<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
TO THE 1934 ACT REPORTING REQUIREMENTS
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ____________
Commission File No. 0-24833
FUTURELINK CORP.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
- --------------------------------------------------------------------------------
Delaware 95-4763404
- ------------------------------------ --------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
100, 6 Morgan, Irvine, California 92618
- --------------------------------------------------------------------------------
(Address of principal executive offices) (ZIP Code)
(949) 837-8252
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
---
The total number of shares of the Registrant's Common Stock outstanding as of
September 30, 1999 was 9,194,111
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE> 2
FUTURELINK CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1999 and 1998 and December 31, 1998 ............... 1
Consolidated Statements of Loss and Deficit and Comprehensive Loss for the nine month
and three month periods ended September 30, 1999 and 1998 ........................................ 2
Consolidated Statements of Change in Stockholders' Equity to September 30, 1999 and 1998 .......... 3
Consolidated Statements of Cash Flows for the nine month and three
month periods ended September 30, 1999 and 1998................................................... 5
Notes to Consolidated Financial Statements ........................................................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............. 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................................. 34
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................................... 35
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................... 36
ITEM 4. SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS.............................................. 36
ITEM 5. OTHER INFORMATION.................................................................................. 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................... 37
SIGNATURES ....................................................................................... 39
</TABLE>
<PAGE> 3
FUTURELINK CORP.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FUTURELINK CORP.
CONSOLIDATED BALANCE SHEETS
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
-------------------------------------
1999 1998 1998
$ $ $
----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT
Cash 7,814,600 68 6,651
Accounts receivable, net of $648,372
allowance for doubtful account 1,811,086 1,100,475 1,532,095
Prepaid expenses and other [note 8a] 1,259,624 74,167 116,220
Inventory and work in progress 68,844 25,880 22,205
Current portion of loan receivable [note 4] 1,018,750 -- --
----------- ---------- ----------
11,972,904 1,200,590 1,677,171
----------- ---------- ----------
CAPITAL ASSETS, NET OF $ 751,643 ACCUMULATED
DEPRECIATION 2,597,222 149,496 1,122,923
DEPOSITS ON ACQUISITIONS [note 2] 3,304,975 -- --
INVESTMENTS [note 3] -- 903,000 --
INTANGIBLE ASSETS, NET OF $ 2,088,652
ACCUMULATED AMORTIZATION 6,451,619 5,158,682 7,845,717
LOAN RECEIVABLE [note 4] 750,000 -- --
OTHER 58,375 -- --
----------- ---------- ----------
25,135,095 7,411,768 10,645,811
----------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Bank indebtedness [note 7] -- 564,754 819,217
Accounts payable and accrued liabilities 2,524,192 833,126 2,787,383
Deferred Revenues 50,000 -- --
Notes payable 137,500 -- 387,795
Due to related party -- 292,118 363,887
Interest payable 328,203 -- --
Capital lease obligations payable 37,962 -- 65,916
---------- ---------- ----------
3,077,857 1,689,998 4,424,198
---------- ---------- ----------
CAPITAL LEASE OBLIGATIONS PAYABLE 27,612 13,048 30,262
CONVERTIBLE DEBENTURES [note 5] 22,170,366 2,070,602 2,153,457
NOTES PAYABLE -- 381,033 --
DEFERRED TAXES 854,673 -- 1,211,634
---------- ---------- ----------
26,130,508 4,154,681 7,819,551
---------- ---------- ----------
MINORITY INTEREST -- -- (11,141)
COMMITMENTS AND CONTINGENCIES [notes 8 AND 9]
STOCKHOLDERS' EQUITY
Authorized
5,000,000 preferred shares without par value
100,000,000 common shares with par value of $0.0001
Issued and paid-up 9,194,111, 4,083,615 and 4,908,072 3,401 2,042 2,018
shares issued and outstanding at September 30, 1999,
September 30, 1998 and December 31, 1998, respectively
To be issued -- 732,706 50,000
Exchangeable shares -- -- 2,550,000
Capital in excess of par value 13,847,351 7,133,899 6,437,640
Contributed surplus 14,636,300 1,205,357 1,224,668
Cumulative translation adjustment (183,107) -- (96,468)
Deficit (29,299,358) (5,816,917) (7,330,457)
----------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY/(DEFICIENCY) (995,413) 3,257,087 2,837,401
----------- ---------- ----------
25,135,095 7,411,768 10,645,811
----------- ---------- ----------
</TABLE>
See accompanying notes
1
<PAGE> 4
FUTURELINK CORP.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT AND COMPREHENSIVE LOSS
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
3 MONTH PERIOD ENDED 9 MONTH PERIOD ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ -------------------------
1999 1998 1999 1998
$ $ $ $
----------- ----------- ----------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE 1,581,642 622,854 5,036,715 622,854
----------- ---------- ----------- ----------
EXPENSES
Hardware and software purchases 510,761 143,991 1,332,891 143,991
Contracts, payroll and benefits 2,236,508 2,527,457 5,460,470 2,527,457
Accounting and legal 184,737 5,351 331,584 45,509
Consulting expenses 996,946 -- 1,888,185 --
Advertising and promotion 743,819 -- 1,002,704 --
General and administrative and other 1,217,061 50,190 2,798,564 81,108
Bad debt expense 417,332 -- 509,836 --
Provision for inventory valuation 95,393 -- 95,393 --
----------- ---------- ----------- ----------
Loss before interest, taxes, depreciation,
and amortization (4,820,915) (2,104,135) (8,382,912) (2,175,211)
----------- ---------- ----------- ----------
Interest expense 473,139 1,232,912 7,879,282 1,232,912
Amortization of deferred financing fees and
debt discount 1,868,465 -- 3,334,982 --
Depreciation 172,012 6,396 522,262 6,396
Amortization of intangible assets 460,515 160,460 1,421,035 160,460
----------- ---------- ----------- ----------
Loss from operations (7,795,046) (3,503,903) (21,540,473) (3,574,979)
----------- ---------- ----------- ----------
Interest Income 59,164 -- 59,164 --
Extinguishment of debt [note 5a] -- -- (844,552) --
Equity in loss of affiliate [note 3a] -- (395,963) -- (807,279)
----------- ---------- ----------- ----------
59,164 (395,963) (785,388) (807,279)
----------- ---------- ----------- ----------
LOSS BEFORE INCOME TAXES (7,735,882) (3,899,866) (22,325,861) (4,382,258)
Deferred tax benefit 118,987 15,504 356,960 15,504
----------- ---------- ----------- ----------
NET LOSS FOR THE PERIOD (7,616,895) (3,884,362) (21,968,901) (4,366,754)
OTHER COMPREHENSIVE INCOME/(LOSS)
Foreign currency translation adjustment (27,143) -- 86,639 --
----------- ---------- ----------- ----------
COMPREHENSIVE LOSS (7,644,038) (3,884,362) (21,882,262) (4,366,754)
----------- ---------- ----------- ----------
DEFICIT, BEGINNING OF PERIOD (21,682,463) (1,932,555) (7,330,457) (1,450,163)
DEFICIT, END OF PERIOD (29,299,358) (5,816,917) (29,299,358) (5,816,917)
----------- ---------- ----------- ----------
LOSS PER COMMON SHARE $ (1.00) $ (0.79) $ (3.36) $ (1.61)
----------- ---------- ----------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 7,594,083 3,059,686 6,534,575 2,715,793
----------- ---------- ----------- ----------
</TABLE>
The above statement gives retroactive effect to share consolidations of 5 to 1
on June 1, 1999.
See accompanying notes
2
<PAGE> 5
FUTURELINK CORP.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
(UNAUDITED) COMMON STOCK TO BE ISSUED
SHARES $ SHARES
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 2,040,700 1,020 --
Issuance of shares on acquisition of 46% of FutureLink Alberta [note 3a] 308,000 154 --
Issuance of share capital for cash 51,163 26 --
Issuance of share capital to employees, officers and directors of the company 700,000 350 --
Shares issued upon conversion of convertible debt 133,752 67 --
Issuance of exchangeable shares on acquisition of SysGold [note 3b] 850,000 -- --
BALANCE SEPTEMBER 30, 1998 4,083,615 1,617 --
Shares issued on conversion of loan 225,448 113 --
Issuance of shares on acquisition of 50.4% of FutureLink Alberta [note 3a] 334,755 167 --
Shares issued upon conversion of convertible debt 241,203 121 --
Shares to be issued for services 23,051 -- 50,000
------------- -------- -------------
BALANCE, DECEMBER 31, 1998 4,908,072 2,018 50,000
- -------------------------- ------------- -------- -------------
</TABLE>
<TABLE>
<CAPTION>
CAPITAL IN EXCESS OF
(UNAUDITED) EXCHANGEABLE SHARES PAR
$ $
------------------- ----------------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1997 -- 1,425,211
Issuance of shares on acquisition of 46% of FutureLink Alberta [note 3a] -- 338,646
Forgiveness of stockholder debt -- 60,200
Issuance of share capital for cash -- 846,774
Forgiveness of stockholder debt -- 10,125
Issuance of share capital to employees, officers and directors of the company -- 2,117,150
Shares issued upon conversion of convertible debt -- 201,632
Share issue costs -- (81,889)
Financing fees associated with converted debentures -- (44,525)
BALANCE SEPTEMBER 30, 1998 2,550,000 --
Shares issued on conversion of loan -- 732,538
Issuance of shares on acquisition of 50.4% of FutureLink Alberta [note 3a] -- 663,960
Shares issued upon conversion of convertible debt -- 304,921
Shares to be issued for services -- --
Shares issue costs -- (137,103)
------------------- --------------------
BALANCE, DECEMBER 31, 1998 2,550,000 6,437,640
- -------------------------- ------------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
SHARE PURCHASE
(UNAUDITED) CONTRIBUTED SURPLUS WARRANTS
$ SHARES
---------------------- ---------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1997 -- --
Issuance of share capital for cash -- 51,163
Warrants issued with issuance of convertible debentures [note 5a] 562,500 208,334
Equity component of convertible debentures [note 5a] 777,143 --
Equity component of financing fees (75,600) --
Equity component of financing fees (39,375) --
BALANCE SEPTEMBER 30, 1998 -- 259,497
Shares issued on conversion of loan -- 225,448
----------- -------------
BALANCE, DECEMBER 31, 1998 1,224,668 484,945
- -------------------------- ----------- -------------
</TABLE>
3
<PAGE> 6
FUTURELINK CORP.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
(UNAUDITED) COMMON STOCK TO BE ISSUED
----------------- ------------
SHARES $ SHARES
--------- ------ ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 4,908,072 2,018 50,000
Additional shares due to rounding on common share reverse split 227 -- --
Shares issued on conversion of convertible debt [note 5a] 1,197,054 599 --
Issuance of shares on 3.6% acquisition of FutureLink Alberta [note 3a] 23,500 12 --
Issuance of common stock for services 41,652 32 (50,000)
Issuance of common stock relating to exchange of exchangeable shares on
acquisition of SysGold in 1998 [note 3b] -- 424 --
Issuance of common stock for interest [note 5a] 36,706 18 --
Exercise of employee stock options 27,500 3 --
Shares issued on conversion of 8% convertible debt and accrued interest [note 6b] 355,836 36 --
Shares issued on conversion of 10% convertible debt and accrued interest [note 6a] 27,431 2 --
Shares issued on conversion of convertible debt [note 5c] 2,291,221 229 --
Exercise of warrants [note 5a] 52,083 5 --
Shares issued under loan agreement [note 4] 232,829 23 --
--------- ------ -----------
BALANCE, SEPTEMBER 30, 1999 9,194,111 3,401 --
- --------------------------- --------- ------ -----------
</TABLE>
<TABLE>
<CAPTION>
CAPITAL IN EXCESS
(UNAUDITED) EXCHANGEABLE SHARES OF PAR
$ $
------------------ -------------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1998 2,550,000 6,437,640
Shares issued on conversion of convertible debt [note 5a] -- 1,560,887
Financing fees associated with converted debentures -- (96,834)
Discount associated with converted debentures -- (26,747)
Issuance of shares on 3.6% acquisition of FutureLink Alberta [note 3a] -- 42,288
Issuance of common stock for services -- 124,968
Issuance of common stock relating to exchange of exchangeable shares on
acquisition of FL/SysGold in 1998 [note 3b] (2,550,000) 2,549,576
Issuance of common stock for interest [note 5a] -- 76,347
Exercise of employee stock options -- 100,622
Shares issued on conversion of 8% convertible debt and accrued interest [note 6b] -- 537,278
Financing fees and debt discount associated with converted debentures -- (38,619)
Shares issued on conversion of 10% convertible debt and accrued interest [note 6a -- 55,125
Shares issued on conversion of convertible debt [note 5c] -- 2,302,244
Financing fees and debt discount associated with converted debentures -- (444,673)
Exercise of warrants [note 5a] -- 65,099
Shares issued under loan agreement [note 4] -- 1,999,977
Finance fees associated with convertible debt issuance [note 5b] -- 1,392,592
Share issue costs -- (5,262)
------------------ -------------------
BALANCE, SEPTEMBER 30, 1999 -- 13,847,324
- --------------------------- ------------------ -------------------
</TABLE>
<TABLE>
<CAPTION>
SHARE PURCHASE
(UNAUDITED) CONTRIBUTED SURPLUS WARRANTS
------------------- --------------------
$ SHARES
------------------ --------------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1998 1,224,668 484,945
Equity components of 10% convertible debentures [note 5a] 911,990 --
Warrants issued with issuance of convertible debentures [note 5a] 129,500 129,534
Equity component of financing fees (91,194) --
Warrants issued with issuance of 10% convertible debentures [note 6b] 20,000 150,621
Equity component of 8% convertible debentures [note 6b] 125,000 --
Warrants issued with issuance of 8% convertible debentures [note 6b] 35,847 26,553
Warrants issued with issuance of convertible debentures under amended agreement
[note 5a] 1,200,000 862,132
Equity component of 10% convertible debentures under amended agreement
[note 5a] 1,015,000 --
Warrants issued with issuance of 8% senior subordinated convertible promissory
notes [note 5c] 3,126,620 4,019,250
Equity component of 8% senior subordinated convertible promissory notes
[note 5c] 4,911,880 --
Warrants issued as placement fee on issuance of 8% senior subordinated
convertible promissory note [note 5c] 1,800,000 2,000,000
Placement fee attributable to equity component of 8% senior subordinated
convertible promissory notes [note 5c] (1,800,000) --
Warrants issued for advisory services [note 8] 1,800,000 2,000,000
Warrants issued for advisory services [note 8] 40,320 45,600
Warrants issued for advisory services [note 8] 228,950 95,000
Finance fees attributable to equity component of 8% senior subordinated
convertible promissory notes [note 5c] (159,722) --
Equity component of 10% convertible debentures [note 5d] 79,821 --
Warrants issued with issuance of 10% convertible debentures [note 5d] 41,800 44,505
Financing fees associated with 10% convertible debentures [note 5d] (4,180) --
Exercise of warrants [note 5a] -- (52,083)
Shares issued under loan agreement [note 4] -- --
Issuance of 8% senior subordinated convertible promissory notes [note 5b] -- 2,475,000
------------------ --------------------
BALANCE, SEPTEMBER 30, 1999 14,636,300 12,281,057
------------------ --------------------
</TABLE>
4
<PAGE> 7
FUTURELINK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (All amounts
stated in $U.S.)
