<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
TO THE 1934 ACT REPORTING REQUIREMENTS
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ____________
Commission File No. 0-24833
FUTURELINK DISTRIBUTION CORP.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Colorado 95-3895211
------------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
300, 250 - 6th Avenue S.W., Calgary, Alberta CANADA T2P 3H7
- --------------------------------------------------------------------------------
(Address of principal executive offices) (ZIP Code)
(403) 216-6000
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
The total number of shares of the Registrant's Common Stock outstanding as of
March 31, 1999 was 29,433,304.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE> 2
FUTURELINK DISTRIBUTION CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1999 and 1998................... 3
Consolidated Statements of Loss and Deficit and Comprehensive Loss
Quarterly periods ended March 31, 1999 and 1998 ......................... 5
Consolidated Statements of Change in Stockholders' Equity
Quarterly periods ended March 31, 1999 and 1998 ......................... 6
Consolidated Statements of Cash Flows
Quarterly periods ended March 31, 1999 and 1998.......................... 8
Notes to Consolidated Financial Statements.................................. 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ................................................................... 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ............................................................ 22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................................... 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .............................................. 25
ITEM 4. SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS ........................ 25
ITEM 5. OTHER INFORMATION ............................................................ 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................................. 25
SIGNATURES ................................................................... 26
</TABLE>
2
<PAGE> 3
FUTURELINK DISTRIBUTION CORP.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED BALANCE SHEETS
(See basis of presentation - Note 1)
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
MARCH 31
----------------------------
1999 1998
$ $
- -------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT
Cash 5,316 --
Accounts receivable, net of $167,856
allowance for doubtful account 1,808,876 --
Due from related parties, net of
$177,541 allowance for doubtful
accounts 63,756 --
Prepaid expenses 98,041 --
Inventory and work in progress 543,495 --
- -------------------------------------------------------------------------
2,519,484 --
- -------------------------------------------------------------------------
CAPITAL ASSETS, NET OF $344,013
ACCUMULATED DEPRECIATION 1,678,954 --
INVESTMENT [NOTE 2] -- 447,573
GOODWILL, NET OF $518,733 ACCUMULATED
DEPRECIATION 4,821,538 --
EMPLOYEE AND CONSULTANTS BASE, NET OF
$648,889 ACCUMULATED DEPRECIATION 2,551,111 --
OTHER INVESTMENTS 40,016 --
- -------------------------------------------------------------------------
9,091,619 447,573
- -------------------------------------------------------------------------
11,611,103 447,573
=========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Bank indebtedness [note 4] 945,719 --
Accounts payable 2,931,673 --
Accrued Liabilities 64,227 19,457
Due to related party 112,747 --
- -------------------------------------------------------------------------
4,054,366 19,457
- -------------------------------------------------------------------------
CAPITAL LEASE OBLIGATIONS PAYABLE 30,262 --
CONVERTIBLE DEBENTURES [NOTES 3] 3,938,809 --
OTHER LONG TERM DEBT 247,500 --
DEFERRED TAXES 1,092,647 --
- -------------------------------------------------------------------------
9,363,584 19,457
=========================================================================
</TABLE>
3
<PAGE> 4
FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED BALANCE SHEETS
(See basis of presentation - Note 1)
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
MARCH 31
---------------------------------
1999 1998
$ $
- -----------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
STOCKHOLDERS' EQUITY
Authorized
5,000,000 preferred shares
without par value 100,000,000
common shares with par value
of $0.0001
Issued and paid-up
29,433,304 and 11,826,834 common
shares issued and outstanding at
March 31, 1999 and March 31, 1998,
respectively 2,944 1,182
Exchangeable shares 850,850 --
Capital in excess of par value 9,735,807 2,074,049
Contributed surplus 2,228,885 --
Cumulative translation adjustment (138,187) --
Deficit (10,432,780) (1,647,115)
- -----------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2,247,519 428,116
- -----------------------------------------------------------------------------------
11,611,103 447,573
===================================================================================
</TABLE>
See accompanying notes
On behalf of the Board: [signed: Robert Kubbernus] [signed: F. Bryson Farrill]
Director Director
4
<PAGE> 5
FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT AND
COMPREHENSIVE LOSS
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
3 month period ended
March 31
------------------------------------------
1999 1998
$ $
- --------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
REVENUE
Consulting services, including ASP related
services 1,196,848 --
Hardware and software sales 382,701 --
Server farm revenue 164,076 --
- --------------------------------------------------------------------------------------------------
1,743,625 --
- --------------------------------------------------------------------------------------------------
EXPENSES
Hardware and software purchases 352,530 --
Contracts, payroll and benefits 1,595,714 --
Accounting and legal 49,464 55,725
Rent 152,909 --
Consulting expenses 355,150
General and administrative 617,163 --
Interest on long term debt 997,790 --
Amortization of deferred financing fees and debt
discount [note 3] 28,849 --
Bad debt expense 183,527 --
Depreciation 131,834 --
Amortization of intangible assets 500,005 --
- --------------------------------------------------------------------------------------------------
4,964,935 55,725
- --------------------------------------------------------------------------------------------------
Loss from operations (3,221,310) (55,725)
- --------------------------------------------------------------------------------------------------
Equity in loss of affiliate [note 2] -- (141,227)
- --------------------------------------------------------------------------------------------------
-- (141,227)
- --------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (3,221,310) (196,952)
Deferred tax benefit 118,987 --
- --------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD (3,102,323) (196,952)
OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustment (41,719) --
- --------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS (3,144,042) (196,952)
- --------------------------------------------------------------------------------------------------
DEFICIT, BEGINNING OF PERIOD (7,330,457) (1,450,163)
DEFICIT, END OF PERIOD (10,432,780) (1,647,115)
- --------------------------------------------------------------------------------------------------
LOSS PER COMMON SHARE (0.11) (0.02)
- --------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 29,069,963 11,468,389
==================================================================================================
</TABLE>
See accompanying notes
5
<PAGE> 6
FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
CAPITAL
TO BE EXCHANGEABLE IN EXCESS CONTRIBUTED
COMMON STOCK ISSUED SHARES OF PAR SURPLUS
------------------- ------ --------- ---------- ----------
(UNAUDITED) SHARES $ $ $ $ $
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 10,203,500 1,020 -- -- 1,425,211 --
Issuance of shares on
acquisition of 46% of
FutureLink Alberta 1,540,000 154 -- -- 338,646 --
Forgiveness of stockholder debt -- -- -- -- 60,200
Issuance of share capital for cash 83,334 8 -- -- 249,992 --
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 11,826,834 1,182 -- -- 2,074,049 --
Issuance of share capital for cash 172,479 18 -- -- 596,782 --
Forgiveness of stockholder debt -- -- -- -- 10,125 --
Issuance of share capital to employees,
officers and directors of the company 3,500,000 350 -- -- 2,117,150 --
Warrants issued with issuance of convertible
debentures [note 3a] -- -- -- -- -- 562,500
Equity component of convertible
debentures [note 3a] -- -- -- -- -- 777,143
Equity component of financing
fees [note 3a] -- -- -- -- -- (75,600)
Equity component of financing
fees [note 3a] -- -- -- -- -- (39,375)
Shares issued upon conversion of
convertible debt [note 3a] 1,874,777 188 -- -- 506,553 --
Shares issued on conversion of loan 1,127,240 113 -- -- 732,538 --
Issuance of shares on acquisition
of 50.4% of FutureLink Alberta 1,673,775 167 -- -- 663,960 --
Share issue costs -- -- -- -- (218,992) --
Financing fees associated with
converted debentures [note 3a] -- -- -- -- (44,525) --
----------
TOTAL OUTSTANDING SHARES 20,175,105
----------
Issuance of exchangeable shares
on acquisition of FL/SysGold 4,250,000 -- -- 2,550,000 -- --
Shares to be issued for services 115,253 -- 50,000 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 24,540,358 2,018 50,000 2,550,000 6,437,640 1,224,668
=========================================================================================================================
</TABLE>
See accompanying notes
6
<PAGE> 7
FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
CAPITAL
TO BE EXCHANGEABLE IN EXCESS CONTRIBUTED
COMMON STOCK ISSUED SHARES OF PAR SURPLUS
------------------- ------ ------------ ---------- ----------
(UNAUDITED) SHARES $ $ $ $ $
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 20,175,105 2,018 -- -- 6,437,640 1,224,668
Equity components of
10% convertible debentures
[note 3a] -- -- -- -- -- 770,964
Warrants issued with issuance
of convertible debentures
under amended agreement
[note 3a] -- -- -- -- -- 129,500
Equity component of financing
fees [note 3a] -- -- -- -- -- (77,094)
Shares issued on conversion of
convertible debt [note 3a] 5,985,269 599 -- -- 1,560,887 --
Financing fees associated with
converted debentures [note 3a] -- -- -- -- (96,834) --
Discount associated with
converted debentures [note 3a] -- -- -- -- (26,747) --
Warrants issued with issuance
of 10% convertible
debentures [note 3b] -- -- -- -- -- 20,000
Equity component of 8%
convertible debentures [note 3c] -- -- -- -- -- 125,000
Warrants issued with issuance
of 8% convertible debentures [note 3c] -- -- -- -- -- 35,847
Issuance of shares on 3.6%
acquisition of FutureLink
Alberta [note 2] 117,500 12 -- -- 42,288 --
Issuance of common stock for services 323,514 32 -- -- 124,968 --
Issuance of common stock relating
to exchange of exchangeable shares
on acquisition of FL/SysGold
in 1998 2,831,916 283 -- -- 1,698,867 --
Stock issue costs -- -- -- -- (5,262) --
----------
TOTAL OUTSTANDING SHARES 29,433,304
----------
Issuance of exchangeable
shares on acquisition of
FL/SysGold in 1998 1,418,084 -- -- 850,850 -- --
- -------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 30,851,388 2,944 -- 850,850 9,735,807 2,228,885
==================================================================================================================
</TABLE>
The above statement gives retroactive effect to share consolidations of 200 to 1
on July 20, 1997 and 30 to 1 on December 2, 1997.
See accompanying notes
7
<PAGE> 8
FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
3 MONTH PERIOD ENDED
MARCH 31
---------------------------
1999 1998
$ $
- ----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss for the period (3,102,322) (196,952)
Adjustments to reconcile net loss to net cash
provided by operating activities
Equity in loss of affiliate [note 2] -- 141,227
Non cash interest expense 981,381 --
Non cash consulting expense 125,000 --
Depreciation 131,834 --
Amortization of deferred financing fees and
debt discount 28,849 --
Amortization of intangible assets 500,005 --
Bad debt expense 183,527 --
Other (50,000) --
Deferred tax recovery (118,987) --
- ----------------------------------------------------------------------------------------
(1,320,713) (55,725)
Changes in non-cash working capital (1,122,345) (4,475)
Effect of foreign currency on operating activities (68,485) --
- ----------------------------------------------------------------------------------------
(2,511,543) (60,200)
- ----------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital assets purchased (696,847) --
Cash advances to equity investee -- (250,000)
Other investments (40,016) --
Changes in non-cash working capital 390,733 --
Other (125,193) --
- ----------------------------------------------------------------------------------------
(471,323) (250,000)
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received under demand credit facility 126,502 --
Issuance of common stock [note 2] -- 250,000
Share issue costs (5,262) --
Repayment of capital lease obligations (14,261) --
Forgiveness of stockholder debt -- 60,200
Issuance of 10% convertible debentures [note 3b] 2,750,000 --
Financing fees on issue of 10% convertible
debentures (275,000) --
Issuance of 8% convertible debentures [note 3a) 500,000 --
Financing fees on issue of 8% convertible debentures (10,000) --
Issuance of other long term debt 275,000 --
Financing fees on other long term debt (27,500) --
Repayment of notes payable (381,033) --
Issuance of promissory note 150,000 --
Repayment of promissory note (150,000) --
Other financing fees (50,000) --
Changes in non-cash working capital 93,085 --
- ----------------------------------------------------------------------------------------
2,981,531 310,200
- ----------------------------------------------------------------------------------------
DECREASE IN CASH (1,335) --
Cash, beginning of period 6,651 --
- ----------------------------------------------------------------------------------------
CASH, END OF PERIOD 5,316 --
========================================================================================
</TABLE>
See accompanying notes
8
<PAGE> 9
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998 (unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company has an accumulated deficit amounting to $10,432,780, a
working capital deficiency of $1,534,882 and total net operating cash outflows
of $2,511,543. The Company has also violated its working capital ratio relating
to its credit facility. The Company's continuation as a going concern is in
substantial doubt and dependent on its ability to generate sufficient cash flow
to meet its obligations on a timely basis, to obtain additional financing as may
be required, and ultimately to attain successful operations. However, no
assurance can be given at this time as to whether the Company will achieve any
of these conditions. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern for a reasonable period of
time.
During the period from March 31, 1999 to May 10, 1999, management has raised
$8,663,500 gross proceeds of additional capital in the form of convertible
debentures and promissory notes which has enabled the Company to eliminate its
working capital deficiency and remedy the violation of its credit facility. The
Company's recent registration with the Securities and Exchange Commission is
also expected to increase the Company's growth and expansion opportunities.
The accompanying financial statements reflect all adjustments which are, in the
opinion of management, necessary to reflect a fair presentation for the periods
being presented.
NOTE 2. ACQUISITION OF FUTURELINK DISTRIBUTION CORP. (ALBERTA)
On February 26, 1999, FutureLink Alberta became a wholly owned subsidiary when
the Company purchased the remaining 117,500 shares (3.6%) of FutureLink Alberta
in exchange for 117,500 common shares of the Company at an ascribed value of
$42,300. Net assets acquired are as follows:
<TABLE>
<CAPTION>
$
- -------------------------------------------------------
<S> <C>
NET ASSETS ACQUIRED
Non cash working capital deficiency (49,208)
Capital assets 66,657
Goodwill 26,937
Other obligations (2,086)
- -------------------------------------------------------
NET ASSETS ACQUIRED 42,300
=======================================================
</TABLE>
As at March 31, 1998, the Company held a 46% interest in FutureLink Alberta
which had been accounted for on an equity basis since the period of ownership
commencing January 20, 1998. The Company acquired the interest in FutureLink
Alberta by issuing 1,540,000 common shares in exchange for 1,540,000 common
share of FutureLink Alberta. The value ascribed to the investment was $338,800
and was based on an independent valuation report. The Company's investment in
FutureLink Alberta at March 31, 1998 was as follows:
<TABLE>
<CAPTION>
$
- -------------------------------------------
<S> <C>
1,540,000 common shares 338,800
Advances to equity investee 250,000
Equity loss in investee (141,227)
- -------------------------------------------
447,573
===========================================
</TABLE>
The advances to FutureLink Alberta were non-interest bearing and had no
repayment terms.
9
<PAGE> 10
NOTE 3. CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
$
- -------------------------------------------------------------------------------------
<S> <C>
10% TK convertible debentures (a) 3,188,270
Stockholder 10% convertible debentures (b) 292,449
8% convertible debentures (c) 458,090
- -------------------------------------------------------------------------------------
3,938,809
=====================================================================================
</TABLE>
(a) 10% TK CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
$
- -------------------------------------------------------------------------------------
<S> <C>
PRINCIPAL
Funds advance to date 5,470,000
Debentures converted to date (2,000,000)
- -------------------------------------------------------------------------------------
3,470,000
- -------------------------------------------------------------------------------------
FINANCING FEES
Total financing fees attributable to debt (392,306)
Amortization of financing fees to date 37,654
Financing fees associated with debt converted to date 131,234
- -------------------------------------------------------------------------------------
(223,418)
- -------------------------------------------------------------------------------------
DISCOUNT ON DEBT
Total discount attributable to debt 230,750
Amortization of discount to date (20,247)
Discounted associated with debt converted to date (36,872)
- -------------------------------------------------------------------------------------
(173,631)
- -------------------------------------------------------------------------------------
INTEREST EXPENSES
Accrued interest expense 115,319
- -------------------------------------------------------------------------------------
NET BALANCE AT MARCH 31, 1999 3,188,270
=====================================================================================
</TABLE>
During 1998 the Company entered into a 10% convertible debenture agreement with
Thomson Kernaghan & Co. Ltd. as agent, to provide up to $5,000,000 of financing.
In February, 1999 the company amended the terms of the 10% TK convertible
debentures which increased the total financing from $5,000,000 to $6,000,0000.
As at March 31, 1998, the Company issued a total of $5,470,000 under the 10% TK
convertible debenture agreement due August 20, 2001. The debenture holders have
the right to convert the debentures in increments of at least $100,000, at a
price equal to the lower of $0.75 per share and 78% of the average closing bid
price of the Company's common stock for the three trading days immediately
preceding the conversion. The Company may prepay any or all of the outstanding
principal amounts at any time, upon thirty days' notice, subject to the holders'
right to convert into common shares. At the debenture holders' election,
interest can be settled in common stock of the Company based on market prices.
Of the total principal amount of the debentures of $5,470,000, a total of
$1,548,107 has been attributed to the intrinsic value of the conversion option
at the issue date and included with contributed surplus. Of this amount $770,964
relates to debentures received during the first quarter of 1999. The amount
attributed to the conversion option has been included in interest on long term
debt as the conversion option was exercisable upon issuance.
Upon entering into the original agreement, the Company issued 1,041,667 common
share purchase warrants. Each warrant gives the holders the right to purchase
one common share of the Company at $0.96 until August 20, 2001. The Company also
issued an additional 647,668 warrants under the amended agreement. Each warrant
gives the holders the right to purchase one common share of the Company at $0.39
until August 20, 2001. An amount of $129,500 has been included in contributed
surplus as the estimated value attributed to the 647,668 warrants as they were
exercisable upon issuance.
10
<PAGE> 11
An amount of $230,750 relating to debt discount has been recorded in relation to
the warrants, of which $129,500 relates to the first quarter of 1999. The amount
is being amortized over the life of the debentures unless the debentures are
converted. If converted, the prorated portion of the unamortized balance is
charged to capital in excess of par. A total of $26,747 has been charged to
capital in excess of par relating to $1,500,000 of convertible debentures which
were converted during the first quarter of 1999.
For each issuance of 10% TK convertible debentures, the Company must pay a
financing fee of approximately 10%. The value of the fees associated with the
equity component of the 10% TK convertible debentures issued during the first
quarter of 1999 in the amount of $77,094 has been charged to contributed
surplus. The remaining amount is being amortized over the life of the 10% TK
convertible debentures, unless the debentures are converted. If converted, the
pro rata portion of the financing fees associated with the converted debentures
is charged to capital in excess of par value. A total of $96,034 has been
charged to capital in excess of par relating to $1,500,000 of convertible
debentures which were converted during the first quarter of 1999.
