursuant to the Form of Stock Purchase Agreement set forth in 10.09.
10.11* Form of Investor Rights Agreement by and between JAWS Technologies,
Inc., a Nevada corporation, and Glentel Inc., dated June 21, 1999.
<PAGE> 59
10.12* Schedule of investors that received rights pursuant to the Form of
Investors Rights Agreement set forth above in 10.11.
10.13* Debenture Amendment and Settlement Agreement, dated November 17, 1999
and effective as of November 1, 1999, by and between JAWS
Technologies, Inc., a Nevada corporation, and Thomson Kernaghan & Co.
Limited..
10.14* Form of Employment Agreement.
10.15* Schedule of officers of JAWS Technologies, Inc., a Nevada
corporation, who executed employment agreements the form of which is
set forth in Exhibit 10.20.
21.1 Subsidiaries of JAWS Technologies, Inc., a Nevada corporation: JAWS
Technologies Inc., an Alberta corporation, Pace Systems Group Inc.,
JAWS Technologies, Inc., an Ontario corporation, JAWS Technologies
(Delaware), Inc., a Delaware corporation and JAWS Acquisition Corp.,
an Alberta corporation.
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule.
----------------------------------
* Previously filed with JAWS' registration statement on Form S-1 (File No.
333-30406), filed with the Securities and Exchange Commission on February
14, 2000.
<PAGE> 1
EXHIBIT 4.13
JAWS TECHNOLOGIES, INC.
1013 17TH AVENUE, S.W.
CALGARY, ALBERTA T2T0A7
CANADA
PLACEMENT AGENCY AGREEMENT
Thomson Kernaghan & Co. Limited
356 Bay Street, 10th Floor
Toronto, M5H 2V2
Attention: Lionel Conacher
Gentlemen:
This Placement Agency Agreement (the "Agreement") confirms the retention
by JAWS Technologies, Inc., a Nevada corporation (the "Company"), of Thomson
Kernaghan & Co. Limited, (the "Canadian Placement Agent"), to act as the sales
agent in Canada and outside of Canada and the United States on a best efforts
basis in connection with the private placement of Units (as defined below) of
the Company on the terms set forth below, including the financial and other
terms set forth in Schedule A hereto, which is hereby incorporated by reference
into this Agreement.
1. PLACEMENT
(a) Each unit (a "Unit") shall consist of one share of common stock, par
value $.001 per share (the "Common Stock), of the Company, and a warrant (each,
a "Warrant" and collectively, the "Warrants") to acquire 1/2 (one-half) of a
share of Common Stock at an exercise price of US$ 6.50 per share. The placement
of the Units (the "Placement") will be made pursuant to the Canadian Memorandum
(as defined in Section 2 below). Except as provided in Schedule A, the Units
(and the shares of Common Stock and Warrants included therein) will not be
registered under the Securities Act of 1933, as amended, or any applicable
successor statute (the "Act"), but will be issued in reliance on the private
offering exemption available under Section 4(2) of the Act and the rules and
regulations promulgated thereunder, including Regulation D, and outside the
United States, through exemptions from any prospectus requirements of applicable
foreign securities laws. The Canadian Placement Agent understands that all
subscriptions for Units are subject to acceptance by the Company. The Company
and the Canadian Placement Agent reserve the right in their reasonable
discretion to accept or reject any or all subscriptions for Units in whole or in
part. Investors shall be required to subscribe for a minimum number of Units
with additional increments available at the Company's discretion as set forth in
Schedule A or as provided in the Canadian Memorandum. Any subscription monies
received by the Canadian Placement Agent from investors will be handled in
accordance with Rule 15c2-4 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") , whether or not the Canadian
1
<PAGE> 2
Placement Agent is subject to the Exchange Act, and as otherwise may be
prescribed by the terms of the Canadian Memorandum. Without limiting the
generality of the foregoing, the Canadian Placement Agent agrees with the
Company that, in connection with the Placement and the Concurrent Offering, it
will receive all funds in connection therewith and promptly deposit the same in
a separate bank account, as agent or trustee for the persons who have a
beneficial interest therein, until the closing occurs, the offerings are
terminated or another appropriate event or contingency has occurred, at which
time the funds shall be promptly transmitted or retained, as the case may be, to
the Company or the person entitled thereto.
(b) The Company is making an offering of the Units, concurrent with the
making of the private placement of Units in Canada and outside Canada and the
United States as described herein (the "Placement"), in the United States
through the Company's US Placement agent, SmallCaps Online LLC ("SmallCaps").
Such concurrent United States offering is referred to herein as the "Concurrent
Offering." The Canadian Placement Agent will only offer Units to prospective
investors in Canada and outside of Canada and the United States and SmallCaps
will only offer Units to prospective investors in the United States. The terms
of the Concurrent Offering are substantially identical to the terms of this
Placement, except to the extent that either the laws of the United States,
Canada and/or outside of Canada and the United States require special disclosure
in the Canadian Memorandum and/or terms in this Agreement for the placement
agent agreement with SmallCaps and/or terms in the Subscription Agreement (as
defined below) or the subscription agreement between the Company and United
States investors. The Units, Shares and Warrants sold in the United States,
Canada and outside of Canada and the United States will be identical in all
respects. For purposes of calculating the minimum and maximum sizes of the
offering, Units sold in the United States, Canada and outside of Canada and the
United States will be aggregated.
2. OFFERING CIRCULAR
The Company will prepare an Offering Circular relating to the Company
(such Offering Circular, together with the exhibits and attachments thereto or
available thereunder and any amendments or supplements thereto prepared and
furnished by the Company, being referred to herein as the "Canadian Memorandum")
which describes the Placement and certain investment risks relating thereto. The
Company has been and will continue to be responsible for preparing and filing
required documentation, if any, with the authorities in the United States and
provincial securities regulatory authorities in Canada prior to (and subsequent
to, if required by the laws of such jurisdiction) the distribution of the
Canadian Memorandum to prospective investors (the parties acknowledging,
however, that the offering of Units is intended and expected to be wholly or
partially exempt from filing requirements in the United States by reason of an
"accredited investor" exemption). The Canadian Placement Agent and its counsel
and the Company and its counsel will jointly prepare a form of Subscription
Agreement to be entered into between the Company and Canadian and other
purchasers of the Units (the "Subscription Agreement"), with such
representations, warranties, conditions and covenants as are customary in
private placements of corporate equity securities with United States accredited
investors. The Canadian Placement Agent and its counsel shall have an
opportunity to review the final form of the Canadian Memorandum and Subscription
Agreement prior to the distribution thereof to prospective investors, and the
Canadian
2
<PAGE> 3
Memorandum and the Subscription Agreement will be the only offering documents
(other than cover letters which may be used by the Canadian Placement Agent, and
any documents made available to investors in accordance with the terms of the
Canadian Memorandum) shown to prospective investors. The Company and its counsel
will advise the Canadian Placement Agent and its counsel in writing of those
jurisdictions in which Units may lawfully be offered and sold, and the manner in
which the Units may lawfully be offered and sold in each such jurisdiction, in
connection with the Placement, and the Canadian Placement Agent agrees that the
Units will be offered or sold only in such jurisdictions and in the manner
specified by the Company. The offering of Units will be made in accordance with
the requirements of Section 4(2) under the Act to investors that qualify as
accredited investors, as defined in Rule 501(a) under the Act ("Accredited
Investors"), purchasing for their own account for investment purposes and not
for distribution in violation of securities laws.
3. PLACEMENT AGENT
(a) Upon the terms and conditions set forth in this Agreement and
Schedule A hereto, the Company hereby employs the Canadian Placement Agent as
its sales agent in Canada and outside of the United States and Canada for the
purpose of placing the Units for the account and risk of the Company. This
appointment shall be exclusive with respect to the Placement, and the Company
shall not have the right to appoint additional sales agents in Canada and
outside of the United States without the Canadian Placement Agent's express
prior written consent (other than SmallCaps with respect to the Concurrent
Offering); provided that this Agreement shall not give the Canadian Placement
Agent any right to act as sales agent or receive compensation in connection with
any future offerings sponsored by the Company absent a separate agreement to
such effect between the Canadian Placement Agent and the Company. Subject to the
provisions of Section 5 hereof and to the performance by the Company of all of
its obligations to be performed hereunder, the Canadian Placement Agent agrees
to use its best efforts to assist in arranging for sales of Units. The Canadian
Placement Agent will also assist the Company in the preparation of the Canadian
Memorandum and presentations to prospective investors. It is understood and
agreed that this Agreement does not create any partnership, joint venture or
other similar relationship between or among the Canadian Placement Agent and the
Company, that the Canadian Placement Agent is acting only as a sales agent and
that, except as specifically set forth in Schedule A, there is no undertaking on
the Canadian Placement Agent's part to purchase any of the Units or to arrange
or participate in any other financing in connection with the Placement.
(b) For the services of the Canadian Placement Agent hereunder, the
Company will pay or cause to be paid to the Canadian Placement Agent the
commissions, fees and expenses ("fees") stated in Schedule A (it being
understood and agreed that the Placement Agent may deduct such fees from the
aggregate amount of subscriptions received by the Placement Agent in respect of
any Closing).
(c) Upon receipt by the Company from a proposed purchaser of completed
subscription materials in the form set prepared by the Company, and such other
documents
3
<PAGE> 4
as the Company requests, the Company and the Canadian Placement Agent will
determine in their reasonable discretion whether they wish to accept or reject
the subscription.
(d) Subject to the provisions relating thereto contained in Schedule A,
the Canadian Placement Agent's commissions, fees and expenses based on a
percentage of gross proceeds and all other expenses reimbursable or payable by
the Company as provided herein or in Schedule A will be paid in full upon
transfer to the account of the Company of the purchase price of such Units;
provided, however, that no such commissions or fees shall be payable until
subscriptions for the minimum number of Units described in the Canadian
Memorandum have been accepted and the purchase price of the Units to be
purchased from the Company has been transferred to the account of the Company.
For purposes of calculating the minimum and maximum sizes of the offering, Units
sold in the United States, Canada and outside of the United States will be
aggregated.
(e) The Company and the Canadian Placement Agent agree to the terms of,
and to comply with, the agreements set forth on Schedule A hereto as if such
terms and agreements were repeated herein in their entirety.
4. PLACEMENT EXPENSES
(a) The Company will pay, whether or not any Units are sold in
connection with the Placement, all reasonable, accountable costs and expenses
incurred by the Canadian Placement Agent in connection with the Placement as
provided in Schedule A. Reimbursement of the Canadian Placement Agent's
reasonable, accountable out-of-pocket costs and expenses hereunder shall be made
promptly in full in the event the Canadian Placement Agent elects to terminate
this Agreement in accordance with Section 5.
(b) Without limiting the generality of the foregoing, the Company hereby
agrees to pay all fees, charges and expenses incident to the performance by the
Company and the Canadian Placement Agent of its respective obligations
hereunder, including, without limitation, all fees, charges, and expenses in
connection with (i) the preparation, printing, reproduction, filing,
distribution and mailing of the Canadian Memorandum and all other documents
relating to the offering, purchase, sale and delivery of the Units, and any
supplements or amendments thereto, including the fees and expenses of counsel to
the Company and to the Canadian Placement Agent and the cost of all copies
thereof, (ii) the issuance, sale, transfer and delivery of the Units, the
Shares, and the Warrants, including any transfer or other taxes payable thereon
and the fees of any transfer agent, warrant agent or registrar, (iii) the
registration or qualification of the Units or the securing of an exemption
therefrom under state of foreign "blue sky" or securities laws, including,
without limitation, filing fees payable in the jurisdictions in which such
registration or qualification or exemption therefrom is sought, the costs of
preparing preliminary, supplemental and final "blue sky surveys" relating to the
offer and sale of the Units and the fees and disbursements of counsel to the
Placement Agents in connection with such "blue sky" matters, and (iv) the filing
fees, if any, payable to the applicable securities regulatory authorities.