<TABLE>
<CAPTION>
3 MONTH PERIOD ENDED 9 MONTH PERIOD ENDED
(UNAUDITED) SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
1999 1998 1999 1998
$ $ $ $
---------- --------- ----------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss for the period (7,616,895) (3,884,362) (21,968,901) (4,366,754)
Adjustments to reconcile net loss to net cash provided by
operating activities
Equity in loss of affiliate [note 3b] -- 395,963 -- 807,279
Non cash interest expense 86,374 1,205,357 7,321,543 1,205,357
Non cash consulting expense -- -- 125,000 --
Non cash expenses included with contracts, payroll and
benefits expense -- 2,114,000 -- 2,114,000
Depreciation 172,012 166,856 522,262 6,396
Amortization of deferred financing fees and debt discount 1,868,465 -- 3,334,982 --
Amortization of intangible assets 460,515 -- 1,421,035 160,460
Forgiveness of loan 250,000 -- 250,000 --
Extinguishment of debt -- -- 432,952 --
Other 51,545 -- (13,391) --
Deferred tax recovery (118,987) -- (356,961) --
---------- --------- ----------- ----------
(4,846,971) (2,186) (8,931,479) (73,262)
Changes in non-cash working capital 1,916,185 (572,888) 651,487 (571,839)
Other (58,376) -- (58,376) --
---------- --------- ----------- ----------
Net cash flows used in operating activities (2,989,162) (575,074) (8,338,368) (645,101)
---------- --------- ----------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Advances to FutureLink Distribution Corp. (Alberta) -- (353,104) -- (1,694,879)
Capital assets purchased (478,711) (20,266) (2,022,488) (20,266)
Cash advances to equity investee [note 3] -- (2,019,149) -- (2,019,149)
Proposed acquisitions [note 2] (2,084,786) -- (3,304,975) --
Other -- -- (125,193) --
Changes in non-cash working capital 38,527 -- (250,924) --
---------- --------- ----------- ----------
Net cash flows used in investing activities (2,524,970) (2,392,519) (5,703,580) (3,734,294)
---------- --------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received/(paid) under demand credit facility (638,945) 564,754 (819,217) 564,754
Issuance of common stock -- -- -- 764,885
Exercise of employee stock options 98,825 -- 100,625 --
Exercise of warrants 65,104 -- 65,104 --
Share issue costs -- -- (5,262) --
Repayment of capital lease obligations (12,900) -- (30,604) --
Issuance of 8% convertible debentures net of issue costs -- -- 2,925,000 --
[note 5a]
Repayment of 8% convertible debentures [note 5a] -- -- (1,470,000) --
Repayment of 10% convertible debentures [note 6a] -- -- (218,725) --
Issuance of 8% senior subordinated convertible debentures net
of issue costs [note 5c] -- -- 7,258,327 --
Issuance of 8% senior subordinated convertible debentures net
of issue costs [note 5b] 13,607,408 -- 13,607,408 --
Issuance of 10% convertible debentures net of issue costs -- 2,025,000 247,500 2,025,000
[note 5d]
Issuance of 8% convertible debentures net of issue costs -- -- 490,000 --
[note 6b)
Issuance of note payable net of issue costs -- -- 125,000 --
Issuance of promissory note -- -- 150,000 --
Repayment of promissory note -- -- (150,000) --
Repayment of note payable -- -- (381,033) --
Other financing fees (48,311) -- (137,311) --
Advances from stockholders -- 377,907 -- 1,024,824
Changes in non-cash working capital -- -- 93,085 --
---------- --------- ----------- ----------
Net cash flows received from financing activities 13,071,181 2,967,661 21,849,897 4,379,463
---------- --------- ----------- ----------
INCREASE IN CASH 7,557,049 68 7,807,949 68
Cash, beginning of period 257,551 -- 6,651 --
---------- --------- ----------- ----------
CASH, END OF PERIOD 7,814,600 68 7,814,600 68
---------- --------- ----------- ----------
</TABLE>
See accompanying notes
5
<PAGE> 8
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements reflect all adjustments which are, in the
opinion of management, necessary to reflect a fair presentation for the periods
being presented.
The following notes to the financial statements give retroactive effect to the
reverse stock split of 5 to 1 on June 1, 1999.
2. PROPOSED ACQUISITIONS
As at September 30, 1999, the Company paid the following amounts relating to
deposits and acquisition costs on the proposed acquisitions of Executive LAN
Management, Inc. ("Micro Visions"), CN Networks, Inc. ("CNI"), and Async
Technologies, Inc. ("Async"):
<TABLE>
<CAPTION>
Deposit Acquisition Costs Total
$ $ $
---------- ----------------- ---------
<S> <C> <C> <C>
Micro Visions 2,000,000 268,235 2,268,235
CNI 390,000 20,665 410,665
Async 600,000 26,075 626,075
---------- ----------------- ---------
$2,990,000 314,975 3,304,975
---------- ----------------- ---------
</TABLE>
A) PROPOSED ACQUISITION OF MICRO VISIONS
On June 2, 1999, the Company signed an Agreement and Plan of Reorganization and
Merger with Micro Visions. The agreement provided for a merger of the Company
with Micro Visions such that all of Micro Visions' outstanding stock shall be
sold to the Company in exchange for $12,000,000 cash and 6,000,000 common
shares, as well as contingent consideration of 2,400,000 common shares subject
to the achievement of certain targets. On October 15, 1999 all conditions set
forth in the Agreement had been satisfied or waived and the merger was
completed.
The additional share consideration is based upon the achievement of the
following performance criteria as described in the agreement for the period from
January 1, 1999 to December 31, 1999 of which items ii) and iii) have been
achieved thus far
i) 1,200,000 common shares to be issued if Micro Visions achieves sales in
excess of $18,000,000;
ii) 720,000 common shares to be issued if Micro Visions enlists 100 new
customers; and
iii) 480,000 common shares to be issued if Micro Visions installs and
integrates at least 200 new servers.
Upon signing the agreement, a deposit of $1,000,000 was paid by the Company for
the purchase of Micro Visions. As per the agreement, a further $500,000
deposit was paid on each of July 31, 1999, and August 31, 1999.
The Company has incurred costs relating to this proposed acquisition of
$268,235 to September 30, 1999.
6
<PAGE> 9
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
The acquisition will be accounted for by the purchase method. The purchase
price will be allocated to the net assets acquired based on their estimated
fair values. As at September 30, 1999, the purchase allocation would be as
follows:
<TABLE>
<CAPTION>
$
----------
<S> <C>
NET ASSETS ACQUIRED
Working capital deficiency (454,713)
Capital and other assets 1,063,831
Goodwill 51,815,555
----------
NET ASSETS ACQUIRED 52,424,673
==========
CONSIDERATION:
Cash 12,000,000
Common shares 40,049,673
Estimated acquisition costs 375,000
----------
52,424,673
==========
</TABLE>
The amounts referred to in ii) and iii) above have been achieved and this
additional consideration has been recorded as part of the purchase price
allocation. The remaining consideration has not been reflected, as the outcome
of the contingency cannot be reasonably determined at this time. The additional
share consideration will be recorded as additional purchase price consideration
(goodwill) if and when it becomes payable.
On October 15, 1999, the acquisition was completed. 7,200,000 shares were
issued including 6,000,000 purchase shares, 1,200,000 performance shares (refer
to ii) and iii)), and the remaining $10,000,000 cash was paid.
B) PROPOSED ACQUISITION OF CNI
On September 7, 1999, the Company entered into an Agreement and Plan of
Reorganization and Merger with CNI. The Agreement provides for a merger of CNI
with the Company such that all of CNI's outstanding stock shall be sold to the
Company in exchange for $3,900,000 cash and 1,181,816 common shares. On
November 5, 1999 all conditions set forth in the Agreement had been satisfied or
waived and the merger was completed.
Upon signing the agreement, a deposit of $390,000 was paid by the Company for
the purchase of CNI.
The Company has incurred costs relating to this proposed acquisition of $20,664
to September 30, 1999.
The acquisition will be accounted for by the purchase method. The purchase
price will be allocated to the net assets acquired based on their estimated
fair values. As at November 5, 1999, the date of close, the purchase
allocation would be as follows:
7
<PAGE> 10
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
$
----------
<S> <C>
NET ASSETS ACQUIRED
Working capital 444,126
Capital and other assets 76,626
Goodwill 13,004,248
----------
NET ASSETS ACQUIRED 13,525,000
==========
CONSIDERATION:
Cash 3,900,000
Common shares of FutureLink 9,100,000
Estimated acquisition costs 525,000
----------
13,525,000
==========
</TABLE>
On November 5, 1999, the acquisition was completed; 1,181,816 shares were issued
and the remaining $3,510,000 cash was paid.
C) PROPOSED ACQUISITION OF ASYNC
On September 7, 1999, FutureLink entered into an Agreement and Plan of
Reorganization and Merger with Async and Async Technical Institute, Inc.
("ATII"). The Agreement provides for an initial merger between Async and ATII,
with Async being the surviving entity, and then a subsequent merger of Async
with the Company such that Async's outstanding stock shall be sold to the
Company in exchange for $6,000,000 cash and 1,298,705 common shares. The merger
is to take place after all conditions are satisfied and is to be no later than
November 30, 1999.
Upon signing the agreement, a deposit of $600,000 was paid by the Company for
the purchase of Async.
The Company has incurred costs relating to this proposed acquisition of $26,075
to September 30, 1999.
The acquisition, upon completion will be accounted for by the purchase method.
The purchase price will be allocated to the net assets acquired based on their
estimated fair values. As at September 30, 1999, the purchase allocation would
be as follows:
8
<PAGE> 11
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
$
----------
<S> <C>
NET ASSETS ACQUIRED
Working capital deficiency (331,424)
Capital and other assets 135,077
Goodwill 16,721,347
----------
NET ASSETS ACQUIRED 16,525,000
==========
CONSIDERATION:
Cash 6,000,000
Common shares 10,000,000
Estimated acquisition costs 525,000
----------
16,525,000
==========
</TABLE>
The pro forma third party revenues for the nine month period ended September 30,
1999 including the Company, Micro Visions and CNI are $27,302,000.
9
<PAGE> 12
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
3. INVESTMENTS
A) FUTURELINK DISTRIBUTION CORP. (ALBERTA)
On January 20, 1998 the Company issued 308,000 common shares in exchange for
1,540,000 common shares (46%) of FutureLink Alberta. The total value ascribed
to the investment was $15,400.
As at September 30, 1998, the Company had advanced FutureLink Alberta
$1,694,879. This amount was non-interest bearing and had no repayment terms.
