<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 19, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FUTURELINK CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7371 95-4763404
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<S> <C>
2 SOUTH POINTE DRIVE 2 SOUTH POINTE DRIVE
LAKE FOREST, CA 92630 LAKE FOREST, CA 92630
(949) 672-3000 (ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR
(ADDRESS AND TELEPHONE NUMBER OF INTENDED PRINCIPAL PLACE OF BUSINESS)
PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
HOWARD E. TAYLOR
CHIEF EXECUTIVE OFFICER
FUTURELINK CORP.
2 SOUTH POINTE DRIVE
LAKE FOREST, CA 92630
(949) 672-3000
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JOHN F. DELLA GROTTA, ESQ. THOMAS R. POLLOCK, ESQ.
STEPHEN D. COOKE, ESQ. PAUL, HASTINGS, JANOFSKY & WALKER LLP
PAUL, HASTINGS, JANOFSKY & WALKER LLP 399 PARK AVENUE, 31ST FLOOR
695 TOWN CENTER DRIVE, 17TH FLOOR NEW YORK, NEW YORK 10022-4697
COSTA MESA, CALIFORNIA 92626 TEL: (212) 318-6000
TEL: (714) 668-6200 FAX: (212) 319-4090
FAX: (714) 979-1921
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2)
---------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.0001 per
share................................ 62,117,457 $1.06 $62,680,531
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
<S> <C>
----------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE(3)
---------------------------------------------------------------------------------------
Common Stock, par value $0.0001 per
share................................ $16,548
--------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 12,891,623 shares represent stock to be issued upon exercise of certain
outstanding common stock warrants and convertible securities and other
convertible securities which may become outstanding upon the exercise of
certain outstanding preferred stock warrants. We are also registering
such additional shares of common stock as may be issued as a result of
the anti-dilution provisions contained in such securities. Pursuant to
Rule 429, includes 2,984,881 shares being carried forward from the
Registrant's Registration Statement No. 333-46778. Also includes
59,132,576 shares covered by this Registration Statement that are not
presently covered by any other registration statement.
(2) Estimated solely for the purpose of computing the registration fee
required by Section 6(b) of the Securities Act for the 59,132,576 shares
covered by this Registration Statement that are not presently covered by
any other registration statement, and computed pursuant to Rule 457(c)
under the Securities Act based upon the average of the high and low
prices of the common stock on December 11, 2000, as reported on the
Nasdaq National Market.
(3) A filing fee of $3,211 was previously paid by the Registrant under
Registration Statement No. 333-46778 covering the 3,025,350 shares
originally registered thereunder, which fee relates to the 2,984,881
shares being carried forward from that registration statement which had
a proposed maximum offering price per share of $4.02. A filing fee of
$16,548 is being paid to cover the 59,132,576 shares covered by this
Registration Statement that are not presently covered by any other
registration statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
PURSUANT TO RULE 429, THIS REGISTRATION STATEMENT CONTAINS A COMBINED
PROSPECTUS THAT COVERS 2,984,881 SHARES BEING CARRIED FORWARD FROM THE
REGISTRANT'S REGISTRATION STATEMENT NO. 333-46778, IN ADDITION TO THE 59,132,576
SHARES BEING REGISTERED FOR THE FIRST TIME HEREUNDER.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE
THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION DATED DECEMBER 19, 2000
PROSPECTUS
62,117,457 SHARES
[FUTURELINK LOGO]
COMMON STOCK
-------------------------
This prospectus relates to an aggregate 62,117,457 shares of common stock
of FutureLink Corp., which may be offered for sale by persons who have acquired
such shares in certain acquisitions of businesses by us or in certain other
private transactions and by persons who may acquire shares of common stock upon
exercising warrants or converting convertible securities. Included in the
aggregate number of shares are: 8,120,230 shares of common stock, which may be
offered for sale by certain selling stockholders who may acquire them if they
exercise outstanding common stock warrants we issued to them; 1,428,571 shares
of common stock, which may be offered for sale by a selling stockholder upon
conversion of shares of Series A preferred stock; 1,142,857 shares of common
stock, which may be offered for sale by a selling stockholder who may acquire
them if it converts shares of Series A preferred stock that it may acquire if it
exercises preferred stock warrants we issued to it; and 2,199,965 shares of
common stock, which may be offered for sale by certain selling stockholders who
may acquire them in exchange for shares of one of our subsidiaries held by them.
We have registered the aggregate number of shares under the Securities Act of
1933 on behalf of these stockholders so that they can sell them in a public
offering or other distribution. We will not receive any of the proceeds from the
offer and sale of the shares. If the warrants related to the shares of common
stock offered for sale pursuant to this prospectus are exercised in full, we
will receive proceeds from such exercises of $101,280,870.
Our common stock currently trades on the Nasdaq National Market under the
symbol "FTRL."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------------
The date of this prospectus is , 2000
<PAGE> 3
PROSPECTUS SUMMARY
You should read the entire prospectus carefully, especially the risks of
investing in our common stock discussed under "Risk Factors" and our financial
statements and related notes included elsewhere in this prospectus.
OUR COMPANY
We provide server-based computing services and are an application service
provider, or ASP. Our services enable software applications to be deployed,
managed, supported and upgraded from centrally located servers, rather than on
individual desktop computers. We are North America's largest integrator of
server-based computing systems using Citrix software, which is deployed with
Microsoft Windows NT Terminal Server software. The ASP market is expected to
grow to over $11.0 billion in 2003. We intend to use our server-based computing
capabilities to grow our ASP business.
We believe that the following factors are driving the growth of our
server-based computing and ASP services:
- the increasing complexity of software applications, the constant need to
upgrade software applications and the growing demand for faster software
integration and deployment, which necessitate more centralized
information management systems,
- the scarcity of information technology professionals, making it expensive
and difficult for companies to operate and manage software on their own,
- the decline in telecommunication costs and the increasing availability of
bandwidth, making it less costly to connect remote users to a central
data center,
- the growing demand for remote and shared access to software applications,
and
- the increasing number of software applications and types of computer
devices requiring integration expertise that is not available to, or is
increasingly expensive for, many companies.
Our goal is to provide our ASP services with the speed, simplicity and
reliability of a utility service. By outsourcing all or part of their
information technology needs, our customers can reduce their information
technology staff and focus on their core competencies. Our secure, reliable and
high-performance system for delivering software applications to multiple users
over a variety of hardware systems provides a flexible, cost-effective solution
for our customers.
OUR ADDRESS AND TELEPHONE NUMBER
The address of our principal executive office is 2 South Pointe Drive, Lake
Forest, California 92630. Our telephone number is (949) 672-3000. Our website
address is www.futurelink.net. Information contained on our website does not
constitute part of this prospectus and our address should not be used as a
hyperlink to our website.
-------------------------
This prospectus contains trademarks and names of persons other than
FutureLink, which are the property of their respective owners.
1
<PAGE> 4
THE OFFERING
Common stock being offered by
Selling Stockholders................ 62,117,457 shares
Common stock outstanding after this
offering............................ 80,996,414 shares
Nasdaq National Market symbol....... FTRL
The total number of shares outstanding after the offering is based on
68,104,791 shares outstanding as of December 4, 2000 and the following shares of
common stock offered for sale by this prospectus which we have assumed to be
outstanding: 8,120,230 shares of common stock issuable upon the exercise of
certain common stock purchase warrants, which contain anti-dilution provisions
and are exercisable at a range of $1.05 to $24.38 per share at a weighted
average exercise price of $11.49 per share; 1,428,571 shares of common stock
relating to the conversion of shares of Series A preferred stock, subject to
anti-dilution provisions; 1,142,857 shares of common stock relating to
conversion of shares of Series A preferred stock that may be acquired upon
exercise of an outstanding Series A preferred stock warrant at an exercise price
of $7.00 per share, which contains anti-dilution provisions; and 2,199,965
shares of common stock relating to the conversion of shares of one of our
subsidiaries issued as part of the purchase price for one of our acquisitions.
It excludes:
- Stock options granted under our employee benefit plans to purchase
12,135,759 shares of our common stock outstanding on December 4, 2000
with a weighted average exercise price of $7.51 per share; and
- 15,000 shares of common stock issuable upon exercise of certain stock
purchase warrants with an exercise price of $7.00 per share.
None of the 8,120,230 shares issuable upon the exercise of common stock
warrants may be sold until the warrants are exercised and the underlying shares
are issued. We do not anticipate that the warrant holders will exercise their
warrants unless and until the market price of our common stock exceeds the
exercise price of their respective warrants. The following table sets forth the
distribution of the current exercise prices for the common stock warrants.
However, the exercise price for most of the warrants may be reduced under
certain circumstances based upon various anti-dilution protections applicable to
most of the warrants.
<TABLE>
<CAPTION>
TOTAL
NUMBER OF PROCEEDS
EXERCISE PRICE SHARES TO COMPANY
-------------- --------- -----------
<S> <C> <C>
Less than $2.50............................................. 234,533 $ 253,336
$2.50 to $4.99.............................................. 20,000 $ 80,000
$5.00 to $7.49.............................................. 5,355 $ 35,986
$7.50 to $9.99.............................................. 5,271,887 $44,213,251
$10.00 or more.............................................. 2,588,455 $48,698,298
--------- -----------
Total............................................. 8,120,230 $93,280,871
========= ===========
</TABLE>
All of the shares are being offered by selling stockholders, who must
deliver a copy of this prospectus to persons who buy them. The selling
stockholders will probably sell the shares at prevailing market prices, through
broker-dealers, although they are not required to do so. The selling
stockholders will retain all of the proceeds of their sales, except for
commissions they may pay to broker-dealers. We will not receive any money when
they sell. However, we will receive the proceeds from the exercise of the
warrants. We are paying the costs of registering the shares.
2
<PAGE> 5
SUMMARY CONSOLIDATED FINANCIAL DATA
In the table below, we provide you with our actual and pro forma summary
consolidated financial data. We have prepared this information using our
consolidated financial statements for the years ended December 31, 1998 and 1999
and for the nine months ended September 30, 1999 and 2000.
When you read this summary consolidated financial data, it is important
that you also read our financial statements and our pro forma condensed
consolidated financial information and notes to that financial information
included elsewhere in this prospectus, as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The pro forma column of the consolidated balance sheet data gives effect to
the following items as if each had occurred at September 30, 2000:
- Receipt of $4.4 million borrowed from a financial institution pursuant to
a new credit facility in November 2000; and
- Repayment of $4.4 million of outstanding indebtedness under our prior
credit facility which allowed for borrowings of up to $10 million, in
November 2000.
The pro forma column in the table does not give effect to the proceeds to
us which would result from the exercise of the common stock warrants or the
Series A preferred stock warrants related to this prospectus.
3
<PAGE> 6
The pro forma column in the table of consolidated statements of operations
data gives effect to our completed acquisitions as if each had occurred on
January 1, 1999:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- --------------------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
------------------------ ----------- ------------------------ -----------
1998 1999 1999 1999 2000 2000
---------- ----------- ----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue......................... $ 2,437 $ 13,600 $ 114,959 $ 5,037 $ 91,364 $ 103,797
Expenses:
Cost of hardware and
software.................... 880 7,013 64,766 1,333 55,009 61,364
Cost of service delivery...... 1,548 10,527 24,793 5,460 17,546 19,859
Selling, general and
administrative.............. 3,064 12,611 39,290 6,627 51,428 55,335
Goodwill and other intangibles
amortization................ 668 4,981 61,958 1,421 42,071 46,790
Depreciation and
amortization................ 203 1,709 1,919 522 5,393 5,544
---------- ----------- ----------- ---------- ----------- -----------
Loss from operations............ (3,926) (23,241) (77,767) (10,326) (80,083) (85,095)
Interest expense, net(1)........ 1,333 11,658 11,880 11,155 1,356 1,368
Equity in loss of investee...... 826 -- -- -- -- --
---------- ----------- ----------- ---------- ----------- -----------
Loss before benefit for income
taxes and extraordinary
item.......................... (6,085) (34,899) (89,647) (21,481) (81,439) (86,463)
Provision (benefit) for income
taxes......................... (205) -- 126 (357) 27 34
---------- ----------- ----------- ---------- ----------- -----------
Loss before extraordinary
item.......................... (5,880) (34,899) $ (89,773) (21,124) (81,466) $ (86,497)
=========== ===========
Extraordinary item.............. -- (845) (845) --
---------- ----------- ---------- -----------
Net loss........................ $ (5,880) $ (35,744) $ (21,969) $ (81,466)
========== =========== ========== ===========
Loss before preferred stock
dividends..................... $ (5,880) $ (35,744) $ (89,773) $ (21,969) $ (81,466) $ (86,497)
Dividends for Series A preferred
stock......................... -- -- -- -- (437) (437)
---------- ----------- ----------- ---------- ----------- -----------
Loss applicable to common
stock......................... $ (5,880) $ (35,744) $ (89,773) $ (21,969) $ (81,903) $ (86,934)
========== =========== =========== ========== =========== ===========
Loss per share -- basic and
diluted:
Loss before extraordinary
item........................ $ (1.86) $ (2.44) $ (2.12) $ (3.23) $ (1.32) $ (1.24)
=========== ===========
Extraordinary item............ -- (0.06) (0.13) --
---------- ----------- ---------- -----------
Net loss per share.............. $ (1.86) $ (2.50) $ (3.36) $ (1.32)
========== =========== ========== ===========
Weighted average shares(2)...... 3,169,413 14,279,647 42,307,351 6,534,575 62,054,083 70,059,830
========== =========== =========== ========== =========== ===========
OTHER DATA:
EBITDA(3)....................... $ (3,881) $ (16,551) $ (13,890) $ (8,383) $ (32,619) $ (32,761)
========== =========== =========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 21,877 $ 21,877
Goodwill and other intangible assets........................ 254,112 254,112
Total assets................................................ 339,727 339,727
Total debt.................................................. 24,103 24,103
Stockholders' equity........................................ 285,239 285,239
</TABLE>
-------------------------
(1) Includes amortization of deferred financing fees and debt discount.
(2) Gives retroactive effect to a 5 for 1 reverse stock split on June 1, 1999 as
if it had occurred as of the beginning of each period presented January 1,
1999.
4
<PAGE> 7
(3) EBITDA is defined as net loss plus:
- interest expense, net,
- provision (benefit) for income taxes,
- goodwill and other intangibles amortization,
- depreciation and amortization, and
- extraordinary items.
EBITDA is presented not as an alternative measure of operating results or
cash flows from operations as determined in accordance with generally
accepted accounting principles, but because it is a widely accepted
financial indicator of a company's ability to incur and service debt.
5
<PAGE> 8
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should read the following risk factors carefully before purchasing our common
stock. The risks and uncertainties described below are not the only ones we
face. Other risks and uncertainties, including those that we do not currently
consider material, may impair our business. If any of the risks discussed below
actually occur, our business, financial condition, operating results or cash
flows could be materially adversely affected. This could cause the trading price
of our common stock to decline, and you may lose all or part of your investment.
WE INTEND THAT OUR ASP SERVICES WILL BECOME AN INCREASING PERCENTAGE OF OUR
OVERALL BUSINESS. IF WE ARE NOT SUCCESSFUL IN GROWING OUR ASP BUSINESS, OUR
PROSPECTS WILL BE ADVERSELY AFFECTED AND OUR STOCK PRICE MAY DECLINE.
To date, most of our revenues have come from computer consulting, software
integration, hardware installation and training services. We introduced our ASP
services in March 1999, and it is still a relatively new line of business for
us. Our business strategy includes the expansion of our ASP services. In the
future, we expect that revenue from ASP services will comprise a greater portion
of our revenue. However, our business plan may not be successful and we may not
be able to increase our ASP revenues. We may not be successful in addressing
these risks, and if we are not successful, our business, results of operations
and financial condition will be materially adversely affected.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY AND OUR BUSINESS MODEL IS STILL
EVOLVING, WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS OR ACHIEVE
PROFITABILITY.
Our business is new, evolving and unproven, and our range of services
continues to change. In order to achieve our business plan we must:
- convince customers that we can provide reliable and cost-effective
services and to purchase our ASP services,
- increase awareness and market penetration of our brand,
- attract, retain and motivate qualified personnel,
- maintain our existing, and develop new, relationships with software
providers and vendors, and
- raise additional capital.
Because we have a limited operating history and our business model is
evolving, investors will have difficulty evaluating us and our prospects.
OUR PAST FINANCIAL RESULTS MAY NOT BE REPRESENTATIVE OF OUR FUTURE FINANCIAL
RESULTS AND THEREFORE INVESTORS WILL HAVE DIFFICULTY EVALUATING US AND OUR
PROSPECTS.
We commenced our current business plan in September 1998 and since that
time have grown our business rapidly through acquisitions. Because we have grown
through acquisitions, our pro forma financial results cover periods when we did
not control or manage our subsidiaries and may not be indicative of our future
financial results. Investors will have difficulty evaluating us and our
prospects and therefore our stock price may be adversely affected as well as our
ability to raise money in the future.
WE HAVE A HISTORY OF SUBSTANTIAL LOSSES AND NEGATIVE CASH FLOWS. WE EXPECT THESE
LOSSES AND NEGATIVE CASH FLOWS TO CONTINUE IN THE FUTURE. IF WE ARE UNABLE TO
MAKE A PROFIT, WE MAY NOT BE ABLE TO CONTINUE TO OPERATE OUR BUSINESS, AND YOU
MAY LOSE YOUR INVESTMENT.
We have experienced net losses and negative cash flows since we began
implementing our current business plan. We expect that as we implement our
current business plan which includes investment in
6
<PAGE> 9
personnel, technology and other assets, our net losses and our negative cash
flows will continue for the foreseeable future. As of September 30, 2000, we
had, as a result of our acquisitions, approximately $254.1 million of purchase
price in excess of net assets acquired that we have allocated to goodwill and
assembled work force. The respective amount from each acquisition will be
amortized over a five year period and will substantially increase our net
losses. We may not be able to operate profitably in the future or generate
positive cash flows. If we cannot operate profitably or generate positive cash
flows, we may be unable to continue to operate our business, and you may lose
your investment.
IN ORDER TO EXECUTE OUR BUSINESS PLAN, WE WILL NEED TO RAISE ADDITIONAL CAPITAL.
IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL, WE WILL NOT BE ABLE TO ACHIEVE OUR
BUSINESS PLAN AND YOU COULD LOSE YOUR INVESTMENT.
We need to raise additional funds through public or private debt or equity
financings to be able to fully execute our business plan. Any additional capital
raised through the sale of equity may dilute your ownership interest. We may not
be able to raise additional funds on favorable terms, or at all. If we are
unable to obtain additional funds, we will be unable to execute our business
plan and you could lose your investment.
IF ALL OR A SUBSTANTIAL PORTION OF THE SHARES OF OUR COMMON STOCK OFFERED FOR
SALE BY THIS PROSPECTUS ARE SOLD IN A SHORT PERIOD OF TIME, OUR STOCK PRICE MAY
BE ADVERSELY AFFECTED. OUR STOCK PRICE MAY ALSO BE ADVERSELY AFFECTED BY THE
PERCEPTION THAT SUCH SALES COULD OCCUR.
The shares of common stock offered for sale by this prospectus represent a
majority of our outstanding common stock. We cannot control when the selling
stockholders will sell their shares. If all or a substantial portion of the
shares of common stock offered for sale by this prospectus are sold in a short
period of time, the common stock available for sale may exceed the demand and
the stock price may be adversely affected. In addition, the mere perception that
such sales could occur may depress the price of our common stock.
THE GROWTH IN DEMAND FOR OUR ASP SERVICES IS HIGHLY UNCERTAIN. THE ASP MARKET
MAY NOT DEVELOP AS WE ANTICIPATE AND, ACCORDINGLY, WE MAY NOT BE ABLE TO EXPAND
OUR BUSINESS OR OPERATE IT PROFITABLY.
The market for ASP services is evolving. Future demand for these services
and the timing of when such future demand may occur is highly uncertain. We
believe that many of our potential customers are not fully aware of the benefits
of ASP services. We must educate potential customers regarding these benefits
and convince them of our ability to provide complete and reliable services. The
market for ASP services may never become viable or grow further. If the market
for our ASP services does not grow or grows more slowly than we currently
anticipate, our business, financial condition and operating results will be
materially adversely affected.
OUR INTERNAL ACCOUNTING AND FINANCIAL CONTROLS HAVE WEAKNESSES RESULTING
PRIMARILY FROM THE GROWTH OF OUR BUSINESS. IF WE ARE UNABLE TO RECRUIT AND
RETAIN QUALIFIED ACCOUNTING AND FINANCIAL STAFF, WE MAY CONTINUE TO EXPERIENCE
WEAKNESSES IN THESE MANAGEMENT SYSTEMS AND WE THEREFORE MAY NOT BE ABLE TO
PROPERLY EXECUTE OUR BUSINESS PLAN. IF WE CAN NOT PROPERLY EXECUTE OUR PLAN, OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE MATERIALLY
ADVERSELY AFFECTED.
When auditing our consolidated financial statements for the year ended
December 31, 1999, our independent auditors reported to us conditions they
believed to be material weaknesses in our system of internal accounting and
financial controls related to the financial statement close process and the
reconciliation and analysis of general ledger account balances. In response to
this report, in early 2000 we hired a new vice president controller, financial
reporting manager, assistant controller, and additional subsidiary accounting
personnel. We have identified and have taken measures to improve our system of
internal controls, implement more rigorous internal accounting policies,
procedures and controls, and conduct accounting systems training. However, these
measures may not be successful in correcting the noted deficiencies and we may
experience similar or other deficiencies in the future as we continue to
7
<PAGE> 10
further expand our operations. If we are unable to establish and maintain
effective internal accounting and financial controls, we will not be able to
timely and accurately account for and monitor the operations of our business and
we therefore may not be able to properly execute our business plan, which could
materially adversely affect our business, results of operations and financial
condition.
