<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/A
(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/A
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 1
Consolidated Balance Sheets as of September 30, 1999 and 1998 and December 31,
1998 2
Consolidated Statements of Loss and Deficit and Comprehensive Loss for the
nine month and three month periods ended September 30, 1999 and 1998 3
Consolidated Statements of Change in Stockholders' Equity to September 30,
1999 and 1998 4
Consolidated Statements of Cash Flows for the nine and three month periods ended September
30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
ITEM 2. ADDENDUM TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 33
SIGNATURES 37
</TABLE>
<PAGE> 3
FUTURELINK CORP.
PART I - FINANCIAL INFORMATION
ITEM 1 - AUDITED CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of FUTURELINK CORP.
We have audited the accompanying consolidated balance sheets of FUTURELINK CORP.
as at September 30, 1999, and December 31, 1998, and the related consolidated
statements of loss and deficit and comprehensive loss, changes in stockholders'
equity and cash flows for the nine month period ended September 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FutureLink Corp. as at
September 30, 1999 and December 31, 1998 and the results of its operations and
its cash flows for the nine month period ended September 30, 1999 in conformity
with accounting principles generally accepted in the United States.
Calgary, Canada /s/ Ernst & Young LLP
November 16, 1999 Chartered Accountants
(except for Notes 21 (g) and (h)
which are as at January 13, 2000)
<PAGE> 4
FUTURELINK CORP.
CONSOLIDATED BALANCE SHEETS
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998 1998
$ $ $
(unaudited)
<S> <C> <C> <C>
ASSETS [NOTE 10]
CURRENT
Cash 7,814,600 68 6,651
Accounts receivable, net of $174,450, $4,256 and 1,753,301 1,100,475 1,458,314
$57,101 allowance for doubtful accounts
Due from related parties, net of $473,922, nil, and 57,784 -- 73,781
$57,513 allowance for doubtful accounts [note 14]
Prepaid expenses and other 209,624 74,167 116,220
Inventory and work in progress 68,844 25,880 22,205
Interest receivable [note 5] 18,750 -- --
Debenture receivable [note 6] 1 -- 1
--------- --------- ---------
9,922,904 1,200,590 1,677,171
--------- --------- ---------
CAPITAL ASSETS, NET OF $751,643, $6,396, AND $203,455
ACCUMULATED DEPRECIATION [NOTE 7] 2,597,222 149,496 1,122,923
DEPOSITS ON ACQUISITIONS [NOTE 3] 3,304,975 -- --
INVESTMENTS [NOTE 4] -- 903,000 --
INTANGIBLE ASSETS, NET OF $2,088,652, $160,460 AND
$667,617 ACCUMULATED AMORTIZATION [NOTE 8] 6,451,619 5,158,682 7,845,717
OTHER 58,375 -- --
---------- --------- ----------
22,335,095 7,411,768 10,645,811
---------- --------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Bank indebtedness [note 10] -- 564,754 819,217
Accounts payable and accrued liabilities 2,525,916 833,126 2,787,383
Due to related parties [note14] 135,776 -- 44,816
Deferred revenues 50,000 -- --
Notes payable [note 4b] -- -- 387,795
Stockholder advance [note 14e] -- 292,118 319,071
Interest payable 328,203 -- --
Capital lease obligations payable [note 9] 37,962 -- 65,916
--------- --------- ---------
3,077,857 1,689,998 4,424,198
--------- --------- ---------
CAPITAL LEASE OBLIGATIONS PAYABLE [NOTE 9] 27,612 13,048 30,262
CONVERTIBLE DEBENTURES [NOTE 11] 22,170,366 2,070,602 2,153,457
NOTES PAYABLE [NOTE 4B] -- 381,033 --
DEFERRED TAXES [NOTE 13] 854,673 -- 1,211,634
---------- --------- ---------
26,130,508 4,154,681 7,819,551
---------- --------- ---------
MINORITY INTEREST -- -- (11,141)
COMMITMENTS AND CONTINGENCIES [NOTES 9, 17 AND 18]
STOCKHOLDERS' EQUITY [NOTE 12]
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 3,401 1,617 2,018
and 4,908,072 common shares at September 30,
1999, September 30, 1998 and December 31, 1998,
respectively
To be issued [note 12] -- 732,706 50,000
Exchangeable shares of subsidiary [note 4b] -- 2,550,000 2,550,000
Capital in excess of par value 13,847,351 4,584,324 6,437,640
Contributed surplus 14,636,300 1,205,357 1,224,668
Loan receivable [note 5] (1,750,000) -- --
Warrants issued for services [note 17a] (1,050,000) -- --
Cumulative translation adjustment (183,107) -- (96,468)
Deficit (29,299,358) (5,816,917) (7,330,457)
---------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (3,795,413) 3,257,087 2,837,401
---------- --------- ---------
22,335,095 7,411,768 10,645,811
---------- --------- ----------
</TABLE>
See accompanying notes
[signed: Timothy P. Flynn] [signed: Gerald A. Poch]
On behalf of the Board: Director Director
<PAGE> 5
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)
<S> <C> <C> <C> <C>
REVENUE [NOTE 14] 1,581,642 622,854 5,036,715 622,854
----------- ----------- ----------- -----------
EXPENSES [NOTE 14]
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 --
Equity in loss of investee [note 4a] -- (395,963) -- (807,279)
----------- ----------- ----------- -----------
59,164 (395,963) 59,164 (807,279)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (7,735,882) (3,899,866) (21,481,309) (4,382,258)
Deferred tax benefit 118,987 15,504 356,960 15,504
----------- ----------- ----------- -----------
NET LOSS BEFORE EXTRAORDINARY ITEM (7,616,895) (3,884,362) (21,124,349) (4,366,754)
Extraordinary item [note 11a] -- -- (844,552) --
----------- ----------- ----------- -----------
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 BEFORE EXTRAORDINARY ITEM $ (1.00) $ (1.27) $ (3.23) $ (1.61)
LOSS PER COMMON SHARE $ (1.00) $ (1.27) $ (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 reverse split of 5 to 1 on
June 1, 1999.
See accompanying notes
<PAGE> 6
FUTURELINK CORP.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
TO BE EXCHANGEABLE
COMMON STOCK ISSUED SHARES
---------------------- -------- ------------
SHARES $ $ $
--------- ----- ------ ---------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 2,040,700 1,020 -- --
Issuance of shares on acquisition of 46%
of FutureLink Alberta [note 4a] 308,000 154 -- --
Forgiveness of stockholder debt -- -- -- --
Issuance of share capital for cash
[note 12c] 51,163 26 -- --
Issuance of share capital to employees,
officers and directors of the company [note 12d] 700,000 350 -- --
Warrants issued with issuance of convertible
debentures [note 11a] -- -- -- --
Equity component of convertible debentures
[note 11a] -- -- -- --
Equity component of financing fees -- -- -- --
Equity component of financing fees -- -- -- --
Shares issued upon conversion of convertible
debt [note 11a] 133,752 67 -- --
Share issue costs -- -- -- --
Shares to be issued on conversion of loan [note 12e] -- -- 732,706 --
Issuance of exchangeable shares on acquisition of
SysGold [note 4b] 850,000 -- -- 2,550,000
--------- ----- ------ ---------
BALANCE SEPTEMBER 30, 1998 4,083,615 1,617 732,706 2,550,000
Forgiveness of stockholder debt -- -- -- --
Shares issued on conversion of loan [note 12e] 225,448 113 (732,706) --
Issuance of shares on acquisition of 50.4% of
FutureLink Alberta [note 4a] 334,755 167 -- --
Shares issued upon conversion of convertible debt
[note 11a] 241,203 121 -- --
Financing fees associated with converted debentures -- -- -- --
Shares to be issued for services [note 12] 23,051 -- 50,000 --
Shares issue costs -- -- -- --
--------- ----- ------ ---------
BALANCE, DECEMBER 31, 1998 4,908,072 2,018 50,000 2,550,000
========= ===== ====== =========
</TABLE>
<TABLE>
<CAPTION>
CAPITAL SHARE
IN EXCESS CONTRIBUTED PURCHASE
OF PAR SURPLUS WARRANTS
--------- ----------- --------
$ $ #
--------- ----------- --------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 1,425,211 -- --
Issuance of shares on acquisition of
of FutureLink Alberta [note 4a] 15,246 -- --
Forgiveness of stockholder debt 60,200 -- --
Issuance of share capital for cash
[note 12c] 846,774 -- 51,163
Issuance of share capital to employees,
officers and directors of the company [note 12d] 2,117,150 -- --
Warrants issued with issuance of convertible
debentures [note 11a] -- 562,500 208,333
Equity component of convertible debentures
[note 11a] -- 777,143 --
Equity component of financing fees -- (94,911) --
Equity component of financing fees -- (39,375) --
Shares issued upon conversion of convertible
debt [note 11a] 201,632 -- --
Share issue costs (81,889) -- --
Shares to be issued on conversion of loan [note 12e] -- -- --
Issuance of exchangeable shares on acquisition of
SysGold [note 4b] -- -- --
--------- --------- -------
BALANCE SEPTEMBER 30, 1998 4,584,324 1,205,357 259,496
Forgiveness of stockholder debt 10,125 -- --
Shares issued on conversion of loan [note 12e] 732,538 -- 225,448
Issuance of shares on acquisition of 50.4% of
FutureLink Alberta [note 4a] 987,360 -- --
Shares issued upon conversion of convertible debt
[note 11a] 304,921 19,311 --
Financing fees associated with converted debentures (44,525) -- --
Shares to be issued for services [note 12] -- -- --
Shares issue costs (137,103) -- --
--------- --------- -------
BALANCE, DECEMBER 31, 1998 6,437,640 1,224,668 484,944
========= ========= =======
</TABLE>
The above statement gives retroactive effect to the share reverse split of 5 to
1 on June 1, 1999.
