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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1998
[ ] 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.
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(Name of Small Business Issuer in Its Charter)
Colorado 95-3895211
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(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
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(Address of principal executive offices) (ZIP Code)
(403) 216-6000
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(Issuer's Telephone Number, Including Area Code)
SECURITIES REGISTERED UNDER TO SECTION 12 (b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER TO SECTION 12 (g) OF THE EXCHANGE ACT:
Common Stock, $0.0001 par value
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(Title of Class)
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 [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenue for its most recent fiscal year. $2,436,658
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The aggregate market value of the voting and non-voting Common Stock held
by non-affiliates of the registrant, computed by reference to the closing sales
price of the Common Stock on the OTC Bulletin Board on March 31, 1998, but based
on Common Stock holdings and totals as at December 31, 1998, was $5,652,030.
The number of shares of the Registrant's Common Stock outstanding was
20,175,105 as of December 31, 1998.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
None.
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FUTURELINK DISTRIBUTION CORP.
INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
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PART I
Item 1. Description of Business ................................................................ 1
Glossary of Terms ...................................................................... 14
Item 2. Description of Properties............................................................... 16
Item 3. Legal Proceedings....................................................................... 16
Item 4. Submission of Matters to the Vote of Security Holders................................... 17
PART II
Item 5. Market for Common Equity and Related Stockholder Matters................................ 17
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations... 21
Item 7. Financial Statements.................................................................... 28
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.... 28
PART III
Item 9. Directors and Executive Officers; Compliance with Section 16(a) of the Exchange Act..... 29
Item 10. Executive Compensation.................................................................. 32
Item 11. Security Ownership of Certain Beneficial Owners and Management.......................... 36
Item 12. Certain Relationships and Related Transactions.......................................... 38
PART IV
Item 13. Exhibits and Reports on Form 8-K........................................................ 41
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PART I
This 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 "ITEM 1. DESCRIPTION OF
BUSINESS -Factors Affecting Operating Results" and elsewhere in this Report.
ITEM 1 - DESCRIPTION OF BUSINESS
FutureLink Distribution Corp., a Colorado corporation ("FutureLink" or the
"Company"), is an application service provider supplying 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.
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
96.4% 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") (see
"Certain Relationships and Related Transactions"). FutureLink has, since
December 31, 1998, completed the acquisition of all of the remaining issued and
outstanding securities of FutureLink Alberta.
HISTORY
FutureLink was incorporated under the Colorado Corporation Code on April 4,
1955 under the name of Cortez Uranium and Mining Co. On February 25, 1957, the
Company changed its name to Core Oil, Inc. On June 16, 1983, it changed its name
to Core Mineral Recoveries, Inc. and on July 20, 1997, changed its name again to
Core Ventures, Inc. Finally, on February 17, 1998, the Company changed its name
to FutureLink Distribution Corp.
In the past year, FutureLink has made two significant acquisitions. On
January 19, 1998, the stockholders of the Company ratified a share purchase
agreement between FutureLink, FutureLink Alberta, Cameron Chell, Linda Carling,
Colleen Rudolph, Bernie March, and Gerald Albert whereby FutureLink agreed to
acquire 1,540,000 Class "A" Common Voting Shares of FutureLink Alberta (46% of
the outstanding shares of such company) in consideration of the issuance of
1,540,000 FutureLink Common Shares. The shares were issued subject to an escrow
agreement. The agreement provided that 3,500,000 FutureLink Common Shares would
be issued to various employees for the consideration of $3,500. FutureLink
Alberta was added as a party for the purpose of making representations and
warranties to induce the Company to enter into the agreement.
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On September 28, 1998, the Company issued a take-over bid circular offering
to purchase the remaining 54% of FutureLink Alberta on the basis of one
FutureLink Common Share for each FutureLink Alberta Class "A" Common Voting
Share. Management of FutureLink Alberta was identical to that of the Company and
certain security holders of FutureLink Alberta were also security holders of
FutureLink at the time of such takeover bid.
In addition, by agreement among the Company, FutureLink Alberta, Donald A.
Bialik, Olivia B. Bialik, Bialik Family Trust, Riverview Management Corporation
(now known as FutureLink/SysGold) and that company's subsidiaries, SysGold Ltd.
and SysGold Inc., dated August 4, 1998, as amended by agreement dated August 24,
1998, FutureLink acquired all of the issued and outstanding shares of
FutureLink/SysGold (the "SysGold Acquisition Agreement"). The consideration was
CDN$7,600,015 paid by CDN$3,100,000 cash on closing, CDN$585,000 in promissory
notes payable on demand before 90 days following closing, and by the issuance of
4,250,000 FutureLink/SysGold shares exchangeable into 4,250,000 FutureLink
Common Shares (attributed value $0.60/share). Subsequent to this transaction,
SysGold Ltd. and SysGold Inc. were wound up into FutureLink/SysGold. The
CDN$585,000 promissory notes have since been paid in full by the Company.
FutureLink/SysGold (formerly known as Riverview Management Corporation)
purchased a 33% minority interest in its subsidiary SysGold Ltd. from a minority
stockholder for a purchase price of CDN$315,000 on July 24, 1998. The buy out
was based on an evaluation dated effective April 30, 1996 which valued 100% of
SysGold Ltd. at approximately CDN$950,000. The acquisition of FutureLink/
SysGold by the Company in August, 1998 valued SysGold Ltd. at CDN$8,000,000 on
an arm's length basis.
GENERAL
ASP AND COMPUTER UTILITY SERVICES
FutureLink offers a set of services called "Computer Utility Services",
allowing business customers to compute in a simple, cost effective and
consistent manner. FutureLink's Computer Utility Services include:
- Application Service Provision (ASP);
- Business Practices Consulting;
- IT Management / Outsourcing;
- IT Procurement; and
- Data Hosting (future service yet to be launched).
ASP
As a leader in ASP, FutureLink hosts brand-name software applications (such
as Great Plains and Onyx software) on its Server Farm. And rents the
applications to business users on a monthly subscription basis. The applications
run on high performance, multi-user enabled Windows NT(TM) servers. Users at
client sites use Citrix server-based computing software to connect to
FutureLink's facility and are able to compute with 24x7 availability, fast
performance and strong security. FutureLink's management anticipates that the
ASP industry will see tremendous growth in the next 18 to 24 months, and as
such, ASP is the Company's flagship service offering. FutureLink offers a
variety of ASP services to meet the various needs of its customers.
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Customers sign a multi-year contract (usually 36 months) for subscription
to FutureLink's ASP services. Customers connect to FutureLink's Server Farm via
dedicated telecom bandwidth and/or the Internet. The Server Farm stores and
retrieves customers' data and software applications, which are encrypted to
protect each customer's information. Customers receive Web-based and
telephone-based customer support and have service level agreements with
FutureLink that impose a high level of system availability.
On March 10, 1999, the Company officially launched its Class "A" Server
Farm facility in Calgary, Alberta, Canada. Phase 1 of the Server Farm will
accommodate 350 concurrent users with solid redundancy and backup and is
scaleable to 4,200 users. The Server Farm's operational features include
conditioned power, environmental and other control systems (including redundant
air conditioning, security card access, fire detection and suppression systems,
etc.) high performance features, redundancy and back-up.
FutureLink uses Citrix's (Nasdaq: CTXS) Independent Computing Architecture
(ICA) and its MetaFrame technology as the platform to host applications from its
Server Farm. Citrix's technology is mature, reliable and is fast becoming the de
facto industry standard for server-based computing. Citrix's technology shifts
the application processing from client to server, thereby enabling high
performance over low bandwidth requirements. Citrix's technology is being
broadly adopted by industry leading vendors for building server-based computing
capability into Windows-based terminals, network computers, wireless devices,
and a new range of information appliances.
FutureLink has entered into agreements with Great Plains Software, Onyx
Software, Applix, Inc. and Galleon Distributed Technologies to distribute their
products through its ASP service delivery channel. FutureLink believes that it
will be an attractive partner for these companies because of FutureLink's
strategy to deliver integrated solutions to middle market enterprises in a
cost-effective service model. Each of its software agreements are unique, but
most allow FutureLink to deploy packaged application software as a service
without the need to establish a separate licensing arrangement for each client.
The agreements also generally include co-marketing, specialized product training
and preferred pricing on the licenses to the software. FutureLink plans to enter
into additional agreements with other software vendors over time.
APPLICATION PORTAL (ASP 1) - FUTURE SERVICE OFFERING
Application Portal is a service that allows anyone with a browser and an
Internet connection to access consumer and/or small business software
applications from FutureLink servers. Using server-based computing software,
including a simple Web browser plug-in, users can run applications on any
platform, over multiple bandwidth types and store data locally or take advantage
of FutureLink's professionally-managed data storage facility. The applications
would reside and be executed on FutureLink's Server Farm and controlled remotely
by the client via his or her web browser. Web-based and telephone support would
be included.
APPLICATION HOSTING (ASP 2)
Application Hosting is the hosting of individual enterprise-level
applications; i.e. accounting (Great Plains), contact management (Onyx), etc.
This service is designed for companies that already have some form of an IT
capability but are looking for a cost-effective way to access more powerful
applications and support. This allows companies to integrate new applications
without the large up-front costs or hiring additional IT staff. Application
Hosting is sold on a per employee/user and per month basis through the Company's
sales force, the software vendor's sales channel, their VARs or may even be
co-branded by the vendor. The customer connects to FutureLink's server farm
through a wide-area network connection.
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HOSTED OUTSOURCING (ASP 3)
Hosted Outsourcing refers to the outsourcing of a company's IT department
to FutureLink's ASP service. All of the client's applications and data are
accessed remotely from FutureLink's server farm. The service is sold directly or
through a FutureLink authorized VAR. The Hosted Outsourcing service is priced on
a per employee/user, per month basis and on a three to five year contract, and
includes application(s), data storage, systems integration, connectivity, help
desk support and customer hardware.
IT BUSINESS CONSULTING
FutureLink's IT management consultants help clients develop strategic
direction, manage business practices and computer applications for specific
business disciplines. The services are tailored to complement customers'
existing resources and knowledge base. The key is to work with the clients'
existing IT staff to optimize their business process and to maximize the
effectiveness of their computer systems. Evaluation parameters include:
Strategic: Vision, Strategy, Planning, and Process
Operational: Project Management, Data Management, Support, Training,
Applications, Implementation, and
Development.
IT MANAGEMENT / OUTSOURCING SERVICES
FutureLink's IT Management and Outsourcing Services consist of computing
infrastructure provision, support and maintenance, which are performed by its
client services and technical services teams. The support teams are capable of
performing any work required of the most complex Information Technology
department. The work can be projects, out-tasking (partial outsourcing) or full
outsourcing of the IT function. The hardware and software support includes PCs
running Windows 95/98/NT, Unix Workstations, Servers running NT, Novell, Unix or
OS/400, database servers running Oracle or SQL server, and many other
specialized industry applications. Networking expertise includes Ethernet, Fast
Ethernet, Token Ring, ATM, and Frame Relay. Pricing for Infrastructure and
Support work is provided to customers at an hourly rate, at a daily rate, on a
project by project basis, on a monthly price per consultant engaged or on a
monthly fee per employee/user.
PROCUREMENT
FutureLink offers as part of its service offering the procurement of
computer equipment and software. FutureLink offers drop-ship deliveries and
custom configuration of most computer equipment.
DATA HOSTING - FUTURE SERVICE OFFERING
Data Hosting is a service where large industry-specific data sets would be
stored and delivered from FutureLink's server farms. An example of these data
sets or hubs would be government environmental and medical databases, oil and
gas industry data sets, and municipal geographical information data sets.
Organizations, which have an interest in these types of data sets, would
establish a high-speed link to FutureLink's Data Hub and download the portions
of data sets that they are interested in. This service will be complementary to
FutureLink's ASP service, in that many of the same organizations, which need
access to data sets, can also use the same high-speed link to get ASP service.
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TARGET MARKETS
The Company targets customers who have the following characteristics:
ASP SERVICES
- Companies that are presently using a pre-Windows computer
system/network and want to upgrade to a Windows-based operating
environment;
- Companies that do not have the in-house IT staff required to manage a
networked PC environment or an ERP program in a cost-effective manner;
- Companies who in the past either could not afford an ERP program nor
did they have the manpower to manage an ERP program; and
- Companies that want to contain their IT expenditures by switching over
to a fixed term contract.
IT BUSINESS CONSULTING
- Companies which must audit their IT departments to ensure software and
equipment are Year 2000 compliant;
- Companies which recognize that in order for them to gain a competitive
advantage in their marketplace they have to expand their IT
capabilities (analysis and decision-making tools), but do not have the
in-house staff to analyze and/or manage the project; and
- Companies in the process of deciding on the installation of an ERP
program which do not have the necessary in-house IT capabilities to
conduct a suitable evaluation of alternative solutions.
IT MANAGEMENT / OUTSOURCING
- Companies which realize that they can achieve significant cost-savings
by outsourcing all or part of their IT services to a traditional
outsourcing provider;
- Companies in a vertical market in which FutureLink has a proven record
of expertise (ie. oil and gas);
- Companies that wish to concentrate on their core business and realize
that IT management is not a core competence;
- Companies which require quality IT professionals to manage specific IT
operations, but the hours required per week/month for this operation
do not justify hiring such a person full-time; or
- Companies which are unable to hire or retain appropriate IT staff to
manage an existing network.
SUBSEQUENT EVENTS
Many events subsequent to December 31, 1998 are dealt with elsewhere in
this Form 10-KSB Annual Report. These events included the acquisition of the
remaining shares of FutureLink Alberta not held by the Company as at December
31, 1998, additional issuances of securities by FutureLink and the official
launch of the Company's first Server Farm on March 10, 1999, among other
matters. Please refer to the subsequent events set forth in "ITEM 1. DESCRIPTION
OF BUSINESS - History", "ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS - Issuances of Securities", in various sections of "ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the management changes effected in March, 1999, being the
addition of Kyle Scott as Secretary, the promotion of Bill Arnett to Chief
Operating Officer, the promotion of Donald Bialik to Vice-Chairman and the
assumption of the office of President by Cameron Chell as set forth in "ITEM 9.
DIRECTORS AND EXECUTIVE OFFICERS."
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EMPLOYEES
At December 31, 1998, the Company had 111 full-time employees, including 76
IT technologists, 11 sales and marketing personnel, 4 customer service
representatives, and 20 general administration and finance staff.
As well as these 111 employees, FutureLink had, at December 31, 1998,
retained 15 consultants under contract, 12 as IT technologists, 2 as customer
service consultants and 1 providing general and administrative services.
The Company believes its future will depend in large part on its ability to
attract and retain highly skilled technical employees. None of the employees of
the Company are covered by a collective bargaining agreement.
COMPETITION
The market for IT services is very competitive because of the large number
of competitors and the rapidly changing environment. Primary competitors include
participants from a wide variety of market segments, including "Big Five"
accounting firms, systems consulting and implementation firms, service groups of
computer equipment companies, facilities management companies, general
management consulting firms and programming companies. The companies which
FutureLink believes to be its direct competitors, in that they have announced or
are already delivering ASP service, include USInternetworking, Corio,
Telecomputing USA and Interliant (to be acquired by Sage Networks).
Additionally, the market for Internet-related services is extremely
competitive. FutureLink anticipates that competition will continue to intensify
as the use of the Internet grows. In the market for Internet-enabled application
software and network solutions, FutureLink competes on the basis of performance,
price, software functionality and overall network design. While FutureLink's
competition comes from many different industry segments, FutureLink believes no
indirect competitor provides the integrated, single-source solution provided by
FutureLink. Current and prospective indirect competitors include systems
integrators, ISPs, and hardware and software suppliers.
FutureLink also competes with national, regional, and local commercial
systems integrators. A certain number of these companies bundle their services
with software and hardware providers and perform an IT management outsourcing
role for the customer, including Arthur Anderson and Electronic Data Systems
("EDS"). Arthur Anderson provides an ASP service featuring JD Edwards ERP
financial software and Electronic Data Systems ("EDS") has teamed with SAP
America to bring SAP's ERP applications to small and mid-size businesses.
FutureLink's indirect competition may also include ISP companies, whose
primary business involves hosting web pages, such as USWeb, Exodus
Communications and Verio Inc.
In the wider realm of general IT outsourcing, FutureLink considers its
possible competitors to be local IT services companies in cities the Company
operates in and larger IT companies such as IBM Global Services, EDS, Cap
Gemini, McKinsey & Co., Booz, Allen & Hamilton, Whittman-Hart, Inc. and the "Big
5" consulting firms.
MAJOR CUSTOMERS
Major customers of FutureLink are primarily Calgary, Alberta, Canada-based
oil & gas companies, including the following:
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Canadian Natural Resources Ltd. Numac Energy Inc.
Rio Alto Exploration Ltd. Newport Petroleum Corporation
PrimeWest Management Inc. Northstar Energy Corporation
Maxx Petroleum Ltd. Ocelot Energy Inc.
University of Calgary, Faculty of Management Sigma Explorations Inc.
Dominion Energy Canada Ltd. Pioneer Natural Resources Inc.
Archean Energy Inc. AdFarm
Parks Canada (Kootenay) Burnco Rock Products Ltd.
Coparex Canada Ltd. Renata Resources
Merit Energy Ltd. Canor Energy Ltd.
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Revenue from Canadian Natural Resources represented 22% of total revenue
for the year ended December 31, 1998. No other single customer accounted for
over 10% of FutureLink's total revenue in 1998.
Canadian revenues accounted for nearly 100% of total revenues in the year
ended December 31, 1998. A large amount of FutureLink's total revenue will
continue to be generated in Canada.