The Company's investment in FutureLink Alberta at September 30, 1998 was as
follows:
<TABLE>
<CAPTION>
$
---------
<S> <C>
308,000 common shares 15,400
Advances to equity investee 1,694,879
Equity loss in investee (807,279)
---------
903,000
=========
</TABLE>
Effective November 23, 1998, the Company issued 334,755 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 334,755
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 were as follows:
<TABLE>
<CAPTION>
$
---------
<S> <C>
NET ASSETS ACQUIRED
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 losses accounted for using the equity method, were $860,131. The
Company's share in FutureLink Alberta's losses for the three and nine month
periods ended September 30, 1998 were $395,963 and $807,279, respectively.
FutureLink Alberta was consolidated from November 24, 1998 to December 31, 1998.
10
<PAGE> 13
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
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 through the issuance of 23,500 common shares.
B) RIVERVIEW MANAGEMENT CORPORATION
Effective August 24, 1998, the Company acquired all of the outstanding shares of
Riverview Management Corporation ("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 $381,033 ($585,000 Canadian)
payable on demand on or before 90 days after August 24, 1998, and 850,000
exchangeable common shares of the Company with an ascribed value of $2,550,000.
The common shares issued are exchangeable shares in SysGold which are
convertible at any time into shares of the Company on a one to one basis. The
acquisition was accounted for using the purchase method. Net assets acquired
were 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. During 1999, these
notes were paid in full and the 850,000 exchangeable shares were exchanged
for common shares.
The results of operations for FL/SysGold are consolidated as of August 24,
1998.
4. LOAN RECEIVABLE
On August 1, 1999, the Company entered into an agreement with an executive of
the Company. In accordance with the terms of the agreement, the Company loaned
$2,000,000 to the executive which was then used by the executive to purchase
232,829 common shares of the Company. The common stock are escrowed. On October
1, 1999, 29,129 shares were released from escrow. An additional 29,100 shares
will be released from escrow on a quarterly basis commencing January 1, 2000.
So long as the executive remains employed by the Company, $250,000 of the
principal amount of the loan shall be forgiven on a quarterly basis, commencing
on October 1, 1999.
The loan bears interest at 5.625% per year. Interest is payable annually on
each anniversary date of August 1; however should the executive be employed at
the end of each annual period, the interest will be forgiven at such time.
Interest earned by the Company for both the three and nine month period ended
September 30, 1999 was $18,750.
During the three month and nine month periods ending September 30, 1999, the
Company recognized $250,000 as salary expense relating to the services received
from the employee in relation to the loan agreement.
11
<PAGE> 14
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
5. CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 December 31, 1998
$ $
------------------ -----------------
<S> <C> <C>
LONG TERM
10% TK convertible debentures (a) 1,678,344 2,153,457
8% Senior subordinated convertible
promissory notes (b) 15,000,000 -
8% Senior subordinated convertible
promissory notes (c) 5,259,043 -
8% convertible debentures (d) 232,979 -
------------------ -----------------
22,170,366 2,153,457
------------------ -----------------
</TABLE>
A) 10% TK CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 December 31, 1998
$ $
----------------- ----------------
<S> <C> <C>
Principal 2,500,000 2,220,000
Discount on debt (977,830) -
Deferred financing fee - (222,073)
Accrued interest 156,174 155,530
----------------- ----------------
NET BALANCE AT SEPTEMBER 30, 1999 1,678,344 2,153,457
----------------- ----------------
</TABLE>
During 1998 the Company entered into a 10% convertible debenture agreement with
Thomson Kernaghan & Co. Ltd. as agent, to provide up to $5,000,000 of financing.
The financing included the issuance of 208,334 share purchase warrants. In
February, 1999 the company amended the terms of the 10% TK convertible
debentures which increased the total financing from $5,000,000 to $6,000,0000.
An additional 129,534 warrants were also issued which were recorded to
contributed surplus at a value of $129,500 based on the fair value of the
warrants.
Of the total principal amount of the debentures of $6,000,000, a total of
$1,689,133 has been attributed to the intrinsic value of the conversion option.
Of this amount, $911,990 relates to debentures received during the nine months
to September 30, 1999. The amount attributed to the conversion option has been
included in interest on long term debt as the conversion option was exercisable
upon issuance.
During 1999, $1,500,000 of the convertible debentures, together with $61,486 of
accrued interested, were converted into 1,197,054 common shares.
On April 26, 1999, the Company amended the terms of the 10% TK convertible
debenture agreement. The amendment supersedes all prior amendments.
Previously the debenture holders had the right to convert the debentures at a
price equal to the lower of $3.75 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. Under the terms of the amendment, the debenture
conversion price was fixed at $1.00 per common share. In addition, the common
share purchase warrants of 208,334 and 129,534 issued under prior agreements
were repriced such that their exercise price became $1.25 per common share.
The Company also issued an additional 862,132 share purchase warrants at an
exercise price of $1.25 per common share such that a total of 1,200,000 share
purchase warrants are outstanding relating to this convertible debenture
agreement. In addition, the Company paid $1,881,600 as consideration for the
cancellation of $1,470,000 of the principal balance such that $2,500,000 of the
convertible debentures remain outstanding.
12
<PAGE> 15
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
During the nine month period ended September 30, 1999, an amount of $844,552 has
been recorded as a loss on extinguishment of debt and includes $259,318
unamortized finance fees and $173,634 unamortized debt discount associated with
the prior debt, as well as $411,600 relating to the cost of settling $1,470,000
of debt. In addition, an amount of $1,015,000 attributable to the intrinsic
value of the conversion feature of the amended debt has been included as
interest expense with a corresponding credit to contributed surplus as the
conversion option was exercisable upon issuance.
An amount of $1,200,000 has been included in contributed surplus as the
estimated value attributed to the 1,200,000 warrants as they were exercisable
upon issuance. The amount is being amortized over the remaining life of the
debentures of which $221,170 has been amortized to September 30, 1999. The
warrants expire August 20, 2001.
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. During the nine month
period ended September 30, 1999, the Company issued 36,706 shares as payment for
$76,365 of accrued interest.
During the three month period ended September 30, 1999, 52,083 common shares
were issued on the exercise of 52,083 warrants.
B) 8% SENIOR SUBORDINATED CONVERTIBLE PROMISSORY NOTES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
$
------------------
<S> <C>
Principal 15,000,000
------------------
NET BALANCE AT SEPTEMBER 30, 1999 15,000,000
------------------
</TABLE>
On July 27, 1999, the Company completed a closing of 8% senior subordinated
convertible promissory notes and warrants for gross proceeds of $15,000,000.
The Notes are due on the earlier of (i) July 19, 2001; (ii) the consummation of
a public offering of the Company's securities; (iii) the completion of a
private placement resulting in gross proceeds of at least $15,000,000; and (iv)
the consummation of a merger, combination or the sale of substantially all of
the Company's assets, or the purchase by a single entity or person of more than
50% of the Company's voting stock. The Notes are convertible into common stock
at an exercise price of $8.50 per common share. However, if prior to maturity,
the Company completes a private placement of debt or equity securities
resulting in gross proceeds of $15,000,000, and the terms of this subsequent
placement are acceptable to the agent and the noteholders, the Notes will
automatically convert as payment for an investment into the securities sold in
the subsequent conversion, and will be converted at the same price and terms as
that private placement.
Interest on the Notes is payable semi-annually commencing January 31, 2000.
In addition, 2,250,000 warrants were issued to note holders to purchase common
stock at an exercise price of $8.50 per common share. The warrants are
exercisable until July 27, 2001; however, they are callable at the option of
the Company on 30 days' notice if (i) the average closing bid price of the
Company's common stock for 20 consecutive trading days exceeds $17 and (ii) a
registration statement covering the warrant shares has been declared effective
by the Securities and Exchange Commission.
13
<PAGE> 16
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
The Company paid $1,350,000 cash and issued 225,000 warrants to the placement
agent as a finance fee. These warrants are exercisable at $8.50 per share and
expire July 27, 2001. Additional issue costs of $42,592 were incurred.
The 2,475,000 warrants issued under this offering were recorded as a component
of equity since the notes will automatically convert into the securities of a
subsequent offering. Accordingly, a net amount of nil has been recorded to
capital in excess of par.
Subsequent to September 30, 1999, the $15,000,000 promissory notes converted
into, and thereby obtained the same terms and conditions as that of a subsequent
private equity offering. As a result, the notes converted into 2,727,273 common
shares at $5.50 per share. In addition, an additional 711,818 warrants were
issued to former noteholders at an exercise price of $8.50 per share.
C) 8% SENIOR SUBORDINATED CONVERTIBLE PROMISSORY NOTES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
$
------------------
<S> <C>
Principal 5,736,000
Discount on debt (383,164)
Deferred financing fee (93,793)
------------------
NET BALANCE AT SEPTEMBER 30, 1999 5,259,043
------------------
</TABLE>
On May 7, 1999, the Company completed $8,038,500 financing of 8% senior
subordinated convertible promissory notes. The notes are due April 30, 2000,
however maturity may be extended by up to one year at the option of the
placement agent. Interest is payable quarterly from April 30, 1999. The
notes are convertible at the option of the note holders at a conversion price
of $1.00 per share (except those issued to management and directors, see
below). The notes will automatically convert in the event the Company raises
gross proceeds from a subsequent offering of at least $10,000,000, at a
valuation in excess of the greater of (i) double the average closing bid price
of the Company's common stock for the 10 trading days immediately preceding the
initial closing date; or (ii) $1.00 per common share. Such conversion is
conditioned upon the common stock underlying the notes being registered at the
time of conversion.
Of the total $8,038,500 notes issued, management and directors of the Company
purchased $433,000. The notes are convertible at a conversion price of $1.50
per share, subject to a 12 month lock up provision.
An amount of $4,911,880 has been attributed to the intrinsic value of the
conversion option and has been included in contributed surplus.
An amount of $3,195,848 has been included as a discount on debt and is being
amortized over the estimated life of the debt of six months.
Upon entering into the agreement, the Company issued warrants to purchase
3,802,750 of common stock to the external holders of the debentures and 216,500
of common stock to directors and management of the Company. Common stock can be
purchased at $1.25 per share by external holders and at $1.50 per share by
directors and management. The warrants expire on April 29, 2006 but may be
redeemed at the option of the Company on 30 days' notice at a redemption price
of $1.25 per warrant provided (i) a registration statement is declared effective
by the Securities and Exchange Commission; and (ii) the average closing bid
price of the
14
<PAGE> 17
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
Company's common stock for 15 consecutive trading days exceeds $7.50. An
amount of $3,126,620 has been included in contributed surplus as the estimated
value of the warrants.
In addition, 2,000,000 warrants at an exercise price of $1.25 per common share
were provided to the agent as a placement fee. An amount of $1,800,000 has
been attributed to the value of the warrants and has been recorded to
contributed surplus. The placement fee is attributable to the equity portion
of the debt and therefore this issue cost has also been recorded as a charge
against contributed surplus. The warrants are exercisable at $1.25 per share
and expire on April 29, 2006.
On August 20, 1999, $2,302,500 of the convertible promissory notes were
converted into 2,291,221 common shares.
Subsequent to September 30, 1999, $5,090,500 notes were converted into 5,988,824
common shares. In addition, a further 269,556 common shares were issued to
those noteholders which had converted on August 20, 1999 due to the notes having
anti-dilution provisions. The subsequent issuance of securities at terms and
conditions preferential to that of the promissory notes resulted in the
additional common shares. These anti-dilution privileges also resulted in the
remaining $645,500 unconverted notes having a conversion price of $0.89 for
noteholders and $1.34 for management.
D) 10% CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
$
------------------
<S> <C>
Principal 278,164
Discount on debt (36,180)
Deferred financing fee (20,209)
Accrued interest 11,204
------------------
NET BALANCE AT SEPTEMBER 30, 1999 232,979
==================
</TABLE>
During the first quarter of 1999, the Company issued a $275,000 promissory
note. Effective May 7, 1999, the Company entered into an agreement which
converted the promissory note and $3,160 accrued interest into a 10%
convertible debenture. The holder of the convertible debenture has the right to
convert the debenture at $1.15 per common share. The Company may prepay upon
30 days advance notice. The note matures on April 20, 2002. At the
noteholders' option, interest can be paid in stock at $1.15 per share.
Interest is otherwise due at maturity.
An amount of $79,821 has been attributed to the intrinsic value of the
conversion options and has been included in contributed surplus.
Upon entering into the 10% convertible debenture agreement, the Company issued
warrants to purchase 44,505 of common stock of the Company to the holder of the
debenture. Common stock can be purchased at $1.25 per share. The warrants
expire April 30, 2001. An amount of $41,800 has been included in contributed
surplus as the estimated value of the warrants.
The Company also paid a 10% financing fee on the original $275,000. The value
of the fees associated with the equity component of the 10% convertible
debentures in the amount of $4,180 has been charged to contributed surplus.
The remaining amount is being amortized over the life of the debentures.
15
<PAGE> 18
\
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
6. SHARE CAPITAL
ISSUED
A) During the first quarter of 1999 the Company issued $301,241 10%
convertible debentures, due on June 30, 1999 in exchange for stockholders
advances of $289,264 ($440,000 Canadian) including interest existing at
December 31, 1998.