4
<PAGE> 5
5. TERMINATION OF PLACEMENT
The Placement may be terminated by the mutual consent of the Canadian
Placement Agent and SmallCaps at any time by them giving written notice to the
Company if (a) in the opinion of the Canadian Placement Agent, the Canadian
Memorandum contains an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make the
statements appearing therein not misleading in the light of the circumstances in
which they were made, and the Company shall not have corrected such untrue
statement or omission to the reasonable satisfaction of the Canadian Placement
Agent and SmallCaps and their counsel within ten business days after the Company
receives notice of such untrue statement or omission, provided that
notwithstanding such ten business day period, no such closing shall occur
hereunder until the Canadian Placement Agent and SmallCaps shall have notified
the Company that they are satisfied, in their reasonable determination, that the
Company has taken such steps (including circulating amended offering materials)
to allow any such closing to occur, or (b) the Company shall be in material
breach of any representation, warranty or covenant made by it in this Agreement.
6. CLOSING
(a) Subject to the conditions set forth in Section 10 hereof, if
subscriptions to purchase at least 500,000 Units in the aggregate in the
Placement and the Concurrent Offering have been received prior to the expiration
of the offering period and accepted by the Company, the initial closing under
this Agreement (the "Closing") shall be held at the offices of Battle Fowler
LLP, Park Avenue Tower, 75 East 55th Street, New York, New York, at 10:00 A.M.,
New York time, on February 18, 2000 or at such other place, time and/or date as
the Company and the Canadian Placement Agent shall agree upon. The Company shall
provide the notice required by the preceding sentence as promptly as
practicable. The date upon which the Closing is held shall hereinafter be
referred to as the "Closing Date."
(b) Subject to the conditions set forth in Section 10 hereof, if,
subsequent to the date the subscriptions referred to in Section 6(a) hereof are
received and accepted and prior to the expiration of the offering period,
additional subscriptions to purchase Shares are received from prospective
investors, which subscriptions are accepted by the Company, one or more
additional closings under this Agreement (each, an "Additional Closing") shall
be held at the offices of Battle Fowler LLP, Park Avenue Tower, 75 East 55th
Street, New York, New York, at 10:00 A.M., New York time, on the third business
day following the date upon which the Canadian Placement Agent receives notice
from the Company that additional subscriptions have been so accepted, or at such
other place, time or date as the Company and the Canadian Placement Agent shall
agree upon. The Company shall notify the Canadian Placement Agent as promptly as
practicable whether any additional subscriptions so received have been accepted.
The date upon which any additional Closing is held shall hereinafter be referred
to as an "Additional Closing Date."
(c) Promptly after the Closing Date or an Additional Closing
Date, as the case may be, the Company shall deliver to the purchasers (or the
Canadian Placement Agent,
5
<PAGE> 6
on behalf of the purchasers) of Unit certificates representing the Shares and
agreements representing the Warrants to which they are entitled.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
The Company represents and warrants to, and covenants with, the Canadian
Placement Agent that:
(a) The Company has been validly formed and is legally existing as a
corporation in good standing under the laws of the State of Nevada, with full
corporate power and authority to conduct its business as currently conducted,
and is in good standing in each jurisdiction in which the conduct of its
business or the nature of its properties requires such qualification or
authorization, except where the failure to be so qualified or authorized and in
good standing could not reasonably be expected to have a material adverse effect
on the business and financial condition of the Company and its subsidiaries,
taken as a whole (a "Material Adverse Effect"). As of the date hereof, the
Company does not have, directly or indirectly, any material subsidiaries other
than Jaws Technologies Inc. an Alberta corporation ("Jaws Canada"), Pace Systems
Group Inc., an Ontario corporation ("Pace"), Jaws Technologies (Delaware), Inc.,
a Delaware corporation ("Jaws Delaware"), Offsite Data Services Ltd., an Alberta
corporation ("Offsite"), Jaws Technologies, Inc., an Ontario corporation ("Jaws
Ontario") and Jaws Acquisition Corp., an Alberta corporation ("JAC" and
collectively with Jaws Canada, Pace, Jaws Delaware, and Offsite, the
"Subsidiaries"). Each Subsidiary has been duly organized, is validly existing
and in good standing under the laws of the jurisdiction of its organization, has
the power and authority to own its properties and to conduct its business and is
duly qualified and authorized to transact business and is in good standing in
each jurisdiction in which the conduct of its business or the nature of its
properties requires such qualification or authorization, except where the
failure to be so qualified or authorized and in good standing could not
reasonably be expected to have a Material Adverse Effect. All of the outstanding
capital stock of each Subsidiary is owned by the Company, free and clear of any
liens, and has been duly authorized and validly issued, and is non-assessable,
except for such failures as could not reasonably be expected to have a Material
Adverse Effect.
(b) Neither the Canadian Memorandum nor the Subscription Agreement
contain any untrue statement of a material fact, and the Canadian Memorandum and
the Subscription Agreement taken as a whole will not omit to state any material
fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading, except that the
Company shall have no liability for any information provided to the Company in
writing by, and relating to, the Canadian Placement Agent, for use in and used
in the Canadian Memorandum. It is understood that any summary in the Canadian
Memorandum of a document which appears therein in full (either as signed or
substantially in the form to be signed) does not constitute an untrue or
misleading statement merely because it is a summary; provided, however, that any
such summary may not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements made, in light of the
circumstances under which they were made, not misleading. If, at any time before
the Placement is completed or terminated or before all subscriptions are
6
<PAGE> 7
accepted by the Company, there should be any change which would cause the
Canadian Memorandum or the Subscription Agreement not to comply with this
paragraph 7(b), the Company will promptly advise the Canadian Placement Agent
thereof and prepare and furnish the Canadian Placement Agent with, for
distribution to investors, after prior review and approval by the Canadian
Placement Agent and their counsel (such approval not to be unreasonably
withheld), such copies of such supplements or amendments to the Canadian
Memorandum and the Subscription Agreement as will cause the Canadian Memorandum
and the Subscription Agreement, as so supplemented or amended, to comply with
this paragraph 7(b), and will authorize the Canadian Placement Agent to make to
investors, if (i) deemed necessary by counsel to the Canadian Placement Agent
and approved by the Canadian Placement Agent or (ii) if deemed necessary by
counsel to the Company, an offer of rescission.
(c) The execution, delivery and performance of this Agreement, and all
other documents to be entered into by the Company in connection with any
transaction described in the Canadian Memorandum and the consummation of the
transactions contemplated hereby and thereby have been or will be prior to such
execution, delivery, performance or consummation, as the case may be, duly and
validly authorized by the Company and do not and will not (i) constitute, or
result in, a breach or violation of any of the terms, provisions or conditions
of the articles of incorporation or bylaws of the Company or any of its
Subsidiaries, (ii) constitute, or result in, a material violation of any
applicable statute, law, ordinance or regulation of any state, territory or
other jurisdiction, or (iii) violate, constitute, or result in, a default under
(or an event which with the passing of time or the giving of notice or both
would constitute a default under) or breach of the terms, provisions or
conditions of any material indenture, note, contract, commitment, instrument or
document to which the Company or any of its Subsidiaries is or will be a party
or by which the Company or any of their respective properties are bound, or any
award, judgment, decree, rule or regulation of any court or governmental or
regulatory agency or body having jurisdiction over the Company or any of its
Subsidiaries or their respective activities or properties, in each case which
breach, violation or default would have a Material Adverse Effect; and no
material consent, approval, authorization or order of any court or governmental
or regulatory agency or body is required on the part of the Company for the
lawful consummation of the transactions contemplated hereby and thereby, except
for such consents and approvals with respect to the offer and sale of Units in
certain jurisdictions which are identified to you by counsel for the Company.
(d) Neither the Company nor any of its officers, employees, agents or
representatives has taken or will take any action which has caused or may cause
the Placement not to qualify for exemption from the registration requirements of
the Act or of United States federal or state, or other securities laws. In
connection with the Placement, the Company shall not offer or cause to be
offered the Units by any form of general solicitation or general advertising as
defined in Rule 502(c) of Regulation D, has not taken and shall not take any
action (except for actions contemplated by the Canadian Memorandum) that would
cause the Placement to be integrated with other transactions under Rule 502(a)
of Regulation D.
7
<PAGE> 8
(e) This Agreement has been duly authorized, executed and delivered by
the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms (except
insofar as enforcement of the indemnification or contribution provisions hereof
may be limited by applicable laws or principles of public policy and subject, as
to enforcement, to the availability of equitable remedies and limitations
imposed by bankruptcy, insolvency, reorganization and other similar laws and
related court decisions relating to or affecting creditors' rights generally).
(f) The Company will not offer the Units for sale hereunder on the basis
of any communications or documents relating to the Canadian Placement Agent or
the Units except the Canadian Memorandum and the exhibits thereto and documents
described or referred to therein (including the Subscription Agreement).
(g) So long as the Units (or the Shares, Warrants or shares of Common
Stock underlying the Warrants) are "restricted securities" within the meaning of
Rule 144(a)(3) under the Act, the Company, during any period in which it is not
subject to and in compliance with Section 13 or 15(d) of the Exchange Act, or is
not exempt from such reporting requirements pursuant to and in compliance with
Rule 12g3-2b under the Exchange Act, provide to each holder of such Units and to
each prospective purchaser (as designated by such holder) of such Units, upon
the request of such holder or prospective holder, any information required to be
provided by Rule 144A(d)(4) under the Act.
(h) The Company will initially invest the proceeds of the Offering of
the Units and all other funds of the Company in such a manner so as to cause the
Company not to be subject to the United States Investment Company Act of 1940,
as amended (the "1940 Act"), and will thereafter use its best efforts to avoid
the Company's becoming subject to the 1940 Act.
(i) In addition to the foregoing, to the extent not set forth herein,
the Canadian Placement Agent may rely on the representations and warranties made
by the Company in the Subscription Booklet provided by the Company and used in
connection with the Placement.
8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
CANADIAN PLACEMENT AGENT
The Canadian Placement Agent hereby represents and warrants to, and
covenant with, the Company that:
(a) This Agreement has been duly authorized, executed and delivered by
the Canadian Placement Agent and constitutes the legal, valid and binding
obligation of the Placement Agent, enforceable against it in accordance with its
terms (except insofar as enforcement of the indemnification or contribution
provisions hereof may be limited by applicable laws or principles of public
policy and subject, as to enforcement, to the availability of equitable remedies
and limitations imposed by bankruptcy, insolvency, reorganization and
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<PAGE> 9
other similar laws and related court decisions relating to or affecting
creditors' rights generally).
(b) The Canadian Placement Agent will cooperate with the Company to
ensure that the offering and sale of the Units will comply with the requirements
of Rule 506 under the Act, including, without limitation, the general conditions
contained in Regulation D and the federal securities laws, and will follow the
reasonable advice of the Company with respect to the manner in which to offer
and sell the Units so as to ensure that the offering and sale thereof will
comply with the securities laws of the jurisdictions which is not listed in
Exhibit A or in any jurisdiction in which Units are offered by the Canadian
Placement Agent, and the Canadian Placement Agent will not make an offer of
Units in any jurisdiction which is not listed on Exhibit A or in any
jurisdiction in which the Company advises it in writing that such offer would be
unlawful for the Canadian Placement Agent to offer or sell securities.
(c) The Canadian Placement Agent is a registered as a broker-dealer in
each jurisdiction in which it is required to be registered as such in order to
offer and sell the Units in such jurisdiction.