WE ARE INVOLVED AND MAY BECOME INVOLVED IN LEGAL PROCEEDINGS WITH FORMER
EMPLOYEES, CONSULTANTS AND SERVICE PROVIDERS WHICH, IF DETERMINED AGAINST US,
COULD CAUSE US TO ISSUE A SIGNIFICANT AMOUNT OF OUR SHARES OF COMMON STOCK AND
PAY A SIGNIFICANT AMOUNT OF DAMAGES. THE ISSUANCE OF A SIGNIFICANT NUMBER OF
SHARES OF OUR COMMON STOCK ESPECIALLY IF AT A LARGE DISCOUNT TO THE THEN CURRENT
MARKET PRICE, WILL DILUTE OUR STOCKHOLDERS AND THE PAYMENT OF SIGNIFICANT
DAMAGES WILL MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND THEREFORE
OUR ABILITY TO ACHIEVE OUR BUSINESS PLAN.
We are party to one lawsuit by a former consultant to one of our
subsidiaries who seeks damages of approximately $2 million which includes
approximately 50,000 stock options and monetary damages.
In the past, we have entered into contracts with third parties in the
normal course of business and with advisors and consultants based on business
plans that we are no longer pursuing. We believe that those contracts are no
longer effective. However, it is possible that the other parties to those
contracts could claim that we did not fulfill our obligations under the
contracts. If a court found that we are obligated under any of those contracts
we could be liable for an undeterminable amount of compensation.
Our stockholders may suffer material dilution if a material number of
options or other securities are awarded. If awarded, the options or securities
may have a strike price that is at a significant discount to the current market
price. All of these litigations are likely to be expensive for us. If such suits
are determined against us and a court awards a material amount of cash damages,
our business, results of operations and financial condition will be materially
adversely affected. In addition, any such litigation could divert management's
attention and resources.
WE HAVE GROWN, IN PART, THROUGH THE ACQUISITION OF OTHER COMPANIES. HOWEVER, WE
MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE THE COMPLETED ACQUISITIONS INTO OUR
OWN OPERATIONS, WHICH MAY MATERIALLY ADVERSELY AFFECT OUR GROWTH AND OUR
OPERATING RESULTS.
We have made a number of significant acquisitions in 1999 and 2000. These
acquisitions have increased our revenue from $2.4 million for the year ended
December 31, 1998 to $115.0 million for the year ended December 31, 1999, on a
pro forma basis after giving effect to our completed acquisitions as if each had
occurred as of January 1, 1999. We have not yet fully integrated any of these
companies. We may not be able to successfully integrate these acquisitions into
our business. If we fail to successfully integrate the acquired companies into
our operations, such failure could have a material adverse effect upon our
business, operating results and financial condition.
OUR INDUSTRY IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGY WITH CONTINUOUS
IMPROVEMENTS IN BOTH COMPUTER HARDWARE AND SOFTWARE. IF WE DO NOT RESPOND
EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY,
WE WILL NOT BE ABLE TO EFFECTIVELY SELL OUR SERVICES AND OUR SALES WILL
MATERIALLY DECLINE.
We must continually buy or lease new computer hardware and license new
computer software systems to effectively compete in our industry. In addition,
our software delivery applications must be able to support changes in the
underlying software applications that are delivered to our customers. The rapid
development of new technologies increases the risk that current or new
competitors could develop products or services that would reduce the
competitiveness of our products or services. We rely on software providers to
produce software applications that keep pace with our customers' demands.
We may not successfully develop or adopt new technologies, introduce new
services or enhance our existing services on a timely basis and new
technologies, new services or enhancements we use or develop
8
<PAGE> 11
may never achieve market acceptance. If we fail to address these developments,
we will lose sales to our competitors and our business, operating results and
financial condition will be materially adversely affected.
OUR CURRENT DATA CENTERS ARE LOCATED IN ONLY FOUR LOCATIONS, IRVINE, CALIFORNIA,
CALGARY AND TORONTO, CANADA, AND NEWBURY, UNITED KINGDOM, WHICH LEAVES US
VULNERABLE TO DISRUPTIONS THAT AFFECT OUR DATA CENTERS. IF ONE OR MORE OF OUR
DATA CENTERS ARE DISRUPTED, WE COULD LOSE OUR CUSTOMERS AND FAIL TO ATTRACT NEW
CUSTOMERS, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
Our ASP business strategy depends on the consistent performance of our four
data centers located in Irvine, California, Calgary and Toronto, Canada, and
Newbury, United Kingdom. We offer back-up storage of data for customers that
elect this service. However, our current data centers are vulnerable to
interruption from fire, earthquake, flood, power loss, telecommunications
failure, break-ins and other events beyond our control. If a data center is
damaged, a customer storing its data on that data center may lose its data if it
is not backed up. If one of our data centers was damaged, the loss of data may
affect a significant portion of our customers. We have experienced periodic
systems disruptions in the past and anticipate that such disruptions will occur
in the future. In the event that we experience significant disruptions that
affect one or more of our data centers, we could lose customers and fail to
attract new customers, and our business, results of operations and financial
condition would be materially adversely affected.
WE RELY ON SOFTWARE APPLICATION AND SOFTWARE SYSTEMS INTEGRATION COMPANIES TO
REFER MANY OF OUR CLIENTS TO US. ANY FAILURE BY THESE THIRD PARTIES TO PROVIDE
US WITH THESE REFERRALS WILL CAUSE OUR SALES TO MATERIALLY DECLINE.
We rely on referrals from software application and technology integrators
for a portion of our business. These software application and technology
integrators refer their customers to us because we can provide an array of
services which complement the products and services they offer. However, these
software application and technology integrators may stop or substantially
diminish referring business to us or they may decide to cooperate with our
competitors and thereby adversely impact or eliminate the amount of referrals
made to us. If these third-party referrals cease or materially decline, our
sales will materially decline and our business, results of operations and
financial condition will be materially adversely affected.
WE MUST LICENSE THE SOFTWARE APPLICATIONS WE PROVIDE TO OUR CUSTOMERS FROM THIRD
PARTIES. IF WE CANNOT OBTAIN THESE SOFTWARE APPLICATIONS WE WILL NOT BE ABLE TO
OFFER ASP SERVICES RELATED TO SUCH SOFTWARE APPLICATIONS.
We depend on third-party software manufacturers agreeing to allow their
software applications to be hosted or run at our data centers and provided to
our customers. We have entered into non-exclusive agreements with Microsoft,
Onyx, Great Plains, SalesLogix and others that allow us to host some of their
software applications at our data centers or re-license their software
applications to our customers. Under most of these agreements, the software
manufacturer can terminate its relationship with us for any reason by giving us
as little as 30 days notice. In these instances, the software manufacturer is
not liable to us or our customers for any damages resulting from termination. If
our relationships with these software manufacturers are terminated or if these
or other software manufacturers do not allow our customers to obtain a license
to operate the software application on our data centers, our business, operating
results and financial condition could be materially adversely affected.
9
<PAGE> 12
IF WE ARE UNABLE TO OBTAIN CITRIX OR MICROSOFT PRODUCTS, AS WELL AS OTHER KEY
HARDWARE COMPONENTS AND SOFTWARE APPLICATIONS FROM OTHER VENDORS, WE WOULD BE
UNABLE TO DELIVER OUR SERVICES, AND UNTIL WE REPLACE THESE PRODUCTS, OUR
BUSINESS WOULD BE MATERIALLY ADVERSELY AFFECTED.
We depend on third-party suppliers to provide us with key hardware
components and software applications for our infrastructure and with sufficient
communications lines to allow our customers to access their software
applications. Some components or applications are only available from limited
sources. Citrix Systems, Inc. and Microsoft Corporation are our key suppliers of
software that we utilize to connect our customers to software applications.
Although there are other competing software applications on the market, we
believe that Citrix software, deployed with Windows NT Terminal Server software
from Microsoft, is currently best suited to serve this function. If we are
unable to obtain these products or services such as telecommunications services
from other vendors, in a timely manner, at an acceptable cost or at all, we
would be unable to deliver our services. Until we replace these products, our
business, results from operations and financial condition will be materially
adversely affected.
IF THE SOFTWARE WE UTILIZE CONTAINS DEFECTS, OUR CUSTOMERS' SERVICE COULD BE
DISRUPTED AND THEIR DATA COULD BE LOST. THIS COULD RESULT IN OUR INCURRING
LIABILITY AND LOSING CUSTOMERS FOR OUR SERVICES, WHICH WOULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR OPERATIONS.
Our service offerings depend on complex software which may contain defects,
particularly when first introduced or when new versions are released. Although
we test software applications prior to deployment, we may not discover software
defects that affect our new or current services or enhancements until after they
are deployed. These defects could cause service interruptions or data loss which
could damage our reputation or increase our service costs, cause us to lose
revenue, delay market acceptance or divert our development resources. Any
software modifications we perform as part of our integration services could
cause problems in application delivery. Also, because we offer a one-source
solution to our customers, they are likely to hold us accountable for any
problems associated with their software, even if the problem results from
software defects the manufacturer causes. Typically, software manufacturers
disclaim liability for any damages suffered as a result of software defects or
provide only limited warranties. As a result, we may have no recourse against
the providers of defective software applications.
BREACHES OF OUR SECURITY COULD DISRUPT THE OPERATION OF OUR DATA CENTERS AND
JEOPARDIZE OUR SECURE TRANSMISSION OF CONFIDENTIAL INFORMATION. THESE BREACHES
COULD CAUSE OUR CUSTOMERS TO LOSE CONFIDENCE IN OUR SERVICES AND CANCEL THEIR
CONTRACTS WITH US OR PROSPECTIVE CUSTOMERS NOT TO PURCHASE OUR SERVICES.
The growth of our business depends upon our ability to securely transmit
confidential information to and from our data centers or the servers of our
customers. Despite our design and implementation of a variety of delivery system
security measures, unauthorized access, computer viruses and accidental or
intentional disturbances could occur. We may need to devote substantial capital
and resources to protect against the threat of unauthorized penetration of our
delivery system or to remedy any problems that the penetration of our delivery
system security creates. The occurrence of any of these events could cause us to
lose customers and expose us to liability, all of which could have a material
adverse effect on us.
OUR ASP SERVICE CONTRACTS GUARANTEE CERTAIN SERVICE LEVELS. IF WE DO NOT MEET
SUCH SERVICE LEVELS, WE MAY BE REQUIRED TO GIVE OUR CUSTOMERS CREDIT FOR FREE
SERVICE AND OUR CUSTOMERS MAY BE ENTITLED TO CANCEL THEIR ASP SERVICE CONTRACTS,
WHICH COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
Our ASP contracts contain service level guarantees which obligate us to
provide our hosted applications at a guaranteed level of performance. To the
extent we fail to meet those service levels, we may be obligated to provide our
customers credit for free service. If we continue to fail to meet these service
levels, our ASP customers may have the right to cancel their contracts with us.
These credits or cancellations will cost us money, damage our reputation with
our customers and prospective customers and could materially adversely affect
our business, results of operations and financial condition.
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<PAGE> 13
IF WE ARE UNABLE TO RETAIN OUR KEY EMPLOYEES AT ALL LEVELS OF OUR BUSINESS, WE
WILL NOT BE ABLE TO GROW OUR BUSINESS AND MEET OUR BUSINESS PLAN. IF WE FAIL TO
ACHIEVE OUR BUSINESS PLAN WE WILL NOT BE ABLE TO CONTINUE TO OPERATE OUR
BUSINESS AND YOU MAY LOSE YOUR INVESTMENT.
Our success depends in significant part on the continued services of our
key employees. Losing one or more of our key personnel will seriously impair our
ability or could cause us to fail to successfully implement our business plan.
This will have a material adverse effect on our business, results of operations
and financial condition and you could lose your investment.
WE OPERATE IN AN INDUSTRY WHERE IT IS DIFFICULT TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL. IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR
OPERATIONS WOULD SUFFER AND WE COULD LOSE OUR CUSTOMERS OR FAIL TO ATTRACT NEW
CUSTOMERS.
Our business is labor-intensive, and our success depends in large part upon
our ability to attract, develop, motivate and retain highly skilled personnel.
We have grown from over 100 employees as of December 31, 1998 to 657 as of
December 4, 2000. We believe that we will need to hire additional qualified
technical employees and experienced sales personnel. These employees are in
great demand and are likely to remain a limited resource for the foreseeable
future. We may not be able to engage the services of such personnel or retain
our current personnel. If we do not succeed in attracting new, qualified
personnel or successfully retain our current technical and sales personnel, our
business could suffer.
MANY COMPANIES USE THE NAME "FUTURELINK." INTELLECTUAL PROPERTY INFRINGEMENT
CLAIMS AGAINST US FOR THE USE OF THE "FUTURELINK" NAME, EVEN IF WITHOUT MERIT,
COULD BE EXPENSIVE TO DEFEND AND DIVERT MANAGEMENT'S ATTENTION FROM OUR
BUSINESS. IF A CLAIM TO STOP US FROM USING OUR NAME IS SUCCESSFUL, WE WILL HAVE
TO EITHER BUY THE RIGHT TO USE OUR NAME OR CHANGE OUR NAME, WHICH IN EITHER CASE
MAY BE EXPENSIVE.
We are aware that other companies have claimed prior use of the name
"FutureLink" for products or services similar to our own. We are in the process
of investigating the rights, if any, others may have to the name. In addition,
we are attempting to register "FutureLink" as a service mark in the United
States, Canada and the United Kingdom. However, we may not be able to obtain
proprietary rights to the use of this name. We will incur expenses if called to
defend our use of the "FutureLink" name. Any litigation, even if without merit,
may be time consuming and expensive to defend. It also could divert management's
attention and resources and require us to enter into costly royalty or licensing
agreements. In addition, if any company in our industry is able to establish a
use of the "FutureLink" name that is prior to our use, we could be liable for
damages and could be forced to stop using the name unless we are able to buy the
right to use the name. If we are unable to buy the right to use our name after
we lose an infringement claim, we would have to change our name, which may
require us to spend money to build new brand recognition and incur other costs.
Third parties may assert other infringement claims against us. Any of these
events could have a material adverse effect on our business, financial condition
and results of operations.
WE ARE A TECHNOLOGY COMPANY. HOWEVER, OUR PREVIOUS BUSINESS ACTIVITIES INCLUDED
NATURAL RESOURCE MINING AND EXPLORATION. AS A RESULT WE MAY BE EXPOSED TO
UNKNOWN ENVIRONMENTAL LIABILITY THAT COULD REQUIRE US TO EXPEND OUR FINANCIAL
RESOURCES AND MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION.
We merged with a publicly-traded company that prior to 1992 was engaged in
the natural resource exploration and development business, including mining and
oil and gas. The mining, mineral processing and oil and gas industries are
subject to extensive governmental regulations for the protection of the
environment, including regulations relating to air and water quality, site
reclamation, solid and hazardous waste handling and disposal and the promotion
of occupational safety. We could be held responsible for any liabilities
relating to our previous involvement in mining or oil and gas exploration and
development,
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<PAGE> 14
which liabilities would result in our spending our cash resources and could have
a material adverse effect on our business, financial condition and results of
operations.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. We have identified
forward-looking statements in this prospectus using words such as "believes,"
"intends," "expects," "may," "will," "should," "plan," "projected,"
"contemplates," "anticipates," and similar statements. These statements are
based on our beliefs as well as assumptions we made using information currently
available to us. Because these statements reflect our current views concerning
future events, these statements involve risks, uncertainties and assumptions.
Actual future results may differ significantly from the results discussed in the
forward-looking statements. Some, but not all, of the factors that may cause
these differences include those discussed in the Risk Factors section of this
prospectus. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus.
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<PAGE> 15
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares offered
and sold for the accounts of the selling stockholders. In order for certain
selling stockholders to sell 9,263,087 shares of common stock offered for sale
pursuant to this prospectus, they must exercise outstanding warrants for the
purchase of common stock or Series A preferred stock. If all of those warrants
are exercised, we will receive proceeds of $101,280,870. Since we do not have
any control over when or to what extent the warrants will be exercised,
management intends to use any proceeds received upon exercise for working
capital and general corporate purposes. Since we have not made any specific
allocation for any proceeds, our management will have significant flexibility in
applying such proceeds.
The selling stockholders will not pay any of the expenses that are incurred
in connection with the registration of the shares, but they will pay all
commissions, discounts, and other compensation to any securities broker-dealers
through whom they sell any of the shares.
DIVIDEND POLICY
We currently intend to retain all of our future earnings, if any, for use
in our business and therefore we do not anticipate paying any cash dividends on
our common stock in the foreseeable future. In addition, our current credit
agreement contains a covenant which restricts our ability to pay cash dividends
on our common stock. Any future determination to pay cash dividends will be at
the discretion of our board of directors and will depend upon our financial
condition, operating results, capital requirements, restrictions contained in
our agreements and other factors which our board of directors deems relevant.
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<PAGE> 16
PRICE RANGE OF OUR COMMON STOCK
On January 4, 2000, our common stock began trading on the Nasdaq National
Market under the trading symbol "FTRL." Before our listing on the Nasdaq
National Market, our common stock traded on the OTC Bulletin Board under the
trading symbol "FLNK" from 1998 through 1999 and under the trading symbol "CVNK"
from 1995 to 1998. Trading activity in our common stock has been limited,
sporadic and highly volatile. The high and low closing sales prices, as adjusted
to reflect the one-for-five reverse stock split effected June 1, 1999, are as
follows:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
2000
4th Quarter (through December 4, 2000)..................... $ 3.00 $ 0.81
3rd Quarter................................................ $ 7.63 $ 3.06
2nd Quarter................................................ $21.50 $ 5.50
1st Quarter................................................ $35.88 $17.31
1999
4th Quarter................................................ $35.75 $ 8.50
3rd Quarter................................................ $ 9.31 $ 6.06
2nd Quarter................................................ $ 8.69 $ 1.35
1st Quarter................................................ $ 2.60 $ 1.45
1998
4th Quarter................................................ $ 4.00 $ 1.25
3rd Quarter................................................ $ 8.45 $ 1.95
2nd Quarter................................................ $21.10 $ 3.30
1st Quarter................................................ $21.25 $ 7.50
</TABLE>
On December 4, 2000, the last reported sale price of our common stock was
$0.81 per share. As of December 4, 2000, there were 68,104,791 shares of our
common stock issued and outstanding and 732 holders of record of our common
stock.
The public market for our common stock has been limited, sporadic and
highly volatile. Between January 1, 1999 and December 4, 2000, the closing
trading price of our common stock ranged from a low of $0.81 to a high of $35.88
per share. There can be no assurance that a more active trading market for our
common stock will develop or be sustained. Even if a more active trading market
does develop, the market price of the common stock is likely to be highly
volatile and could fluctuate widely in response to factors such as:
- actual or anticipated variations in our revenues, earnings and cash flow,
- announcements of new products and services by us or our competitors and
consumer acceptance of such new products and services,
- changes in the information technology environment,
- announcements of mergers or acquisitions by ourselves or our competitors,
- sales of shares of our common stock by existing shareholders,
- financial estimates by securities analysts,
- fluctuations in the market price of our competitors' publicly-traded
stock,
- adoption of new accounting standards affecting our industry, and
- general market conditions and other factors.
Further, the stock markets have recently experienced extreme price and
volume fluctuations that have affected the market prices of equity securities of
many companies, including many companies in our industry. Some of these
fluctuations have been unrelated or disproportionate to the operating
performance of such companies. These broad market factors may adversely affect
the market price of our common stock. Such fluctuation may adversely affect our
ability to raise additional capital and your ability to liquidate your
investments at a favorable price.
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<PAGE> 17
CAPITALIZATION
The following table sets forth at September 30, 2000:
- our actual cash and cash equivalents and capitalization,
- our cash and cash equivalents and capitalization, after giving pro forma
effect to each of the following as if each had occurred on September 30,
2000:
- Receipt of $4.4 million borrowed from a financial institution pursuant
to a new credit facility in November 2000; and
- Repayment of $4.4 million of outstanding indebtedness under our prior
credit facility which allowed for borrowings of up to $10 million in
November 2000.
The table does not give effect to the proceeds to us which would result
from the exercise of the common stock warrants or the Series A preferred stock
warrants related to this prospectus.
This table should be read with "Pro Forma Condensed Consolidated Financial
Information" and related notes and our consolidated financial statements and
related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-------------------------
PRO FORMA AS
ACTUAL ADJUSTED
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 21,877 $ 21,877
========= =========
Long term obligations:
Total long term obligations............................... $ 11,764 $ 11,764
Stockholders' equity:
Preferred stock, no par value; 20,000,000 shares
authorized, 2,571,428 shares of Series A preferred
stock authorized and 1,428,571 shares of Series A
preferred stock, issued and outstanding................ 3,394 3,394
Common stock, $0.0001 par value, 300,000,000 shares
authorized, 68,104,789 issued and outstanding.......... 8 8
Common stock issuable for completed acquisitions,
2,199,965 shares....................................... 16,369 16,369
Additional paid-in capital................................ 393,369 393,369
Deferred compensation..................................... (1,752) (1,752)
Accumulated deficit....................................... (125,022) (125,022)
Accumulated other comprehensive loss...................... (1,127) (1,127)
--------- ---------
Total stockholders' equity................................ 285,239 285,239
--------- ---------
Total capitalization.............................. $ 297,003 $ 297,003
========= =========
</TABLE>
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ACQUISITIONS
As part of our growth strategy, from October 15, 1999 through June 19,
2000, we acquired seven businesses. The following table presents certain
information with respect to these acquisitions.
<TABLE>
<CAPTION>
REVENUE FOR THE
YEAR ENDED
CLOSING DATE PURCHASE PRICE DECEMBER 31, 1999 PRIMARY MARKETS
------------ --------------------- --------------------- ---------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Executive LAN Management, Inc., October 15, 1999 $86.0 $20.7 Southern California
doing business as Micro Visions
CN Networks, Inc. November 5, 1999 $19.9 $ 8.2 Northern California
Async Technologies, Inc. November 26, 1999 $35.0 $ 9.4 Midwest
KNS Holdings Limited December 22, 1999 $44.0 $19.2 United Kingdom
Vertical Software, Inc. January 31, 2000 $27.6 $13.1 Mid-Atlantic
MicroLAN Systems, Inc., doing business as February 29, 2000 $57.5 $23.6 New York and New
Madison Technology Group, Madison Jersey
Consulting Resources, Inc. and Madison
Consulting Resources NJ, Inc.