FACTORS AFFECTING FUTURE OPERATING RESULTS
LOSSES AND ACCUMULATED DEFICIT; ABILITY TO CONTINUE AS A GOING CONCERN. For
the year ended December 31, 1998, the Company reported a net loss of $5,880,294,
including an operating loss of $5,210,947. As of December 31, 1998, FutureLink
had an accumulated deficit of $7,330,457 as shown in the Company's audited
consolidated financial statements for the year ended December 31, 1998. The
Company effected the acquisition of Riverview Management Corporation and the
SysGold group of companies (its subsidiaries), now renamed FutureLink/SysGold
Ltd., effective August 24, 1998, and as such, the consolidated 1998 financial
statements only reflect the larger revenue stream from FutureLink/SysGold Ltd.
for the last 4 and 1/3 months of 1998. However, even annualizing the larger
revenue stream and expenses from FutureLink/SysGold Ltd., the Company would have
shown a net loss for 1998. The Company is not currently profitable and there can
be no assurance that Company will operate profitably in the future and that the
Company will not continue to sustain losses. Continued losses could materially
and adversely affect the Company's business. In addition, the Company and its
subsidiaries are parties to certain lawsuits described under "Legal
Proceedings". The Company can not conclusively predict the outcome of these
lawsuits and could be directed to pay penalties to the other parties in the
suits. Should this happen, it could put a considerable cash burden on the
Company.
FUTURE CAPITAL NEEDS. The Company is intensifying its expansion efforts in
the growing ASP market which is the key reason for current losses and
requirements for additional capital. The Company requires significant funds to
continue its growth strategy of building additional in-house "Server Farms", for
hosting applications for clients and to either effect acquisitions of additional
information technology outsourcing companies based in other North American
centers or establish a presence in other cities directly in order to grow
geographically. In order to remain competitive and at the forefront of the ASP
industry, the Company must continue to make significant investments in
technology, systems, staff and branch offices. These capital needs cannot be met
from internal cash flow and must be met by financing through additional debt or
equity. There can be no assurance that such financing will be available or, if
available, that it will be upon terms satisfactory to the Company. Without new
debt or equity financing, there is significant doubt that the Company has
adequate resources to fund its operations as currently structured and in the
ordinary course throughout 1999.
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SPECULATIVE NATURE OF IT BUSINESS. The IT outsourcing industry is subject
to significant risk factors including changes in general economic conditions,
competition from other properties, the failure of customers to meet their
obligations and other operating costs which may result in a failure to produce
income or revenue.
COMPETITION. The market for IT services is very competitive because of the
large number of competitors and the rapidly changing environment. Primary
competitors include participants from a variety of market segments, including
"Big Five" accounting firms, systems consulting and implementation firms,
application software firms, service groups of computer equipment companies,
facilities management companies, general management consulting firms and
programming companies. Many of these competitors have significantly greater
financial, technical and marketing resources and greater name recognition than
FutureLink. In addition, the Company's services compete with its clients'
internal resources, particularly where these resources represent a fixed cost to
the client. Such competition may impose additional pricing pressures on the
services offered by FutureLink. There can be no assurances that the Company will
compete successfully with its existing competitors or with any new competitors.
RAPID TECHNOLOGICAL CHANGE. The information technology sector in which the
Company offers outsourcing services is characterized by rapidly changing
technology with continuous improvements in both computer hardware and software
and rapid obsolescence of current systems. Management believes that while such
rapid change poses risks for the Company in striving to keep its server
hardware, communications links and hosted software offerings up to date, these
risks will have a positive impact on marketing ASP services in that potential
clients face the same risks with less expertise to deal with these issues
internally, as effectively. FutureLink's success will depend in part on its
ability to develop IT solutions that keep pace with continuing changes in IT,
evolving industry standards and changing client preferences. There can be no
assurance that the Company will be successful in adequately addressing these
developments on a timely basis or that, if these developments are addressed,
FutureLink will be successful in the marketplace. In addition, there can be no
assurance that products or technologies developed by others will not render
FutureLink's services uncompetitive or obsolete. Any failure by the Company to
address these developments could have a material adverse effect on FutureLink's
business, operating results and financial conditions.
DEVELOPMENT AND ACCEPTANCE OF NEW SERVICES. The ASP industry is in its
infancy and the Company must both work to establish the ASP market as well as
attain market share. While the Company continues to provide more traditional
information technology outsourcing (consulting regarding software application
and customization, consulting regarding Year 2000 issues, establishing in-house
server-based networks for clients, etc.), it is focusing its efforts on
marketing fully outsourced information technology by hosting client applications
on its "Server Farm" network. Many existing and potential customers may prove
reluctant to totally outsource their IT function in the ASP model. However, by
offering the full range of traditional IT outsourcing services as well as its
"Server Farm" concept, the Company expects to expand its customer base, with
expectations of greatest growth in the fully hosted ASP segment.
DEPENDENCE ON THIRD PARTIES. FutureLink depends on certain third party
suppliers to provide key components for the provision of our ASP services,
including telecommunications providers and network management software
providers, primarily Citrix. Some of these components or applications are only
available from limited sources or sole providers in the quality and quantity our
Company demands. Any failure to obtain necessary products or services in a
timely manner and at an acceptable cost could have a material adverse affect on
FutureLink's business, results from operations and financial condition.
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STRATEGIC SOFTWARE VENDOR RELATIONSHIPS. FutureLink obtains software
products pursuant to agreements with Onyx, Great Plains, Applix and Galleon and
offers these software packages to clients as part of our ASP solution. The
provision of such software, as well as any additional software offerings, is
critical to our ASP expansion strategy. If one or more of our existing
relationships with our key software partners were to be terminated or not
renewed, FutureLink could be faced with discontinuing products or services or
delaying or reducing introduction of services unless the Company can find,
license and offer equivalent software packages, if available.
All of our third party agreements are non-exclusive. FutureLink's
competitors could also license and offer software products which we offer as
part of our ASP services. We cannot be sure that our current strategic software
vendors will continue to support the software we currently license from them in
current form, nor can we be sure that our Company will be able to adapt our
systems to changes in such software. Furthermore, we cannot be sure that
financial or other difficulties may be faced by such vendors and have a material
adverse effect on the software offered by us to clients or that if such software
packages become unavailable, that we will be able to locate suitable
alternatives.
SECURITY RISKS. Questions surrounding the secure transmission of
confidential information to and from our Server Farm form a barrier to the
growth of our ASP services. FutureLink's ASP services rely on encryption and
authentication technology licensed from third parties to provide the security
required to safely transmit confidential information. While the Company has
implemented a variety of state of the art network security systems to protect
against unauthorized access, computer viruses, other intentional acts and
accidents and disruptions may occur. Our clients may experience service
interruptions or delays as a result of accidental or intentional disruptions.
Such acts could jeopardize the security of confidential client information. This
could potentially result in liability to the Company, loss of existing clients
or the loss of reputation leading to difficulties in attracting new clients.
Although we plan to continuously upgrade our security systems, such measures
have been circumvented in the past and FutureLink's security could be
circumvented in future. The costs required to avoid the intrusion of or to
eliminate computer viruses or to alleviate other potential or real security
threats could be expensive and any additional efforts required to address
security issues could result in service interruptions or delays to clients which
would have a material adverse effect on FutureLink's business, results of
operations and financial condition.
PROJECT RISKS. Many of the engagements undertaken by FutureLink or its
subsidiaries involve projects that are critical to the operations of its
clients' businesses and provide benefits that may be difficult to quantify.
FutureLink's failure or inability to meet a client's expectations in the
performance of its services could result in a material adverse change to the
client's operations and therefore could give rise to claims against FutureLink
(or a FutureLink subsidiary) or damage the Company's reputation, adversely
affecting its business, operating results and financial condition.
FIXED-BID PROJECTS. FutureLink and its subsidiaries undertake many projects
billed on a fixed-bid basis, which is distinguishable from the Company's other
methods of billing on a time and materials basis or on a monthly, per
employee/user basis. The failure of the Company to complete such projects within
budget would expose the Company to risks associated with cost overruns, which
could have a material adverse effect on FutureLink's business, operating results
and financial condition.
CUSTOMER CONCENTRATION. To date, the Company's sales have been highly
concentrated with most revenues derived from customers headquartered near the
Company's head office in Calgary, Alberta, Canada. In addition, approximately
22% of its revenues for the year ended December 31, 1998, were derived from
sales to Canadian Natural Resources Ltd. There can be no assurance that Canadian
Natural Resources will continue to purchase services and technology from the
Company at current levels, if at all.
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INTERNATIONAL EXPOSURE AND FOREIGN EXCHANGE RISK. Revenues outside of the
United States accounted for almost 100% of the Company's total revenues for the
year ended December 31, 1998, with virtually all revenues being earned in
Canada. While the Company is focusing its expansion efforts in the United
States, management anticipates that Canadian sales will continue to account for
a substantial amount of the Company's revenues. International sales are subject
to certain risks, including unexpected changes in regulatory requirements,
tariffs and other barriers and potentially adverse tax consequences. In
addition, international sales may be materially adversely affected by currency
risks associated with fluctuations in exchange rates and the potential for
devaluation of certain currencies. The Company's audited consolidated financial
statements for the year ended December 31, 1998 show a negative foreign currency
translation adjustment of $96,468. There can be no assurance that the above
listed and other factors associated with international operations will not have
a material adverse effect on the Company's revenues and net earnings (losses).
CREDITWORTHINESS OF CLIENTS. The value of the Company's computer equipment,
software, and intellectual property thereto may depend on the credit and
financial stability of FutureLink's and its subsidiary's customers. The
Company's projected income would be adversely affected if a significant number
of customers were unable to meet their obligations to FutureLink or its
subsidiaries or if FutureLink were unable to continue to collect its accounts
receivables. In the event of default by customers, the Company may experience
delays in enforcing its rights as a vendor and may incur substantial costs in
protecting its investment.
DEPENDENCE ON KEY PERSONNEL/ATTRACTION AND RETENTION OF EMPLOYEES.
FutureLink's business, both directly or indirectly, involves the delivery of IT
consulting services and is labor-intensive. The Company's success depends in
large part upon its ability to attract, develop, motivate and retain highly
skilled employees, directors and officers. Qualified technical employees are in
great demand and are likely to remain a limited resource for the foreseeable
future. The unexpected loss or departure of any of FutureLink's key directors,
officers or employees could be detrimental to the future operations of the
Company. The Company has historically experienced turnover rates which it
believes are consistent with industry norms. An increase in this rate could have
a material adverse effect on FutureLink's business, operating results and
financial condition, including its ability to secure and complete engagements.
The success of the Company's business will depend, in part, upon FutureLink's
ability to attract and retain qualified personnel as they are needed. There can
be no assurance that FutureLink will be able to engage the services of such
personnel or retain its current personnel.
RISKS RELATED TO GROWTH, INCLUDING POSSIBLE ACQUISITIONS. The Company plans
to and may expand its operations, internally and/or through the acquisition of
firms operating in similar business areas. There can be no assurance that the
Company will be able to effectively expand or identify, acquire or profitably
manage additional businesses or successfully integrate any acquired businesses
into the Company without substantial expenses, delays or other operational or
financial problems. Further, growth through direct expansion or by acquisitions
may involve a number of special risks or effects, including diversion of
management's attention, failure to retain key acquired personnel, unanticipated
events or circumstances, legal liabilities and amortization of acquired
intangible assets and other one-time or ongoing acquisition related expenses,
some or all of which could have a material adverse effect on the Company's
business, operating results and financial condition. Client satisfaction or
performance problems of a single acquired firm could have a material adverse
impact on the reputation of the Company as a whole. In addition, there can be no
assurance that if FutureLink acquires any businesses or adds offices in other
geographical locations that these actions will achieve anticipated revenues and
earnings. The failure of the Company to arrange its growth strategy successfully
could have a material adverse effect upon the Company's business, operating
results and financial condition.
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INTELLECTUAL PROPERTY RIGHTS. The Company relies on contractual
relationships with a number of key suppliers for intellectual property required
to service clients. For example, certain licensee rights or reseller rights lie
with companies such as Citrix, Onyx, Great Plains, Applix, Galleon, Microsoft,
etc. We rely on copyright, trademark, service mark, trade secret laws,
non-disclosure agreements and restrictions in our contracts with third parties
to protect certain proprietary rights in our products and services. FutureLink
has no patented technology to bar competitors from the Company's market. Despite
our best efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain our technology for their use. Preventing
such unauthorized duplication and use is difficult and we are not certain that
we can fully protect our proprietary rights. Although we believe that the
Company's trademarks and other intellectual property may have value, we believe
that FutureLink's success will also depend on the innovation, technical
expertise and the marketing abilities of its personnel.
TRADENAME. A number of U.S. and international companies currently use all
or a portion of the name "FutureLink" in connection with products or services in
similar industries as that engaged in by the Company. While the Company is
attempting to qualify under a trademark its name throughout the U.S. and Canada,
significant issues may be present as to the ability to widely use the name in
connection with the products or services to be rendered by the Company.
LIMITED CONTROL AND INFLUENCE ON THE COMPANY. The current officers and
directors, including the controlling beneficial shareholders of the Company in
the aggregate, directly or beneficially, own approximately 20.6% of the total
outstanding Common Stock as at December 31, 1998. As a result, these individuals
will probably be able to elect a majority of the Company's directors and thereby
control the management policies of the Company, as well as determine the outcome
of corporate actions requiring shareholder approval by majority action,
regardless of how other shareholders of the Company may vote. Such ownership of
Common Stock may have the effect of delaying, deferring or preventing a change
in control of the Company and may adversely affect the voting rights of holders
of Common Stock.
LIMITATION OF LIABILITY OF DIRECTORS. As permitted by the Colorado Business
Corporation Act, the Company has Articles of Incorporation, as amended, and
by-laws which eliminate, with certain exceptions, the personal liability of its
directors to the Company and its shareholders for monetary damages as a result
of a breach of fiduciary duty. Such a provision makes it more difficult to
assert a claim and obtain damages from a director in the event of any alleged
breach of fiduciary duty. The Colorado Business Corporation Act provides that a
corporation has the power to (i) indemnify directors, officers, employees and
agents of the corporation against judgments, fines and amounts paid in
settlement in connection with suits, actions and proceedings and against certain
expenses incurred by such parties if specified standards of conduct are met: and
(ii) purchase and maintain insurance on behalf of any of the foregoing parties
against liabilities incurred by such parties in the foregoing capacities. The
by-laws of FutureLink provide for indemnification of its officers and directors
against expenses actually and necessarily incurred by them in connection with
the defense of any action, suit or proceeding in which they are made parties by
reason of being or having been officers or directors of the Company; except in
relation to matters as to which any such director or officer is adjudged in such
action, suit or proceeding to be liable for gross negligence or willful
misconduct in the performance of duty. However, such indemnification is not
exclusive of any other rights to which those indemnified may be entitled under
any by-law, agreement, vote of shareholders or otherwise.
LIMITED TRADING HISTORY OF FUTURELINK COMMON STOCK; STOCK PRICE VOLATILITY.
Between January 1, 1998, and December 31, 1998, the closing sale price has
ranged from a low of $0.13 per share to a high of $4.34 per share. The market
price of the FutureLink Common Stock could continue to fluctuate substantially
due to a variety of factors, including quarterly fluctuations in results of
operations, adverse circumstances affecting the introduction of market
acceptance of new products and services offered by the Company, announcements of
new products and services by competitors, changes in the IT environment, changes
in earnings estimates by analysts, changes in accounting principles, sales of
shares of FutureLink Common Stock by existing holders, loss of key personnel and
other factors. The market price for
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FutureLink Common Stock may also be affected by the Company's ability to meet
analysts' expectations, and any failure to meet such expectations, even if
minor, could have a material adverse effect on the market price. In addition,
the stock market is subject to extreme price and volume fluctuations. This
volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to the operating performance of
these companies. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such a company. Any such litigation instigated against
the Company could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
RISKS OF LOW-PRICED OR PENNY STOCK. The common stock of the Company is
traded on the NASD OTC Bulletin Board. As such it is subject to Rule 15(g)-(9)
under the 1934 Act. Rule 15g-9 requires additional disclosure, relating to the
market for penny stocks, in connection with trades in any stock defined as a
penny stock. The Commission defines a penny stock to be any equity security that
has a market price of less than $5.00 per share (exclusive of commissions),
subject to certain exceptions. Such exceptions include any equity security
listed on Nasdaq and any equity security issued by an issuer that has (i) net
tangible assets of at least $2,000,000, if such issuer has been in continuous
operation for three years, (ii) net tangible assets of at least $5,000,000, if
such issuer has been in continuous operation for less than three years, or (iii)
average annual revenue of at least $6,000,000, if such issuer has been in
continuous operation for less than three years. Unless an exemption is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith.
In addition, trading in the Company's common stock is covered by Rules
15(g)-(1) through 15(g)-(6) under the 1934 Act for non-Nasdaq and non-exchange
listed securities. Under such rules, broker/dealers who recommend such
securities to persons other than established customers and accredited investors
must make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to a transaction prior to sale.
Securities also are exempt from these rules if the market price is at least
$5.00 per share.
The regulations on penny stocks could limit the ability of broker/dealers
to sell the Company's securities and thus the ability of the Company's
shareholders to sell their securities in the secondary market.
NO DIVIDENDS ANTICIPATED ON COMMON STOCK. The Company has a limited history
and no history of positive earnings and has not paid any dividends on its Common
Stock to date. The Company currently transacts all of its business through its
subsidiaries. The Company does not currently intend to declare or pay any
dividends on its Common Stock in the foreseeable future, but plans to retain
earnings, if any, for development and expansion of its business operations.
RELIABILITY OF MARKET DATA. Market data used within this report was
obtained from internal sources and from industry publications. Such industry
publications typically contain a statement to the effect that the information
contained therein was obtained from sources considered reliable, but that the
completeness and accuracy of such information is not guaranteed. While we
believe that the market data presented herein is reliable, we have not
independently verified such data. Similarly, market data supplied by internal
sources which we believe to be reliable has not been verified by independent
sources.
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RISKS ASSOCIATED WITH THE YEAR 2000
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 expect 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.