See accompanying notes
<PAGE> 7
FUTURELINK CORP.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(All amounts stated in $U.S.)
<TABLE>
<CAPTION>
TO BE EXCHANGEABLE
COMMON STOCK ISSUED SHARES
----------------------- ------- ------------
SHARES $ $ $
--------- ----- ------- ----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 4,908,072 2,018 50,000 2,550,000
Additional shares due to rounding on common share reverse split 227 -- -- --
Equity components of 10% convertible debentures [note 11a] -- -- -- --
Warrants issued with issuance of convertible debentures [note 11a] -- -- -- --
Equity component of financing fees [note 11a] -- -- -- --
Shares issued on conversion of convertible debt and accrued interest 1,197,054 599 -- --
[note 11a]
Financing fees associated with converted debentures -- -- -- --
Discount associated with converted debentures -- -- -- --
Warrants issued with issuance of 10% convertible debentures [note 12b] -- -- -- --
Equity component of 8% convertible debentures [note 12b] -- -- -- --
Warrants issued with issuance of 8% convertible debentures [note 12b] -- -- -- --
Issuance of shares on 3.6% acquisition of FutureLink Alberta [note 4a] 23,500 12 -- --
Issuance of common stock for services [note 12] 41,652 32 (50,000) --
Issuance of common stock relating to exchange of exchangeable shares
on acquisition of SysGold in 1998 [note 4b] -- 424 -- (2,550,000)
Issuance of common stock for interest [note 11a] 36,706 18 -- --
Warrants issued with issuance of convertible debentures under amended
agreement [note 11a] -- -- -- --
Equity component of 10% convertible debentures under amended
agreement -- -- -- --
[note 11a]
Warrants issued with issuance of 8% senior subordinated convertible
promissory notes [note 11c] -- -- -- --
Equity component of 8% senior subordinated convertible promissory -- -- --
notes [note 11c]
Warrants issued as placement fee on issuance of 8% senior
subordinated convertible promissory note [note 11c] -- -- -- --
Placement fee attributable to equity component of 8% senior
subordinated convertible promissory notes [note 11c] -- -- -- --
Warrants issued for advisory services [note 17] -- -- -- --
Warrants issued for advisory services [note 17] -- -- -- --
Warrants issued for advisory services [note 17] -- -- -- --
Finance fees attributable to equity component of 8% senior
subordinated convertible promissory notes [note 17b] -- -- -- --
Equity component of 10% convertible debentures [note 11d] -- -- -- --
Warrants issued with issuance of 10% convertible debentures [note 11d] -- -- -- --
Financing fees associated with 10% convertible debentures [note 11d] -- -- -- --
Exercise of employee stock options 27,500 3 -- --
Shares issued on conversion of 8% convertible debt and accrued 355,836 36 -- --
interest [note 12b]
Financing fees and debt discount associated with converted debentures -- -- -- --
Shares issued on conversion of 10% convertible debt and accrued 27,431 2 -- --
interest [note 12a]
Shares issued on conversion of convertible debt [note 11c] 2,291,221 229 -- --
Financing fees and debt discount associated with converted debentures -- -- -- --
Exercise of warrants [note 11a] 52,083 5 -- --
Shares issued under loan agreement [note 5] 232,829 23 -- --
Issuance of 8% senior subordinated convertible promissory notes [note -- -- -- --
11b]
Finance fees associated with convertible debt issuance [note 11b] -- -- -- --
Share issue costs -- -- -- --
--------- ----- ------- ----------
BALANCE, SEPTEMBER 30, 1999 9,194,111 3,401 -- --
========= ===== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
CAPITAL SHARE
IN EXCESS CONTRIBUTED PURCHASE
OF PAR SURPLUS WARRANTS
---------- ----------- ----------
$ $ #
---------- ----------- ----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 6,437,640 1,224,668 484,944
Additional shares due to rounding on common share reverse split -- -- --
Equity components of 10% convertible debentures [note 11a] -- 911,990 --
Warrants issued with issuance of convertible debentures [note 11a] -- 129,500 129,534
Equity component of financing fees [note 11a] -- (91,194) --
Shares issued on conversion of convertible debt and accrued interest 1,560,887 -- --
[note 11a]
Financing fees associated with converted debentures (96,834) -- --
Discount associated with converted debentures (26,747) -- --
Warrants issued with issuance of 10% convertible debentures [note 12b] -- 20,000 150,621
Equity component of 8% convertible debentures [note 12b] -- 125,000 --
Warrants issued with issuance of 8% convertible debentures [note 12b] -- 35,847 26,553
Issuance of shares on 3.6% acquisition of FutureLink Alberta [note 4a] 42,288 -- --
Issuance of common stock for services [note 12] 124,968 -- --
Issuance of common stock relating to exchange of exchangeable shares
on acquisition of SysGold in 1998 [note 4b] 2,549,576 -- --
Issuance of common stock for interest [note 11a] 76,347 -- --
Warrants issued with issuance of convertible debentures under amended
agreement [note 11a] -- 1,200,000 862,132
Equity component of 10% convertible debentures under amended
agreement -- 1,015,000 --
[note 11a]
Warrants issued with issuance of 8% senior subordinated convertible
promissory notes [note 11c] -- 3,126,620 4,019,250
Equity component of 8% senior subordinated convertible promissory -- 4,911,880 --
notes [note 11c]
Warrants issued as placement fee on issuance of 8% senior
subordinated convertible promissory note [note 11c] -- 1,800,000 2,000,000
Placement fee attributable to equity component of 8% senior
subordinated convertible promissory notes [note 11c] -- (1,800,000) --
Warrants issued for advisory services [note 17] -- 1,800,000 2,000,001
Warrants issued for advisory services [note 17] -- 40,320 45,600
Warrants issued for advisory services [note 17] -- 228,950 95,000
Finance fees attributable to equity component of 8% senior
subordinated convertible promissory notes [note 17b] -- (159,722) --
Equity component of 10% convertible debentures [note 11d] -- 79,821 --
Warrants issued with issuance of 10% convertible debentures [note 11d] -- 41,800 44,505
Financing fees associated with 10% convertible debentures [note 11d] -- (4,180) --
Exercise of employee stock options 100,622 -- --
Shares issued on conversion of 8% convertible debt and accrued 537,278 -- --
interest [note 12b]
Financing fees and debt discount associated with converted debentures (38,619) -- --
Shares issued on conversion of 10% convertible debt and accrued 55,125 -- --
interest [note 12a]
Shares issued on conversion of convertible debt [note 11c] 2,302,271 -- --
Financing fees and debt discount associated with converted debentures (444,673) -- --
Exercise of warrants [note 11a] 65,099 -- (52,083)
Shares issued under loan agreement [note 5] 1,999,977 -- --
Issuance of 8% senior subordinated convertible promissory notes [note -- -- 2,475,000
11b]
Finance fees associated with convertible debt issuance [note 11b] (1,392,592) -- --
Share issue costs (5,262) -- --
---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1999 13,847,351 14,636,300 12,281,057
========== ========== ==========
</TABLE>
The above statement gives retroactive effect to the share reverse split of 5 to
1 on June 1, 1999.
<PAGE> 8
FUTURELINK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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)
<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 investee [note 4b] -- 395,963 -- 807,279
Non cash interest expense 86,374 1,205,357 7,321,543 1,205,357
Non cash consulting expense 450,000 -- 875,000 --
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
Non cash compensation expense 250,000 -- 250,000 --
Extraordinary item -- -- 432,952 --
Other 51,543 -- 81,445 --
Deferred tax benefit (118,987) -- (356,961) --
---------- ---------- ----------- ----------
(4,396,973) (2,186) (8,086,643) (73,262)
Changes in non-cash working capital [note 15] 1,466,187 (572,888) (193,349) (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 Alberta -- (353,104) -- (1,694,879)
Capital assets purchased (478,711) (20,266) (2,022,488) (20,266)
Cash consideration on acquisition of SysGold [note 4a] -- (2,019,149) -- (2,019,149)
Deposits on acquisitions [note 3] (2,084,786) -- (3,304,975) --
Other -- -- (125,193) --
Changes in non-cash working capital [note 15] 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 [note -- -- 2,925,000 --
11a]
Repayment of 8% convertible debentures [note 11a] -- -- (1,470,000) --
Repayment of 10% convertible debentures [note 12a] -- -- (218,725) --
Issuance of 8% senior subordinated convertible debentures net
of issue costs [note 11c] -- -- 7,258,327 --
Issuance of 8% senior subordinated convertible debentures net
of issue costs [note 11b] 13,607,408 -- 13,607,408 --
Issuance of 10% convertible debentures net of issue costs -- 2,025,000 247,500 2,025,000
[note 11d]
Issuance of 8% convertible debentures net of issue costs [note -- -- 490,000 --
12b)
Issuance of note payable net of issue costs -- -- 125,000 --
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 [note 15] -- -- 243,085 --
---------- ---------- ----------- ----------
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
========== ========== =========== ==========
Cash interest paid 175,970 15,701 230,707 15,701
</TABLE>
See accompanying notes
<PAGE> 9
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, September 30, 1998 (unaudited), and December 31, 1998
1. BASIS OF PRESENTATION
The Company's predecessor was incorporated on April 4, 1955 in the State of
Colorado, USA. Effective February 17, 1998, the Company's name became FutureLink
Distribution Corp. On October 15, 1999, the Company merged with an inactive
subsidiary to form FutureLink Corp. The Company is now incorporated in the state
of Delaware.