Charon Systems Inc. June 19, 2000 $21.4 $13.5 Canada
</TABLE>
The figures under the column "Purchase Price" comprise the total purchase
price, including cash paid, notes payable and common stock issued, the dollar
values of which were valued using the quoted market price on the date of the
signing of the definitive agreement for each respective acquisition. The
purchase price for each of Executive LAN Management, Inc. and Async
Technologies, Inc. includes the value of the shares of our common stock earned
upon the satisfaction of specified performance criteria in 1999.
Executive LAN Management, Inc.
On October 15, 1999, we acquired Executive LAN Management, Inc., which
conducted business as Micro Visions, for total consideration of $86.0 million,
consisting of $12.0 million in cash, 6,000,000 shares of our common stock,
contingent consideration of 2,400,000 shares of our common stock valued in the
aggregate at $71.2 million to be issued upon the satisfaction of specified
performance criteria in 1999 and options to acquire 475,000 shares of our common
stock valued at $2.8 million. At December 31, 1999, 1.2 million of the
contingent shares had been issued and the remaining 1.2 million shares had been
earned but not yet issued. In April 2000, the remaining 1.2 million shares were
issued. Executive LAN Management, Inc., was founded in Irvine, California in
1993 and was a leading reseller and service provider of thin client/server-based
computing systems. Its principal markets were in California, Arizona, Nevada,
Georgia and North Carolina. Executive LAN Management, Inc. was among North
America's leading server-based computing integrators using Citrix products in
1998. It is headquartered in Irvine, California which we recently made our
corporate head offices.
CN Networks, Inc.
On November 5, 1999, we acquired CN Networks, Inc. for total consideration
of $19.9 million, consisting of $3.9 million in cash, 1,181,816 shares of our
common stock valued at $9.1 million, and options to acquire 500,000 shares of
common stock valued at $6.9 million. CN Networks, Inc. was founded in 1991. It
was headquartered in Pleasanton, California. CN Networks was one of the leading
server-based computing integrators using Citrix products in Northern California.
Async Technologies, Inc.
On November 26, 1999, we acquired Async Technologies, Inc. for total
consideration of $35.0 million, consisting of $6.0 million in cash, options to
acquire 500,000 shares of our common stock valued at $7.6 million and 1,298,705
shares of our common stock issued upon closing and contingent consideration
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<PAGE> 19
which was earned but not yet issued as of December 31, 1999, of 439,850 shares
of our common stock valued in the aggregate at $21.4 million. In April 2000, the
remaining 439,850 shares were issued. Async Technologies, Inc. was founded in
1994 in Walled Lake, Michigan. It provided computer software and hardware
installation, maintenance services and technical training to medium and large
businesses located in the mid-western United States. Async Technologies, Inc.
was one of the leading server-based computing integrators using Citrix products
in the Great Lakes region of the United States.
KNS Holdings Limited
On December 22, 1999, we acquired KNS Holdings Limited, which conducted
business as KNS Distribution, for a total consideration of $44.0 million
consisting of $5.0 million in cash, 2,160,307 shares of our common stock valued
at $32.3 million, and notes payable in the amount of $6.7 million which have
since been paid. KNS Holdings Limited was incorporated in 1997 in the United
Kingdom. It was the largest distributor of Citrix products and related services
outside of the United States and distributed other services including video
internet teleconferencing.
Vertical Software, Inc.
On January 31, 2000, we acquired Vertical Software, Inc. for total
consideration of $27.6 million, consisting of $8.1 million in cash and 1,026,316
shares of our common stock valued at $19.5 million. Vertical Software, Inc. was
a U.S. mid-Atlantic regional provider of system integration and information
technology services. Vertical Software, Inc. was among the leading server-based
computing integrators using Citrix products in the metropolitan Washington, D.C.
area.
MicroLAN Systems, Inc.
On February 29, 2000, we acquired MicroLAN Systems, Inc., doing business as
Madison Technology Group, Madison Consulting Resources, Inc. and Madison
Consulting Resources NJ, Inc. for total consideration of $57.5 million,
consisting of $6.5 million in cash, a note payable in the amount of $7.3 million
which has since been paid and 1,975,170 shares of our common stock valued at
$43.7 million. The note payable is secured by the shares of our subsidiary
formed in this acquisition. MicroLAN Systems, Inc., doing business as Madison
Technology Group, installed, serviced and provided integration services for
computer hardware systems, software systems and networks. It was an authorized
dealer for Novell, Microsoft, Citrix, Cisco and various other major companies.
Madison Consulting Resources, Inc. provided information technology through
placement of computer consultants on a temporary and permanent basis to Fortune
1000 companies. Madison Consulting Resources NJ, Inc. was a leading provider of
information technology through placement of computer consultants on a temporary
and permanent basis to Fortune 1000 companies. These companies were among the
leading server-based computing integrators using Citrix products in the New York
and New Jersey markets.
Charon Systems Inc.
On June 19, 2000, we acquired Charon Systems Inc. for total consideration
of $21.4 million, consisting of approximately $0.7 million in cash, a note
payable in the amount of $4.3 million which has since been paid, and
exchangeable shares convertible into 2,199,965 shares of our common stock valued
at $16.4 million. Charon Systems Inc. was incorporated in Ontario, Canada in
1991 and was headquartered in Toronto, Canada. Charon Systems Inc. was a leading
server-based computing integrator using Citrix products in central and eastern
Canada.
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<PAGE> 20
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Statement of
Operations (the "Pro Forma Statement of Operations") for the year ended December
31, 1999 and the nine months ended September 30, 2000 gives effect to our
completed acquisitions as if each had occurred as of January 1, 1999.
The Pro Forma Balance Sheet gives effect to the following as if each had
occurred as of September 30, 2000:
- Receipt of $4.4 million borrowed from a financial institution pursuant to
a new credit facility in November 2000; and
- Repayment of $4.4 million of outstanding indebtedness under our prior
credit facility which allowed for borrowings of up to $10 million in
November 2000.
The Pro Forma Condensed Consolidated Balance Sheet does not give effect to
the proceeds to us which would result from the exercise of common stock warrants
or the Series A preferred stock warrants relating to this prospectus.
Pro forma adjustments are described in the accompanying Notes to Unaudited
Pro Forma Condensed Consolidated Financial Information.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations does
not necessarily indicate the actual results of operations that we would have
reported if the events described above had occurred as of January 1, 1999, nor
does it necessarily indicate the results of our future operations. Furthermore,
the pro forma results do not give effect to any cost savings or incremental
costs that may occur as a result of the integration and consolidation of our
completed acquisitions. In the opinion of management, we have made all
adjustments necessary to fairly present this pro forma financial information.
We have accounted for all of our acquisitions using the purchase method of
accounting.
The Unaudited Pro Forma Financial Information should be read with the
related notes, the "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections of this prospectus, and
the financial statements and the notes to financial statements for us and our
completed acquisitions included elsewhere in this prospectus.
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<PAGE> 21
FUTURELINK CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
FUTURELINK CORP. ADJUSTMENTS PRO FORMA
---------------- ------------ ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 21,877 $ --(A) $ 21,877
Restricted cash.................................... 562 562
Accounts receivable, net........................... 25,309
Inventory.......................................... 5,018
Prepaid expenses and other current assets.......... 2,791 2,791
-------- -------- --------
Total current assets..................... 55,557 55,557
Property and equipment, net........................ 29,108 29,108
Goodwill and other intangibles..................... 254,112 254,112
Other long-term assets............................. 950 950
-------- -------- --------
Total assets............................. $339,727 $ -- $339,727
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit..................................... $ 5,464 $ --(B) $ 5,424
Accounts payable and accrued liabilities........... 28,417 28,417
Current portion of long-term debt.................. 6,875 6,875
Deferred revenue................................... 1,380 1,380
-------- -------- --------
Total current liabilities................ 42,136 42,136
Long-term debt, net of current of portion.......... 11,764 11,764
Convertible debentures, net........................ -- --
Deferred taxes..................................... 588 588
Stockholders' equity............................... 285,239 285,239
-------- -------- --------
Total liabilities and stockholders'
equity................................. $339,727 $ -- $339,727
======== ======== ========
</TABLE>
19
<PAGE> 22
FUTURELINK CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMPLETED ACQUISITIONS(1)
-------------------------------------------------
MADISON
FUTURELINK VERTICAL GROUP CHARON PRO FORMA
CORP. SOFTWARE, INC. HOLDINGS(2) SYSTEMS INC.(3) ADJUSTMENTS PRO FORMA
----------- -------------- ----------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Hardware and software........ $ 66,043 $ 588 $ 2,294 $ 5,515 $ -- $ 74,440
Service delivery............. 25,321 471 1,160 2,405 -- 29,357
----------- -------- -------- ---------- ---------- -----------
91,364 1,059 3,454 7,920 -- 103,797
Operating expenses:
Cost of hardware and
software................... 55,009 453 1,573 4,329 -- 61,364
Cost of service delivery..... 17,546 19 240 2,054 -- 19,859
Selling, general and
administrative............. 51,428 218 2,003 1,686 -- 55,335
Depreciation and amortization
of goodwill and other
intangible assets.......... 47,464 4 20 127 4,719(A) 52,334
----------- -------- -------- ---------- ---------- -----------
Income (loss) from
operations................... (80,083) 365 (382) (276) (4,719) (85,095)
Interest expense, net.......... 1,356 1 -- 11 -- 1,368
----------- -------- -------- ---------- ---------- -----------
Income (loss) before provision
for income taxes............. (81,439) 364 (382) (287) (4,719) (86,463)
Provision for income taxes..... 27 -- -- 7 -- 34
----------- -------- -------- ---------- ---------- -----------
Income (loss) from continuing
operations................... $ (81,466) $ 364 $ (382) $ (294) $ (4,719) $ (86,497)
=========== ======== ======== ========== ========== ===========
Income (loss) from continuing
operations before preferred
stock dividends.............. $ (81,466) $ 364 $ (382) $ (294) $ (4,719) $ (86,497)
Dividends for Series A
preferred stock.............. (437) -- -- -- -- (437)
----------- -------- -------- ---------- ---------- -----------
Net loss applicable to common
stock........................ $ (81,903) $ 364 $ (382) $ (294) $ (4,719) $ (86,934)
=========== ======== ======== ========== ========== ===========
Loss per common share from
continuing operations --basic
and diluted.................. $ (1.32) $ (1.24)
=========== ===========
Weighted average shares........ 62,054,083 116,116 432,519 1,372,971 6,084,141 70,059,830
=========== ======== ======== ========== ========== ===========
</TABLE>
-------------------------
(1) Balances represent the statements of operations from January 1, 2000 to date
of acquisition.
(2) Reflects a combination of MicroLAN Systems, Inc. "DBA" Madison Technology
Group, Madison Consulting Resources, Inc. and Madison Consulting Resources
NJ, Inc. All material intercompany transactions have been eliminated.
(3) The functional currency of Charon Systems Inc. is the Canadian Dollar.
Accordingly, we have translated the assets and liabilities into U.S. dollars
at an exchange rate of CDN $1.4741 per US $1.00, the average exchange rate
in effect for the nine months ended September 30, 2000.
20
<PAGE> 23
FUTURELINK CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMPLETED ACQUISITIONS(1)
------------------------------------------------------------------
EXECUTIVE
LAN CN ASYNC KNS
FUTURELINK MANAGEMENT, NETWORKS, TECHNOLOGIES, HOLDINGS
CORP. INC. INC. INC. LIMITED(2)
----------- ----------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Hardware and software................ $ 6,748 $ 11,204 $ 5,706 $ 6,540 $ 19,082
Service delivery..................... 6,852 6,181 1,233 1,232 --
---------- --------- ------- --------- ---------
13,600 17,385 6,939 7,772 19,082
Operating expenses:
Cost of hardware and software........ 7,013 9,576 4,446 4,884 15,560
Cost of service delivery............. 10,527 1,720 414 696 --
Selling, general and
administrative..................... 12,611 6,913 1,946 1,477 2,686
Depreciation and amortization of
goodwill and other intangible
assets............................. 6,690 84 -- 35 --
---------- --------- ------- --------- ---------
Income (loss) from operations......... (23,241) (908) 133 680 836
Interest expense, net(5).............. 11,658 12 35 36 --
---------- --------- ------- --------- ---------
Income (loss) before provision for
income taxes......................... (34,899) (920) 98 644 836
Provision for income taxes............ -- -- 27 -- --
---------- --------- ------- --------- ---------
Income (loss) from continuing
operations........................... $ (34,899) $ (920) $ 71 $ 644 $ 836
========== ========= ======= ========= =========
Loss per share from continuing
operations -- basic and diluted...... $ (2.44)
Weighted average shares(6)............ 14,279,647 6,623,077 999,998 1,585,715 2,106,893
<CAPTION>
COMPLETED ACQUISITIONS(1)
------------------------------------
VERTICAL MADISON CHARON
SOFTWARE, GROUP SYSTEMS PRO FORMA
INC. HOLDINGS(3) INC.(4) ADJUSTMENTS PRO FORMA
---------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Hardware and software................ $ 8,357 $ 10,133 $ 9,807 $ -- $ 77,577
Service delivery..................... 4,761 13,454 3,669 -- 37,382
--------- --------- --------- ---------- ----------
13,118 23,587 13,476 -- 114,959
Operating expenses:
Cost of hardware and software........ 6,657 8,277 8,353 -- 64,766
Cost of service delivery............. 316 8,957 2,163 -- 24,793
Selling, general and
administrative..................... 4,822 6,166 2,669 -- 39,290
Depreciation and amortization of
goodwill and other intangible
assets............................. 50 -- 41 56,977(C) 63,877
--------- --------- --------- ---------- ----------
Income (loss) from operations......... 1,273 187 250 (56,977) (77,767)
Interest expense, net(5).............. 3 131 5 -- 11,880
--------- --------- --------- ---------- ----------
Income (loss) before provision for
income taxes......................... 1,270 56 245 (56,977) (89,647)
Provision for income taxes............ -- 19 80 -- 126
--------- --------- --------- ---------- ----------
Income (loss) from continuing
operations........................... $ 1,270 $ 37 $ 165 $ (56,977) $ (89,773)
========= ========= ========= ========== ==========
Loss per share from continuing
operations -- basic and diluted...... $ (2.12)
==========
Weighted average shares(6)............ 1,026,316 1,975,170 2,199,973 11,510,570 42,307,351
==========
</TABLE>
-------------------------
(1) For acquisitions completed prior to December 31, 1999, the amounts represent
the statements of operations from January 1, 1999 to the date of
acquisition.
(2) The functional currency of KNS Holdings Limited is the United Kingdom Pound
Sterling. Accordingly, we have translated the revenue and expenses into U.S.
dollars at an exchange rate of L0.6189 per U.S. $1.00, the average exchange
rate during the period translated.
(3) The Statement of Operations for Madison Group Holdings reflects a
combination of MicroLAN Systems, Inc., doing business as Madison Technology
Group, Madison Consulting Resources, Inc., and Madison Consulting Resources
NJ, Inc. All material intercompany transactions have been eliminated.
(4) The functional currency of Charon Systems Inc. is the Canadian Dollar.
Accordingly, we have translated the revenue and expenses into U.S. dollars
at an exchange rate of CDN $1.4854 per U.S. $1.00, the average exchange rate
in effect for the year ended December 31, 1999.
(5) Interest expense includes amortization of deferred financing fees and debt
discount.
(6) The weighted average number of shares outstanding and the loss per share
have been adjusted to reflect a 5 for 1 reverse stock split on June 1, 1999.
21
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
BALANCE SHEETS
The accompanying Pro Forma Balance Sheet as of September 30, 2000 reflects
the following pro forma adjustments:
(A) Pro forma adjustments to assets consist of the following (in millions):
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Capital Financing Adjustments:
Receipt of funds from new credit facility, net of
expenses............................................... $4.4
----
Total capital financing adjustments............... 4.4
----
Use of Proceeds Adjustments:
Cash paid for repayment of bank debt...................... 4.4
----
Total use of proceeds adjustment.................. 4.4
----
Total pro forma adjustments....................... $ --
====
</TABLE>
(B) Pro forma adjustments to liabilities and stockholders' equity consist of the
following (in millions):
<TABLE>
<CAPTION>
CURRENT STOCKHOLDERS'
LIABILITIES EQUITY
----------- -------------
<S> <C> <C>
Use of Proceeds Adjustments:
Repayment of bank debt.................................... $(4.4) $ --
----- -----
Total use of proceeds adjustments................. (4.4) --
----- -----
Capital Financing Adjustments:
Record receipt of funds from new credit facility.......... 4.4
----- -----
Total capital financing adjustments............... 4.4
----- -----
Total pro forma adjustments....................... $ (--) $
===== =====
</TABLE>
STATEMENT OF OPERATIONS
The accompanying Pro Forma Statement of Operations reflects the following
pro forma adjustments (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
EXPENSES EXPENSES
----------------- ------------------
<S> <C> <C>
(C) To adjust goodwill amortization based on an
amortization rate of five years for the 12 months ended
December 31, 1999 and nine months ended September 30,
2000 for completed acquisitions........................ $57.0 $4.7
</TABLE>
22
<PAGE> 25
PRO FORMA AVERAGE SHARES
The weighted average number of shares outstanding has been adjusted to give
effect to the shares issued upon the acquisitions of Vertical Software, Inc.,
Madison Group Holdings and Charon Systems Inc. as though the shares had been
outstanding from the beginning of the period. The weighted average number of
shares outstanding has also been adjusted for the exercise of warrants related
to the October 1999 Pequot private placement and the April 2000 Pequot private
placement as though the shares had been outstanding from the beginning of the
period or the date of issuance, if later. The weighted average number of shares
outstanding includes all contingent share consideration as if all performance
criteria had been met. The weighted average shares -- basic and diluted, has
been calculated as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES FOR NINE MONTHS
FOR YEAR ENDED ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
<S> <C> <C>
FutureLink......................................... 14,279,647 62,054,083
Executive LAN Management, Inc...................... 6,623,077 --
CN Networks, Inc. ................................. 999,998 --
Async Technologies, Inc. .......................... 1,585,715 --
KNS Holdings Limited............................... 2,106,893 --
Vertical Software, Inc. ........................... 1,026,316 116,116
Madison Group Holdings............................. 1,975,170 432,519
Warrant exercises.................................. 2,545,783 572,014
April 2000 Pequot private placement................ 1,764,704 766,422
Conversion convertible debt........................ 950,083 468,332
Charon Systems Inc................................. 2,199,965(1) 1,372,971(1)
Public offering.................................... 6,250,000 4,277,373
---------- ----------
Total.................................... 42,307,351 70,059,830
========== ==========
</TABLE>
-------------------------
(1) Represents common shares of Charon Systems Inc. exchangeable for shares of
our common stock. Charon Systems Inc. is our Canadian subsidiary.
23
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
The following historical selected consolidated financial data are derived
from the consolidated financial statements of FutureLink Corp. which Ernst &
Young LLP, Independent Auditors, have audited. This data should be read with the
consolidated financial statements, related notes, and other financial
information included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1998 1999 1999 2000
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue.............................................. $ 2,437 $ 13,600 $ 5,037 $ 91,364
---------- ----------- ---------- -----------
Expenses:
Cost of hardware and software...................... 880 7,013 1,333 55,009
Cost of service delivery........................... 1,548 10,527 5,460 17,546
Selling, general and administrative................ 3,064 12,611 6,627 51,428
Goodwill and other intangibles amortization........ 668 4,981 1,421 42,071
Depreciation and amortization...................... 203 1,709 522 5,393
---------- ----------- ---------- -----------
Loss from operations................................. (3,926) (23,241) (10,326) (80,083)
Interest expense, net(1)............................. 1,333 11,658 11,155 1,356
Equity in loss of investee........................... 826 -- -- --
---------- ----------- ---------- -----------
Loss before income taxes and extraordinary item...... (6,085) (34,899) (21,481) (81,439)
Provision (benefit) for income taxes................. (205) -- (357) 27
---------- ----------- ---------- -----------
Loss before extraordinary item....................... (5,880) (34,899) (21,124) (81,466)
Extraordinary item................................... -- (845) (845) --
---------- ----------- ---------- -----------
Net loss............................................. $ (5,880) $ (35,744) $ (21,969) $ (81,466)
========== =========== ========== ===========
Net loss before preferred stock dividends............ $ (5,880) $ (35,744) $ (21,969) $ (81,466)
Dividends for Series A preferred stock............... -- -- -- (437)
---------- ----------- ---------- -----------
Net loss applicable to common stock.................. (5,880) (35,744) (21,969) (81,903)
========== =========== ========== ===========
Loss per share applicable to common stock -- basic
and diluted:
Loss before extraordinary item..................... $ (1.86) $ (2.44) $ (3.23) $ (1.32)
Extraordinary item................................. -- (0.06) (0.13) --
---------- ----------- ---------- -----------
Net loss per share................................. $ (1.86) $ (2.50) $ (3.36) $ (1.32)
========== =========== ========== ===========
Weighted average shares(2)......................... 3,169,413 14,279,647 6,534,575 62,054,083
========== =========== ========== ===========
OTHER DATA:
EBITDA(3).......................................... $ (3,881) $ (16,551) $ (8,383) $ (32,619)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1998 1999 2000
------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 7 $ 19,185 $ 21,877
Total assets................................................ 10,646 240,678 339,727
Total debt.................................................. 3,002 15,201 24,103
Stockholders' equity........................................ 2,837 202,748 285,239
</TABLE>
-------------------------
(1) Includes amortization of deferred financing fees and debt discount.
(2) Gives retroactive effect to a reverse stock split of 5 to 1 on June 1, 1999
as if it had occurred as of the beginning of each period presented.
(3) EBITDA is defined as net loss plus:
- interest expense, net,
- provision (benefit) for income taxes,
- goodwill and other intangibles amortization,
- depreciation and amortization, and
- extraordinary items.