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GLOSSARY OF TERMS
APPLICATION SERVICE PROVISION ("ASP"). A service that allows anyone,
anywhere to access computer applications hosted on a third-party server via the
Internet or dedicated telecom line. Utilizing client/server software including a
web browser, a user can run applications on any platform, over multiple
bandwidth types and store data locally or from a managed data storage facility.
CDN$. Denotes amounts quoted in Canadian dollars.
COMPUTER OR INFORMATION TECHNOLOGY ("IT") OUTSOURCING. Refers to the
process by which a company hires a third party to manage all or part of their
computer hardware, software and information systems. The third party manages
these services for a preset fee.
COMPUTER UTILITY MODEL. A business model for computer network use and
management similar to a phone or power company model.
ELECTRONIC COMMERCE ("E-COMMERCE"). The process where consumers or
corporations conduct business over the Internet.
ENTERPRISE RESOURCE PLANNING ("ERP"). A packaged business software system
that lets a company automate and integrate the majority of its business
processes, share common data and practices across the enterprise and produce and
access information in a real-time environment. Following is an example of how an
ERP program operates: A sale is completed, the program makes the necessary
entries in the company's general ledger, adjusts the company's inventory
records, reorders the product and allows the sales and marketing department to
analyze the transaction - in real-time.
EXTRANET. A private Internet connection for a company's suppliers.
HOSTED OUTSOURCING. The complete outsourcing of a company's IT department
to an ASP.
INDEPENDENT COMPUTING ARCHITECTURE ("ICA"). A three-part Server-based
computing technology by Citrix that separates an application's logic from its
user interface and allows 100% application execution on the server.
INDEPENDENT SOFTWARE VENDORS ("ISV"). Independent third party software
companies that sell software (ie. Corel, PeopleSoft, SAP, etc.).
INTRANET. A private Internet connection for a company's employees.
SERVER FARM. A group of servers that are linked together as a "single
system image" to provide centralized administration and horizontal scalability.
SERVER-BASED COMPUTING. A server-based approach to delivering business
applications to end-user devices, whereby an application's logic is deployed,
managed, supported and executed 100% on a server and only the user interface is
transmitted across a network to the client.
SMALL OFFICE/HOME OFFICE ("SOHO") MARKET . Those companies with less than
19 employees.
TOTAL COST OF OWNERSHIP ("TCO"). A model that assists IT professionals in
understanding and managing the direct and indirect costs incurred for acquiring,
maintaining and using an application or a computing system such as training,
upgrades, administration, as well as the purchase price.
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THIN CLIENT. A low-cost computing device that works in a server-centric
computing model.
USER INTERFACE. The graphic portion of the application that is split from
the program being executed and "pushed" to the end user so they can manipulate
their data.
VALUE-ADDED RESELLER ("VAR"). A person or entity that acts as an
intermediary between software/hardware producers and the end users. Resellers
frequently "add value" by performing consulting, system integration and product
enhancement work.
VERTICAL APPLICATION HOSTING. Hosting of an application or ERP program
remotely via a Server Farm.
VIRTUAL PRIVATE NETWORK ("VPN"). A secure, encrypted private Internet
connection.
WEB HOSTING. When all file, print, database and application servers are
managed remotely via the Internet.
WINFRAME(R). Citrix's multi-user extension to Microsoft Windows NT Server
which allows a User Interface to be "pushed" to the end-user.
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ITEM 2 - DESCRIPTION OF PROPERTIES
The Company presently has an operating lease agreement for approximately
19,639 square feet of office space in Calgary, Alberta for its corporate
headquarters. This lease expires on January 31, 2002, and has an aggregate
minimum annual rental payments of approximately CDN$373,312 plus operating
expenses and is subject to escalation.
Other leased office space includes a small local sales office in Tampa,
Florida. The Company is currently negotiating the lease of additional local
sales offices in Seattle, Washington and Houston, Texas.
ITEM 3 - LEGAL PROCEEDINGS
In the ordinary course of its business, FutureLink may be involved in legal
proceedings from time to time. As of the date hereof, the only material legal
proceedings commenced or pending against the Company consist of the following:
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
defence 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.
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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.
ITEM 4 - SUBMISSION OF MATTERS TO
THE VOTE OF SECURITY HOLDERS
On November 30, 1998, the Company's present management held an Annual
Meeting of the Stockholders. As per the Inspector of Elections report, 5,879,083
shares were represented at the meeting either in person or by proxy and a quorum
was present to vote upon items 1, 2 and 3, however, an insufficient number of
votes were present to establish a quorum to vote on items 4 and 5. Items 1
through 3 of the following resolutions were approved by the stockholders:
1. To elect to the Board of Directors for the ensuing year or until their
successors are duly elected and qualified: Cameron Chell, Raghu Kilambi,
Don Bialik, Philip Ladouceur, F. Bryson Farrill, Robert H. Kohn and Robert
Kubbernus.
2. To grant the Board of Directors the ability to proceed with a reverse stock
split not to exceed a 1 for 30 split, with a cash-out option to minority
stockholders for fractional shares. The Board would have until June 1, 1999
to execute the reverse split.
3. Approve an increase in the number of shares of Common Stock available for
grant pursuant to the Company's Stock Option Plan for officers, directors
and employees to a rolling 30% of the issued and outstanding shares at the
time of each grant.
4. Approve an amendment of the Articles of Incorporation to convert the
Company's Preferred Shares into blank check Preferred Shares to facilitate
the issuance of one Preferred share with the voting power of 4,250,000
Common Shares in connection with the Company's acquisition of the
outstanding shares of Riverview Management Corporation (now known as
FutureLink/SysGold Ltd).
5. Approve a change in the State of Incorporation from Colorado to Delaware.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company commenced quotation on the NASD
Over-the-Counter Bulletin Board ("OTC-BB") under the symbol "CVNK" in early
1995. Subsequent to the share acquisition agreement of January 20, 1998 between
Core Ventures, Inc and the five major stockholders of FutureLink Distribution
Corp., an Alberta corporation, the Company changed its name from Core Ventures,
Inc. to FutureLink Distribution Corp. and trading commenced under the symbol
"FLNK" in early 1998.
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The following table summarizes the trading activity of FutureLink from
January 1998 without providing information on prior years' trading activity,
given that the Company has only been active as "FutureLink" since January 20,
1998. The prices set forth below represent quotes between dealers and do not
include commissions, mark-ups or mark-downs, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
------------------
1998 HIGH LOW
----- -----
<S> <C> <C>
1st Quarter ............................................ $4.09 $0.13(1)
2nd Quarter ............................................ 4.22 0.63
3rd Quarter ............................................ 1.69 0.39
4th Quarter ............................................ 0.80 0.25
</TABLE>
Notes:
1. The low of $0.13 per share occurred prior to the January 20, 1998
transaction involving the Company (then Core Ventures, Inc.) and
FutureLink Alberta and the resulting change of the Company's
management.
2. Based upon closing trade prices as quoted on Bloomberg.
As of December 31, 1998, there were approximately 336 holders of record and
in excess of 4,800 beneficial owners of the Company's Common Stock.
The Company has not declared or paid cash dividends to its stockholders.
The Company anticipates that any earnings in the near future will be retained
for the development and expansion of its business and, therefore, does not
anticipate paying dividends on its shares of Common Stock in the foreseeable
future. In addition, any declaration of dividends on the shares of Common Stock
will depend, among other things, upon levels of indebtedness, the effect on the
conversion ratio of the Convertible Debentures, restrictions in future debt
agreements, future earnings, the operating and financial condition of the
Company, its capital requirements and general business conditions.
On March 31, 1999, the closing bid and ask prices of FutureLink's Common
Stock, as reported by Bloomberg and based on quotes available from the
NASD-OTC-BB market, were $0.28 and $0.31, respectively.
ISSUANCES OF SECURITIES DURING THE LAST FISCAL YEAR AND SUBSEQUENT TO
DECEMBER 31, 1998
The following is a description of each of the Company's security issuances
since January 1, 1998:
A. COMMON STOCK
1. Share Acquisition Agreement dated January 20, 1998, between
the Company, FutureLink Alberta, Cameron Chell, Linda Carling,
Colleen Rudolph, Bernie March, and Gerald Albert pursuant to
which FutureLink agreed to acquire 1,540,000 Class "A" Common
Voting Shares of FutureLink Alberta (46% of such Company's
issued shares) in consideration of the issuance of 1,540,000
shares of the Company's Common Stock. The shares were issued
subject to an escrow agreement. The agreement also provided
for the issuance of 3,500,000 shares of the Company's Common
Stock to certain employees for consideration of $3,500. All
shares of Common Stock issued under this Share Acquisition
Agreement were issued to non-residents of the U.S. in
accordance with Regulation S promulgated under the Securities
Act of 1933, as amended ("Reg S").
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2. Subscription Agreement dated January 29, 1998, pursuant to
which the Company sold 83,334 shares of Common Stock at $3.00
per share to Bank August Roth AG ("Bank Roth"), a Swiss entity
for an aggregate investment of $250,000, pursuant to
Regulation D promulgated under the Securities Act of 1933, as
amended ("Reg D").
3. Subscription Agreements dated April 3, 1998, pursuant to which
the Company sold Common Stock at $3.75 per share: (i) 68,480
shares to Bank Roth for an aggregate investment of $256,800
and (ii) 37,333 shares to Tidewater Enterprises Limited, a
Canadian entity, for an aggregate investment of $140,000, both
pursuant to Reg D.
4. Subscription Agreements dated April 22-24, 1998, pursuant to
which the Company sold Common Stock at $3.00 per share: (i)
46,666 shares to Deremie Enterprises Limited for an aggregate
investment of $140,000 and (ii) 20,000 shares to Linear
Strategies Inc., a Canadian entity, for an aggregate
investment of $60,000, both pursuant to Reg D.
5. On April 29, 1998, FutureLink entered into a Loan Agreement
with Linear Strategies Inc. for US$729,802. On July 2, 1998,
Linear Strategies Inc. assigned US$350,000 of the debt to
Hampton Park Ltd. and both parties gave notice to convert
their debt plus accrued interest into equity under the terms
of the Loan Agreement. In connection with the conversion,
588,778 shares were issued to Linear Strategies Inc. and
538,462 shares were issued to Hampton Park Ltd. The securities
issuances to these non-residents of the U.S. were effected
pursuant to Reg S.
6. On November 23, 1998, the Company completed its obligations
under the terms and conditions of the Takeover Bid for
FutureLink Alberta by issuing 1,673,775 shares to 77
stockholders of FutureLink Alberta. Subsequent to the
completion of the terms and conditions of the Takeover Bid,
the Company owned 96.4% of FutureLink Alberta.
7. On February 26, 1999, the Company completed a force out of the
remaining 3.6% of the FutureLink Alberta stockholders in order
to acquire a 100% interest in FutureLink Alberta, with 117,500
shares issued to the last 12 remaining FutureLink Alberta
stockholders.
B. EXCHANGEABLE SHARES
1. Effective August 24, 1998, FutureLink acquired all of the
voting shares of Riverview Management Corporation (now
FutureLink/SysGold). Consideration for the purchase included
the issuance by FutureLink/SysGold of 4,250,000 "exchangeable
shares" with an ascribed value of $2,550,000 ($0.60 per share)
in accordance with the securities legislation of the Province
of Alberta, Canada. These FutureLink/SysGold exchangeable
shares are convertible at any time into shares of FutureLink
Common Stock for no additional consideration. The Form SB-2
filed by the Company January 6, 1999 registered the 4,250,000
shares of Common Stock issuable upon conversion of these
exchangeable shares, originally issued pursuant to Reg S.
19
<PAGE> 22
C. DEBENTURES
1. 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, purchased from FutureLink a $5,000,000 10%
Convertible Debenture and a series of warrants, which would
provide up to $1,000,000 if exercised, pursuant to Reg S. A
share certificate representing 11,000,000 shares was issued
under escrow for the shares of Common Stock underlying the
Debenture and Warrants. These securities were issued to TK
pursuant to Reg S. 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. As of
March 5, 1999, the Company had received from TK 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.
2. 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 as outlined above in Subsection
C.1 and were issued pursuant to identical exemptions. These
shares of Common Stock underlying the TK Debentures and
Warrants have registration rights.
3. On August 11, 1998, Cameron Chell and Linda Carling lent the
Company $144,632 (CDN$220,000) each as a stockholder loan. As
at December 31, 1998, the balance outstanding, including
interest, was $150,620.62 (CDN$230,900) each. On February 22,
1999, these stockholder loans were converted into 10%
Convertible Debentures, the said securities being issued to
these non-US resident persons in accordance with Reg S. As of
March 18, 1999, neither party had converted either of these
debentures.
D. OPTIONS
1. On June 29, 1998, the Company issued 2,930,000 options to
directors, officers and employees at an exercise price of
$0.76 with 1,052,500 stock options vesting on June 29, 1998,
250,000 stock options vesting on July 16, 1998, 200,000 stock
options vesting on December 29, 1998, 1,177,500 stock options
vesting on June 29, 1999, and 250,000 stock options vesting on
July 16, 1999.
2. On August 4, 1998, the Company issued 800,000 stock options to
directors, officers and employees at an exercise price of
$1.17 with 125,000 stock options vesting on August 5, 1998,
275,000 stock options vesting on January 5, 1999, and 400,000
stock options vesting on August 5, 1999.
3. On December 1, 1998, the Company issued 432,500 stock options
to staff at a exercise price of $0.45 with 71,500 stock
options vesting on April 1, 1999, 12,500 stock options vesting
on May 1, 1999, 29,166 stock options vesting on December 1,
1999, 71,500 stock options vesting on April 1, 2000, 16,666
stock options vesting on December 1, 2000, 71,500 stock
options vesting on April 1, 2001, 16,668 stock options vesting
on December 1, 2001, 71,500 stock options vesting on April 1,
2002, and 71,500 stock options vesting on April 1, 2003.
As of March 5, 1999, no stock options had been exercised and
the Common Stock underlying the stock options had not been
registered.
20
<PAGE> 23
E. WARRANTS
1. In connection with the investment in Subsection A.2, and
pursuant to the same Reg D exemption, the Company granted Bank
Roth a warrant for the purchase of 83,334 shares of Common
Stock exercisable at $3.00 per share if exercised prior to
February 6, 1999, or at $3.10 per share if exercised prior to
February 6, 2000, at which time the warrant will expire.
2. In connection with the issuances in Subsection A.3 and the
exemption relied on in Subsection A.3, the Company also
granted Bank Roth a warrant for the purchase of 68,480 shares
of Common Stock and Tidewater Enterprises a warrant for the
purchase of 37,333 shares of Common Stock, such warrants
exercisable at $3.75 if exercised prior to April 4, 1999, or
at $4.00 if exercised prior to April 4, 2000.
3. In connection with the issuances in Subsection A.4, the
Company also granted Deremie Enterprises Limited a warrant to
purchase up to 46,666 shares of Common Stock and Linear
Strategies Inc. a warrant for the purchase of up to 20,000
shares of Common Stock, such warrants exercisable at $3.25 per
share at any time prior to May 4, 2000, with such securities
issued pursuant to Reg D.
4. In connection with the Debenture in Subsection C.1, 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 underlying the Debentures issued to
TK, which shares were issued pursuant to Reg S and of which
10,615,384 shares have been registered by virtue of the
Company's Form SB-2 filed January 6, 1999.
5. In connection with the debentures in Subsection C.3, and
pursuant to the same exemption relied upon in the issuance of
the debentures, the Company also granted each of Cameron Chell
and Linda Carling a warrant for the purchase of up to 376,552
shares of Common Stock at $0.40 per share if exercised prior
to February 22, 2000, $0.60 per share prior to February 22,
2001, and $0.80 per share prior to February 22, 2002.
6. In connection with the loan agreement in Subsection A.5, the
Company also granted Linear Strategies Inc. a warrant for the
purchase of up to 588,778 shares of Common Stock at $1.00 per
share if exercised prior to June 30, 1999 and $1.25 per share
if exercised prior to June 30, 2000. Hampton Park Ltd. was
granted a warrant for the purchase of up to 538,462 shares of
Common Stock under the same terms and conditions as Linear
Strategies Inc. As in Subsection A.5, these securities were
issued in reliance on Reg S.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Core Ventures, Inc. (now known as FutureLink Distribution Corp.) had no
active operations in 1997. The Company incurred a loss of $737,049 in 1997 that
included a $100,000 cash loss on a deposit on a proposed acquisition (Printscan)
that was not completed, accounting and legal expenses of $109,992 related to the
unsuccessful proposed acquisition by and general operations of the Company under
21
<PAGE> 24
previous management, $12,057 of general and administrative expenses and a
$515,000 non-cash charge related to the write off of discontinued mining related
assets.
On January 20, 1998, Core Ventures, Inc. acquired a 46% interest in
FutureLink Alberta. Effective November 23, 1998, FutureLink acquired a further
50.4% interest in FutureLink Alberta bringing its total ownership in FutureLink
Alberta to 96.4%. FutureLink Alberta is the computing utility company and
focuses on providing mid-sized businesses with server-based computing solutions.
FutureLink accounted for its investment in FutureLink Alberta for the period
January 20, 1998 to November 23, 1998 using the equity method for accounting for
investments. FutureLink Alberta's results were consolidated into the results of
its parent, FutureLink, from November 24, 1998 to December 31, 1998. On February
26, 1999, FutureLink Alberta became a wholly owned subsidiary when FutureLink
acquired the remaining 3.6% minority shares.
Effective August 24, 1998, FutureLink acquired all of the outstanding
shares of Riverview Management Corporation (now called FutureLink/SysGold Ltd).
FutureLink/SysGold owned SysGold, a leading Western Canadian IT services company
focused on outsourcing IT services to mid-sized companies in the oil and gas
sector. FutureLink/SysGold's results were consolidated into the results of its
parent, FutureLink, from August 24, 1998 to December 31, 1998.