During the first quarter of 1999, $1,500,000 of the convertible debentures,
together with $61,486 of accrued interest, were converted into 5,985,269 common
shares.
(b) STOCKHOLDER 10% CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
$
- -------------------------------------------------------------
<S> <C>
Principal 301,242
Discount on debt (14,218)
Accrued interest 5,425
- -------------------------------------------------------------
NET BALANCE AT MARCH 31, 1999 292,449
=============================================================
</TABLE>
During the first quarter of 1999 the Company issued $301,241 10% convertible
debentures, due on June 30, 1999 in exchange for stockholders advances of
$289,264 ($440,000 Canadian) including interest existing at December 31, 1998.
The holders have the right to convert the debentures in increments of at least
$10,000, at a price per share equal to $0.40. The Company may prepay any and all
of the outstanding principal amounts at any time, upon thirty days' notice,
subject to the holders' right to convert into common shares. At the holders'
election, interest can be settled in common stock of the Company based on market
prices.
Upon entering into the convertible debenture agreement, the Company issued
753,104 common share purchase warrants to the holders of the debentures. Each
warrant gives the holders the right to purchase one common share of the Company
for $0.40 per share on or before February 22, 2000, for $0.60 per share between
February 23, 2000 and February 22, 2001 and $0.80 per share between February 23,
2001 and February 22, 2002. An amount of $20,000 has been included in
contributed surplus as the estimated value attributed to the 753,104 warrants.
(c) 8% CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
$
- -----------------------------------------------------------------
<S> <C>
Principal 500,000
Discount on debt (35,847)
Deferred finance fee (9,396)
Accrued interest 3,333
- -----------------------------------------------------------------
NET BALANCE AT MARCH 31, 1999 458,090
=================================================================
</TABLE>
During the first quarter of 1999, the Company issued an aggregate of $500,000 8%
convertible debentures, due February 28, 2002. The holders have the right to
convert the debentures at a price per share equal to the lower of $0.38 per
share or 80% of the closing prices for the three days prior to the date of
conversion. The Company may prepay any and all of the outstanding principal
amounts at any time, upon thirty days notice, subject to the holders' right to
convert into common shares. At the holders' election, interest can be settled in
common stock of the Company based on market prices.
An amount of $125,000 has been attributed to the intrinsic value of the
conversion option and has been included in contributed surplus.
11
<PAGE> 12
Upon entering into the 8% convertible debenture agreement, the Company issued
warrants to purchase 132,743 of common stock of the Company to the holder of the
debentures. Common stock can be purchased at $0.30 per share. The warrants
expire on February 28, 2001. An amount of $35,847 has been included in
contributed surplus as the estimated value of the warrants.
The Company paid a finance fee of $10,000 which is being amortized over the life
of the convertible debentures.
NOTE 4. BANK INDEBTEDNESS
A subsidiary of the Company has a demand credit facility with a Canadian
chartered bank for $1,000,000 Canadian for which the Company has provided a
guarantee and postponement of claim. The facility provides for a first floating
charge over all assets of the subsidiary as well as an assignment of the shares
of the subsidiary. Interest on the facility is based on a range of the bank's
prime rate plus 1% to the bank's prime rate plus 3% depending on the
subsidiary`s debt to equity ratio.
As at March 31, 1999 the subsidiary was in deficiency with respect to a covenant
relating to its current ratio. The lender has not waived these deficiencies and
has not indicated its intention to do so. In addition, as per the terms of the
agreement, should the subsidiary be in default, a penalty interest rate may be
applied.
The Company is currently working with the bank and undertaking efforts to
rectify the covenant deficiencies. To May 12, 1999 the bank has not formally
given notice of the covenant deficiencies, has not given an indication of plans
to call the loan, and has not imposed the penalty interest. No amount has been
accrued in the accompanying financial statements for any penalty interest which
may be imposed.
NOTE 5. CONTINGENCIES
A statement of claim has been filed against the Company in the amount of
approximately $326,000 ($500,000 Canadian) plus costs. The statement of claim
alleges that the Company made certain misrepresentations and interfered with
contractual relations in respect of a sale transaction between two third parties
involving the Company's common shares. The Company has entered into an indemnity
agreement with a former principal whereby such former principal directs the
action on behalf of the Company, bears the costs of legal counsel and agrees to
indemnify the Company for any losses arising. Management believes the claim is
without merit; consequently, no liability in respect of the claim has been
recorded in the financial statements.
A statement of claim has been filed against the Company's subsidiary, FutureLink
Alberta in the amount of $185,571 ($285,000 Canadian) plus costs seeking damages
and loss of rent related to a purported lease agreement with respect to a
building in Calgary, Alberta, Canada. The Company is counter claiming an amount
of approximately $254,000 ($390,000 Canadian) against the claimant. It is
impossible at this time for the Company to predict with any certainty the
outcome of such litigation. Management believes the claim is without merit and
will defend the Company's position vigorously. However, should the matter
proceed to trial, costs may be in excess of $65,000 ($100,000 Canadian). These
financial statements contain no provision for loss related to the claims.
A statement of claim was filed against the Company's subsidiary, FL/SysGold by
TAP Consulting Ltd. in the amount of $97,828 ($150,000 Canadian). The claim
seeks damages and loss of compensation relating to services provided to the
Company. It is management's position that the claim is without merit. An
indemnity agreement has been obtained from the previous stockholders of
FL/SysGold.
NOTE 6. LOSS PER SHARE
Loss per common share is loss for the period divided by the weighted average
number of common shares outstanding after retroactive effect of the share
consolidations. The effect on earnings per share of the exercise of options and
warrants, and the conversion of the convertible debentures is anti-dilutive.
12
<PAGE> 13
NOTE 7. SUBSEQUENT EVENTS
On April 26, 1999, the Company amended the terms of the 10% TK convertible
debenture agreement. The amendment supersedes all prior amendments (see note
3a). Under the terms of the amendment, the debenture conversion price is fixed
at $0.20 per common share. In addition, the common share purchase warrants of
1,041,667 and 647,668 were repriced such that their exercise price is $0.25 per
common share. The Company issued an additional 4,310,665 share purchase warrants
at an exercise price of $0.25 per common share such that a total of 6,000,000
share purchase warrants are outstanding relating to this convertible debenture
agreement. In addition, the Company agreed to pay $1,881,600 as consideration
for the cancellation of $1,470,000 of the principal balance such that $2,500,000
of the convertible debentures will remain outstanding.
Subsequent to March 31, 1999, the Company entered into an agency agreement to
issue 8% convertible notes to provide up to $8 million of financing. The
agreement provides for the issuance of units which include 8% convertible
promissory notes convertible at $0.20 per common share, and warrants to purchase
common stock at an exercise price of $0.25 per common share. A total of 20
million warrants are available to the subscribers of the agreement. In addition,
10 million warrants at an exercise price of $0.25 per common share were provided
to the agent as an agency fee, as well as the agent receiving commissions and
structuring fees totalling 9%. As this private placement was fully subscribed,
the agent received approximately $720,000 in such commissions and fees.
The Company also entered into an advisory agreement with the agent. Under this
agreement, the agent has the right to purchase 10 million share purchase
warrants at a price of $0.01 per warrant, equating to approximately $100,000.
The warrants have an exercise price of $0.25 per common share. The agent also
receives $5,000 per month in advisory fees under this agreement.
On May 7, 1999, the Company completed the second of two closings for total gross
proceeds of $8,038,500. Approximately 5% of the offering was subscribed for by
management of the Company, the terms of which provide for a conversion price of
$0.30 per common stock and a warrant exercise price of $0.30 per common stock.
On May 14, 1999, the Company approved a 1 for 5 reverse stock split of its
common stock, to be effective June 1, 1999. This transaction has not been
reflected in the Statements of Changes in Stockholders' equity.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates" and other similar expressions or variations of such words
are intended to identify these forward-looking statements. Additionally,
statements concerning future matters such as the development of new products,
enhancements or technologies, possible changes in legislation and other
statements regarding matters that are not historical fact are forward-looking
statements. Forward-looking statements involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, availability of financial resources adequate for short-,
medium- and long-term needs, demand for our products and services and market
acceptance, as well as those factors discussed in this "ITEM 2. Management's
Discussion and Analysis of Financial Condition and Operating Results" and
elsewhere in this Report.
OVERVIEW
FutureLink Distribution Corp., a Colorado corporation ("FutureLink" or the
"Company")is a founder of the Application Services Provider (ASP) industry.
FutureLink provides computer utility services (as "the Computer Utility
Company(TM)") that include ASP (Application Service Provision), computer
infrastructure management and IT business consulting. FutureLink strives to
understand its clients' organizational processes and information requirements
and provides a full suite of information management solutions.
13
<PAGE> 14
FutureLink and its subsidiaries provide computing solutions for mid-sized
businesses. The Company is currently expanding its services, which now include
the provision of off-site network management solutions to clients, in the
growing ASP industry. The Company's ASP services make it possible for clients to
access and use leading software packages without all of the costs of owning and
managing the IT infrastructure typically required.
FutureLink transacts business through the following subsidiaries: (i) a 100%
interest in FutureLink Distribution Corp. (an Alberta corporation) ("FutureLink
Alberta") located in Calgary, Alberta, Canada; (ii) a 100% interest in
FutureLink Acquisition Corp. (an Alberta corporation) which in turn owns 100% of
the voting shares of FutureLink/SysGold Ltd. ("FutureLink/SysGold").
FutureLink provides small and mid-sized businesses (10-1,000 employees) with
off-site, Internet-based computing, allowing subscribers to escape
hardware/software upgrade cycles, precisely control total cost of technology
ownership and focus on their core businesses. FutureLink's expertise in
application hosting on a monthly subscription basis, outsourcing and facility
management, and business practices consulting enables the company to offer an
all-inclusive, trouble-free service at a predictable price. FutureLink markets
itself as "The Computer Utility Company," and offers computer and information
service as transparently and reliably as today's utilities deliver electricity,
water and telephone services.
In August, 1998, in conjunction with the acquisition of FutureLink/SysGold,
FutureLink entered into a 10% convertible debenture agreement to obtain up to
$5,000,000, which was later increased to $6,000,000 of financing (the "TK
debenture financing"). In addition, FutureLink/ Sysgold obtained a Canadian
$1,000,000 demand secured credit facility with a Canadian chartered bank for
which FutureLink has provided a guarantee. FutureLink was funded with $2,720,000
of TK debenture financing in 1998 and $2,750,000 in the first quarter of 1999.
The capital was used to acquire FutureLink/SysGold, fund the operations of
FutureLink, FutureLink/SysGold and FutureLink Alberta and for capital
investments. In the first quarter of 1999, FutureLink was funded with $775,000
of additional gross convertible debt and debt financing its fund operations and
capital investments.
RESULTS OF OPERATIONS
EBITDA
FutureLink incurred a loss for the three months ended March 31, 1999 of
$3,102,323. The Company's EBITDA (earnings before interest, taxes, depreciation
and amortization) for the first quarter of 1999 is as follows:
<TABLE>
<S> <C>
Loss for the Quarter $(3,102,323)
Interest on Long-Term Debt $ 997,790
Deferred Tax Benefit $ (118,987)
Depreciation and Amortization $ 631,839
-----------
TOTAL $(1,591,681)
</TABLE>
1998 FIRST QUARTER INCOME STATEMENT
FutureLink's major operations in the first quarter of 1998 were via its 46%
investment in FutureLink Alberta. FutureLink acquired 46% of the capital stock
of FutureLink Alberta on January 20, 1998 and increased its ownership stake to
96.4% in November, 1998 and to 100% in February, 1999. During the period January
20, 1998 to November 23, 1998, FutureLink Alberta's results were not
consolidated with those of the Company, but were treated as an equity
investment. FutureLink's 46% share of the losses in the first quarter of 1998,
or $141,227 are accounted for as "Equity in Loss of Affiliate" on the Company's
14
<PAGE> 15
Unaudited Consolidated Statement of Loss and Deficit and Comprehensive Loss for
the three months ended March 31, 1998. The background of these losses can be
best shown on a summary Statement of Loss:
FUTURELINK ALBERTA
Statement of Loss
For the Period January 20 to March 31, 1998
<TABLE>
<CAPTION>
-----------------------------------------------------------
46% of
FutureLink
Alberta
January 20 Attributable
Item Attributable to the to March to
Period January 20 to 31, 1998 FutureLink
March 31, 1998 ($) ($)
-----------------------------------------------------------
<S> <C> <C>
Revenues 8,170 3,758
-----------------------------------------------------------
Other Income 179 82
-----------------------------------------------------------
8,349 3,840
-----------------------------------------------------------
Less:
-----------------------------------------------------------
Contracts, Payroll & Benefits 82,761 38,070
-----------------------------------------------------------
Accounting and Legal 26,904 12,376
-----------------------------------------------------------
Rent 17,112 7,872
-----------------------------------------------------------
Travel Expenses 24,728 11,375
-----------------------------------------------------------
Office Expenses 26,942 12,394
-----------------------------------------------------------
Consulting Expenses 79,870 36,740
-----------------------------------------------------------
Staff Development Expenses 136 63
-----------------------------------------------------------
Other Expenses 20,806 9,571
-----------------------------------------------------------
Advertising & Promotion Expenses 36,104 16,608
-----------------------------------------------------------
LOSS FROM OPERATIONS (307,015) (141,227)
===========================================================
</TABLE>
WORKING CAPITAL
As at March 31, 1999, FutureLink had a working capital deficit of $1,534,882 and
was in technical breach of its working capital ratio covenant with its bank.
FutureLink's continuation as a going concern remains dependent on its ability to
obtain additional financing and generate sufficient cash flow from operations to
meet its obligations on a timely basis.
Between March 31, and May 10, 1999, FutureLink obtained additional debt
financing of $8,663,500 and had eliminated its working capital deficit.
FutureLink also became an SEC registrant effective January 6, 1999, with such
registration improving the Company's ability to raise additional capital. To May
10 1999, the bank had not formally given notice of any covenant deficiencies,
has not given an indication of plans to call the loan, and has not imposed the
penalty interest. As of May 10, 1999 the company is in compliance with all bank
covenants.
MARCH 31, 1999 VS. MARCH 31, 1998
The following is an analysis and comparison to the first quarter of 1998 (where
applicable) of the main components of FutureLink's 1999 first quarter loss from
operations of $3,221,310.
REVENUES
In the three months ended March 31, 1999, the Company recorded total revenues of
$1,743,625. In the first quarter of 1998 FutureLink did not record any
consolidated revenues.
15
<PAGE> 16
The major source of FutureLink's revenue in 1999 was information technology
consulting services, including Application Service Provision ("ASP") related
services, which generated revenues of $1,196,848. These revenues were generated
by the Company's subsidiaries for providing information technology outsourcing
services, IT business practices consulting and server-based (including ASP)
computing consulting.
The other major source of FutureLink's 1999 first quarter revenues were hardware
and software sales generated by FutureLink's subsidiaries' procurement business
whereby the Company sources, purchases and then resells hardware and software to
its IT consulting clients. FutureLink generated a 7.9% gross margin on those
procurement services in the first quarter.
Direct Application Service Provider ("ASP") services also contributed to
FutureLink's revenue stream, with $164,076 generated from direct sales of hosted
application from the Company's Server Farm. This amount does not include
revenues from ASP related services included within consulting revenues for
assisting clients with upgrading their network capabilities to allow access to
FutureLink's server farm, etc. In total, FutureLink's revenues from ASP exceeded
$250,0000 for the first quarter of 1999.
EXPENSES
Hardware and Software Purchases
Hardware and software purchases of $352,530 in the first quarter of 1999
were for customer equipment and software that was resold to customers at
cost plus an administration mark up. The gross margin on the resale of
the equipment was 7.9%.
Contracts, Payroll and Benefits
FutureLink's contracts, payroll and benefits expenses comprise payments
and accrued payments to information technology service contractors and
salaries, revenue sharing and benefits for directors, management, sales,
marketing, information technology service and administrative employees.
FutureLink's 46% share of FutureLink Alberta's contracts, payroll and
benefits expense of $82,761 in the first quarter of 1998 is included in
the equity in loss of affiliate.
Accounting and Legal Costs
FutureLink had 1999 first quarter consolidated accounting and legal
expenses of $49,464 related to accounting, audit, corporate governance,
compliance and commercial transaction costs. In the first quarter of
1998, FutureLink incurred accounting and legal expenses of $55,725.
FutureLink Alberta incurred 1998 first quarter accounting and legal
expenses of $26,904 of which 46% of the expenses are included in
FutureLink's $141,227 equity in loss of affiliate.
Rent
The Company incurred rent expenses of $152,909 related to its premises
in Calgary, Tampa and Houston. FutureLink Alberta incurred 1998 first
quarter rent of $17,112, 46% of which is attributable to FutureLink as
equity in loss of affiliate.
General and Administrative Expenses
FutureLink's consolidated general and administrative expenses for the
first quarter ending March, 31, 1999 were $617,163.
16
<PAGE> 17
The consolidated general and administrative expenses are comprised of
the following:
<TABLE>
<S> <C>
Travel Expenses $120,496
Meals and Entertainment Expenses $ 26,368
Office Expenses $145,959
Promotional Expenses $107,794
Staff Development Expenses $ 49,108
Other Expenses $167,438
--------
TOTAL $617,163
</TABLE>
FutureLink Alberta's results for the first quarter of 1998 included the
following general and administrative expense categories:
<TABLE>
<S> <C>
Travel Expenses $ 24,728
Office Expenses $ 26,942
Advertising and Promotional Expenses $ 36,104
Staff Development Expenses $ 136
Other Expenses $ 20,806
--------
TOTAL $108,716
</TABLE>
Again, 46% of these 1998 first quarter general and administrative
expenses are included as part of FutureLink's equity in loss of
affiliate.
Travel expenses were incurred to secure business partnerships, customers
and financing, in addition to establishing offices in the United States.
Office expenses were incurred in maintaining and establishing
FutureLink's head office in Calgary and satellite offices in the United
States. Promotional expenses include advertising, marketing and public
relations expenditures and were incurred in order to build FutureLink's
brand awareness in the general business, technology services and
financial markets to generate business for FutureLink and build
long-term value for FutureLink's shareholders. Staff development
expenses are composed mainly of costs relating to training to ensure
FutureLink's professional IT staff are current with their technical
skills in order to deliver quality value-added services to our
customers.
Consulting Expenses
Consulting expenses of $355,150 were incurred to engage consultants to
assist the Company in several areas including business development,
marketing, market research, market analysis, investor relations and
delivery of IT services to customers. FutureLink Alberta incurred
consulting expenses of $79,870 in the first quarter of 1998, of which
46% of these expenses are included as part of FutureLink's equity in
loss of affiliate.