EBITDA is presented not as an alternative measure of operating results or
cash flow from operations as determined in accordance generally accepted
accounting principles, but because it is a widely accepted financial
indicator of a company's ability to incur and service debt.
24
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read with the consolidated financial statements and the
related notes included elsewhere in this prospectus. This discussion contains
forward-looking statements the accuracy of which involves risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements for many reasons including, but not limited
to, those discussed in "Risk Factors" and elsewhere in this prospectus. We
disclaim any obligation to update information contained in any forward-looking
statement.
OVERVIEW
We provide server-based computing services and are an application service
provider, or ASP. Our services enable software applications to be deployed,
managed, supported and upgraded from centrally located servers, rather than on
individual desktop computers. For our server-based computing customers, we
install and integrate software applications on our customers' servers. For our
ASP customers, we host software applications on our servers at our data centers,
rent computing services to our customers for a monthly fee, and perform remote
management and maintenance of our customers' servers from our network operations
centers. Our ASP customers connect to our facilities over the Internet, through
a dedicated telecommunications line or by wireless connection. Our goal is to
provide our ASP services with the speed, simplicity and reliability of a utility
service.
We introduced our ASP services in March 1999 and launched our sales program
for ASP services in July 1999. Since then, we have built our server-based
computing business through seven acquisitions that we closed between October 15,
1999, and June 19, 2000 as follows:
- On October 15, 1999, we acquired Executive LAN Management, Inc. for total
consideration of $86.0 million.
- On November 5, 1999, we acquired CN Networks, Inc. for total
consideration of $19.9 million.
- On November 26, 1999, we acquired Async Technologies, Inc. for total
consideration of $35.0 million.
- On December 22, 1999, we acquired KNS Holdings Limited, for total
consideration of $44.0 million.
- On January 31, 2000, we acquired Vertical Software, Inc. for total
consideration of $27.6 million.
- On February 29, 2000, we acquired MicroLAN Systems, Inc., doing business
as Madison Technology Group, Madison Consulting Resources, Inc. and
Madison Consulting Resources N.J., Inc. for total consideration of $57.5
million.
- On June 19, 2000, we acquired Charon Systems Inc. for total consideration
of $21.4 million.
Our acquisitions reflect our strategy to rapidly expand our market
penetration and our ability to deliver ASP services. All of the companies we
have acquired to date offer their customers information technology services,
specializing in server-based applications relying on software from Citrix
Systems, Inc. The Citrix Systems software interacts with Windows NT Terminal
Server software from Microsoft, the same software used by us to run our ASP
servers. The acquisitions have allowed us to enter other major markets through
an established market participant, with local sales and marketing teams now able
to offer both server-based integration and outsourcing services and ASP, while
allowing us to leverage the talents of additional technical staff to deliver ASP
as well as the more traditional server-based computing solutions to a wider
range of clients.
The acquisitions resulted in approximately $302 million of purchase price
in excess of net assets acquired that we have allocated to goodwill and
assembled workforce. We believe that we will be able to
25
<PAGE> 28
realize the value of the goodwill acquired through the overall expansion of our
ASP business based on our strategic business plan. We will periodically evaluate
the goodwill based upon the future undiscounted cash flows using the forecasts
in our strategic business plan. If our estimate of future undiscounted cash
flows should change or our strategic business plan is not achieved, future
analyses may indicate insufficient future undiscounted cash flows to recover the
carrying value of the goodwill, in which case the goodwill would be written down
to fair value.
Our historical financial statements for the nine month period ended
September 30, 1999 reflect our historical Canadian business and Canadian ASP
operations and do not reflect any United States server-based computing, ASP
business or server-based computing distribution business until the effective
dates of the acquisitions listed previously. These acquired businesses now
represent a significant portion of our revenue, operations and employees.
Our discussion of operations for the nine month periods ended September 30,
1999 and 2000 and for the years ended December 31, 1998 and 1999 focuses on
activities in each respective period because our significant acquisition
activity in late 1999 and 2000 distorts period to period comparisons.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER
30, 1999
Revenue
The components of our revenue for the nine months ended September 30, 1999
and 2000 were as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------- -------------
<S> <C> <C>
Sale of hardware and software............................. $1.5 $66.0
Service delivery.......................................... 3.6 25.3
---- -----
Total........................................... $5.1 $91.3
==== =====
</TABLE>
Revenue for the nine months ended September 30, 1999 consisted of $3.6
million of information technology outsourcing revenue, a portion of which
related to delivery of ASP services. The purchase and resale of hardware and
software to our customers accounted for $1.5 million of revenue for the nine
months ended September 30, 1999.
Revenue for the nine months ended September 30, 2000 consisted of $25.3
million of information technology outsourcing revenue, a portion of which
related to delivery of ASP services. We also purchase and resell hardware and
software to our customers as part of our services, which accounted for $66.0
million of revenue for the nine months ended September 30, 2000.
Cost of Goods Sold
Cost of goods sold reflects costs of hardware and software purchased for
resale to customers. Cost of goods sold for the nine months ended September 30,
1999 was $1.3 million, or 87% of hardware and software sales.
Our cost of goods sold for the nine months ended September 30, 2000 was
$55.0 million, or 83% of related hardware and software sales.
Cost of Service Delivery
Our cost of service delivery for the nine months ended September 30, 1999
was $5.5 million, or 153% of service delivery revenue. This includes amounts
related to the cost of service delivery of information technology outsourcing
and the direct cost related to the development of our ASP services, including
operating a "beta test" data center for early customers.
26
<PAGE> 29
Our cost of service delivery for the nine months ended September 30, 2000
was $17.5 million, or 69% of service delivery revenue. Our cost of service
delivery reflects payroll and benefit costs for our outsourcing consultants who
support the information technology activities of our clients and payroll,
benefit, and operational costs related to testing and operating our data center
and installing and supporting software applications related to our ASP and
information technology outsourcing businesses.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses include travel, payroll,
operations, advertising, and marketing expenses to secure customers and to
develop business partnerships, as well as for meeting and developing
relationships with industry analysts and financiers.
Our selling, general and administrative expenses for the nine months ended
September 30, 1999 were $6.6 million. This amount includes $1.7 million of
non-cash compensation charges relating to the issuance of our common stock,
options and warrants.
Selling, general and administrative expenses for the nine months ended
September 30, 2000 increased $44.8 million to $51.4 million, from $6.6 million
in the comparable period in 1999. The increase in such costs results from the
expansion of our ASP business which resulted in increased payroll and operating
costs, additional costs for our financing and marketing activities, and the
additional selling, general and administrative costs of the subsidiaries that we
acquired during 1999 and 2000. The 2000 amount also includes $2.2 million of
non-cash compensation charges relating to the issuance of our common stock,
options and warrants.
Depreciation and Amortization of Goodwill and Other Intangible Assets
Our depreciation and amortization costs for the nine months ended September
30, 1999 and 2000 are comprised of the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------- -------------
<S> <C> <C>
Goodwill amortization...................................... $1.4 $42.1
Depreciation and other amortization........................ 0.5 5.4
---- -----
$1.9 $47.5
==== =====
</TABLE>
Our amortization of intangible assets for the nine months ended September
30, 1999 relates to the amortization of amounts capitalized for assembled
workforce.
Amortization of goodwill for the nine months ended September 30, 2000
relates to the acquisitions made during 1999 and the nine months ended September
30, 2000. Our depreciation and other amortization expense for the nine months
ended September 30, 2000 includes depreciation on the expansion of our data
centers, software user licenses, office and leasehold improvements, and
amortization of amounts capitalized for assembled workforce.
Interest Expense
Our interest expense of $11.2 million for the nine months ended September
30, 1999 includes a non-cash $3.3 million charge related to amortization of
intrinsic value of conversion features related to convertible debenture
financing and $7.9 million related to interest on bank indebtedness and lines of
credit, capital lease obligations and convertible debt outstanding during the
nine months.
Our interest expense of $2.0 million for the nine months ended September
30, 2000 relates mainly to interest on bank indebtedness and lines of credit,
capital lease obligations and convertible debt outstanding during the nine
months.
27
<PAGE> 30
PRO FORMA RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenue
Revenue for the nine months ended September 30, 2000 on a pro forma basis
was $103.8 million, comprised of $29.4 million of service revenue and $74.4
million of revenue from hardware and software sales.
Cost of Goods Sold
Our cost of goods sold for the nine months ended September 30, 2000 on a
pro forma basis was $61.4 million, or 83% of pro forma hardware and software
sales.
Cost of Service Delivery
Our cost of service delivery for the nine months ended September 30, 2000
on a pro forma basis was $19.9 million or 68% of service revenue.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the nine months ended
September 30, 2000 on a pro forma basis were $55.3 million. These costs are
mainly attributable to the increased payroll, operations, marketing and
administrative costs incurred by us to secure customers and to develop business
partnerships, as well as for meeting and developing relationships with industry
analysts and financiers.
Amortization of Goodwill and Other Intangible Assets and Depreciation
Our amortization of goodwill and other intangible assets and depreciation
for the nine months ended September 30, 2000 on a pro forma basis was $52.3
million.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1998 AND 1999
Revenue
The components of our revenue for the years ending December 31, 1998 and
1999 were as follows (dollars in millions):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Information technology outsourcing, consulting and other... $1.4 $ 6.9
Sale of hardware/software.................................. 1.0 6.7
---- -----
$2.4 $13.6
==== =====
</TABLE>
Revenue for the year ended December 31, 1998 consisted of $1.4 million of
information technology outsourcing and business consulting revenue, and $1.0
million of hardware and software sales. The revenue for this period reflects the
operations of our FutureLink/SysGold Ltd. subsidiary, which we acquired on
August 24, 1998, and our FutureLink Alberta subsidiary for the period November
23, 1998 to December 31, 1998. Prior to that date, we only held a 46% interest
in FutureLink Alberta, and we accounted for those results under the equity
method of accounting and reflected those results in equity of loss of investee.
Revenue for the year ended December 31, 1999 consisted of $1.7 million of
information technology, outsourcing and ASP service revenue generated by the
United States companies that we acquired during the year, and $5.2 million of
information technology outsourcing and consulting services that our Canadian
companies generated, which they provided to mostly oil and gas industry
customers. We also purchase and
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<PAGE> 31
resell hardware and software to our customers as part of our services, which
accounted for $6.7 million of revenue in 1999, of which $4.7 million related to
revenues generated by the acquired companies.
Cost of Goods Sold
Cost of goods sold reflects costs of hardware and software purchased for
resale to customers. Cost of goods sold for the year ended December 31, 1998 was
$0.9, or 91% of hardware and software sales.
Our cost of goods sold for the year ended December 31, 1999 was $7.0
million, or 103% of related hardware and software sales. The cost of sales for
the year ended December 31, 1999 exceeded related revenue primarily because we
wrote off $232,000 of inventory during the period that existed on the books of
the companies we acquired.
Cost of Service Delivery
Our cost of service delivery for the year ended December 31, 1998 was $1.5
million. This includes amounts related to the cost of delivering our outsourcing
services and the direct cost related to the development of our ASP services,
including operating a "beta test" data center for early customers. The costs of
service delivery for this period reflects costs resulting from the operations of
our FutureLink/SysGold Ltd. subsidiary, which we acquired on August 24, 1998,
and from Futurelink Alberta for the period November 23, 1998 to December 31,
1998. Prior to that date, we only held a 46% interest in FutureLink Alberta, and
we accounted for those results under the equity method of accounting and
reflected those results in loss of investee.
Our cost of service delivery for the year ended December 31, 1999 was $10.5
million. Our cost of service delivery reflects payroll and benefit costs for our
outsourcing consultants who support the information technology activities of our
clients and payroll, benefit, and operational costs related to testing and
operating our data centers and installing and supporting software applications
related to our ASP and information technology outsourcing businesses.
Selling, General and Administrative
Our selling, general and administrative expenses for the year ended
December 31, 1998 were $3.1 million and included selling, general and
administrative costs resulting from the operations of our FutureLink/SysGold
Ltd. subsidiary, which we acquired on August 24, 1998. The 1998 amount includes
selling, general and administrative costs from our FutureLink Alberta subsidiary
for the period November 23, 1998 to December 31, 1998. Prior to that date, we
only held a 46% interest in FutureLink Alberta, and we accounted for those
results under the equity method of accounting and reflected those results in
loss of investee. The 1998 amount also includes $2.1 million of non-cash
compensation charges relating to the issuance of our common stock, options and
warrants.
Our selling, general and administrative expenses include travel, payroll,
operations, advertising, and marketing expenses to secure customers and to
develop business partnerships, as well as for meeting and developing
relationships with industry analysts and financiers. Selling, general and
administrative expenses for the year ended December 31, 1999 increased $9.5
million to $12.6 million, from $3.1 million in the comparable period in 1998.
The increase in such costs results from the expansion of our ASP business which
resulted in increased payroll and operating costs, additional costs to our
financing and marketing activities, and $4.6 million additional selling, general
and administrative costs of the subsidiaries that we acquired during the year.
The 1999 amount also includes $3.3 million of non-cash compensation charges
relating to the issuance of our common stock, options and warrants.
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<PAGE> 32
Interest Expense
Our 1998 interest expense of $1.3 million includes a non-cash charge
related to amortization of deferred financing fees of $1.2 million.
Our interest expense, including amortization of deferred financing fees and
debt discount, of $12.1 million for the year ended December 31, 1999, reflects
non-cash charges of $11.1 million related to, among other factors, the
difference between the market value of the debt conversion features on the date
of the debt agreement and the price of conversion. The cash interest expense of
$1.0 million relates to interest on bank indebtedness and lines of credit,
capital lease obligations and convertible debt and promissory notes outstanding
during the year.
Amortization of Goodwill and Other Intangible Assets and Depreciation
Our depreciation and amortization costs for the years ended December 31,
1998 and 1999 are comprised of the following (dollars in millions):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Amortization of goodwill and other intangible assets........ $0.7 $5.0
Depreciation and amortization............................... 0.2 1.7
---- ----
$0.9 $6.7
==== ====
</TABLE>
Our amortization of intangible assets for the year ended December 31, 1998
relates to the amortization of the assembled workforce that we acquired during
1998.
Our depreciation for the year ended December 31, 1999 includes depreciation
on the expansion of our Canadian data center, software user licenses, and office
and leasehold improvements. Our amortization of intangible assets for the year
ending December 31, 1999 relates to the amortization of goodwill on the
acquisitions made during the year and from the assembled workforce acquired
during the year ended December 31, 1998.
Equity in Loss of Investee
On January 20, 1998, we acquired a 46% interest in FutureLink Alberta.
Effective November 23, 1998, we acquired a further 50.4% interest in FutureLink
Alberta, bringing our total ownership to 96.4%. We accounted for our investment
in FutureLink Alberta for the period January 20, 1998 to November 23, 1998 using
the equity method of accounting for investments, and included 46% of FutureLink
Alberta's net loss on our statement of operations as "Equity in loss of
investee." Upon the November 24, 1998 acquisition of the additional 50.4%
interest, we consolidated FutureLink Alberta's results of operations into our
results of operations. In 1999, we consolidated FutureLink Alberta's operations
with our operations for the full year.
Extraordinary Item
During the year ended December 31, 1999, we renegotiated the terms of our
10% convertible debentures having an original aggregate principal amount of $6.0
million. We issued additional warrants to holders of our convertible debentures
and also retired a portion of the principal amount of these convertible
debentures at a premium. As a result of this series of transactions, we recorded
an extraordinary loss of $0.8 million.
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<PAGE> 33
PRO FORMA RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1999
Revenue
Revenue for the year ended December 31, 1998 on a pro forma basis was $78.5
million, comprised of $19.3 million of service revenue and $59.2 million of
revenue from hardware and software sales. Revenue for the year ended December
31, 1999 on a pro forma basis was $115.0 million, comprised of $37.4 million of
service revenue and $77.6 million of revenue from hardware and software sales.
The increase in revenue was a result of the overall increase in demand for
Citrix products, as well as for service-based computing services, particularly
as they related to delivering software applications from remote locations.
Cost of Goods Sold
Our cost of goods sold for the year ended December 31, 1998 on a pro forma
basis was $53.2 million, or 89.7% of pro forma hardware and software sales. Our
cost of goods sold for the year ended December 31, 1999 on a pro forma basis was
$64.8 million, or 83.5% of pro forma hardware and software sales. The change in
the cost of goods sold percentage was due primarily to a change in product mix
and better pricing in 1999.
Cost of Service Delivery
Our cost of service delivery for the year ended December 31, 1998 on a pro
forma basis was $5.2 million or 26.9% of service revenue as compared to $24.8
million or 66.3% of service revenue on a pro forma basis for the year ended
December 31, 1999. The increase in cost of service delivery percentage is due
primarily to the 1999 amount including a substantial amount of ASP service
development and engineering costs, which had a limited amount of offsetting
revenue.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the year ended
December 31, 1998 on a pro forma basis were $20.5 million, as compared to $39.3
million on a pro forma basis for the year ended December 31, 1999. The increase
in expenses was mainly attributable to the increased payroll, operations,
marketing and administrative costs incurred by us in 1999 to secure customers
and to develop business partnerships, as well as for meeting and developing
relationships with industry analysts and financiers. The increase in costs is
also consistent with the overall increase in operations resulting from the
increased sales activity.
Depreciation and Amortization of Goodwill and Other Intangible Assets
Our depreciation and amortization of goodwill and other intangible assets
for the year ended December 31, 1998 on a pro forma basis was $60.0 million as
compared to $63.0 million on a pro forma basis for the year ended December 31,
1999.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, we had net cash outflows
from operating activities of $36.0 million and utilized another $36.5 million
for acquisitions. These outflows related mainly to the expansion of our ASP
business, our significant acquisition activity and a payment of $5.0 million to
SmallCaps Online Group LLC relating to the settlement of a litigation matter. In
addition, during the nine months ended September 30, 2000 we invested $5.4
million in property and equipment, mostly in expanding our existing data
centers, and for the acquisition of software, hardware and other infrastructure
costs necessary to host our ASP customers. These net cash outflows are
significantly greater than net cash outflows for the same period in 1999.
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<PAGE> 34
During the nine months ended September 30, 2000 we acquired three
companies. The total consideration for these acquisitions was $106.5 million
consisting of $15.2 million cash; 5,201,459 shares of common stock valued at
$79.6 million; and notes payable of $11.7 million, all of which have been paid.
We used the following sources of financing to fund operations, our
acquisitions, expansion of our ASP business, our expansion into the United
States and the United Kingdom, investments in property and equipment, and for
the acquisition of software, hardware and other infrastructure costs necessary
to host our ASP customers:
Issuance of common stock and warrants -- During 1999, we completed a
private placement of $50.0 million of common equity with institutional private
equity investors and received net proceeds of approximately $46.1 million after
deducting commissions and fees. As part of this placement, we issued warrants to
acquire 2,401,041 shares of common stock to the investors and the placement
agent. The holders exercised these warrants in February 2000, resulting in net
proceeds to the Company of $18.0 million. On April 28, 2000, the Company
completed a private placement of approximately $15 million common equity with
institutional private equity investors. As part of this placement, the Company
issued to the investors 1,764,706 shares of common stock and warrants to
purchase 441,176 shares of common stock at an exercise price of $9.25 per share.
On July 10, 2000, the Company issued to Microsoft Corporation, for proceeds of
$10.0 million, 1,428,571 shares of FutureLink Series A preferred stock for a
price of $7.00 per share. The Company also issued to Microsoft a warrant with a
five-year term to purchase up to an additional 1,142,857 shares of Series A
preferred stock at an exercise price of $7.00 per share. In July 2000, the
Company completed a public offering of 6,250,000 shares of its common stock at a
price of $7.00 per share. The Company received net proceeds of $37.3 million
from this offering after deducting underwriting discounts, commissions and
offering costs.
Lease Financing -- During the nine months ended September 30, 2000, we
utilized several capital asset lease lines with financial lenders and computer
hardware vendors. These lines allow us to lease up to $25.9 million of computer
hardware and related infrastructure. As of September 30, 2000, we have used
$14.1 million of these lines. We had available borrowings of $11.8 million as of
September 30, 2000 and $8.3 million as of November 30, 2000 under the various
lease lines. Aggregate monthly payments under these lines were $0.8 million as
of September 30, 2000 and $0.9 million as of November 30, 2000, including
interest implicit in the leases at rates ranging from 9% to 14% per annum. These
lines have been partially used to build and expand our United States, Canadian
and United Kingdom data centers.
Bank Financing -- In November 2000, we entered into a loan and security
agreement with a financial institution relating to a revolving credit facility
that allows borrowings up to a maximum of $25 million, which may be increased to
$30 million at our option subject to payment of additional fees. The amount that
we are permitted to borrow at any given time will vary from time-to-time based
upon a percentage of our eligible accounts receivable as described in the loan
and security agreement. In addition, there are limits as to how much we can
borrow against various categories of accounts receivable. For example, the most
we can borrow against our Canadian subsidiary accounts receivable is $10
million. The percentage of our accounts receivable against which we can borrow
may be reduced if the amount of bad debt write-downs, advertising allowances,
credits, or similar reductions of our accounts receivable exceed 5% of the
applicable category of accounts receivable used for purposes of determining the
maximum borrowing amount. If at any time the amount we owe under the credit
facility exceeds the borrowing limits under the facility, we may immediately be
required to repay in cash the amount of such excess. The credit facility is
secured by substantially all of our assets, the receivables and other assets of
certain of our subsidiaries, and by guarantees and a pledge of a percentage of
the shares of those subsidiaries. The credit facility has an initial term of
three years, and will automatically be renewed for successive one-year terms,
unless it is terminated sooner. We can terminate the facility at any time upon
90 days prior notice, but if we terminate the credit facility during the first
three years, we will be required to pay a prepayment penalty. The credit
facility bears interest at prime or prime plus 1.5% per annum, depending on the
amount of our available unrestricted cash from time to time; however, at no time
will the interest rate charged by the lender be less than 8% per annum. The
credit facility contains certain financial and other covenants and restrictions,
including the maintenance of a minimum tangible net worth, limitations on
capital
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<PAGE> 35
expenditures and the incurrence of indebtedness and restrictions on the payment
of dividends. The terms of the $25 million credit facility also require us to
follow cash management procedures. Specifically, we are required to establish
and maintain cash management bank accounts in the lender's name, into which our
collections on accounts receivable will be deposited. So long as we are not in
default under the credit facility and our aggregate cash balances are at least
$10 million, we may transfer funds from the cash management accounts to our
operating accounts. If we default under the credit facility, or if our aggregate
cash balances fall below $10 million, all amounts in the cash management bank
accounts will be forwarded by daily sweep to the lender's account. After paying
any amounts due to itself, the lender must remit the remaining balance to us.