(d) The Canadian Placement Agent has not and will not make an offer of
Units (or of any securities, the offering of which may be integrated with the
Placement), on the basis of any communications or documents relating to the
Company or the Units except the Canadian Memorandum and the exhibits thereto and
documents described or referred to therein (including the Subscription
Agreement), and the cover letters referred to in Section 2 hereof. Without
limiting the generality of the foregoing, the Canadian Placement Agent has not
and will not make any representation as to any rate of return on investment that
an offeree may obtain from the ownership of Units other than as set forth in the
Canadian Memorandum. The Placement Agent will deliver a copy of the Canadian
Memorandum to each prospective investor solicited by it prior to such offeree's
execution of a Purchase Agreement or, in the case of amendments or supplements
to the Canadian Memorandum (other than those amendments and supplements approved
in writing by the Company but designated in writing as not subject to this
requirement), prior to such offeree's execution of an acknowledgment of receipt
of such amendment or supplement and reconfirmation of intent to subscribe.
(e) The Canadian Placement Agent has not and will not make an offer of
Units on behalf of the Company, or of any securities, the offering of which may
be integrated with the Placement, by any form of general solicitation or general
advertising in violation of Rule 502(c) of Regulation D such as would cause the
offering of Units not to qualify under Section 4(2) of the Act as a transaction
exempt from Section 5 thereof. The Canadian Placement Agent has not and will not
supply in writing for inclusion in the Canadian Memorandum or any related sales
materials any information relating to the Canadian Placement Agent containing
any untrue statement of a material fact or omitting to state any material fact
required to be stated therein or necessary to make such information, in light of
the circumstances under which it is used, not misleading.
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<PAGE> 10
(f) The Placement Agent will not transmit to the Company any written
offer from an offeree to purchase a Unit or Units unless, immediately prior
thereto, it reasonably believes that:
(i) the offeree is an Accredited Investor; and
(ii) the offeree meets all other offeree and/or purchaser
suitability standards, if any, required under applicable securities laws
and regulations.
(g) The Canadian Placement Agent will exercise reasonable care to
determine that prospective investors are not "underwriters" within the meaning
of Section 2(11) of the Act, and in that connection will obtain from each
investor purchasing Units in the Placement a duly executed Subscription
Agreement, in the form provided to the Canadian Placement Agent by the Company.
(h) The Canadian Placement Agent will periodically notify the Company of
the jurisdiction in which the Units are being offered by it or will be offered
by it pursuant to this Agreement, and will periodically notify the Company of
the status of the offering conducted pursuant to this Agreement.
(i) The Canadian Placement Agent will take such other action or refrain
from taking such action as the Company may reasonably request in order to comply
with all applicable United States laws and all applicable securities laws of
those jurisdictions listed in Schedule A of which the Company advises the
Canadian Placement Agent, including using its best efforts to cause offerees and
subscribers for Units to execute and deliver such additional documents and
instruments as the Company may reasonably require, except that the Company shall
be required to complete all necessary securities qualifications with respect to
those jurisdictions listed in Schedule A as provided in Section 2.
(j) The Canadian Placement Agent has delivered or caused to be delivered
to each prospective investor the Canadian Memorandum.
9. COVENANTS
(a) Covenants of the Company. The Company covenants to the Canadian
Placement Agent that it will:
(i) Notify the Canadian Placement Agent as soon as
practicable, and confirm such notice promptly in writing, (A) when any event
shall have occurred during the period commencing on the date hereof and ending
on the later of the Closing Date and the last Additional Closing Date (if any)
as a result of which the Canadian Memorandum would include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and (B) of
the receipt of any notification with respect to the modification, recission,
withdrawal or suspension of the qualification or registration of the Shares or
of an exemption from such registration or qualification in any jurisdiction. The
Company will use its reasonable best
10
<PAGE> 11
efforts to prevent the issuance of any such modification, rescission, withdrawal
or suspension and, if any such modification, rescission, withdrawal or
suspension is issued and you so request, to obtain the lifting thereof as
promptly as possible.
(ii) Not supplement or amend the Canadian Memorandum unless
the Canadian Placement Agent shall have approved of such supplement or amendment
in writing. If, at any time during the period commencing on the date hereof and
ending on the later of the Closing Date and the last Additional Closing Date (if
any), any event shall have occurred as a result of which the Canadian Memorandum
contains any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, or if, in the opinion of counsel to the Company or counsel to
the Canadian Placement Agent, it is necessary at any time to supplement or amend
the Canadian Memorandum to comply with the Act, Regulation D or any applicable
securities or "blue sky" laws, the Company will promptly prepare an appropriate
supplement or amendment (inform and substance reasonably satisfactory to you)
which will correct such statement or omission or which will effect such
compliance.
(iii) Deliver without charge to the Canadian Placement Agent
such number of copies of the Canadian Memorandum and any supplement or amendment
thereto as may reasonably be requested by the Canadian Placement Agent.
(iv) Not directly or indirectly, solicit any offer to buy
from, or offer to sell to, any person any Units except through the Canadian
Placement Agent or SmallCaps.
(v) Not solicit any offer to buy or offer to sell Units by
any form of general solicitation or advertising, including, without limitation,
any advertisement, article, notice or other communication published in any
newspaper, magazine or similar medium or broadcast over television or radio or
any seminar or meeting whose attendees have been invited by any general
solicitation or advertising.
(vi) At all times during the period commencing on the date
hereof and ending on the later of the Closing Date and the last Additional
Closing Date (if any), provide to each prospective investor or his purchaser
representative, if any, on reasonable request, such information (in addition to
that contained in the Canadian Memorandum) concerning the Placement, the Company
and any other relevant matters as it possesses or can acquire without
unreasonable effort or expense and extend to each prospective investor or his
purchaser representative, if any, the opportunity to ask questions of, and
receive answers from the Company concerning the terms and conditions of the
Placement and the business of the Company and to obtain any other additional
information, to the extent it possesses the same or can acquire it without
unreasonable effort or expense, as such prospective investor or purchaser
representative may consider necessary in making an informed investment decision
or in order to verify the accuracy of the information furnished to such
Prospective Investor or purchaser representative, as the case may be.
(vii) Notify the Canadian Placement Agent promptly of the
acceptance or rejection of any subscription. Any subscription unreasonably
rejected shall
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<PAGE> 12
be deemed to have been accepted for purposes of determining whether at least
500,000 Units have been sold solely for the purpose of determining whether the
Canadian Placement Agent is entitled to its compensation pursuant to Schedule A
hereof.
(viii) File five (5) copies of a Notice of Sales of
Securities on Form D with the Securities and Exchange Commission (the
"Commission") no later than 15 days after the first sale of the Units, if
required by law. The Company shall file promptly such amendments to such Notices
on Form D as shall become necessary and shall also comply with any filing
requirement imposed by the laws of any province or jurisdiction in which offers
and sales are made. The Company shall furnish you with copies of all such
filings.
(ix) Place the following legend on all certificates
representing the Units and the Warrants:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND NEITHER
THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS WHICH, IN THE
OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE."
(x) Not, directly or indirectly, engage in any act or
activity which may jeopardize the status of the offering and sale of the Units
as exempt transactions under the Act or under the securities or "blue sky" laws
of any jurisdiction in which the Placement may be made.
(xi) Apply the net proceeds from the sale of the Units for
the purposes set forth under the caption "Use of Proceeds" in the Canadian
Memorandum in substantially the manner indicated thereunder.
(xii) Not, during the period commencing on the date hereof and
ending on the later of the Closing Date and the last Additional Closing Date (if
any) issue any press release or other communication or hold any press conference
with respect to the Company, its financial condition, results of operations,
business properties, assets, liabilities or future prospects of the Placement,
without the prior written consent of the Canadian Placement Agent and SmallCaps,
which consent will not be unreasonably withheld.
(xiii) Not, prior to the completion of the Offering, bid for,
purchase, attempt to induce others to purchase, or sell, directly or indirectly,
any shares of Common Stock or any other securities in violation of the
provisions of Regulation M under the Exchange Act.
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<PAGE> 13
10. CONDITIONS OF THE CANADIAN PLACEMENT AGENT'S OBLIGATIONS
The obligations of the Canadian Placement Agent pursuant to this
Agreement shall be subject, in its discretion, to the continuing accuracy of the
representations and warranties of the Company contained herein and in each
certificate and document contemplated under this Agreement to be delivered to
the Canadian Placement Agent, as of the date hereof and as of the Closing Date
(and, if applicable, each Additional Closing Date), to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) At the Closing and each Additional Closing, as the case may
be, the Placement Agents shall have received the favorable opinion of each of
Battle Fowler LLP, Bennett Jones, Sonfield & Sonfield LLP, Lionel, Sawyer &
Collins LLP, and Beard Winter LLP, in each case, as counsel for the Company, in
form and substance reasonably satisfactory to the Placement Agents.
(b) On or prior to the Closing Date and each Additional Closing
Date, as the case may be, the Canadian Placement Agent shall have been furnished
such information, documents and certificates as it may reasonably require for
the purpose of enabling it to review the matters referred to in this Section 10
and in order to evidence the accuracy, completeness or satisfaction of any of
the representations, warranties, covenants, agreements or conditions herein
contained, or as it may otherwise reasonably request.
(c) At the Closing and each Additional Closing, as the case may
be, the Canadian Placement Agent shall have received a certificate of the chief
executive officer of the Company, dated the Closing Date or such Additional
Closing Date, as the case may be, to the effect that, as of the date of this
Agreement and as of the Closing Date or such Additional Closing Date, as the
case may be, the representations and warranties of the Company contained herein
were and are accurate, and that as of the Closing Date or such Additional
Closing Date, as the case may be, the obligations to be performed by the Company
hereunder on or prior thereto have been fully performed.
(d) All proceedings taken in connection with the issuance, sale
and delivery of the Shares shall be reasonably satisfactory in form and
substance to you and your counsel.
Any certificate or other document signed by any officer of the Company
and delivered to you or to your counsel as required hereunder shall be deemed a
representation and warranty by the Company hereunder as to the statements made
therein. If any condition to your obligations hereunder has not been fulfilled
as and when required to be so fulfilled, you may terminate this Agreement or, if
you so elect, in writing waive any such conditions which have not been fulfilled
or extended the time for their fulfillment. In the event that you elect to
terminate this Agreement, you shall notify the Company of such election in
writing. Upon such termination, neither party shall have any further liability
or obligation to the other except as provided in Section 11 hereof.
11. INDEMNIFICATION
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<PAGE> 14
(a) The Company agrees to indemnify and hold harmless the Canadian
Placement Agent, any person who controls the Placement Agent within the meaning
of the Act, Section 20(a) of the Exchange Act or any applicable statute and each
partner, director, officer, employee, agent and representative of the Canadian
Placement Agent or any person who controls any such Placement Agent from and
against any loss, damage, expense, liability or claim, or actions or proceedings
in respect thereof (including, without limitation, reasonable attorneys' fees
and expenses incurred in investigating, preparing or defending against any
litigation commenced) which any such person may incur or which may be made or
brought against any such person arising out of or based upon (i) any breach of
any of the agreements, representations or warranties of the Company contained in
this Agreement or Schedule A, (ii) any violation of securities laws attributable
to the offer or sale of Units in a jurisdiction listed in Schedule A and in a
manner authorized by the Company, or (iii) any violation of law by the Company
or any Affiliate thereof, or any director, officer, employee, agent or
representative of any of them, related to or arising out of the Placement. This
indemnity agreement by, and the agreements, warranties and representations of,
the Company shall survive the offer, sale and delivery of the Units and the
termination of this Agreement and shall remain in full force and effect
regardless of any investigation made by or on behalf of any person indemnified
hereunder, and termination of this Agreement and acceptance of any payment for
the Units hereunder.