Interest on Long-Term Debt
FutureLink's 1999 first quarter interest expense of $997,790 is
comprised of:
<TABLE>
<S> <C>
Non-Cash Interest Charge Related to Convertible $895,964
Debenture Financing (intrinsic value of conversion features)
Accrued Interest on Convertible Debt $ 85,289
Other Interest $ 16,537
--------
TOTAL $997,790
</TABLE>
17
<PAGE> 18
Bad Debt Expense
FutureLink's bad debt expense of $183,527 as at December 31, 1998
includes actual bad debts and a provision for doubtful accounts in
FutureLink Alberta and FutureLink/SysGold relating to amounts for which
management believes collection to be unlikely.
Bad debt expense also includes $112,486 of bad debt provisions related
to accounts receivable from companies which certain of FutureLink's
officers are or were directors of. These related client companies were
early customers of FutureLink Alberta's server-based computing
information technology service and supported FutureLink Alberta as it
built its server-based computing expertise key to its launch of its ASP
business in late 1998.
Depreciation
FutureLink's consolidated depreciation of $131,834 is related to
FutureLink/SysGold's and FutureLink Alberta's depreciation of computer
equipment, software, leasehold improvements and office equipment.
Amortization of Intangible Assets
FutureLink's Q1 amortization expense of $500,005 includes:
<TABLE>
<S> <C>
Goodwill amortization related to the acquisitions
of FutureLink Alberta and FutureLink/SysGold: $233,338
Amortization of employee and consultant base
intangible asset related to the acquisition of FutureLink/SysGold: $266,667
--------
TOTAL: $500,005
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As at March 31, 1999, FutureLink had a working capital deficit of $1,534,882,
and was in technical breach of its working capital ratio covenant with its bank.
From April 1 to May 10, 1999, the Company closed $8,663,500 (gross proceeds) of
debt financing, $8,358,500 of which is in the form of convertible debentures.
This financing enabled the Company to eliminate its working capital deficit and
comply with all its bank covenants.
FutureLink received debt and stockholder loan amounts in the first quarter
between January 1 and March 31, 1999 comprised of:
<TABLE>
<S> <C>
Convertible Debentures $3,250,000
Other long-term debt $ 275,000
Promissory Note 150,000
Shareholder Loan $ 93,085
----------
$3,768,085
</TABLE>
During the first quarter of 1999, the promissory note of $150,000 was repaid in
full.
In the first quarter of 1999, the original August 1998 TK debenture financing in
funding of $2,750,000 of capital. The TK agreement extension provided for a
further $1,000,000 of funding, of which $470,000 was received in the first
quarter of 1999. The company also closed $775,000 of gross convertible debt and
debt financing in the first quarter of 1999. As of March 31, 1999, $4,186,309 of
convertible debt, other long term debt and the related accrued interest, net of
debt discounts was outstanding.
In the first quarter of 1999, FutureLink's sources and uses of cash were as
follows:
18
<PAGE> 19
<TABLE>
-------------------------------------------------------------------------------
<S> <C>
Operating loss adjusted for non-cash expenses $(1,320,713)
Foreign currency translation $ (68,485)
Working capital changes $(1,122,345)
Net Capital Assets acquired $ (696,847)
Other investment activities 225,524
Long term debt & convertible debentures net of issue costs &
financing fees $ 3,212,500
Other net financing activities $ (357,471)
Financing from demand credit facility $ 126,502
-----------
NET DECREASE IN CASH $ (1,335)
-------------------------------------------------------------------------------
</TABLE>
In addition, FutureLink/Sysgold maintains a CDN$1,000,000 demand secured credit
facility with a Canadian chartered bank for which FutureLink has provided a
guarantee. FutureLink/SysGold was in technical breach on its working capital
ratio related to the credit facility as of March 31, 1999. To May 10, 1999, the
bank had not formally given notice of the covenant deficiencies, had not given
an indication of plans to call the loan, and had not imposed the penalty
interest. In early May, 1999 the Company closed a private placement financing
with gross proceeds to the Company of $8,038,500 and as of May 10, 1999
FutureLink/Sysgold is no longer in technical breach of its bank covenants.
RECENT DEVELOPMENTS
FINANCINGS
The most significant recent developments of FutureLink include additional
financing transactions, raising the Company gross proceeds of $3,525,000 during
the first quarter of 1999 and gross proceeds of $8,663,500 during the period
April 1 to May 10, 1999. For further details regarding these financings, please
refer to the financial statements included in Part I, Item 1 of this Report and
in Part II, Item 2, below.
SERVER FARM
Another material recent development is the launch of the Company's Class "A"
Server Farm on March 10, 1999. The introduction of this Server Farm positioned
FutureLink at the forefront of the Application Service Provider ("ASP")
industry, whereby the Company provides customers with off-site, internet (or
other dedicated telecom line) based computing. Software applications are
delivered on a monthly subscription basis, providing customers an all-inclusive,
trouble-free service at a predictable price and providing FutureLink with
regular subscription revenues. From the launch of the Server Farm to the end of
the first quarter, FutureLink received direct Server Farm revenues of $164,076,
with ASP related consulting services adding additional ASP revenues, such that
the Company earned in excess of $250,000 in ASP revenues to March 31, 1999.
As at March 31, 1999, FutureLink had fully integrated five clients into its
Server Farm and is currently adding approximately one new ASP customer each
week.
MANAGEMENT CHANGES
Since January 1, 1999, the Company has undergone a number of management changes,
including changes to the board of directors.
Effective March 1, 1999, William ("Bill") Arnett, an experienced and
long-serving manager of the Company's FutureLink/SysGold subsidiary, became
Chief Operating Officer and Kyle Scott, who previously practiced corporate and
securities law with a large Calgary law firm and was involved in the SysGold
acquisition transaction, joined the Company as General Counsel and Secretary. On
March 6, 1999, Don Bialik stepped down as President and became Vice-Chairman of
the Company, a role he has since vacated, remaining a director of FutureLink,
while Cameron Chell added the office of President to his roles of Chairman and
Chief Executive Officer.
19
<PAGE> 20
The Company's board accepted the resignation of Robert Kohn on May 10, 1999 and
appointed Michael S. Falk of New York, NY to fill the vacancy created by Mr.
Kohn's departure. On May 17, 1999, the board appointed Timothy P. Flynn of Las
Vegas, NV as an additional director. The Company now has a total of 8 directors,
as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
NAME AGE POSITION HELD
--------------------------------------------------------------------------------
<S> <C> <C>
Cameron B. Chell 30 Chairman of the Board, Chief Executive Officer and
President
--------------------------------------------------------------------------------
Raghu Kilambi 33 Director, VP Finance and Chief Financial Officer
--------------------------------------------------------------------------------
Donald A. Bialik 43 Director
--------------------------------------------------------------------------------
Philip R. Ladouceur 58 Director
--------------------------------------------------------------------------------
Robert Kubbernus(1) 39 Director
--------------------------------------------------------------------------------
F. Bryson Farrill(1) 71 Director
--------------------------------------------------------------------------------
Michael S. Falk 37 Director
--------------------------------------------------------------------------------
Timothy P. Flynn 48 Director
--------------------------------------------------------------------------------
</TABLE>
Note (1): Members of both the Audit Committee and the Compensation
Committee.
Detailed information on Mr. Falk and Mr. Flynn is as follows:
MICHAEL S. FALK (director since May, 1999): Mr. Falk is the co-founder of
Commonwealth Associates, a New York-based merchant bank and investment bank
established in 1988, and remains that firm's Chairman and CEO. Over the past 15
years, Mr. Falk has led the successful consummation of more than 60 public and
private equity financings raising in excess of $1 billion for early stage and
emerging growth companies in the technology, telecommunications, leisure,
healthcare and consumer services fields. More recently, Falk has led
Commonwealth's transition into the Internet sector and various related
businesses. Falk is a graduate of the Stanford University Executive Program for
Smaller Companies and holds a B.A. degree with honors in Economics from Queen's
College.
TIMOTHY P. FLYNN (director since May, 1999): From 1992 when it was founded until
November, 1997, Mr. Flynn was a director of ValuJet Airlines, having previously
served almost 10 years as a senior executive and director of WestAir Holdings,
Inc., a company which operated WestAir, a California-based commuter airline
affiliated with United Airlines (a United Express partner). Many are familiar
with ValuJet's remarkable growth earlier this decade, while WestAir expanded to
become an airline with 90 aircraft operating in 28 states with $250,000,000 in
annual revenue under Mr. Flynn's direction. Mr. Flynn is currently a director of
MGC Communications Inc. (NASD: MGCX).
REVERSE STOCK SPLIT
On May 14, 1999, the Company announced its plans to proceed with a 1 for 5
reverse stock to be effective June 1, 1999. FutureLink's shareholders authorized
the directors to effect up to a 1 for 30 reverse stock split, to be executed on
or before June 1, 1999, at the annual meeting of shareholders held November 30,
1998. FutureLink has authorized capital of 100,000,000 shares of Common Stock,
$0.0001 par value, as well as preferred stock. As at May 14, 1999, the Company
had less than 30,000,000 shares of common stock fully paid, issued and
outstanding, but share acquisition rights (warrants, options, conversion
rights), if exercised, would result in the issuance of over 120,000,000
additional shares of common stock - a fully diluted common stock amount in
excess of 150,000,000 shares which exceeds FutureLink's authorized capital. The
reverse stock split will result in the Company having approximately 6,000,000
shares of common stock outstanding and 30,000,000 shares fully diluted, well
within the continuing 100,000,000 share authorized common stock limit.
20
<PAGE> 21
YEAR 2000 ISSUES
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field to specify year and cannot
distinguish 21st century dates from 20th century dates. These date code fields
will have to be able to distinguish 21st century dates from 20th century dates
to avoid systems failures or miscalculations causing disruptions of operations
by, at or beyond the Year 2000, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar ordinary
business activities. As a result, many companies' computer systems and software
may require replacement or modification in order to address such Year 2000
issues.
We are completing a review of our systems and the software utilized by our
Company, including software utilized internally, software supplied to clients
and software hosted for clients, and believe that the majority are designed to
properly function through and beyond the Year 2000. We cannot guarantee that all
of our computer systems, particularly if they interface with or incorporate
third-party software, will contain all date code changes necessary to ensure
Year 2000 compliance.
Since we have experienced most of our growth in systems and personnel since
January 1, 1998, purchases and upgrades of systems have occurred principally
during the past year. Our internal systems for accounting, human resources and
sales reporting, as well as telephone, voice mail and other office support
systems, have all been assessed for Year 2000 compliance. While our
FutureLink/SysGold Ltd. subsidiary, acquired in August, 1998, was in business
since 1988, that company has actively updated its systems and those of its
clients. FutureLink/SysGold Ltd. is currently active in consulting to its
clients on Year 2000 compliance issues.
We are in the process of contacting providers of various equipment used
internally and/or by our clients, primarily Compaq, Citrix, Microsoft, Novell,
Hewlett Packard and IBM, to determine what degree their systems' are Year 2000
compliant. We are not dependent on any suppliers or manufacturers whose failure
to be Year 2000 compliant would have a significant impact on our financial
condition or results of operations except providers of utilities
(telecommunications, electricity, natural gas, etc.) to our offices. We
currently estimate that our Year 2000 compliance assessment is 70% complete and
that 60% of our systems are Year 2000 compliant or have already been upgraded.
The Company has adequate resources, both fiscal and personnel, to complete our
Year 2000 compliance assessment. We do not expect to expend any significant
funds to correct Year 2000 issues. Any minor expenses will be funded in the
ordinary course from cash generated by operations. We remain on tract to
complete our internal Year 2000 compliance program before September 30, 1999.
Based on available information, we are preparing contingency plans in the event
of failure of critical systems resulting from Year 2000 compliance issues
including the failure of computer systems of outside suppliers, for example, our
outsourced payroll.
FutureLink sells computer-related services and so the Company's risk of
litigation relating to Year 2000 issues is likely to be higher than the risks
faced by companies in other industries. With computer products and IT services
often incorporating components from multiple suppliers, it may be difficult to
determine which component(s) may cause Year 2000 problems. As such, FutureLink
may be subject to lawsuits regarding Year 2000 issues whether or not our
products and services are Year 2000 compliant. We can not be certain what the
outcome or impact of any such lawsuits may be.
21
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of its business, FutureLink continues to be involved in a
number of material legal proceedings commenced or pending against the Company,
as follows:
1. Midland Walwyn Capital Inc. (now Merrill Lynch Canada Inc.) ("Midland
Walwyn") commenced an action on October 20, 1997, in Ontario Court (General
Division), Toronto, Canada, against Core Ventures, Inc. (now FutureLink),
Abecorn Enterprises Limited ("Abecorn"), Alixe Cormick, Venture Law Corporation,
and Raymond Kompani. At the time of the alleged transactions, John A. Xinos of
Abecorn was also a director of the Company, Alixe Cormick of Venture Law
Corporation acted as legal counsel for the Company and Ray Kompani was a third
party with no relation to the Company. Midland Walwyn is seeking judgement in
the amount of CDN$500,000 against all defendants. The action against the Company
alleges fraudulent misrepresentation, negligent misrepresentation or intentional
or negligent interference with contractual relations. The Company has filed a
defense jointly with Abecorn. The action relates to a share sale transaction in
which Raymond Kompani apparently failed to pay Abecorn for 50,000 shares of the
Company's Common Stock he purchased from Abecorn. Ms. Cormick, solicitor for the
Company, advised the Company's transfer agent to stop transfer the relevant
share certificate registered in the name of Abecorn. Mr. Kompani deposited the
share certificate with Midland Walwyn and instructed Midland Walwyn to sell all
50,000 shares. When Midland Walwyn sent the Abecorn/Kompani share certificate to
the clearinghouse, they were advised of the stop transfer. Midland Walwyn paid
the net sale proceeds to Raymond Kompani before being advised by the
clearinghouse of any problem. Midland Walwyn was required to repurchase 50,000
shares of the Company's Common Stock on the market at a cost of just over
$325,000. Midland Walwyn demanded repayment from Raymond Kompani but Mr. Kompani
failed to pay. Midland Walwyn brought suit to recover its losses. John Xinos and
the Company entered into an indemnity agreement dated January 19, 1998, whereby
Mr. Xinos agreed to bear the costs of defending this action and to indemnify the
Company for any losses arising from the Midland Walwyn lawsuit. Management
believes that FutureLink has minimal exposure in this matter due to the role
played by the Company and the indemnity agreement with John A. Xinos and does
not believe that there will be a material impact on the Company if the plaintiff
were successful.
2. 554495 Alberta Ltd. commenced an action against Coffee.com
Interactive Cafe Corp. (now the Company's FutureLink Alberta subsidiary) on
October 31, 1997, in the Court of Queen's Bench of Alberta, Calgary, Canada. The
proceedings relate to a purported lease agreement with respect to commercial
space in Calgary. The Plaintiff claims that a lease agreement exists with
FutureLink Alberta and seeks judgement in an amount in excess of CDN$285,000
plus costs. FutureLink Alberta has filed a defense and counterclaim for up to
CDN$390,000, plus legal costs. The parties are proceeding to discovery of
corporate officers and the legal costs are mounting. Management of the Company
believes that its FutureLink Alberta subsidiary has minimal exposure in this
matter.
3. A Statement of Claim was issued by TAP Consulting Ltd. ("TAP") on
August 19, 1998, in the Court of Queen's Bench of Alberta, Calgary, Canada,
naming SysGold Ltd. (now part of the Company's FutureLink/SysGold Ltd.
subsidiary) as a defendant. The suit alleges that SysGold Ltd. wrongfully
terminated a management services contract dated January 19, 1991, between
SysGold Ltd. and TAP without cause or reasonable notice. TAP seeks CDN$150,000
plus court costs. Management believes that its FutureLink/SysGold Ltd.
subsidiary has a sustainable defence to this claim and intends to vigorously
defend it and to file a counterclaim. At the time of acquiring
FutureLink/SysGold Ltd., the Company and Don Bialik entered into an indemnity
agreement dated August 21, 1998, whereby Don Bialik agreed to indemnify the
Company for any losses suffered by FutureLink/SysGold Ltd. and the Company
arising from the TAP lawsuit. Management believes that FutureLink has minimal
exposure in this matter due to the indemnity agreement with Don Bialik and do
not believe that there would be any material impact on the Company should TAP
prove its claim.
22
<PAGE> 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company has completed a number of material financing transactions ($500,000
or more gross proceeds being considered "material") since January 1, 1999. These
include additional funding provided by Thomson Kernaghan & Co. Limited, a
financing by Augustine Fund, LP and a financing led by Commonwealth Associates.
As previously reported in the Company's SB-2 Registration Statement and in the
Company's Form 10-KSB Annual Report for the year ended December 31, 1998, the
Company entered into a Debenture Acquisition Agreement dated August 14, 1998, as
amended on August 21, 1998, with Thomson Kernaghan & Co. Limited ("TK") pursuant
to which TK, acting as an agent for certain investors, agreed to purchase from
FutureLink, in one or more tranches, a $5,000,000 10% Convertible Debenture and
a series of warrants, which would provide up to $1,000,000 if exercised (see
below). A share certificate representing 11,000,000 shares was issued under
escrow for the shares of Common Stock underlying the Debenture and Warrants. The
Form SB-2 filed by the Company January 6, 1999 registered 10,615,384 of these
11,000,000 shares of Common Stock underlying the Debenture and Warrants.
Effective February 26 1999, the Company received from TK the final portion of
the entire $5,000,000 contemplated by the Debenture Acquisition Agreement and TK
had converted $2,000,000 of the Convertible Debenture plus accrued interest into
7,860,046 shares of Common Stock. In connection with the TK Debenture, the
Company also granted to TK a warrant to subscribe for 781,250 Common Shares at a
price of $0.96 per share at any time prior to August 20, 2001, together with a
warrant to subscribe for 260,417 Common Shares at a price of $0.96 per share at
any time prior to August 20, 2001. The shares of the Company's Common Stock
underlying these warrants were included as part of the 11,000,000 shares issued
but not paid for underlying the Debentures and warrants. On February 16, 1999,
the Company issued an additional 8,000,000 restricted common shares to TK to
fulfill the terms and conditions of the TK Debenture Acquisition Agreement and
Debentures purchased thereby.