Upon entering into the convertible debenture agreement, the Company
issued 150,621 common share purchase warrants to the holders of the
debentures. Each warrant gives the holder the right to purchase one common
share of the Company for $2.00 per share on or before February 22, 2000, for
$3.00 per share between February 23, 2000 and February 22, 2001 and $4.00
per share between February 23, 2001 and February 22, 2002. An amount of
$20,000 has been included in contributed surplus as the estimated value
attributed to the 150,621 warrants.
During the second quarter of 1999, the Company repaid $218,725 of the
principal amount. In addition, $3,867 of accrued interest was forgiven by a
noteholder. During the third quarter, $34,055 of principal and interest was
repaid and $55,128 of principal and interest was converted into 27,431 common
shares such that the full principal and interest relating to the note has
been settled.
B) During the first quarter of 1999, the Company issued an aggregate of $500,000
8% convertible debentures, due February 28, 2002. An amount of $125,000 has
been attributed to the intrinsic value of the conversion option and has been
included in contributed surplus.
Upon entering into the 8% convertible debenture agreement, the Company issued
warrants to purchase 26,553 of common stock of the Company to the holder of
the debentures. Common stock can be purchased at $1.88 per share. The
warrants expire on February 28, 2001. An amount of $35,847 has been included
in contributed surplus as the estimated value of the warrants.
The Company paid a finance fee of $10,000 which had been amortized over the
life of the convertible debentures.
On August 21, 1999, $500,000 of principal and $37,314 of interest and other
fees were converted into 355,836 common shares.
7. BANK INDEBTEDNESS
A subsidiary of the Company has a demand credit facility with a Canadian
chartered bank for $2,100,000 Canadian for which the Company has provided a
guarantee and postponement of claim. The facility provides for a first floating
charge over all assets of the subsidiary as well as an assignment of the shares
of the subsidiary. Interest on the facility is based on a range of the bank's
prime rate plus 1% to the bank's prime rate plus 3% depending on the
subsidiary`s debt to equity ratio.
16
<PAGE> 19
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
8. COMMITMENTS
A) On May 1, 1999 the Company entered into an agreement in which the Company
retained an advisor for a period of one year. Compensation for the
services received under the agreement include payment of $5,000 per month
and issuance of 2,000,001 warrants exercisable at $1.25 per common share.
An amount of $1,800,000 has been included in contributed surplus as the
estimated value of the warrants. The issuance of the warrants has been
recorded as a prepaid expense and is being amortized over the life of the
agreement.
B) On April 1, 1999 the Company issued 45,600 warrants relating to an
agreement which provides for advisory services to the Company for a period
of one year commencing December 1, 1998. An amount of $40,320 has been
included in contributed surplus as the estimated value of the warrants. The
warrants are exercisable at $2.35 per common share and expire on December
31, 2001. In addition, 95,000 warrants were issued to the advisor as
compensation for services rendered relating to certain financing
transactions. An amount of $228,950 has been included in contributed
surplus as the estimated value of the warrants. Of this amount, $159,722
has been charged to contributed surplus as the amount attributable to the
equity component of the related financing. The balance has been recorded
as a deferred financing fee against the related debt. These warrants are
exercisable at $4.00 per common share and expire on April 29, 2002.
9. CONTINGENCIES
A) A statement of claim has been filed against the Company in the amount of
approximately $340,000 ($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 of
the Company whereby such former principal directs the action on behalf of
the Company, bears the costs of legal counsel and agrees to indemnify the
Company for any losses arising. Management believes the claim is without
merit; consequently, no liability in respect of the claim has been recorded
in the financial statements.
B) A statement of claim has been filed against the Company's subsidiary,
FutureLink Alberta in the amount of $194,000 ($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 $266,000 ($390,000 Canadian)
against the claimant. The plaintiff has now leased the premises in
question to a third party, thereby mitigating its alleged losses. However,
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 $68,000 ($100,000
Canadian). These financial statements contain no provision for losses
related to the claims.
17
<PAGE> 20
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(unaudited)
C) A statement of claim was filed against the Company's subsidiary, SysGold
(now merged into FutureLink Alberta) by TAP Consulting Ltd. in the amount
of $102,000 ($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 SysGold.
10. 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 convertible securities is
anti-dilutive.
11. SUBSEQUENT EVENTS
A) On October 15, 1999, the Company completed the acquisition of Micro
Visions. The remaining cash of $10,000,000 was paid and 7,200,000 common
share were issued, including 1,200,000 common shares of contingent
consideration which had been achieved. The remaining 1,200,000 common
share contingent consideration will be paid if and when the remaining
contingent criterion has been achieved.
B) On November 5, 1999, the Company completed the acquisition of CNI. The
remaining cash of $3,510,000 was paid and 1,181,816 common shares were
issued.
C) During October and November, 1999, the Company completed a private
placement of $50,000,000 gross proceeds through the issuance of 9,090,909
common shares and 2,372,727 common share purchase warrants. The warrants
are exercisable for up to five years at an exercise price of $8.50 per
share. The company received $30,000,000 upon initial closing. $13,000,000
was received on November 5, 1999 after the satisfaction of conditions
relating to the conversion of certain existing debt (see 10D). The
remaining $7,000,000 was received on November 12, 1999.
A finance fee of 6% or $3,000,000 was paid to the placement agent.
The Company also issued 909,091 common share purchase warrants to the
placement agent. The warrants are exercisable for up to five years at an
exercise price of $8.50 per share. Additional cash issue costs are
expected to be $1,000,000 for a total expected cash cost of $4,000,000.
D) During the fourth quarter, the $15,000,000 of 8% senior subordinated
convertible promissory notes (see 5b) converted into 2,727,273 common
shares. An additional 711,818 common share purchase warrants were also
issued. The warrants are exercisable for up to five years at an exercise
price of $8.50 per common share.
E) Subsequent to September 30, 1999, 5,988,824 common shares were issued in
relation to the conversion of $5,090,500 of 8% senior subordinated
convertible promissory notes (see 5c). In addition, 3,517,933 common
shares were issued on the exercise of 3,696,500 warrants primarily on a non
cash basis. These warrants were issued in connection with the original
issuance of the promissory notes.
F) Subsequent to September 30, 1999, 3,799,974 shares were issued on a non
cash basis relating to the exercise of 4,000,001 warrants. These warrants
included 2,000,000 issued as a placement fee in relation to the issuance of
8% senior subordinated convertible promissory notes (see note 5c), as well
as 2,000,000 issued for advisory services (see note 8).
18
<PAGE> 21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates" and other similar expressions or variations of such words
are intended to identify these forward-looking statements. Additionally,
statements concerning future matters such as the development of new products,
enhancements or technologies, possible changes in legislation and other
statements regarding matters that are not historical fact are forward-looking
statements. Forward-looking statements involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, availability of financial resources adequate for short-,
medium- and long-term needs, demand for our products and services and market
acceptance, as well as those factors discussed in this "ITEM 2. Management's
Discussion and Analysis of Financial Condition and Operating Results" and
elsewhere in this Report.
OVERVIEW
FutureLink, The Computer Utility Company[TM], is a founder of the Application
Service Provider (ASP) industry and a founding member of the ASP Industry
Consortium. The company has the largest installed base of application hosting
platforms with thousands of customers worldwide.
FutureLink's Application Hosting Services Division provides businesses with
off-site, Internet-based computing, allowing subscribers to escape costly
hardware/software upgrade cycles, precisely control total cost of technology
ownership and focus on their core businesses. The division offers customers an
all-inclusive, trouble-free ASP service at a predictable price and provides
computing service as transparently and reliably as today's utilities deliver
electricity, water and telephone service.
The Company's Application Hosting Platforms Division builds application server
farms and provides Citrix application server software integration services.
With Application Hosting Platform solutions, FutureLink customers manage their
own server farms, and provide ASP services to users with their own IT staff and
FutureLink consultants.
FutureLink transacts business through the following subsidiaries: (i) a 100%
interest in FutureLink Distribution Corp. (an Alberta corporation) ("FutureLink
Alberta") located in Calgary, Alberta, Canada; (ii) a 100% interest in
FutureLink Micro Visions Corp. (a Delaware corporation) located in Irvine,
California (acquired October 15, 1999); and (iii) a 100% interest in FutureLink
Pleasanton Corp., a Delaware corporation, located in Pleasanton, California
(acquired November 5, 1999). (please see "Recent Developments - Acquisition of
Micro Visions" and "Recent Developments - Acquisition of CNI", below).
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<PAGE> 22
During the period from June 1, 1999 to November 15, 1999, FutureLink raised
$65,000,000 of financing. This includes $15,000,000 of convertible promissory
notes, subsequently converted into 2,727,273 common shares, and $50,000,000 of
equity, or 9,090,909 common shares.
In the first quarter of 1999, FutureLink was funded with $775,000 of additional
gross convertible debt and debt financing to fund operations and capital
investments as well as amending an existing $5,000,000 facility to a $6,000,000
package. Funding received during 1999 under this amended facility totaled
$3,250,000. In the second quarter of 1999, the Company secured an additional
$8,038,500 (gross) of convertible debt financing, again for operations and
capital investments. In late July, 1999 FutureLink closed the additional
$15,000,000 (gross) of convertible debt financing. In October and early November
1999, the Company closed the $50,000,000 gross proceeds of a common stock equity
financing, with warrants. The raising of capital has been a key focus of the
Company during the first ten months of 1999.
FINANCIAL POSITION
SEPTEMBER 30, 1999 VS. DECEMBER 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Current assets ......... 11,972,904 1,677,171
Long term assets ....... 13,162,191 4,193,551
----------- ----------
Total assets ........... 25,135,095 10,645,811
----------- ----------
Current liabilities .... 3,077,857 4,424,198
Long term liabilities 23,052,651 3,395,353
----------- ----------
Total Liabilities ...... 26,130,508 7,819,551
----------- ----------
Total Equity ........... (995,413) 2,837,401
----------- ----------
</TABLE>
ASSETS
Current assets increased to $11,973,000 at September 30, 1999 from $1,677,000 at
December 31, 1998. This increase is primarily due to various debt financings
which put the company in a positive cash position . Prepaids increased to
$1,260,000 and includes $1,050,000 (non cash) relating to an agreement for
advisory services for a period of one year. The agreement provided for payment
by way of warrants. Current assets also increased in relation to a non cash loan
receivable by an executive of the Company. FutureLink issued 232,829 shares to
the executive in exchange for a $2,000,000 loan of which approximately
$1,000,000 is current. $250,000 of this loan is forgiven on a quarterly basis
provided the executive remains employed with the Company.
Long term assets increased by $8,969,000 since December 31, 1999. The increase
includes deposits of $2,990,000 and acquisition costs of $315,000 relating to
Micro Visions, CNI, and Async. The increase is also due to fixed asset additions
of $2,022,000 and the long term portion of the executive loan in the amount of
$750,000. These increases are offset by depreciation of $522,000 and
amortization of intangible assets of $1,421,000 for the period.
LIABILITIES
Current liabilities deceased by $1,346,000. Accounts payable has decreased by
$263,000 from December 31, 1998. While payables have increased proportionately
with operational growth, payments to suppliers and contractors are generally
paid within 30-40 days which has decreased from December, 1998. This decrease in
payment period is largely due to the company obtaining additional financing and
thereby enabling the Company to pay major secured creditors on a more current
20
<PAGE> 23
basis. The decrease in current liabilities is also due to the Company repaying
the amount drawn on its line of credit by $819,000; the bank indebtedness is now
extinguished.
Long term liabilities increased approximately $19,657,000. The increase is
primarily due to the issuance of approximately $26,300,000 (gross) debt during
the nine months less issue costs and debt discounts. In addition, the Company
repaid approximately $2,000,000 of debt during the period.
Subsequent to September 30, 1999, the Company raised gross proceeds of
$50,000,000 which has further strengthened the Company's balance sheet position.
STOCKHOLDERS' EQUITY
Equity decreased by approximately $3,832,814 over that at December 31, 1998.
Capital in excess of par increased $7,410,000 largely relating to the conversion
of debt into common shares. Contributed surplus increased by $13,412,000
relating to the (non cash) value of conversion features and warrants associated
with new debt. These increases are offset by an accounting loss of approximately
$21,969,000 for the nine month period ended September 30, 1999.
Subsequent to September 30, 1999 the Company issued $50,000,000 of common
shares. In addition, $20,090,500 of debt had been converted into common shares.
These transactions result in a significant increase to shareholders' equity.
RESULTS OF OPERATIONS
PRO FORMA REVENUE RESULTS
Subsequent to September 30, 1999, FutureLink completed the acquisitions of Micro
Visions and CNI. The results of operations for these entities will be
consolidated with FutureLink's results in the fourth quarter commencing from the
date the acquisitions were completed.