(b) The Canadian Placement Agent agrees to indemnify and hold harmless
the Company and its Affiliates, any person who controls any of them within the
meaning of the Act, Section 20(a) of the Exchange Act or any applicable statute,
and each officer, director, employee, agent and representative of the Company or
any of its Affiliates from and against any loss, damage, expense, liability or
claim or actions or proceedings in respect thereof (including, without
limitation, reasonable attorneys' fees and expenses incurred in investigating,
preparing or defending against any litigation commenced) which any such person
may incur or which may be made or brought against any such person, but only to
the extent the same arises out of or is based upon (i) any breach of any of the
agreements, representations or warranties of the Canadian Placement Agent
contained in this Agreement or Schedule A or (ii) any untrue statement of a
material fact in any information provided to the Company in writing by, and
relating to, the Canadian Placement Agent, expressly for use in and used in the
Canadian Memorandum, or any omission in any information provided to the Company
in writing by, and relating to, the Canadian Placement Agent, expressly for use
in and used in the Canadian Memorandum of any material fact necessary in order
to make the statements made, in light of the circumstances under which they were
made, not misleading. This indemnity agreement by, and the agreements,
warranties and representations of, the Canadian Placement Agent shall survive
the offer, sale and delivery of the Units and shall remain in full force and
effect regardless of any investigation made by or on behalf of any person
indemnified hereunder, and termination of this Agreement and acceptance of any
payment for the Units hereunder.
(c) If any action is brought against a party (the "Indemnified Party")
in respect of which indemnity may be sought against one or more other parties
(the "Indemnifying Party" or "Indemnifying Parties"), the Indemnified Party
shall promptly notify the Indemnifying Party or Parties in writing of the
institution of such action; provided, however, the failure to give
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<PAGE> 15
such notice shall not release the Indemnifying Party or Parties from its or
their obligation to indemnify the Indemnified Party hereunder except to the
extent the Indemnifying Party actually incurs damage by reason of such failure
and shall not release the Indemnifying Party or Parties from any other
obligations or liabilities to the Indemnified Party in any event. The
Indemnifying Party or Parties may at its or their own expense elect to assume
the defense of such action, including the employment of counsel reasonably
acceptable to the Indemnified Party; provided, however, that no Indemnifying or
Indemnified Party shall consent to the entry of any judgment or enter into any
settlement by which the other party is to be bound without the prior written
consent of such other party, which consent shall not be unreasonably withheld.
In the event the Indemnifying Party or Parties assume a defense hereunder, the
Indemnified Party shall be entitled to retain its own counsel in connection
therewith and, except as provided below, shall bear the fees and expenses of any
such counsel, and counsel to the Indemnified Party or Parties shall cooperate
with such counsel to the Indemnifying Party in connection with such proceeding.
If an Indemnified Party reasonably determines that there are or may be differing
or additional defenses available to the Indemnified Party which are not
available to the Indemnifying Party, or that there is or may be a conflict
between the respective positions of the Indemnifying Party and of the
Indemnified Party in conducting the defense of any action, then the Indemnifying
Party shall bear the reasonable fees and expenses of any counsel retained by the
Indemnified Party in connection with such proceeding. All references to the
Indemnified Party contained in this paragraph 8(c) include, and extend to and
protect with equal effect, any persons who may control the Indemnified Party
within the meaning of the Act, Section 20(a) of the Exchange Act or any
applicable statute, any successor to the Indemnified Party and each of its
partners, officers, directors, employees, Agents and representatives. The
indemnity agreements set forth in this paragraph 8 shall be in addition to any
other obligations or liabilities of the Indemnifying Party or Parties hereunder
or at common law or otherwise.
(d) If recovery is not available under the foregoing indemnification
provisions of this paragraph, for any reason other than as specified therein,
the party entitled to indemnification by the terms thereof shall be entitled to
contribution to losses, damages, liabilities and expenses of the nature
contemplated by such indemnification provisions. In determining the amount of
such losses, damages, contribution, there shall be considered the relative
benefits received by the Company on the one hand, and the Canadian Placement
Agent on the other hand from the Placement (which shall be deemed to be the
portion of the proceeds of the Placement realized by each party), the parties'
relative knowledge and access to information concerning the matter with respect
to which the claim was asserted, the opportunity to correct and prevent any
statement or omission, the relative culpability of the parties and any other
equitable considerations appropriate under the circumstances. No party shall be
liable for contribution with respect to any action or claim settled without its
consent. Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect of which a claim for contribution may be made against another party or
parties under this Section, notify such party or parties from whom contribution
may be sought, but the omission to so notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from any
obligation it or they may have under this Section or otherwise. For purposes of
this Section, each person, if any, who controls a party to this Agreement within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall
have the same rights to contribution as that party to this Placement Agreement.
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<PAGE> 16
(e) In any claim for indemnification for United States Federal or state
securities law violations, the party seeking indemnification shall place before
the court the position of (i) the United States Securities and Exchange
Commission and (ii) if applicable, any state securities commissioner or agency
having jurisdiction with respect to the issue of indemnification for securities
law violations.
12. MISCELLANEOUS
(a) The agreements set forth in this Agreement have been made and are
made solely for the benefit of the Company, the Canadian Placement Agent, their
affiliates and the respective heirs, personal representatives and permitted
successors and assigns thereof, and except as expressly provided herein nothing
expressed or mentioned herein is intended or shall be construed to give any
other person, firm or corporation any legal or equitable right, remedy or claim
under or in respect of this Agreement or any representation, warranty or
agreement herein contained. The term "successors and assigns" as used herein
shall not include any purchaser of any Units merely because of such purchase.
(b) Any notice or other communication required or appropriate under the
provisions of this Agreement shall be given in writing addressed as follows: (i)
if to the Company, at the address set forth above, Attention: President; and
(ii) if to the Canadian Placement Agent, Thomson Kernaghan & Co. Limited, 356
Bay Street, 10th Floor, Toronto, M5H 2V2 Attention: Lionel Conacher, or at such
other address as any party may designate to the others in accordance with this
paragraph.
(c) This Agreement and Schedule A constitute the entire agreement
between the parties hereto with respect to the Placement and supercedes any and
all prior agreements, and may be amended or modified only by a duly authorized
writing signed by such parties. This Agreement and Schedule A may be executed in
any number of counterparts, each of which shall be deemed an original and all of
which shall constitute a single instrument.
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 17
This Agreement is executed and shall be effective as of February 15,
2000, and shall be governed and construed in accordance with the laws of the
State of New York, without giving effect to conflicts of law provisions thereof.
JAWS TECHNOLOGIES, INC.
By: /s/ RIAZ MAMDANI
---------------------------
Name:
Title:
Agreed and accepted:
THOMSON KERNAGHAN & CO. LIMITED
By: /s/ LIONEL F. CONACHER
----------------------------
Name: Lionel F. Conacher
Title: Executive Vice President and Director
<PAGE> 18
SCHEDULE A
JAWS TECHNOLOGIES, INC.
The parties hereto enter into this Schedule A to the Placement Agency
Agreement (the "Agreement") effective as of February 15, 2000 (the "Effective
Date"), and incorporate said Agreement herein by reference in full.
Capitalized terms used in this Schedule and not otherwise defined have the
meanings provided in the Agreement. All dollar amounts are in $USD.
<TABLE>
<S> <C>
Issuer: JAWS Technologies, Inc., a Nevada corporation.
Placement Agents: US: SmallCaps Online LLC.
CDN: Thomson Kernaghan & Co. Limited.
Security Offered: Units, each Unit consisting of (i) one share of common stock, par value $.001 per share
(the "Common Stock"), of the Company and (ii) one warrant to purchase 1/2 (one half) a
share of Common Stock at an exercise price of $6.50 per share (subject to adjustment, as
described below), which warrants shall expire on the third anniversary date of the
effective date of the registration statement relating thereto (as described below).
Certificates representing shares of Common Stock and warrants shall bear appropriate
legends, including those relating to "restricted securities" under the Act.
Number of Units: A minimum of 500,000 Units (aggregate gross proceeds of $2,125,000) and a maximum of
900,000 Units (gross proceeds of $3,825,000).
Offering Price
(Per Unit): $4.25 per Unit.
Minimum Subscription: $100,000, or greater if required by local law.
Use of Proceeds: Working capital and general corporate purposes, and acquisitions yet to be identified.
Placement Period: From February 15, 2000 to February 22, 2000, unless extended by the Company in its sole
discretion. The anticipated date of the initial closing is February 18, 2000.
Sales Commissions, Warrants
and Financial Advisory Fees
to Placement Agents: An aggregate cash payment to the Placement Agents of a 7% sales commission and a 3%
financial advisory fee,
</TABLE>
A-1
<PAGE> 19
<TABLE>
<S> <C>
in each case, based upon the gross proceeds from all Units sold by or on behalf of the
Company.
On the closing date, the Company shall issue to the Placement Agents an aggregate number
of warrants to purchase shares of Common Stock equal to 10% of the number of Units sold,
one-half of which will constitute a financial advisory fee. The warrants will be
exercisable at an exercise price of $4.25 per share, and will expire on the third
anniversary date of the effectiveness of the registration statement relating thereto (as
described below). The warrants will be issued pursuant to a warrant agreement and/or form
of warrant certificate in form and substance satisfactory to the Company and the Placement
Agents.
Expenses of Placement Agents
to be Reimbursed: Each Placement Agent will receive reimbursement of all reasonable, accountable
out-of-pocket expenses, including legal fees and disbursements of one counsel, and travel
and due diligence expenses.
Jurisdictions in Which
Units Will Be Offered United States: New York
Canada: Ontario
Bermuda, Isle of Man, St. Vincent and the Grenadines
Registration of
Common Stock: The Company will use its best efforts to file, no later than 30 days following the final
closing date, a registration statement with the United States Securities and Exchange
Commission registering for resale all of the shares of Common Stock included in the Units,
and shares of Common Stock issuable upon exercise of the warrants included in the Units
and the warrants issued to the Placement Agents. The Company will use its best efforts to
cause such registration statement to become effective no later than 90 days following the
final closing date, and to cause such registration statement to remain effective until 30
days following the date on which all warrants have been exercised or expired, and/or have
been called and repurchased by the Company as provided below. During such period, the
Company will file all documents required to be filed by it under the Securities Exchange
Act of 1934, as amended.
If a registration statement covering such shares of Common Stock is not declared effective
within 90 days,
</TABLE>
A-2
<PAGE> 20
<TABLE>
<S> <C>
but prior to 180 days, following the final closing date, the exercise price of the
warrants sold to Investors shall be reduced by $0.25 per month, or a pro rated amount
thereof for partial months, until a registration statement covering such shares is
declared effective. If a registration statement covering such shares of Common Stock is
not declared effective within 180 days following the final closing date, the exercise
price of the warrants sold to Investors shall be reduced by $0.50 per month, or a pro
rated amount thereof for partial months, until a registration statement covering such
shares of Common Stock is declared effective. Notwithstanding the foregoing, in no event
shall the exercise price of the Warrants sold to Investors be reduced to a price lower
than $3.75 per share.
Call Rights on Warrants: If at any time following the effectiveness of the registration statement described above
the last reported sale price per share of Common Stock exceeds $9.75 for any consecutive
thirty day trading period, then the Company may, at any time upon thirty days notice, call
and repurchase warrants issued to the purchasers and the Placement Agents at a call price
of $.001 per warrant.
Definitive Agreements: The purchase and sale of Units is subject to the execution and delivery of definitive
agreements containing such representations, warranties, terms and conditions as the
respective parties and their counsel may agree.
</TABLE>
A-3
<PAGE> 1
EXHIBIT 4.14
JAWS TECHNOLOGIES, INC.
1013 17TH AVENUE, S.W.