On February 26, 1999 the Company issued a Letter of Intent in which to amend the
terms of the TK convertible debentures such that the total financing available
would increase from $5,000,000 to $6,000,000. In addition, under the new terms,
a share certificate is to be issued in trust for unpaid shares of common stock
representing 125% of the common stock underlying the $1,000,000 10% convertible
debenture. In addition, the Company is to issue an additional $250,000 of
warrants at a price based on a formula contingent on the Company's next major
financing. On April 26, 1999, the Company and TK executed a Letter Agreement
amending the terms of the outstanding convertible debentures and warrants. As of
that date, TK had acquired a total of $5,970,000 of debentures and had converted
$2,000,000 of the principal amount and accrued interest). Of the balance of
$3,970,000 outstanding principal, the Company agreed to pay out $1,470,000 of
principal on or before May 26, 1999 for $1,881,600 in cash plus common stock to
cover accrued interest thereon issuable at "market price". Of the remaining
$2,500,000 of convertible debentures, these will no longer be convertible at a
floating conversion rate and will, instead be convertible to common stock at the
fixed rate of $0.20 per share. As at April 26, 1999, TK or its clients held
warrants to purchase 1,041,667 shares of common stock at $0.96 per share and
were to receive an additional 647,668 shares at $0.39 per share under the terms
of the February 26, 1999 Letter of Intent. All of these warrants are to be
re-priced to have an exercise price of $0.25 per share and warrants to purchase
an additional 4,310,665 shares of common stock at an exercise price of $0.25 per
share are issuable pursuant to the April 26, 1999 Letter Agreement.
On March 2, 1999, the Company issued an aggregate of $500,000 8% convertible
debentures, due February 28, 2002 to Augustine Fund, L.P. The holder has the
right to convert the debenture at a price per share equal to 80% of the closing
prices of the Company's common stock for the three days prior to either the
initial funding date or the date of conversion, whichever is less. The Company
may prepay any and all of the outstanding principal amounts at any time, upon
thirty days notice, subject to the holders' right to convert into common stock.
At the holders' election, interest can be settled in common stock of the Company
based on market prices.
23
<PAGE> 24
Upon entering into this convertible debenture agreement, the Company issued
warrants to purchase 132,743 shares of common stock of the Company to Augustine
Fund, LP. Common stock can be purchased at a price per share equal to the
average closing price of the common stock for the three trading days prior to
the initial funding date which has been calculated as $0.3767 per share. The
warrants expire on February 28, 2001.
On March 2, 1999, a share certificate for 2,621,659 unpaid shares of common
stock was issued in escrow for the common stock underlying the $500,000 8%
convertible debentures and warrants issued on that date.
Pursuant to Letters of Intent dated March 19, 1999 and April 13, 1999, effective
April 14, 1999, the Company entered into a formal Agency Agreement with
Commonwealth Associates L.P. ("Commonwealth") whereby Commonwealth agreed to act
as the Company's placement agent for a private offering of units consisting of
convertible notes and warrants. The offering was for a minimum of $2 million and
a maximum of $4 million, with provisions allowing for the issuance of an
additional $4 million over-subscription. Closings took place April 29, 1999 and
May 7, 1999 with the offering being fully oversubscribed. In total, the Company
sold $8,038,500 worth of units. The vast majority of the units consisted of 8%
senior subordinated convertible notes convertible to shares of common stock at
$0.25 per share for each $1,000 invested. Members of FutureLink management
subscribed for $433,000 of the units on modified terms such that notes issued to
management are convertible at $0.30 per share and warrants received by
management subscribers are exercisable at $0.30 per share, which pricing is
based on an average market price formula for the ten trading days to April 14,
1999. Commonwealth's compensation for acting as placement agent consisted of 9%
of gross proceeds for sales commissions, placement fees and structuring fees,
and 2,500 agent's warrants in total for each $1,000.00 of units sold in the
offering, half as compensation as Placement Agent and half sold to Commonwealth
as advisor at $0.01 per warrant. All agent's warrants are also exercisable at
$0.25 per share.
All together, from January 1, 1999 through May 10, 1999, the Company raised an
additional $12,188,500 gross proceeds from all financings. Of these funds, the
Company netted approximately $11 million following payment of commissions,
finders' fees, professional fees and other expenses associated with such
financings.
The uses made or to be made of these gross financing proceeds can be broken down
as follows (all figures approximated to the nearest thousand dollars):
<TABLE>
<S> <C>
Gross Proceeds: $12,188,500
Less: Finance Fees: $ 1,136,000
Less: Other Offering Expenses: $ 63,500
-----------
Net Proceeds: $10,989,000
Capital Asset Purchases January 1 to March 31, 1999: $ 1,088,000
Repaid Promissory Note re: SysGold Acquisition (plus interest): $ 401,000
Debenture Repayment Commitment: $ 1,882,000
Repayment of Affiliate re: Bridge Financing: $ 218,000
Projected Additional IT Infrastructure: $ 1,700,000
Projected Future Expansion Costs: $ 1,500,000
Provision for Annual Interest on 8% Convertible Notes: $ 643,000
General Working Capital: $ 3,557,000
</TABLE>
The above projected uses of proceeds are estimates only and the Company may
reallocate such projected uses of proceeds.
24
<PAGE> 25
On May 14, 1999, FutureLink announced plans to proceed with a 1 for 5 reverse
stock split. At the Company's annual meeting of shareholders held November 30,
1998, the shareholders passed a resolution authorizing (but not obligating)
FutureLink's board of directors to amend the Articles of the Company to effect
up to a 1 for 30 reverse stock split and that such reverse split be executed, if
at all, on or before June 1, 1999. The Company intends to have its common stock
trading on a post-reverse split basis on June 1, 1999, the board having decided
that a 1 for 5 reverse split was sufficient and would address the fact that on a
fully diluted basis, the outstanding common stock, together with common stock
issuable on exercise of all share acquisition rights, exceeds FutureLink's
authorized capital of 100,000,000 shares of common stock. The reverse split will
reduce the total common stock issued or issuable (fully diluted) to
approximately 30,000,000 shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) LIST OF EXHIBITS
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of Registrant*
3.2 By-laws of Registrant*
10.1 Debenture Acquisition Agreement dated August 14, 1998, as amended on
August 21, 1998, between FutureLink and Thomson Kernaghan & Co. Limited
("TK").*
10.2 Letter agreement dated February 26, 1999 between FutureLink and TK
extending the terms of the original Debenture Acquisition Agreement from
$5,000,000 maximum to $6,000,000.
10.3 Debenture and Warrant Purchase Agreement dated March 2, 1999 between
FutureLink and Augustine Fund, LP.
10.4 Agency Agreement dated April 14, 1999 between FutureLink and
Commonwealth Associates, LP ("Commonwealth") regarding a $4,000,000
maximum plus $4,000,000 over-allotment private placement financing.
10.5 Letter Agreement dated April 26, 1999 between FutureLink and TK amending
certain terms of outstanding FutureLink Securities and redeeming certain
convertible debentures.
10.6 Advisory Agreement dated effective May 1, 1999 between FutureLink and
Commonwealth.
27.1 1999 Financial Data Schedule for the three months ended March 31, 1999
(electronic filing only).
</TABLE>
* incorporated by reference to the Company's Registration Statement on
Form SB-2 (No. 333-62133).
25
<PAGE> 26
(b) REPORTS ON FORM 8-K
FutureLink filed a Form 8-K on May 7 1999 to report closings for a total of
$8,000,000 gross proceeds raised by way of private placement.
FutureLink filed a Form 8-K on May 14, 1999 to report the resignation of Robert
H. Kohn from the Board of Directors and the appointment of Michael S. Falk as a
Director to fill the vacancy on the Board.
FutureLink filed a Form 8-K on May 17, 1999 to report that the Company was
proceeding with a reverse stock split on the basis of 1 new share for each 5
current shares of common stock.
FutureLink filed a Form 8-K on May 18, 1999 to report the appointment of Timothy
P. Flynn as an additional Director of the Company.
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.
FUTURELINK DISTRIBUTION CORP.
Date: May 20, 1999 By: [signed: C. Chell]
-------------------------------------
Cameron Chell, Chairman, President
and Chief Executive Officer
Date: May 20, 1999 By: [signed: R. Kilambi]
-------------------------------------
Raghu Kilambi, Vice-President Finance
and Chief Financial Officer
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- ------- ----------- --------
<S> <C> <C>
3.1 Certificate of Incorporation of Registrant*
3.2 By-laws of Registrant*
10.1 Debenture Acquisition Agreement dated August 14, 1998, as amended on
August 21, 1998, between FutureLink and Thomson Kernaghan & Co. Limited
("TK").*
10.2 Letter agreement dated February 26, 1999 between FutureLink and TK
extending the terms of the original Debenture Acquisition Agreement from
$5,000,000 maximum to $6,000,000.
10.3 Debenture and Warrant Purchase Agreement dated March 2, 1999 between
FutureLink and Augustine Fund, LP.
10.4 Agency Agreement dated April 14, 1999 between FutureLink and
Commonwealth Associates, LP ("Commonwealth") regarding a $4,000,000
maximum plus $4,000,000 over-allotment private placement financing.
10.5 Letter Agreement dated April 26, 1999 between FutureLink and TK amending
certain terms of outstanding FutureLink Securities and redeeming certain
convertible debentures.
10.6 Advisory Agreement dated effective May 1, 1999 between FutureLink and
Commonwealth.
27.1 1999 Financial Data Schedule for the three months ended March 31, 1999
(electronic filing only).
* incorporated by reference to the Company's Registration Statement on
Form SB-2 (No. 333-62133).
</TABLE>
27
<PAGE> 1
EXHIBIT 10.2
FUTURELINK DISTRIBUTION CORP.
LETTER AGREEMENT WITH
THOMSON KERNAGHAN & CO. LIMITED
February 26, 1999
Mr. Mark Valentine
Executive Vice President, U.S. Capital Markets
Thomson Kernaghan & Co. Limited
1000, 365 - Bay Street
Toronto, ON
M5H 2V2
Dear Mr. Valentine:
As per our discussions over the last several weeks, FutureLink Distribution
Corp. (the "Issuer") and Thomson Kernaghan & Co. Limited (the "Agent") wish to
modify an existing convertible Debenture Acquisition Agreement (the "Debenture
Agreement") dated August 14, 1998, as:
1. The Agent and Issuer wish to increase the total purchase price of the
Debenture Agreement to $6,000,000 from $5,000,000.
2. The Issuer will issue a share certificate in the Agent's name, in trust,
representing one hundred and twenty five percent (125%) of the Issuer's
Common Stock underlying the $1,000,000 Debenture, based on a Conversion
Price per share equal to the average closing price of the Issuer's stock
as quoted on the NASD-OTC-BB on the three days prior to the signing of
this addendum.
3. The Issuer will issue $150,000 of Warrants of the Issuer for the benefit
of the Purchasers (the "Purchasers' Warrants") exercisable at a per
share price to be determined based on a formula agreed upon in a
concurrent equity private placement offering also being undertaking by
the Agent.
4. The Issuer will issue $100,000 of Warrants of the Issuer to the Agent
(the "Agent's Warrants) exercisable at a per share price to be
determined based on a formula agreed upon in a concurrent equity private
placement offering also being undertaken by the Agent (a February 26,
1999, draft of which is to be appended to this letter).
5. The Common Stock, Purchasers' Warrants and Agent's Warrants represented
in Item 2, 3 and 4 above will be issued under Regulation S under the
Securities Act of 1933 and 1934 (the "Securities Acts"), as amended, and
may be transferred only a provided for in the Debenture Agreement.
6. The Issuer covenants to the Agent that it will include in an appropriate
form of registration statement filed under the Securities' Act for
resale by the holders the following shares of Common Stock, of the
Issuer:
a) 8,000,000 shares represented by certificate 3706 as issued on
February 16, 1999 to the Agent as additional conversion stock
underlying the original $5,000,000 Convertible Debenture;
<PAGE> 2
b) $1,000,000 worth of the Issuer's Common Stock with the number of
Shares to be determined as to one hundred and twenty five
percent (125%) of the Issuer's Common Stock (underlying the
$1,000,000 Debenture), based on a Conversion Price per share
equal to the average closing price of the Issuer's stock as
quoted on the NASD-OTC-BB on the three days prior to the signing
of this addendum;
c) $150,000 of Purchasers' Warrants, and;
d) $100,000 of Agent's Warrants.
7. The Issuer covenants to file the appropriate form of registration
statement no later than April 15, 1999, following the filing of its
10-KSB report and agrees to pay liquidation damages on equivalent terms
to those provided for in the Debenture Agreement if the amended
registration statement is not effective by July 15, 1999.
Mr. Valentine, should you wish to agree with these terms and conditions, please
sign in the space allotted below and return a copy of this letter to my
attention at the address noted below.
Kindest regards,
FUTURELINK DISTRIBUTION CORP.
[signed: R. Kilambi]
Raghu Kilambi
Chief Financial Officer
cc.: Mr. Robert F. Wilson, Thomson Kernaghan & Co. Limited
I HEREBY UNDERSTAND AND AGREE TO THE ABOVE AMENDMENTS TO THE DEBENTURE
ACQUISITION AGREEMENT BETWEEN FUTURELINK DISTRIBUTION CORP. AND THOMSON
KERHAGHAN & CO. LIMITED, DATED AUGUST 14, 1998.
[signed: M. Valentine] [April 5 / 99]
- ---------------------------------- ----------------------------------------
THOMSON KERNAGHAN & CO. LIMITED DATE
2
<PAGE> 1
EXHIBIT 10.3
FUTURELINK DISTRIBUTION CORP.
DEBENTURE AND WARRANT PURCHASE AGREEMENT
THIS DEBENTURE AND WARRANT PURCHASE AGREEMENT (the "Agreement") is made and
entered into as of March 2, 1999, by and between FUTURELINK DISTRIBUTION CORP.,
a Colorado corporation ("Seller") and AUGUSTINE FUND, LP, an Illinois
corporation ("Buyer"), with respect to the following facts:
A) Seller desires to sell to the Buyer, and Buyer desires to purchase from
the Seller up to $500,000 of a 8% Convertible Debenture (the
"Debentures") for the Common Stock of the Seller at an exercise price
per share equal to the lesser of 80% of the average of the closing price
of the Common Stock of the Seller as quoted on the NASD Electronic
Bulletin Board for the three trading days prior to i) the Initial
Funding Date or ii) the Conversion Date; and
B) $50,000 of Warrants to purchase shares of the Seller's Common Stock (the
"Warrants") at an exercise price per share equal to the average of the
closing price of the Common Stock of the Seller as quoted on the NASD
Electronic Bulletin Board for the three trading days prior to the
Initial Funding Date (as hereinafter defined), in the form of Exhibits A
and B hereto, respectively, (collectively, the "Securities"), upon the
terms and conditions as set forth in this Agreement.
NOW THEREFORE, in consideration of the foregoing facts and the mutual covenants
and agreements contained herein, the parties hereby agree as follows:
1. PURCHASE AND SALE OF SECURITIES. Seller hereby sells the Securities to
Buyer, and Buyer hereby purchases the Securities from Seller. Seller is
acquiring the Securities as Nominee and intends to resell the Securities
to its customers.
2. PURCHASE PRICE. The total purchase price (the "Purchase Price") for the
Securities shall be up to Five Hundred Thousand Dollars ($500,000),
payable in cash in accordance with the terms, conditions and procedures
set forth herein.
3. TRANSFER OF SECURITIES AND DELIVERY OF PURCHASE PRICE.
3.1
a) On the Initial Funding Date, the Buyer will advance Five Hundred
Thousand Dollars ($500,000) which is to be used for working
capital; provided that;
i. The Seller shall file with the United States Securities
and Exchange Commission (the "SEC") within 45 days of
the Initial Funding Date: (A) an appropriate form to
register its Common Stock under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the
"Securities Act"), and (B) the registration statement
described in Section 6 below to register for resale
under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), a portion of the shares of Common
Stock issuable upon conversion or exercise of the
Securities.
<PAGE> 2
The amount advanced shall be represented by a Debenture(s) in the form
of Exhibit A hereto for the amount advanced; provided that Debentures,
at the Buyer's request may be issued in amounts of One Hundred Thousand
Dollars ($100,000) or multiples thereof, whether issued at the Initial
Funding Date of any Subsequent Funding Date. The Seller shall also
deliver to the Buyer on the Initial Funding Date, the Warrants in the
form of Exhibit B hereto.
3.2
On the Initial Funding Date, Seller shall issue to the Buyer, for Buyer's own
account, $50,000 of Warrants of the Seller exercisable at a per share price
equal to the average of the closing price of the Common Stock of the Seller as
quoted on the NASD Electronic Bulletin Board for the three trading days prior to
the Initial Funding Date, in the form of Exhibit B hereto.
3.3
On the Initial Funding Date, the Seller and the Buyer shall enter into the
Escrow Agreement in the form of Exhibit C hereto, with Brobeck Phleger &
Harrision LLP as Escrow Agent.
4. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller hereby
represents and warrants to the Buyers as follows:
4.1
Any Common Stock of Seller issuable upon conversion of or as payment of interest
pursuant to the Debentures and the exercise of the Warrants will be duly and
validly issued fully paid and nonassessable Common Stock of the Seller.
4.2
The Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of Colorado. The Seller has full corporate
power and authority to own and operate its properties and assets, and to carry
on its business as presently conducted and as proposed to be conducted. The
Seller is duly qualified to do business as a foreign corporation in each
jurisdiction to which the failure to be so qualified could have a material
adverse effect on the Seller.
4.3
The Seller has and will have at the Initial Date, all required legal and
corporate power and authority to execute and deliver this Agreement and the
Exhibits hereto, to sell and issue the Securities and all Common Stock
underlying the Securities hereunder, and to carry out and perform its
obligations under the terms of the Agreement and the Exhibits hereto.
4.4
The authorized capital stock of the Seller consists of (a) 100,000,000 shares of
Common Stock, par value $.0001 per share, of which 29,300,318 shall be issued
and outstanding as of the Initial Funding Date and, (b) 5,000,000 shares of
Preferred Stock, no par value per share, none of which are issued and
outstanding immediately prior to the Initial Funding Date.
2
<PAGE> 3
4.5
All corporate action on the part of the Seller, its directors and stockholders
necessary for the authorization, execution, delivery and performance of this
Agreement and the Exhibits hereto, the authorization, sale, issuance and
delivery of the Securities and all underlying Common Stock and the performance
of all of the Seller's obligations hereunder and under each of the Exhibits
hereto shall be duly taken by the Seller. This Agreement, when executed and
delivered by the Seller, constitutes and each of the Exhibits thereto shall,
when executed and delivered, constitute, a valid and binding obligation of the
Seller, enforceable in accordance with their terms except for bankruptcy and
equitable remedies. The Common Stock when issued in compliance with the
Securities shall be validly issued, fully paid and non-assessable. The
Securities are free of any liens, claims or encumbrances; provided, however,
that they will be subject to restrictions on transfer under applicable state
and/or federal securities laws as set forth herein. The issuance of the
Securities will not be subject to any preemptive rights or rights of first
refusal, or result in any default of, or conflict with, the Articles of
Incorporation or Bylaws of the Seller, any contract or agreement to which the
Seller is a party or by which it is bound of any other obligation or commitment
of the Seller.