The Company is an information technology service provider focusing on providing
utility-like computing services to businesses.
The Company has experienced net losses over the past three years and as of
September 30, 1999, had an accumulated deficit of $3,795,413. Such losses are
attributable to both cash operating losses relating to costs incurred in the
development of the Company's services and infrastructure and non cash interest
and amortization charges. The Company expects operating losses to continue for
the foreseeable future as it continues to develop and promote its services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have, in management's opinion, been properly prepared
in accordance with accounting principles generally accepted in the United
States.
USE OF ESTIMATES
Because a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period necessarily
involves the use of estimates which would affect the amount of recorded assets,
liabilities, revenues and expenses. Actual amounts could differ from these
estimates.
INVENTORY AND WORK IN PROGRESS
Inventories of computer hardware held for re-sale and work in progress are
recorded at the lower of actual cost or net realizable value.
CAPITAL ASSETS
Capital assets are recorded at cost. Depreciation is provided at rates designed
to depreciate the cost of the assets over their estimated useful lives as
follows:
Computers and equipment 30%
Leasehold improvements term of lease
Software 100%
Office equipment 20%
Equipment under capital lease 30%
7
<PAGE> 10
INTANGIBLE ASSETS
(a) Employee and consultants base
The employee and consultants base recorded on the acquisition of SysGold is
recorded at cost and is being amortized on a straight-line basis over three
years. The recoverability of the employee and consultants base is assessed
periodically based on retention of employees and consultants in relation to
management estimates of undiscounted future revenue provided from
information technology services.
(b) Goodwill
Goodwill is recorded at cost and is being amortized on a straight line
basis over five years. The recoverability of goodwill is assessed
periodically based on management estimates of undiscounted future operating
income from each of the acquired businesses to which the goodwill relates.
FINANCING FEES
Financing fees consisting of cash paid and warrants issued associated with that
portion of convertible debentures classified as debt are deferred and amortized
over the life of the debentures, unless the debentures have been converted.
Financing fees associated with that portion of the convertible debentures
classified as contributed surplus is charged to that account. The pro rata
portion of unamortized financing fees associated with converted debentures is
charged to share capital in excess of par value.
CAPITAL LEASES
Leases in which substantially all the benefits and risks of ownership are
transferred to the Company are capitalized with an offsetting amount recorded as
a liability.
REVENUE
Revenue from information technology services and outsourcing contracts is
recognized when the service is delivered over the term of the applicable
contracts.
INCOME TAXES
The Company records its provision for income taxes using the liability method.
Under this method deferred tax assets and liabilities are recognized based on
the anticipated future tax effects arising from the differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases.
CONSOLIDATION
These consolidated financial statements include the accounts of the Company's
wholly owned subsidiary FutureLink Distribution Corp. ("FutureLink Alberta")
which is the result of mergers effective August 1, 1999 of FutureLink
Distribution Corp. (Alberta), FutureLink Acquisition Corp. and
FutureLink/SysGold Ltd. ("SysGold").
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's subsidiaries as at September 30, 1999
is the Canadian Dollar. Adjustments arising from translating the subsidiaries'
financial statements into United States dollars are recorded in stockholders'
equity as a cumulative translation adjustment.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
8
<PAGE> 11
RELATED PARTY TRANSACTIONS
Related party transactions are recorded at the amounts agreed to by the parties.
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 convertible debentures is anti-dilutive.
STOCK OPTIONS
The Company applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost is recognized in the accounts.
CERTAIN RECLASSIFICATIONS
Certain amounts in the 1998 financial statements have been reclassified to
conform to the current year presentation.
3. DEPOSITS ON 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>
ACQUISITION
DEPOSIT 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 Micro Visions
with a subsidiary of the Company such that all off 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
acquisition and merger were 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.
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:
9
<PAGE> 12
<TABLE>
<CAPTION>
$
------------
NET ASSETS ACQUIRED
<S> <C>
Working capital deficiency (656,000)
Capital and other assets 1,063,000
Goodwill 52,017,673
------------
NET ASSETS ACQUIRED 52,424,673
------------
CONSIDERATION:
Cash 12,000,000
7,200,000 common shares 40,049,673
Estimated acquisition costs 375,000
------------
52,424,673
------------
</TABLE>
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.
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 a subsidiary of 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, the merger was completed, 1,181,816 shares were issued, and
the remaining $3,510,000 cash was paid.
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>
$
------------
NET ASSETS ACQUIRED
<S> <C>
Working capital 435,383
Capital and other assets 83,874
Goodwill 13,005,743
------------
NET ASSETS ACQUIRED 13,525,000
------------
CONSIDERATION:
Cash 3,900,000
1,181,816 common shares 9,100,000
Estimated acquisition costs 525,000
------------
13,525,000
------------
</TABLE>
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 a subsidiary of 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 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:
10
<PAGE> 13
<TABLE>
<CAPTION>
$
------------
NET ASSETS ACQUIRED
<S> <C>
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
1,298,705 common shares 10,000,000
Estimated acquisition costs 525,000
------------
16,525,000
------------
</TABLE>
4. INVESTMENTS
A) FUTURELINK 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.
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>
$
------------
NET ASSETS ACQUIRED
<S> <C>
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>
FutureLink Alberta was consolidated from November 24, 1998 to December 31, 1998.
On February 26, 1999, FutureLink Alberta became a wholly owned subsidiary when
the Company purchased the remaining 117,500 shares (3.6%) of FutureLink Alberta
in exchange for 23,500 common shares of the Company.
11
<PAGE> 14
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 4,250,000 SysGold
exchangeable shares which are exchangeable into 850,000 common shares of the
Company. The exchangeable shares had 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>
During 1999, the notes were paid in full and the 850,000 exchangeable shares
were exchanged for common shares.
5. LOAN RECEIVABLE
On August 1, 1999, the Company loaned $2,000,000 to an executive which was then
used by the executive to purchase 232,829 common shares of the Company. The loan
receivable has been recorded as a reduction of stockholders' equity. 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.
The loan bears interest at 5.625% per year. Interest is payable annually,
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 periods ended September 30, 1999 was $18,750.
During the three 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.
6. DEBENTURE RECEIVABLE
During 1998, the Company's subsidiary, FutureLink Alberta, disposed of certain
assets and operations in exchange for a 50% equity investment in NextClick Ltd.
valued at $1. On November 30, 1998 the Company sold its investment in exchange
for a non interest bearing debenture receivable in the amount of $100,000
Canadian. The debenture is due on demand on or after March 31, 1999. A first
floating charge against the assets of the issuer has been pledged as security.
Due to the uncertainty of collectibility, the $100,000 debenture is carried at
the book value of the exchanged common shares, being $1.
12
<PAGE> 15
7. CAPITAL ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $ $
--------- ------- ---------
<S> <C> <C> <C>
Computers and equipment 1,846,940 340,206 1,506,734
Leasehold improvements 299,103 49,674 249,429
Software 561,135 249,683 311,452
Office equipment 503,952 68,298 435,654
Equipment under capital lease 137,735 43,782 93,953
--------- ------- ---------
3,348,865 751,643 2,597,222
========= ======= =========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $ $
------- ----- -------
<S> <C> <C> <C>
Computers and equipment 50,470 3,484 46,986
Leasehold improvements 25,029 617 24,412
Software 1,561 421 1,141
Office equipment 24,900 878 24,022
Equipment under capital lease 53,932 996 52,935
------- ----- -------
155,892 6,396 149,496
======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $ $
--------- ------- ---------
<S> <C> <C> <C>
Computers and equipment 605,830 80,872 524,958
Leasehold improvements 218,018 16,720 201,298
Software 185,406 69,405 116,001
Office equipment 181,384 17,706 163,678
Equipment under capital lease 135,740 18,752 116,988
--------- ------- ---------
1,326,378 203,455 1,122,923
========= ======= =========
</TABLE>
8. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
--------- ------- ---------
<S> <C> <C> <C>
Goodwill 5,340,271 906,429 4,433,842
Employee and consultants base 3,200,000 1,182,223 2,017,777
--------- --------- ---------
8,540,271 2,088,652 6,451,619
========= ========= =========
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
--------- ------- ---------
<S> <C> <C> <C>
Goodwill 2,119,142 43,565 2,075,577
Employee and consultants base 3,200,000 116,895 3,083,105
--------- ------- ---------
5,319,142 160,460 5,158,682
========= ======= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
--------- ------- ---------
<S> <C> <C> <C>
Goodwill 5,313,334 285,395 5,027,939
Employee and consultants base 3,200,000 382,222 2,817,778
--------- ------- ---------
8,513,334 667,617 7,845,717
========= ======= =========
</TABLE>
The $3,200,000 relating to employee and consultants base represents the
valuation placed on the knowledge, expertise, and contacts of employees and
consultants of SysGold.