CALGARY, ALBERTA T2T0A7
CANADA
PLACEMENT AGENCY AGREEMENT
SmallCaps Online LLC
1285 Avenue of the Americas
New York, New York 10019
Attention: Jeffrey B. Davis, President
Gentlemen:
This Placement Agency Agreement (the "Agreement") confirms the
retention by JAWS Technologies, Inc., a Nevada corporation (the "Company"), of
SmallCaps Online LLC (the "U.S. Placement Agent"), to act as the sales agent
in the United States on a best efforts basis in connection with the private
placement of Units (as defined below) of the Company on the terms set forth
below, including the financial and other terms set forth in Schedule A hereto,
which is hereby incorporated by reference into this Agreement.
1. PLACEMENT
(a) Each unit (a "Unit") shall consist of one share of common stock,
par value $.001 per share (the "Common Stock), of the Company, and a warrant
(each, a "Warrant" and collectively, the "Warrants") to acquire 1/2 (one-half)
of a share of Common Stock at an exercise price of US$ 6.50 per share. The
placement of the Units (the "Placement") will be made pursuant to the U.S.
Memorandum (as defined in Section 2 below). Except as provided in Schedule A,
the Units (and the shares of Common Stock and Warrants included therein) will
not be registered under the Securities Act of 1933, as amended, or any
applicable successor statute (the "Act"), but will be issued in reliance on
the private offering exemption available under Section 4(2) of the Act and the
rules and regulations promulgated thereunder, including Regulation D, and
outside the United States, through exemptions from any prospectus
requirements of applicable foreign securities laws. The U.S. Placement Agent
understands that all subscriptions for Units are subject to acceptance by the
Company. The Company and the U.S. Placement Agent reserve the right in their
reasonable discretion to accept or reject any or all subscriptions for Units in
whole or in part. Investors shall be required to subscribe for a minimum
number of Units with additional increments available at the Company's
discretion as set forth in Schedule A or as provided in the U.S. Memorandum.
Any subscription monies received by the U.S. Placement Agent from investors
will be handled in accordance with Rule 15c2-4 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), whether or not the U.S.
Placement Agent is subject to the Exchange Act, and as otherwise may be
prescribed by the terms of the U.S. Memorandum.
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<PAGE> 2
Without limiting the generality of the foregoing, the U.S. Placement Agent
agrees with the Company that, in connection with the Placement and the
Concurrent Offering, the Canadian Placement Agent (as defined below) will
receive all funds in connection therewith and promptly deposit the same in a
separate bank account, as agent or trustee for the persons who have a
beneficial interest therein, until the closing occurs, the offerings are
terminated or another appropriate event or contingency has occurred, at which
time the funds shall be promptly transmitted or retained, as the case may be,
to the Company or the person entitled thereto.
(b) The Company is making an offering of the Units, concurrent
with the making of the private placement of Units in the United States as
described herein (the "Placement"), in Canada and outside of the United States
and Canada as described herein through the Company's Canadian Placement agent,
Thomson Kernaghan & Co. Limited (the "Canadian Placement Agent"). Such
concurrent offering is referred to herein as the "Concurrent Offering." The
U.S. Placement Agent will only offer Units to prospective investors in the
United States and the Canadian Placement Agent will only offer Units to
prospective investors in Canada and outside of the United States and Canada as
described herein. The terms of the Concurrent Offering are substantially
identical to the terms of this Placement, except to the extent that either the
laws of the United States, Canada and/or outside of Canada and the United
States require special disclosure in the U.S. Memorandum and/or terms in this
Agreement for the placement agent agreement with the Canadian Placement Agent
and/or terms in the Subscription Agreement (as defined below) or the
subscription agreement between the Company and applicable investors. The
Units, Shares and Warrants sold in the United States, Canada and outside of
Canada and the United States will be identical in all respects. For purposes
of calculating the minimum and maximum sizes of the offering, Units sold in the
United States, Canada and outside of Canada and the United States will be
aggregated.
2. OFFERING CIRCULAR
The Company will prepare an Offering Circular relating to the Company
(such Offering Circular, together with the exhibits and attachments thereto or
available thereunder and any amendments or supplements thereto prepared and
furnished by the Company, being referred to herein as the "U.S. Memorandum")
which describes the Placement and certain investment risks relating thereto.
The Company has been and will continue to be responsible for preparing and
filing required documentation, if any, with the authorities in the United
States and provincial securities regulatory authorities in Canada prior to (and
subsequent to, if required by the laws of such jurisdiction) the distribution
of the U.S. Memorandum to prospective investors (the parties acknowledging,
however, that the offering of Units is intended and expected to be wholly or
partially exempt from filing requirements in the United States by reason of an
"accredited investor" exemption). The U.S. Placement Agent and its counsel
and the Company and its counsel will jointly prepare a form of Subscription
Agreement to be entered into between the Company and U.S. and other purchasers
of the Units (the "Subscription Agreement"), with such representations,
warranties, conditions and covenants as are customary in private placements of
corporate equity securities with United States institutional accredited
investors. The U.S. Placement Agent and its counsel shall have an
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opportunity to review the final form of the U.S. Memorandum and Subscription
Agreement prior to the distribution thereof to prospective investors, and the
U.S. Memorandum and the Subscription Agreement will be the only offering
documents (other than cover letters which may be used by the U.S. Placement
Agent, and any documents made available to investors in accordance with the
terms of the U.S. Memorandum) shown to prospective investors. The Company and
its counsel will advise the U.S. Placement Agent and its counsel in writing of
those jurisdictions in which Units may lawfully be offered and sold, and the
manner in which the Units may lawfully be offered and sold in each such
jurisdiction, in connection with the Placement, and the U.S. Placement Agent
agrees that the Units will be offered or sold only in such jurisdictions and in
the manner specified by the Company. The offering of Units will be made in
accordance with the requirements of Section 4(2) under the Act to investors
that qualify as accredited investors, as defined in Rule 501(a) under the Act
("Accredited Investors"), purchasing for their own account for investment
purposes and not for distribution in violation of securities laws.
3. PLACEMENT AGENT
(a) Upon the terms and conditions set forth in this Agreement and
Schedule A hereto, the Company hereby employs the U.S. Placement Agent as
its sales agent in the United States for the purpose of placing the Units for
the account and risk of the Company. This appointment shall be exclusive with
respect to the Placement, and the Company shall not have the right to appoint
additional sales agents in the United States without the U.S. Placement
Agent's express prior written consent (other than the Canadian Placement Agent
with respect to the Concurrent Offering); provided that this Agreement shall
not give the U.S. Placement Agent any right to act as sales agent or receive
compensation in connection with any future offerings sponsored by the Company
absent a separate agreement to such effect between the U.S. Placement Agent
and the Company. Subject to the provisions of Section 5 hereof and to the
performance by the Company of all of its obligations to be performed hereunder,
the U.S. Placement Agent agrees to use its best efforts to assist in arranging
for sales of Units. The U.S. Placement Agent will also assist the Company in
the preparation of the U.S. Memorandum and presentations to prospective
investors. It is understood and agreed that this Agreement does not create any
partnership, joint venture or other similar relationship between or among the
U.S. Placement Agent and the Company, that the U.S. Placement Agent is acting
only as a sales agent and that, except as specifically set forth in Schedule A,
there is no undertaking on the U.S. Placement Agent's part to purchase any of
the Units or to arrange or participate in any other financing in connection
with the Placement.
(b) For the services of the U.S. Placement Agent hereunder, the
Company will pay or caused to be paid to the U.S. Placement Agent the
commissions, fees and expenses ("Fees") stated in Schedule A (it being
understood and agreed that the U.S. Placement Agent may deduct such Fees from
the aggregate amount of subscriptions received by the U.S. Placement Agent in
respect of any Closing).
(c) Upon receipt by the Company from a proposed purchaser of
completed subscription materials in the form set prepared by the Company, and
such other documents
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as the Company requests, the Company and the U.S. Placement Agent will
determine in their reasonable discretion whether they wish to accept or reject
the subscription.
(d) Subject to the provisions relating thereto contained in
Schedule A, the U.S. Placement Agent's commissions, fees and expenses based on
a percentage of gross proceeds and all other expenses reimbursable or payable
by the Company as provided herein or in Schedule A will be paid in full upon
transfer to the account of the Company of the purchase price of such Units;
provided, however, that no such commissions or fees shall be payable until
subscriptions for the minimum number of Units described in the U.S. Memorandum
have been accepted and the purchase price of the Units to be purchased from the
Company has been transferred to the account of the Company. For purposes of
calculating the minimum and maximum sizes of the offering, Units sold in the
United States, Canada and outside of the United States will be aggregated.
(e) The Company and the U.S. Placement Agent agree to the terms
of, and to comply with, the agreements set forth on Schedule A hereto as if
such terms and agreements were repeated herein in their entirety.
4. PLACEMENT EXPENSES
(a) The Company will pay, whether or not any Units are sold in
connection with the Placement, all reasonable, accountable costs and expenses
incurred by the U.S. Placement Agent in connection with the Placement as
provided in Schedule A. Reimbursement of the U.S. Placement Agent's
reasonable, accountable out-of-pocket costs and expenses hereunder shall be
made promptly in full in the event the U.S. Placement Agent elects to
terminate this Agreement in accordance with Section 5.
(b) Without limiting the generality of the foregoing, the Company
hereby agrees to pay all fees, charges and expenses incident to the performance
by the Company and the U.S. Placement Agent of its respective obligations
hereunder, including, without limitation, all fees, charges, and expenses in
connection with (i) the preparation, printing, reproduction, filing,
distribution and mailing of the U.S. Memorandum and all other documents
relating to the offering, purchase, sale and delivery of the Units, and any
supplements or amendments thereto, including the fees and expenses of counsel
to the Company and to the U.S. Placement Agent, and the cost of all copies
thereof, (ii) the issuance, sale, transfer and delivery of the Units, the
Shares, and the Warrants, including any transfer or other taxes payable thereon
and the fees of any transfer agent, warrant agent or registrar, (iii) the
registration or qualification of the Units or the securing of an exemption
therefrom under state of foreign "blue sky" or securities laws, including,
without limitation, filing fees payable in the jurisdictions in which such
registration or qualification or exemption therefrom is sought, the costs of
preparing preliminary, supplemental and final "blue sky surveys" relating to
the offer and sale of the Units and the fees and disbursements of counsel to
the Placement Agents in connection with such "blue sky" matters, and (iv) the
filing fees, if any, payable to the applicable securities regulatory
authorities.
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5. TERMINATION OF PLACEMENT
The Placement may be terminated by the mutual consent of the U.S.
Placement Agent and the Canadian Placement Agent at any time by them giving
written notice to the Company if (a) in the opinion of the U.S. Placement
Agent, the U.S. Memorandum contains an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements appearing therein not misleading in the light of
the circumstances in which they were made, and the Company shall not have
corrected such untrue statement or omission to the reasonable satisfaction of
the U.S. Placement Agent and the Canadian Placement Agent and their counsel
within ten business days after the Company receives notice of such untrue
statement or omission, provided that notwithstanding such ten business day
period, no such closing shall occur hereunder until the U.S. Placement Agent
and the Canadian Placement Agent shall have notified the Company that they are
satisfied, in their reasonable determination, that the Company has taken such
steps (including circulating amended offering materials) to allow any such
closing to occur, or (b) the Company shall be in material breach of any
representation, warranty or covenant made by it in this Agreement.
6. CLOSING
(a) Subject to the conditions set forth in Section 10
hereof, if subscriptions to purchase at least 500,000 Units in the aggregate in
the Placement and the Concurrent Offering have been received prior to the
expiration of the offering period and accepted by the Company, the initial
closing under this Agreement (the "Closing") shall be held at the offices of
Battle Fowler LLP, Park Avenue Tower, 75 East 55th Street, New York, New York,
at 10:00 A.M., New York time, on February 18, 2000 or at such other place, time
and/or date as the Company and the U.S. Placement Agent shall agree upon. The
Company shall provide the notice required by the preceding sentence as promptly
as practicable. The date upon which the Closing is held shall hereinafter be
referred to as the "Closing Date."