4.6
The Seller has delivered to the Buyer the reviewed balance sheet and statements
of operations and cash flows of the Seller as of and for the period ended
September 30, 1998 (the "Financial Statements"). The Financial Statements are
complete and correct and have been prepared in accordance with the books and
records of the Seller on a consistent basis. The Financial Statements accurately
set out, present fairly and describe the consolidated financial condition and
operating results of the Seller as of the dates, and during the periods,
indicated therein.
4.7
The Seller has no liabilities or obligations of any kind, absolute, contingent
or otherwise, except (a) the liabilities and obligations set forth in the
Financial Statements, (b) liabilities and obligations which have been incurred
subsequent to September 30, 1998, in the ordinary course of business and
consistent with past practice.
4.8
The Seller has good and marketable title to its properties and assets, and has
good title to all it leasehold forecasts, in each case subject to no lien, claim
or encumbrance other than (a) the lien of current taxes not yet due and payable,
(b) possible minor liens and encumbrances which do not in any case or in the
aggregate materially detract from the value of the property subject thereto or
materially impair the operations of the Seller, and which have not arisen
otherwise than in the ordinary course of business. The assets and properties of
the Seller are adequate to conduct the operations currently conducted and
proposed to be conducted by it. The Seller enjoys peaceful and undisturbed
possession under all leases under which it is operating, and all said leases are
valid and subsisting and in full force and effect. The leasehold improvements of
the Seller and all of their tangible personal property, machinery, equipment,
fixtures and inventories used in the ordinary course of business are in good
repair and in good operating condition, reasonable wear and tear excluded.
3
<PAGE> 4
4.9
The Seller is not in violation of any term of its Articles of Incorporation or
Bylaws, or of any material term or provision of any mortgage, indebtedness,
indenture, contract, agreement, instrument, judgment or decree, including
without limitation any Material Contract. The Seller is in compliance with all
judgments, decrees, governmental orders, laws, statutes, rules and regulations
by which it is bound or to which it or any of its properties or assets is
subject, except where the failure to comply would not have a material adverse
effect on the Seller. The Seller has all permits, licenses, franchises and
authorizations (collectively, the "License") which are required by law and/or
necessary to operate its business as conducted or proposed to be conducted,
except where the failure to have any such License would not have a material
adverse effect on the Seller. All such Licenses were validly issued and are in
full force and effect. The Seller is in compliance in all material respect with
all of its Licenses and no suspension, revocation or termination of any License
is pending or, to the knowledge of the Seller, thereafter. The execution,
delivery and performance of and compliance with this Agreement and the Exhibits
thereto, and the issuance of the Securities have not resulted and will not
result in any violation of, or conflict with, or constitute a material default
under, (a) the Articles of Incorporation or Bylaws of the Seller or (b) assuming
the accuracy of the representations and warranties of the Seller set forth in
hereto, any applicable law, statute, rule, regulation or License, or (c) any
agreement, contract, franchise or instrument to which the Seller is a party, and
has not resulted and will not result in the creation of, any Lien upon any of
the properties or assets of the Seller.
4.10
The Seller has good and marketable titles to, or valid and continuing rights and
licenses to use, all patents, patent rights, trade secrets, trademarks,
trademark rights, service marks, trade names, copyrights, franchises, licenses,
permits, inventions, customer lists, and all rights with respect to the
foregoing, which are necessary for the operation of its business as presently
conducted and now proposed to be operated (collectively, the "Intangible
Property"). To the Seller's knowledge, the conduct of business of the Seller as
now operated and as now proposed to be operated does not and will not conflict
with any valid intellectual property right of others. The Seller has not
received any notices of any claim against it that any of its operations,
activities, products or publications infringes on any patent, trademark, trade
name, copyright or other property right of a third party or that it is illegally
or otherwise using the trade secrets or any property rights of others. The
Seller has no knowledge that any licensor of it has any disputes with or claims
against any third party for infringements by such third party of any trade name
or other Intangible Property.
4.11
There are no actions, suits, proceedings or investigations pending against the
Seller or its properties before any court or governmental agency (nor, to the
best of the Seller's knowledge, is there any reasonable basis therefore or
threat thereof) that has not been disclosed to the Buyer.
4.12
To the best of the Seller's knowledge, no employee of the Seller is in violation
of any term of any employment contract, patent disclosure agreement or any other
contract or agreement relating to the relationship of such employee with Seller.
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<PAGE> 5
4.13
All agreements material to the business of the Seller ("Material Contracts") are
valid, binding and in full force and effect in all material respects. The Seller
and, to the best of the Seller's knowledge, each other party to a Material
Contract have in all material respects performed all the obligations required to
be performed by them, have received no notice of default under any Material
Contract.
4.14
The Seller: (a) has accurately prepared and timely filed all tax returns that
are required to have been filed by it with all appropriate federal, state,
country and local governmental agencies (and all such returns fairly reflect the
Seller's operations for tax purposes); and (b) has paid in full or made adequate
provision on the financial Statements for the payment of all taxes.
4.15
None of this Agreement (including the Exhibits hereto), any instruments,
certificate or report furnished to the Shareholder when read together, contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein, in light
of the circumstances under which they are made, not misleading. The Seller knows
of no information or fact that has and/or could have a material adverse effect
on it that has not been disclosed to the Buyer.
5. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF THE BUYER. The
Buyer hereby represents and warrants to and covenants and agrees with
the Seller the following:
5.1
The Buyer has the full power and authority to execute, deliver and perform this
Agreement. This Agreement when executed and delivered by the Buyer will
constitute a valid and legally binding obligation of the Buyer, enforceable in
accordance with its terms except for bankruptcy and equitable remedies.
5.2
This Agreement is made with the Buyer in reliance upon such Buyer's
representation to the Company, which by such Buyer's execution of this Agreement
such Buyer hereby confirms, that the Securities to be purchased by such Buyer
and the Common Stock issuable upon conversion of the Debenture or upon exercise
of the Warrant will be acquired for investment for such Buyer's own account, not
as a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that such Buyer has no present intention of selling, granting
any participation in, or otherwise distributing the same. By executing this
Agreement, the Buyer further represents that such Buyer does not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to any of the Securities to be purchased by such Buyer and the Common
Stock issuable upon conversion of the Debenure or upon exercise of the Warrant.
The Buyer has not been formed for the specific purpose of acquiring the
Debenture or the Warrant.
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5.3
The Buyer understands that the Debenture and the Warrant are not, and any Common
Stock acquired on conversion of the Debenture or upon exercise of the Warrant at
the time of issuance may not be, registered under the Securities Act.
5.4
The Buyer represents that it has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Securities and the business, properties, prospects and financial condition
of the Company.
5.5
The Buyer is an "accredited investor" as defined in Rule 501(a) under the
Securities Act. The Buyer is able to bear the economic risk of this investment,
and has such knowledge and experience in financial and business matters that
such Buyer is capable of evaluating the merits and risks of the investment in
the securities to be purchased hereunder. The Buyer is purchasing the Securities
pursuant to this Agreement for investment purposes for its own account and not
with a view to, or for resale in connection with, any distribution thereof,
within the meaning of Section 2(11) of the Securities Act.
5.6
The Buyer understands that the Debenture and the Warrant and any Common Stock
issued upon conversion of the Debenture or upon exercise of the Warrant are
characterized as "restricted securities" under applicable U.S. federal and state
securities laws. The Buyer understands that the Debenture and the Warrant and
Common Stock issuable upon conversion of the Debenture or upon exercise of the
Warrant may not be sold except in compliance with the Securities Act and
applicable state securities laws.
5.7
The Buyer understands that the Debenture and the Warrant, and any securities
issued in respect thereof or exchange therefor, may bear one or both of the
following legends.
A. "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. THESE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED EXCEPT IN COMPLIANCE WITH THE FEDERAL AND STATE
SECURITIES LAWS."
B. Any legend required by the blue sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
5.8
The Purchase Price to be paid by Buyer to Seller for the Securities has been
determined by Buyer as fair and appropriate based solely upon Buyer's
independent investigation and due diligence of the Seller, and neither the
Seller nor any of its agents, including, without limitation, any of their
officers, directors, employees, accountants and attorneys, has made any
representations or warranties whatsoever in
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connection with the sale of the Securities by the Seller to the Buyer, except as
specifically set forth herein. The Buyer has had sufficient opportunity in
connection with the sale of the Securities to review the Seller's business and
affairs (including, without limitation, the Seller's financial statements and
other information) and to inquire of the Seller's management with respect
thereto. The Buyer has had answered to its satisfaction any questions with
respect to the Seller's business and affairs. The Buyer further has had the
opportunity to obtain independent financial, legal, accounting, business, tax
and other appropriate advice with respect to the transactions contemplated by
this Agreement, and is not relying upon the Seller or any of its agents in any
manner in connection with same.
5.9
The Buyer has reviewed with his/her or its own tax advisors the foreign,
federal, state and local tax consequences of this investment, where applicable,
and the transactions contemplated by this Agreement. The Buyer is relying solely
on such advisors and not on any statements or representations of the Seller or
any of its agents and understands that the Buyer (and not the Seller) shall be
responsible for the Buyer's own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.
5.10
The Buyer acknowledges that it has had this Agreement and the transactions
contemplated by this Agreement reviewed by its own legal counsel. The Buyer is
relying solely on such counsel and not on any statements or representations of
the Seller or any of its agents for legal advice with respect to this investment
or the transactions contemplated by this Agreement.
6. REGISTRATION UNDER THE SECURITIES ACT.
6.1
As soon as possible after the date (but in no case prior to the Initial Funding
Date), the Seller will include in an appropriate form of registration statement
filed under the Securities Act for resale by the potential holders (the "Buyer")
the following shares of Common Stock, but only Common Stock, of the Seller
(collectively, the "Securities");
i. One hundred fifty percent (150%) of the shares underlying the
Debenture, assuming the aggregate outstanding Principal Sum was
Five Hundred Thousand Dollars ($500,000) based on a Conversion
Price per share equal to eighty percent of the closing prices
for the Common Stock of the Seller for the three trading days
prior to the Initial Funding Date; and
ii. One hundred percent (100%) of the shares underlying the Warrants
to purchase Fifty Thousand Dollars ($50,000) of the Common Stock
of the Seller based on an exercise price per share equal to the
closing price for the Common Stock of the Seller for the three
trading days prior to the Initial Funding Date.
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6.2
The Seller shall use its best efforts to cause the registration statement
provided for in Section 6.1 hereof to become effective under the Act no later
than the ninetieth (90th) day after March 31, 1999. Should the registration
statement not become effective on the 90th day after March 31, 1999, then the
Seller shall pay to the Buyer a penalty equal to .067 of a percent of the
Initial Funding Amount for each day following the 90th day after March 31, 1999,
that the registration statement is not effective.
6.3
The following provision of this Section 6 shall also be:
i. The Seller shall file the registration statement at its own
expense and without charge to the Buyer. The Buyer shall,
however, bear the fees of his own counsel and any transfer taxes
applicable to the Securities sold by it pursuant thereto.
ii. The Seller's agreements with respect to the Securities in this
Section 6 shall continue by effect regardless of the conversion
and surrender of the Debenture or any exercise of the Warrants
or the underlying Common Stock, except for any such underlying
Common Stock sold pursuant to a registration statement under the
Act or sold pursuant to Rule 144.
7. ENTIRE AGREEMENT. This agreement, and the Exhibits hereto embodies the
entire agreement and understanding between the parties hereto with
respect to the subject matter hereof and supercedes all prior agreements
and understandings relating to such subject matter.
8. CHOICE OF LAW AND VENUE. This Agreement shall be governed by and
construed under the laws of the State of Delaware, USA, without regard
to choice of laws, in force from time to time. Any proceeding arising
out of this Agreement shall be brought in Delaware, USA and all parties
hereby consent to the jurisdiction of the courts in Delaware.
9. ATTORNEY'S FEES. On the Initial Funding Date, the Seller agrees to pay
$2,500.00 to Foley & Lardner, legal counsel to the Buyer. In any action
to enforce this Agreement, the prevailing party shall be entitled to
recover from the non-prevailing party all reasonable costs, including,
without limitation, attorneys' fees.
10. PARTIES BOUND. This Agreement is binding on and shall inure to the
benefit of the parties and their respective successors, assigns, heirs
and legal representatives.
11. NOTICES. Except as otherwise provided herein, all notices, instructions
or other communications required or permitted hereunder shall be in
writing and sent by registered mail, postage prepaid, addressed as
follows:
To: FutureLink
300, 250 - 6th Avenue S.W.
Calgary, AB, Canada T2P 2T5
Fax: [removed]
Attention: Mr. Raghu Kilambi
Chief Financial Officer
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<PAGE> 9
To: Augustine Fund, LP
[removed]
or such other address, telephone numbers of contact persons as shall be
furnished in writing by such party to the other parties hereto. Any such notice,
instruction or communication shall be deemed to have been given three (3)
business days after the date mailed by registered mail or if sent by fax, upon
electronic confirmation or receipt.
12. GENDER. Masculine nouns and pronouns shall include feminine nouns and
pronouns.
13. ATTORNEY'S FEES. The Seller agrees to pay all costs and expenses,
including without limitation reasonable attorney's fees, which may be
incurred by the Buyer in collecting any amount due under the Debenture
or in enforcing any of the Buyer's conversion rights as described
herein.
14. INDEMNIFICATION. The Seller shall indemnify, defend and hold harmless
each holder of Registrable Securities which are included in a
registration statement pursuant to the provisions hereof and each of its
officers, directors, employees, agents, partners or controlling persons
(within the meaning of the Securities Act) (each, an "indemnified
party") from and against, and shall reimburse such indemnified party
with respect to, any and all claims, suits, demands, causes of action,
losses, damages, liabilities, costs or expenses ("Liabilities") to which
such indemnified party may become subject under the Securities Act or
otherwise, arising from or relating to (a) any untrue statement or
alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any
amendment or supplement thereto, or (b) the omission or alleged omission
to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
in which they were made, not misleading; provided, however, that the
Seller shall not be liable in any such case to the extent that any such
Liability arises out of or is based upon an untrue statement or omission
so made in strict conformity with information furnished by such
indemnified party in writing specifically for use in a registration
statement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
SELLER: FUTURELINK DISTRIBUTION CORP.
By: [signed: R. Kilambi]
-------------------------------------
As: Chief Financial Officer
-------------------------------------
BUYER: AUGUSTINE FUND, LP
By: [signed: Thomas F. Duszynski]
-------------------------------------
As: CFO, Augustine Capital Management
Inc., GP
----------------------------------------
9
<PAGE> 1
EXHIBIT 10.4
FUTURELINK DISTRIBUTION CORP.
AGENCY AGREEMENT
Commonwealth Associates L.P.
830 Third Avenue
New York, New York 10022
April 14, 1999
Gentlemen:
FutureLink Distribution Corp., a Colorado corporation (the "Company"),
proposes to offer for sale to "accredited investors", in a private placement,
units ("Units"), each Unit consisting (i) $50,000 principal amount of 8%
convertible promissory notes (the "Notes") and (ii) seven-year warrants (the
"Warrants") to purchase 125,000 shares of the Company's common stock, $.0001 par
value (the "Common Stock"). Such offering and sale are referred to herein as the
"Offering." A minimum of 40 Units for $2,000,000 ("Minimum Offering") and a
maximum of 80 Units for $4,000,000 ("Maximum Offering") will be sold in the
Offering at $50,000 per Unit. The Maximum Offering may be increased by up to
$4,000,000 at the discretion of the Placement Agent (as defined below) in the
event of over-subscription (the "Over-Allotment Option"). The Units will be
offered pursuant to those terms and conditions acceptable to you as reflected in
the Confidential Term Sheet dated April 14, 1999 (the "Term Sheet"), as it may
be supplemented or amended from time to time. The Minimum Offering will be made
on a "best efforts - all or none" basis and the balance of the Offering will be
offered on a "best efforts" basis. The Units are being offered pursuant to the
Term Sheet and related documents in accordance with Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") and Regulation D
promulgated thereunder.
Commonwealth Associates is sometimes referred to herein as the
"Placement Agent." The Term Sheet (including the exhibits thereto), as it may be
amended or supplemented from time to time, and the form of proposed subscription
agreement between the Company and each subscriber (the "Subscription Agreement")
and the exhibits which are part of the Term Sheet and/or Subscription Agreement
are collectively referred to herein as the "Offering Documents."
The Company will prepare and deliver to the Placement Agent a reasonable
number of copies of the Offering Documents in form and substance satisfactory to
counsel to the Placement Agent.
Each prospective investor subscribing to purchase Units ("Subscriber")
will be required to deliver, among other things, a Subscription Agreement and a
confidential purchaser questionnaire ("Questionnaire") in the form to be
provided to offerees. Capitalized terms used herein, unless otherwise defined or
unless the context otherwise indicates, shall have the same meanings provided in
the Offering Documents.
1. APPOINTMENT OF PLACEMENT AGENT.
(a) You are hereby appointed exclusive Placement Agent of
the Company (subject to your right to have Selected Dealers, as defined in
Section 1(c) hereof, participate in the Offering) during the Offering Period
herein specified for the purposes of assisting the Company in finding qualified
Subscribers pursuant to the offering (the "Offering") described in the Offering
<PAGE> 2
Documents. The Offering Period shall commence on the day (the "Commencement
Date") the Offering Documents are first made available to you by the Company for
delivery in connection with the offering for sale of the Units and shall
continue until the earlier to occur of (i) the sale of all of the Maximum
Offering or (ii) April 30, 1999 (unless extended for a period of up to 30 days
under circumstances specified in the Term Sheet). If the Minimum Offering is not
sold prior to the end of the Offering Period, the Offering will be terminated
and all funds received from Subscribers will be returned, without interest and
without any deduction. The day that the Offering Period terminates is
hereinafter referred to as the "Termination Date."
(b) Subject to the performance by the Company of all of its
obligations to be performed under this Agreement and to the completeness and
accuracy of all representations and warranties of the Company contained in this
Agreement, Commonwealth Associates hereby accepts such agency and agrees to use
its best efforts to assist the Company in finding qualified subscribers pursuant
to the Offering described in the Offering Documents. It is understood that the
Placement Agent has no commitment to sell the Units. Your agency hereunder is
not terminable by the Company except upon termination of the Offering Period.