In conjunction with the acquisition of FutureLink/SysGold, FutureLink
entered into a 10% convertible debenture agreement to obtain up to $5,000,000 of
financing. In addition, FutureLink/ Sysgold secured 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 debenture
financing in 1998 which was used to acquire FutureLink/SysGold, fund the
operations of FutureLink, FutureLink/SysGold and FutureLink Alberta and for
capital investments.
EBITDA AND NON-CASH CHARGES
FutureLink incurred a loss from operations in the year ended December 31,
1998 of $5,210,947. The Company's EBITDA (earnings before interest, taxes,
depreciation and amortization) for 1998 is as follows:
<TABLE>
<S> <C>
Loss for the Year $(5,880,294)
Interest on Long-term Debt $ 1,303,743
Deferred Tax Benefit $ (204,609)
Depreciation and Amortization $ 815,905
-----------
TOTAL $(3,965,255)
</TABLE>
FutureLink's EBITDA also includes other non-cash charges, as follows:
<TABLE>
<S> <C>
Contracts, Payroll and Benefits (shares issued to Directors, $ 2,114,000
Officers and Employees)
Bad Debt Expense $ 125,832
Non-cash Consulting Fees $ 10,109
-----------
Total Non-Cash Charges in EBITDA $ 2,249,941
EBITDA $(3,965,255)
EBITDA adjusted for non-cash charges $(1,715,314)
</TABLE>
22
<PAGE> 25
COMPREHENSIVE LOSS
FutureLink's comprehensive loss of $5,976,762 was comprised as follows:
<TABLE>
<S> <C>
Loss from Operations $(5,210,947)
Non Cash Equity in Loss of Affiliate $ (860,131)
Non Cash Loss from Sale of Assets $ (47,596)
Non Cash Deferred Tax Benefit $ 204,609
Non Cash Minority Interest in FutureLink
Alberta's Net Loss $ 33,771
Non Cash Foreign Currency Translation
Adjustment $ (96,468)
TOTAL $ 5,976,762
</TABLE>
With regard to the item "Non-Cash Equity in Loss of Affiliate" shown in the
above table, FutureLink acquired 46% of the capital stock of FutureLink Alberta
on January 20, 1998 and increased its ownership stake to 96.4% effective
November 23, 1998. During this period of January 20 to November 23, 1998, in
which FutureLink Alberta incurred a loss of $1,869,850, including loss from
discontinued operations, FutureLink Alberta's results were not consolidated with
those of the Company, but treated as an equity investment. FutureLink's 46%
share of these losses, or $860,131, incurred during the January 20 to November
23, 1998 period are accounted for as "Equity in Loss of Affiliate" on the
Company's audited Consolidated Statement of Loss and Deficit and Comprehensive
Loss for the year ended December 31, 1998. The background of these losses can
best be shown on a summary Statement of Loss:
FUTURELINK ALBERTA
Statement of Loss
For the Period January 20 to November 23, 1998
<TABLE>
<CAPTION>
46% OF
JANUARY 20 TO FUTURELINK
ITEMS ATTRIBUTABLE TO THE PERIOD NOVEMBER 23, ALBERTA
JANUARY 20 TO NOVEMBER 23, 1998 1998 ATTRIBUTABLE TO
($) FUTURELINK ($)
------------- ---------------
<S> <C> <C>
REVENUES 241,722 111,192
OTHER INCOME 793 365
---------- ----------
242,515 111,557
CONTRACTS, PAYROLL & BENEFITS 556,868 256,159
ACCOUNTING AND LEGAL 125,136 57,563
RENT 83,491 38,406
TRAVEL EXPENSES 171,387 78,838
OFFICE EXPENSES 145,548 66,952
CONSULTING EXPENSES 397,330 182,772
STAFF DEVELOPMENT EXPENSES 18,124 8,337
OTHER EXPENSES 142,115 65,373
ADVERTISING & PROMOTION EXPENSES 162,852 74,912
INTEREST 5,674 2,610
DEPRECIATION 196,081 90,197
---------- ----------
LOSS FROM OPERATIONS (1,762,091) (810,562)
LOSS FROM DISCONTINUED OPERATIONS (107,759) (49,569)
---------- ----------
TOTAL LOSS (1,869,850) (860,131)
</TABLE>
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<PAGE> 26
Also included in FutureLink's comprehensive loss is $47,596 relating to
non-cash loss from sale of assets. During the year, the Company's subsidiary,
FutureLink Alberta, disposed of certain assets in exchange for a 50% equity
investment in NextClick Ltd. valued at $1, leading to a non-cash loss of
$47,596. On November 30, 1998, the Company sold its investment in exchange for a
debenture receivable in the amount of CDN$100,000. The debenture is due on
demand on or after March 31, 1999. A first floating charge against the assets of
the issuer has been pledged as security. Due to the uncertainty of
collectibility, the CDN$100,000 debenture is carried at the book value of the
exchanged Common Shares, being $1. The debenture is non-interest bearing.
WORKING CAPITAL
As at December 31, 1998, FutureLink had a working capital deficit of
$2,747,027, and was in technical breach of its working capital ratio covenant
with its bank. FutureLink's continuation as a going concern is dependent on its
ability to obtain additional financing and generate sufficient cash flow from
operations to meet its obligations on a timely basis.
As at March 18, 1999, FutureLink obtained financing of $2,780,000 and has
reduced its working capital deficit. FutureLink has also become an SEC
registrant effective January 6, 1999, with such registration improving the
Company's ability to raise additional capital. To March 18, 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.
DECEMBER 31, 1998 VS. DECEMBER 31, 1997
The following is an analysis and comparison (where applicable) of the main
components of FutureLink's 1998 loss from operations of $5,210,947:
REVENUES
In the twelve months ended December 31, 1998, the Company recorded total
revenues of $2,436,658. In 1997, FutureLink (then known as Core Ventures Inc.)
did not have any active operations.
The major source of FutureLink's 1998 revenues were information technology
consulting revenues of $1,471,206 generated by its subsidiaries for providing
information technology outsourcing services, IT business practices consulting
and server-based computing consulting. FutureLink's consulting revenues from its
FutureLink/SysGold subsidiary amounted to $1,451,770 representing
FutureLink/SysGold's revenues for the period August 24, 1998 to December 31,
1998.
The other source of FutureLink's 1998 revenues were hardware and software
sales, resulting from FutureLink's subsidiaries procurement business whereby the
Company sources, purchases and then resells hardware and software to its IT
consulting clients. FutureLink generated a 8.6% gross margin on those
procurement services.
EXPENSES
Hardware and Software Purchases
Hardware and software purchases of $879,927 in 1998 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
8.6%.
24
<PAGE> 27
Contracts, Payroll and Benefits
Contracts, payroll and benefit expenses includes FutureLink Alberta cash
compensation for employees and contractors for the period November 24, 1998 to
December 31, 1998 (the period that FutureLink Alberta was a subsidiary of
FutureLink). FutureLink Alberta's cash compensation for the period January 1,
1998 to November 23, 1998 is included in the Equity in Loss of Affiliate line on
the income statement. In addition, FutureLink/SysGold compensation for employees
and contractors is included for the period after the acquisition by FutureLink.
FutureLink Alberta and FutureLink/SysGold's cash contracts, payroll and benefits
expense 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.
Also included in contracts, payroll and benefits is FutureLink's non-cash
expense of $2,114,000 related to the issuance of 3,500,000 shares to employees,
officers and directors in 1998, as approved by the Company's stockholders in
January 1998 as part of the Company's acquisition of 46% of FutureLink Alberta.
FutureLink's consolidated contracts, payroll and benefits expense is
composed of the following:
<TABLE>
<S> <C>
FutureLink Non-Cash Share Issuance Expense $2,114,000
FutureLink Cash Compensation $5,666
FutureLink Alberta Cash Compensation (for the period $134,380
November 24, 1998 to December 31, 1998)
FutureLink/SysGold Cash Compensation (for the period August 24, 1998 to
December 31, 1998) $1,407,560
----------
TOTAL $3,661,606
</TABLE>
Accounting and Legal Costs
FutureLink had 1998 consolidated accounting and legal expenses of $80,591
related to accounting, audit, corporate governance, compliance and commercial
transaction costs. In addition, FutureLink Alberta incurred 1998 accounting and
legal expenses of $125,136 prior to its results being consolidated into
FutureLink's results effective November 23, 1998. These pre-consolidation
expenses are included in the $860,131 equity in loss of affiliate. On
acquisition of FutureLink Alberta, $56,218 of legal and accounting expenses were
capitalized. In addition, FutureLink capitalized $53,705 of accounting and legal
costs as part of its acquisition of Riverview Management Corp. (now
FutureLink/SysGold Ltd.).
In 1997, the Company incurred $109,992 of legal and accounting expenses as
part of its general accounting and compliance costs and the unsuccessful attempt
to acquire Printscan.
Rent
The Company incurred rent expenses of $77,035, relating mainly to rent for
its premises in Bow Valley Square, in Calgary, being $51,930 commencing August
24, 1998. In addition, included in the rent costs is rent related to FutureLink
Alberta's previous premises in Calgary of $16,854 for the period FutureLink
Alberta was consolidated (November 23, 1998 to December 31, 1998). FutureLink
also incurred rent expenses relating to U.S. operations of $8,251. Subsequent to
December 31, 1998, FutureLink Alberta's previous premises were sublet.
25
<PAGE> 28
General and Administrative Expenses
FutureLink's consolidated general and administrative expenses include
FutureLink/SysGold's general and administrative expenses for the period from
August 24, 1998 to December 31, 1998 and FutureLink Alberta's general and
administrative expenses for the period from November 23, 1998 to December 31,
1998.
FutureLink's consolidated general and administrative expenses are comprised
of the following:
<TABLE>
<S> <C>
Travel Expenses $ 95,148
Meals and Entertainment Expenses $ 9,379
Office Expenses $204,790
Consulting Expenses $ 78,622
Promotional Expenses $ 99,814
Staff Development Expenses $ 58,043
Other Expenses $ 68,169
--------
TOTAL $613,965
</TABLE>
The Company incurred minor general and administrative expenses in 1997 of
$12,057 as it did not have any active operations.
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. Consulting expenses 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. 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.
Interest on Long-Term Debt
FutureLink's 1998 interest expense of $1,303,743 is comprised of:
<TABLE>
<S> <C>
Non-Cash Interest Charge Related to the 10% Convertible $1,199,018
Debenture Financing
Interest Related to the 10% Convertible Debenture Financing $ 73,271
Interest Accrued related to Stockholder Loans $ 12,197
Interest Accrued related to Notes Payable $ 6,763
Interest Accrued related to Bank Indebtedness $ 9,645
Other Non-Cash Interest Expense $ 2,849
----------
TOTAL $1,303,743
</TABLE>
Financing Fees
FutureLink's financing fees of $89,000 relate to penalties incurred on the
10% convertible debenture due to the late registration of the shares underlying
the debentures with the Securities and Exchange Commission. The penalties have
been added to the total convertible debenture balance as at December 31, 1998.
26
<PAGE> 29
Bad Debt Expense
FutureLink's bad debt expense of $125,833 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 $56,611 of bad debt provisions related to
accounts receivables from companies which certain FutureLink's officers are or
were directors of. The 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 Applications Service Provision business in late 1998.
Depreciation
FutureLink's consolidated depreciation of $119,236 is related to
FutureLink/SysGold's and FutureLink Alberta's depreciation of computer
equipment, software, leasehold improvements and office equipment for the period
their results were consolidated into the results of FutureLink.
Amortization of Intangible Assets
FutureLink's amortization expense of $667,617 includes:
<TABLE>
<S> <C>
Goodwill amortization for 1998 related to the acquisitions
of FutureLink Alberta and FutureLink/SysGold $285,395
1998 amortization of employee and consultant base
intangible asset related to the acquisition of FutureLink/SysGold $382,222
--------
TOTAL $667,617
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 1998, FutureLink had a working capital deficit of
$2,747,027, and was in technical breach of its working capital ratio covenant
with its bank. As at March 18, 1999, FutureLink has raised $2,780,000. Of the
$2,780,000, $2,280,000 was convertible debt capital remaining on the initial TK
Debenture Acquisition Agreement and $500,000 came from the Augustine Fund LP
Debenture Acquisition Agreement. As a result of these financings, FutureLink
reduced its working capital deficit after year end. FutureLink has also become
an SEC registrant effective January 6, 1999, with such registration improving
the Company's ability to raise additional capital in the United States and
Canada and in the public and private capital markets.
FutureLink received $4,606,974 of capital in 1998 comprised of:
<TABLE>
<S> <C>
Private placement of units of shares and warrants $ 850,300
Convertible Debentures and Stockholder Loans $3,756,674
</TABLE>
27
<PAGE> 30
In 1998, FutureLink's sources and uses of cash were as follows:
<TABLE>
<S> <C>
Operating loss adjusted for non-cash expenses $(1,677,363)
Foreign currency translation $ (96,468)
Working capital changes $ 685,587
Acquisition of subsidiaries including acquisition costs $(2,129,072)
Net Capital Assets acquired $ (785,288)
Advances to equity investee $ (990,305)
Other investment activities $ (69,435)
Equity & convertible equity capital net of issue costs & financing fees $ 4,117,982
Other net financing activities $ 131,796
Financing from demand credit facility $ 819,217
-----------
NET INCREASE IN CASH $ 6,651
</TABLE>
In August 1998, FutureLink entered into a 10% convertible debenture
agreement to provide up to $5,000,000 of financing. FutureLink was funded
$2,720,000 of convertible debenture financing in 1998 which funding was used to
acquire FutureLink/SysGold, to fund the operations of FutureLink,
FutureLink/SysGold and FutureLink Alberta and for capital investments
particularly related to the construction of the Calgary server farm used to host
applications for FutureLink's Application Service Provision services. As of
December 31, 1998, there was $2,375,530 of convertible debt and accrued interest
still outstanding.
In addition, FutureLink/Sysgold secured 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 December 31, 1998. To March 31, 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.
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index included at "Item 13. Exhibits and Financial Statements
Schedules and Reports on Form 8-K".
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
In May, 1998, the Company engaged Ernst & Young LLP as its independent
chartered accountants to audit its financial statements beginning the year ended
December 31, 1997. Ernst & Young LLP reported, without reservation, on
FutureLink's audited financial statements for the year ended December 31, 1997.
FutureLink Alberta retained Halpin Anthony Owen & Mayer, Chartered
Accountants ("HAOM") of Calgary, Alberta, Canada since its incorporation in
March, 1996. During the term of HAOM's engagement by FutureLink Alberta, there
were no disagreements on any matter of accounting principle or practice,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to the satisfaction of HAOM, would have caused it to make reference to
the subject matter of the disagreement in connection with HAOM's report. With
the acquisition of FutureLink Alberta by the Company in a series of transactions
between July, 1998 and January, 1999, FutureLink Alberta engaged Ernst & Young
LLP, the Company's independent auditors, to become their independent auditors
replacing HAOM.
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<PAGE> 31
FutureLink/SysGold (formerly Riverview Management Corporation and its
subsidiary SysGold Ltd.) had retained Buchanan Barry & Co. of Calgary, Alberta,
Canada first as independent chartered accountants, and later as auditors, since
1993. During the term of Buchanan Barry's engagement by FutureLink/SysGold,
there were no disagreements on any matter of accounting principle or practice,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to the satisfaction of Buchanan Barry, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report. With the Company's acquisition of all of the voting equity of
FutureLink/SysGold in August, 1998, Ernst & Young LLP, the Company's independent
auditors, were engaged as FutureLink/SysGold's independent auditors.
Ernst & Young LLP has acted as independent chartered accountants to the
Company and all of its subsidiaries, including FutureLink Alberta and
FutureLink/SysGold, in auditing the consolidated financial statements for the
FutureLink companies for the year ended December 31, 1998 and 1997. There have
been no disagreements on any matter of accounting principle or practice,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to the satisfaction of Ernst & Young LLP, would have caused that firm
to make reference to the subject matter of the disagreement in connection with
its report.
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table and the more detailed information which follows sets
forth certain information concerning FutureLink's Directors and Executive
Officers:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
-------------------------- ----- ------------------------------------------------------------
<S> <C> <C>
Cameron B. Chell 30 Chairman of the Board, Chief Executive Officer and President
Donald A. Bialik 43 Vice-Chairman of the Board
Raghu Kilambi 33 Director, VP-Corporate Finance and Chief Financial Officer
Linda M. Murray 33 Corporate Secretary (to February 28, 1999)
Kyle B.A. Scott 34 Corporate Secretary (from March 1, 1999)
William (Bill) Arnett 43 Chief Operating Officer (from March 6, 1999)
Philip R. Ladouceur 58 Director
Robert Kubbernus(1) 39 Director
F. Bryson Farrill(1) 71 Director
Robert H. Kohn(1) 41 Director
</TABLE>
Note (1): Members of both the Audit Committee and the Compensation
Committee
CAMERON B. CHELL
Chairman of the Board and CEO since April, 1998 and Director since January, 1998
Effective March 6, 1999, assumed the office of President
Age: 30
Mr. Chell has served as Chief Executive Officer and Chairman of the Board
since April 24, 1998. His primary responsibility has been to assemble a leading
edge professional technology and business team to implement the business plans
of the Company and each of its subsidiaries. His secondary responsibility is to
seek financing for FutureLink Alberta and FutureLink. Mr. Chell has helped build
several technology companies over the past 10 years. He is a director of JAWS
Technologies Inc., an
29
<PAGE> 32
Internet based encryption technology company (OTC--BB: symbol JAWZ) and a
director of Willson Stationers Ltd. From 1994 to May 1997, Mr. Chell was
employed as a registered representative of a brokerage firm in Calgary, Alberta,
Canada. Prior to 1994, Mr. Chell was self-employed in computer sales and other
non-related positions.