Pro forma revenues for the nine month period ended September 30, 1999 are
$27,302,000, including $5,037,000, $16,471,000 and $5,899,000 for each of
FutureLink, Micro Visions, and CNI, respectively net of intercompany revenues of
$105,000. Revenues for the three month periods ended September 30, 1999 as
compared to June 30, 1999 are as follows:
<TABLE>
<CAPTION>
3 months to 3 months to
September 30, 1999 June 30, 1999
$(000's) $(000's)
------------------ -------------
<S> <C> <C>
FutureLink .................. 1,582 1,711
Micro Visions ............... 7,149 5,290
CNI ......................... 2,743 1,468
Less intercompany revenues... (105) --
------ -----
Total ....................... 11,369 8,469
</TABLE>
EBITDA
The following results do not include Micro Visions or CNI.
FutureLink incurred a loss for the nine months ended September 30, 1999 of
$21,968,901, a significant portion of which relates to non-cash interest
expenses as well as amortization. The Company's EBITDA (loss before interest,
taxes, depreciation and amortization) for the three month periods ending
June 30, 1999, September 30, 1999 and the nine month period ending September 30,
1999 were as follows:
<TABLE>
<CAPTION>
3 months to 9 months to 3 months to
September, 30 September, 30 June, 30
------------- ------------- -----------
<S> <C> <C> <C>
Loss for the Period .............. (7,616,895) (21,968,901) (11,368,670)
Add back:
Interest Expense ................. 473,139 7,879,282 6,408,353
Depreciation and Amortization
of Intangible Assets ............. 460,515 1,421,035 460,515
Amortization of deferred
finance fees and debt discount... 1,868,465 3,334,982 1,437,668
Debt extinguishment .............. -- 844,552 844,552
---------- ----------- -----------
EBITDA ........................... (4,814,776) (8,489,050) (2,217,582)
---------- ----------- -----------
</TABLE>
Interest expense for the three months to September 30, 1999 of $473,139 relates
primarily to the interest on convertible debentures expected to be paid out in
cash. Interest for the nine months of $7,879,282 includes $7,321,543 of non-cash
interest.
Depreciation and amortization of intangible assets includes the amortization of
the employee and consultants base and goodwill.
The amortization of deferred finance fees and debt discount of $1,868,465
relates primarily to non cash charges relating to warrants issued in association
with convertible debt.
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<PAGE> 24
SEPTEMBER 30, 1999 VS. SEPTEMBER 30, 1998
The following is an analysis and comparison of the nine month results ending
September 30, 1999 to that of September 30, 1998 (where applicable) for
FutureLink. The results do not include Micro Visions or CNI.
REVENUES
During the nine months ended September 30, 1999, the Company recorded total
revenues of $5,036,715 excluding Micro Visions' and CNI's server based
computing revenues which total $22,466,000. Revenues for FutureLink for the
same period in 1998 were $622,854 from FutureLink acquiring Riverview
Management Corporation ("SysGold"), the Company's Consulting and IT
Outsourcing subsidiary. As at September 30, 1998, the Company did not have
a controlling interest in FutureLink Alberta which became majority owned on
November 23, 1998.
The major source of FutureLink's revenue for the nine months was
information technology outsourcing services, IT business practices
consulting and server-based computer consulting including Application
Service Provision ("ASP") related services, which generated total revenues
of $3,232,070.
FutureLink's 1999 revenues also include hardware and software sales
relating to items procured by the Company for its clients. FutureLink
purchases and resells hardware and software to many of its IT consulting
clients as an additional service to these clients. These sales are not
considered a primary line of business, but part of the Company's overall
consulting services. During the first nine months of 1999, FutureLink
generated $1,459,987 of hardware and software sales, earning a gross
margin of approximately 8.7%.
Direct Application Service Provider ("ASP") services also contributed to
FutureLink's revenue stream, with $281,145 generated from direct sales of
hosted application from the Company's Server Farm for the nine months ended
September 30, 1999.
Other revenues of $65,513 were also generated during the nine month period.
EXPENSES
Hardware and Software Purchases
Hardware and software purchases of $1,332,891 for the nine months to
September 30, 1999 relates to equipment procured on behalf of customers as
part of the Company's overall IT consulting services. Purchases increased
by $1,188,900 over last year largely due to the acquisition of SysGold in
August, 1998. September 1998 results only include one month of
hardware/software purchases.
Contracts, Payroll and Benefits
FutureLink's contracts, payroll and benefits expense comprise amounts
relating to salaries to
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<PAGE> 25
information technology services staff, directors, management, sales,
marketing, and administrative employees, as well as the related revenue
sharing and benefits. The amount totaled $5,460,470 for the nine months
ended September 30, 1999. The increase over 1998 of $2,933,013 is
attributable to increases in the number of staff, and the hiring of senior
technical managers and executives. Expertise for expansion and ASP service
offerings required increases in senior staff during the period in
anticipation of the growth in the coming periods.
Accounting and Legal Costs
FutureLink expensed $331,584 in accounting and legal expenses through to
September 30, 1999. These costs include amounts related to fees for
accounting, audit, taxation services, legal advice and services associated
with corporate governance, compliance and commercial transactions. Legal
and accounting fees associated with acquisitions and the issuance of
securities have been capitalized.
For the nine month comparable period in 1998, FutureLink incurred
accounting and legal expenses of $45,509. The significant increase is a
reflection of the increased business activities undertaken by the Company.
Consulting Expenses
Consulting expenses of $1,888,185 were incurred to engage consultants to
assist the Company in several areas including business development, server
based computing, Y2K, e-commerce, market research, market analysis,
investor relations and delivery of IT services to customers. The $1,188,185
also includes non-cash charges of $773,000 relating to advisory services
obtained for assessing financing strategies and business acquisitions.
Advertising and promotion
In efforts to increase the company profile and the ASP Industry, $1,002,704
costs were incurred to September 30, 1999 for advertising and promotion.
The Company participated in tradeshows and other computer industry related
events, and obtained outside services for marketing and advertising to
increase the Company's profile. A significant amount of promotional
material was purchased to increase FutureLink brand recognition. These
costs were not incurred in 1998 as the company had just started to develop
the market and the ASP consortium had not yet been formed.
General and Administrative Expenses
FutureLink's consolidated general and administrative expenses for the nine
months ending September 30, 1999 were $2,798,566.
The consolidated general and administrative expenses are comprised of the
following:
<TABLE>
<S> <C>
Travel Expenses ................... $ 786,105
Meals and Entertainment Expenses .. $ 93,975
Staff Development Expenses ........ $ 121,404
Rent .............................. $ 506,444
Compliance ........................ $ 246,979
Office and Other Expenses ......... $1,043,657
----------
TOTAL ............................. $2,798,564
----------
</TABLE>
The Company's travel expenses were significant and relate to sales,
securing business partnerships and vendor alliances, as well as meeting and
developing relationships with industry analysts and financiers. The
Company's attendance at numerous industry events increased travel costs.
Lastly, the acquisition of Micro Visions caused travel between the Irvine
and Calgary offices to increase significantly.
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<PAGE> 26
Staff development expenses relate to training and further education of
technical staff . The Company believes this as an important aspect of
remaining competitive in the industry and providing highly qualified
technical expertise to clients.
Rent costs relate primarily to amounts incurred for operations in Calgary,
Canada. During the 2nd Quarter of 1999 the company expanded Calgary
operations by leasing an additional floor to facilitate growth and
expansion.
Compliance costs relate to fees incurred in preparing and filing
documentation as required by the Securities and Exchange Commission as well
as costs associated with preparation and mailing for the Company's Annual
General Meeting.
Office and other expenses relate primarily to telephone, insurance, and
office supplies. These costs totaled $1,043,657 for the nine months ending
September 30, 1999, and have increased due to the significant growth of the
Company over the past nine months. Telephone costs have risen because of
conference calls, investor relations inquiries and web/data connectivity
costs. Insurance expense has increased over the 1998 period as more
insurance was required for Directors and Officers and commercial liability
insurance. Office costs have risen proportionate to increased staff levels.
Bad Debt Expense
FutureLink's bad debt expense of $509,836 for the nine months to September
30, 1999 includes actual bad debts and a provision for doubtful accounts
relating to amounts for which management believes collection to be
unlikely. The amount includes approximately $466,000 from companies related
to a former officer and director of the Company, one of which filed for
court protection during the period. The Company is currently negotiating
with these parties to recover some of the accounts receivable.
Provision for Inventory Valuation
For the period ending September 30, 1999, FutureLink recorded $95,393 as a
provision against inventory. Management believes that new technology and
updated software will require that inventory be sold at a discounted price.
Interest Expense
FutureLink's interest expense for the nine months ended September 30, 1999
of $7,879,282 includes $7,321,543 non-cash interest. This non-cash interest
includes intrinsic values of debt conversion features. The remaining
interest expense relates to interest payable on a quarterly basis for the
8% senior subordinated convertible promissory notes.
Depreciation
FutureLink's consolidated depreciation of $522,262 includes depreciation of
computer equipment, software, leasehold improvements and office equipment.
For the period ended September 30, 1999 there is a significant increase in
the value of assets over last year due to server farm expansion, software
user licenses for additional staff, office equipment additions, and
leasehold improvements to the Calgary office.
Amortization of Intangible Assets
FutureLink's amortization expense of $1,421,035 for the nine months ended
September 30, 1999 and relates to the amortization of goodwill relating to
the acquisition of FutureLink Alberta and SysGold in 1998.
24
<PAGE> 27
Debt Extinguishment
During the nine month period, FutureLink renegotiated the terms of its 10%
convertible debenture which had been previously issued in relation to $6
million of financing. The Company also issued additional warrants such that
1,200,000 warrants became outstanding relating to this debt. FutureLink
also paid $1,881,600 to settle $1,470,000 of principle. For accounting
purposes, all amounts relating to the "old" debt were treated as
extinguished and new debt issued. As a result of the transaction,
FutureLink recognized a loss of $844,552.
SEPTEMBER 30, 1999 VS. JUNE 30, 1999
The following is a discussion of the three months ended September 30, 1999 as
compared to the three months ended June 30, 1999 for FutureLink. The results do
not include Micro Visions or CNI.
REVENUES
FutureLink recognized revenues of $1,581,642 during the third quarter as
compared to $1,711,448 during the second quarter. IT Consulting revenue
decreased this quarter due to fewer billable hours as both staff and
clients take vacation during the summer months. In addition, in
anticipation of Y2K issues, customers are delaying any major
changes/development until 2000.
Hardware and software sales increased slightly over the prior quarter.
Hardware and software sales were $576,000 as compared to $501,000 for the
prior quarter.
Other revenue includes miscellaneous income and ASP sales. ASP sales during
the third quarter were $99,544 as compared to $35,345 for the second
quarter. The second quarter revenue was net of credits issued to an early
adopter of server-based computing. Third quarter ASP sales included eleven
customers obtaining ASP services, seven of which were hosted ASP and four
of which have server farms managed by FutureLink.
EXPENSES
Hardware and Software Purchases
Hardware and software purchases increased in the third quarter over that in
the second quarter as a direct result of an increase in sales of these
items. The Company maintains budgets for margins of approximately 8 to 9%
on such items and actual results for this quarter were within the target
margin.
Contracts, Payroll and Benefits
Contracts, payroll and benefits were $2,236,508 in the third quarter as
compared to $1,738,920 in the second quarter. The increase is largely due
to the hiring of additional staff, in anticipation of the closing of the
Micro Visions acquisition. In preparation for acquisition and expansion,
several US staff were hired for the Irvine location. The increase in staff
also contributed to an increase in benefit and other related personnel
costs.
Accounting and Legal Costs
Accounting and legal fees were $184,737 for the three months to September
30, 1999 compared to $97,382 in the second quarter. The Company's
re-incorporation in the State of Delaware and other general legal advice
resulted in an increase of approximately $60,000 over the prior quarter.
25
<PAGE> 28
Accounting fees increased $25,000 over the second quarter due to the
completion of several tax returns, general accounting advice and the
quarterly review.
Consulting Expenses
Consulting expenses were $425,416 and $996,946 in the second and third
quarter respectively. These expenses were incurred to engage consultants to
assist the Company in business development, e-commerce, Y2K readiness,
marketing, market research and analysis, and delivery of IT services to
customers. Outside consultants were hired for term projects to use special
expertise with out incurring direct payroll and benefit costs. In addition,
consulting expenses during the quarter are $150,000 higher and relate to
non-cash consulting. This amount was $300,000 in the second quarter
compared to $450,000 in the third quarter due to the contract commencing in
May 1999.
Advertising and Promotion
Advertising, promotion and investor relations costs increased $485,000 over
the second quarter of 1999. FutureLink has incurred significant amounts
during the third quarter to promote both itself and the ASP industry. It is
expected that the Company will continue to incur such costs to enhance its
profile and branding in the communications and technology sectors. This
will be done through the Company's presence in trade and industry related
shows, sponsorships of forums and advertising/marketing.