9. CAPITAL AND OPERATING LEASE OBLIGATIONS PAYABLE
The future minimum lease payments at September 30, 1999 under capital and
operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
$ $
-------- ---------
<C> <C> <C>
1999 12,484 147,309
2000 40,382 554,352
2001 20,624 495,190
2002 2,251 46,099
2003 -- 192
-------- ---------
Total future minimum lease payments 75,741 1,243,142
Less: imputed interest (10,167) --
-------- ---------
Balance of obligations under capital lease 65,574 --
Less: current portion included in accounts payable
and accrued liabilities (37,962) --
-------- ---------
Long term obligation under capital lease 27,612 --
======== =========
</TABLE>
The future minimum lease payments at December 31, 1998 under capital and
operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
$ $
-------- ---------
<C> <C> <C>
1999 65,916 265,111
2000 33,466 244,205
2001 13,748 243,654
2002 -- 20,289
2003 -- --
-------- ---------
Total future minimum lease payments 113,130 773,259
Less: imputed interest (16,952) --
-------- ---------
Balance of obligations under capital lease 96,178 --
Less: current portion (65,916) --
-------- ---------
Long term obligation under capital lease 30,262 --
======== =========
</TABLE>
14
<PAGE> 17
10. BANK INDEBTEDNESS
As at September 30, 1999, a subsidiary of the Company, FutureLink Alberta, 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.
As at December 31, 1998, the demand credit facility was $1,000,000. At that time
the Company was in breach of its current ratio covenant. During the second
quarter of 1999, the Company rectified the situation. The bank waived its right
in respect of the breach.
11. CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
SEPTEMBER 30, September 30, December 31,
1999 1998 1998
$ $ $
------------- ------------- -------------
<S> <C> <C> <C>
LONG TERM
10% TK convertible debentures (a) 1,678,344 2,070,602 2,153,457
8% Senior subordinated convertible promissory
notes (b) 15,000,000 - -
8% Senior subordinated convertible promissory
notes (c) 5,259,043 - -
10% Convertible debentures (d) 232,979 - -
---------- --------- ---------
22,170,366 2,070,602 2,153,457
========== ========= =========
</TABLE>
A) 10% TK CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
SEPTEMBER 30, September 30, December 31,
1999 1998 1998
$ $ $
------------- ------------- -------------
<S> <C> <C> <C>
Principal 2,500,000 2,050,000 2,220,000
Discount on debt (977,830) - -
Deferred financing fee - - (222,073)
Accrued interest 156,174 20,602 155,530
--------- --------- ---------
NET BALANCE 1,678,344 2,070,602 2,153,457
========= ========= =========
</TABLE>
During 1998 the Company entered into a 10% convertible debenture agreement with
Thomson Kernaghan & Co. Ltd. (`TK") as agent, to provide up to $5,000,000 of
financing. The financing included the issuance of 208,333 share purchase
warrants. During the nine month period to September 30, 1998, the Company
received $2,250,000 under the financing arrangement. On September 21, 1998,
$200,000 of the convertible debentures, together with accrued interest were
converted into 133,752 common shares. During the fourth quarter of 1998, an
additional $470,000 of funding was received and $300,000 plus $5,042 of accrued
interest was converted into 241,203 common shares.
During the first quarter of 1999, the Company received the final $2,280,000
under the $5,000,000 facility. In addition, the Company amended the terms of the
10% TK convertible debentures which increased the total available financing from
$5,000,000 to $6,000,000 following which the Company received an additional
$970,000. In addition, an additional 129,534 warrants were issued which were
recorded to contributed surplus at a value of $129,500 based on the fair value
of the warrants with an offsetting entry to discount on debt.
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 expense as the conversion option was exercisable upon
issuance.
During 1999, $1,500,000 of the convertible debentures, together with $61,486 of
accrued interest, were converted into 1,197,054 common shares.
15
<PAGE> 18
On April 26, 1999, the Company amended the terms of the 10% TK convertible
debenture agreement. 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. Following 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 of $4.80 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.
During the nine month period ended September 30, 1999, an amount of $844,552 has
been recorded as an extraordinary item relating to the loss on extinguishment of
debt and includes $259,318 unamortized finance fees and $173,634 unamortized
debt discount associated with the $3,470,000 of debt existing at the time, 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 to expenses over the remaining life
of the debentures of which $222,170 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% $15,000,000 PRINCIPAL AMOUNT OF SENIOR SUBORDINATED CONVERTIBLE
PROMISSORY NOTES
SEPTEMBER 30, 1999
$
------------------
Principal 15,000,000
----------
NET BALANCE AT SEPTEMBER 30, 1999 15,000,000
==========
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 at least $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.
16
<PAGE> 19
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 it was known that the notes would 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 and following a private placement (see note
21c), the $15,000,000 promissory notes converted into 2,727,273 common shares at
$5.50 per share and 711,818 warrants at an exercise price of $8.50 per share.
C) 8% $8,038,500 PRINCIPAL AMOUNT OF SENIOR SUBORDINATED CONVERTIBLE
PROMISSORY NOTES
SEPTEMBER 30, 1999
$
------------
Principal 5,736,000
Discount on debt (383,164)
Deferred financing fee (93,793)
------------
NET BALANCE AT SEPTEMBER 30, 1999 5,259,043
============
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 of
the subsequent offering; or (ii) $1.00 per common share. Such conversion is
conditional 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 with an
offsetting entry to interest expense.
An amount of $3,195,848 has been included as a discount on debt and is being
amortized to expenses 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 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.
Issue costs of $780,173 were paid relating to the issuance of the debentures and
were recorded as a discount on debt. The amount is being amortized over the
estimated life of the debentures. 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 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.
17
<PAGE> 20
Subsequent to September 30, 1999, $5,090,500 notes were converted into 5,988,824
common shares. Also subsequent to September 30, 1999, 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
SEPTEMBER 30, 1999
$
-------------
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
-------------
-------------
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 to expenses over the life of the debentures.
12. SHARE CAPITAL
On June 1, 1999, the Company completed a reverse stock split of 5 to 1. All
amounts disclosed in these financial statements have been restated to give
effect to the reverse stock split.
ISSUED AND PAID UP
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
debenture holder. During the third quarter, $34,055 of principal and
interest was repaid and $55,125 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.
18
<PAGE> 21
B) During the first quarter of 1999, the Company issued an aggregate of
$500,000 8% convertible debentures, due February 28, 2002, convertible at
$1.51 per share. 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 was recorded as a discount
on debt and was being amortized to expenses over the life of the
convertible debentures.
On August 21, 1999, $500,000 of principal and $37,314 of accrued interest
and other fees were converted into 355,836 common shares.
C) During the nine month period ended September 30, 1998, the Company issued
51,163 common shares and 51,163 warrants for $846,800 cash. Of the
warrants, 16,667 are exercisable at $15.00 on or before January 29, 1999
and at $15.50 on or before January 29, 2000; 21,163 are exercisable at
$18.75 on or before April 3, 1999 and at $20.00 on or before April 3, 2000;
and 13,333 are exercisable at $16.25 on or before April 22, 2000. As at
September 30, 1999 none of the warrants have been exercised.
D) On July 27, 1998, the Company issued 700,000 shares to employees, officers
and directors of the Company for $3,500. The fair value of these shares at
that time was $2,117,500. The difference between the fair value and the
cash consideration received has been included with capital in excess of par
and with expenses under contracts, payroll and benefits.
E) During 1998, a stockholder advanced the Company $729,802. Interest incurred
on the loan to July 2, 1998 in the amount of $2,849 was added to the
principal amount owing. $350,000 of the loan was assigned to another
stockholder on July 2, 1998. On the same date, both portions of the loan
were converted into 225,448 common shares with an ascribed value of
$732,651, and an equal number of warrants. Each warrant entitles the
holders to purchase one common share at $5.00 on or before June 30, 1999
and $6.25 on or before June 30, 2000. As at September 30, 1999 none of the
warrants have been exercised.
TO BE ISSUED
During 1998, the Company entered into an agreement for consulting services which
provided for the settlement of fees by way of shares in the Company's stock. The
number of shares issued was based on 95% of the average closing price of the
Company's stock during the trading days for the month in question as quoted on
the Nasdaq Over the Counter Bulletin Board. As at December 31, 1998, $50,000 was
owing for consulting services in relation to this agreement, equating to 23,051
shares. During 1999, the 23,051 shares were issued along with an additional
41,652 shares relating to services performed in 1999.
OPTIONS
As of September 30, 1999, the Company has issued 4,845,500 options to purchase
common stock to the Company's directors, officers and employees. Of the total
issued, 27,500 have been exercised and 49,900 had expired or been cancelled.