In December 2000, certain of our UK subsidiaries entered into a loan
agreement with the same financial institution relating to a revolving credit
facility for up to $5 million. Any amount we borrow under the UK facility will
reduce the available amount we can borrow under our $25 million credit facility.
The UK credit facility is secured by substantially all of the assets of our UK
subsidiaries and by guarantees by us and certain of our subsidiaries. The terms
of the UK credit facility are substantially the same as the $25 million credit
facility.
As of December 15, 2000, we have borrowed $8.8 million under the $25
million credit facility and had no borrowings under the UK credit facility,
leaving the remaining amount we could borrow under the credit facility at $6.5
million. A portion of these funds were used to refinance $4.4 million of
outstanding indebtedness under our prior credit facility, which allowed
borrowings of up to $10 million. The balance will be used to provide the
necessary funds for working capital, including the funding of hardware and
software purchases related to the performance of our server-based computing
services.
In connection with entering into the new $25 million credit facility, we
granted the lender a warrant to purchase 100,000 shares of our common stock at
an exercise price of $8.40 per share, with related registration rights.
Our future liquidity will depend on our ability to successfully restructure
our operations and to reduce our operating losses. In October 2000, consistent
with our plan to integrate our recently acquired companies and achieve more
efficient operations, we closed 6 branch offices and eliminated an aggregate of
75 positions company-wide through a combination of reduction in force and
attrition. As a result of these actions, we expect to realize annualized cost
savings of approximately $12 million by the end of the fourth quarter 2000. We
are continuing to evaluate all aspects of our operations with a view to reducing
our operating losses. This may include: the elimination of certain unprofitable
lines of business, further staff and overhead reductions and the curtailment of
further expansion of our ASP business and infrastructure until such time as our
ASP product becomes more readily accepted by the market. The Company is also
refocusing its efforts to improve its margins in our server based computing
business. We believe that our available cash, cash equivalents and available
borrowings under our lease and bank credit facilities, may not be sufficient to
meet our anticipated cash needs to fund our operating losses, working capital
and capital expenditures through 2001 unless we are successful in raising
additional financing and continuing to reduce our operating losses.
This additional financing may involve incurring additional debt (beyond our
existing credit facilities discussed above) and/or selling equity securities. We
cannot assure you that such additional financing will be available to us on
commercially reasonable terms or at all. If we incur debt, the risks associated
with our business and with owning our common stock should increase. If we raise
capital through the sale of equity securities, the percentage ownership of our
stockholders will be diluted. In addition, any new equity securities may have
rights, preferences or privileges senior to those of our common stock.
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<PAGE> 36
Foreign Currency Translation and Hedging
We are exposed to foreign currency fluctuations through our operations in
Canada and the United Kingdom. At September 30, 2000 approximately 11% of our
revenue and 17% of our receivables are in Canadian dollars and approximately 22%
of our revenue and 21% of our receivables are in British pounds. We do not enter
into forward exchange contracts or any derivative financial investments for
trading purposes. Thus, we do not currently hedge our foreign currency exposure.
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BUSINESS
OUR COMPANY
We provide server-based computing services and are an application service
provider, or ASP. Our services enable software applications to be deployed,
managed, supported and upgraded from centrally located data centers, rather than
on individual desktop computers. For our server-based computing customers, we
install and integrate software applications on our customers' servers. For our
ASP customers, we host applications on our servers at our data centers, rent
computing services to our customers for a monthly fee, and perform remote
management and maintenance of our customers' servers from our network operations
centers. Our ASP customers connect to our facilities over the Internet, through
a dedicated telecommunications line or by wireless connection. Our goal is to
provide our ASP services with the speed, simplicity and reliability of a utility
service. We introduced our ASP services in March 1999 and our goal is to make
our ASP services a much larger portion of our overall business.
We are the largest integrator in North America of server-based computing
systems using Citrix software. Citrix software is one of the leading
technologies for delivering software applications from remote locations. We
typically install Citrix software along with Windows NT Terminal Server software
from Microsoft. Customers for our server-based computing services have included
Cisco Systems, The Walt Disney Company, Allied Signal, General Motors, Ford
Motor Company, Bank of America, Apple Computer and Delta Airlines. We are
building upon our server-based computing expertise to develop our ASP services.
We believe that through our experience in the server-based computing
business, we have developed a number of strengths that position us to
successfully grow our ASP business, including:
- a recognizable customer base, lending credibility to our ASP services,
- technical expertise in enabling a variety of software applications to
operate in a server-based computing environment, and
- relationships with sales channels, including software vendors and
software application integrators.
In addition to our operations in the United States, we currently conduct
business in Canada and the United Kingdom. A material part of our growth
strategy is based on expanding operations internationally. We anticipate that
Canadian and European sales will account for a significant amount of our future
revenue.
There are certain risks inherent in doing business in international
markets, such as:
- different telecommunications access fees,
- different technology standards,
- different liability standards,
- less protective intellectual property laws,
- changes in political conditions,
- changes in regulatory requirements,
- increased expenses due to tariffs and other trade barriers,
- fluctuations in currency exchange rates,
- restrictions on currency transfers,
- potentially adverse tax consequences, and
- difficulties in managing or overseeing foreign operations.
Any of these risks may have a material adverse effect on our current or
future international operations and, consequently, on our business, results of
operations and financial condition.
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OUR MARKET OPPORTUNITY
Both the ASP and the server-based computing markets are growing. According
to Forrester Research, Inc., the size of the ASP market in 1999 was less than
$1.0 billion. Forrester Research, Inc. projects this market to grow to over
$11.0 billion in 2003 and that 22% of all U.S.-based application revenue will
flow through ASPs' such as us. In 1999, server-based computing accounted for
substantially all of our revenues. Our business strategy is to leverage our
server-based computing business to grow our ASP business into a larger portion
of our business.
We believe the growth of the server-based computing and ASP services
markets is being driven by the following factors:
- Software Complexity. Software applications are increasingly more complex
and need to be continually upgraded, integrated and supported. This is
beyond the expertise of many companies.
- Shortage of Information Technology Professionals. According to
International Data Corporation, by 2002 there will be a shortage of
850,000 information technology professionals in the United States and an
even greater shortage of one million information technology personnel in
Europe. Companies are finding it increasingly more difficult and
expensive to maintain their information technology departments.
- Telecommunication Costs Have Been Declining. The greater availability of
telecommunications capacity and declining costs over the last several
years have made the use of centralized computing more economical to
businesses.
- Increasing Demand for Remote and Shared Access to Software
Applications. Many companies require that their employees be able to
access software applications both from their desktops and from locations
away from their offices. These companies are using server-based computing
and ASP solutions to meet these requirements.
OUR SOLUTIONS
Our solutions offer the following key benefits:
- Reliable service. By offering service level agreements and utilizing the
latest technology, we are able to provide increased levels of service
which our customers cannot easily replicate.
- Reduce dependency on information technology staff. The maintenance of a
complete, professionally-managed information technology team necessary to
effectively manage complex software and information technology
infrastructures is increasingly expensive and difficult. By outsourcing
all or part of their information technology needs, our customers are able
to reduce their information technology staff and can focus on their core
competencies.
- Lower costs. By spreading information technology costs among many
customers, we are able to achieve economies of scale not possible for our
target customers and as a result offer our customers significant cost
savings. Customers of our server-based computing services are able to
reduce their information technology costs. Our ASP customers realize the
same benefits, and are able to forecast and budget their ongoing
information technology costs and reduce their upfront information
technology investment.
- Rapid deployment. By having their software applications hosted at central
locations, our customers are able to rapidly deploy and quickly upgrade
their software, allowing them to more rapidly realize returns on their
information technology expenditures. For our ASP customers, we are able
to offer applications installed at our servers to customers almost
immediately.
- Ability to run on a variety of hardware systems. We can integrate
different computer systems and devices, including a company's existing
personal computer terminals, without the need for significant hardware
upgrades. This allows our customers to implement our solutions without
replacing existing computer hardware, extending the useful life of their
existing computer systems.
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- Flexibility. We are not committed to any particular software package or
linked to any single software manufacturer. Instead, we seek to deliver
software applications best suited for our customers. We can accommodate
virtually any software application. Our customers have the flexibility to
host some or all of their software applications on our servers.
OUR STRATEGY
We seek to build a global ASP and continue to develop our server-based
computing business by:
- Leveraging our existing server-based computing capabilities to build our
ASP business. Our expertise in providing server-based computing solutions
makes us well-positioned to provide ASP services. Through our
acquisitions, we have built a strong base of technical experts. We plan
to continue to build this base, and to transition technical professionals
from server-based computing services to ASP services in order to
implement our business plan.
- Penetrating the market through our third-party distribution channels. We
market our ASP services primarily through third-party distribution
channels, including software application and system integrators. We
believe these distribution channels will allow us to increase our market
penetration without incurring significant capital expenditures. This
should also allow us to shorten the sales cycle for our service offerings
by targeting the customer closer to the time of the customer's decision
to purchase software. We also believe this strategy gives us access to
market leading products and technology and allows us to focus on service
delivery rather than software development. We currently maintain
relationships with over 60 software applications and systems integrators.
- Broadening our relationships with software vendors. We have established
relationships with software application vendors in key application areas,
including Microsoft, Great Plains Software, Onyx Software and SalesLogix.
Our agreements with software application providers generally enable us to
deploy software applications for a monthly fee, without the need to
establish a separate licensing arrangement for each customer. Our
relationships with these providers also enable us to provide our
customers with an economically attractive service offering, and afford us
co-marketing and co-branding opportunities. We plan to enter into
relationships with other software application providers. This will enable
us to expand our portfolio of software applications and reduce our
reliance on any one software application provider.
OUR SERVICE OFFERINGS
Server-Based Computing Services
Our server-based computing services are aimed at customers who have or wish
to install their own data centers and operate these with their own information
technology staff, but need expertise to assist in addressing certain aspects of
their information technology needs. For the year ended December 31, 1999, on a
pro forma basis, after giving effect to our completed acquisitions, our
server-based computing services accounted for a substantial portion of our
revenues on a pro forma basis and we expect these services to account for a
substantial portion of our revenues for the year ending December 31, 2000. We
currently serve customers which range from small organizations to Fortune 100
companies. Our server-based computing services include the following:
- installing and integrating software applications on our customers'
servers using Citrix server-based computing software,
- maintaining, onsite and remotely, our customers' server-based computing
environments, and
- training information technology professionals to use Citrix and Microsoft
operating software.
Our typical contract for server-based computing services provides for the
installation of one or more servers to deliver software applications to our
customers' desktops through their own local area network and the integration of
software at their servers. Depending on the type and length of the project,
pricing for these services is based on an hourly rate, at a daily rate, on a
project by project basis, on a monthly price per consultant or on a monthly fee
per employee or user. We also offer maintenance services and
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training. Maintenance services are typically charged on a fixed fee basis or on
an hourly rate for employees who maintain the system. Our direct sales force
sells our server-based computing services.
ASP Services
Our ASP services involve deploying, managing and supporting software
applications hosted at our data centers for our customers. Our ASP services are
designed so that our customers can choose the combination of software
applications that best meet their business requirements, technical needs and
financial resources. Depending on the requirements of our software providers, we
sometimes enter into sublicensing agreements with our customers granting the
right to use certain software applications.
Most of our ASP customers are small to mid-sized businesses having 20 to
2,000 employees. To date, our ASP services have accounted for a small portion of
our business. However, we expect our ASP services to account for an increasingly
larger portion of our business in the future. We typically enter into three year
agreements with our customers and charge them a flat monthly fee depending on
the software applications we host for them. Our customers pay for our ASP
services on a monthly basis. Our prices are based on the number of users, types
of applications hosted and number of support services that our customers use.
Growth in the demand for our ASP services is dependent upon the following
factors:
- the compatability between our ASP services and technology that our
customers use,
- our ability to reliably deliver ASP services to our customers,
- other ASP providers providing quality services so as not to diminish
consumer confidence in ASP services,
- mitigating the effects of defects in software applications delivered from
our data centers that are beyond our control,
- our ability to strengthen awareness of our brand and differentiate the
services we offer from those of our competitors,
- our ability to market our services in a cost-effective manner to new
customers, and
- satisfying customer concerns over data security and user privacy.
Other Services
We provide video conferencing for our European customers. We also provide
consulting and other complementary services to our customers, usually as a
supplementary service to our server-based computing and ASP offerings.
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SOFTWARE APPLICATIONS
We have assisted our server-based computing customers with the hosting and
delivery of the following software applications, among others:
<TABLE>
<CAPTION>
SOFTWARE APPLICATION
PROVIDER PRODUCT TYPE OF SOFTWARE APPLICATION
-------------------- ------- ----------------------------
<S> <C> <C>
Microsoft Exchange Messaging
FoxPro Database
Microsoft Office Office productivity suite
Microsoft Publisher Desktop publishing
Adobe Systems Adobe Acrobat Reader PDF reader
Adobe PageMaker Desktop publishing
Autodesk AutoCAD Computer aided design
Clarify Clarify Client 5.0 Customer relationship management
Epicor Platinum Accounting
Great Plains Dynamics Accounting
Hyperion Enterprise Financial reporting
JD Edwards One World Enterprise resource planning
Lotus Lotus Notes Messaging
NetObjects Fusion Web design
Oracle Oracle Financials Financial and enterprise resource
planning
PeopleSoft PeopleSoft Financials Financial reporting
PeopleSoft HR Enterprise resource planning
Sage Mas 90 Accounting
SAP R/3 Enterprise resource planning
Solomon Solomon IV Accounting
Wall Data Rhumba Terminal emulation
</TABLE>
Our experience in delivering a variety of software applications to our
server-based computing customers gives us the expertise to host such software
applications for our ASP customers. Among the software applications already
offered for delivery as part of our ASP services are the following:
<TABLE>
<CAPTION>
SOFTWARE APPLICATION
PROVIDER PRODUCT TYPE OF SOFTWARE APPLICATION
-------------------- ------- ----------------------------
<S> <C> <C>
Microsoft Office 2000 Office productivity software, including
Exchange Project word processing, e-mail, project
SQL management, data base and charting
Visio
Corel WordPerfect Word processing, spreadsheet, graphics
QuattroPro and other office productivity tools
Corel Draw
Great Plains Dynamics Integrated accounting software
e Enterprise
Onyx Customer Center 5.0 Customer relationship management
Pivotal eRelationship 2 Customer relationship management
SalesLogix 4.0 Integrated customer contact management
Epicor Clientelle Integrated accounting software, customer
Era relationship management, manufacturing
Vantage and resource planning
</TABLE>
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KEY RELATIONSHIPS
In implementing our growth strategy, we have developed important commercial
relationships with the following:
CITRIX. Citrix Systems, Inc. provides technology that enables users to
access software applications from virtually any computing device, including
desktops, mobile computers, network computers, terminals, information
appliances, palmtops or other devices, across virtually any network. Citrix
provides what we believe is the most advanced technology for delivering software
applications to remote users as well as the most scalable and flexible tools for
server-based computing. Citrix's software is designed to work within a
Microsoft's Windows NT-compatible server environment, allowing virtually any
computer terminal to access standard Windows applications running on the server.
We are the largest integrator of server-based computing solutions using Citrix
technology in North America.
COMPAQ. In the fourth quarter of 1999, Compaq Computer Corporation invested
$2.2 million in our company and extended us a $20.0 million lease line of credit
to provide our data centers with Compaq servers on an exclusive basis. We have
deployed Compaq's products in our Irvine and Calgary data centers. Compaq's
equity investment will be used for joint marketing efforts to promote our ASP
services featuring Compaq hardware. These promotions will principally occur
through our joint participation at industry trade shows, the publication and
distribution of marketing materials and the advertisement of these products in
trade journals and other media. We also indicate in our product materials that
our internal data centers operate on Compaq servers. We believe our joint
marketing programs will allow us to align the strengths of our respective sales
and distribution channels.
SOFTWARE APPLICATION PROVIDERS. We have significant commercial
relationships with a variety of leading software providers, including Microsoft,
Citrix, Onyx Software, SalesLogix and Great Plains. We believe our ability to
deliver a broad array of applications is a significant competitive advantage.
Our agreements with these software suppliers allow us to deploy applications on
a monthly subscription basis without the need to establish a separate licensing
arrangement for each customer. The agreements also generally include
co-marketing, specialized product training and preferred pricing on the licenses
to the software.
Certain important relationships with software application providers are
described below.
- Microsoft. We have been selected to participate in Microsoft
Corporation's Back Office software pilot program to host its Back Office
software for delivery to ASP customers. We have been approved to host
Microsoft Office 2000 at our data centers as part of Microsoft's new
service offering, Microsoft Office Online. In addition, we are a
participant in Microsoft's Complete Commerce program which showcases our
ASP offerings for Great Plains and Pivotal offerings. The term of our
agreement with Microsoft expires June 30, 2001. Either party may
terminate the agreement for cause by giving the other party 30 days
written notice.
- Citrix. We are a participant in Citrix's ASP license program. This allows
us to use Citrix technology in our data centers to deliver applications
to our ASP customers. We are the largest integrator of server-based
computing solutions using Citrix technology in North America. Our
subsidiaries are parties to several agreements with Citrix covering
various geographic territories. These agreements typically have a one
year term and may be terminated by either party for any reason by giving
the other party 30 days written notice.
- Onyx Software Corp. We have entered into a strategic relationship with
Onyx Software. Onyx has agreed to provide us with ASP customers
purchasing a minimum of $25,000 per month of our ASP services. We have
agreed to spend $300,000 on joint marketing and advertising promoting
Onyx products and our ASP services. The agreement may be terminated by
either party on 30 days notice if the other party materially breaches the
agreement and fails to cure the breach within 30 days.
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- SalesLogix. We have been approved to host SalesLogix software
applications. Our agreement with SalesLogix terminates when either party
gives the other party written notice of termination at least 60 days
prior to November 1 of the then current year, in which case the agreement
terminates on November 1 of such year.
- Great Plains. We have been approved to host Great Plains software
applications. Our agreement with Great Plains may be terminated by either
party for any reason by giving the other party 180 days notice.
SOFTWARE APPLICATION INTEGRATORS. Many companies rely on software
application integrators with expertise in business software applications to
evaluate, install, integrate, modify and customize software applications for
them. We have developed significant commercial relationships with software
integrators to provide us with an additional sales channel without requiring us
to make a significant capital investment to develop an extensive direct sales
force. Software application integrators desire to work with us so that they can
expand their sales offerings.
SALES AND MARKETING
We offer our services through our direct sales force, the sales forces of
software application providers and independent software distributors and
application integrators. We are initially targeting our ASP services to small
and medium sized businesses, which we believe represent a strong market
opportunity, and market these services through our independent software
distribution sales channel. We plan to expand our marketing to larger businesses
in the future. We currently have strategic relationships with over 20 software
application providers and over 100 independent resellers, software distributors
and application integrators. Our direct sales force consists of over 60
professionals, who are focused on offering our server-based computing services
and ASP services to existing and new customers in the small- and medium-sized
business markets. In 1999, we allocated $1.5 million for our advertising and
promotional strategies. In 2000, we increased this amount to approximately $2.5
million to build our brand name and create market awareness. As part of our
efforts to continue end user and channel education about the ASP concept, we
have initiated a $2.0 million print advertising campaign in the United States
and Canada in several major business publications (Business Week, The Wall
Street Journal, Wired Magazine, Industry Standard and others) targeting chief
executive officers, chief technology officers, chief information officers and
chief financial officers. This campaign will extend from June to December of
this year. Our strategy is to educate our channel sales partners while
simultaneously generating end user demand. To service that demand effectively,
we are investing in building a call center and lead management process. We are
also developing new ASP and server-based computing sales tools for both our
direct sales force and our channel sales partners to support them throughout the
sales process. We will continue our strategy to develop our channel sales
through cooperative seminars and events with our independent software vendor and
channel sales partners. We are leveraging our relationships with brand name
partners such as Microsoft, Citrix and Compaq as well as our independent
software vendor partners in co-marketing arrangements to extend the reach and
effectiveness of our marketing efforts.
OUR ASP DELIVERY SYSTEM
We have developed a secure, reliable and high-performance system for
delivering software applications to multiple users, which we believe provides us
with a significant competitive advantage. Our personnel in Irvine, California
monitor our system on a continual basis. We combine internally created
technology innovations with technologies from leading software and hardware
providers, including, among others, Citrix delivery software, Compaq, IBM and
Sun MicroSystems computer servers, Cisco Systems routers and firewall protection
software, and EMC(2) storage devices. To address the diverse requirements of our
customers, we offer our ASP services on all of the leading operating systems and
computing platforms including Solaris, which operates on a Sun MicroSystems,
Inc. platform, and Microsoft Windows NT Terminal Server software, which operates
on an Intel personal computer platform. Our delivery system is
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scalable, allowing servers to be added to support additional users without
disrupting other servers that are concurrently running software applications.
We operate state-of-the-art data centers in Irvine, California, Calgary and
Toronto Canada and Newbury, United Kingdom, from which we deliver our ASP
services. Each facility features separate, back-up network and power
connections, cooling systems and on-site back-up diesel generators to ensure a
continuous power supply. We employ several security measures including:
- 24-hour security guards,
- electronic surveillance,
- limited access electronic card key measures,
- the physical separation of servers from administrative workstations, and
- firewalls at each entry point to our data centers.
We offer connectivity to our systems from virtually anywhere in the world,
providing customers with global access to software applications. Customers can
access us:
- via the Internet,
- through high speed connections in more than 105 countries, and
- over Frame Relay through AT&T Corp., Sprint Corporation and MCI Worldcom,
Inc., or over dedicated, private lines.