(c) Subscriptions for Units shall be evidenced by the
execution by Subscribers of a Subscription Agreement. No Subscription Agreement
shall be effective unless and until it is accepted by the Company. Until the
Closing, all subscription funds received shall be held as described in the
Subscription Agreement. The Placement Agent shall not have any obligation to
independently verify the accuracy or completeness of any information contained
in any Subscription Agreement or the authenticity, sufficiency, or validity of
any check delivered by any prospective investor in payment for Units.
(d) The Placement Agent and its affiliates will purchase
Units sold in the Offering.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Placement Agent and each Selected Dealer, if any,
as follows:
(a) Securities Law Compliance. The Offering Documents
conform in all respects with the requirements of Section 4(2) of the Securities
Act and Regulation D promulgated thereunder and with the requirements of all
other published rules and regulations of the Securities and Exchange Commission
(the "Commission") currently in effect relating to "private offerings" to
"accredited investors" of the type contemplated by the Company. The Offering
Documents will not contain an untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances in which they were made, not misleading. If at any
time prior to the completion of the Offering or other termination of this
Agreement any event shall occur as a result of which it might become necessary
to amend or supplement the Offering Documents so that they do not include any
untrue statement of any material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances then existing, not misleading, the Company will promptly notify
you and will supply you with amendments or supplements correcting such statement
or omission. The Company will also provide the Placement Agent for delivery to
all offerees and purchasers and their representatives, if any, any information,
documents and instruments which the Placement Agent deems reasonably necessary
to comply with applicable state and federal law.
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<PAGE> 3
(b) Organization. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Colorado and has all requisite corporate power and authority to own and lease
its properties, to carry on its business as currently conducted and as proposed
to be conducted, to execute and deliver this Agreement and to carry out the
transactions contemplated by this Agreement, as appropriate, and is duly
licensed or qualified to do business as a foreign corporation in each other
jurisdiction in which the conduct of its business or ownership or leasing of its
properties requires it to be so qualified, except where the failure to be so
licensed or qualified would not, in the aggregate, have a material adverse
effect on the business or financial condition of the Company (a "Material
Adverse Effect").
(c) Capitalization. The authorized, issued and outstanding
capital stock of the Company prior to the consummation of the transactions
contemplated hereby is as set forth in the Offering Documents. All issued and
outstanding shares of the Company's common stock are validly issued, fully paid
and non-assessable (with the exception of 13,761,613 shares currently held in
escrow to satisfy certain obligations upon conversion of outstanding debentures
and exercise of outstanding warrants which shares will not be paid for until
such conversion or exercise) and such shares have not been issued in violation
of the preemptive rights of any stockholder of the Company. All prior sales of
securities of the Company were either registered under the Securities Act and
applicable state securities laws or exempt from such registration, and no
security holder has any rescission rights with respect thereto.
(d) Warrants, Preemptive Rights, etc. Except as set forth in
or contemplated by the Term Sheet, there are not, nor will there be immediately
after the Closing (as hereinafter defined), any outstanding warrants, options,
agreements, convertible securities, preemptive rights to subscribe for or other
commitments pursuant to which the Company is, or may become, obligated to issue
any shares of its capital stock or other securities of the Company and this
Offering will not cause any anti-dilution adjustments to such securities or
commitments except as reflected in the Term Sheet.
(e) Subsidiaries and Investments. Other than as set forth in
the Offering Documents, the Company has no subsidiaries and the Company does not
own, directly or indirectly, any capital stock or other equity ownership or
proprietary interests in any other corporation, association, trust, partnership,
joint venture or other entity.
(f) Financial Statements. The financial information
contained in the Offering Documents is accurate in all material respects. The
financial statements attached to the Offering Documents are hereinafter referred
to collectively as the "Financial Statements". The Financial Statements have
been prepared in conformity with generally accepted accounting principles
consistently applied and show all material liabilities, absolute or contingent,
of the Company required to be recorded thereon and present fairly the financial
position and results of operations of the Company as of the dates and for the
periods indicated.
(g) Absence of Changes. Since the date of the Term Sheet,
except with respect to matters of which the Company has notified you in writing,
the Company has not incurred any liabilities or obligations, direct or
contingent, not in the ordinary course of business, or entered into any
transaction not in the ordinary course of business, which is material to the
business of the Company, and, except as set forth in Schedule G to this
Agreement there has not been any change in the capital stock of, or any
incurrence of long-term debt by, the Company, or any issuance of options,
warrants or other rights to purchase the capital stock of the Company, or any
adverse change or any development involving, so far as the Company can now
reasonably foresee, a prospective adverse change in the condition (financial or
otherwise), net worth, results
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<PAGE> 4
of operations, business, key personnel or properties which would be material to
the business or financial condition of the Company, and the Company has not
become a party to, and neither the business nor the property of the Company has
become the subject of, any material litigation whether or not in the ordinary
course of business.
(h) Title. Except as set forth on Schedule H hereto, the
Company has good and marketable title to all properties and assets, owned by it,
free and clear of all liens, charges, encumbrances or restrictions, except such
as are not significant or important in relation to the Company's business; all
of the material leases and subleases under which the Company is the lessor or
sublessor of properties or assets or under which the Company holds properties or
assets as lessee or sublessee are in full force and effect, and the Company is
not in default in any material respect with respect to any of the terms or
provisions of any of such leases or subleases, and no material claim has been
asserted by anyone adverse to rights of the Company as lessor, sublessor, lessee
or sublessee under any of the leases or subleases mentioned above, or affecting
or questioning the right of the Company to continued possession of the leased or
subleased premises or assets under any such lease or sublease. The Company owns
or leases all such properties as are necessary to its operations as now
conducted.
(i) Proprietary Rights. Except as set forth in Schedule I
hereto, the Company owns or possesses adequate and enforceable rights to use all
patents, patent applications, trademarks, service marks, copyrights, trade
secrets, processes, formulations, technology or know-how used in the conduct of
its business as described in the Term Sheet and will own or possess such rights
with respect to the business to be conducted as contemplated by the Term Sheet
(the "Proprietary Rights"). The Company has not received any notice of any
claims, nor does it have any knowledge of any threatened claims, and knows of no
facts which would form the basis of any claim, asserted by any person to the
effect that the sale or use of any product or process now used or offered by the
Company or proposed to be used or offered by the Company infringes on any
patents or infringes upon the use of any such Proprietary Rights of another
person and, to the best of the Company's knowledge, no others have infringed the
Company's Proprietary Rights.
(j) Litigation. Other than as set forth in the Offering
Documents, there is no material action, suit, investigation, customer complaint,
claim or proceeding at law or in equity by or before any arbitrator,
governmental instrumentality or other agency now pending or, to the knowledge of
the Company, threatened against the Company (or basis therefor known to the
Company) the adverse outcome of which would have a Material Adverse Effect. The
Company is not subject to any judgment, order, writ, injunction or decree of any
Federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign which have a Material
Adverse Effect.
(k) Non-Defaults; Non-Contravention. The Company is not in
violation of or default under, nor will the execution and delivery of this
Agreement or any of the Offering Documents, the Fund Escrow Agreement, the
Advisory Agreement or the M/A Agreement (all as defined herein) or consummation
of the transactions contemplated herein or therein result in a violation of or
constitute a default in the performance or observance of any obligation under
(i) its Articles of Incorporation, or its By-laws, or (ii) any indenture,
mortgage, contract, material purchase order or other agreement or instrument to
which the Company is a party or by which it or its property is bound or
affected, where such violation or default would have a Material Adverse Effect,
or (iii) any material order, writ, injunction or decree of any court of any
Federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, where such violation or
default would have a Material
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<PAGE> 5
Adverse Effect, and there exists no condition, event or act which constitutes,
nor which after notice, the lapse of time or both, could constitute a default
under any of the foregoing, which in either case would have a Material Adverse
Effect.
(l) Taxes. To the best of the knowledge of the current
management of the Company, the Company has filed all Federal, state, local and
foreign tax returns which are required to be filed by it or otherwise met its
disclosure obligations to the relevant agencies and all such returns are true
and correct in all material respects. The Company has paid all taxes pursuant to
such returns or pursuant to any assessments received by it or which it is
obligated to withhold from amounts owing to any employee, creditor or third
party. The Company has properly accrued all taxes required to be accrued by
generally accepted accounting principals consistently applied. The tax returns
of the Company have never been audited by any state, local or Federal
authorities. The Company has not waived any statute of limitations with respect
to taxes or agreed to any extension of time with respect to any tax assessment
or deficiency.
(m) Compliance with Laws; Licenses, etc. The Company has not
received notice of any violation of or noncompliance with any Federal, state,
local or foreign, laws, ordinances, regulations and orders applicable to its
business which has not been cured, the violation of, or noncompliance with
which, would have a Material Adverse Effect. The Company has all licenses and
permits and other governmental certificates, authorizations and permits and
approvals (collectively, "Licenses") required by every Federal, state and local
government or regulatory body for the operation of its business as currently
conducted and the use of its properties, except where the failure to be licensed
would not have a Material Adverse Effect. The Licenses are in full force and
effect and to the Company's knowledge no violations currently exist in respect
of any License and no proceeding is pending or threatened to revoke or limit any
thereof.
(n) Authorization of Agreement, etc. This Agreement has been
duly and validly authorized, executed and delivered by the Company and the
execution, delivery and performance by the Company of this Agreement, the
Subscription Agreement, the Fund Escrow Agreement, the Advisory Agreement and
the M/A Agreement have been duly authorized by all requisite corporate action by
the Company and when delivered, constitute or will constitute the legal, valid
and binding obligations of the Company, enforceable in accordance with their
respective terms, subject to applicable laws regarding insolvency and to
principles of equity.
(o) Authorization of Notes and Warrants, etc. The issuance,
sale and delivery of the Notes, the Warrants and the Agent's Warrants (as
defined herein) have been duly authorized by all requisite corporate action of
the Company. When so issued, sold and delivered, the Notes, the Warrants and the
Agent's Warrants will be duly executed, issued and delivered and will constitute
valid and legal obligations of the Company enforceable in accordance with their
respective terms and, in each case, will not be subject to preemptive or any
other similar rights of the stockholders of the Company or others which rights
shall not have been waived prior to the Initial Closing.
(p) Authorization of Reserved Shares. The issuance, sale and
delivery by the Company of the shares of Common Stock issuable upon conversion
of the Notes and exercise of the Warrants and the Agent's Warrants (the
"Reserved Shares") have been duly authorized by all requisite corporate action
of the Company, and the Reserved Shares have been duly reserved for issuance
upon conversion of all or any of the Notes and exercise of all or any of the
Warrants and Agent's Warrants and when so issued, sold, paid for and delivered,
the Reserved Shares will be validly issued and outstanding, fully paid and
nonassessable, and not subject to preemptive or
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any other similar rights of the stockholders of the Company or others which
rights shall not have been waived prior to the Initial Closing.
(q) Exemption from Registration. Assuming (i) the accuracy
of the information provided by the respective Subscribers in the Subscription
Documents and (ii) that the Placement Agent has complied in all material
respects with the provisions of Regulation D promulgated under the Securities
Act, the offer and sale of the Units pursuant to the terms of this Agreement are
exempt from the registration requirements of the Securities Act and the rules
and regulations promulgated thereunder (the "Regulations"). The Company is not
disqualified from the exemption under Regulation D by virtue of the
disqualifications contained in Rule 505(b)(2)(iii) or Rule 507 promulgated
thereunder.
(r) Registration Rights. Except with respect to holders of
the Units, and except as set forth in Schedule R hereto, no person has any right
to cause the Company to effect the registration under the Securities Act of any
securities of the Company. The Company shall grant registration rights under the
Securities Act to the investors in the Offering and/or their transferees as more
fully described in the Subscription Agreement between the Company and the
investors.
(s) Brokers. Neither the Company nor any of its officers,
directors, employees or stockholders has employed any broker or finder in
connection with the transactions contemplated by this Agreement other than the
Placement Agent.
(t) Title to Units. When certificates representing the
securities comprising the Units shall have been duly delivered to the purchasers
and payment shall have been made therefor, the several purchasers shall have
good and marketable title to the Notes and Warrants and/or the Reserved Shares
free and clear of all liens, encumbrances and claims whatsoever (with the
exception of claims arising through the acts or omissions of the purchasers and
except as arising from applicable Federal and state securities laws), and the
Company shall have paid all taxes, if any, in respect of the original issuance
thereof.
(u) Right of First Refusal. Except for the right of first
refusal granted to the Placement Agent herein, no person, firm or other business
entity is a party to any agreement, contract or understanding, written or oral
entitling such party to a right of first refusal with respect to offerings by
the Company.
3. CLOSING; PLACEMENT AND FEES.
(a) Closing. Provided the Minimum Offering shall have been
subscribed for and funds representing the sale thereof shall have cleared, a
closing (the "Initial Closing") shall take place at the offices of the Placement
Agent, 830 Third Avenue, New York, New York within 10 days following the
Termination Date (which date (the "Closing Date") may be accelerated or
adjourned by agreement between the Company and the Placement Agent). At the
Initial Closing, payment for the Units issued and sold by the Company shall be
made against delivery of the Notes and Warrants comprising such Units. In
addition, subsequent closings (if applicable) may be scheduled at the discretion
of the Company and Placement Agent, each of which shall be deemed a "Closing"
hereunder.
(b) Conditions to Placement Agent's Obligations. The
obligations of the Placement Agent hereunder will be subject to the accuracy of
the representations and warranties of the Company herein contained as of the
date hereof and as of each Closing Date, to the
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performance by the Company of its obligations hereunder and to the following
additional conditions:
(i) Due Qualification or Exemption. (A) The Offering
will become qualified or be exempt from qualification under the securities laws
of the several states pursuant to paragraph 4(e) below not later than the
Closing Date, and (B) at the Closing Date no stop order suspending the sale of
the Units shall have been issued, and no proceeding for that purpose shall have
been initiated or threatened;
(ii) No Material Misstatements. Neither the Blue Sky
qualification materials nor the Term Sheet, nor any supplement thereto, will
contain an untrue statement of a fact which in the opinion of the Placement
Agent is material, or omits to state a fact, which in the opinion of the
Placement Agent is material and is required to be stated therein, or is
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading;
(iii) Compliance with Agreements. The Company will
have complied with all agreements and satisfied all conditions on its part to be
performed or satisfied hereunder at or prior to each Closing;
(iv) Corporate Action. The Company will have taken
all necessary corporate action, including, without limitation, obtaining the
approval of the Company's board of directors, for the execution and delivery of
this Agreement, the performance by the Company of its obligations hereunder and
the offering contemplated hereby;
(v) Opinion of Counsel. The Placement Agent shall
receive the opinion of acceptable counsel to the Company, dated the Closing(s),
substantially to the effect that:
(A) the Company is validly existing and in
good standing under the laws of Colorado, has all requisite corporate power and
authority necessary to own or hold its respective properties and conduct its
business and is duly qualified or licensed to do business as described in the
Offering Documents. The Company is not qualified to do business as a foreign
corporation in states other than Colorado;
(B) each of this Agreement, the Notes, the
Warrants, the Agent's Warrants, the Fund Escrow Agreement, the Subscription
Agreements, the Advisory Agreement and the M/A Agreement has been duly and
validly authorized, executed and delivered by the Company, and is the valid and
binding obligation of the Company, enforceable against it in accordance with its
terms, subject to any applicable bankruptcy, insolvency or other laws affecting
the rights of creditors generally and to general equitable principles;
(C) to the best of such counsel's knowledge,
(i) the authorized, issued and outstanding capital stock of the Company as of
the date hereof (before giving effect to the transactions contemplated by this
Agreement) is as set forth in the Offering Documents. To such counsel's
knowledge, there are no commitments pursuant to which the Company is, or may
become, obligated to issue any shares of its capital stock or other securities
of the Company other than as set forth in the Offering Documents, (ii) all of
the issued shares of capital stock of the Company issued in connection with and
subsequent to the reverse merger in January 1998 have been duly and validly
authorized and issued, are fully paid and non-assessable (with the exception of
certain shares currently held in escrow to satisfy certain obligations upon
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<PAGE> 8
conversion of outstanding debentures and exercise of outstanding warrants, which
shares will not be fully paid and non-assessable until such conversion or
exercise) and (iii) have not been issued in violation of the preemptive rights
of any securityholder of the Company. The offers and sales of such securities
were either registered under the Securities Act and applicable state securities
laws or exempt from such registration requirements;
(D) assuming (i) the accuracy of the
information provided by the Subscribers in the Subscription Documents, (ii) that
the Placement Agent has complied with the requirements of section 4(2) of the
Securities Act (and the provisions of Regulation D promulgated thereunder),
(iii) that there has been no public solicitation, (iv) each Subscriber has
received the Offering Documents, (v) that the Offering Documents do not contain
any material misstatements or omissions, and (vi) that a Notice on Form D is
timely and accurately filed, the issuance and sale of the Units is exempt from
registration under the Securities Act and Regulation D promulgated thereunder;
(E) neither the execution and delivery of
this Agreement, the Subscription Agreement, the Advisory Agreement or the M/A
Agreement, nor compliance with the terms hereof or thereof, nor the consummation
of the transactions herein or therein contemplated, nor the issuance of the
Notes, the Warrants or the Agent's Warrants, has, nor will, conflict with,
result in a breach of, or constitute a default under the Articles of
Incorporation or By-laws of the Company, or, to the best of such counsel's
knowledge, any material contract, instrument or document to which the Company is
a party, or by which it or any of its properties is bound or, to the best of
such counsel's knowledge, violate any applicable law, rule, regulation,
judgment, order or decree known to us of any governmental agency or court having
jurisdiction over the Company or any of its properties or business;
(F) to the best of such counsel's knowledge,
there are no claims, actions, suits, investigations or proceedings before or by
any arbitrator, court, governmental authority or instrumentality pending or, to
such counsel's knowledge, threatened against or affecting the Company or
involving the properties of the Company which might materially and adversely
affect the business, properties or financial condition of the Company or which
might materially adversely affect the transactions or other acts contemplated by
this Agreement or the validity or enforceability of this Agreement, except as
set forth in or contemplated by the Offering Documents; and
(G) such counsel has reviewed the Offering
Documents and nothing has come to the attention of such counsel to cause them to
believe that the Offering Documents contain any untrue statement of a material
fact required to be stated therein or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading (except for the financial statements, notes thereto and other
financial information and statistical data contained therein, as to which such
counsel need express no opinion).
(vi) Officers' Certificate. The Placement Agent shall
receive a certificate of the Company, signed by the Chief Executive Officer and
Chief Financial Officer thereof, that the representations and warranties
contained in Section 2 hereof are true and accurate in all material respects at
such Closing with the same effect as though expressly made at such Closing.