Details of the stock options outstanding at September 30, 1999 are as follows:
19
<PAGE> 22
<TABLE>
<CAPTION>
EXERCISE PRICE EXPIRY DATE
NUMBER OF OPTIONS
- ------------------------------ ------------------------ -----------------------
<S> <C> <C>
561,000 3.80 June 29, 2001
160,000 5.85 August 5, 2001
5,000 2.25 December 1, 2001
5,000 2.25 December 1, 2002
44,900 2.25 April 1, 2004
265,000 1.40 April 1, 2004
2,147,000 3.15 June 1, 2004
100,000 5.00 June 1, 2004
880,000 6.08 June 1, 2004
600,000 7.56 August 30, 2004
- ------------------------------ ------------------------ -----------------------
4,786,100
- ------------------------------ ------------------------ -----------------------
</TABLE>
The fair value of each option granted during 1999 is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: expected volatility of 146% - 205%; risk-free interest rate of
4.0%; no payment of common share dividends; and expected life of 1 to 5 years.
Had compensation cost for these plans been determined based upon the fair value
at grant date, consistent with the methodology prescribed in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
compensation' (FAS 123), the Company's net loss and net loss per common share
for the nine month period ended September 30, 1999 would have been $27,124,287
and $4.15, respectively.
13. INCOME TAXES
The income tax benefit differs from the amount computed by applying the U.S.
federal statutory tax rates to the loss before income taxes for the following
reasons:
<TABLE>
<CAPTION>
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
$ $ $ $
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tax benefit at U.S. statutory rate (34%) (2,630,200) (1,325,954) (7,590,793) (1,489,968)
Increase (decrease) in taxes resulting
from:
Deferred tax asset valuation allowance 2,318,107 1,520,137 4,178,596 1,496,047
Equity loss on affiliate -- 176,679 -- 360,208
U.S. state taxes (150,241) -- (505,127) --
Non deductible expenses 681,395 27,800 4,305,780 83,605
Foreign tax rate differences (338,048) (414,166) (745,416) (465,396)
Other -- -- -- --
---------- ---------- ---------- ----------
Deferred tax benefit (118,987) (15,504) (356,960) (15,504)
========== ========== ========== ==========
</TABLE>
Deferred income taxes reflect the net taxes of temporary differences between the
carrying amounts of the assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The components of the companies
deferred tax liabilities and assets are as follows:
20
<PAGE> 23
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998 1998
$ $ $
---------- ---------- ------------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Employee and consultants base 854,673 -- 1,211,634
---------- ---------- ----------
---------- ---------- ----------
Deferred tax assets
Net operating loss carryforwards 4,863,601 910,035 1,904,583
Start-up costs 29,591 41,991 39,715
Write-off of mining related assets 206,000 206,000 206,000
Depreciation 324,484 69,559 77,017
Debt issue costs -- 17,495 23,327
Debenture receivable 22,564 22,564 22,564
---------- ---------- ----------
Total deferred tax assets 5,446,240 1,267,644 2,273,206
Valuation allowance (5,446,240) (1,267,644) (2,273,206)
---------- ---------- ----------
Net deferred tax assets -- -- --
---------- ---------- ----------
Net deferred tax liabilities 854,673 -- 1,211,634
========== ========== ==========
</TABLE>
The Company has provided a valuation allowance for the full amount of deferred
tax assets in light of its history of operating losses since its inception. When
recognized, $288,194 of the valuation allowance will reduce goodwill. The
remaining balance may be available to offset future taxes when the Company
achieves profitability.
The Company has U.S. net operating losses carried forward of $7,201,000 which
expire as follows:
<TABLE>
<CAPTION>
$
-------------
<S> <C> <C>
2012 100,000
2018 2,467,000
2019 4,634,000
</TABLE>
The availability of these loss carryforwards to reduce future taxable income
could be subject to limitations under Section 382 of the Internal Revenue Code
of 1986, as amended. Certain ownership changes can significantly limit the
utilization of net operating loss carryforwards in the period following the
ownership change. The Company has not determined whether such changes have
occurred and the effect such changes could have on its ability to carry forward
all or some of the U.S. net operating losses.
The Company has non-capital losses carried forward for Canadian income tax
purposes of $6,849,000. These losses expire as follows:
<TABLE>
<CAPTION>
$
-------------
<S> <C> <C>
2002 123,000
2003 563,000
2004 1,868,000
2005 906,000
2006 3,389,000
</TABLE>
21
<PAGE> 24
14. RELATED PARTY TRANSACTIONS
A) On August 1, 1999, the Company loaned $2,000,000 to an executive of the
Company which was used to purchase 232,829 common shares from Treasury (see
note 5).
B) During the nine months ended September 30, 1999, management of the Company
participated in the 8% senior subordinated convertible promissory note
offering by way of purchasing notes totaling $433,000 (see note 11c).
C) During the nine months ended September 30, 1999, the Company provided
services and products of $30,292 ($45,117 Canadian) to Jaws Technologies
Inc., an entity of which a Director was also a Director of the Company. An
amount of $43,571 ($63,927 Canadian) is owing from Jaws Technologies Inc.
as at September 30, 1999.
In addition, the Company obtained services from Jaws Technologies Inc. in
the amount of $2,031 ($3,025 Canadian). As at September 30, 1999 $2,206
($3,237 Canadian) remains owing by the Company.
During the year end December 31, 1998, the Company provided services and
products of $40,277 ($59,735 Canadian) to Jaws Technologies Inc. An amount
of $37,002 ($56,735 Canadian) was owing from Jaws Technologies Inc. at
December 31, 1998.
D) During the nine months ended September 30, 1999, the Company provided
services and products of $267,439 ($398,323 Canadian) to Willson Stationers
Ltd. and e-Supplies Inc., related entities of which a previous Director was
also a previous Director of these companies. As at September 30, 1999,
$488,135 ($716,192 Canadian) remains owing from these entities. An
allowance for doubtful accounts of $473,922 ($695,339 Canadian) has been
recorded due to the uncertainty of collection.
During the year ended December 31, 1998, the Company provided services and
products of $63,561 ($94,267 Canadian) to Willson Stationers Ltd. As at
December 31, 1998 an amount of $58,909 ($90,325 Canadian) was owing from
Willson Stationers Ltd.
In addition, the Company obtained $20,857 ($31,077 Canadian) of products
from Willson Stationers Ltd. during the period. As at September 30, 1999,
$26,382 ($38,707 Canadian) remains owing by the Company. As at December 31,
1999 an amount of $4,976 ($7,630 Canadian) was owing.
E) During 1998, two of the Company's stockholders advanced the Company
$289,264 ($440,000 Canadian). Simple interest at a rate of prime plus 1%,
totaling $2,854 and $10,145 to September 30, 1998 and December 31, 1998,
respectively was added to the principal amount owing. In addition, one of
the Company's stockholders advanced the Company $17,609 ($27,000 Canadian)
of which $19,662 ($30,147) including interest was outstanding at year end.
These amounts were repaid during 1999.
F) During the third quarter of 1999, the Company obtained services from Micro
Visions relating to consulting work performed in connection with the
Company's overall expansion of application service provider and server
based computing services. The services provided by Micro Visions were
charged on normal commercial terms and conditions. The total value of these
services was $107,188, all of which remained outstanding at September 30,
1999.
22
<PAGE> 25
15. NET CHANGE IN NON-CASH WORKING CAPITAL
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDING ENDING
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
$ $
------------- ------------
<S> <C> <C>
(Increase) decrease in non-cash working capital:
Accounts receivable 305,846 (278,991)
Inventory 58,063 (46,639)
Prepaid expenses and deposits (7,948) (77,004)
Interest receivable (18,750) (18,750)
Accounts payable and accrued liabilities 951,815 (170,507)
Deferred revenue -- 50,000
Interest payable 215,688 340,703
---------- ----------
1,504,714 (201,188)
========== ==========
The change relates to the following activities:
Operating activities 1,466,187 (193,349)
Investing activities 38,527 (250,924)
Financing activities -- 243,085
---------- ----------
1,504,714 (201,188)
========== ==========
(Increase) decrease in non-cash working capital:
Accounts receivable (1,100,475) (1,100,475)
Inventory (25,880) (25,880)
Prepaid expenses and deposits (74,167) (74,167)
Accounts payable and accrued liabilities 808,145 809,194
Other (1,260) (1,260)
Working capital acquired (179,251) (179,251)
---------- ----------
(572,888) (571,839)
========== ==========
The change relates to the following activities:
Operating activities (572,888) (571,839)
Investing activities -- --
Financing activities -- --
---------- ----------
(572,888) (571,839)
========== ==========
</TABLE>
16. 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.
23
<PAGE> 26
17. 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. An amount of $1,800,000 has been included
in contributed surplus as the estimated value of the warrants with an
offset to shareholders' equity as warrants for services. As the amount
relates to services for a one year period, $150,000 per month is being
taken to income as consulting expense.
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.
18. 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.
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.
D) The Company is currently in discussion with certain shareholders and
ex-employees with respect to various issues, including employment related
matters and other claims. These parties seek additional compensation in the
form of cash and options. Formal statements of claim have not been filed
against the Company with respect to these matters. At this time, management
is unable to determine the amount, if any, it will be required to pay to
settle these issues.