We have designed our network to minimize the effect of any interruptions.
We monitor the performance and security of our entire infrastructure. We have
also implemented security measures to identify potential sources of failure or
interruption. Although we have attempted to build complete back-up into our
network and hosting facilities, our delivery system is currently subject to
several single points of failure, and a problem with one of our servers, routers
or switches could cause an interruption in the services we provide to some of
our customers.
The design of our data centers enables systems administrators and support
staff to be promptly alerted to problems and rapidly resolve any technical
issues.
Our success depends upon our ability to increase the capacity of our data
centers and related communications systems in a timely and cost-effective
manner. Expanding our delivery system significantly and rapidly in response to
any increased demand for our ASP services will place additional stress upon our
hardware, traffic management systems and hosting facilities as well as our
financial, operational and management resources. We may be unable to manage our
growth successfully, in which case our business, financial condition and results
of operation could be materially adversely affected.
COMPETITION
The markets for our services are extremely competitive. The tremendous
growth and potential size of these markets have attracted many start-ups, as
well as extensions of existing businesses from different industries. The
principal competitive factors in this market include:
- quality of service, including performance, scalability, reliability and
functionality,
- customer service and support,
- variety of services offered,
- price,
- name recognition, and
- network security.
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Our current and prospective competitors include other ASPs, systems
integrators, Internet service providers, hardware and software suppliers and
telecommunications companies.
ASPS. We compete with other companies whose core business is providing ASP
services. These competitors include, among others, USinternetworking, Corio,
Interliant, Breakaway Solutions, and Telecomputing. Many of these competitors
are targeting the same small and medium-sized enterprises that we are initially
targeting.
SYSTEMS INTEGRATORS. We compete with commercial systems integrators who
bundle their services with software and hardware providers and perform an
outsourcing role for the customer. Examples of these competitors include EDS,
Andersen Consulting, PricewaterhouseCoopers and MCI Systemhouse, among others.
These companies provide professional consulting services in the use and
integration of software applications in single-project customer engagements.
Systems integrators may establish strategic relationships with software
application providers to offer services similar to our ASP offerings. Their
strengths include local customer awareness and relationships with hardware and
software companies. Additionally, regional systems integrators may align
themselves with Internet service providers to offer complex website management
combined with professional implementation services.
INTERNET SERVICE PROVIDERS AND WEBSITE HOSTING COMPANIES. Our current
competitors include business-focused Internet service providers and website
hosting companies with a significant national presence, such as, among others,
UUNet Technologies, GTE Internetworking, PSINet, Concentric, DIGEX, Frontier and
Exodus Communications. These companies intend to expand their service offerings
by bundling their Internet access and website hosting service offerings with the
delivery of software applications on a subscription basis.
HARDWARE AND SOFTWARE COMPANIES. We compete with hardware and software
companies in providing software application solutions as well as delivery system
infrastructure. In order to build market share, both hardware and software
providers may establish strategic relationships to enhance their service
offerings. IBM Solutions currently provides applications outsourcing of its
Lotus Notes products and delivers the service via the IBM network
infrastructure. J.D. Edwards & Company, a developer of enterprise resource
planning software, has announced that it will offer its software in an
outsourced model. SAP Aktiengesellschaft has formed an outsourcing organization
to develop key partnerships with leading consulting firms with the intent of
offering SAP software and PeopleSoft and Oracle have announced an ASP strategy.
We believe that additional hardware and software providers, potentially
including our current software partners, may enter the outsourcing market in the
future.
TELECOMMUNICATIONS COMPANIES. Many long distance companies, regional Bell
operating companies and competitive local exchange carriers offer Internet
access services. In order to address the Internet connectivity requirements of
their current business customers, we believe that there is a move towards
horizontal integration through acquisitions of, joint ventures with, and
purchasing connectivity from, Internet service providers. Accordingly, we expect
that we will experience increased competition from the traditional
telecommunications carriers. Many of these telecommunications carriers, in
addition to their substantially greater network coverage, market presence, and
financial, technical and personnel resources, also have large existing
commercial customer bases. We believe that our local presence, our strong
technical and data-oriented sales force and our offering a single source
computing solution are important features distinguishing us from the
telecommunications companies.
OTHER POTENTIAL COMPETITORS. It is possible that new competitors or
alliances may emerge and gain market share. Such competitors could materially
affect our ability to obtain new contracts. Further, competitive pressure could
require us to reduce the price of our products and services thus affecting our
business, financial condition and results from operations.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
As a result, certain of these competitors may be able to develop and expand
their
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service offerings more rapidly, adapt to new or emerging technologies and
changes in customer requirements more quickly, take advantage of acquisition and
other opportunities more readily, devote greater resources to the marketing and
sale of their services and adopt more aggressive pricing policies than we can.
INTELLECTUAL PROPERTY
Our intellectual property is important to our business. We rely on a
combination of copyright, trademark, and trade secret laws, confidentiality
procedures and contractual provisions to protect our intellectual property. We
have no patented technology, and patented technology is not material to our
business.
We enter into agreements with many of our employees giving us proprietary
rights to certain technology these employees develop while we employ them. We
cannot assure you that a court will enforce these agreements. In addition, we
may be inadequately protected against the use of technology employees develop
who have not entered into such agreements.
We have applied for federal trademark or service mark registration of the
names "FutureLink," "Flink," "FutureServe," "Wide Area Thin Client Hook-up,"
"W.A.T.C.H.," "Your Way Ahead," "The World's First Computer Utility Company,"
"ApplicationPortal," "The Computer Utility Company," "Computer Utility" and "The
Application Utility Company" and for our various logos in both Canada, the
United States and the United Kingdom. In addition, we may seek further
trademarks and may in the future take other steps, such as seeking copyrights or
patents on some of our intellectual property. We are aware of other companies
using the "FutureLink" name, and are in the process of investigating the rights,
if any, others may have in the name. If any such company engaged in businesses
in our industry can establish prior use to such name and damages caused by our
use of the name, we may incur liability and be forced to cease using the name.
Our efforts to protect our intellectual property may not be adequate. We
may need to commence lawsuits from time to time to protect our intellectual
property.
Our competitors may independently develop similar technology or duplicate
our products or services. Unauthorized parties may infringe upon or
misappropriate our products, services or proprietary information. In the future,
litigation may be necessary to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of others. Any such
litigation could be time-consuming and costly.
In order to safeguard the flow of personal information over the Internet,
we intend to offer our customers various forms of encryption technology. The
United States government regulates the export of this technology and may require
a license or other authorization. There is no guarantee that we will be able to
obtain such a license. In addition, many other countries regulate the export,
import, or use of encryption technology. There is no guarantee that we will be
able to obtain the necessary permission to engage in our contemplated
activities.
FACILITIES
In late 1999 we relocated our headquarters from Calgary, Canada to Irvine,
California. In September 2000, we moved our headquarters to a 77,326 square foot
facility which we lease in Lake Forest, California. In addition, we lease an
approximate 1,000 square foot facility in Irvine, California which serves as one
of our data centers. We also lease office facilities in Los Angeles and
Pleasanton, California; Phoenix, Arizona; Atlanta, Georgia; Ft. Lauderdale,
Florida; Albany and New York, New York; Walled Lake, Michigan; Beltsville,
Maryland; Richmond, Virginia; Edison, New Jersey; Las Vegas, Nevada; and
Waitsfield, Vermont. In October 2000, we closed our offices in Los Angeles,
California; Atlanta, Georgia; Ft. Lauderdale, Florida; Chantilly, Virginia; Las
Vegas, Nevada and Durham, North Carolina. We have no further obligations under
our leases in Chantilly, Virginia and Durham, North Carolina and have subleased
our Las Vegas facility to a third party. We plan to sublease the other closed
facilities to third parties until
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the leases expire. We lease a 2,500 square foot training facility in Pleasanton,
California. We lease a facility that is approximately 31,500 square feet in
Calgary, Canada that contains both office space and a data center, a 28,000
square foot facility in Toronto, Canada and a 3,000 square foot facility in
London, Canada. We also lease facilities in Montreal and Quebec City, Canada. We
lease 9,000 square feet of office space in Newbury, United Kingdom and a
facility in Edinburgh, United Kingdom. Our leases have expiration dates ranging
from 2000 to 2010. We believe our facilities are adequate for our current
operations and that we can obtain additional leased space if needed.
EMPLOYEES
As of December 4, 2000 we employed 657 persons, including 303 information
technicians, 179 sales and marketing personnel and 175 administration and
management staff. We have never experienced work stoppages, and we are not a
party to any collective bargaining agreement. We believe our employee
relationships to be generally good.
LITIGATION AND OTHER PROCEEDINGS
From time to time we are a defendant or plaintiff in litigation arising in
the ordinary course of our business. To date, other than the SmallCaps OnLine
Group LLC litigation and the subsequent settlement of that action, no litigation
has had a material effect on us and, as of the date of this prospectus, we are
not a party to any material litigation except as described below.
In the past, persons formerly associated with us, which may include one or
more of our former executive officers and directors, may have engaged in
activities as part of an effort to profit from unlawful trading activity in our
stock. We are aware that in October 1998, the SEC announced the filing of an
enforcement action against the publisher of an Internet newsletter called The
Future Superstock, written by Jeffrey Bruss. According to the SEC's litigation
release, the SEC's complaint alleged that The Future Superstock recommended to
the newsletter's more than 100,000 subscribers and to visitors to the
newsletter's website the purchase of approximately 25 microcap stocks which it
predicted to double or triple in the next three to twelve months. According to
the SEC's release, in most instances, the prices of recommended securities
increased for a short period of time after The Future Superstock newsletter made
a recommendation, after which the prices of those stocks dropped substantially.
The SEC alleged that in making its recommendations, the Internet newsletter:
- failed to adequately disclose compensation it had received from profiled
companies,
- failed to disclose that it had sold stock in many of the issuers it
recommended shortly after disseminating such recommendation,
- had conducted little, if any, research into companies it recommended, and
- made false and misleading statements about the success of certain prior
stock picks.
According to press reports, Jeffrey C. Bruss claimed that he received $300,000
from us to promote our stock. The SEC sought civil penalties against the
publisher of the newsletter. The SEC did not bring any action against us. We
believe that we made no payments to Mr. Bruss, but one or more persons who were
associated with our predecessor company prior to 1998 may have made payments. We
are unable to determine whether, as a result of the alleged activities of Mr.
Bruss, any stockholder suffered any losses for which we might be liable.
In addition, we recently received a subpoena from the SEC requesting any
documentation in our possession with respect to a confidential investigation
regarding Internet newsletters. This investigation relates to the use of the
Internet to engage in fraudulent transactions with respect to the offer,
purchase and sale of securities. We have responded to the SEC's request for
documents.
As a result of these activities, we may be subject to civil or criminal
actions, fines or penalties. If any proceedings are commenced against us, we
will need to spend significant money and management time on our defense. If we
participated in these activities, we could be liable for damages or penalties
that would
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have a material adverse effect on our financial condition, results of operations
and liquidity. See "Risk Factors -- Persons formerly associated with our
business may have engaged in activities designed to manipulate our stock."
SmallCaps OnLine Group LLC, previously known as Bridge Technology Group
LLC, sued us on January 12, 2000 in the New York County Supreme Court to recover
fees we allegedly owed for advisory and investor relations services. SmallCaps'
complaint requested compensation for fees totaling $5.1 million, as well as
warrants to purchase an aggregate of 3,289,689 shares of our common stock at
exercise prices ranging from $1.00 to $8.50 per share. The total value of the
damages SmallCaps claimed was $110.0 million. On February 11, 2000, we settled
SmallCaps' complaint by agreeing to pay SmallCaps $5.0 million on or before
March 14, 2000, and to issue to SmallCaps warrants to purchase an aggregate of
3,000,000 shares of our common stock at exercise prices ranging from $8.50 to
$22.50 per share, subject to anti-dilution protection. We issued the warrants to
SmallCaps on March 1, 2000 and paid SmallCaps the $5.0 million on March 14,
2000. Since the issuance of these warrants, their exercise prices have been
adjusted and now range from $8.27 to $21.89 per share and these warrants
currently entitle the holders to acquire 3,084,494 shares of our common stock.
The total value of the settlement on February 11, 2000 was $65.0 million which
has been recorded in our financial statements as a charge to paid-in capital.
On November 6, 1998, our former Chief Executive Officer and a director, Mr.
Cameron Chell, entered into a Settlement Agreement with The Alberta Stock
Exchange to resolve a pending investigation into Mr. Chell's alleged breaches of
Alberta Stock Exchange rules and by-laws. As part of the Settlement Agreement,
Mr. Chell acknowledged that he had breached certain duties of supervision,
disclosure, or compliance relating to various offers and sales of securities,
and Mr. Chell was prohibited from receiving Alberta Stock Exchange approval in
any capacity for a five year period, subjected to a CDN$25,000 fine and a three
year period of enhanced supervision. We cannot be certain that the Settlement
Agreement with the Alberta Stock Exchange ends all proceedings with regard to
these matters.
On January 20, 2000, we commenced a proceeding in Canada against Mr. Chell,
various other former employees of and consultants to our company and various
other defendants alleging that these defendants misappropriated a corporate
opportunity in breach of fiduciary and contractual obligations. Most of these
defendants made counterclaims against us seeking, among other things, damages
for interference with their economic interests and for severance compensation in
the form of cash and stock options. We entered into a settlement agreement with
the defendants effective April 26, 2000 that had the following key terms:
- Mr. Chell is entitled to exercise options to acquire 175,000 shares of
common stock that were scheduled to vest June 1, 2000 and were exercised
by Mr. Chell in September 2000,
- Mr. Chell or his nominee shall pay to us $400,000 in settlement of a
related party debt that involved Mr. Chell, which amount has been paid,
and
- All other claims will be dropped by all parties, who have provided mutual
releases, with the claim and counterclaims to be discontinued.
On January 26, 2000, Michael Chan filed a suit in the Court of Queen's
Bench of Alberta, Judicial District of Calgary alleging that FutureLink Alberta
breached its contract to deliver him options to purchase 250,000 Class "A"
common shares of FutureLink Alberta at $1.00 per share. Mr. Chan seeks 50,000
shares of our common stock or, alternatively, damages of approximately $1.5
million in cash, general damages of approximately $200,000 and punitive damages
of approximately $200,000. We have filed a Statement of Defense in this action
refuting Mr. Chan's claims. Cameron Chell, a co-defendent in the lawsuit, and
our former Chief Executive Officer, has filed a claim against us, seeking
indemnification with respect to Mr. Chan's claims.
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On July 12, 2000, Integrated Solutions Corp. filed a Statement of Claim in
the Court of Queen's Bench of Alberta, Judicial District of Calgary, against
FutureLink Alberta and Brian Greenlaw, a former employee of Integrated
Solutions, Inc., and a current employee of FutureLink Alberta. The Statement of
Claim alleges that FutureLink Alberta induced Mr. Greenlaw to breach an
employment agreement with Integrated Solutions, Inc. and to disclose to
FutureLink Alberta confidential information. Integrated Solutions, Inc. is
seeking to recover $1.5 million from FutureLink Alberta and Mr. Greenlaw,
jointly.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Our executive officers, key employees and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Philip R. Ladouceur.................. 59 Executive Chairman and a Director
Howard E. Taylor..................... 51 President and Chief Executive Officer
Richard M. White..................... 56 Executive Vice President and Chief Financial Officer
William R. Botti..................... 50 Senior Vice President, Professional Services West
Ira Silverman........................ 36 Senior Vice President, Professional Services East
Roger J. Gallego..................... 31 Senior Vice President, Strategy and Corporate
Development
Dorothy C. Farris.................... 49 Senior Vice President, Marketing and Channel Sales
James A. Smith, Jr. ................. 51 Senior Vice President, Operations
Ross D. Vincenti..................... 40 Senior Vice President, General Counsel and Secretary
Yuri M. Pasea........................ 38 President and Managing Director (Europe)
David Fung........................... 47 President and Chief Operating Officer (Canada)
Glen C. Holmes....................... 43 Director
F. Bryson Farrill.................... 72 Director
Michael S. Falk...................... 38 Director
Timothy P. Flynn..................... 50 Director
Gerald A. Poch....................... 53 Director
James P. McNiel...................... 37 Director
Marshall S. Geller................... 61 Director
</TABLE>
MR. LADOUCEUR has served as our Executive Chairman since June 1999, and as
a director since August 1998. Mr. Ladouceur served as our Chief Executive
Officer from August 1999 through November 2000. From October 1996 to April 1998,
Mr. Ladouceur was President, Chairman and Chief Executive Officer of MetroNet
Communications Corp. and served as MetroNet's Executive Chairman until its
merger with AT&T Canada in June, 1999. From February 1995 to October 1996, Mr.
Ladouceur was Executive Vice President of Operations at Bell Canada
International Inc. From October 1992 to February 1995, Mr. Ladouceur was the
founding President and Chief Executive Officer of ISM Information Systems
Management (Alberta) Ltd., a computer and network management outsourcing company
which IBM Global Services acquired. Mr. Ladouceur founded, and from June 1990 to
October 1992, was the Managing Director of HDL Capital Corporation, a private
merchant bank specializing in business turnarounds, management buyouts and
financing for companies in the telecommunications, technology, software and
retail sectors. From 1986 to 1989, Mr. Ladouceur was Senior Vice President,
Finance, Chief Financial Officer and a director of Rogers Communications Inc.,
one of the largest cable, cellular and broadcasting companies in North America.
Mr. Ladouceur currently serves as a director of AT&T Canada, Cell-Loc Inc., Plan
B Communications and Intellispan, Inc.
MR. TAYLOR has served as our Chief Executive Officer and President since
December 2000. From September 2000 to November 2000, he was a venture operating
partner at Pequot Capital Management, Inc. From June 1999 to September 2000, Mr.
Taylor served as Chairman and Chief Executive Officer of OnSite Access, Inc., a
building-centric communications company. From November 1996 to June 1999, he
served as President and Chief Operating Officer of WinStar Broadband Services, a
business unit of WinStar Communications. From September 1994 to November 1996,
Mr. Taylor served as President of the Customer Business Group of Southern New
England Telephone. Mr. Taylor currently serves as a director of Cybernostics,
Skyonline and Bays Village of Connecticut.
MR. WHITE has served as our Executive Vice President and Chief Financial
Officer since November 2000. He served as our Senior Vice President, Corporate,
from August 2000 to November 2000, as our Senior Vice President, Administration
from May 2000 to August 2000, and as our Vice
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President, Administration from January 2000 to May 2000. From August 1997 to
January 2000, he served as Vice President Administration -- Telecommunications
for AT&T Canada, which was formerly MetroNet Communications Corp. From October
1995 to August 1997, he served as Executive Vice President and Chief Financial
Officer for American Louver of Canada. From April 1994 to September 1995, he was
a partner of Core Plus International. Mr. White is a Chartered Accountant
(Canada) and was previously a partner with KPMG.
MR. BOTTI has served as our Senior Vice President, Professional Services
West since December 2000. He served as our Senior Vice President, Operations
from August 2000 to November 2000, as our Senior Vice President, Application
Service Provision from May 2000 to August 2000, and as our Senior Vice
President, Server-Based Computing, from November 1999 to May 2000. Mr. Botti
founded CN Networks, Inc. in November 1991, and, until we acquired that company
in November 1999, he served as its President and Chief Executive Officer and as
a director.
MR. SILVERMAN has served as our Senior Vice President, Professional
Services East, since December 2000. He served as our Regional Director, North
East Region from March 2000 to November 2000. Mr. Silverman founded MicroLAN
Systems, Inc., a leading server-based computing integrator, and served as its
President from April 1991 until we acquired that company in February 2000.
MS. FARRIS has served as our Senior Vice President, Marketing and Channel
Sales since December 2000. She served as our Vice President, Sales and Channel
Marketing from July 2000 to November 2000. From January 1999 to July 2000, Ms.
Farris served as Director, Channel Sales West for Wyse Technology, and from July
1994 to May 1998, she served as Director of Worldwide Sales Support Operations
for AlliedSignal Aerospace.
MR. GALLEGO has served as our Senior Vice President, Strategy and Corporate
Development since November 2000, as our Senior Vice President, Corporate
Development, from August 2000 to November 2000 and served as our Senior Vice
President, Strategic Business Unit, from October 1999 to August 2000. From June
1992 to October 1999, he served in a variety of roles with Micro Visions,
including Executive Vice President.
MR. SMITH has served as our Senior Vice President, Operations since
December 2000. He served as our Senior Vice President, Product Delivery from
August 2000 to November 2000, and as our Senior Vice President, Operations from
February 2000 to August 2000. From May 1998 until joining us, Mr. Smith was the
Senior Vice President of Operations for AT&T Canada, which was formerly MetroNet
Communications Corp. From October 1996 until May 1998, Mr. Smith was Senior Vice
President of West Coast Operations and Senior Vice President of Long Distance
Operations for Brooks Fiber Communications Inc. From October 1985 to October
1996, Mr. Smith served as the President of Execuline Inc., a long distance
telephone company.
MR. VINCENTI has served as our Senior Vice President, General Counsel and
Secretary since September 2000. From November 1997 to September 2000, Mr.
Vincenti served as Vice President and Associate General Counsel to Long Beach
Mortgage Company and from August 1994 to November 1997, Mr. Vincenti served as
Assistant General Counsel and Corporate Secretary to the Consumer Finance
Division of Transamerica Corporation.
MR. PASEA has served as President and Managing Director of our European
Operations since December 1999. From March 1998 to December 1999, he served as
Director for KNS Holdings, Limited, and from January 1992 to February 1998, Mr.
Pasea served as Associate Director for Kerridge Computer Company.
MR. FUNG has served as the President and Chief Operating Officer of our
Canadian operations since June 2000. Mr. Fung founded Charon Systems Inc. in
August 1991 and until we acquired that company in June 2000, he served as its
President.
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<PAGE> 52
MR. HOLMES has served as a director since September 1999. Mr. Holmes served
as our President and Chief Operating Officer from September 1999 to November
2000. Mr. Holmes is the founder of Micro Visions, a leading server-based
computing integrator, and served as its Chairman and President from 1987 until
our acquisition of Micro Visions in October 1999.