On November 6, 1998, Cameron Chell entered into a Settlement Agreement with
The Alberta Stock Exchange (the "ASE") to resolve a pending investigation into
alleged breaches by Mr. Chell of ASE rules and by-laws. As part of the
Settlement Agreement, (i) Mr. Chell acknowledged that he had breached certain
duties of supervision, disclosure, or compliance in connection with various
offers and sales of securities and (ii) Mr. Chell was prohibited from receiving
ASE approval for a five year period, subjected to a CDN$25,000 fine and a three
year period of enhanced supervision. The Company is not entirely certain whether
the Settlement Agreement with the ASE represents "closure" with regard to these
matters.
DONALD A. BIALIK, P.ENG.
President and Director since September, 1998
Effective March 6, 1999, assumed the office of Vice-Chairman
Age: 43
Mr. Bialik has been the President since August 21, 1998. He received his
Bachelor of Applied Science (B.A.Sc.) in Civil Engineering from the University
of Toronto in 1980 and his MBA from the University of Calgary in 1988. Mr.
Bialik's focus as Vice-Chairman is on the opening and integration of new markets
and acquisitions. Mr. Bialik is a highly respected, successful entrepreneur and
the founder of FutureLink/SysGold Ltd. with 15 years in the Information Systems
business. Mr. Bialik offers clients 10 years of specific information systems
expertise.
RAGHU KILAMBI, C.A.
Vice-President, Corporate Finance and CFO since March, 1998 and Director since
June, 1998 Age: 33
Mr. Kilambi has served as Vice President of Corporate Finance and Chief
Financial Office of the Company since March 1998, with primary responsibilities
including corporate finance, acquisitions, financial reporting and compliance.
As President of New Economy Capital Inc., Mr. Kilambi raised significant equity
and debt financing for Canadian and US public and private high technology
corporations. Previously, Mr. Kilambi was the Director, Financial Services and
Taxation and Corporate Secretary for Canada Starch Company Inc., a CDN$400
million subsidiary of CPC International (now known as Bestfoods) and the Chief
Accountant for a financial services company, Morgan Financial Corporation. Mr.
Kilambi graduated from McGill University with a Bachelor of Commerce in Finance
and Accounting and commenced his career as a Chartered Accountant with the
international accounting firm of Touche Ross & Co. (now Deloitte & Touche). Mr.
Kilambi is also a director of Advanced Vision Systems Corp. (ASE: AVD) and
Willson Stationers Ltd., a private company and FutureLink customer.
F. BRYSON FARRILL
Director since January, 1998
Age: 71
Until 1989, Mr. Farrill had various positions with Scotia McLeod and McLeod
Young Weir including acting in the capacity as the former Chairman of Scotia
McLeod (USA) Inc. and McLeod Young Weir Ltd. Mr. Farrill brings to FutureLink
more than 30 years of equity, fixed income and corporate finance experience in
North America and Europe. He is the President and Chairman of Solar
Pharmaceuticals Ltd. (VSE.SLR) and Director of Panther Resources Ltd.
(OTC-BB-PTHR), Devine Entertainment Inc. (TSE-BBD), and Home Life Inc.
(OTC-BB-HLMF).
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<PAGE> 33
ROBERT H. KOHN
Director since February, 1998
Age: 41
Mr. Kohn has a Bachelors degree in Business Administration from California
State University in Northridge and a law degree from Loyola Law School in Los
Angeles. From 1983 to 1985 he worked as corporate counsel to Ashton-Tate
Corporation, a developer and marketer of personal computer software. From
October 1985, to March 1987, Mr. Kohn was associate general counsel for Candel
Corporation, a developer of software for IBM mainframes. From March 1987, to
September 1996, Mr. Kohn was a Senior Vice-President of Borland International,
Inc. (now Inprise Corp.), a developer and marketer of personal computer software
(Inprise Corp. trades on NASDAQ-National Board-INPR). From October 1996, to
December 1997, Mr. Kohn was Vice President of Business Development and General
Counsel of Pretty Good Privacy, Inc. a data encryption company. From January
1998, to present Mr. Kohn has been the Chairman of GoodNoise Corporation (OTC-BB
symbol GDNO), an Internet record company. Mr. Kohn is also an Adjunct Professor
of Law and Business Organizations at the Monterey College of Law.
ROBERT KUBBERNUS
Director since January, 1998
Age: 39
Prior to 1992, Mr. Kubbernus was the Chief Financial Officer of Bankers
Capital Group. His responsibilities included the development of new products and
markets as well as overseeing the financial controls of the Company. Since 1992,
Mr. Kubbernus has served as the President of Bankton Financial Corporation,
which specializes in the placement of debt instruments with institutional and
private lenders. Bankton Financial is also involved in corporate restructuring
and planning. In addition, Mr. Kubbernus has served as the President of JAWS
Technologies, Inc. since 1998.
PHILIP R. LADOUCEUR
Director since August, 1998
Age: 58
Mr. Ladouceur has served MetroNet Communications Corp. as a director since
October 1996, and was President of MetroNet from October 1996, to October 1997.
When Mr. Ladouceur joined MetroNet, the company was a local Calgary, Alberta,
Canada telecommunications concern. He has led the company through equity and
debt financings of more than CDN$2,000,000,000 as well as the company's initial
public offering on the NASDAQ and Toronto Stock Exchanges. Also, Mr. Ladouceur
guided the company through its recent acquisition of Rogers Communications'
Telecom business, a transaction valued at over CDN$1,000,000,000. AT&T Canada
recently announced plans to acquire MetroNet in a transaction valued at
approximately CDN$4,000,000,000. Prior to joining MetroNet, Mr. Ladouceur was
Executive Vice President, Operations at Bell Canada International Inc. from
February 1995, to October 1996, where he led key restructuring efforts and the
formation of a major joint venture with IBM Canada. From October 1992, to
February 1995, Mr. Ladouceur was the founding President and Chief Executive
Officer of ISM Information Systems Management (Alberta) Ltd., ("ISM"), a
Canadian computer and network management outsourcing company. Under Mr.
Ladouceur's direction, ISM grew to CDN$75,000,000 in revenue on an annual basis,
and over 700 employees in a two-year period from start-up. Mr. Ladouceur founded
and, from June 1990, to October 1992, was the Managing Director of HDL Capital
Corporation, a Toronto-based merchant bank that specializes in business
turnarounds, management buyouts, and financing for medium and small businesses
in the telecommunications, technology, software, and retail sectors. From 1986
to 1989, Mr. Ladouceur was Senior Vice President, Finance, Chief Financial
Officer and a director of Rogers Communications Inc., one of the largest cable,
cellular and broadcasting companies in North America. While with Rogers, he
oversaw the completion of over CDN$3,000,000,000 in public and private
financings. Additionally, Mr. Ladouceur is currently serving as the Chairman of
the Competitive Telecommunications Association of Canada.
31
<PAGE> 34
WILLIAM V. (BILL) ARNETT
Effective March 6, 1999, Chief Operating Officer
Age: 43
Mr. Arnett was recently promoted Chief Operating Officer of FutureLink from
his previous position as Vice-President and Managing Director of FutureLink
SysGold. Prior to the acquisition of FutureLink/ SysGold by the Company, Mr.
Arnett served SysGold Ltd. as Vice-President. He received a B.Sc. in Economics
(with honors) from the London School of Economics. Before joining SysGold Ltd.,
Mr. Arnett spent 13 years in various IT management positions in the oil and gas
industry, based in Calgary, with Numac Energy Inc., WestCoast Petroleum, Amoco
Canada and Dome Petroleum, gaining significant experience in managing all
aspects of information technology for "upstream" oil and gas companies. Prior to
moving to Calgary, Mr. Arnett spent five years in England in various IT roles
with manufacturing organizations developing real-time application solutions for
companies including Black & Decker.
KYLE B.A. SCOTT
Effective March 1, 1999, Corporate Secretary
Age: 34
Mr. Scott recently joined FutureLink as General Counsel and Corporate
Secretary from the law firm Howard Mackie of Calgary, Alberta, Canada where he
served as an associate specializing in corporate and securities law. Prior to
joining Howard Mackie, Mr. Scott served with the Listings Department of the ASE,
reviewing applications for listing or proposed acquisitions of junior natural
resource, industrial and high technology companies. Before joining the ASE, Mr.
Scott served as an Associate, Corporate Finance with Oxbow Capital Corporation,
a private merchant banking and venture capital company specializing in financing
businesses in knowledge-based industries and assisting in the "going public"
process. From 1993 to 1996, Mr. Scott served as General Counsel for Kedon Waste
Services, Western Canada's largest landfill contractor. Mr. Scott received both
a Bachelor of Laws (with distinction) and MBA from the University of Western
Ontario (Ivey School of Business) in 1991.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
FutureLink's directors and executive officers and individuals owning more
than 10 percent of the Company's Common Stock are required to file initial
reports of ownership and changes in ownership with the Securities and Exchange
Commission under Section 16(a) of the Securities Exchange Act of 1934, as
amended. The Securities and Exchange Commission regulations also require those
persons to provide copies of all filed Section 16(a) reports to FutureLink. The
Company has reviewed the report copies filed in 1998, and based also on written
representations from those persons, the Company believes that there was
compliance with Section 16(a) filing requirements for 1998, except that Robert
Kohn did not file a Form 3 Initial Statement of Beneficial Ownership of
Securities.
ITEM 10 - EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth all compensation received for services
rendered to FutureLink in all capacities for the years ended December 31, 1998
and 1997, by (i) Cameron Chell, who has served as Chief Executive Officer of
FutureLink during the years ended December 31, 1998 and 1997 and (ii) each of
the four most highly compensated executive officers of FutureLink who were
serving as executive officers as at December 31, 1998.
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<PAGE> 35
SUMMARY COMPENSATION TABLE
The following table sets forth compensation in respect of the senior
executive officers of the Company and its subsidiaries for the fiscal years
ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Annual Compensation Paid Long Term
------------------------ Compensation
Other Annual Securities All Other
Name and Principal Period Salary Bonus Compensation Under Options Compensation
Position Ended ($) ($) ($)(1) Granted (#) ($)(2)
- ----------------------- ------ ----------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cameron Chell Chairman, 1998 CDN$125,000 Nil Nil 500,000 CDN$10,417
CEO and President
Raghu Kilambi(3) 1998 CDN$100,000 Nil Nil 500,000 CDN$7,000
CFO and VP-Finance
Don Bialik(4) 1998 CDN$64,846 Nil Nil 250,000 Nil
Vice-Chairman
Bill Arnett(4) 1998 CDN$45,625 CDN$3,500 CDN$9,173 150,000 CDN$39,310
COO
</TABLE>
Notes:
1. Other Annual Compensation represents Registered Retirement Savings Plan
contributions made on behalf of the employee by the Company. This program
was a carry over from the FutureLink/SysGold acquisition and is calculated
at 5% of the gross T4 income less previous year's RRSP payment.
2. Other Compensation:
a) for Cameron Chell consisted of consulting fees;
b) for Raghu Kilambi was for consulting fees; and
c) For Bill Arnett was part of the Profit Sharing Program as a carry over
from the FutureLink/SysGold acquisition which is based upon a
negotiated percentage of consulting revenue earned by that particular
person (see "Employment Agreements").
3. Raghu Kilambi's compensation is for the period March 1 to December 31,
1998.
4. The compensation figures Don Bialik and Bill Arnett reflect the period
August 24 through December 31, 1998 following the acquisition of
FutureLink/SysGold by the Company.
1998 STOCK OPTION PLAN
FutureLink's 1998 Stock Option Plan (the "Option Plan") provides for the
granting of either incentive stock options or non-qualified stock options to
officers, other key employees and directors of the Company. The Option Plan is
to be administered by the Board's "outside directors" and the Option Plan is
administered by the Compensation Committee of the Board of Directors.
Stock Options granted under the Option Plan can have a term of up to ten
years and must have an exercise price equal to at least the fair market value of
the stock subject to the option on the date of the grant (or 110% with respect
to holders of more than 10% of the voting power of FutureLink's outstanding
shares of Common Stock with a five year maximum term). Stock options granted
under the Option Plan
33
<PAGE> 36
are non-transferable and generally expire ninety days after the termination of
an optionee's service to the Company (one year in the case of disability or
death of the optionee). Upon the dissolution or liquidation of FutureLink or
upon any reorganization, merger or consolidation in which the Company does not
survive, the Option Plan, and each outstanding stock option granted thereunder
may terminate, provided that each optionee to whom no substitute option has been
tendered by the surviving corporation in any such transaction shall have the
right to exercise, in whole or in part, any unexpired stock option or options
issued to him or her, without regard to any applicable vesting provisions.
The 1998 Option Plan, which became effective June 29, 1998, originally
placed a fixed maximum of 3,400,000 shares of Common Stock which may be issued
pursuant to the exercise of stock options granted under the Option Plan. At the
Annual Meeting of Stockholders held November 30, 1998, Stockholders approved an
amendment to the Option Plan setting a floating maximum of 30% of the total
issued and outstanding shares of Common Stock which may be issued pursuant to
the exercise of stock options granted under the (amended) Option Plan. The
number of shares of Common Stock issuable on the exercise of stock options
granted to December 31, 1998 by the Company, being 4,162,500 shares, is well
within this 30% maximum. Of these outstanding stock options, 2,930,000 shares of
Common Stock are issuable at an exercise price of $0.76 per share, 800,000
shares at an exercise price of $1.17 per share and 432,500 shares at $0.45 per
share. Please refer to "ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS - Issuances of Securities During the Last Fiscal Year and Subsequent to
December 31, 1998 - D. Options" for the vesting provisions relating to all
outstanding stock options.
OPTION GRANTS IN LAST FISCAL YEAR
The Company's Option Plan became effective on June 29, 1998 and all
outstanding stock options were granted during the year ended December 31, 1998.
No stock options have been exercised to date. Stock options granted to, and held
by, the five most highly paid executive officers of the Company, including
Cameron Chell, FutureLink's CEO, are as follows:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS GRANTED EXERCISE OR
OPTIONS/SARS TO EMPLOYEES IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED (#) YEAR ($/SH) DATE
- ------------------------ ------------- ---------------------- ------------ ---------------
<S> <C> <C> <C> <C>
Cameron Chell, Chairman, 500,000 12.0% $0.76 June 29, 2001
President & CEO
Raghu Kilambi, CFO 500,000 12.0% $0.76 June 29, 2001
Don Bialik, Vice-Chairman 250,000 6.0% $1.17 August 5, 2001
Bill Arnett, COO 150,000 3.6% $1.17 August 5, 2001
</TABLE>
EMPLOYMENT AGREEMENTS
FutureLink has, through its subsidiaries, FutureLink Alberta and
FutureLink/SysGold, entered into formal employment agreements with each of the
"named executives" listed in the Summary Compensation Table.
34
<PAGE> 37
Cameron Chell executed a Services and Compensation Agreement with
FutureLink Alberta (then Coffee.com interactive c@fe corp.) July 1, 1997 to
serve as President and Chief Executive Officer of that company. Since May 1,
1998, Mr. Chell's annual base salary has been set at CDN$150,000 per annum.
Additional terms include notice provisions (Mr. Chell must provide 60 days'
notice, FutureLink Alberta must provide Mr. Chell 30 days' notice). A draft
Employment Agreement, to be dated effective December 1, 1998, between Mr. Chell,
FutureLink Alberta and the Company has been negotiated, but requires the final
approval of the Compensation Committee of the Board of Directors before
execution. The financial terms and other conditions of this draft Employment
Agreement include formalizing Mr. Chell's base salary of CDN$150,000 per annum
as CEO, four weeks paid vacation per year, a maximum 20% performance bonus,
discretionary incentive bonus and standard benefits. Mr. Chell will be able to
resign on four months notice and FutureLink must pay one year's base salary as
severance if it terminates Mr. Chell's employment prior to the end of the term,
unless the termination is for improper activities. The draft Employment
Agreement also includes confidentiality and non-competition clauses, the latter
for the term of the agreement plus six months thereafter.
An Employment Agreement between FutureLink/SysGold, the Company and Mr.
Bialik was executed August 21, 1998 as part of the FutureLink/SysGold
acquisition. Under the terms of this agreement, Mr. Bialik agreed to serve the
Company in an executive capacity, as President (or in such capacity as the Board
of Directors may determine) for a three year term to August 21, 2001. Other key
terms of Mr. Bialik's contract include annual base salary of CDN$180,000, which
may be increased by agreement between the parties in subsequent years, a maximum
performance bonus of 20% of base salary, standard employer benefits and six
weeks paid vacation per year. Mr. Bialik is entitled to resign on four months
notice to the Company. Should FutureLink terminate Mr. Bialik as an executive,
FutureLink/SysGold would be obligated to pay out amounts owed to Mr. Bialik for
the balance of the term of the agreement, unless the termination is for improper
activities. The agreement sets out confidentiality and non-competition
provisions, the latter for the term of the agreement and for two years
thereafter.
Mr. Kilambi entered into a formal Employment Agreement with FutureLink
Alberta (and the Company) on December 1, 1998 as Vice-President - Corporate
Finance and Chief Financial Officer for both FutureLink and FutureLink Alberta
for a two year term. Base salary under this agreement is CDN$150,000 per year,
which can be adjusted upward in subsequent years. Additional terms include four
weeks paid vacation per year, a maximum 20% performance bonus, discretionary
incentive bonus and standard benefits. Mr. Kilambi can resign on four months
notice and FutureLink must pay one year's base salary as severance if it
terminates Mr. Kilambi prior to the end of the term, unless the termination is
for improper activities. The Employment Agreement also includes confidentiality
and non-competition (for the term plus six months thereafter) clauses.
Bill Arnett's formal Employment Agreement is dated July 29, 1996 and is
with SysGold Ltd., which was wound-up into FutureLink/SysGold in August, 1998.
Mr. Arnett began with SysGold as Manager - Information Technology and has risen
to the position of Chief Operating Officer of FutureLink and FutureLink/SysGold.