E) In November, 1999 the Company received correspondence from a party making
claims under a letter agreement seeking further compensation for financing
transactions completed by the Company. The Company is not aware of formal
litigation having been filed with respect to these matters, however, the
party claims an entitlement to cash fees totaling $5,129,733 as well as
warrants to purchase an aggregate of 3,289,689 common shares of the Company
at exercise prices ranging from $1.00 to $8.50 per share. The Company
believes the claim is without merit, but continues to discuss this matter
with the party in question. At this early juncture, an evaluation of the
dollar amount to be paid, if any, cannot be made.
24
<PAGE> 27
F) Under certain California State regulatory requirements, it appears the
Company may be obliged to offer a rescission of certain options granted to
California employees subsequent to September 30, 1999. The Company has
applied for an order from the State of California approving the proposed
terms of the rescission offer. The rescission offer, if approved, would be
made with respect to 1,240,500 options at an exercise price of $8.50, and
40,000 shares issued in relation to other options exercise to date. In
light of market prices for the Company's common stock recently being
significantly in excess of the exercise price, the Company expects few
holders would accept the rescission offer. However, should all offers be
accepted , the maximum dollar amount the Company would be required to pay
under this offer is estimated to be $2,377,800 for option holders and
$152,000 for shareholders plus 7% interest per annum.
19. SEGMENTED INFORMATION
The Company's activities are conducted in one operating segment with all
activities relating to the sales and support of information technology. These
activities are carried out in two geographic segments, being Canada and the
United States.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
---------------------------------------
Canada U.S. Total
$ $ $
--------- ------ ---------
<S> <C> <C> <C>
Revenue 5,036,715 -- 5,036,715
========= ====== =========
Capital assets, goodwill and employee
and consultants base 8,964,840 84,001 9,048,841
========= ====== =========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------
Canada U.S. Total
$ $ $
--------- ------ ---------
<S> <C> <C> <C>
Revenue 622,854 -- 622,854
========= ====== =========
Capital assets, goodwill and employee
and consultants base 5,308,178 -- 5,308,178
========= ====== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
Canada U.S. Total
$ $ $
--------- ------ ---------
<S> <C> <C> <C>
Revenue 2,436,658 -- 2,436,658
========= ====== =========
Capital assets, goodwill and employee
and consultants base 9,046,685 3,187 9,049,872
========= ====== =========
</TABLE>
20. FINANCIAL INSTRUMENTS
Financial instruments comprising cash, accounts receivable, due from related
parties, bank indebtedness, accounts payable, accrued liabilities, due to
related parties, notes payable, stockholder advances, interest payable and
capital lease obligations payable approximate their fair value. It is
management's opinion that the Company is not exposed to significant currency or
credit risks arising from these financial instruments.
The Company's sales have been primarily derived from customers in Calgary,
Alberta, Canada. In addition, approximately 18% of revenues for the nine month
period ended September 30, 1999 were derived from one customer, as compared to
22% for the year ended December 31, 1998.
The estimated fair value of the Company's convertible debentures are as follows:
25
<PAGE> 28
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------
CARRYING ESTIMATED
VALUE FAIR VALUE
$ $
--------- ---------
<S> <C> <C>
TK convertible debentures (see note 11a) 1,678,344 2,703,286
Senior subordinated convertible promissory notes, not subsequently
converted (see note 11c and 21e) 591,826 1,123,420
Convertible debentures (see 11d) 232,979 235,937
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------
CARRYING ESTIMATED
VALUE FAIR VALUE
$ $
--------- ---------
<S> <C> <C>
TK convertible debentures (see note 11a) 2,070,602 1,873,895
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
CARRYING ESTIMATED
VALUE FAIR VALUE
$ $
--------- ---------
<S> <C> <C>
TK convertible debentures (see note 11a) 2,375,530 2,150,000
--------- ---------
</TABLE>
The above fair values have been calculated based on the estimated present value
of the principle and interest under the debenture plus the estimated fair value
of the conversion option (exclusive of the intrinsic value of the conversion
option and the detachable warrants at the issue date of the debenture). Fair
values have not been determined for debt that has been converted to equity
subsequent to September 30, 1999.
The fair value of the loan receivable (see note 5) is nil given $250,000 of the
loan is forgiven on a quarterly basis and the Company does not expect to collect
the loan balance by way of cash.
The Company is subject to interest rate risk to the extent of the interest rate
being charged on the various convertible debentures. The effective interest
rates realized by the Company, inclusive of the amounts relating to the non cash
value of conversion features and warrants associated with the debt are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
---------------------------
STATED INTEREST EFFECTIVE
RATE RATE
--------------- ---------
<S> <C> <C>
TK convertible debentures (see note 11a) 10% 92%
Senior subordinated convertible promissory notes (see note 11b) 8% 8%
Senior subordinated convertible promissory notes (see note 11c) 8% 149%
Convertible debentures (see note 11d) 10% 44%
Convertible debentures (converted during the period) (see note 12a) 10% 30%
Convertible debentures (converted during the period) (see note 12b) 8% 35%
--------------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------
STATED INTEREST EFFECTIVE
RATE RATE
--------------- ---------
<S> <C> <C>
TK convertible debentures (see note 11a) 10% 38%
--------------- ---------
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------
STATED INTEREST EFFECTIVE
RATE RATE
--------------- ---------
<S> <C> <C>
TK convertible debentures (see note 11a) 10% 38%
--------------- ---------
</TABLE>
21. 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 11c, 21e and 21f).
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 costs of the issue are expected to be
$1,000,000.
D) During the fourth quarter, the $15,000,000 of 8% senior subordinated
convertible promissory notes (see 11b) converted into 2,727,273 common
shares. An additional 711,811 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 11c). 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 previously issued as a placement fee in relation to the
issuance of 8% senior subordinated convertible promissory notes (see note
11c), as well as 2,000,001 previously issued for advisory services (see
note 17).
G) On November 29, 1999, the Company completed the acquisition of Async. The
remaining cash of $5,400,000 was paid and 1,298,705 common share were
issued.
H) On January 13, 2000, the Company became aware of a formal complaint having
been filed by the party referred to in note 18(e) in respect of the matter
described therein. The total amount of damages claimed is $110 million.
Management believes the amount claimed is without merit and intends to
vigorously defend this matter.
27
<PAGE> 30
7
ITEM 2 - ADDENDUM TO 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 OF ADDENDUM
On November 19, 1999, FutureLink Corp. ("FutureLink" or the "Company") filed its
Quarterly Report on Form 10-QSB for the nine month period ended September 30,
1999 containing unaudited consolidated financial statements. Since that time,
the Company's independent auditors completed an audit of the Company's
consolidated financial statements as at September 30, 1999 and for the nine
months ended September 30, 1999 which resulted in certain changes to the figures
reported in the previously released unaudited consolidated financial statements.
The changes made after consultation with our independent auditors involved the
reclassification of certain amounts in the Company's consolidated balance
sheet as at September 30, 1999, and the reclassification of non-cash consulting
expense in FutureLink's consolidated statement of cash flows for the nine months
ended September 30, 1999.
The changes to the consolidated balance sheet as at September 30, 1999 from that
previously filed reflect the reclassification of a Loan Receivable from an
executive for the purchase of common stock in the amount of $1,750,000 and of
Prepaid Expenses related to warrants issued for services, in the amount of
$1,050,000. Both these amounts have been reclassified as a reduction to
stockholders' equity, as further described in Notes 5 and 17a, respectively, to
the consolidated financial statements.
As a result of the reclassification of the Prepaid Expenses referred to above,
the consolidated statement of cash flows was revised from that previously filed
to reflect a reduction of $450,000 and $750,000 to the amounts previously
reported as non cash consulting expense for the three month and nine month
periods ended September 30, 1999, respectively, with a corresponding increase to
the amounts previously reported as changes in non-cash working capital. This
reclassification had no effect on the amounts of net cash flows used in
operating activities as previously reported for those periods.
The above-noted changes had no effect on the consolidated statements of loss and
deficit and comprehensive loss, nor on the consolidated statement of changes in
stockholders' equity as previously reported. Accordingly, the MD&A for results
of operations has not been amended.
28
<PAGE> 31
The remainder of this Amended Management's Discussion and Analysis of Financial
Condition and Results of Operations will focus on the financial position of the
Company as at September 30, 1999 based on the figures provided in the Audited
Consolidated Balance Sheet included within this Amended Current Report on Form
10-QSB/A and will also focus on recent corporate developments.
FINANCIAL POSITION
SEPTEMBER 30, 1999 VS. DECEMBER 31, 1998
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
<S> <C> <C>
Current assets 9,922,904 1,677,171
Long term assets 12,412,191 8,968,640
----------- ----------
Total assets 22,335,095 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 (3,795,413) 2,837,401
(Deficit) Equity ----------- ----------
</TABLE>
ASSETS
Current assets increased to $9,923,000 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.
Long term assets increased by $3,444,000 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. These increases are offset by depreciation of $522,000 and
amortization of intangible assets of $1,421,000 for the period.