(vii) Fund Escrow Agreement. On or prior to the
Initial Closing Date, the Placement Agent shall receive a copy of a duly
executed escrow agreement in the form previously delivered to you regarding the
deposit of funds pending the Closing(s) with a bank or
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<PAGE> 9
trust company acceptable to the Placement Agent (the "Fund Escrow Agreement").
(viii) Insider Subscriptions. Prior to the Initial
Closing Date, the Placement Agent shall receive irrevocable Subscription
Agreements for the purchase of not less than an aggregate of $250,000 of Units
from management and directors of the Company or their designees and shall have
been advised, either by the escrow agent that cleared funds for the purchase of
such Units is in escrow, or by the Company that it has received from such
subscriber(s) an irrevocable assignment of proceeds payable by the Company to
such subscriber(s) in favor of the Company, together with the dollar amount of
same.
(ix) Independent Auditors. On or prior to the Initial
Closing Date, the Company shall have retained a firm of independent auditors
acceptable to the Placement Agent. The Company will not switch auditors other
than to another "Big Five" firm during the three-year period following the
Initial Closing Date.
(x) Financial Projections. On or prior to the
Initial Closing Date, the Placement Agent shall receive two-year quarterly
financial projections which have been reviewed and approved by the Company and
the Placement Agent.
(xi) Advisory Agreement. On or prior to the Initial
Closing Date, the Company shall execute and deliver to the Placement Agent an
advisory agreement with the Placement Agent, in the form previously delivered to
the Company by the Placement Agent (the "Advisory Agreement") and shall deliver
to the Placement Agent the warrants provided for in such agreement.
(xii) Merger and Acquisition Agreement. On or prior to
the Initial Closing Date, the Company shall execute and deliver to the Placement
Agent an agreement with the Placement Agent regarding mergers and acquisitions,
in the form previously delivered to the Company by the Placement Agent (the "M/A
Agreement").
(xiii) Lock-Up Agreements. On or prior to the Initial
Closing Date, the Placement Agent shall receive agreements from each executive
officer and director of the Company to the effect that such person shall not
sell, assign or transfer any of their securities of the Company for the period
of 12 months from the final Closing without the prior written consent of the
Placement Agent and, if requested by the managing underwriter of a public
offering, for up to an additional 12-month period.
(xiv) Board Designee. During the period ending two
years from the Initial Closing Date, the Company agrees to nominate a designee
of the Placement Agent to the Company's Board of Directors. The Placement Agent
shall also have the right to immediately appoint a majority of the Board of
Directors if the Company fails to repay the Notes when due.
(xv) Irrevocable Proxy. The Placement Agent shall
receive, on or prior to the Initial Closing Date, an irrevocable proxy from each
of the senior officers and directors of the Company granting the Placement Agent
a proxy to vote their shares for the election of directors solely for and
limited to the purpose of enforcing the Placement Agent's rights described in
subsection (xiv) above. All other rights to vote the shares held by such senior
officers and directors of the Company shall remain with the shareholder.
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<PAGE> 10
(c) Blue Sky. A summary blue sky survey shall be prepared by
counsel to the Placement Agent stating the extent to which and the conditions
upon which offers and sales of the Units may be made in certain jurisdictions.
It is understood that such survey may be based on or rely upon (i) the
representations of each Subscriber set forth in the Subscription Agreement
delivered by such Subscriber, (ii) the warranties, representations and
agreements of the Company set forth in Section 2 of this Agreement, (iii) the
representations and warranties of the Placement Agent, and (iv) the
representations of the Company set forth in the officers' certificate to be
delivered at the Closing pursuant to paragraph (vii) of Section 3(b).
(d) Placement Fees and Expenses. Simultaneously with payment
for and delivery of the Units at each Closing as provided in paragraph 3(a)
above, the Company shall at such Closing pay to the Placement Agent (i) a
commission equal to 6.5% of the aggregate purchase price of the Units sold
(including Over-allotment Option Units); (ii) a structuring fee equal to 2.5% of
the aggregate purchase price of the Units sold (including Over-allotment Option
Units) and (iii) reimbursement of accountable expenses up to $25,000 (excluding
legal fees and disbursements of counsel to the Placement Agent which shall also
be reimbursable by the Company). The Company shall also pay all expenses in
connection with the qualification of the Units under the securities or Blue Sky
laws of the states which the Placement Agent shall designate, including legal
fees (not to exceed $2,500) and filing fees. The Company will, at each Closing,
issue to you or your designees (which may include any Selected Dealer or any
officer of the Placement Agent or a Selected Dealer) the warrants (the "Agent's
Warrants") to purchase 62,500 shares of Common Stock at an exercise price of
$0.25 per share for each $50,000 raised in the Offering (up to 10,000,000 shares
if the Over-Allotment Option is exercised in full); provided; however, that no
Agent's Warrants will be issued until at least 35 Units have been sold. The
Agent's Warrants will be substantially identical to the Warrants comprising the
Units.
(e) Bring-Down Opinions and Certificates. If there is more
than one Closing, then at each such Closing there shall be delivered to the
Placement Agent updated opinion and certificate as described in (v) and (vi) of
Section 3(b) above, respectively.
(f) No Adverse Changes. There shall not have occurred, at
any time prior to the Closing or, if applicable, any additional Closing, (i) any
domestic or international event, act or occurrence which has materially
disrupted, or in the Placement Agent's opinion will in the immediate future
materially disrupt, the securities markets; (ii) a general suspension of, or a
general limitation on prices for, trading in securities on the New York Stock
Exchange or the American Stock Exchange or in the over-the-counter market; (iii)
any outbreak of major hostilities or other national or international calamity;
(iv) any banking moratorium declared by a state or federal authority; (v) any
moratorium declared in foreign exchange trading by major international banks or
other persons; (vi) any material interruption in the mail service or other means
of communication within the United States; (vii) any material adverse change in
the business, properties, assets, results of operations, or financial condition
of the Company; or (viii) any change in the market for securities in general or
in political, financial, or economic conditions which, in the Placement Agent's
reasonable judgment, makes it inadvisable to proceed with the offering, sale,
and delivery of the Units.
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4. COVENANTS OF THE COMPANY.
(a) Use of Proceeds. The net proceeds of the Offering will
be used by the Company substantially as set forth in the Term Sheet. Other than
$200,000 of working capital advances to be repaid to an executive officer of the
Company, the Company shall not use any of the proceeds from the Offering to
repay any indebtedness of the Company (other than trade payables in the ordinary
course) to any current executive officers, directors or principal stockholders
of the Company.
(b) Expenses of Offering. The Company shall be responsible
for, and shall bear all expenses directly incurred in connection with, the
proposed Offering including, but not limited to, (i) legal fees of the Company's
counsel relating to the costs of preparing the Offering Documents and all
amendments, supplements and exhibits thereto and preparing and delivering all
placement agent and selling documents, including, but not limited to, the Agency
Agreement with the Placement Agent and the blue sky memorandum; Note and Warrant
certificates; (ii) blue sky fees, filing fees and the fees (up to $2,500) and
disbursements of Placement Agent's counsel in connection with Blue Sky matters
(the "Company Expenses"). Such expenses shall not include the cost of the
Placement Agent's mailing, telephone, telegraph, travel, due diligence meetings,
or other similar expenses (the "Placement Agent expenses") which are
reimbursable by the Company up to $25,000 (exclusive of fees and expenses of
counsel to the Placement Agent which are also reimbursable by the Company).
If the Company decides not to proceed with the Offering for any
reason (other than Placement Agent's failure to close on the Offering in the
time frame set forth in Paragraph 1 of the letter of intent dated April 13, 1999
between the parties (the "LOI")), or if the Placement Agent decides not to
proceed with the Offering because of a material breach by the Company of its
representations, warranties, or covenants in this Agreement or in the LOI or as
a result of material adverse changes in the affairs of the Company, or failure
to meet the General Conditions set forth in Paragraph 9 of the LOI, the Company
will be obligated to pay the Placement Agent liquidated damages of $120,000, to
reimburse the Placement Agent for its time, work and expenses up to the sum of
$25,000 and to issue the Placement Agent Agent's Warrants to purchase 10,000,000
shares of the Company's common stock. If the Placement Agent decides not to
proceed with the Offering other than for the reasons set forth above, the
Company's obligation to reimburse the Placement Agent shall be limited to
$25,000. The Placement Agent shall have no liability to the Company for any
reason should the Placement Agent choose not to proceed with the Offering
contemplated hereby.
(c) Notification. The Company shall notify the Placement
Agent immediately, and in writing, (A) when any event shall have occurred during
the period commencing on the date hereof and ending on the later of the last
Closing or the Termination Date as a result of which the Offering Documents
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, rescission, withdrawal or suspension of the qualification
or registration of the Units, or of any exemption from such registration or
qualification, in any jurisdiction. The Company will use its best 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.
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(d) Blue Sky. The Company will use its best efforts to
qualify or register the Units for offering and sale under, or establish an
exemption from such qualification or registration under, the securities or "blue
sky" laws of such jurisdictions as you may reasonably request; provided however,
that the Company will not be obligated to qualify as a dealer in securities in
any jurisdiction in which it is not so qualified. The Company will not
consummate any sale of Units in any jurisdiction in which it is not so qualified
or in any manner in which such sale may not be lawfully made.
(e) Form D Filing. The Company shall file five 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. 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 state or jurisdiction in which offers and sales are
made. The Company shall furnish the Placement Agent with copies of all such
filings.
(f) Press Releases, etc. The Company shall not, during the
period commencing on the date hereof and ending on the later of the last Closing
and the Termination Date, 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, or liabilities, or the
Offering, without the prior consent of the Placement Agent, which consent shall
not be unreasonably withheld.
(g) Key-Man Insurance. Prior to the Initial Closing Date,
the Company shall have obtained "key-man" life insurance policies in the amount
of at least $2,000,000 (CDN$3,000,000) on the life of Cameron Chell. Such policy
will be kept in effect for at least two years from the Initial Closing Date.
(h) Executive Compensation. The compensation of the
executive officers of the Company shall not increase until repayment of or
conversion of the Notes. In addition, prior to the maturity date of the Notes
and thereafter, in the event the Company defaults on repayment of the Notes, the
Company shall not amend or enter into any employment agreement containing
anti-takeover provisions without the approval of the holders of a majority in
principal amount of the Notes (including holders who have converted their
Notes), so long as at least 10% of the Notes issued in the Offering remain
outstanding.
(i) Budgets. During the period ending two years after the
Initial Closing Date, the Company shall prepare quarterly budgets reflecting its
proposed operations and cash flow needs and submit such budgets to the Placement
Agent for review and to the Company's Board of Directors for its approval.
(j) By-Laws. Prior to the maturity date of the Notes and
thereafter in the event the Company defaults on repayment of the Notes, the
Company shall not amend its By-laws without shareholder approval and the
approval of the holders of a majority in principal amount of the Notes
(including holders who have converted their Notes), so long as at least 10% of
the Notes issued in the Offering remain outstanding.
(k) Right of First Refusal. In the event the Maximum
Offering is sold, if during the two-year period after the Initial Closing Date
the Company proposes to use a manager, placement agent or investment banker or
persons performing similar services for a fee, the Placement Agent shall have
the right of first refusal (the "Right of First Refusal") to purchase for
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the account of the Placement Agent or to act as an underwriter or agent for any
and all public or private offerings of the securities of the Company, or any
successor to or subsidiary of the Company or other entity in which the Company
has a controlling equity interest (collectively referred to herein as the
"Company"), up to $40,000,000 (the "Subsequent Offering"); provided, that if the
Subsequent Offering is to be lead managed by a "major bracket underwriting
firm", the Placement Agent shall have only the right to participate in the
Subsequent Offering as a co-manager and receive at least 33% of the total
consideration (including commissions, expense allowance, consulting fees,
warrants or other equity); and provider, further, that if more than $40,000,000
is to be raised in the Subsequent Offering, the Placement Agent shall have only
the right to act as co-manager or co-agent and receive at least 25% of the total
consideration. Accordingly, if during such period the Company intends to make a
Subsequent Offering, the Company shall notify you in writing of such intention
and of the proposed terms of the offering. The Company shall thereafter promptly
furnish you with such information concerning the business, condition and
prospects of the Company as you may reasonably request. If within 10 business
days of the mailing by registered mail addressed to the Placement Agent with
respect to a Subsequent Offering of such notice of intention and statement of
terms you do not accept in writing such offer to act as underwriter or agent
with respect to such offering or investment banker with respect to such
transaction, upon the terms proposed, the Company shall be free to negotiate
terms with other underwriters or agents with respect to such offering or
investment banker with respect to such transaction, and to effect such offering
or transaction on such proposed terms. Before the Company shall accept any
proposal less favorable to the Company from such underwriter or agent or
investment banker or if such Subsequent Offering is not consummated within six
(6) months, your preferential right shall be reinstated and the same procedure
with respect to such modified proposal as provided above shall be adopted;
provided, however, that your preferential right shall not be reinstated later
than two years after the Initial Closing Date. The failure by you to exercise
your Right of First Refusal in any particular instance shall not affect in any
way such right with respect to any other Subsequent Offering.
(l) Transmittal Letters. Within five days after the Closing,
the Placement Agent shall receive copies of all letters from the Company to the
investors transmitting the Notes and Warrants and shall receive a letter from
the Company confirming transmittal of the securities to the investors.
5. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless the
Placement Agent and each Selected Dealer, if any, and their respective
shareholders, directors, officers, agents and controlling persons (an
"Indemnified Party") against any and all loss, liability, claim, damage and
expense whatsoever (and all actions in respect thereof), and to reimburse the
Placement Agent for reasonable legal fees and related expenses as incurred
(including, but not limited to the costs of investigating, preparing or
defending any such action or claim whether or not in connection with litigation
in which the Placement Agent is a party and the costs of giving testimony or
furnishing documents in response to a subpoena or otherwise), arising out of any
untrue statement or alleged untrue statement of a material fact contained in the
Offering Documents or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(b) The Company agrees to indemnify and hold harmless an
Indemnified Party to the same extent as the foregoing indemnity, against any and
all loss, liability, claim, damage and expense whatsoever directly arising out
of the exercise by any person of any right
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under the Securities Act or the Exchange Act or the securities or Blue Sky laws
of any state on account of violations of the representations, warranties or
agreements set forth in Section 2 hereof.
(c) Promptly after receipt by an Indemnified Party under
this Section of notice of the commencement of any action, the indemnified party
will, if a claim in respect thereof is to be made against the Company under this
Section, notify in writing the Company of the commencement thereof; but the
omission so to notify the Company will not relieve it from any liability which
it may have to the Indemnified Party otherwise than under this Section except to
the extent the defense of the claim is prejudiced. In case any such action is
brought against an Indemnified Party, and it notifies the Company of the
commencement thereof, the Company will be entitled to participate in, and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, subject to the provisions herein
stated, with counsel reasonably satisfactory to the Indemnified Party, and after
notice from the Company to the Indemnified Party of its election so to assume
the defense thereof, the Company will not be liable to the Indemnified Party
under this Section for any legal or other expenses subsequently incurred by the
Indemnified Party in connection with the defense thereof other than reasonable
costs of investigation (provided the Company has been advised in writing that
such investigation is being undertaken). The Indemnified Party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall not be at the
expense of the Company if the Company has assumed the defense of the action with
counsel reasonably satisfactory to the Indemnified Party; provided that the fees
and expenses of such counsel shall be at the expense of the Company if (i) the
employment of such counsel has been specifically authorized in writing by the
Company or (ii) the named parties to any such action (including any impleaded
parties) include both the Indemnified Party or Parties and the Company and, in
the reasonable judgment of counsel for the Indemnified Party, it is advisable
for the Indemnified Party or Parties to be represented by separate counsel due
to an actual conflict of interest (in which case the Company shall not have the
right to assume the defense of such action on behalf of the an Indemnified Party
or Parties), it being understood, however, that the Company shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys for all the Indemnified Parties. No
settlement of any action against an Indemnified Party shall be made unless such
an Indemnified Party is fully and completely released in connection therewith.
6. CONTRIBUTION.
To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section (5) but
it is found in a final judicial determination, not subject to further appeal,
that such indemnification may not be enforced in such case, even though this
Agreement expressly provides for indemnification in such case, or (ii) any
indemnified or indemnifying party seeks contribution under the Securities Act,
the Exchange Act, or otherwise, then the Company (including for this purpose any
contribution made by or on behalf of any officer, director, employee or agent
for the Company, or any controlling person of the Company), on the one hand, and
the Placement Agent and any Selected Dealers (including for this purpose any
contribution by or on behalf of an indemnified party), on the other hand, shall
contribute to the losses, liabilities, claims, damages, and expenses whatsoever
to which any of them may be subject, in such proportions as are appropriate to
reflect the relative benefits received by the Company, on the one hand, and the
Placement Agent and the Selected Dealers, on the other hand; provided, however,
that if applicable law does not permit such allocation, then
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other relevant equitable considerations such as the relative fault of the
Company and the Placement Agent and the Selected Dealers in connection with the
facts which resulted in such losses, liabilities, claims, damages, and expenses
shall also be considered. In no case shall the Placement Agent or a Selected
Dealer be responsible for a portion of the contribution obligation in excess of
the compensation received by it pursuant to Section 3 hereof or the Selected
Dealer Agreement, as the case may be. No person guilty of a fraudulent
misrepresentation shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. For purposes of this Section 6,
each person, if any, who controls the Placement Agent or a Selected Dealer
within the meaning of Section 15 of the Securities Act or Section 20(a) of the
Exchange Act and each officer, director, stockholder, employee and agent of the
Placement Agent or a Selected Dealer, shall have the same rights to contribution
as the Placement Agent or the Selected Dealer, and each person, if any who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act and each officer, director, employee and agent
of the Company, shall have the same rights to contribution as the Company,
subject in each case to the provisions of this Section 6. Anything in this
Section 6 to the contrary notwithstanding, no party shall be liable for
contribution with respect to the settlement of any claim or action effected
without its written consent. This Section 6 is intended to supersede any right
to contribution under the Securities Act, the Exchange Act, or otherwise.
7. MISCELLANEOUS.
(a) Survival. Any termination of the Offering without
consummation thereof shall be without obligation on the part of any party except
that the indemnification provided in Section 5 hereof and the contribution
provided in Section 6 hereof shall survive any termination and shall survive the
Closing for a period of five years.
(b) Representations, Warranties and Covenants to Survive
Delivery. The respective representations, warranties, indemnities, agreements,
covenants and other statements of the Company as of the date hereof shall
survive execution of this Agreement and delivery of the Units and the
termination of this Agreement for a period of one year after such respective
event.
(c) No Other Beneficiaries. This Agreement is intended for
the sole and exclusive benefit of the parties hereto and their respective
successors and controlling persons, and no other person, firm or corporation
shall have any third-party beneficiary or other rights hereunder.