The terms of the agreement include base salary of CDN $115,000 per year
(increased to CDN$127,000 per year in July, 1998), annual paid vacation of four
weeks per year, profit sharing incentives based on direct consulting billing,
supervisory work and marketing, as well as a discretionary bonus. Termination is
four weeks notice by Mr. Arnett with no specified severance or notice period
should the Company (or FutureLink/SysGold) terminate the agreement. The
non-competition clause sets a nine month following date of termination period
and the agreement also addresses confidentiality issues. With the recent
promotion of Mr. Arnett to COO of FutureLink, it is likely that a revised
Employment Agreement will be negotiated and executed in the not-too-distant
future.
35
<PAGE> 38
DIRECTOR COMPENSATION
The Company's outside directors currently receive nominal cash compensation
of $250 per meeting of the Board of Directors and any committee thereof which
they attend. Outside directors may also be reimbursed for certain expenses in
connection with attendance at Board and committee meetings and may receive
grants of options to purchase shares of Common Stock upon their initial joining
of the Board and any re-election as a director thereafter.
Pursuant to an agreement dated July 16, 1998, FutureLink agreed to nominate
Mr. Philip Ladouceur to the Board of Directors on or before November 30, 1998.
Under the terms of this agreement, Mr. Ladouceur's service company, Mardale
Investments Ltd., was paid a fee of CDN$100,000 and Mr. Ladouceur was granted
stock options to purchase 500,000 shares of Common Stock at an exercise price of
$0.76 per share until June 29, 2001. Half of these stock options vested upon
execution of the agreement and the other half on the first anniversary of the
date of execution of the agreement with Mr. Ladouceur. As an outside director,
Mr. Ladouceur is also entitled to receive $250 per meeting attended as well as
reimbursement for meeting-related expenses. This agreement also anticipates the
payment of consulting fees to Mr. Ladouceur should he provide additional
services to the Company.
Stock options have also been granted to the other outside directors of the
Company upon their election to FutureLink's Board. Both Mr. Farrill and
Mr. Kubbernus each hold 250,000 non-qualified stock options exercisable at
$0.76, half of which vested June 29, 1998 with the second half vesting June 29,
1999. Mr. Kohn received 200,000 non-qualified stock options with similar
exercise and vesting provisions to Mr. Farrill's and Mr. Kubbernus' stock
options.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of the outstanding
shares of Common Stock owned beneficially as of December 31, 1998, by each
director as of such date, by the Company's Chief Executive Officer (the "CEO"),
by the four other most highly compensated executive officers other than the CEO
(who receive in excess of $100,000 in annual compensation), by all directors and
executive officers as a group, and by each person who, to the knowledge of the
Company, beneficially owned more that 5% of any class of the Company's voting
stock on such date.
<TABLE>
<CAPTION>
Shares of Common Percentage Options, Percentage
Stock of Common Warrants and Based on
NAME AND ADDRESS Beneficially Stock Exchangeable Full
OF BENEFICIAL OWNER Owned (1) Shares(2) Dilution(3)
- ---------------------------------------------- ----------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cameron Chell(4)
306 - 20th Street NW 577,750 2.9% 250,000 2.9%
Calgary, Alberta T2N 2K3
Don Bialik(5)
3911 Crestview Road SW Nil 0% 4,375,000 15.2%
Calgary, Alberta
Raghu Kilambi(6)
286 Briar Hill Avenue 300,000 1.5% 250,000 1.9%
Toronto, Ontario M4R 1J2
Philip Ladouceur(7)
119 Valley Ridge Green NW 240,000 1.2% 250,000 1.7%
Calgary, Alberta T3B 5L5
</TABLE>
36
<PAGE> 39
<TABLE>
<S> <C> <C> <C> <C>
Robert Kohn(8)
One Arbor Lane 375,000 1.9% 100,000 1.7%
Pebble Beach, California, 93953
Bryson Farrill(9)
305 Old Oaks Road 225,000 1.1% 125,000 1.2%
Fairfield, Connecticut 06432
Robert Kubbernus(9)
300 Water Stone Crescent 225,000 1.1% 125,000 1.2%
Airdrie, Alberta T4B 1H4
Bill Arnett(10)
5 Sunlake Street S.E. 0 0.0% 75,000 0.3%
Calgary, Alberta T2X 3J1
</TABLE>
Notes:
1. Based upon 20,175,105 shares of Common Stock outstanding (and paid for) as
of December 31, 1998. Does not include any shares issued underlying
convertible debentures or warrants not yet converted or exercised.
2. Does not include options granted prior to December 31, 1998 that vest more
than 60 days following the date of this Report (on or before June 8, 1999,
only 1,986,500 of 4,162,500 shares underlying stock options granted prior
to December 31, 1998 will be issuable upon exercise of stock options which
will have vested)
3. Based upon 28,836,325 shares of Common Stock outstanding after all stock
options (which vest before June 8, 1999), warrants and exchangeable shares
outstanding as at December 31, 1998 have been exercised or exchanged. This
figure does not include shares of Common Stock issuable upon conversion of
$2,220,000 of outstanding (non-converted) convertible debentures as at
December 31, 1998.
4. Includes options for the purchase of 250,000 shares of Common Stock
exercisable at $0.76 per share which vested on June 29, 1998.
5. Donald A. Bialik and Olivia B. Bialik (wife of Donald Bialik) do not
currently own any shares of FutureLink. However, pursuant to a stock
purchase agreement in connection with Riverview Management Corporation,
they have the right to an aggregate of 4,250,000 Common Shares in the
Company. Donald Bialik also has options for the purchase of 125,000 shares
of Common Stock exercisable at $1.17 per share which vested on August 5,
1998.
6. Includes options for the purchase of 250,000 shares of Common Stock
exercisable at $0.76 per share which vested on June 29, 1998.
7. Includes options for the purchase of 250,000 shares of Common Stock
exercisable at $0.76 per share which vested on July 16, 1998.
8. Includes options for the purchase of 100,000 shares of Common Stock
exercisable at $0.76 per share which vested on June 29, 1998.
9. Includes options for the purchase of 125,000 shares of Common Stock
exercisable at $0.76 per share which vested on June 29, 1998.
10. Includes options for the purchase of 75,000 shares of Common Stock
exercisable at $1.17 per share which vested on January 5, 1999.
37
<PAGE> 40
ITEM 12 - CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
SHARE ACQUISITION AGREEMENT
In the Share Acquisition Agreement dated January 20, 1998, between Core
Ventures, Inc. (now known as FutureLink), FutureLink Alberta, Cameron Chell,
Linda Carling, Colleen Rudolph, Bernie March, and Gerald Albert, the Company
agreed to acquire 1,540,000 Class "A" Common Voting Shares of FutureLink Alberta
(46% of such Company's issued shares) in consideration of the issuance of
1,540,000 FutureLink Common Shares. The shares were issued subject to an escrow
agreement. The agreement provided that 3,500,000 FutureLink Common Shares would
be issued to various employees for the consideration of $3,500, and were issued
in July, 1998. FutureLink Alberta was added as a party for the purpose of making
representations and warranties to induce the Company to enter into the
agreement. All parties involved were at one time principals in FutureLink
Alberta and Cameron Chell is currently C.E.O. of both companies.
TAKE-OVER BID CIRCULAR
The Take-Over Bid Circular dated September 28, 1998 is an offer by the
Company to purchase the remaining 54% of the outstanding shares of FutureLink
Alberta. The board of directors and officers of both companies are essentially
the same. See "ITEM 1. DESCRIPTION OF BUSINESS--History."
ESCROW AGREEMENT
The Escrow Agreement dated, January 20, 1998, is an agreement among General
Securities Transfer Agency, Inc., FutureLink, Cameron Chell (as to 500,000
FutureLink Common Shares), Linda Carling (as to 490,000 FutureLink Common
Shares), Bernie March (as to 200,000 FutureLink Common Shares), Colleen Rudolph
(as to 250,000 FutureLink Common Shares) and Gerald Albert (as to 100,000
FutureLink Common Shares) pursuant to which an aggregate of 1,540,000 FutureLink
Common Shares were deposited in escrow. The agreement states that one half of
the FutureLink Common Shares be released on July 20, 1998 and one half be
released on January 20, 1999. All parties involved were at one point principles
in FutureLink Alberta and Cameron Chell is currently CEO of the Company and
FutureLink Alberta.
SYSGOLD AGREEMENT
This was an agreement by and among FutureLink Alberta, the Company, Donald
A. Bialik, Olivia B. Bialik, Bialik Family Trust, Riverview Management
Corporation (now known as FutureLink/SysGold) and its subsidiaries, SysGold Ltd.
and SysGold Inc. (the "SysGold Subsidiaries") dated August 4, 1998, and amended
by agreement August 24, 1998 (the "SysGold Acquisition Agreement") wherein
FutureLink agreed to acquire all of the issued and outstanding shares of
FutureLink/SysGold which in turn owns all of the issued and outstanding shares
of both the SysGold subsidiaries. The total consideration was CDN$7,600,015
payable by CDN$3,100,000 cash on closing (August 24, 1998), CDN$585,000 by a
promissory note payable within 90 days of closing, and by the issuance of
4,250,000 shares in FutureLink /SysGold exchangeable into FutureLink Common
Shares (attributed value of $0.60/share). Don Bialik is currently the
Vice-Chairman of the Company.
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<PAGE> 41
INDEMNITY AGREEMENT
The Company, FutureLink Alberta, FutureLink Acquisition Corp., SysGold Ltd.
and Riverview Management Corporation (now known as FutureLink/SysGold) entered
into an Indemnity Agreement dated August 21, 1998 whereby FutureLink/SysGold has
agreed to indemnify all of the parties from any loss, damage, liability,
deficiency, claim, cost recovery, expense, assessment or re-assessment arising
from the claim filed by TAP Consulting Ltd., without limitation as well as any
claims by employees of the SysGold Subsidiaries with respect to any claim for
options, warrants or other similar rights. Don Bialik was the President of
Riverview Management Corporation at the time of signing this agreement and is
now Vice-Chairman of the Company.
WILLSON STATIONERS CONTRACT
Willson Stationers Ltd. has entered into the Company's standard Service
Provider Agreement. The contract is material because of the potential size of
the transaction and because of the relationship with Cameron Chell and Raghu
Kilambi. Both Mr. Chell and Mr. Kilambi, directors and senior officers of
FutureLink, are directors of Willson Stationers Ltd.
During the year ended December 31, 1998, the Company provided services and
products of $63,561 (CDN$94,267) to Willson Stationers Ltd. Included in accounts
receivable is an amount of $58,909 (CDN$90,325) owing from Willson Stationers
Ltd. These transactions are on normal commercial terms and conditions. In
addition, the Company purchased office products from Willson Stationers Ltd.
Included in accounts payable is an amount of $4,976 (CDN$7,630). These
transactions are on normal commercial terms and conditions.
THOMSON KERNAGHAN ("TK") TRANSACTIONS
As at March 31, 1999, TK, on behalf of clients, held 7,860,046 shares of
FutureLink Common Stock, making it the Company's second largest registered (but
not beneficial) stockholder behind CEDE & Co. As well, TK, on behalf of clients,
held $3,000,000 of Debentures convertible into additional Common Stock pursuant
to the August 14, 1998 $5,000,000 Debenture Acquisition Agreement between the
Company and TK, $2,000,000 of Debentures plus interest thereon having been
converted to Common Stock as at March 31, 1999. TK has also advanced a further
$500,000 pursuant to a $1,000,000 extension to the Debenture Acquisition
Agreement which the parties agreed to effective February 26, 1999. TK is also
party to a Consulting Agreement with the Company dated February 2, 1999 (and
effective November 1, 1998) whereby TK provides FutureLink with financial
advisory services for compensation of $25,000 per month, payable in Common
Stock. Under this Consulting Agreement, FutureLink is obligated to issue share
certificates for 115,253 shares of Common Stock (for November and December,
1998) and for 208,261 shares of Common Stock (for the quarter ended March 31,
1999) to TK.
While all dealings with TK have been and continue to be at arm's length,
these transactions have been set forth in this section given the large stake in
the Company which TK, directly or on behalf of clients, has taken in the
Company by virtue of the $5,500,000 of convertible debenture financing extended
since August, 1998 and by virtue of the special relationship that exists between
TK and FutureLink as a result of the Consulting Agreement.
OTHER RELATED PARTY TRANSACTIONS
During 1998, two of the Company's stockholders advanced the Company
$289,264 (CDN$440,000). Simple interest at a rate of prime plus 1%, totaling
$10,145 to December 31, 1998 has been added to the principal amount owing. In
addition, one of the Company's stockholders advanced the Company $17,609
(CDN$27,000) of which $19,662 (CDN$30,147), including interest, is outstanding
at December 31, 1998. The amount bears interest at the bank's prime rate.
39
<PAGE> 42
During 1998, Linear Strategies Ltd., a stockholder, advanced the Company
$729,802. Interest incurred on the loan to July 2, 1998 in the amount of $2,849
has been added to the principal amount owing. A total of $350,000 of the loan
was assigned to another stockholder on July 2, 1998. On the same date, both
portions of the loan were converted into 1,127,250 FutureLink Common Shares with
an ascribed value of $732,651, and an equal number of Common Shares purchase
warrants. Each warrant entitles the holder to purchase one share of Common Stock
at $1.00 on or before June 30, 1999 and at $1.25 on or before June 30, 2000.
An amount of $39,840 (CDN$61,087) is owing to stockholders and employees of
the Company at December 31, 1998. The amounts do not carry interest and have no
set repayment terms.
An amount of $10,138 (CDN$14,545) is owing from a stockholder of the
Company as at December 31, 1998. The amount does not carry interest and has no
set repayment terms. An allowance for doubtful accounts has been recorded for
the full amount due to the uncertainty of collection.
An amount of $11,040 (CDN$16,927) is owed by an entity of which a certain
stockholder is also a Director and stockholder of the Company. The amount does
not carry interest and has no set repayment terms.
During the year end December 31, 1998, the Company provided services and
products of $40,277 (CDN$59,735) to Jaws Technologies Inc., an entity of which
certain Directors are also Directors of the Company. An amount of $37,002
(CDN$56,735) is owed by Jaws Technologies Inc. at December 31, 1998, which has
been provided as an allowance for doubtful accounts due to the uncertainty of
collection. The amounts charged for services and products are on normal
commercial terms and conditions.
During the year end December 31, 1998, the Company provided services and
products of $9,471 (CDN$14,047) to NextClick Ltd. Certain Directors of the
Company were also Directors of NextClick Ltd. until December 1, 1998. These
transactions are on normal commercial terms and conditions. The full amount
remains outstanding at year end but has been provided as an allowance for
doubtful accounts due to the uncertainty of collection.
During the year ended December 31, 1998, the Company provided services and
products of $10,199 (CDN$15,126) to Sheraton Business Forms Ltd., an entity of
which a stockholder is also a stockholder of the Company. Included in accounts
receivable is an amount of $4,434 (CDN$6,799) owing to the Company. These
transactions are on normal commercial terms and conditions.
40
<PAGE> 43
PART IV
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets - December 31, 1998 and 1997 F-3
Consolidated Statements of Loss and Deficit and Comprehensive Loss - Years ended
December 31, 1998 and 1997 F-5
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 1998 and 1997 F-6
Consolidated Statements of Cash Flows - Years ended December 31, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
(a) (2) INDEX TO FINANCIAL STATEMENTS SCHEDULES
All other schedules for which provision is made in the applicable
accounting requirements of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and therefore have
been omitted.
(a) (3) LIST OF EXHIBITS
None.
(b) REPORTS ON FORM 8-K
None.
41
<PAGE> 44
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.
By: [signed: C. Chell] Date: April 9, 1999
--------------------------------------
Cameron Chell, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Cameron
Chell or Raghu Kilambi, or either of them, his true and lawful attorney-in-fact
and agent, acting alone, with full powers of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Form 10-KSB and
any Amendments thereto and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, each acting alone,
full powers and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
[signed: C. Chell]
- ---------------------------------
Cameron B. Chell Chairman of the Board, Chief Executive April 9, 1999
Officer and President
[signed: Don Bialik]
- ---------------------------------
Donald A. Bialik Vice-Chairman of the Board April 9, 1999
[signed: R. Kilambi]
- ---------------------------------
Raghu Kilambi Chief Financial Officer and Director April 9, 1999
[signed: Philip Ladouceur]
- ---------------------------------
Philip R. Ladouceur Director April 9, 1999
[signed: Rob Kubbernus]
- ---------------------------------
Robert Kubbernus Director April 9, 1999
[signed: F. B. Farrill]
- ---------------------------------
F. Bryson Farrill Director April 9, 1999
[signed: Bob Kohn]
- ---------------------------------
Robert H. Kohn Director April 9, 1999
[signed: W. Arnett]
- ---------------------------------
William V. (Bill) Arnett Chief Operating Officer April 9, 1999
[signed: K. B. Scott]
- ---------------------------------
Kyle B.A. Scott Corporate Secretary April 9, 1999
</TABLE>
42
<PAGE> 45
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets - December 31, 1998 and 1997 F-3
Consolidated Statements of Loss and Deficit and Comprehensive Loss Years ended
December 31, 1998 and 1997 F-5
Consolidated Statements of Change in Stockholders' Equity - Years ended
December 31, 1998 and 1997 F-6
Consolidated Statements of Cash Flows - Years ended
December 31, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 46
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
FUTURELINK DISTRIBUTION CORP.