Subsequent to September 30, 1999, the Company raised gross proceeds of
$50,000,000 and a large portion of the debt (over $22,000,000) has been
converted to common stock which has further strengthened the Company's asset
position.
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 creditors on a more current 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 and a large portion of the debt (over $22,000,000) has been
converted to common stock which has further strengthened the Company's balance
sheet position.
29
<PAGE> 32
STOCKHOLDERS' EQUITY
Equity decreased by approximately $6,633,000 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 a loss of approximately $21,969,000
for the nine month period ended September 30, 1999 and certain non cash charges
against shareholders' equity. These charges include $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. Shareholders' equity also
reflects 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.
$250,000 of this loan is forgiven on a quarterly basis provided the executive
remains employed with the Company. As at September 30, 1999, $250,000 had been
charged against income and the balance of $1,750,000 was a loan receivable
charge against shareholders' equity given the likelihood that the executive will
remain employed with the Company.
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.
RECENT DEVELOPMENTS
ACQUISITION OF ASYNC TECHNOLOGIES
As previously reported, on November 26, 1999, FutureLink completed the
acquisition of all of the issued and outstanding shares of Async Technologies,
Inc. of Walled Lake, Michigan ("Async").
Prior to the acquisition, Async was 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 approximately
$6,208,000. This compares to earnings for the years ended December 31, 1998 and
1997 of approximately $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 combined
with the former Executive LAN Management, Inc. ("Micro Visions") acquired
October 15, 1999, CN Networks, Inc. acquired November 5, 1999 and Async for the
nine month period ending September 30, 1999 are approximately $33.5 million.
The acquisition of Async involved the payment of $6.0 million cash (which
included a $600,000 deposit which had been paid prior to closing) and the
issuance of 1,298,705 shares of FutureLink common stock. In addition to the
consideration payable at closing, the former shareholders of Async could earn an
additional 519,481 FutureLink shares based on achievement of certain performance
criteria in 1999.
30
<PAGE> 33
ACQUISITION OF KNS
As previously reported, on December 22, 1999, FutureLink completed the
acquisition of all of the issued and outstanding shares of KNS Holdings Limited
of the U.K. ("KNS").
Prior to the acquisition, KNS was the largest distributor of products from
Citrix Systems Inc. outside the United States. KNS distributes a variety of
other information technology hardware and software products. As well as its
Newbury headquarters, KNS's 44 employees serve customers in the UK, continental
Europe and the Middle East from a satellite office in Edinburgh.
KNS's revenues for the nine months ended September 30, 1999 were approximately
$15,837,000 (unaudited). This compares to earnings for KNS's fiscal years ended
February 28, 1999 and 1998 of approximately $18,324,000 and $948,000,
respectively.
On a pro forma basis, revenues for the entity consisting of FutureLink combined
with the former Micro Visions (acquired October 15, 1999) CNI (acquired November
5, 1999), Async (acquired November 26, 1999) and KNS for the nine month period
ending September 30, 1999 are approximately $49.3 million.
The acquisition of KNS involved the payment of (pound)3,095,294 (approx. $5.0
million) cash and the issuance of 2,160,307 shares of FutureLink common stock to
KNS's shareholders. In addition to the consideration paid at closing, the former
shareholders of KNS received two notes due April 6, 2000 and June 30, 2000 for
(pound)1,654,706 (approx. $2.66 million) and (pound)2,500,000 (approx. $4.025
million), respectively.
PROPOSED ACQUISITION OF VSI TECHNOLOGY SOLUTIONS
As previously reported, on December 2, 1999, FutureLink entered into an
agreement to acquire all of the issued and outstanding shares of Maryland-based
Vertical Software, Inc., d.b.a. VSI Technology Solutions ("VSI").
Like Micro Visions, CNI and Async, VSI is a leading mid-Atlantic region Platinum
reseller and integrator of products from Citrix Systems Inc. VSI's 75 employees
serve customers from its head office in Beltsville, Maryland and from satellite
offices throughout Virginia.
VSI's revenues for the nine months ended September 30, 1999 were approximately
$9,300,000 (unaudited), representing a 45% increase over revenues for the same
period in 1998. 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 combined
with the former Micro Visions, CNI, Async, KNS and VSI for the nine month period
ending September 30, 1999 are approximately $58.6 million.
The proposed acquisition of VSI is expected to close on or before January 31,
2000 and will involve the payment to VSI's shareholders of $7.0 million cash and
the issuance of 1,026,316 shares of FutureLink common stock.
MANAGEMENT CHANGES
Since July 1, 1999, the Company has undergone a number of management changes,
including changes in addition to those reported in the Current Report on Form
10-QSB released November 18, 1999, as follows:
31
<PAGE> 34
WILLIAM R. ("BILL") BOTTI - Mr. Botti was the founder of CN Networks, Inc.
("CNI"), building that company from its incorporation in 1991 into the Bay
Area's leading provider of server-based computing solutions for a wide range of
customers, including a number of Fortune 500 companies. Under Mr. Botti's
direction, CNI grew to over 25 employees, with annual revenues averaging over $6
million over the past two fiscal years (1997 and 1998), which the former CNI
will exceed in 1999. Mr. Botti was named FutureLink's Senior Vice-President
leading the Application Hosting Platforms Division in December, 1999.
VINCENT L. ROMANO, JR. - Mr. Romano was named FutureLink's Executive
Vice-President, Sales and Marketing in July, 1999. With the restructuring of the
Company into operating divisions, Mr. Romano was named Executive Vice-President
heading the Application Hosting Services Division in December, 1999. Mr. Romano
brings more than 25 years of high technology industry experience to FutureLink.
Most recently Senior Vice-President, World-Wide Sales and Support at
USInternetworking, Inc., he was one of the founders of the Application Service
Provider industry, Mr. Romano has also held executive positions at Motorola
Computer Group, Data General, ShareTech (AT&T) and Honeywell.
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 and the Quarterly
Report on Form 10-QSB for the quarterly period ended September 30, 1999
previously filed. In addition, the recent acquisitions of Micro Visions, CNI,
Async and KNS and the proposed acquisition of VSI give rise to additional to the
following risk factors:
NO ASSURANCE OF COMPLETION OF VSI ACQUISITION. The Agreement to acquire VSI
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 VSI 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.
RISKS ASSOCIATED WITH RECENT AND PROPOSED ACQUISITIONS. With the recent
acquisitions of Micro Visions, CNI, Async and KNS, and if the VSI 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, CNI, Async and KNS and proposed acquisition of
VSI, if successful, will result in the generation of anticipated revenues and
earnings.
32
<PAGE> 35
PART II - OTHER INFORMATION
ITEM 1. LEGAL MATTERS
As well as the three litigation matters reported in the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended September 30, 1999, a
fourth matter which can be characterized as a material liability, has come to
the attention of the company's management. In November, 1999, the Company
received correspondence from SmallCaps OnLine LLC (formerly Bridge Technology
Group LLC) ("Bridge") making claims under letter agreements seeking further
compensation for financing transactions completed by the Company in 1999. On
January 13, 2000, Futurelink became aware of a formal Complaint having been
filed by Bridge in New York with respect to this matter. In the prior
correspondence, Bridge claimed entitlement to cash fees totaling $5,129,733 as
well as warrants to purchase an aggregate of 3,289,689 shares of FutureLink
common stock at exercise prices ranging from $1.00 to $8.50 per share. The total
value of the damages claimed by Bridge in its Complaint is $110 million.
Management of the Company believes that the amount claimed by Bridge for "unpaid
compensation" is without merit and intends to vigorously defend this matter.
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.****
33
<PAGE> 36
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 Agreement and Plan of Reorganization and Merger dated September 7,
1999 among FutureLink Distribution Corp., a Colorado corporation,
FutureLink Pleasanton Acquisition Corp., a Delaware corporation
and CN Networks, Inc., among others.******
10.13 Agreement and Plan of Reorganization and Merger dated September 7,
1999 among FutureLink Distribution Corp., a Colorado corporation,
FutureLink Michigan Acquisition Corp., a Delaware corporation and
Async Technologies, Inc., among others.*******
10.14 Certificate of Merger of FutureLink Distribution Corp., a Colorado
corporation, with and into FutureLink California Acquisition
Corp., a Delaware corporation, dated October 15, 1999.*****
10.15 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.*****
10.16 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).*****
10.17 Registration Rights Agreement dated October 15, 1999 by and among
the Registrant, Pequot Private Equity Fund II, L.P. and certain
other investors.*****
10.18 Amending Agreement dated October 29, 1999 to the Agreement and
Plan of Reorganization and Merger dated September 7, 1999 among
FutureLink Corp., a Delaware corporation (successor to FutureLink
Distribution Corp., a Colorado corporation), FutureLink Michigan
Acquisition Corp., a Delaware corporation and Async Technologies,
Inc., among others.*******
10.19 Amending Agreement dated October 31, 1999 to the Agreement and
Plan of Reorganization and Merger dated September 7, 1999 among
FutureLink Corp., a Delaware corporation (successor to FutureLink
Distribution Corp., a Colorado corporation), FutureLink Pleasanton
Acquisition Corp., a Delaware corporation and CN Networks, Inc.,
among others.******
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<PAGE> 37
10.20 Amending Agreement dated November 14, 1999 to the Agreement and
Plan of Reorganization and Merger dated September 7, 1999 among
FutureLink Corp., a Delaware corporation (successor to FutureLink
Distribution Corp., a Colorado corporation), FutureLink Michigan
Acquisition Corp., a Delaware corporation and Async Technologies,
Inc., among others.*******
10.21 The Agreement for the Sale and Purchase of the Entire Issued Share
Capital of KNS Holdings Limited dated November 15, 1999 between
FutureLink Corp., a Delaware corporation and John Bennett, Richard
Bennett, Colin Matthissen, Quadrangle Trust Company, Peter
Crozier, Michael Dorward, Anthony Harrison-Wallace, Robert Kell,
Mark Kerridge, Nicola Kerridge, Nigel Hawley, Rajan Mehta and Yuri
Pasea. (the "KNS Acquisition Agreement").********
10.22 Supplemental Agreement for Sale and Purchase of Shares dated
December 20, 1999 to the KNS Acquisition Agreement among all of
the parties to the KNS Acquisition Agreement.********
23.1 Consent of Ernst & Young LLP, the independent auditors of
FutureLink Corp.