General and Administrative Expenses
FutureLink's consolidated general and administrative expenses for the three
months ending September 30, 1999 were $1,217,061 as compared to $769,908 in
the second quarter 1999. The increase, again, relates to the overall
increase in Company activities. General and administrative expenses for
each of the two quarters were as follows:
<TABLE>
<CAPTION>
3 months to 3 months to
September 30, 1999 June 30, 1999
--------------------- ----------------
<S> <C> <C>
Travel Expenses ................ $ 450,708 $214,901
Meals and Entertainment Expenses $ 41,097 $ 26,510
Staff Development Expenses ..... $ 24,715 $ 47,581
Rent ........................... $ 191,832 $161,703
Compliance ..................... $ 166,032 $ 80,541
Office and Other Expenses ...... $ 342,677 $265,672
---------- --------
TOTAL .......................... $1,217,061 $769,908
---------- --------
</TABLE>
Travel expenses increased significantly over the prior quarter and relate
to increased travel for executives, sales and business development staff
between Calgary and Irvine. Increased travel costs were also incurred for
investor relations related and alliance activities. Attendance at
tradeshows and conferences contributed to a large portion of the increase
in travel costs.
Staff development expenses are lower in quarter three due to the seasonal
break in institutional and professional course offerings over the summer.
Rent costs have remained relatively stable other than an adjustment to rent
for the second quarter relating to services provided by the management
company.
Compliance costs increased by $85,491 over the second quarter. These costs
are largely attributable to the re-incorporation in Delaware, costs
associated with the Company's annual
26
<PAGE> 29
general meeting, Securities and Exchange Commission reporting requirements,
periodic reports and other such filings.
The overall growth of the Company resulted in a $77,005 increase to office
and other expenses. Other expenses include items such as telephone,
insurance and memberships and subscriptions. Staff memberships to
professional organizations are viewed by the company as a commitment to
superior technical expertise. Such costs for existing and new staff
accounted for a $33,000 increase this quarter for professional memberships
and associations. The remaining increase can be directly attributed to the
expansion and growth of the Company.
Bad Debt Expense
For quarter three, bad debt expense was $417,332. This amount includes
$133,000 to one customer, a related party, who filed for court protection
during the quarter, and an additional $264,000 to a second related party
with which the Company is currently negotiating. The total allowance for
doubtful accounts for these two related party receivable balances is
approximately $470,000 as at September 30, 1999.
Provision for Inventory Valuation
During the third quarter, $95,393 was recorded as a provision against
inventory. This is an increase over other periods, as management has
determined that because of price drops in hardware/software and the
introduction of new technology, there are items in inventory whose values
will need to be reduced. Of this amount, approximately $70,000 relates to a
resell software license with a one year life. The software license was
purchased for a specific customer transaction which because of the related
parties financial position, the sale did not materialize. Therefore the
license has a reduced value which was reflected this quarter.
Interest Expense
Interest expense during the third quarter totaled $473,139 as compared to
$6,408,353 in the second quarter. The second quarter amount includes
significant non-cash, non-recurring amounts. The third quarter amount
largely relates to interest payable on a quarterly basis.
Depreciation
Depreciation during the third quarter was $172,012 as compared to $218,416
in the second quarter. The slight decrease is due to changes in the second
quarter amortization and depreciation of certain computer assets.
Amortization of Intangible Assets
The amortization of intangible assets relates to the amortization of
goodwill and the employee and consultants base. On a quarterly basis,
$460,515 is recognized associated with these amounts.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING
During the third quarter of 1999, FutureLink issued $15,000,000 8% senior
subordinated convertible promissory notes. The net cash proceeds of this
issuance of securities was $13,607,408, after placement fees of 9% and expenses
of the offering, of which $1,000,000 was used for subsequent deposits on the
acquisition of Micro Visions. Subsequent to September 30, 1999, the convertible
notes were converted into 2,727,273 common shares.
Subsequent to September 30, 1999, the Company completed a further financing of
$50,000,000 for
27
<PAGE> 30
common stock and warrants. The Company received net proceeds of $47,000,000
after placement fees of 6% (exclusive of other costs associated with the
financing). Of these proceeds, $10,000,000 was used as the final payment on
closing of the acquisition of Micro Visions and $3,510,000 was used as the final
payment at closing of the CNI acquisition.
WORKING CAPITAL
As at September 30, 1999, FutureLink had working capital of $8,895,047. This
amount includes the balance of the financing received in the second quarter;
$15,000,000 of financing received in the third quarter; fees and commissions of
$1,393,000; deposits and acquisitions costs of $2,085,000 relating to Micro
Visions, CNI and Async; a repayment to the line of credit of $640,000; and
$3,000,000 for operations. Working capital also includes $1,019,000 relating to
a non cash loan receivable.
CASHFLOW
FutureLink's operating cash outflows for the nine month period ending September
30, 1999 were $8,931,479. These outflows are largely due to the hiring of
personnel and other resources to build an infrastructure which will accommodate
the significant growth in business anticipated over the next year. The Company
does not expect to be profitable or to have positive operating cashflows within
the next year as it continues to grow, develop the ASP industry, its presence
within the industry, its services, and a customer base.
FutureLink's investing activities during the nine months ending September 30,
1999 included payment of a deposit of $1,000,000 for the acquisition of Micro
Visions, $390,000 for the acquisition of CNI, and $600,000 for the acquisition
of Async. In addition, the Company incurred capital additions of approximately
$2,000,000 relating to the building of the Company's first server farm, as well
as other capital additions. The Company has recently commenced building a second
server farm in California. Funding for this second server farm is expected to
come from leasing arrangements.
The Company's financing cashflow for the nine month period January 1 through
September 30, 1999 included net proceeds of $24,868,339 relating to the issuance
of convertible debentures, convertible notes, promissory notes, and the exercise
of warrants. During this period, the Company also repaid $2,219,258 of such
instruments. Most recently, FutureLink has commenced discussions with various
parties in relation to lease lines for equipment purchase for its data
centers/server farms. It is expected that several of these will close during the
last quarter of 1999.
28
<PAGE> 31
RECENT DEVELOPMENTS
FINANCINGS
FutureLink has completed additional financing transactions, raising the Company
gross proceeds of $15,000,000 during the third quarter of 1999 and gross
proceeds of $50,000,000 during the period October 1 to November 12, 1999. For
further details regarding these financings, please refer to the financial
statements included in Part I, Item 1 of this Report, Management's Discussion
and Analysis of Financial Condition and Results of Operation which forms Item 2
of Part I hereof, and Changes in Securities and Use of Proceeds in Part II, Item
2, below.
ACQUISITION OF MICRO VISIONS
As previously reported, on June 2, 1999, FutureLink entered into an agreement to
acquire all of the issued and outstanding shares of Executive LAN Management,
Inc. of Irvine, California, doing business as Micro Visions ("Micro Visions").
Founded in 1987, Micro Visions is one of North America's leading server-based
computing systems integrators. In 1998, Micro Visions was the number 1 (up from
number 2 in 1997) reseller and integrator of products from Citrix Systems Inc.
in North America. Citrix products provide the foundation for the Company's main
ASP business. As well as the Irvine main office, the acquisition of Micro
Visions also adds branch offices in Atlanta, Las Vegas, Los Angeles, Phoenix and
Raleigh/Durham.
Micro Visions' revenues for the nine months ended September 30, 1999 were
$16,471,000, of which $4,032,000 had been earned during the first quarter of
1999, $5,290,000 during the second quarter and $7,149,000 during the third
quarter of 1999. This compares to earnings for the twelve months ended December
31, 1998 and 1997 of $13,669,000 and $9,565,000, respectively. Revenues consist
of consulting services relating to server-based computing and the associated
hardware and software sales. The $7,149,000 third quarter revenues include
approximately $105,000 billed to FutureLink.
On a pro forma basis, revenues for FutureLink and Micro Visions for the nine
month period ending September 30, 1999 are $21.4 million.
Shareholder approval of the acquisition of Micro Visions was received at the
Annual and Extraordinary Meeting of Shareholders held September 23, 1999. On
that date, Mr. Glen Holmes, 43, the founder and CEO of Micro Visions, became the
President, Chief Operating Officer and a Director of FutureLink.
The Micro Visions acquisition closed October 15, 1999 and involved the payment
of a final $10 million cash ($2 million of deposits had been paid prior to
closing) and the issuance of 7.2 million shares. In addition, the former Micro
Visions' shareholder(s) could earn an additional 1.2 million shares based on
achievement of certain performance criteria in 1999.
ACQUISITION OF CNI
As previously reported, on September 7, 1999, FutureLink entered into an
agreement to acquire all of the issued and outstanding shares of CN Networks,
Inc. of Pleasanton, California, doing business as Computer Networks ("CNI").
Founded in 1991, CNI is arguably the Bay Area's leading server-based computing
systems integrator. Like Micro Visions, CNI is ranked as a "Platinum" reseller
and integrator of products from Citrix
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<PAGE> 32
Systems Inc. CNI has 23 employees based in its Pleasanton office and had average
annual revenues of $6 million in 1997 and 1998.
CNI's revenues for the nine months ended September 30, 1999 were $5,899,000.
This compares to earnings for the twelve months ended December 31, 1998 and 1997
of $5,568,000 and $6,476,500, respectively. Revenues consist of consulting
services relating to server-based computing and the associated hardware and
software sales.
On a pro forma basis, revenues for the combined entity consisting of the former
FutureLink, Micro Visions and CNI for the nine month period ending September 30,
1999 are $27.3 million.
The CNI acquisition closed November 5, 1999 and involved the payment of a final
$3.5 million cash (a $390,000 deposit had been paid prior to closing) and the
issuance of 1,181,816 shares. On closing, Mr. Bill Botti, the founder, President
and Chief Executive Officer of CNI, executed an employment agreement with the
company, becoming Senior Vice-President of FutureLink's Application Hosting
Platforms Division.
PROPOSED ACQUISITION OF ASYNC TECHNOLOGIES
As previously reported, on September 7, 1999, FutureLink entered into an
agreement to acquire all of the issued and outstanding shares of Async
Technologies, Inc. of Walled Lake, Michigan ("Async").
Like Micro Visions and CNI, Async is a Platinum reseller and integrator of
products from Citrix Systems Inc., recently ranked among the top ten solution
providers in the United States. Async is a dominant competitor in the Northern
Midwest. As well as its headquarters, Async's 24 employees serve customers from
satellite offices in Detroit, Chicago, Indianapolis, Cleveland, Columbus and
Pittsburgh.
Async's revenues for the nine months ended September 30, 1999 were $6,208,000.
This compares to earnings for the years ended December 31, 1998 and 1997 of
$6,056,000 and $4,599,000, respectively. Revenues consist of consulting services
relating to server-based computing and the associated hardware and software
sales.
On a pro forma basis, revenues for the entity consisting of FutureLink, Micro
Visions and CNI combined with Async for the nine month period ending September
30, 1999 are $33.5 million.
The proposed acquisition of Async is scheduled to close on or before November
30, 1999 and will involve the payment of a final $5.4 million cash (a $600,000
deposit having been paid prior to closing) and the issuance of nearly 1.3
million shares. In addition to the consideration payable at closing, the current
shareholders of Async could earn an additional 519,480 shares based on
achievement of certain performance criteria in 1999.
CONVERSION OF CONVERTIBLE SECURITIES
Between August 20, 1999 and November 8, 1999, certain outstanding convertible
debt instruments valued at nearly $22.4 million, as well as certain outstanding
warrants, were converted or exercised into common stock of the Company. For
further details regarding the conversions or exercises of
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<PAGE> 33
these convertible securities, please refer to the financial statements included
in Part I, Item 1 of this Report and Changes in Securities and Use of Proceeds
in Part II, Item 2, below.
MANAGEMENT CHANGES
Since July 1, 1999, the Company has undergone a number of management changes,
including changes to the board of directors.
On July 16, 1999, the Company's board accepted the resignation of Donald Bialik
as a director and officer of the Company and all of its subsidiaries and did not
appoint a replacement director. On August 30, 1999, the Company's board accepted
the resignation of Cameron Chell as a director and officer of the Company and
did not appoint a replacement director. Mr. Philip Ladouceur, FutureLink's
Executive Chairman, was appointed interim Chief Executive Officer and President.
On September 23, 1999, management's nominees to the board of directors, being
Philip Ladouceur, Raghu Kilambi, Bryson Farrill, Robert Kubbernus, Michael Falk,
Timothy Flynn and Glen Holmes were elected by the shareholders at their annual
and extraordinary meeting held that date. That same date, Glen Holmes was
appointed as FutureLink's President and Chief Operating Officer, leaving Mr.
Ladouceur as Chairman and Chief Executive Officer.
Concurrent with the closing of the $50 million private placement and the
acquisition of Micro Visions on October 15, 1999, the board expanded the number
of directors to nine from seven and appointed Gerald Poch and Jim McNiel as
directors.
On November 15, 1999, Robert Kubbernus submitted his resignation to the Company,
which was accepted by the Company's board on November 17, 1999. The Company has
not appointed a replacement director.