(b) Subject to the conditions set forth in Section 10
hereof, if, subsequent to the date the subscriptions referred to in Section
6(a) hereof are received and accepted and prior to the expiration of the
offering period, additional subscriptions to purchase Shares are received from
prospective investors, which subscriptions are accepted by the Company, one or
more additional closings under this Agreement (each, an "Additional Closing")
shall be held at the offices of Battle Fowler LLP, Park Avenue Tower, 75 East
55th Street, New York, New York, at 10:00 A.M., New York time, on the third
business day following the date upon which the U.S. Placement Agent receives
notice from the Company that additional subscriptions have been so accepted, or
at such other place, time or date as the Company and the U.S. Placement Agent
shall agree upon. The Company shall notify the U.S. Placement Agent as
promptly as practicable whether any additional subscriptions so received have
been accepted. The date upon which any additional Closing is held shall
hereinafter be referred to as an "Additional Closing Date."
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<PAGE> 6
(c) Promptly after the Closing Date or an Additional
Closing Date, as the case may be, the Company shall deliver to the purchasers
(or the U.S. Placement Agent, on behalf of the purchasers) of Unit certificates
representing the Shares and agreements representing the Warrants to which they
are entitled.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
The Company represents and warrants to, and covenants with, the U.S.
Placement Agent that:
(a) The Company has been validly formed and is legally existing as
a corporation in good standing under the laws of the State of Nevada, with full
corporate power and authority to conduct its business as currently conducted,
and is in good standing in each jurisdiction in which the conduct of its
business or the nature of its properties requires such qualification or
authorization, except where the failure to be so qualified or authorized and in
good standing could not reasonably be expected to have a material adverse
effect on the business and financial condition of the Company and its
subsidiaries, taken as a whole (a "Material Adverse Effect"). As of the date
hereof, the Company does not have, directly or indirectly, any material
subsidiaries other than Jaws Technologies Inc. an Alberta corporation ("Jaws
Canada"), Pace Systems Group Inc., incorporated under the laws of the Province
of Ontario ("Pace"), Jaws Technologies (Delaware), Inc., a Delaware corporation
("Jaws Delaware"), Offsite Data Services Inc., an Alberta corporation
("Offsite"), Jaws Technologies, Inc., an Ontario corporation ("Jaws Ontario")
and Jaws Acquisition Corp., an Alberta corporation ("JAC" and collectively with
Jaws Canada, Pace, Jaws Delaware, and Offsite, the "Subsidiaries"). Each
Subsidiary has been duly organized, is validly existing and in good standing
under the laws of the jurisdiction of its organization, has the power and
authority to own its properties and to conduct its business and is duly
qualified and authorized to transact business and is in good standing in each
jurisdiction in which the conduct of its business or the nature of its
properties requires such qualification or authorization, except where the
failure to be so qualified or authorized and in good standing could not
reasonably be expected to have a Material Adverse Effect. All of the
outstanding capital stock of each Subsidiary is owned by the Company, free and
clear of any liens, and has been duly authorized and validly issued, and is
non-assessable, except for such failures as could not reasonably be expected to
have a Material Adverse Effect.
(b) Neither the U.S. Memorandum nor the Subscription Agreement
contain any untrue statement of a material fact, and the U.S. Memorandum and
the Subscription Agreement taken as a whole will not omit to state any material
fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading, except that the
Company shall have no liability for any information provided to the Company in
writing by, and relating to, the U.S. Placement Agent, for use in and used in
the U.S. Memorandum. It is understood that any summary in the U.S. Memorandum
of a document which appears therein in full (either as signed or substantially
in the form to be signed) does not constitute an untrue or misleading statement
merely because it is a summary; provided, however, that any such summary may
not contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements made,
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<PAGE> 7
in light of the circumstances under which they were made, not misleading. If,
at any time before the Placement is completed or terminated or before all
subscriptions are accepted by the Company, there should be any change which
would cause the U.S. Memorandum or the Subscription Agreement not to comply
with this paragraph 7(b), the Company will promptly advise the U.S. Placement
Agent thereof and prepare and furnish the U.S. Placement Agent with, for
distribution to investors, after prior review and approval by the U.S.
Placement Agent and its counsel (such approval not to be unreasonably
withheld), such copies of such supplements or amendments to the U.S. Memorandum
and the Subscription Agreement as will cause the U.S. Memorandum and the
Subscription Agreement, as so supplemented or amended, to comply with this
paragraph 7(b), and will authorize the U.S. Placement Agent to make to
investors, if (i) deemed necessary by counsel to the U.S. Placement Agent and
approved by the U.S. Placement Agent or (ii) if deemed necessary by counsel to
the Company, an offer of rescission.
(c) The execution, delivery and performance of this Agreement, and
all other documents to be entered into by the Company in connection with any
transaction described in the U.S. Memorandum and the consummation of the
transactions contemplated hereby and thereby have been or will be prior to such
execution, delivery, performance or consummation, as the case may be, duly and
validly authorized by the Company and do not and will not (i) constitute, or
result in, a breach or violation of any of the terms, provisions or conditions
of the articles of incorporation or bylaws of the Company or any of its
Subsidiaries, (ii) constitute, or result in, a material violation of any
applicable statute, law, ordinance or regulation of any state, territory or
other jurisdiction, or (iii) violate, constitute, or result in, a default under
(or an event which with the passing of time or the giving of notice or both
would constitute a default under) or breach of the terms, provisions or
conditions of any material indenture, note, contract, commitment, instrument or
document to which the Company or any of its Subsidiaries is or will be a party
or by which the Company or any of their respective properties are bound, or any
award, judgment, decree, rule or regulation of any court or governmental or
regulatory agency or body having jurisdiction over the Company or any of its
Subsidiaries or their respective activities or properties, in each case which
breach, violation or default would have a Material Adverse Effect; and no
material consent, approval, authorization or order of any court or governmental
or regulatory agency or body is required on the part of the Company for the
lawful consummation of the transactions contemplated hereby and thereby, except
for such consents and approvals with respect to the offer and sale of Units in
certain jurisdictions which are identified to you by counsel for the Company.
(d) Neither the Company nor any of its officers, employees, agents
or representatives has taken or will take any action which has caused or may
cause the Placement not to qualify for exemption from the registration
requirements of the Act or of United States federal or state, or other
securities laws. In connection with the Placement, the Company shall not offer
or cause to be offered the Units by any form of general solicitation or general
advertising as defined in Rule 502(c) of Regulation D, has not taken and shall
not take any action (except for actions contemplated by the U.S. Memorandum)
that would cause the Placement to be integrated with other transactions under
Rule 502(a) of Regulation D.
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(e) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms (except insofar as enforcement of the indemnification or contribution
provisions hereof may be limited by applicable laws or principles of public
policy and subject, as to enforcement, to the availability of equitable
remedies and limitations imposed by bankruptcy, insolvency, reorganization and
other similar laws and related court decisions relating to or affecting
creditors' rights generally).
(f) The Company will not offer the Units for sale hereunder on the
basis of any communications or documents relating to the U.S. Placement Agent
or the Units except the U.S. Memorandum and the exhibits thereto and documents
described or referred to therein (including the Subscription Agreement).
(g) So long as the Units (or the Shares, Warrants or shares of
Common Stock underlying the Warrants) are "restricted securities" within the
meaning of Rule 144(a)(3) under the Act, the Company, during any period in
which it is not subject to and in compliance with Section 13 or 15(d) of the
Exchange Act, or is not exempt from such reporting requirements pursuant to and
in compliance with Rule 12g3-2b under the Exchange Act, provide to each holder
of such Units and to each prospective purchaser (as designated by such holder)
of such Units, upon the request of such holder or prospective holder, any
information required to be provided by Rule 144A(d)(4) under the Act.
(h) The Company will initially invest the proceeds of the Offering
of the Units and all other funds of the Company in such a manner so as to cause
the Company not to be subject to the United States Investment Company Act of
1940, as amended (the "1940 Act"), and will thereafter use its best efforts to
avoid the Company's becoming subject to the 1940 Act.
(i) In addition to the foregoing, to the extent not set forth
herein, the U.S. Placement Agent may rely on the representations and
warranties made by the Company in the Subscription Booklet provided by the
Company and used in connection with the Placement.
8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
U.S. PLACEMENT AGENT
The U.S. Placement Agent hereby represents and warrants to, and
covenant with, the Company that:
(a) This Agreement has been duly authorized, executed and
delivered by the U.S. Placement Agent and constitutes the legal, valid and
binding obligation of the Placement Agent, enforceable against it in accordance
with its terms (except insofar as enforcement of the indemnification or
contribution provisions hereof may be limited by applicable laws or principles
of public policy and subject, as to enforcement, to the availability of
equitable
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<PAGE> 9
remedies and limitations imposed by bankruptcy, insolvency, reorganization and
other similar laws and related court decisions relating to or affecting
creditors' rights generally).
(b) The U.S. Placement Agent will cooperate with the Company to
ensure that the offering and sale of the Units will comply with the
requirements of Rule 506 under the Act, including, without limitation, the
general conditions contained in Regulation D and the federal securities laws,
and will follow the reasonable advice of the Company with respect to the manner
in which to offer and sell the Units so as to ensure that the offering and sale
thereof will comply with the securities laws of the jurisdictions which is not
listed in Exhibit A or in any jurisdiction in which Units are offered by the
U.S. Placement Agent, and the U.S. Placement Agent will not make an offer of
Units in any jurisdiction which is not listed on Exhibit A or in any
jurisdiction in which the Company advises it in writing that such offer would
be unlawful for the U.S. Placement Agent to offer or sell securities.
(c) The U.S. Placement Agent is (i) a registered broker-dealer
under the Exchange Act, (ii) a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD"), and (iii) registered as a
broker-dealer in each jurisdiction in which it is required to be registered as
such in order to offer and sell the Units in such jurisdiction.
(d) The U.S. Placement Agent has not and will not make an offer
of Units (or of any securities, the offering of which may be integrated with
the Placement), on the basis of any communications or documents relating to the
Company or the Units except the U.S. Memorandum and the exhibits thereto and
documents described or referred to therein (including the Subscription
Agreement), and the cover letters referred to in Section 2 hereof. Without
limiting the generality of the foregoing, the U.S. Placement Agent has not and
will not make any representation as to any rate of return on investment that an
offeree may obtain from the ownership of Units other than as set forth in the
U.S. Memorandum. The Placement Agent will deliver a copy of the U.S.
Memorandum to each prospective investor solicited by it prior to such offeree's
execution of a Purchase Agreement or, in the case of amendments or supplements
to the U.S. Memorandum (other than those amendments and supplements approved in
writing by the Company but designated in writing as not subject to this
requirement), prior to such offeree's execution of an acknowledgment of receipt
of such amendment or supplement and reconfirmation of intent to subscribe.
(e) The U.S. Placement Agent has not and will not make an offer
of Units on behalf of the Company, or of any securities, the offering of which
may be integrated with the Placement, by any form of general solicitation or
general advertising in violation of Rule 502(c) of Regulation D such as would
cause the offering of Units not to qualify under Section 4(2) of the Act as a
transaction exempt from Section 5 thereof. The U.S. Placement Agent has not
and will not supply in writing for inclusion in the U.S. Memorandum or any
related sales materials any information relating to the U.S. Placement Agent
containing any untrue statement of a material fact or omitting to state any
material fact required to be stated therein or necessary to make such
information, in light of the circumstances under which it is used, not
misleading.
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(f) The Placement Agent will not transmit to the Company any
written offer from an offeree to purchase a Unit or Units unless, immediately
prior thereto, it reasonably believes that:
(i) the offeree is an Accredited Investor; and
(ii) the offeree meets all other offeree and/or purchaser
suitability standards, if any, required under applicable securities
laws and regulations.