MR. FARRILL has been a director since January 1998. Since April 1989, Mr.
Farrill has been a consultant and advisor to various companies unrelated to us.
Since May 1996, Mr. Farrill has served as a director for Devine Entertainment,
LTD. From January 1978 to March 1989, Mr. Farrill held various positions with
Scotia McLeod and McLeod Young Weir, including acting as Chairman of Scotia
McLeod (USA) Inc. and McLeod Young Weir Ltd. Since July 1997, Mr. Farrill has
held the position of President and Chairman of Solar Pharmaceuticals Ltd. Mr.
Farrill is currently a director of Power Technology, Inc., Devine Entertainment
Inc. and Home Life Inc.
MR. FALK has been a director since May 1999. Mr. Falk is the co-founder of
Commonwealth Associates, a New York-based merchant bank and investment bank
established in May 1988 that specializes in early stage investments in Internet,
technology and telecommunications businesses. Mr. Falk has served as
Commonwealth Associate's Chairman and Chief Executive Officer since 1995. Mr.
Falk currently serves as a director of Intellispan Inc.
MR. FLYNN has been a director since May 1999. Since August 1996, Mr. Flynn
has been President of Flynn Investment Corporation. Previously, Mr. Flynn
co-founded and served as a director of Valujet Airlines from June 1993 until
November 1996. Mr. Flynn also co-founded WestAir Holdings, Inc., a company which
owned WestAir, a California-based commuter airline that operated as a United
Express affiliate of United Airlines. Mr. Flynn served as an executive officer
and a director of WestAir until its merger with Mesa Airlines in May 1992, and
served as a director of Mesa Airlines until March 1993. Mr. Flynn currently
serves on the board of directors of Mpower Communications Corp.
MR. POCH has been a director since October 1999. Mr. Poch has served as
Managing Director of Pequot Capital Management, Inc., an investment funds group,
since January 2000. From August 1998 through January 2000, he was a principal of
Pequot Capital Management. From August 1996 to June 1998, Mr. Poch acted as
Chairman, President and Chief Executive Officer of GE Capital Information
Technology Solutions. Prior to that, he served as Co-Chairman and Co-President
of AmeriData Technologies, Inc. Mr. Poch is Co-chairman and director of
MessageMedia, Inc. and serves as a director of BriteSmile, Inc., Elastic
Networks, Inc. and NETGEAR, Inc.
MR. MCNIEL has been a director since October 1999. Mr. McNiel is currently
a Senior Vice President with Pequot Capital Management, Inc., an investment
funds group. From 1997 to 1998, Mr. McNiel served as an Executive Vice President
and Director for Spike Technologies, Inc., a semiconductor design consulting
company. From 1996 to 1997, Mr. McNiel served as an Executive Vice President of
USWeb, an internet professional services company. From 1990 to 1996, Mr. McNiel
founded and served in various positions at Cheyenne Software, Inc., a provider
of software products for desktops and personal networks, most recently as
Executive Vice President of Corporate Development.
MR. GELLER has been a director since December 2000. Since 1995, he has been
the Chairman, Chief Executive Officer and Founding Partner of Geller & Friend
Capital Partners, Inc. and Brighton Venture Partners, two venture capital firms.
From February 1991 to October 1995, Mr. Geller served as Senior Managing Partner
of Golenberg & Geller, Inc., a merchant banking investment company which he
founded. From April 1988 to December 1990, he was Vice Chairman of Gruntal &
Company, a New York Stock Exchange investment banking firm. From July 1967 to
March 1988, Mr. Geller served as Senior Managing Director of Bear, Stearns &
Co., Inc. Mr. Geller currently serves as a director of ValueVision
International, Inc., Ballantyne of Omaha, Inc., and Cabeltel Communications
Corporation.
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<PAGE> 53
APPOINTMENT OF DIRECTORS
In an Agency Agreement we entered into with Commonwealth Associates, L.P.
on April 14, 1999, we granted Commonwealth Associates, L.P. the right, until
April 2001, to appoint one person to serve on our board of directors.
In a Securities Purchase Agreement we entered into with Pequot Private
Equity Fund II, L.P. and other investors on October 15, 1999 relating to a
private placement of equity securities, we granted Pequot Private Equity Fund
II, L.P. and the other investors in such financing the right to appoint two
directors as long as they hold 50% or more of the common stock purchased in the
private placement. Pequot Private Equity Fund II, L.P. and these investors will
lose the right to appoint two directors if their ownership falls below 50% of
the common stock purchased in the private placement. In such instance, Pequot
Private Equity Fund II, L.P. and these investors will retain the right to
appoint one director as long as they hold 25% or more of the common stock
purchased in the private placement. Pequot Private Equity Fund II, L.P. and
these investors can transfer these rights to other investors that purchased our
common stock from us under the Securities Purchase Agreement of October 15,
1999.
In an Investor Rights Agreement we entered into with Microsoft Corporation
on July 6, 2000, relating to a private placement of equity securities, we
granted Microsoft Corporation the right to have one person designated by it
nominated to the Board of Directors as long as Microsoft Corporation and its
affiliates hold 50% or more of the preferred stock (or the common stock issued
upon conversion of the preferred stock) purchased in the private placement. We
also granted Microsoft Corporation the right to appoint a person to attend and
speak at the meetings of the Board of Directors as an observer if a nominee of
Microsoft Corporation is not serving on the Board of Directors.
COMMITTEES OF OUR BOARD OF DIRECTORS
Our board of directors currently has three committees: an audit committee,
a compensation committee and an executive committee.
The audit committee consists of Timothy P. Flynn, who serves as Chairman,
and Gerald A. Poch. The audit committee has the authority to review our
financial reporting and financial statements and to sign quarterly and annual
financial statements on behalf of the board of directors. The audit committee
acts on and reports to the board of directors with respect to various auditing
and accounting matters, including the engagement of our auditors, the scope of
the annual audits, the reasonableness of fees to be paid to the auditors, the
performance of our independent auditors and our accounting practices.
The compensation committee consists of F. Bryson Farrill, who serves as
Chairman, James P. McNiel and Timothy P. Flynn. The compensation committee has
the authority to review and approve executive compensation, make recommendations
for the appointment of executive officers and to act as the plan administrator
of our stock option plan.
The executive committee consists of Gerald A. Poch, who serves as Chairman,
Philip R. Ladouceur, Glen C. Holmes and Michael S. Falk. The executive committee
has the authority to approve:
- our daily operational matters,
- our corporate policies and strategy, and
- our contractual commitments or payments of funds up to $1.0 million.
COMPENSATION OF OUR DIRECTORS
The Company's outside directors currently receive compensation of $25,000
per year plus $5,000 for each committee of our board of directors on which they
serve, payable in stock. They also receive $500 for each meeting of the board of
directors or board committee they attend in person, and $250 for each
51
<PAGE> 54
meeting attended by telephone. We also reimburse our outside directors for their
expenses in attending board of directors and committee meetings.
At the time Mr. Ladouceur joined our board of directors he entered into an
agreement dated July 16, 1998. Under the terms of this agreement, we paid
Mardale Investments Ltd., of which Mr. Ladouceur is a principal, a fee of
$68,000 and we granted Mr. Ladouceur options to purchase 100,000 shares of our
common stock at an exercise price of $3.80 per share.
We have granted options to each of the outside directors of the Company
upon their election to our board of directors. We granted Mr. Falk, Mr. Farrill,
Mr. Flynn, Mr. Poch, Mr. McNeil and Mr. Geller options to purchase 100,000
shares of common stock with exercise prices ranging from $0.84 to $8.97 per
share. We expect to grant additional options to outside directors upon their
joining the board of directors for the first time and their subsequent
re-election as a director.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table summarizes the compensation earned by or paid to our
chief executive officers and the other four most highly compensated executive
officers whose total salary and bonuses exceeded $100,000 for services rendered
in all capacities to us and our subsidiaries during 1999. We refer to these
individuals as our named executive officers in other parts of this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------
---------------------------------- OTHER ANNUAL SHARES UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION OPTIONS(#)
--------------------------- ----------- --------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Cameron B. Chell(1).............. 1999 $149,658 -- -- 350,000(2)
Former Chairman, President and 1998 $ 84,291 -- $ 7,000 100,000
Chief Executive Officer
Philip R. Ladouceur(3)........... 1999 $110,000 $200,000(4) -- 1,300,000
Former Chief Executive Officer
Glen C. Holmes(5)................ 1999 $ 58,435 $ 90,000(6) -- 100,000
Former President and Chief
Operating Officer
Raghu N. Kilambi(7).............. 1999 $146,771 $ 90,000(8) -- 500,000
Former Executive Vice President 1998 $ 67,433 -- $ 4,700 100,000
and Chief Financial Officer
Vincent L. Romano, Jr.(9)........ 1999 $ 75,000 $185,000(10) $278,359 250,000
Former Executive Vice
President, Special Projects
</TABLE>
-------------------------
(1) Mr. Chell served as Chief Executive Officer from April 1998 to August 1999
and was our President from March 1999 to August 1999. We no longer employ
him in any capacity. Other annual compensation for 1998 includes consulting
fees. On March 13, 2000, Mr. Chell exercised 275,000 vested stock options.
(2) Excludes 350,000 shares underlying options granted in 1999 which expired
under our Stock Option Plan when Mr. Chell's employment with us terminated.
(3) Mr. Ladouceur served as our Chief Executive Officer from August 1999 to
December 2000. He currently serves as our Executive Chairman and as a
director.
(4) Accrued in 1999 but paid in 2000.
(5) Mr. Holmes served as our President and Chief Operating Officer from
September 1999 to November 2000. Mr. Holmes is currently a non-officer
employee and a director of the Company.
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<PAGE> 55
(6) Includes $50,000 accrued in 1999 but paid in 2000.
(7) Mr. Kilambi served as our Executive Vice President between October 1999 and
November 2000 and as our Chief Executive Officer from March 1998 to
November 2000. Mr. Kilambi is currently a non-officer employee of the
Company.
(8) Accrued in 1999 but paid in 2000.
(9) Mr. Romano served as our Executive Vice President, Special Projects from
May 2000 to June 2000, and as our Executive Vice President, Application
Service Provision from December 1999 to May 2000. We no longer employ him
in any capacity.
(10) Includes $90,000 accrued in 1999 but paid in 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information related to options granted to our
named executive officers during fiscal year ended December 31, 1999. The
information in this table reflects options granted under our Amended and
Restated Stock Option Plan. We granted options to purchase 6,559,000 shares of
our common stock to our employees and directors in 1999. We granted all options
at an exercise price equal to the fair market value of our common stock on the
date of grant as determined based on the closing price of our common stock on
the day preceding the grant, except options granted to Mr. Holmes on May 14,
1999, which grant has an exercise price based on the average closing bid and ask
prices for the ten trading days prior to the date of the grant. The options
granted on May 14, 1999 have an exercise price that is 74% of the market value
of the common stock on such date, on which date the average of the closing bid
and ask price was $6.72. Options granted to our named executive officers during
the 1999 fiscal year vest in either three or four yearly increments and expire
between March 2000 and June 2004.
<TABLE>
<CAPTION>
OPTIONS GRANTED IN LAST FISCAL YEAR
-------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE PER ---------------------
NAME GRANTED YEAR SHARE EXPIRATION DATE 5% 10%
---- ---------- ---------- --------- ------------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cameron B. Chell......... 350,000(1) 5.3% $3.15 September 15, 2000 $ 55,125 $ 110,250
Philip R. Ladouceur ..... 700,000(2) 10.7% $3.15 June 1, 2004 $609,242 $1,346,153
600,000(3) 9.1% $7.56 August 31, 2003 $977,508 $2,105,158
Glen C. Holmes........... 100,000 1.5% $5.00 June 1, 2004 $357,674 $ 582,256
Raghu N. Kilambi......... 500,000 7.6% $3.15 June 1, 2004 $435,172 $ 961,538
Vincent L. Romano,
Jr. ................... 250,000(4) 3.8% $6.08 June 30, 2004 $419,976 $ 927,960
</TABLE>
-------------------------
(1) 350,000 of the options granted to Mr. Chell in 1999 expired under the Stock
Option Plan when Mr. Chell's employment with us terminated. On March 13,
2000, Mr. Chell exercised 275,000 stock options.
(2) 500,000 of the options were granted under the Stock Option Plan. The
remaining 200,000 options were granted by our Board of Directors outside of
our Stock Option Plan.
(3) All of the options were granted by our Board of Directors outside of our
Stock Option Plan.
(4) Mr. Romano exercised options to purchase 62,500 shares of common stock in
early January 2000.
The potential realizable values in the table above represent amounts, net
of exercise price before taxes, that may be realized upon exercise of the
options immediately prior to the expiration of their terms assuming appreciation
of 5% and 10% over the option term. The 5% and 10% are calculated based on SEC
rules and do not reflect our estimate of future stock price growth. The actual
value realized may be greater or less than the potential realizable value set
forth in the table.
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<PAGE> 56
AGGREGATED OPTION EXERCISES IN 1999 AND LAST FISCAL YEAR-END OPTION VALUES
The following table shows the number of shares our named executive officers
acquired upon exercise of stock options during 1999, the aggregate value
received from those exercises, the number of shares underlying both exercisable
and unexercisable options as of December 31, 1999 and the year-end value of
exercisable and unexercisable options as of December 31, 1999.
The value of unexercised in-the-money options at December 31, 1999, is
based on a year-end stock price of $26.00, the last reported trade of our common
stock on the OTC Bulletin Board on December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cameron B. Chell............ 0 0 275,000 175,000(1) $ 6,218,750 $3,998,750
Philip R. Ladouceur......... 0 0 950,000 450,000 $20,981,000 $8,298,000
Glen C. Holmes.............. 0 0 50,000 50,000 $ 1,050,000 $1,050,000
Raghu N. Kilambi............ 0 0 225,000 375,000 $ 5,076,250 $8,568,750
Vincent L. Romano, Jr.(2)... 0 0 62,500 187,500 $ 1,245,000 $3,735,000
</TABLE>
-------------------------
(1) During 1999, Mr. Chell held an additional 350,000 options that expired under
the terms of our Stock Option Plan when Mr. Chell's employment with us
terminated. Each of the 175,000 unexercisable options have an exercise price
of $3.15 per share.
(2) Mr. Romano exercised options to purchase 62,500 shares of common stock in
early January 2000.
EMPLOYMENT AGREEMENTS
We have employment agreements with each of our named executive officers.
Each agreement provides for a fixed base salary and an annual performance bonus
that our compensation committee or the board of directors determines.
Mr. Ladouceur's employment agreement provides for an annual base salary of
$200,000, and he is eligible to earn an annual performance bonus of up to
$400,000. Mr. Kilambi, who is no longer an officer or a director but remains an
employee, has an employment agreement which provides for an annual base salary
of $180,000, and he is eligible to earn an annual bonus of up to $180,000. Our
employment agreements with Mr. Ladouceur and Mr. Kilambi are at-will and either
party can terminate the agreement at any time. Mr. Ladouceur's and Mr. Kilambi's
employment agreements provide that if there is a change in our control, and
either of them is terminated without just cause within six months of a change in
control of us, his level of responsibility or compensation is reduced and he
elects within six months of such change in control to treat his employment as
terminated, or he elects within three months of such change in control to
terminate his employment, we must pay him an amount equal to one year's salary,
his most recent performance bonus, and one year's premium contributions to our
employee benefit plan paid on his behalf, provide up to $10,000 in relocation
and financial consulting services, or, at his option, pay him $10,000, and cause
his unvested stock options to accelerate and become exercisable for three
months. If we terminate either Mr. Ladouceur's or Mr. Kilambi's employment
without just cause or change his level of responsibility, and he elects to
terminate, we must pay him an amount equal to one year's salary, his most recent
performance bonus, and one year's premium contributions to our employee benefit
plan paid on his behalf, and provide him with up to $10,000 in relocation and
financial consulting services or, at his option, pay him $10,000.
Mr. Holmes, who is no longer an officer but remains an employee and a
director, has an employment agreement which provides for an annual base salary
of $200,000. Mr. Holmes is also entitled to receive a minimum bonus of $50,000
each quarter and is eligible to receive a discretionary bonus to be determined
by the board of directors. His agreement also provides for 18 months severance
pay (including the
54
<PAGE> 57
minimum bonus for such period), if we terminate Mr. Holmes without cause, his
employment is terminated within 18 months of a change of our control, Mr. Holmes
voluntarily terminates because we materially reduce his duties or his
compensation, or we move his place of business out of Orange County, California.
Mr. Romano, who is no longer an employee, had a three-year employment
agreement commencing August 1999 that provided for an annual base salary of
$180,000. He was eligible to earn an annual bonus of up to $180,000. Upon
commencement of his employment, Mr. Romano received a signing bonus of $95,000,
a one time payment of $5,000 to cover certain fees relating to his joining us,
and 250,000 stock options. His employment agreement provided for a separate loan
agreement between us and Mr. Romano under which we loaned Mr. Romano $2.0
million at an annual interest rate of 5.625% to purchase 232,829 shares of our
common stock. The loan was to be forgiven in quarterly installments of $250,000.
In October 1999, we forgave the first installment of $250,000 of this loan,
comprising most of Mr. Romano's "other compensation" in 1999. On June 30, 2000
the Company and the employee agreed to terminate the loan agreement and cancel
the issuance of any further shares. In addition, the employee returned 14,212 of
these shares to the Company valued at the then current market price of $129,000
in settlement of an employee advance. On July 31, 2000, the Company and Mr.
Romano agreed to terminate the employment agreement for a settlement amount of
$30,000.
STOCK OPTION PLAN
Our Stock Option Plan became effective on June 29, 1998, and we amended it
on each of November 30, 1998, September 23, 1999, November 17, 1999, December
10, 1999 and June 27, 2000. Our Stock Option Plan provides for the issuance of
incentive and non-qualified Stock options and deferred stock compensation. The
aggregate number of shares which may be issued upon the exercise of options
under the Stock Option Plan may not exceed twenty percent of our shares of
common stock issued and outstanding on a fully diluted basis.
Our board of directors administers our Stock Option Plan. Generally, our
board may amend or terminate our Stock Option Plan if it does not cause any
adverse affect on any then outstanding options or unexercised portions of any
then outstanding options. Our board of directors must obtain the consent of the
stockholders to increase the number of shares that the Stock Option Plan covers,
to change the class of persons eligible to receive options, or to extend the
term of the Stock Option Plan beyond 10 years. Our board of directors sets the
consideration for each option award. All options must have an exercise price
equal to at least 85% of the fair market value of the underlying common stock on
the date of the grant. Incentive stock options must have an exercise price equal
to at least 100% of the fair market value of the underlying common stock on the
date of the grant, and options granted to a person who owns more than 10% of the
voting power of our outstanding stock and any outstanding stock of our
subsidiaries must have an exercise price equal to at least 110% of the fair
market value of the underlying common stock on the date of the grant.
Options granted under the Stock Option Plan are non-transferable except
through will or the laws of descent and distribution upon the death of the
option holder. If we liquidate, reorganize, merge or consolidate and we are not
the surviving entity, each outstanding stock option shall become exercisable
prior to such event unless the options are assumed in a merger.
401(k) PLAN
We assumed several 401(k) plans as a result of our acquisitions in 1999,
all of which have been rolled into one plan. The 401(k) plans covers our
full-time U.S. employees. It is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986 so that we can deduct any contributions that we
make to the plan at the time they are made. The plan provides that employees may
elect to reduce their current compensation by up to the statutorily prescribed
annual limit and have the amount of such reduction contributed to the plan. The
plan permits us, but does not require us to make, additional
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<PAGE> 58
matching contributions on behalf of all participants in the plan. We have
instituted an employee contribution plan under which we shall match 100% of the
amounts each employee contributes to the plan, up to 5% of the employee's annual
compensation. In August 2000, we issued 19,612 shares of our common stock to the
Plan to meet our contributions for the period of January 1, 2000 to June 30,
2000. We also operate a defined contribution pension plan on behalf of our
directors and employees in the United Kingdom.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation provides that, to the fullest extent the
Delaware General Corporation Law permits, our directors shall not be personally
liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director. Under Delaware law, the directors have a fiduciary duty to
us that this provision of our certificate does not eliminate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
non-monetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to us for acts or omissions which a court of
competent jurisdiction finds to be not in good faith or that involve intentional
misconduct, or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that Delaware law prohibits. This provision
also does not affect the director's responsibilities under any other laws, such
as federal securities laws.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers,
provided that this provision shall not eliminate or limit the liability of a
director:
- for any breach of the director's duty of loyalty to a corporation or its
stockholders,
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- arising under Section 174 of the Delaware General Corporation Law as a
result of unlawful payments of dividends or stock purchases or
redemptions, or
- for any transaction from which the director derived an improper personal
benefit.
Delaware law provides further that the indemnification that Delaware law
permits is not exclusive of any other rights to which the directors and officers
may be entitled under a corporation's bylaws, any agreement, a vote of
stockholders or otherwise. Our bylaws provide that we shall indemnify, to the
maximum extent and in the manner the Delaware General Corporation Law permits,
any person against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred as a result of any
threatened, pending or completed action, suit or proceeding in which such person
was or is a party or is threatened to be made a party by reason of the fact that
such person is or was our director or officer, or is or was serving at our
request as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or is or was a director or officer of a
corporation which was our predecessor corporation or of another enterprise at
the request of such predecessor corporation.
We have insured our directors, officers, employees and agents and persons
serving at our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against such person and incurred by such person in any such
capacity or arising out of such person's status as such, regardless of whether
indemnification would be permitted under Delaware law.
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<PAGE> 59
CERTAIN PROVISIONS OF DELAWARE LAW
We are a Delaware corporation, and the provisions of Section 203 of the
Delaware General Corporation Law, an anti-takeover law, apply to us. In general,
the statute prohibits a publicly held Delaware corporation from engaging in a
business combination with an interested stockholder for a period of three years
after the date of the transaction by which that person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a business combination includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an interested stockholder is a person who, together with
affiliates and associates, owns, or within three years prior, did own 15% or
more of our voting stock.