As at November 17, 1999, the Company has a total of 8 directors as follows:
<TABLE>
<CAPTION>
- --------------------------- ------- -------------------------------------------------------------------
NAME AGE POSITION HELD
- --------------------------- ------- -------------------------------------------------------------------
<S> <C> <C>
Philip R. Ladouceur (3) 59 Executive Chairman and Chief Executive Officer
- --------------------------- ------- -------------------------------------------------------------------
Glen C. Holmes (3) 43 President, Chief Operating Officer and Director
- --------------------------- ------- -------------------------------------------------------------------
Raghu Kilambi 34 Executive Vice-President, Chief Financial Officer and Director
- --------------------------- ------- -------------------------------------------------------------------
F. Bryson Farrill (2) 72 Director
- --------------------------- ------- -------------------------------------------------------------------
Michael S. Falk (3) 38 Director
- --------------------------- ------- -------------------------------------------------------------------
Timothy P. Flynn (1) (2) 49 Director
- --------------------------- ------- -------------------------------------------------------------------
Gerald A. Poch (1) (3) 52 Director
- --------------------------- ------- -------------------------------------------------------------------
James P. McNiel(2) 36 Director
- --------------------------- ------- -------------------------------------------------------------------
</TABLE>
Note (1): Members of the Audit Committee
Note (2): Members of the Compensation Committee
Note (3): Members of the Executive Committee
Information regarding many directors was included in the Form 10-KSB for the
year ended December 31, 1998 previously filed by FutureLink. Detailed
information regarding Mr. Falk and Mr. Flynn was included in the Form 10-QSB for
the quarterly period ended March 31, 1999 previously filed by the Company.
Information regarding Mr. Holmes, Mr. Poch and Mr. McNiel is as follows:
GLEN C. HOLMES - Mr. Holmes was the founder of Micro Visions, building that
company from its earliest beginnings in 1987 into a leading provider of
server-based computing solutions for a wide range of customers, including a
number of Fortune 500 companies. Under Mr. Holmes direction, between 1996 and
1999, Micro Visions grew from 10 to over 80 employees, with annual revenues more
than quadrupling to nearly $13.7 million in 1998, which the former Micro Visions
will exceed in 1999.
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<PAGE> 34
GERALD A. POCH - Mr. Poch joined the Pequot family of funds in 1998 as a
Principal. Mr. Poch was the former Chairman, President and CEO of GE Capital
Information Technology Solutions ("ITS"), and before ITS, founder, Co-Chairman
and Co-President of AmeriData Technologies, Inc. (NYSE: ADA) until its
acquisition by GE Capital in 1996. From 1979 until 1983 he was Senior Vice
President of TIE/communications, Inc. and President of Technicom, Inc., two
public telecommunications companies. Mr. Poch graduated cum laude from Boston
University School of Law where he was Managing Editor of the Law Review. He is
admitted to practice law in the States of New York and Massachusetts and the
District of Columbia. Mr. Poch is co-chairman of MessageMedia, Inc. (MESG) and
serves as a director of the following private companies: Elastic Networks,
NewRiver Communications, Lucent Digital Radio, Everest Broadband Networks,
Online Retail Partners, WatchMark and HomeSpace.com.
JAMES P. MCNIEL - Jim McNiel joined Pequot Capital in 1999. Previously, Mr.
McNiel was Executive Vice President of Corporate Development with Cheyenne
Software and most recently, president of McNiel Group, Ltd. Before joining in a
full-time capacity, Mr. McNiel worked with Pequot as a consultant identifying
new technology opportunities. Mr. McNiel also sits on the boards of Netegrity,
Inc. and Asia Online.
RISK FACTORS
FutureLink continues to face numerous risk factors as set forth in the Annual
Report on Form 10-KSB for the year ended December 31, 1998 previously filed. In
addition, the proposed acquisition of Micro Visions gives rise to additional to
the following risk factors:
NO ASSURANCE OF COMPLETION OF ASYNC ACQUISITION. The Agreement to acquire Async
provides a number of conditions precedent to closing the transaction, including,
but not limited to, regulatory approval from each governmental entity necessary
for consummation of the proposed transaction; the Company securing financing
necessary to pay the full cash portion of the purchase consideration; no
material adverse changes in the condition (financial or otherwise) of either the
Company or Async; and the receipt of all other necessary third party consents.
There can be no assurance that the Company or Async will be able to meet all of
these conditions precedent, or even if the Companies meet such obligations, that
the proposed transaction will close for any other unforeseen circumstance. If
the transaction fails to close, there is a risk that all or a portion of the
deposit paid by the Company ($600,000) will be forfeited by the Company.
RISKS ASSOCIATED WITH RECENT AND PROPOSED ACQUISITIONS. With the recent
acquisitions of Micro Visions and CNI, and if the Async acquisition is
successfully concluded, there can be no assurance that the Company will be able
to profitably manage or successfully integrate the acquired assets and personnel
without substantial expenses, delays or other operational or financial problems.
The acquisitions will involve the recognition of substantial goodwill which will
be amortized as a charge to operations over the next 5 years. Furthermore, this
acquisitions may involve additional risks or effects, including diversion of
management's attention, failure to retain key acquired personnel, unanticipated
events or circumstances, legal liabilities 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 the acquired businesses, if any,
could have a material adverse impact on the reputation of the Company as a
whole. These acquisitions involve the Company adding offices in other
geographical locations which will add further responsibilities to the Company's
existing management structure. There is no assurance that the Company's
acquisitions of Micro Visions and CNI and proposed acquisition of Async, if
successful, will result in the generation of anticipated revenues and earnings.
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
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<PAGE> 35
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.
FutureLink, including recently acquired Micro Visions, has completed Phase I of
our Year 2000 project, a review of all hardware, embedded systems and software
utilized by our Company, including software utilized internally, software
supplied to clients and software hosted for clients. The review revealed that
90% of FutureLink's internal systems were deemed to be compliant by the vendor,
and the remaining 10% would be compliant with the application of Year 2000
upgrades supplied by the vendor. The existing Finance system was not Year 2000
compliant, and has been replaced by a new accounting package. A new time sheet
system will be implemented to replace the old, non-compliant system. A few
servers and the associated operating systems require upgrades in order to be
Year 2000 compliant. It is anticipated that the upgrades and implementation of
the new time sheet system will be completed by December, 1999, and we believe
that they are designed to function properly 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.
A letter campaign was conducted with important business associates, suppliers
and vendors to determine the status of their Year 2000 program and the
likelihood of their continued business in the Year 2000. This letter campaign is
ongoing, however the most critical business associates have responded.
FutureLink does not appear to be dependent on any business associates, 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 office.
The Company has adequate resources, both fiscal and personnel, to complete the
remedial actions which make up Phase II of the Year 2000 project. 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. The cost of the new internal office applications was anticipated and
budgeted for, outside of the Year 2000 project, and is included in the annual
operations budget. We expect to complete our Year 2000 remediation actions by
the end of November, 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 systems of outside suppliers, for example our utility
power. We are also preparing contingency plans to deal with the possibility of
systems failures at our client sites. These contingency plans should be
finalized by the end of November, 1999.
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.
33
<PAGE> 36
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of its business, FutureLink continues to be involved in a
number of material legal proceedings commenced or pending against the Company,
as follows:
1. Midland Walwyn Capital Inc. (now Merrill Lynch Canada Inc.) ("MWC")
commenced an action in October 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. MWC seeks judgement of CDN$500,000
against all defendants. The action against the Company alleges fraudulent
misrepresentation, negligent misrepresentation or intentional or negligent
interference with contractual relations. The Company has filed a defense jointly
with Abecorn. This 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 MWC and instructed MWC to sell all 50,000 shares. When MWC sent
the Abecorn/Kompani share certificate to the clearinghouse, they were advised of
the stop transfer. MWC paid the net sale proceeds to Raymond Kompani before
being advised by the clearinghouse of any problem. MWC was required to
repurchase these 50,000 shares on the market at a cost of just over $325,000.
MWC demanded repayment from Raymond Kompani but Mr. Kompani failed to pay. MWC
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 MWC 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 is successful.
2. 554495 Alberta Ltd. commenced an action against Coffee.com Interactive
Cafe Corp. (now the Company's FutureLink Alberta subsidiary) in October 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 have now completed the discovery of corporate officers and
documents. The legal costs to date are not immaterial and will increase should
this matter proceed to trial, which appears likely. The plaintiff has now leased
the premises in question to a third party, thereby mitigating its alleged
losses. Management of the Company believes that its FutureLink Alberta
subsidiary does not face material exposure in this matter.
3. A Statement of Claim was issued by TAP Consulting Ltd. ("TAP") in August
1998 in the Court of Queen's Bench of Alberta, Calgary, Canada, naming SysGold
Ltd. (now part of the Company's FutureLink Alberta 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 Alberta subsidiary has a sustainable defence to this claim
and intends to vigorously defend it and to file a counterclaim. At the time of
acquiring SysGold Ltd., the Company and Donald Bialik entered into an indemnity
agreement dated August 21, 1998, whereby Mr. Bialik agreed to indemnify the
Company for any losses suffered by 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 does not believe that there would be
any material impact on the Company should TAP prove its claim. Mr. Bialik's
indemnity of the Company for this matter was confirmed at the time of his
resignation as an officer and director.
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<PAGE> 37
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company has completed a number of material financing transactions ($500,000
or more gross proceeds being considered "material") since July 1, 1999,
primarily two private placements, one led by Commonwealth Associates, L.P.
("Commonwealth") and the other placed through Gerard Klauer Mattison & Co.,
Inc. ("GKM").
On July 1, 1999, the Company entered into a formal Agency Agreement with
Commonwealth, which was further to a Letter of Intent dated September 16, 1999,
whereby Commonwealth agreed to act as FutureLink's placement agent for a private
placement of units made up of convertible notes and warrants. The offering was
for a minimum of $5 million and a maximum of $10 million, which was amended July
15, 1999 by agreement between Commonwealth and the Company such that the maximum
offering was increased to $15 million. The Company sold the maximum $15 million
of units with closings taking place between July 19 and July 27, 1999. The units
consisted of (i) 8% senior subordinated convertible notes which mature in two
years or will convert into the type and respective amount of securities issued
by the Company in its next round of financing or, in certain circumstances, will
be convertible to common stock at $8.50 per share; and (ii) warrants to purchase
15,000 shares of common stock at $850 per share for each 100,000 invested.
Commonwealth's compensation for acting as placement agent consisted of
commissions and placement fees equal to 9% of the gross proceeds of the offering
as well as a total of 225,000 agent's warrants also exercisable at $8.50.
On August 1, 1999, the Company entered into an agreement with an executive of
the Company. In accordance with the terms of the agreement, the Company loaned
$2,000,000 to the executive which was then used by the executive to purchase
232,829 previously unissued common shares of the Company. These shares of common
stock are escrowed. On October 1, 1999, 29,129 shares will be released from
escrow. An additional 29,100 shares will be released from escrow on a quarterly
basis commencing January 1, 2000. So long as the executive remains employed by
the Company, $250,000 of the principal amount of the loan shall be forgiven on a
quarterly basis, commencing October 1, 1999.
On September 24, 1999, the Company executed a Letter of Intent with Pequot
Capital Management, Inc. ("Pequot Capital") whereby funds managed primarily by
Pequot Capital would purchase FutureLink securities, subject to due diligence
and other conditions. This Letter of Intent was superceded by a formal Share
Purchase Agreement dated October 15, 1999 between the Company, Pequot Private
Equity Fund II, L.P., and other investors (the "Pequot Investors") whereby the
Pequot Investors agreed to fund a total of $50 million to the Company in
exchange for 9,090,909 shares of common stock plus warrants to acquire 2,372,727
shares of common stock at an exercise price of $8.50 per share. The total $50
million has been funded, $30 million closing on October 15, 1999, $13 million on
November 5, 1999 with the final $7 million advanced on November 12, 1999. GKM,
which acted as placement agent in this financing, received commissions and
placement fees equal to 6% of gross proceeds as well as 909,091 agent's warrants
also exercisable at $8.50 per share.
Prior to August 23, 1999, $2,302,500 of the $8,038,500 8% Senior Subordinated
Convertible Notes issued through Commonwealth effective April 29, 1999 (the
"April Notes") converted into 2,291,221 shares of common stock.
Between September 23 and November 8, 1999, the Company made an offer, which was
amended, to holders of the April Notes and Warrants issued in conjunction with
the April Notes, to encourage these security holders to convert these securities
into common stock. In the end, of the $8,038,500 April Notes, a total of
$7,393,000 has converted their debt instruments to 8,549,608 shares of common
stock. Of the warrants to acquire 8,019,251 shares of common stock, holders of
7,696,501 of these warrants elected to exercise their securities, primarily on a
cashless basis, into 7,317,907 shares of common stock.
Effective October 15, 1999, the holders of $15,000,000 of 8% Senior Subordinated
Convertible Notes issued by the Company in July, 1999 (see above) elected to
convert into the same securities on the same terms as the Company's private
placement to the Pequot Investors (see above), in accordance with the terms of
their Notes. These Noteholders receive 2,727,273 shares of common stock together
with warrants to acquire 711,818 shares of common stock at an exercise price of
$8.50 per share.