(g) The U.S. Placement Agent will exercise reasonable care to
determine that prospective investors are not "underwriters" within the meaning
of Section 2(11) of the Act, and in that connection will obtain from each
investor purchasing Units in the Placement a duly executed Subscription
Agreement, in the form provided to the U.S. Placement Agent by the Company.
(h) The U.S. Placement Agent will periodically notify the Company
of the jurisdiction in which the Units are being offered by it or will be
offered by it pursuant to this Agreement, and will periodically notify the
Company of the status of the offering conducted pursuant to this Agreement.
(i) The U.S. Placement Agent will take such other action or
refrain from taking such action as the Company may reasonably request in order
to comply with all applicable United States laws and all applicable securities
laws of those jurisdictions listed in Schedule A of which the Company advises
the U.S. Placement Agent, including using its best efforts to cause offerees
and subscribers for Units to execute and deliver such additional documents and
instruments as the Company may reasonably require, except that the Company
shall be required to complete all necessary securities qualifications with
respect to those jurisdictions listed in Schedule A as provided in Section 2.
(j) The U.S. Placement Agent has delivered or caused to be
delivered to each prospective investor the U.S. Memorandum.
9. COVENANTS
(a) Covenants of the Company. The Company covenants to
the U.S. Placement Agent that it will:
(i) Notify the U.S. Placement Agent as soon as
practicable, and confirm such notice promptly in writing, (A) when any event
shall have occurred during the period commencing on the date hereof and ending
on the later of the Closing Date and the last Additional Closing Date (if any)
as a result of which the U.S. Memorandum would include any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and (B) of
the receipt of any notification with respect to the modification, recission,
withdrawal or suspension of the qualification or registration of the Shares or
of an exemption from such registration or qualification in any jurisdiction.
The Company will use its reasonable best efforts to prevent
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<PAGE> 11
the issuance of any such modification, rescission, withdrawal or suspension
and, if any such modification, rescission, withdrawal or suspension is issued
and you so request, to obtain the lifting thereof as promptly as possible.
(ii) Not supplement or amend the U.S. Memorandum
unless the U.S. Placement Agent shall have approved of such supplement or
amendment in writing. If, at any time during the period commencing on the date
hereof and ending on the later of the Closing Date and the last Additional
Closing Date (if any), any event shall have occurred as a result of which the
U.S. Memorandum contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, or if, in the opinion of counsel to the
Company or counsel to the U.S. Placement Agent, it is necessary at any time to
supplement or amend the U.S. Memorandum to comply with the Act, Regulation D or
any applicable securities or "blue sky" laws, the Company will promptly prepare
an appropriate supplement or amendment (inform and substance reasonably
satisfactory to you) which will correct such statement or omission or which
will effect such compliance.
(iii) Deliver without charge to the U.S. Placement
Agent such number of copies of the U.S. Memorandum and any supplement or
amendment thereto as may reasonably be requested by the U.S. Placement Agent.
(iv) Not directly or indirectly, solicit any offer
to buy from, or offer to sell to, any person any Units except through the U.S.
Placement Agent or the Canadian Placement Agent.
(v) Not solicit any offer to buy or offer to sell
Units by any form of general solicitation or advertising, including, without
limitation, any advertisement, article, notice or other communication published
in any newspaper, magazine or similar medium or broadcast over television or
radio or any seminar or meeting whose attendees have been invited by any
general solicitation or advertising.
(vi) At all times during the period commencing on
the date hereof and ending on the later of the Closing Date and the last
Additional Closing Date (if any), provide to each prospective investor or his
purchaser representative, if any, on reasonable request, such information (in
addition to that contained in the U.S. Memorandum) concerning the Placement,
the Company and any other relevant matters as it possesses or can acquire
without unreasonable effort or expense and extend to each prospective investor
or his purchaser representative, if any, the opportunity to ask questions of,
and receive answers from the Company concerning the terms and conditions of the
Placement and the business of the Company and to obtain any other additional
information, to the extent it possesses the same or can acquire it without
unreasonable effort or expense, as such prospective investor or purchaser
representative may consider necessary in making an informed investment decision
or in order to verify the accuracy of the information furnished to such
Prospective Investor or purchaser representative, as the case may be.
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(vii) Notify the U.S. Placement Agent promptly of
the acceptance or rejection of any subscription. Any subscription unreasonably
rejected shall be deemed to have been accepted for purposes of determining
whether at least 500,000 Units have been sold solely for the purpose of
determining whether the U.S. Placement Agent is entitled to its compensation
pursuant to Schedule A hereof.
(viii) File five (5) copies of a Notice of Sales of
Securities on Form D with the Securities and Exchange Commission (the
"Commission") no later than 15 days after the first sale of the Units, if
required by law. The Company shall file promptly such amendments to such
Notices on Form D as shall become necessary and shall also comply with any
filing requirement imposed by the laws of any province or jurisdiction in which
offers and sales are made. The Company shall furnish you with copies of all
such filings.
(ix) Place the following legend on all
certificates representing the Units and the Warrants:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST
THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR
OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL
AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS
CORPORATION, IS AVAILABLE."
(x) Not, directly or indirectly, engage in any
act or activity which may jeopardize the status of the offering and sale of the
Units as exempt transactions under the Act or under the securities or "blue
sky" laws of any jurisdiction in which the Placement may be made.
(xi) Apply the net proceeds from the sale of the
Units for the purposes set forth under the caption "Use of Proceeds" in the
U.S. Memorandum in substantially the manner indicated thereunder.
(xii) Not, during the period commencing on the date
hereof and ending on the later of the Closing Date and the last Additional
Closing Date (if any) issue any press release or other communication or hold
any press conference with respect to the Company, its financial condition,
results of operations, business properties, assets, liabilities or future
prospects of the Placement, without the prior written consent of the U.S.
Placement Agent and the Canadian Placement Agent, which consent will not be
unreasonably withheld.
(xiii) Not, prior to the completion of the Offering,
bid for, purchase, attempt to induce others to purchase, or sell, directly or
indirectly, any shares of Common
12
<PAGE> 13
Stock or any other securities in violation of the provisions of Regulation M
under the Exchange Act.
10. CONDITIONS OF THE U.S. PLACEMENT AGENT'S OBLIGATIONS
The obligations of the U.S. Placement Agent pursuant to this
Agreement shall be subject, in its discretion, to the continuing accuracy of
the representations and warranties of the Company contained herein and in each
certificate and document contemplated under this Agreement to be delivered to
the U.S. Placement Agent, as of the date hereof and as of the Closing Date
(and, if applicable, each Additional Closing Date), to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) At the Closing and each Additional Closing, as the
case may be, the Placement Agents shall have received the favorable opinion of
each of Battle Fowler LLP, Bennett Jones, Sonfield & Sonfield LLP, Lionel,
Sawyer & Collins LLP, and Beard Winter LLP, in each case, as counsel for the
Company, in form and substance reasonably satisfactory to the Placement Agents.
(b) On or prior to the Closing Date and each Additional
Closing Date, as the case may be, the U.S. Placement Agent shall have been
furnished such information, documents and certificates as it may reasonably
require for the purpose of enabling it to review the matters referred to in
this Section 10 and in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties, covenants, agreements
or conditions herein contained, or as it may otherwise reasonably request.
(c) At the Closing and each Additional Closing, as the
case may be, the U.S. Placement Agent shall have received a certificate of the
chief executive officer of the Company, dated the Closing Date or such
Additional Closing Date, as the case may be, to the effect that, as of the date
of this Agreement and as of the Closing Date or such Additional Closing Date,
as the case may be, the representations and warranties of the Company contained
herein were and are accurate, and that as of the Closing Date or such
Additional Closing Date, as the case may be, the obligations to be performed by
the Company hereunder on or prior thereto have been fully performed.
(d) All proceedings taken in connection with the
issuance, sale and delivery of the Shares shall be reasonably satisfactory in
form and substance to you and your counsel.
Any certificate or other document signed by any officer of the Company
and delivered to you or to your counsel as required hereunder shall be deemed a
representation and warranty by the Company hereunder as to the statements made
therein. If any condition to your obligations hereunder has not been fulfilled
as and when required to be so fulfilled, you may terminate this Agreement or,
if you so elect, in writing waive any such conditions which have not been
fulfilled or extended the time for their fulfillment. In the event that you
elect to terminate this Agreement, you shall notify the Company of such
election in writing. Upon such termination, neither party shall have any
further liability or obligation to the other except as provided in Section 11
hereof.
13
<PAGE> 14
11. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless the U.S.
Placement Agent, any person who controls the Placement Agent within the meaning
of the Act, Section 20(a) of the Exchange Act or any applicable statute and
each partner, director, officer, employee, agent and representative of the U.S.
Placement Agent or any person who controls any such Placement Agent from and
against any loss, damage, expense, liability or claim, or actions or
proceedings in respect thereof (including, without limitation, reasonable
attorneys' fees and expenses incurred in investigating, preparing or defending
against any litigation commenced) which any such person may incur or which may
be made or brought against any such person arising out of or based upon (i) any
breach of any of the agreements, representations or warranties of the Company
contained in this Agreement or Schedule A, (ii) any violation of securities
laws attributable to the offer or sale of Units in a jurisdiction listed in
Schedule A and in a manner authorized by the Company, or (iii) any violation of
law by the Company or any Affiliate thereof, or any director, officer,
employee, agent or representative of any of them, related to or arising out of
the Placement. This indemnity agreement by, and the agreements, warranties and
representations of, the Company shall survive the offer, sale and delivery of
the Units and the termination of this Agreement and shall remain in full force
and effect regardless of any investigation made by or on behalf of any person
indemnified hereunder, and termination of this Agreement and acceptance of any
payment for the Units hereunder.
(b) The U.S. Placement Agent agrees to indemnify and hold
harmless the Company and its Affiliates, any person who controls any of them
within the meaning of the Act, Section 20(a) of the Exchange Act or any
applicable statute, and each officer, director, employee, agent and
representative of the Company or any of its Affiliates from and against any
loss, damage, expense, liability or claim or actions or proceedings in respect
thereof (including, without limitation, reasonable attorneys' fees and expenses
incurred in investigating, preparing or defending against any litigation
commenced) which any such person may incur or which may be made or brought
against any such person, but only to the extent the same arises out of or is
based upon (i) any breach of any of the agreements, representations or
warranties of the U.S. Placement Agent contained in this Agreement or Schedule
A or (ii) any untrue statement of a material fact in any information provided
to the Company in writing by, and relating to, the U.S. Placement Agent,
expressly for use in and used in the U.S. Memorandum, or any omission in any
information provided to the Company in writing by, and relating to, the U.S.
Placement Agent, expressly for use in and used in the U.S. Memorandum of any
material fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading. This indemnity
agreement by, and the agreements, warranties and representations of, the U.S.
Placement Agent shall survive the offer, sale and delivery of the Units and
shall remain in full force and effect regardless of any investigation made by
or on behalf of any person indemnified hereunder, and termination of this
Agreement and acceptance of any payment for the Units hereunder.