(d) Governing Law; Resolution of Disputes. This Agreement
shall be governed by and construed in accordance with the law of the State of
New York without regard to conflict of law provisions. The Placement Agent and
the Company will attempt to settle any claim or controversy arising out of this
Agreement through consultation and negotiation in good faith and a spirit of
mutual cooperation. Should such attempts fail, then the dispute will be mediated
by a mutually acceptable mediator to be chosen by the Placement Agent and the
Company within 15 days after written notice from either party demanding
mediation. Neither party may unreasonably withhold consent to the selection of a
mediator, and the parties will share the costs of the mediation equally. Any
dispute which the parties cannot resolve through negotiation or mediation within
six months of the date of the initial demand for it by one of the parties may
then be submitted to the courts for resolution. The use of mediation will not be
construed under the doctrine of latches, waiver or estoppel to affect adversely
the rights of either party. Nothing in this paragraph will prevent either party
from resorting to judicial proceedings if
15
<PAGE> 16
(a) good faith efforts to resolve the dispute under these procedures have been
unsuccessful or (b) interim relief from a court is necessary to prevent serious
and irreparable injury.
(e) Counterparts. This Agreement may be signed in
counterparts with the same effect as if both parties had signed one and the same
instrument.
(f) Notices. Any communications specifically required
hereunder to be in writing, if sent to the Placement Agent, will be sent by
overnight courier providing a receipt of delivery or by certified or registered
mail to it at Commonwealth Associates, [removed] and if sent to the Company,
will be sent by overnight courier providing a receipt of delivery or by
certified or registered mail to it at [removed].
(g) Entire Agreement. This Agreement constitutes the entire
agreement of the parties with respect to the matters herein referred and
supersedes all prior agreements and understandings, written and oral, between
the parties with respect to the subject matter hereof. Neither this Agreement
nor any term hereof may be changed, waived or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver or termination is sought.
If you find the foregoing is in accordance with our understanding,
kindly sign and return to us a counterpart hereof, whereupon this instrument
along with all counterparts will become a binding agreement between us.
Very truly yours,
FUTURELINK DISTRIBUTION CORP.
By: [signed: R. Kilambi]
-------------------------------------
Name: Raghu Kilambi
Title: Chief Financial Officer
Agreed:
COMMONWEALTH ASSOCIATES,
a New York limited partnership
By: Commonwealth Associates Management Corp., Inc.
a New York corporation, its general partner
By: [signed: J. Wynne]
----------------------------------
Name: Joseph Wynne
Title: Chief Financial Officer
16
<PAGE> 1
EXHIBIT 10.5
FUTURELINK DISTRIBUTION CORP.
LETTER AGREEMENT WITH
THOMSON KERNAGHAN & CO. LIMITED
Kyle B.A. Scott
General Counsel & Secretary
Direct Line: [REMOVED]
E-Mail: [email protected]
VIA FACSIMILE: [REMOVED] CONFIDENTIAL
April 26, 1999
Thomson Kernaghan & Co. Limited
365 Bay Street
Toronto, Ontario M5H 2V2
Attention: Mark Valentine
Executive Vice-President
Dear Sir:
RE: MODIFICATION OF EXISTING AGREEMENTS WITH THOMSON KERNAGHAN ("TK")
Further to the most recent discussions between FutureLink's senior management
and members of your firm, including yourself, concerning modifications to the
existing arrangements between TK and FutureLink to be made in conjunction with
our proposed financing led by Commonwealth Associates, we now believe that
modifications acceptable to all parties can be agreed upon.
Again, our Company's chief goal in these negotiations has been to clean up our
capital structure to focus on creating shareholder value. Given the terms of the
convertible debentures held by TK's clients, there is no way to accurately
determine full dilution of our common stock, leading to a large amount of
uncertainty. While TK expressed some misgivings with regard to the Commonwealth
transaction, that financing does allow for accurate calculation of a fully
diluted share total. The transaction itself is somewhat dilutive to TK's
investors, but we believe the structure we propose below will address this
matter.
TK's Current Position
Before confirming the terms of the modifications, it is helpful to review TK's
current position in FutureLink securities. Under the Debenture Acquisition
Agreement, TK funded $5,000,000 for which it received floating conversion
debentures ($2,000,000 of which, plus accrued interest, having been converted to
7,860,046 shares of common stock) plus 1,041,667 warrants exercisable at $0.96
per share. Our Registration Statement accepted January 6, 1999 registered
9,615,384 shares underlying the convertible debenture and 1,000,000 shares
underlying the warrants. Effective February 26, 1999, TK and FutureLink executed
a Letter Agreement modifying the Debenture Acquisition Agreement to allow for
the issuance of $1,000,000 of additional convertible debenture(s) plus warrants,
of which $970,000 has been funded to date. The common stock to be issued in
trust to support the $1,000,000 additional debenture(s) under the terms of the
Letter Agreement, based on the closing price of FutureLink stock for the three
days prior to February 26th, is 3,306,878 shares ($1,000,000 divided by 125% of
the average closing prices, February 23 to 25, of $0.378 per share). The warrant
pricing formula was tied to the proposed
<PAGE> 2
Thomson Kernaghan
April 26, 1999
Page 2 CONFIDENTIAL
financing which did not go forward. Instead, we have proceeded with the offering
led by Commonwealth Associates. As such, I propose that we use April 14, 1999,
being the date the Commonwealth financing proceeded (which is the date it became
absolutely certain that we would not proceed with a TK private placement) to set
the warrant numbers and pricing. The 20 day closing price average to and
including April 14th is $0.3089 per share and 125% of this average price is
$0.386 per share. The $250,000 of warrant coverage using these figures becomes
warrants to acquire 647,668 shares of common stock.
Modifying Debenture Terms; Additional Warrants
We are willing to modify the number of warrants granted to TK and lower their
exercise price. Specifically, we would modify or cancel existing warrants and
issue additional warrants to TK investors such that TK investors would hold a
total of 6,000,000 warrants exercisable at $0.25 per share, These changes to the
warrant coverage and pricing are being made in exchange for modifications to the
terms of the outstanding convertible debentures issued to TK investors (the "TK
debentures"). These TK debentures, which are currently convertible on a floating
conversion price formula, would have their conversion terms altered to provide
for a fixed conversion rate of $0.20 per share for principal and accrued
interest, bringing the conversion price of the TK debentures in line with the
convertible notes offered by Commonwealth (the "Commonwealth notes"). The
Commonwealth notes also have anti-dilution protection, such that in certain
circumstances they can be converted at less than $0.20, and we would add these
same anti-dilution provisions to the TK debentures. Please refer to the courtesy
copy of the Confidential Term Sheet provided to you previously for details of
the anti-dilution protection attached to the Commonwealth notes.
Prepayment of Certain TK Debentures
As discussed, the fixed conversion price, subject to anti-dilution provisions,
would be added to $2.5 million of outstanding TK debentures, as the Company
would give notice to prepay $1.47 million of outstanding TK debentures. Over and
above the terms contained within Section 3 of each of the relevant debentures
covering $1.47 million of principal amount, the choice of such TK debentures to
be prepaid to be at the discretion of TK, the Company hereby gives thirty days
notice of intention to prepay such TK debentures on the basis of payment in full
of the principal amount together with a 28% premium (a total of $1,881,600),
with such TK debenture holders thereby obligated to accept common stock for
accrued interest based on the "market price formula" contained in the TK
debentures. FutureLink will be modifying the terms of its Confidential Term
Sheet regarding the Commonwealth notes by way of a Supplement which will show
the repayment of these $1.47 million principal amount of TK debentures, together
with prepayment premium, as a revised "Use of Proceeds".
Ranking of Remaining TK Debentures
As to ranking of debt, Commonwealth agreed in the letter of intent between that
firm and FutureLink to have the Commonwealth notes issuable in the planned
offering rank pari passu with the Company's existing convertible debt, including
the TK debentures. If we are changing the terms of our securities issued to TK
to be relatively equal to the securities offered in the Commonwealth offering,
the debt should rank equally. As well, the Commonwealth offering is now US$2.5
to US$5 million, subject to over-allotment, with at least the maximum offering
likely to be closed upon, making the amount of debt likely to be owed to
Commonwealth and its investors double the $2.5 million to remain owing to TK
debenture holders.
<PAGE> 3
Thomson Kernaghan
April 26, 1999
Page 3 CONFIDENTIAL
Registration and Lock-Up
With regard to registration of the common stock underlying the remaining TK
debentures and the 6,000,000 TK warrants, FutureLink will issue additional
"coverage shares", in trust, and register same. For the TK debentures,
13,750,000 shares of common stock should be available to cover the $2.5 million
of TK debentures to be outstanding following prepayment, to be convertible at
$0.20 per share, which includes an additional 10% to cover common stock issuable
for accrued interest should TK debenture holders elect to receive their interest
in common stock. The Company must also make available 6,000,000 coverage shares
underlying the new TK warrants.
At present, there are 1,755,338 registered coverage shares and 8,000,000
unregistered coverage shares underlying TK debentures and 1,000,000 registered
coverage shares underlying TK warrants. As such, an additional 8,994,662
coverage shares must be issued by FutureLink, in trust, to bring the total
coverage shares up to the 19,750,000 to cover TK debentures and TK warrants, as
provided above.
The Company will take immediate steps, following the closing of the Commonwealth
offering, to register the 8,000,000 outstanding unregistered coverage shares and
the 8,994,662 additional (unregistered) coverage shares to be issued as per the
preceding paragraph. FutureLink will also be registering the common stock
underlying the Commonwealth notes and warrants in the same Registration
Statement. TK (and TK investors) and Commonwealth (and Commonwealth investors)
will enter into a lock-up agreement agreeing not to dispose of any common stock
being registered in FutureLink's May 1999 Registration Statement (to be
initially filed in May 1999, with an effective date likely to be somewhat later)
until 180 days following the closing of the Company's current private placement
offering being conducted through Commonwealth.
Summary
o TK convertible debt to rank pari passu with Commonwealth notes;
o TK debentures, now convertible on a floating basis, 22% below market,
modified to convert at a fixed conversion price of $0.20 per share, with
the addition of anti-dilution provisions similar to the Commonwealth
notes;
o Prepayment by the Company of $1.47 million of outstanding TK debentures
on the basis of 128% of principal amount ($1,881,600 in total) plus the
issuance of common stock "at market price" to cover accrued interest;
o Repricing of all TK warrants and/or issuance of additional warrants to
TK, such that TK holds 6,000,000 warrants exercisable at $0.25 per
share, with anti-dilution protection identical to Commonwealth warrants;
o Issuance of an additional 8,994,662 "coverage shares", in trust,
underlying the TK debentures and TK warrants and registration of all
16,994,662 unregistered coverage shares ASAP in a Registration Statement
to be filed following the closing of the Commonwealth offering. (Please
note, TK has 2,755,338 registered coverage shares outstanding from
FutureLink's last Registration Statement);
o All common stock underlying the Commonwealth notes and warrants to be
registered concurrently with the TK warrants and additional "coverage
shares" in FutureLink's next Registration Statement; and
<PAGE> 4
Thomson Kernaghan
April 26, 1999
Page 4 CONFIDENTIAL
o All common stock to be registered on behalf of TK and Commonwealth in
FutureLink's next Registration Statement is to be locked-up FOR 180 DAYS
following the closing of the Commonwealth offering by agreement among
the parties.
Retraction of Objections
In addition to the above, should TK accept these arrangements, we would ask that
TK formally retract the letter of March 23, 1999 signed by Robert Wilson and
addressed to Cameron Chell, FutureLink's Chairman and CEO, regarding the
proposed transaction with Commonwealth.
Acknowledgment and Acceptance
We trust that TK will agree to modify the terms of our current agreements in the
above manner to the benefit of TK and its investors, and to the long-term
benefit of the Company on a go-forward basis. Please signify your acceptance of
the above terms by executing (or by having another officer of TK execute) the
"Acknowledgment" area below.
Please feel free to contact me at either my direct line given above or on my
cell at [removed] should you have any additional comments regarding these
matters. Please also feel free to contact Raghu Kilambi, FutureLink's Chief
Financial Officer, at his direct line of [removed] or on his cell at [removed].
Yours truly,
FUTURELINK DISTRIBUTION CORP.
[signed: K.B. Scott]
Kyle Scott
General Counsel & Secretary
ACKNOWLEDGMENT
Thomson Kernaghan & Co. Limited ("TK") hereby acknowledges and agrees to the
above-noted modifications to the terms of the outstanding debentures and
warrants issued or issuable by FutureLink Distribution Corp. ("FutureLink") in
accordance with the Debenture Acquisition Agreement dated August 14, 1998, as
amended by the Letter Agreement dated February 26, 1999, between TK and
FutureLink; the modification of outstanding warrants and/or issuance of
additional warrants by FutureLink to TK on the terms given above; and TK
formally retracts the letter of March 23, 1999 sent by Mr. Robert Wilson of TK
to Mr. Cameron Chell of FutureLink, all as evidenced by the signature of an
officer of TK duly authorized in that regard.
Dated: April [26th] , 1999 Per: [signed: M. Valentine]
------------------------------------
Name: [Mark Valentine]
----------------------------------
Position: [EVP / Director]
-------------------------------
<PAGE> 1
EXHIBIT 10.6
FUTURELINK DISTRIBUTION CORP.
ADVISORY AGREEMENT
Agreement made and entered into as of the 1st day of May, 1999, by and
between FUTURELINK DISTRIBUTION CORP., a corporation organized under the laws of
the State of Colorado with offices at 300, 250 - 6th Avenue SW, Calgary, AB
Canada T2P 3H7 (the "Company"), and COMMONWEALTH ASSOCIATES L.P., a New York
limited partnership having offices at 830 Third Avenue, New York, New York 10022
(the "Advisor").
W I T N E S S E T H :
WHEREAS, the Company desires to retain the Advisor and the Advisor
desires to be retained by the Company, all pursuant to the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants herein contained, it is agreed as follows:
1. Retention. The Company hereby retains the Advisor to perform
advisory services related to corporate finance and other financial service
matters, and the Advisor hereby accepts such retention. In this regard, the
Advisor shall devote such business time and attention to matters on which the
Company shall request its services, subject to the direction of the Chief
Executive Officer and/or Chairman of the Board of the Company, as shall be
determined by the Advisor.
2. Term. The Advisor's retention hereunder shall be for a term of
12 months commencing on the date first above written (the "Term"), subject to
earlier termination as provided herein.
3. Compensation.
(a) As compensation for the services to be rendered
hereunder, the Advisor shall receive $5,000 per month payable as follows:
$30,000 for the first six months of the Term upon execution of this Agreement;
$5,000 on the first day of each month commencing with the seventh month of the
Term.
(b) The Company shall, to the extent approved in advance by
the Company, pay such reasonable expenses as shall be incurred by the officers
and employees of the Advisor in connection with the discharge of its duties
hereunder, including travel and entertainment, but not including expenses
relating to the Advisor's office operations; such payment to be made upon
presentation by the Advisor of the details of, and vouchers for, such expenses.
(c) The Advisor shall have the right, for a purchase price
of $.01 per warrant, to receive seven-year warrants to purchase at an exercise
price of $.25 per share that number of shares of the Company's Common Stock
which equals 25% of the number of shares issuable upon conversion of the notes
sold in the private placement contemplated by the Agency Agreement between the
parties dated April 14, 1999. The warrants shall be issued on each closing date
of the Private Placement in the names and denominations requested by the
Advisor.
4. Liability and Indemnification.
(a) The Advisor shall not be subject to liability to the
Company or to any officer, director, employee, shareholder or creditor of the
Company by virtue of any act or omission in the course of or connected with the
rendering or providing of advisory services hereunder, except for acts of
willful misconduct, bad faith or gross negligence by the Advisor.
<PAGE> 2
(b) Subject to the provisions of Section 3(b) of this
Agreement, the Company hereby agrees to defend, indemnify and hold harmless the
Advisor from and against any and all costs, expenses, and liabilities (including
reasonable attorneys' fees) arising from services rendered by the Advisor
pursuant to or in connection with this Agreement, except for acts of willful
misconduct, bad faith or gross negligence by the Advisor.
5. Termination. The Company may terminate this Agreement at any
time after six months upon written notice to the Advisor.
6. Notices. Any notices hereunder shall be sent to the Company and
the Advisor at their respective addresses above set forth. Any notice shall be
given by registered or certified mail, postage prepaid, and shall be deemed to
have been given when deposited in the United States mail. Any party may
designate any other address to which notice shall be given, by giving written
notice to the other of such change of address in the manner herein provided.
7. Governing Law. This Agreement has been made in the State of New
York and shall be construed and governed in accordance with the laws thereof
without regard to provisions regarding choice of laws.
8. Entire Agreement. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof, may not be
altered or modified, except in writing and signed by the party to be charged
thereby and supersedes any and all previous agreements between the parties with
respect to the subject matter hereof.
9. Binding Effect. This Agreement shall be binding upon the parties
hereto and their respective heirs, administrators, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
COMMONWEALTH ASSOCIATES L.P.
By: Commonwealth Associates Management
Corp., its general partner
By: [signed: J. Wynne]
-------------------------------------
Name: Joseph Wynne
Title: Chief Financial Officer
FUTURELINK DISTRIBUTION CORP.
By: [signed: R. Kilambi]
------------------------------------
Name: Raghu Kilambi
Title: Chief Financial Officer
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
INTERIM FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,316
<SECURITIES> 0
<RECEIVABLES> 2,218,029
<ALLOWANCES> 345,397
<INVENTORY> 543,495
<CURRENT-ASSETS> 2,519,484
<PP&E> 2,022,967
<DEPRECIATION> 344,013
<TOTAL-ASSETS> 11,611,103
<CURRENT-LIABILITIES> 4,054,366
<BONDS> 4,186,309
0
0
<COMMON> 2,944
<OTHER-SE> 2,244,575
<TOTAL-LIABILITY-AND-EQUITY> 11,611,103
<SALES> 382,701
<TOTAL-REVENUES> 1,743,625
<CGS> 352,530
<TOTAL-COSTS> 1,948,244
<OTHER-EXPENSES> 1,806,525<F1>
<LOSS-PROVISION> 183,527
<INTEREST-EXPENSE> 1,026,639
<INCOME-PRETAX> (3,221,310)
<INCOME-TAX> (118,987)
<INCOME-CONTINUING> 3,102,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,102,323
<EPS-PRIMARY> ($0.11)
<EPS-DILUTED> 0
<FN>
<F1>Other costs and expenses include depreciation ($131,834), amortization of
intangible assets ($500,005), rent ($152,909), general and administration
($617,163), and consulting expenses ($355,150).
</FN>
</TABLE>