We have audited the accompanying consolidated balance sheets of FUTURELINK
DISTRIBUTION CORP. as at December 31, 1998 and 1997 and the related consolidated
statements of loss and deficit and comprehensive loss, changes in stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FutureLink Distribution Corp.
as at December 31, 1998 and 1997 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 1 to the financial statements, the Company's has incurred
recurring losses from operations, has a working capital deficiency, and has not
complied with certain covenants of its credit facility with the bank. These
conditions raise substantial doubts about its ability to continue as a going
concern. Management's plans as to these matters are also described in Note 1.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Calgary, Canada Ernst & Young LLP
March 18, 1999 Chartered Accountants
F-2
<PAGE> 47
FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED BALANCE SHEETS
(See basis of presentation - Note 1)
(All amounts stated in $U.S.)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1997
$ $
--------- ---------
<S> <C> <C>
CURRENT
Cash 6,651 --
Accounts receivable, net of $57,101
allowance for doubtful account 1,458,314 --
Due from related parties, net of
$57,513 allowance for doubtful
accounts [note 11] 73,781 --
Prepaid expenses 116,219 --
Inventory and work in progress 22,205 --
Debenture receivable [note 5] 1 --
---------- ---------
1,677,171 --
---------- ---------
CAPITAL ASSETS, NET OF $203,455
ACCUMULATED DEPRECIATION [NOTE 6] 1,122,923 --
GOODWILL [NOTE 7] 5,027,939 --
EMPLOYEE AND CONSULTANTS BASE [NOTE 7] 2,817,778 --
---------- ---------
8,968,640 --
---------- ---------
10,645,811 --
========== =========
</TABLE>
F-3
<PAGE> 48
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1998 1997
$ $
---------- ----------
<S> <C> <C>
CURRENT
Bank indebtedness [note 15] 819,217 --
Accounts payable [notes 8 and 11] 2,190,098 23,932
Accrued Liabilities 663,201 --
Due to stockholders [notes 11 and 20] 319,071 --
Due to other related parties [note 11] 44,816 --
Notes payable [note 3] 387,795 --
---------- ----------
4,424,198 23,932
---------- ----------
CAPITAL LEASE OBLIGATIONS PAYABLE [NOTE 8] 30,262 --
CONVERTIBLE DEBENTURES [NOTES 9 AND 10] 2,153,457 --
DEFERRED TAXES [NOTE 13] 1,211,634 --
---------- ----------
3,395,353 --
---------- ----------
MINORITY INTEREST (11,141) --
COMMITMENTS AND CONTINGENCIES [NOTES
1, 8, 9 AND 19]
STOCKHOLDERS' EQUITY [NOTE 9]
Authorized
5,000,000 preferred shares without par
value 100,000,000 common shares with par
value of $0.0001
Issued and paid-up
20,175,105 and 10,203,500 common
shares issued and outstanding
at December 31, 1998 and
December 31, 1997, respectively 2,018 1,020
To be issued [note 9] 50,000 --
Exchangeable shares [note 3] 2,550,000 --
Issued in trust and unpaid [note 9] -- --
Capital in excess of par value 6,437,640 1,425,211
Contributed surplus 1,224,668 --
Cumulative translation adjustment (96,468) --
Deficit (7,330,457) (1,450,163)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,837,401 (23,932)
---------- ----------
10,645,811 --
========== ==========
</TABLE>
See accompanying notes
On behalf of the Board: [signed: Robert Kubbernus] [signed: Robert H. Kohn]
Director Director
F-4
<PAGE> 49
FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT AND
COMPREHENSIVE LOSS
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
-------------------------------
1998 1997
$ $
---------- ----------
<S> <C> <C>
REVENUE [NOTE 11]
Consulting services 1,471,206 --
Hardware and software sales 962,751 --
Other 2,701 --
---------- ----------
2,436,658 --
---------- ----------
EXPENSES [NOTE 11]
Hardware and software purchases 879,927 --
Contracts, payroll and benefits [note 9] 3,661,606 --
Accounting and legal 80,591 109,992
Rent 77,035 --
General and administrative 613,965 12,057
Interest on long term debt 1,303,743 --
Amortization deferred financing fees [note 10] 29,052 --
Other financing fees 89,000 --
Bad debt expense [note 11] 125,833 --
Depreciation 119,236 --
Amortization of intangible assets [note 7] 667,617 --
---------- ----------
7,647,605 122,049
---------- ----------
Loss from operations (5,210,947) (122,049)
---------- ----------
Loss on sale of assets (47,596) --
Write-off mining related assets [note 6] -- (515,000)
Loss on non-refundable deposit [note 12] -- (100,000)
Equity in loss of affiliate [note 4] (860,131) --
Minority interest 33,771 --
---------- ----------
(873,956) (615,000)
---------- ----------
LOSS BEFORE INCOME TAXES (6,084,903) (737,049)
Deferred tax benefit [note 13] (204,609) --
---------- ----------
LOSS FOR THE YEAR (5,880,294) (737,049)
OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustment (96,468) --
---------- ----------
COMPREHENSIVE LOSS (5,976,762) (737,049)
========== ==========
DEFICIT, BEGINNING OF YEAR (1,450,163) (713,114)
DEFICIT, END OF YEAR (7,330,457) (1,450,163)
========== ==========
LOSS PER COMMON SHARE (0.38) (1.65)
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 15,846,571 447,445
========== ==========
</TABLE>
See accompanying notes
F-5
<PAGE> 50
FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON STOCK TO BE EXCHANGEABLE EXCESS OF CONTRIBUTED
-------------------------- ISSUED SHARES PAR SURPLUS
SHARES $ $ $ $ $
---------- ----- ------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 2,500 25 -- -- 1,216,712 --
Issuance of share capital for
cash 1,000 10 -- -- 9,990 --
---------- ----- ------ --------- --------- -----------
3,500 35 -- -- 1,226,702 --
Change of par value from
.01 to .0001 -- (35) -- -- 35 --
Issuance of share capital for
cash 10,200,000 1,020 -- -- 158,980 --
Forgiveness of stockholder
debt -- -- -- -- 39,494 --
Loss for the year -- -- -- -- -- --
---------- ----- ------ --------- --------- -----------
BALANCE, DECEMBER 31, 1997 10,203,500 1,020 -- -- 1,425,211 --
Issuance of share capital for
cash 255,813 26 -- -- 846,774 --
Forgiveness of stockholder debt -- -- -- -- 70,325 --
Issuance of share capital to
employees, officers and
directors of the company
[note 9] 3,500,000 350 -- -- 2,117,150 --
Warrants issued with
issuance of convertible
debentures [note 10] -- -- -- -- -- 562,500
Equity component of
convertible debentures
[note 10] -- -- -- -- -- 777,143
Equity component of
financing fees [note 10] -- -- -- -- -- (75,600)
Equity component of
financing fees [note 10] -- -- -- -- -- (39,375)
Shares issued upon
conversion of convertible
debt [note 10] 1,874,777 188 -- -- 506,553 --
Shares issued on conversion of
loan [note 11] 1,127,240 113 -- -- 732,538 --
Issuance of shares on
acquisition of FutureLink
Alberta [note 4] 3,213,775 321 -- -- 1,002,606 --
Share issue costs -- -- -- -- (218,992) --
Financing fees associated
with converted
debentures [note 10] (44,525)
----------
TOTAL OUTSTANDING SHARES 20,175,105
----------
Issuance of exchangeable
shares on acquisition of
FL/SysGold [note 3] 4,250,000 -- -- 2,550,000 -- --
Shares to be issued for
services [note 9] 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>
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
F-6
<PAGE> 51
FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
--------------------------
1998 1997
$ $
---------- --------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss for the year (5,880,294) (737,049)
Adjustments to reconcile net loss to net cash provided by operating
activities
Write off mining related assets [note 6] -- 515,000
Non cash interest expense 1,294,098 --
Amortization financing fees 29,052 --
Non cash expenses included in contracts, payroll and benefits
expense [note 9] 2,114,000 --
Non cash consulting expense 10,109 --
Depreciation and amortization 786,853 --
Loss on refundable deposit [note 12] -- 100,000
Bad debt expense 125,832 --
Loss on sale of assets 47,596 --
Deferred tax recovery [note 13] (204,609) --
---------- ----------
(1,677,363) (122,049)
Changes in non-cash working capital [note 14] 1,187,747 17,059
Non cash working capital deficiency acquired [note 3 and 4] (518,076) --
Effect of foreign currency on operating activities (96,468) --
---------- ----------
(1,104,160) (104,990)
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital assets purchased (818,699) --
Proceeds from disposition of capital assets 33,411 --
Cash consideration on acquisition of subsidiaries [note 3] (2,019,149) --
Acquisition costs of subsidiaries (109,923) --
Cash advances to equity investee (990,305) --
Other (69,435) --
Loss on non-refundable deposit -- (100,000)
---------- ----------
(3,974,100) (100,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received under demand credit facility 819,217 --
Advances from stockholders 1,036,674 (4,504)
Issuance of common stock [note 9] 850,300 170,000
Share issue costs (218,992) --
Repayment of capital lease obligations (67,404) --
Forgiveness of stockholder debt [note 9] 60,200 39,494
Issuance of convertible debentures 2,720,000 --
Financing fees on issue of convertible debentures (270,000) --
Other financing fees 89,000 --
Common stock to be issued [note 9] 50,000 --
Changes in non-cash working capital [note 14] 15,916 --
---------- ----------
5,084,911 204,990
---------- ----------
Increase in cash 6,651 --
Cash, beginning of year -- --
---------- ----------
CASH, END OF YEAR 6,651 --
========== ==========
</TABLE>
See accompanying notes
F-7
<PAGE> 52
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. BASIS OF PRESENTATION
The Company was incorporated on April 4, 1955 in the State of Colorado, USA, as
Cortez Uranium and Mining Co. The Company was involved in several mining related
projects and had changed its name several times. The Company ceased all mining
projects in 1997 and changed its name to FutureLink Distribution Corp. effective
February 17, 1998.
The Company is an information technology service provider focusing on providing
utility-like computing services to businesses.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company has accumulated accounting losses amounting to
$7,330,457, a working capital deficiency of $2,747,027 and total net operating
cash outflows of $1,209,150 relating to 1997 and 1998. 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 January 1, 1998 to March 18, 1999, management has raised
$7,386,975 of capital in the form of convertible debt and equity (see notes
9,10, and 20), and plans to raise additional financing through future private or
public offerings of stock and through the exercise of stock options. The
Company's recent registration with the Securities and Exchange Commission is
expected to improve the Company's ability to raise such additional capital. In
addition, the Company will realize a full year of operations in 1999 relating to
the businesses acquired in 1998. This, combined with the significant marketing
efforts undertaken by the company and the expansion of operations to the United
States, is expected to generate increased sales and cashflows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have, in management's opinion, been properly prepared
in accordance with accounting principles generally accepted in the United
States.
USE OF ESTIMATES
Because a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period necessarily
involves the use of estimates which would affect the amount of recorded assets,
liabilities, revenues and expenses. Actual amounts could differ from these
estimates.
F-8
<PAGE> 53
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
INVENTORY AND WORK IN PROGRESS
Inventories of computer hardware held for re-sale and work in progress are
recorded at the lower of actual cost or net realizable value.
CAPITAL ASSETS
Capital assets are recorded at cost. Depreciation is provided at rates designed
to depreciate the cost of the assets over their estimated useful lives as
follows:
<TABLE>
<S> <C>
Computers and equipment 30%
Leasehold improvements term of lease
Software 100%
Office equipment 20%
Equipment under capital lease 30%
</TABLE>
INTANGIBLE ASSETS
(a) Employee and consultants base
The employee and consultants base recorded on the acquisition of
FL/SysGold is recorded at cost and is being amortized on a straight-line
basis over three years. The recoverability of the employee and
consultants base is assessed periodically based on retention of
employees and consultants in relation to management estimates of
undiscounted future revenue provided from information technology
services.
(b) Goodwill
Goodwill is recorded at cost and is being amortized on a straight line
basis over five years. The recoverability of goodwill is assessed
periodically based on management estimates of undiscounted future
operating income from each of the acquired businesses to which the
goodwill relates.
FINANCING FEES
Financing fees associated with that portion of the 10% convertible debentures
classified as debt are deferred and amortized over the life of the debentures,
unless the debentures have been converted. Financing fees associated with that
portion of the convertible debentures classified as contributed surplus is
charged to that account. The pro rata portion of financing fees associated with
converted debentures is charged to share capital in excess of par value.
CAPITAL LEASES
Leases in which substantially all the benefits and risks of ownership are
transferred to the Company are capitalized with an offsetting amount recorded as
a liability.
F-9
<PAGE> 54
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
REVENUE
Revenue from information technology services and outsourcing contracts is
recognized when the service is delivered over the term of the applicable
contracts.
INCOME TAXES
The Company records its provision for income taxes using the liability method.
Under this method deferred tax assets and liabilities are recognized based on
the anticipated future tax effects arising from the differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases.
CONSOLIDATION
These consolidated financial statements include the accounts of its wholly owned
subsidiary FutureLink/SysGold Ltd. ("FL/SysGold") and 96.4% owned subsidiary
FutureLink Distribution Corp. (Alberta), ("FutureLink Alberta").
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's subsidiaries is the Canadian Dollar.
Adjustments arising from translating the subsidiaries' financial statements into
United States dollars are recorded in stockholders' equity as a cumulative
translation adjustment.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
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
consolidation. The effect on earnings per share of the exercise of options and
warrants, and the conversion of the 10% convertible debentures is anti-dilutive.
STOCK OPTIONS
The Company applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost is recognized in the accounts.
3. ACQUISITION OF RIVERVIEW MANAGEMENT CORPORATION
Effective August 24, 1998, the Company acquired all of the outstanding shares of
Riverview Management Corporation (since renamed FL/SysGold), an information
technology outsourcing and services firm. The consideration for the purchase,
totalling $5,003,887, including acquisition costs of $53,705, consisted of a
cash payment of $2,019,149, promissory notes payable for
F-10
<PAGE> 55
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
$381,033 ($585,000 Canadian) payable on demand on or before 90 days after August
24, 1998, and 4,250,000 exchangeable common shares of the Company with an
ascribed value of $2,550,000. The common shares issued are exchangeable shares
in FL/SysGold which are convertible at any time into shares of the Company. The
acquisition was accounted for using the purchase method. Net assets acquired are
as follows:
<TABLE>
<CAPTION>
$
----------
<S> <C>
NET ASSETS ACQUIRED
Non cash working capital deficiency (179,251)
Capital assets 135,291
Goodwill 3,275,687
Employee and consultants base 3,200,000
Deferred tax liability (1,427,840)
----------
NET ASSETS ACQUIRED 5,003,887
==========
</TABLE>
As at December 31, 1998, the promissory notes of $381,033 ($585,000 Canadian)
remain outstanding along with accrued interest of $6,762. These notes bear
interest at the simple rate of 7%. Subsequent to December 31, 1998 these notes
were paid in full.
The results of operations for FL/SysGold are consolidated as of August 24, 1998.
F-11
<PAGE> 56
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
4. ACQUISITION OF FUTURELINK DISTRIBUTION CORP. (ALBERTA)
On January 20, 1998 the Company issued 1,540,000 common shares in exchange for
1,540,000 common shares (46%) of FutureLink Alberta. The total value ascribed to
the investment was $15,400.
Effective November 23, 1998, the Company issued 1,673,775 common shares in
exchange for an additional 1,673,775 common shares (50.4%) of FutureLink
Alberta. The total value ascribed to the investment was $987,527. The 1,673,775
shares were issued pursuant to an exemption from registration under Regulation S
of the Securities Act of 1933.
As a result of these two transactions the Company acquired 96.4% of FutureLink
Alberta for a total purchase price of $1,059,145, including acquisition costs of
$56,218. Net assets acquired are as follows:
<TABLE>
<CAPTION>
$
---------
<S> <C>
NET ASSETS ACQUIRED
Non cash working capital deficiency (338,825)
Capital assets 350,619
Goodwill 2,037,656
Tax loss carryforwards 288,194
Valuation allowance (288,194)
Other obligations (990,305)
---------
NET ASSETS ACQUIRED 1,059,145
=========
</TABLE>
From January 20, 1998 to November 23, 1998 the Company's share in FutureLink
Alberta's loss, accounted for using the equity method, was $860,131. FutureLink
Alberta was consolidated from November 24, 1998 to December 31, 1998.
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
(see note 20).
F-12
<PAGE> 57
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
5. DEBENTURE RECEIVABLE
During the year, the Company's subsidiary, FutureLink Alberta, disposed of
certain assets and operations in exchange for a 50% equity investment in
NextClick Ltd. valued at $1. On November 30, 1998 the Company sold its
investment in exchange for a debenture receivable in the amount of $100,000
Canadian. The debenture is due on demand on or after March 31, 1999. A first
floating charge against the assets of the issuer has been pledged as security.
Due to the uncertainty of collectibility, the $100,000 debenture is carried at
the book value of the exchanged common shares, being $1. The debenture is
non-interest bearing.
6. CAPITAL ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $ $
--------- ------------ ---------
<S> <C> <C> <C>
Computers and equipment 605,830 80,872 524,958
Leasehold improvements 218,018 16,720 201,298
Software 185,406 69,405 116,001
Office equipment 181,384 17,706 163,678
Equipment under capital lease 135,740 18,752 116,988
--------- ------------ ---------
1,326,378 203,455 1,122,923
========= ============ =========
</TABLE>
During 1997 the Company wrote off its mining assets.
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
--------- ------------ ---------
<S> <C> <C> <C>
Goodwill 5,313,334 285,395 5,027,939
Employee and consultants base 3,200,000 382,222 2,817,778
--------- ------------ ---------
8,513,334 667,617 7,845,717
========= ============ =========
</TABLE>
The $3,200,000 relating to employee and consultants base represents the
valuation placed on the knowledge, expertise, and sales contacts of employees
and consultants of FL/SysGold.
8. CAPITAL AND OPERATING LEASE OBLIGATIONS PAYABLE
The future minimum lease payments at December 31, 1998 under capital and
operating leases are as follows:
F-13
<PAGE> 58
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
$ $
------- -------
<S> <C> <C>
1999 65,916 265,111
2000 33,466 244,205
2001 13,748 243,654
2002 -- 20,289
2003 -- --
------- -------
Total future minimum lease payments 113,130 773,259
Less: imputed interest (16,952)
-------
Balance of obligations under capital lease 96,178
Less: current portion included in
accounts payable and accrued liabilities (65,916)
-------
Long term obligation under capital lease 30,262
-------
</TABLE>
9. SHARE CAPITAL
AUTHORIZED
On January 20, 1998 the Articles of the Company were amended to increase the
authorized share capital to 100,000,000 common shares and 5,000,000 preferred
shares.