(c) If any action is brought against a party (the "Indemnified
Party") in respect of which indemnity may be sought against one or more other
parties (the "Indemnifying Party"
14
<PAGE> 15
or "Indemnifying Parties"), the Indemnified Party shall promptly notify the
Indemnifying Party or Parties in writing of the institution of such action;
provided, however, the failure to give such notice shall not release the
Indemnifying Party or Parties from its or their obligation to indemnify the
Indemnified Party hereunder except to the extent the Indemnifying Party
actually incurs damage by reason of such failure and shall not release the
Indemnifying Party or Parties from any other obligations or liabilities to the
Indemnified Party in any event. The Indemnifying Party or Parties may at its
or their own expense elect to assume the defense of such action, including the
employment of counsel reasonably acceptable to the Indemnified Party; provided,
however, that no Indemnifying or Indemnified Party shall consent to the entry
of any judgment or enter into any settlement by which the other party is to be
bound without the prior written consent of such other party, which consent
shall not be unreasonably withheld. In the event the Indemnifying Party or
Parties assume a defense hereunder, the Indemnified Party shall be entitled to
retain its own counsel in connection therewith and, except as provided below,
shall bear the fees and expenses of any such counsel, and counsel to the
Indemnified Party or Parties shall cooperate with such counsel to the
Indemnifying Party in connection with such proceeding. If an Indemnified Party
reasonably determines that there are or may be differing or additional defenses
available to the Indemnified Party which are not available to the Indemnifying
Party, or that there is or may be a conflict between the respective positions
of the Indemnifying Party and of the Indemnified Party in conducting the
defense of any action, then the Indemnifying Party shall bear the reasonable
fees and expenses of any counsel retained by the Indemnified Party in
connection with such proceeding. All references to the Indemnified Party
contained in this paragraph 8(c) include, and extend to and protect with equal
effect, any persons who may control the Indemnified Party within the meaning of
the Act, Section 20(a) of the Exchange Act or any applicable statute, any
successor to the Indemnified Party and each of its partners, officers,
directors, employees, Agents and representatives. The indemnity agreements set
forth in this paragraph 8 shall be in addition to any other obligations or
liabilities of the Indemnifying Party or Parties hereunder or at common law or
otherwise.
(d) If recovery is not available under the foregoing
indemnification provisions of this paragraph, for any reason other than as
specified therein, the party entitled to indemnification by the terms thereof
shall be entitled to contribution to losses, damages, liabilities and expenses
of the nature contemplated by such indemnification provisions. In determining
the amount of such losses, damages, contribution, there shall be considered the
relative benefits received by the Company on the one hand, and the U.S.
Placement Agent on the other hand from the Placement (which shall be deemed to
be the portion of the proceeds of the Placement realized by each party), the
parties' relative knowledge and access to information concerning the matter
with respect to which the claim was asserted, the opportunity to correct and
prevent any statement or omission, the relative culpability of the parties and
any other equitable considerations appropriate under the circumstances. No
party shall be liable for contribution with respect to any action or claim
settled without its consent. Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect of which a claim for contribution may be made
against another party or parties under this Section, notify such party or
parties from whom contribution may be sought, but the omission to so notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation
15
<PAGE> 16
it or they may have under this Section or otherwise. For purposes of this
Section, each person, if any, who controls a party to this Agreement within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall
have the same rights to contribution as that party to this Placement Agreement.
(e) In any claim for indemnification for United States Federal or
state securities law violations, the party seeking indemnification shall place
before the court the position of (i) the United States Securities and Exchange
Commission and (ii) if applicable, any state securities commissioner or agency
having jurisdiction with respect to the issue of indemnification for securities
law violations.
12. MISCELLANEOUS
(a) The agreements set forth in this Agreement have been made and
are made solely for the benefit of the Company, the U.S. Placement Agent,
their affiliates and the respective heirs, personal representatives and
permitted successors and assigns thereof, and except as expressly provided
herein nothing expressed or mentioned herein is intended or shall be construed
to give any other person, firm or corporation any legal or equitable right,
remedy or claim under or in respect of this Agreement or any representation,
warranty or agreement herein contained. The term "successors and assigns" as
used herein shall not include any purchaser of any Units merely because of such
purchase.
(b) Any notice or other communication required or appropriate
under the provisions of this Agreement shall be given in writing addressed as
follows: (i) if to the Company, at the address set forth above, Attention:
President; and (ii) if to the U.S. Placement Agent, SmallCaps Online LLC, 1285
Avenue of the Americas, 35th Floor, New York, NY 10019, Attention: Jeffrey B.
Davis, or at such other address as any party may designate to the others in
accordance with this paragraph.
(c) This Agreement and Schedule A constitute the entire agreement
between the parties hereto with respect to the Placement and supercedes any and
all prior agreements, and may be amended or modified only by a duly authorized
writing signed by such parties. This Agreement and Schedule A may be executed
in any number of counterparts, each of which shall be deemed an original and
all of which shall constitute a single instrument.
[SIGNATURE PAGE FOLLOWS]
16
<PAGE> 17
This Agreement is executed and shall be effective as of
February 15, 2000, and shall be governed and construed in accordance with the
laws of the State of New York, without giving effect to conflicts of law
provisions thereof.
JAWS TECHNOLOGIES, INC.
By:/s/ RIAZ MAMDANI
---------------------------------
Name:
Title:
Agreed and accepted:
SMALLCAPS ONLINE LLC
By: /s/ JEFFREY B. DAVIS
------------------------------------
Name: Jeffrey B. Davis
Title: President
<PAGE> 18
SCHEDULE A
JAWS TECHNOLOGIES, INC.
The parties hereto enter into this Schedule A to the Placement Agency
Agreement (the "Agreement") effective as of February 15, 2000 (the "Effective
Date"), and incorporate said Agreement herein by reference in full.
Capitalized terms used in this Schedule and not otherwise defined have the
meanings provided in the Agreement. All dollar amounts are in $USD.
<TABLE>
<S> <C>
Issuer: JAWS Technologies, Inc., a Nevada corporation.
Placement Agents: US: SmallCaps Online LLC.
CDN: Thomson Kernaghan & Co. Limited.
Security Offered: Units, each Unit consisting of (i) one share of common stock, par value $.001 per share
(the "Common Stock"), of the Company and (ii) one warrant to purchase 1/2 (one half)
a share of Common Stock at an exercise price of $6.50 per share (subject to adjustment, as
described below), which warrants shall expire on the third anniversary date of the
effective date of the registration statement relating thereto (as described below).
Certificates representing shares of Common Stock and warrants shall bear appropriate
legends, including those relating to "restricted securities" under the Act.
Number of Units: A minimum of 500,000 Units (aggregate gross proceeds of $2,125,000) and a maximum of
900,000 Units (gross proceeds of $3,825,000).
Offering Price
(Per Unit): $4.25 per Unit.
Minimum Subscription: $100,000, or greater if required by local law.
Use of Proceeds: Working capital and general corporate purposes, and acquisitions yet to be identified.
Placement Period: From February 15, 2000 to February 22, 2000, unless extended by the Company in its sole
discretion. The anticipated date of the initial closing is February 18, 2000.
Sales Commissions, Warrants
and Financial Advisory Fees
to Placement Agents: An aggregate cash payment to the Placement Agents of a 7% sales commission and a 3%
financial advisory fee,
</TABLE>
A-1
<PAGE> 19
<TABLE>
<S> <C>
in each case, based upon the gross proceeds from all Units sold by or on behalf of the
Company.
On the closing date, the Company shall issue to the Placement Agents an aggregate number
of warrants to purchase shares of Common Stock equal to 10% of the number of Units sold,
one-half of which will constitute a financial advisory fee. The warrants will be
exercisable at an exercise price of $4.25 per share, and will expire on the third
anniversary date of the effectiveness of the registration statement relating thereto (as
described below). The warrants will be issued pursuant to a warrant agreement and/or form
of warrant certificate in form and substance satisfactory to the Company and the Placement
Agents.
Expenses of Placement Agents
to be Reimbursed: Each Placement Agent will receive reimbursement of all reasonable, accountable
out-of-pocket expenses, including legal fees and disbursements of one counsel, and travel
and due diligence expenses.
Jurisdictions in Which
Units Will Be Offered United States: New York
Canada: Ontario
Bermuda, Isle of Man, St. Vincent and the Grenadines
Registration of
Common Stock: The Company will use its best efforts to file, no later than 30 days following the final
closing date, a registration statement with the United States Securities and Exchange
Commission registering for resale all of the shares of Common Stock included in the Units,
and shares of Common Stock issuable upon exercise of the warrants included in the Units
and the warrants issued to the Placement Agents. The Company will use its best efforts to
cause such registration statement to become effective no later than 90 days following the
final closing date, and to cause such registration statement to remain effective until 30
days following the date on which all warrants have been exercised or expired, and/or have
been called and repurchased by the Company as provided below. During such period, the
Company will file all documents required to be filed by it under the Securities Exchange
Act of 1934, as amended.
If a registration statement covering such shares of Common Stock is not declared effective
within 90 days,
</TABLE>
A-2
<PAGE> 20
<TABLE>
<S> <C>
but prior to 180 days, following the final closing date, the exercise price of the
warrants sold to Investors shall be reduced by $0.25 per month, or a pro rated amount
thereof for partial months, until a registration statement covering such shares is
declared effective. If a registration statement covering such shares of Common Stock is
not declared effective within 180 days following the final closing date, the exercise
price of the warrants sold to Investors shall be reduced by $0.50 per month, or a pro
rated amount thereof for partial months, until a registration statement covering such
shares of Common Stock is declared effective. Notwithstanding the foregoing, in no event
shall the exercise price of the Warrants sold to Investors be reduced to a price lower
than $3.75 per share.
Call Rights on Warrants: If at any time following the effectiveness of the registration statement described above
the last reported sale price per share of Common Stock exceeds $9.75 for any consecutive
thirty day trading period, then the Company may, at any time upon thirty days notice, call
and repurchase warrants issued to the purchasers and the Placement Agents at a call price
of $.001 per warrant.
Definitive Agreements: The purchase and sale of Units is subject to the execution and delivery of definitive
agreements containing such representations, warranties, terms and conditions as the
respective parties and their counsel may agree.
</TABLE>
A-3
<PAGE> 1
Exhibit 4.16
SCHEDULE OF SUBSCRIBERS
BPI Canadian Small Companies Fund
956872 Ontario Limited
Interward Corporation
Rockhaven Holdings Limited
YMG Capital Management Incorporated
Acuity Investment Management Incorporated
Beluga NV
Pinetree Capital Corp.
Fallingbrook Investments Limited
Glentel Incorporated
Scott Leckie
Frank Fini
Crothers Leasing Limited
Moise Afriat
Lionel K. Conacher
Kehler International Equities (1990) Incorporated
Jean Gevaert
Ron Kaulbach
Andrew Parsons
Eldon Guay
David J. Grand
Merdoch & Company
Robert F. Wilson
ABC Family Trust
Third Point Partners LP
Third Point Offshore Fund Limited
Points West International Investments Limited
Banzai Partners LP
Banzai Offshore Fund Limited
<PAGE> 1
Exhibit 21.1
Subsidiaries of JAWS Technologies, Inc., a Nevada corporation:
JAWS Technologies Inc., an Alberta corporation
Pace Systems Group Inc.
JAWS Technologies, Inc., an Ontario corporation
JAWS Technologies (Delaware), Inc., a Delaware corporation
JAWS Acquisition Corp., an Alberta corporation
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT ACCOUNTANTS
We consent to the use of our report dated February 25, 2000, with respect to
the finacial statements of Jaws Technologies, Inc., in the Company's Annual
Report (Form 10-K) dated March 23, 2000.
Calgary, Canada /s/Ernst & Young LLP
March 23, 2000 Chartered Accountants
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 8,863 34
<SECURITIES> 0 0
<RECEIVABLES> 339 7
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,278 195
<PP&E> 818 92
<DEPRECIATION> 118 13
<TOTAL-ASSETS> 12,606 273
<CURRENT-LIABILITIES> 1,377 700
<BONDS> 68 147
0 0
0 0
<COMMON> 25 11
<OTHER-SE> 11,137 2,638
<TOTAL-LIABILITY-AND-EQUITY> 12,606 273
<SALES> 592 29
<TOTAL-REVENUES> 592 29
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 6,619 3,105
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,140 0
<INCOME-PRETAX> (7,168) (3,076)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,168) (3,076)
<EPS-BASIC> (0.50) (0.42)
<EPS-DILUTED> 0 0
</TABLE>