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.
****** incorporated by reference to the Company's Current Report on
Form 8-K filed November 23, 1999.
******* incorporated by reference to the Company's Current Report on
Form 8-K filed December 8, 1999.
******** incorporated by reference to the Company's Current Report on
Form 8-K filed January 6, 2000.
35
<PAGE> 38
(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.
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.
FutureLink filed a Current Report on Form 8-K on November 23, 1999 to report the
completion of the acquisition of CN Networks, Inc. and the resignation of Robert
J. Kubbernus from the Company's Board of Directors.
FutureLink filed a Current Report on Form 8-K/A on December 2, 1999 as an
addendum to the report on Form 8-K filed by the Company on November 23, 1999
regarding the acquisition of CN Networks, Inc.
FutureLink filed a Current Report on Form 8-K on December 8, 1999 to report the
completion of the acquisition of Async Technologies, Inc.
FutureLink filed a Current Report on Form 8-K on December 14, 1999 to report the
execution of agreements to acquire KNS Holdings Limited and Vertical Software,
Inc. and to report a financing agreement with Compaq.
FutureLink filed a Current Report on Form 8-K on January 6, 2000 to report the
completion of the acquisition of KNS Holdings Limited.
FutureLink filed a Current Report on Form 8-K/A on January 6, 2000 as an
addendum to the reports on Form 8-K filed by the Company on November 23, 1999
and December 8, 1999 regarding the acquisitions of CN Networks, Inc. and Async
Technologies, Inc.
36
<PAGE> 39
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: January 21, 2000 By: /s/ R. Kilambi
---------------------------------------
Raghu Kilambi, Executive Vice-President
& Chief Financial Officer
Date: January 21, 2000 By: /s/ K. B. Scott
-------------------------------------------
Kyle B.A. Scott, Vice-President & Secretary
37
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ---------- ----------- -------
<S> <C>
3.1 Certificate of Incorporation of Registrant*****
3.2 By-laws of Registrant*****
10.1 Debenture Acquisition Agreement dated August 14, 1998, as amended
on August 21, 1998, between FutureLink and Thomson Kernaghan & Co.
Limited ("TK").*
10.2 Letter agreement dated February 26, 1999 between FutureLink and TK
extending the terms of the original Debenture Acquisition
Agreement from $5,000,000 maximum to $6,000,000.**
10.3 Debenture and Warrant Purchase Agreement dated March 2, 1999
between FutureLink and Augustine Fund, LP.**
10.4 Agency Agreement dated April 14, 1999 between FutureLink and
Commonwealth Associates, LP ("Commonwealth") regarding a
$4,000,000 maximum plus $4,000,000 over-allotment private
placement financing.**
10.5 Letter Agreement dated April 26, 1999 between FutureLink and TK
amending certain terms of outstanding FutureLink securities and
redeeming certain convertible debentures.**
10.6 Advisory Agreement dated effective May 1, 1999 between FutureLink
and Commonwealth.**
10.7 Letter Agreement dated April 29, 1999 between FutureLink and
Bridge Technology Group LLC ("Bridge") regarding warrants issuable
to Bridge as a referral fees 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>
38
<PAGE> 41
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 Agreement and Plan of Reorganization and Merger dated September 7,
1999 among FutureLink Distribution Corp., a Colorado corporation,
FutureLink Pleasanton Acquisition Corp., a Delaware corporation
and CN Networks, Inc., among others.******
10.13 Agreement and Plan of Reorganization and Merger dated September 7,
1999 among FutureLink Distribution Corp., a Colorado corporation,
FutureLink Michigan Acquisition Corp., a Delaware corporation and
Async Technologies, Inc., among others.*******
10.14 Certificate of Merger of FutureLink Distribution Corp., a Colorado
corporation, with and into FutureLink California Acquisition
Corp., a Delaware corporation, dated October 15, 1999.*****
10.15 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.*****
10.16 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).*****
10.17 Registration Rights Agreement dated October 15, 1999 by and among
the Registrant, Pequot Private Equity Fund II, L.P. and certain
other investors.*****
10.18 Amending Agreement dated October 29, 1999 to the Agreement and
Plan of Reorganization and Merger dated September 7, 1999 among
FutureLink Corp., a Delaware corporation (successor to FutureLink
Distribution Corp., a Colorado corporation), FutureLink Michigan
Acquisition Corp., a Delaware corporation and Async Technologies,
Inc., among others.*******
10.19 Amending Agreement dated October 31, 1999 to the Agreement and
Plan of Reorganization and Merger dated September 7, 1999 among
FutureLink Corp., a Delaware corporation (successor to FutureLink
Distribution Corp., a Colorado corporation), FutureLink Pleasanton
Acquisition Corp., a Delaware corporation and CN Networks, Inc.,
among others.******
10.20 Amending Agreement dated November 14, 1999 to the Agreement and
Plan of Reorganization and Merger dated September 7, 1999 among
FutureLink Corp., a Delaware corporation (successor to FutureLink
Distribution Corp., a Colorado corporation), FutureLink Michigan
Acquisition Corp., a Delaware corporation and Async Technologies,
Inc., among others.*******
39
<PAGE> 42
10.21 The Agreement for the Sale and Purchase of the Entire Issued Share
Capital of KNS Holdings Limited dated November 15, 1999 between
FutureLink Corp., a Delaware corporation and John Bennett, Richard
Bennett, Colin Matthissen, Quadrangle Trust Company, Peter
Crozier, Michael Dorward, Anthony Harrison-Wallace, Robert Kell,
Mark Kerridge, Nicola Kerridge, Nigel Hawley, Rajan Mehta and Yuri
Pasea. (the "KNS Acquisition Agreement").********
10.22 Supplemental Agreement for Sale and Purchase of Shares dated
December 20, 1999 to the KNS Acquisition Agreement among all of
the parties to the KNS Acquisition Agreement.********
23.1 Consent of Ernst & Young LLP, the independent auditors of
FutureLink Corp.
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.
****** incorporated by reference to the Company's Current Report on Form
8-K filed November 23, 1999.
******* incorporated by reference to the Company's Current Report on Form
8-K filed December 8, 1999.
******** incorporated by reference to the Company's Current Report on Form
8-K filed January 6, 2000.
40
<PAGE> 1
EXHIBIT 23.1
FUTURELINK CORP.
o ERNST & YOUNG, LLP o Phone: 403 290-4100
CHARTERED ACCOUNTANTS. Fax: 403 290-4265
Ernst & Young House
1300, 707 - 7 Avenue SW
Calgary, Alberta, Canada
T2P 3H6
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-84679) pertaining to the Stock Option Plan of FutureLink Corp. of
our report dated November 16, 1999 (except for Notes 21(g) and (h) which are as
at January 13, 2000) on the consolidated financial statements of Futurelink
Corp. as at September 30, 1999 and December 31, 1998 and for the nine month
period ended September 30, 1999 in the Form 10-QSB/A dated January 24, 2000
filed with the Securities and Exchange Commission.
/s/ Ernst & Young, LLP
Calgary, Canada
January 24, 2000 Chartered Accountants
<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> 9,922,904
<PP&E> 3,348,865
<DEPRECIATION> 751,643
<TOTAL-ASSETS> 22,335,095
<CURRENT-LIABILITIES> 3,077,857
<BONDS> 22,170,366
0
0
<COMMON> 3,401
<OTHER-SE> (882,285)
<TOTAL-LIABILITY-AND-EQUITY> 22,335,095
<SALES> 1,459,987
<TOTAL-REVENUES> 5,036,715
<CGS> 1,332,891
<TOTAL-COSTS> 7,050,021
<OTHER-EXPENSES> 13,157,561
<LOSS-PROVISION> 509,836
<INTEREST-EXPENSE> 7,879,282
<INCOME-PRETAX> (21,481,309)
<INCOME-TAX> (356,960)
<INCOME-CONTINUING> (21,968,901)
<DISCONTINUED> 0
<EXTRAORDINARY> (844,552)
<CHANGES> 0
<NET-INCOME> (21,968,901)
<EPS-BASIC> (3.36)
<EPS-DILUTED> 0
</TABLE>