ISSUED AND PAID-UP
During the year, the Company issued 255,813 shares for $846,800 cash, as well as
a further 1,127,240 shares for $732,651 cash.
On July 7, 1998, the Company issued 3,500,000 shares to employees, officers and
directors of the Company for $3,500 as had been previously approved by
stockholders in January, 1998. The fair value of these shares at the time of the
share issuance was $2,117,500. The difference between the fair value and the
cash consideration received has been included in capital in excess of par and in
contracts, payroll and benefits expense.
F-14
<PAGE> 59
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
TO BE ISSUED
The company has entered into agreements for consulting services which provides
for the payment of $33,000 in total per month. Of these agreements, one relates
to consulting services obtained from the agent of the 10% convertible debenture
agreement (see note 10). This agreement is for a period of six months and
provides for the settlement of fees by way of shares in the Company's stock. The
number of shares to be issued is based on 95% of the average closing price of
the Company's stock during the trading days in the month in question as quoted
on the Nasdaq Over the Counter Bulletin Board. As at December 31, 1998, $50,000
was owing for consulting services in relation to this agreement, equating to
115,253 shares.
ISSUED IN TRUST AND UNPAID
On August 20, 1998, a share certificate for 11,000,000 unpaid common shares was
issued in trust for the common stock underlying the 10% convertible debenture
and warrants issued on that date (see note 10). Of these 11,000,000 shares,
9,125,223 shares continue to be in trust and 1,874,777 outstanding at December
31, 1998. On January 6, 1999, the 1,874,777 outstanding shares became
unrestricted.
RESTRICTED SHARES
Of the 20,175,105 shares issued and paid-up at December 31, 1998, 8,209,535 are
restricted including 1,874,777 relating to the 10% convertible debenture. The
remaining 11,965,569 are freely trading. Restricted shares held by
non-affiliates of the Company must be held for at least one year. Restricted
shares held by affiliates of the Company must be held for 1 to 2 years subject
to any subsequent registration of such shares which could be affected by the
Company.
The 1,540,000 common shares issued in January, 1998 to purchase the 46%
investment in FutureLink Alberta, are subject to a hold period. One half of the
shares given to the vendors was released from escrow on July 20, 1998 and the
balance released on January 20, 1999.
WARRANTS
Attached to the 255,813 shares issued for cash during the year were warrants
detailed as follows:
a.) 83,334 warrants were issued to the share subscribers who were issued shares
on February 6, 1998. The warrants allow the holder to purchase additional
shares at $3.00 per share on or before one year and $3.10 before two years
from the date of acquisition.
b.) 105,813 warrants were issued to the share subscribers who were issued
shares on April 4, 1998. The warrants allow the holder to purchase
additional shares at $3.75 per share on or before one year and $4.00 before
two years from the date of acquisition.
c.) 66,666 warrants were issued to the share subscribers who were issued shares
on April 22, 1998 and April 24, 1998. The warrants allow the holder to
purchase additional shares at $3.25 per share on or before two years from
May 4, 1998.
On July 2, 1998 1,127,250 share purchase warrants were issued with the same
number of shares as disclosed in note 11.
F-15
<PAGE> 60
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
Share purchase warrants totalling 1,041,667 were issued during the year under
the 10% convertible debenture agreement as disclosed in note 10.
None of the outstanding warrants have been exercised as at December 31, 1998.
OPTIONS
As of December 31, 1998, the Company has issued 4,162,500 options to purchase
common stock to the Company's directors, officers and employees. Of the total
issued, none have been exercised as at December 31, 1998. Details of the stock
options outstanding at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS EXERCISE PRICE EXPIRY DATE
----------------- -------------- ----------------
<S> <C> <C>
2,930,000 0.76 June 29, 2001
800,000 1.17 August 5, 2001
25,000 0.45 December 1, 2001
50,000 0.45 December 1, 2002
357,500 0.45 April 1, 2004
------------- ---------- ----------------
4,162,500
-------------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for its
stock option plans. The fair value of each option granted during 1998 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: expected volatility of 164%; risk-free interest rate
of 4.0%; no payment of common share dividends; and expected life of 1 to 5
years. Had compensation cost for these plans been determined based upon the fair
value at grant date, consistent with the methodology prescribed in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), the Company's net loss and net loss per common share
for the year ended December 31, 1998 would have been $9,406,724 and $0.59
respectively.
F-16
<PAGE> 61
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
10. CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
$
----------
<S> <C>
PRINCIPLE
Funds advance during the year 2,720,000
Debentures converted during the year (500,000)
----------
2,220,000
----------
FINANCING FEES
Fees paid on funds advanced during the year (270,000)
Intrinsic value associated with equity component of debentures 75,600
Fees paid through issuance of warrants to agent (140,625)
Intrinsic value associated with equity component of debentures 39,375
Amortization of financing fees 29,052
Financing fees associated with debentures converted during the year 44,525
----------
(222,073)
----------
INTEREST EXPENSES
Accrued interest expense 155,530
----------
NET BALANCE 2,153,457
----------
</TABLE>
During the year the Company entered into a 10% convertible debenture agreement
to provide up to $5,000,000 of financing ("10% convertible debenture
agreement").
As at December 31, 1998, the Company issued $2,720,000 10% convertible
debentures 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 $2,720,000, an amount of
$777,143 has been attributed to the intrinsic value of the conversion option at
the issue date and included with contributed surplus.
The amount attributed to the conversion option of $777,143, has been included in
interest on long term debt as the conversion option was exercisable upon
issuance.
Upon entering into the agreement, the Company issued 1,041,667 common share
purchase warrants, 260,417 to the agent and 781,250 to the ultimate subscriber
of the issue. Each warrant gives the holders the right to purchase one common
share of the Company at $0.96 until August 20, 2001. An amount of $562,500 has
been included in contributed surplus as the estimated intrinsic value attributed
to these warrants as they were exercisable upon issuance. In addition, the
warrants issued to the agent have been treated as a financing fee in the amount
of $140,625. The intrinsic value of these fees associated with the equity
component of the 10% convertible debentures has been charged to contributed
surplus in the amount of $39,375. The remaining balance is being amortized over
the life of the 10% convertible debentures.
F-17
<PAGE> 62
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
For each issuance of 10% 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% convertible debentures in the amount of $75,600 has
been charged to contributed surplus. The remaining amount is being amortized
over the life of the 10% convertible debentures, unless the debentures are
converted. If converted, the pro rata portion of the financing fees associated
with the converted debentures is charged to capital in excess of par value.
During the period, $44,525 has been charged to capital in excess of par value
relating to $500,000 of convertible debentures which were converted.
During the year, $500,000 of the convertible debentures, together with $6,741 of
accrued interest, were converted into 1,874,777 common shares. An amount of
$2,375,530, including accrued interest and fees of $155,530 remains outstanding
as at December 31, 1998.
Subsequent to December 31, 1998, the Company issued an additional $2,280,000 10%
convertible debentures under the 10% convertible debenture agreement. In
addition, $1,500,000 of the 10% convertible debentures were converted into
common shares of the Company (see note 20).
11. RELATED PARTY TRANSACTIONS
During 1998, two of the Company's stockholders advanced the Company $289,264
($440,000 Canadian). Simple interest at a rate of prime plus 1%, totalling
$10,145 to December 31, 1998 has been added to the principal amount owing. In
addition, one of the Company's stockholders advanced the Company $17,609
($27,000 Canadian) of which $19,662 ($30,147) including interest is outstanding
at year end. The amount bears interest at the bank's prime rate.
During 1998, Linear Strategies Ltd., a stockholder, advanced the Company
$729,802. Interest incurred on the loan to July 2, 1998 in the amount of $2,849
has been added to the principal amount owing. $350,000 of the loan was assigned
to another stockholder on July 2, 1998. On the same date, both portions of the
loan were converted into 1,127,240 common shares with an ascribed value of
$732,651, and an equal number of common share purchase warrants. Each warrant
entitles the holder to purchase one common share at $1.00 on or before June 30,
1999 and at $1.25 on or before June 30, 2000.
An amount of $39,840 ($61,087 Canadian) due to stockholders and employees of the
Company exists at December 31, 1998. The amount does not carry interest and have
no set repayment terms.
An amount of $10,138 ($14,545 Canadian) is owing from a stockholder of the
Company as at December 31, 1998. The amount does not carry interest and has no
set repayment terms. An allowance for doubtful accounts has been recorded for
the full amount due to the uncertainty of collection.
An amount of $11,040 ($16,927 Canadian) is owing from an entity of which a
certain stockholder is also a Director and stockholder of the Company. The
amount does not carry interest and has no set repayment terms.
During the year end December 31, 1998, the Company provided services and
products of $40,277 ($59,735 Canadian) to Jaws Technologies Inc., an entity of
which certain Directors are also Directors of the Company. An amount of $37,002
($56,735 Canadian) is owing from Jaws Technologies Inc. at December 31, 1998
which has been provided as an allowance for doubtful accounts due to the
uncertainty of collection. The amounts charged for services and products are on
normal commercial terms and conditions.
F-18
<PAGE> 63
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
During the year end December 31, 1998, the Company provided services and
products of $63,561 ($94,267 Canadian) to Willson Stationers Ltd., an entity of
which certain Directors are also Directors of the Company. Included in accounts
receivable is an amount of $58,909 ($90,325 Canadian) owing from Willson
Stationers Ltd. These transactions are on normal commercial terms and
conditions. In addition, the Company purchased office products from Willson
Stationers Ltd. Included in accounts payable is an amount of $4,976 ($7,630
Canadian). These transactions are on normal commercial terms and conditions.
During the year end December 31, 1998, the Company provided services and
products of $9,471 ($14,047 Canadian) to NextClick Ltd. Certain Directors of the
Company were also Directors of NextClick Ltd. until December 1, 1998. These
transactions are on normal commercial terms and conditions. The full amount
remains outstanding at year end but has been provided as an allowance for
doubtful accounts due to the uncertainty of collection.
During the year end December 31, 1998, the Company provided services and
products of $10,199 ($15,126 Canadian) to Sheraton Business Forms Ltd., an
entity of which a stockholder is also a stockholder of the Company. Included in
accounts receivable is an amount of $4,434 ($6,799 Canadian) owing to the
Company. These transactions are on normal commercial terms and conditions.
12. LOSS ON NON-REFUNDABLE DEPOSIT
During 1997, the previous management entered into an agreement which included
payment of a $100,000 non-refundable deposit to purchase Printscan International
Inc. The Company did not raise sufficient funds to complete the purchase, and
the deposit was forfeited.
F-19
<PAGE> 64
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
INCOME TAXES
The income tax benefit differs from the amount computed by applying the U.S.
federal statutory tax rates to loss before income taxes for the following
reasons:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
$ $
---------- ------------
<S> <C> <C>
Tax benefit at U.S. statutory rate (34%) (2,068,868) (250,597)
Increase (decrease) in taxes resulting from:
Deferred tax asset valuation allowance 1,690,192 294,820
U.S. state taxes, net of federal tax benefit (120,665) (44,223)
Non-deductible expenses 541,030 --
Foreign tax rate differences (257,895) --
Other 11,597 --
---------- ----------
Deferred tax benefit (204,609) --
========== ==========
</TABLE>
F-20
<PAGE> 65
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
$ $
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Employee and consultants base 1,211,634 --
---------- ----------
Deferred tax assets:
Net operating loss carryforwards 1,904,583 40,000
Start-up costs 39,715 48,820
Write-off of mining related assets 206,000 206,000
Depreciation 77,017 --
Debt issue costs 23,327 --
Debenture receivable 22,564 --
---------- ----------
Total deferred tax assets 2,273,206 294,820
Valuation allowance (2,273,206) (294,820)
---------- ----------
Net deferred tax assets -- --
---------- ----------
Net deferred tax liabilities 1,211,634 --
========== ==========
</TABLE>
The Company has provided a valuation allowance for the full amount of deferred
tax assets in light of its history of operating losses since its inception.
$288,194 of the valuation allowance increase for 1998 of $1,978,386 will reduce
goodwill when recognized. The remaining $1,690,192 may be available to offset
future income taxes if the Company achieves profitability.
The Company has U.S. net operating losses carried forward of $2,563,000 which
expire as follows: $100,000 in 2012 and $2,463,000 in 2018. The availability of
these loss carryforwards to reduce future taxable income could be subject to
limitations under the Internal Revenue Code of 1986, as amended. Certain
ownership changes can significantly limit the utilization of net operating loss
carryforwards in the period following the ownership change. The Company has not
determined whether such changes have occurred and the effect such changes could
have on its ability to carry forward all or some of the U.S. net operating
losses.
F-21
<PAGE> 66
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
The Company has non-capital losses carried forward for Canadian income tax
purposes of $3,071,000. These losses expire as follows:
<TABLE>
<CAPTION>
$
---------
<S> <C>
2002 117,000
2003 539,000
2004 1,507,000
2005 908,000
</TABLE>
14. NET CHANGE IN NON-CASH WORKING CAPITAL
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
$ $
----------- ------------
<S> <C> <C>
(Increase) decrease in non-cash working capital:
Accounts receivable (1,532,095) --
Inventory (22,206) --
Prepaid expenses and deposits (116,219) --
Accounts payable and accrued liabilities 2,874,183 17,059
---------- ------
1,203,663 17,059
---------- ------
The change relates to the following activities:
Operating activities 1,187,747 --
Financing activities 15,916 --
---------- ------
1,203,663 --
---------- ------
</TABLE>
BANK INDEBTEDNESS
FL/SysGold 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 FL/SysGold as well as an assignment of the shares of the
subsidiary. FL/SysGold's net assets at December 31, 1998 are carried at $99,770
in the Company's accounts. 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
Company's debt to equity ratio. $9,645 is the amount of cash interest expensed
during the period.
As at December 31, 1998 FL/SysGold 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 Company 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 March 18, 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.
F-22
<PAGE> 67
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
SEGMENTED INFORMATION
The Company's activities are conducted in one operating segment with all
activities relating to the sales and support of information technology. These
activities are carried out in two geographic segments, being Canada and the
United States.
As at December 31, 1997 and during the year ended December 31, 1997, all of the
Company's activities were carried out in the United States.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
Canada U.S. Total
$ $ $
--------- --------- ---------
<S> <C> <C> <C>
Revenue 2,436,658 -- 2,436,658
========= ========= =========
Capital assets, goodwill and
employee and consultants base 1,119,736 7,930,136 9,049,872
========= ========= =========
</TABLE>
17. FINANCIAL INSTRUMENTS
Financial instruments comprising cash, accounts receivable, bank indebtedness,
accounts payable, accrued liabilities, due to stockholders, capital lease
obligations payable and notes payable approximate their fair value. It is
management's opinion that the Company is not exposed to significant currency or
credit risks arising from these financial instruments.
The Company's sales have been primarily derived from customers in Calgary,
Alberta, Canada. In addition, approximately 22% of revenues for the year ended
December 31, 1998 were derived from one customer.
The estimated fair value as at December 31, 1998 of the 10% convertible
debentures is $2,150,000. This is based on the estimated present value of the
principle and interest under the debenture plus the estimated fair value of the
conversion option (exclusive of the intrinsic value of the conversion option and
the detachable warrants at the issue date of the debenture). The carrying amount
of the 10% convertible debentures is $2,375,530.
The Company is subject to interest rate risk to the extent of the fixed 10%
simple interest rate being charged on the convertible debentures. The effective
annual interest rate realized by the Company, exclusive of the amounts booked
relating to the conversion feature of the 10% convertible debentures and the
warrants was 9.4%.
18. RECENT PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities". The Company does not acquire derivatives or engage in
hedging activities.
19. 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
F-23
<PAGE> 68
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
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.
20. SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company issued $2,280,000 10% convertible
debentures, due August 20, 2001, under the 10% convertible debenture agreement.
In addition, $1,500,000 of the 10% convertible debentures, together with accrued
interest, were converted into 5,985,269 common shares of the Company. These
shares, representing a portion of the unpaid issued shares held in trust at
December 31, 1998, were re-issued as fully paid shares in relation to this
conversion.
Subsequent to December 31, 1998, the Company repaid the $381,033 promissory
notes plus accrued interest of $6,762 existing at December 31, 1998 in relation
to the acquisition of FL/SysGold.
On February 16, 1999 an additional share certificate for 8,000,000 common shares
was issued in trust as coverage in relation to the 10% convertible debenture.
On February 22, 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.
On February 26, 1999, FutureLink Alberta became a wholly owned subsidiary when
the Company completed its purchase of the remaining 117,500 shares (3.6%) of
FutureLink Alberta
F-24
<PAGE> 69
FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
that it did not already own, in exchange for 117,500 common shares of the
Company at an ascribed value of $42,300. These shares were issued pursuant to an
exemption from registration under Regulation S of the Securities Act of 1933.
On February 26, 1999 the Company issued a letter of intent in which to amend the
terms of the 10% 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 to be determined based on a formula to be agreed upon.
On March 2, 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 80% of the closing prices 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 shares. At the holders' election, interest can be
settled in common stock of the Company based on market prices.
Upon entering into the March 2, 1999 convertible debenture agreement, the
Company issued warrants to purchase 132,767 of common stock of the Company to
the holder of the debentures. 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. 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.
F-25
<PAGE> 70
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the incorporation in this Annual Report (Form 10-KSB) of
Futurelink Distribution Corp. (a Colorado corporation) (the "Company") of our
report dated March 18, 1999, with respect to the consolidated financial
statements of the Company for the year ended December 31, 1998.
Calgary, Canada /s/ ERNST & YOUNG LLP
April 9, 1998 Chartered Accountants
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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