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<PAGE> 38
From July 1, 1999 through November 10, 1999, the Company raised an additional
$65,000,000 gross proceeds from all new financings. Of these funds, the Company
netted approximately $59,600,000 following payment of commissions, finders'
fees, professional fees and other expenses associated with such financings.
The uses made or to be made of these gross financing proceeds can be broken down
as follows (all figures approximated to the nearest five hundred dollars):
<TABLE>
<S> <C>
Gross Proceeds .............................................. $65,000,000
Less: Placement Fees and Commissions ....................... $ 4,350,000
Less: Other Offering Expenses (estimated) .................. $ 1,050,000
-----------
Net Proceeds ................................................ $59,600,000
-----------
Capital Asset Purchases July 1 to September 30, 1999 ........ $ 480,000
Deposits paid re: Acquisitions (Micro Visions, CNI and Async) $ 1,990,000
Cash used to Close Acquisition of Micro Visions ............. $10,000,000
Cash used to Close Acquisition of CNI ....................... $ 3,510,000
Cash Reserved to Close Acquisition of Async.................. $ 5,400,000
General Working Capital and Other............................ $38,220,000
-----------
$59,600,000
</TABLE>
The above projected uses of proceeds are estimates only and the Company may
reallocate such projected uses of proceeds.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual and Extraordinary Meeting of Shareholders in Orange
County, California on September 23, 1999. Shareholders of record on August 23,
1999 were entitled to notice of, and to vote at, the meeting. At the meeting:
(1) shareholders holding 69.11% of the Company's common stock approved the
Company's acquisition of Micro Visions; (2) shareholders holding 68.17% of the
Company's common stock approved the merger of the Company with its wholly-owned
subsidiary, FutureLink California Acquisition Corp., a Delaware corporation, to
effectively reincorporate in Delaware as FutureLink Corp. in accordance with the
Merger Agreement presented to the shareholders, also approving the Company's
Delaware Certificate of Incorporation and By-Laws; (3) shareholders holding
62.78% of the Company's common stock approved the Amended and Restated Stock
Option Plan of FutureLink and ratified all stock option grants granted in excess
of Company's pre-existing Stock Option Plan but in accordance with the Amended
and Restated Stock Option Plan; (4) shareholders holding 68.92% of the Company's
common stock voted to ratify and confirm the one for five reverse split of the
Company's common stock effected June 1, 1999; (5) the shareholders elected the
management nominees to the board of directors, being Philip R. Ladouceur, Raghu
Kilambi, F. Bryson Farrill, Robert J. Kubbernus, Michael S. Falk, Timothy P.
Flynn and Glen C. Holmes, each nominee receiving the favorable vote of not less
than 93.18% of the outstanding common stock; (6) shareholders holding 95.77% of
the Company's common stock voted to re-appoint Ernst & Young LLP as the
Company's auditors, at a remuneration to be fixed by the Board of Directors; and
(7) a motion from the floor to approve all actions of the Board of Directors
since the last Annual Meeting of Shareholders was approved.
ITEM 5. OTHER INFORMATION
None.
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<PAGE> 39
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) LIST OF EXHIBITS
3.1 Certificate of Incorporation of Registrant*****
3.2 By-laws of Registrant*****
10.1 Debenture Acquisition Agreement dated August 14, 1998, as amended on
August 21, 1998, between FutureLink and Thomson Kernaghan & Co. Limited
("TK").*
10.2 Letter agreement dated February 26, 1999 between FutureLink and TK
extending the terms of the original Debenture Acquisition Agreement from
$5,000,000 maximum to $6,000,000.**
10.3 Debenture and Warrant Purchase Agreement dated March 2, 1999 between
FutureLink and Augustine Fund, LP.**
10.4 Agency Agreement dated April 14, 1999 between FutureLink and Commonwealth
Associates, LP ("Commonwealth") regarding a $4,000,000 maximum plus
$4,000,000 over-allotment private placement financing.**
10.5 Letter Agreement dated April 26, 1999 between FutureLink and TK amending
certain terms of outstanding FutureLink securities and redeeming certain
convertible debentures.**
10.6 Advisory Agreement dated effective May 1, 1999 between FutureLink and
Commonwealth.**
10.7 Letter Agreement dated April 29, 1999 between FutureLink and Bridge
Technology Group LLC ("Bridge") regarding warrants issuable to Bridge as a
referral fee under an advisory agreement between the parties.****
10.8 Agreement and Plan of Reorganization and Merger by and among FutureLink,
FutureLink California Acquisition Corp., Executive LAN Management, Inc.
dba Micro Visions and Holmes Trust, Glen C. Holmes and Christine M. Holmes
dated as of June 2, 1999 (without schedules). ***
10.9 Agency Agreement dated July 1, 1999 between FutureLink and Commonwealth
regarding a $5,000,000 minimum/$10,000,000 maximum private placement
financing (amended July 15, 1999 to a maximum $15,000,000 financing).****
10.10 Loan Agreement dated July 15, 1999 and effective August 1, 1999 between
FutureLink and Vincent Romano regarding a loan of $2,000,000 to Mr. Romano
to purchase Common Stock of the Company.****
10.11 Agreement and Plan of Merger between FutureLink Distribution Corp., a
Colorado corporation, and FutureLink California Acquisition Corp., a
Delaware corporation, dated August 1, 1999.*****
10.12 Certificate of Merger of FutureLink Distribution Corp., a Colorado
corporation, with and into FutureLink California Acquisition Corp., a
Delaware corporation, dated October 15, 1999.*****
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<PAGE> 40
10.13 Amending Agreement dated October 15, 1999 to the Agreement and Plan of
Reorganization and Merger dated June 2, 1999 among FutureLink Distribution
Corp., a Colorado corporation, FutureLink California Acquisition Corp., a
Delaware corporation and Executive LAN Management, Inc., d.b.a. Micro
Visions, among others.*****
10.14 Securities Purchase Agreement dated October 15, 1999 by and among the
Registrant, Pequot Private Equity Fund II, L.P. and certain other
investors (without schedules).*****
10.15 Registration Rights Agreement dated October 15, 1999 by and among the
Registrant, Pequot Private Equity Fund II, L.P. and certain other
investors.*****
27.1 1999 Financial Data Schedule for the nine months ended September 30, 1999
(electronic filing only).
* incorporated by reference to the Company's Registration Statement on
Form SB-2 (No. 333-62133).
** incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended March 31, 1999.
*** incorporated by reference to the Company's Current Report on Form
8-K filed June 16, 1999.
**** incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 1999.
***** incorporated by reference to the Company's Current Report on Form
8-K filed October 27, 1999.
(B) REPORTS ON FORM 8-K
FutureLink filed a Current Report on Form 8-K on July 22, 1999 to report the
resignation of Donald A. Bialik as an officer and director.
FutureLink filed a Current Report on Form 8-K/A on July 28, 1999 as an addendum
to the report on Form 8-K filed by the Company on June 16, 1999 regarding the
proposed acquisition of Micro Visions.
FutureLink filed a Current Report on Form 8-K on August 3, 1999 to report
closings for a total of $15,000,000 gross proceeds raised by way of private
placement.
FutureLink filed a Current Report on Form 8-K on September 7, 1999 to report the
resignation of Cameron B. Chell as an officer and director.
FutureLink filed a Current Report on Form 8-K on September 15, 1999 to report
the proposed acquisitions of CN Networks, Inc. and Async Technologies, Inc.
38
<PAGE> 41
FutureLink filed a Current Report on Form 8-K on October 27, 1999 to report the
completion of the Micro Visions acquisition, the closing for a total of
$50,000,000 gross proceeds to be raised by way of private placement and the
addition of two new directors, Gerald A. Poch and James P. McNiel.
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 CORP.
Date: November 18, 1999 By: /s/ R. Kilambi
------------------------
Raghu Kilambi, Executive Vice-President
& Chief Financial Officer
Date: November 18, 1999 By: /s/ K.B. Scott
------------------------
Kyle B.A. Scott, Vice-President & Secretary
39
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- ----------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of Registrant*****
3.2 By-laws of Registrant*****
10.1 Debenture Acquisition Agreement dated August 14, 1998, as amended
on August 21, 1998, between FutureLink and Thomson Kernaghan &
Co. Limited ("TK").*
10.2 Letter agreement dated February 26, 1999 between FutureLink and
TK extending the terms of the original Debenture Acquisition
Agreement from $5,000,000 maximum to $6,000,000.**
10.3 Debenture and Warrant Purchase Agreement dated March 2, 1999
between FutureLink and Augustine Fund, LP.**
10.4 Agency Agreement dated April 14, 1999 between FutureLink and
Commonwealth Associates, LP ("Commonwealth") regarding a
$4,000,000 maximum plus $4,000,000 over-allotment private
placement financing.**
10.5 Letter Agreement dated April 26, 1999 between FutureLink and TK
amending certain terms of outstanding FutureLink securities and
redeeming certain convertible debentures.**
10.6 Advisory Agreement dated effective May 1, 1999 between FutureLink
and Commonwealth.**
10.7 Letter Agreement dated April 29, 1999 between FutureLink and
Bridge Technology Group LLC ("Bridge") regarding warrants
issuable to Bridge as a "success fee" under an advisory agreement
between the parties.****
10.8 Agreement and Plan of Reorganization and Merger by and among
FutureLink, FutureLink California Acquisition Corp., Executive LAN
Management, Inc. dba Micro Visions and Holmes Trust, Glen C. Holmes
and Christine M. Holmes dated June 2, 1999 (without schedules). ***
10.9 Agency Agreement dated July 1, 1999 between FutureLink and
Commonwealth regarding a $5,000,000 minimum/$10,000,000 maximum
private placement financing (amended July 15, 1999 to a maximum
$15,000,000 financing).****
10.10 Loan Agreement dated July 15, 1999 and effective August 1, 1999
between FutureLink and Vincent Romano regarding a loan of
$2,000,000 to Mr. Romano to purchase Common Stock of the
Company.****
</TABLE>
40
<PAGE> 43
<TABLE>
<S> <C> <C>
10.11 Agreement and Plan of Merger between FutureLink Distribution
Corp., a Colorado corporation, and FutureLink California
Acquisition Corp., a Delaware corporation, dated August 1,
1999.*****
10.12 Certificate of Merger of FutureLink Distribution Corp., a
Colorado corporation, with and into FutureLink California
Acquisition Corp., a Delaware corporation.*****
10.13 Amending Agreement dated October 15, 1999 to the Agreement and
Plan of Reorganization and Merger dated June 2, 1999 among
FutureLink Distribution Corp., a Colorado corporation, FutureLink
California Acquisition Corp., a Delaware corporation and
Executive LAN Management, Inc., d.b.a. Micro Visions, among
others.*****
10.14 Securities Purchase Agreement dated October 15, 1999 by and among
the Registrant, Pequot Private Equity Fund II, L.P. and certain
other investors (without schedules).*****
10.15 Registration Rights Agreement dated October 15, 1999 by and among
the Registrant, Pequot Private Equity Fund II, L.P. and certain
other investors.*****
27.1 1999 Financial Data Schedule for the nine months ended September
30, 1999 (electronic filing only).
* incorporated by reference to the Company's Registration Statement
on Form SB-2 (No. 333-62133).
** incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 1999.
*** incorporated by reference to the Company's Current Report on Form
8-K filed June 16, 1999.
**** incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended June 31, 1999.
***** incorporated by reference to the Company's Current Report on Form
8-K filed October 27, 1999.
</TABLE>
41
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999. YOU
SHOULD READ THE FINANCIAL STATEMENTS IN THEIR ENTIRETY FOR A FULL EXPLANATION OF
THIS SUMMARY FINANCIAL INFORMATION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,814,600
<SECURITIES> 0
<RECEIVABLES> 2,459,458
<ALLOWANCES> 648,372
<INVENTORY> 68,844
<CURRENT-ASSETS> 11,972,904
<PP&E> 3,348,865
<DEPRECIATION> 751,643
<TOTAL-ASSETS> 25,135,095
<CURRENT-LIABILITIES> 3,077,857
<BONDS> 22,170,366
0
0
<COMMON> 3,401
<OTHER-SE> (998,814)
<TOTAL-LIABILITY-AND-EQUITY> 25,135,095
<SALES> 1,459,987
<TOTAL-REVENUES> 5,036,715
<CGS> 1,332,891
<TOTAL-COSTS> 6,793,361
<OTHER-EXPENSES> 11,394,709<F1>
<LOSS-PROVISION> 509,836
<INTEREST-EXPENSE> 7,879,282
<INCOME-PRETAX> (22,325,861)
<INCOME-TAX> (356,960)
<INCOME-CONTINUING> (21,968,901)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,968,901)
<EPS-BASIC> (3.36)
<EPS-DILUTED> 0
<FN>
<F1>Other costs/expenses include - Accounting and Legal - $331,584, Consulting
expenses - $1,888,185, Advertising and Promotion - $1,002,704, General and
Administrative and Other - $2,798,564, Depreciation - $522,262, Amortization of
intangible assets - $1,421,035, Amortization of deferred financing fees and
debt discount - $3,334,982 and Inventory Provision - $93,393.
</FN>
</TABLE>