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<PAGE> 60
PRINCIPAL STOCKHOLDERS
The following table sets forth specified information with respect to the
beneficial ownership of our common stock and our Series A preferred stock as of
December 4, 2000 by:
- each person or group of affiliated persons that we know beneficially owns
5% or more of our outstanding shares of common stock or Series A
preferred stock,
- each of our directors,
- each of our named executive officers, and
- all of our directors and executive officers as a group.
Shares and percentages beneficially owned are based upon 68,104,791 shares
of common stock outstanding and 1,428,571 shares of Series A preferred stock
outstanding on December 4, 2000, together with options, warrants or other
convertible securities that are exercisable for such respective securities
within 60 days of December 4, 2000 for each stockholder. Under the rules of the
Securities and Exchange Commission, beneficial ownership includes shares over
which the named stockholder exercises voting and/or investment power. Shares of
common stock or Series A preferred stock subject to options, warrants or other
convertible securities that are currently exercisable or will become exercisable
within 60 days of December 4, 2000 are deemed outstanding for computing the
respective percentage ownership of the person holding the option, warrant or
other convertible security, but are not deemed outstanding for purposes of
computing the respective percentage ownership of any other person. Unless
otherwise indicated in the footnotes below, we believe that the persons and
entities named in the table have sole voting and investment power with respect
to all shares beneficially owned, subject to applicable community property laws.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
------------------------------------ ---------- -------
<S> <C> <C>
COMMON STOCK
The Holmes Trust(1)(2)...................................... 8,400,000 12.3%
Glen C. Holmes(1)(2)(3)..................................... 8,475,000 12.4%
Pequot Capital Management, Inc.(4).......................... 10,259,396 15.0%
Philip R. Ladouceur(5)...................................... 1,148,000 1.7%
Howard E. Taylor(6)......................................... 250,000 0.4%
F. Bryson Farrill(7)........................................ 75,000 0.1%
Michael S. Falk(8).......................................... 3,603,427 5.3%
Timothy P. Flynn(9)......................................... 776,873 1.1%
Marshall S. Geller(10)...................................... - -
James P. McNiel(4)(11)...................................... 10,309,396 15.0%
Gerald A. Poch(4)(12)....................................... 10,309,396 15.0%
Cameron B. Chell(13)........................................ 754,733 1.1%
Raghu N. Kilambi(14)........................................ 570,563 0.8%
Vincent L. Romano, Jr.(15).................................. 127,288 0.2%
All directors and executive officers as a group
(22 persons)(16).......................................... 28,743,726 40.0%
SERIES A PREFERRED STOCK
Microsoft Corporation(17)................................... 2,571,428 100%
</TABLE>
-------------------------
(1) The business address of Glen C. Holmes, the trustee of The Holmes Trust, is
2 South Pointe Drive, Lake Forest, California 92630.
(2) On May 26, 2000, The Holmes Trust granted to us an option to purchase up to
600,000 shares of our common stock held by it at a purchase price of $5.50
per share (the fair market value at the date of the grant). On the same
date, The Holmes Trust granted two of our employees options to
58
<PAGE> 61
purchase 2,400,000 shares of our common stock at a purchase price of $5.50
per share. The 3,000,000 shares shall continue to be beneficially held by
The Holmes Trust until the options are exercised.
(3) Includes 75,000 shares issuable upon the exercise of stock options
currently exercisable or exercisable within 60 days of December 4, 2000.
Also includes 8,400,000 shares of common stock held by The Holmes Trust as
a result of Mr. Holmes' power to control The Holmes Trust.
(4) Shares beneficially owned by Pequot Capital Management, Inc. represents
9,806,480 shares held of record by Pequot Private Equity Fund II, L.P.,
Pequot Partners Fund, L.P., Pequot International Fund, Inc., and Pequot
Endowment Fund, L.P. (the "Funds"), which are managed by Pequot Capital
Management, Inc. It also includes 452,916 shares issuable upon the exercise
of warrants currently exercisable within 60 days of December 4, 2000
(subject to further anti-dilution adjustments) held of record by Pequot
Private Equity Fund II, L.P. and Pequot Endowment Fund, L.P. Pequot Capital
Management, Inc. holds voting and dispositive power for all shares held by
the Funds and the address of Pequot Capital Management and each of the
Funds is 500 Nyala Farm Road, Westport, Connecticut 06880.
(5) Includes 1,100,000 shares issuable upon the exercise of stock options
currently exercisable or exercisable within 60 days of December 4, 2000 and
48,000 shares attributable to Mr. Ladouceur as a result of his power to
control Mardale Investments Ltd. The business address of Mr. Ladouceur is 2
South Pointe Drive, Lake Forest, California 92630.
(6) Includes 250,000 options exercisable within 60 days of December 4, 2000.
The business address of Mr. Taylor is 2 South Pointe Drive, Lake Forest,
California 92630.
(7) Includes 75,000 shares issuable upon the exercise of stock options
currently exercisable or exercisable within 60 days of December 4, 2000.
The business address of Mr. Farrill is 305 Oaks Road, Fairfield,
Connecticut 06432.
(8) Includes 50,000 shares issuable upon the exercise of stock options
currently exercisable or exercisable within 60 days of December 4, 2000.
Also includes 266,782 shares attributable to Mr. Falk as a result of his
control of the Michael Falk IRA. Also includes 34,439 shares issuable upon
the exercise of currently exercisable warrants currently exercisable or
exercisable within 60 days of December 4, 2000 (subject to further
anti-dilution adjustments) that Mr. Falk holds. Also includes 2,434,554
shares of common stock and 104,667 shares issuable upon the exercise of
warrants currently exercisable or exercisable within 60 days of December 4,
2000 (subject to further anti-dilution adjustments) that Commonwealth
Associates, L.P. beneficially holds. Mr. Falk is Chairman and Chief
Executive Officer of Commonwealth Associates, L.P. Mr. Falk disclaims
beneficial ownership of the shares and warrants that Commonwealth
Associates, L.P. holds. The business address of Mr. Falk is 830 Third
Avenue, New York, New York 10022.
(9) Includes 50,000 shares issuable upon the exercise of stock options
currently exercisable or exercisable within 60 days of December 4, 2000,
and 214,761 shares issuable upon the exercise of warrants currently
exercisable or exercisable within 60 days of December 4, 2000 (subject to
further anti-dilution adjustments). The business address of Mr. Flynn is
3291 N. Buffalo, Suite 8, Las Vegas, Nevada 89129.
(10) The business address of Mr. Geller is 433 Camden Drive, Suite 500, Beverly
Hills, California 90210.
(11) Includes 50,000 shares issuable upon the exercise of stock options
currently exercisable or exercisable within 60 days of December 4, 2000 are
held by Mr. McNiel. Mr. McNiel is a Senior Vice President of Pequot Capital
Management, Inc. and may be deemed to beneficially own 9,806,480 shares
held of record by the Funds and the 452,916 shares issuable upon the
exercise of warrants held of record by Pequot Private Equity Fund II, L.P.
and Pequot Endowment Fund, L.P. Mr. McNiel disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest. The
business address of Mr. McNiel is 500 Nyala Farm Road, Westport,
Connecticut 06880.
59
<PAGE> 62
(12) Includes 50,000 shares issuable upon the exercise of stock options
currently exercisable or exercisable within 60 days of December 4, 2000 are
held by Mr. Poch. Mr. Poch is a Managing Director of Pequot Capital
Management, Inc. and may be deemed to beneficially own 9,806,480 shares
held of record by the Funds and the 452,916 shares issuable upon the
exercise of warrants held of record by Pequot Private Equity Fund II, L.P.
and Pequot Endowment Fund, L.P. Mr. Poch disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest. The business
address of Mr. Poch is 500 Nyala Farm Road, Westport, Connecticut 06880.
(13) The business address of Mr. Chell is Suite 500, 630 8th Ave. S.W., Calgary,
CAN T2P1G6.
(14) Includes 350,000 shares issuable upon the exercise of stock options
currently exercisable or exercisable within 60 days of December 4, 2000.
The business address of Mr. Kilambi is 2 South Pointe Drive, Lake Forest,
California 92630.
(15) The business address of Mr. Romano is 7410 Walton Lane, Annandale, Virginia
22003.
(16) Includes shares listed in footnotes 2 and 4-10 above, as well as 1,731,411
shares our other executives not listed in this table hold, 2,537,000 shares
issuable upon the exercise of stock options which are currently exercisable
or exercisable within 60 days of December 4, 2000, 806,783 shares issuable
on exercise of warrants currently exercisable or exercisable within 60 days
of December 4, 2000 (subject to further anti-dilution protection) and
585,035 shares of our common stock issuable on conversion of shares held by
one of our executives in one of our subsidiaries.
(17) Includes 1,142,857 shares issuable upon the exercise of warrants currently
exercisable or exercisable within 60 days of December 4, 2000. None of our
directors or executive officers beneficially owns any shares of Series A
preferred stock. The business address of Microsoft Corporation is One
Microsoft Way, Redmond, Washington 98052-6399.
As of December 4, 2000, our executive officers, directors and holders of
over 5% of our common stock and their affiliates beneficially own approximately
40.0% of the outstanding shares of our common stock. If these holders act as a
group, they may be able to control us and direct our affairs, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership also may delay, defer or prevent a change in our
control, and make some transactions more difficult or impossible without the
support of these stockholders. These transactions might include proxy contests,
mergers, tender offers, open market purchase programs or other purchases of
common stock that could give our stockholders the opportunity to realize a
premium over the then prevailing market price of our common stock.
60
<PAGE> 63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1997, Cameron Chell, our former Chief Executive Officer and President,
loaned FutureLink Alberta, approximately $137,000 at an annual interest rate
equal to the prime rate plus 1%. FutureLink Alberta repaid the entire balance of
the loan between April and June 1998.
On January 20, 1998, Core Ventures, Inc., our predecessor-in-interest,
purchased 46% of FutureLink Alberta in exchange for 308,000 shares of our common
stock. On November 23, 1998, Core Ventures purchased another 50.4% of FutureLink
Alberta in exchange for 334,755 shares of our common stock, and on February 26,
1999, it acquired the remaining 3.6% of FutureLink Alberta in exchange for
23,500 shares of our common stock. Mr. Chell was the President and Chief
Executive Officer of FutureLink Alberta, and after the first purchase in January
1998, Mr. Chell became our President, a director and a significant stockholder.
Mr. Chell resigned as our President and a director effective August 27, 1999.
On August 12, 1998, Mr. Chell loaned us approximately $145,000 at an annual
interest rate of 8%. On February 22, 1999, we issued Mr. Chell a convertible
debenture in the principal amount of approximately $150,000, the outstanding
balance of his loan to us. This convertible debenture was convertible at $2.00
per share after adjustment for our five-for-one reverse stock split, for a total
of 75,310 shares. Mr. Chell also received a warrant to acquire 75,310 shares at
$2.00 per share for the first year, $3.00 per share for the second year, and
$4.00 per share for the third year. On April 29, 1999, Mr. Chell surrendered his
debenture having an outstanding balance of approximately $153,000, our notes
payable having an outstanding balance of approximately $67,000 and our trade
loans payable having an outstanding balance of $30,000 in return for a $250,000
aggregate principal amount 8% convertible note convertible at $1.50 per share
and a warrant to acquire 125,000 shares at $1.50 per share. We reduced the
conversion and exercise prices for these securities from $1.50 per share to
$1.335 per share due to the effect of anti-dilution provisions. Mr. Chell has
exercised and converted all of these securities.
In May 1999, Commonwealth Associates privately placed our units consisting
of 8% senior subordinated convertible notes convertible to shares of common
stock at $1.00 per share after adjustment for our five-for-one reverse stock
split and warrants to purchase 500 shares of common stock at $1.25 per share
after adjustment for our five-for-one reverse stock split for each $1,000
invested. Mr. Chell purchased $250,000 of our units and Raghu Kilambi purchased
$127,500 of our units. At the time of the transaction, Mr. Kilambi served as our
Chief Financial Officer and was one of our directors.
Michael Falk, Chief Executive Officer of Commonwealth Associates, L.P. was
appointed to our board of directors on May 7, 1999 following the consummation of
the private placement of our securities concluded in April 1999 for which we
retained Commonwealth Associates as our placement agent. We subsequently
retained Commonwealth Associates as placement agent on July 1, 1999. That
private placement, which raised $15 million in gross proceeds, closed on July
29, 1999. As compensation for acting as the placement agent, we paid
Commonwealth Associates nearly $1,350,000 in commissions and issued to
Commonwealth Associates warrants to acquire 225,000 shares of common stock at an
exercise price of $8.50 per share. We also paid Commonwealth Associates an
additional $50,575 to cover their expenses of the private placement. A portion
of the warrants were divided among the staff members of Commonwealth Associates,
and Mr. Falk received a portion which allowed him to acquire 24,452 shares of
common stock. We also retained Commonwealth Associates under a services
agreement in September 1999 to assist us with an offer made to holders of
convertible securities to encourage them to convert their securities to common
stock. Under that agreement, Commonwealth Associates was paid $55,859 for fees
and expenses. We also paid Commonwealth Associates $30,000 in April 1999,
pursuant to an advisory agreement for services that Commonwealth Associates
provided to us from May 1999 to November 1999.
As of December 31, 1999, we had provided $550,000 in services and products
to Willson Stationers Ltd. and e-Supplies Inc. At December 31, 1999, $543,000
remained due from these entities. An allowance for doubtful accounts was
recorded for the entire amount because of the uncertainty of collection. We
settled this account in June 2000 for $400,000. Mr. Chell was a director of both
companies at the time
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<PAGE> 64
some of the transactions took place. In addition, we have reason to believe that
Mr. Chell was a principal of e-Supplies Inc., at the time of the transactions.
Mr. Kilambi served on the board of directors of Willson Stationers, Ltd., as our
representative, at the request of Willson Stationers, Ltd., for approximately
one month in early 1999.
On August 1, 1999, the Company loaned $2.0 million to an executive with
recourse, which was then used by the executive to purchase 232,829 common shares
of the Company. The loan receivable was recorded as a reduction of stockholders'
equity, and $250,000 of the principal amount of the loan was to be forgiven on a
quarterly basis. The shares had been escrowed and were to be released from
escrow on a quarterly basis commencing January 1, 2000. The Company released
87,349 of these shares to the employee. During the nine months ended September
30, 2000, the Company recognized $250,000 as salary expense relating to the
services received from the employee in relation to the loan agreement. On June
30, 2000, the Company and the employee agreed to terminate the loan agreement
and cancel the issuance of any further shares. In addition, the employee
returned 14,212 of these shares to the Company valued at the then current market
price of $129,000 in settlement of an employee advance.
In October 1999, we issued warrants to acquire 1,658,350 shares of common
stock to Pequot Private Equity Fund II, L.P., Pequot Partners Fund and Pequot
International Fund, which, after giving effect to anti-dilution adjustments
since their issuance, entitled the holders to purchase 1,678,139 shares of
common stock at $8.40 per share. On February 29, 2000, the funds exercised their
warrants to acquire all 1,678,139 shares of our common stock, with net proceeds
to us of approximately $12.6 million, taking into account the warrant exercise
fee of $0.90 for each warrant exercised. On April 28, 2000, in a private
placement we issued to Pequot Private Equity Fund II, L.P. and Pequot Endowment
Fund, L.P. for just under $15.0 million, 1,764,704 shares of common stock and
warrants which currently allow the holders to purchase 452,916 shares of common
stock at a purchase price of $9.01 per share. Pequot Capital Management, Inc.
manages the funds and therefore has the power to direct the vote of the common
stock that the funds hold, which constitute more than 5% of our outstanding
common stock both before and after this warrant exercise. In addition, James
McNiel, one of our directors, is a Senior Vice President at Pequot Capital
Management, Inc., and Gerald Poch, also a director, is a Manager
Director/Portfolio Manager at Pequot Capital Management, Inc. Howard Taylor, our
President and Chief Executive Officer, served as venture operating partner at
Pequot Capital Management, Inc. from September 2000 to November 2000.
The two securities purchase agreements we have entered into with the Pequot
funds and two other institutional investors restrict us and our material
subsidiaries without the prior written consent of the Pequot funds from:
- completing any merger, acquisition or sale of assets if our assets or
revenues are likely to be increased or decreased by 25% or more,
- buying any of our equity securities with a fair market value in excess of
$5.0 million, or
- changing the business in which we are currently engaged.
These restrictions will no longer apply at the earliest to occur of:
- the investors under these securities purchase agreements hold less than
5% of our fully-diluted common stock,
- the investors under these securities purchase agreements no longer have
the right to nominate any of our directors under these agreements, and
- October 15, 2002.
On May 26, 2000, Glen Holmes, our former President and Chief Operating
Officer and one of our directors, granted to us an option to purchase 600,000
shares of common stock at $5.50 per share, the fair market value at the date of
grant. We may only exercise this option to the extent employees to whom we
granted reciprocal options exercise those options.
62
<PAGE> 65
In December 2000, we agreed on the basic terms of an employment
relationship with Howard E. Taylor, our President and Chief Executive Officer.
We are in the process of formalizing these terms and plan to enter into an
employment agreement with Mr. Taylor. Mr. Taylor will receive an annual base
salary of $325,000, a discretionary annual performance bonus consisting of up to
$250,000 in cash and a performance based option to purchase 200,000 shares of
our common stock at an exercise price of $0.81 per share. In addition, we
granted to Mr. Taylor an option to acquire 2,500,000 shares of our common stock
at an exercise price of $0.81 per share. Two million of the shares vest in eight
quarterly increments commencing on January 1, 2001. The remaining 500,000 shares
will vest on January 1, 2004. Mr. Taylor's employment agreement will be an
at-will agreement and either party will be able to terminate the agreement at
any time.
Pequot Capital Management, Inc., which beneficially owns more than 5% of
our common stock, and is one of our largest stockholders, has agreed to pay Mr.
Taylor, our Chief Executive Officer and President, a signing bonus in connection
with his employment with us, in the amount of $650,000, to be paid in two equal
installments on each of January 1, 2001 and April 1, 2001. From September 2000
to November 2000, Mr. Taylor was a venture operating partner with Pequot Capital
Management, Inc.
In November 2000, Richard M. White became our Executive Vice President and
Chief Financial Officer. We have an employment agreement with Mr. White, which
provides for an annual base salary of $160,000, and he is entitled to earn an
annual performance bonus of up to $80,000. The agreement provides for the
payment to Mr. White of up to $39,200 for expenses incurred by Mr. White in
relocating from Calgary, Canada, to Irvine, California.
63
<PAGE> 66
SELLING STOCKHOLDERS
The following table sets forth the names of each selling stockholder, the
aggregate number of shares of common stock beneficially owned by each selling
stockholder as of December 4, 2000, and the aggregate number of shares of common
stock that each selling stockholder may offer and sell pursuant to this
prospectus. Because each selling stockholder may offer all or a portion of the
shares of common stock offered by this prospectus at any time and from time to
time after the date hereof, no estimate can be made of the number of shares that
each selling stockholder may retain upon completion of this offering. However,
assuming all of the shares offered by this prospectus are sold by the selling
stockholders, then unless otherwise noted, after completion of this offering,
none of the selling stockholders will own more than one percent of the shares of
common stock outstanding.
Of the 62,117,457 shares of common stock offered by this prospectus,
49,225,834 shares are issued and outstanding as of December 4, 2000 and
12,891,623 shares have been reserved for issuance by us to certain selling
stockholders upon (i) the exercise of outstanding common stock warrants, (ii)
the conversion of shares of outstanding Series A preferred stock, (iii) the
conversion of outstanding shares of one of our foreign subsidiaries and (iv) the
conversion of shares of Series A preferred stock to be issued upon the exercise
of an outstanding warrant to purchase shares of Series A preferred stock. We
have also registered as part of this offering an additional indeterminate number
of shares of our common stock that we may be required to issue to the selling
stockholders upon the exercise or conversion of the outstanding common stock
warrants, the Series A preferred stock and the Series A preferred stock issuable
upon exercise of an outstanding warrant to purchase Series A preferred stock, in
each case as a result of the anti-dilution provisions of the respective
securities. We are registering all of the shares of common stock offered for
sale pursuant to this prospectus pursuant to certain registration rights
obligations.
In the following table, we have calculated shares of common stock
beneficially owned based upon 68,104,791 shares of common stock outstanding on
December 4, 2000, together with options, warrants or other convertible
securities that are exercisable within 60 days of December 4, 2000 for each
stockholder. Under the rules of the Securities and Exchange Commission,
beneficial ownership includes shares over which the named stockholder exercises
voting and/or investment power. Unless otherwise indicated in the footnotes
below, we believe that the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned,
subject to applicable community property laws. The information with respect to
beneficial ownership of common stock held by each person is based upon record
ownership data provided by our transfer agent, information as supplied or
confirmed by selling stockholders, based upon statements filed with the
Securities and Exchange Commission, or based upon our actual knowledge.
Except as noted in the footnotes to the table below and as described under
the caption "Certain Transactions," within the past three years, none of the
selling stockholders have held any position or office with us or entered into a
material relationship with us.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
BENEFICIALLY SHARES
OWNED PRIOR TO OFFERED
NAME OFFERING HEREBY
---- ---------------- ---------
<S> <C> <C>
The Holmes Trust Dated July 22, 1997(1)..................... 8,400,000 8,400,000
Pequot Private Equity Fund II, L.P.(2)...................... 5,698,060 5,698,060
SmallCaps OnLine Group LLC(3)............................... 2,981,677 2,981,677
Dimensional Partners, Ltd................................... 2,760,139 2,760,139
Microsoft Corporation(4).................................... 2,571,428 2,571,428
Commonwealth Associates, L.P.(5)............................ 2,539,221 2,456,634
Pequot International Fund, Inc.(2).......................... 1,726,263 1,726,263
Pequot Partners Fund, L.P.(2)............................... 1,726,263 1,726,263
Matthew J. Schumacher(6).................................... 1,451,062 1,451,062
Pequot Endowment Fund, L.P.(2).............................. 1,108,810 1,108,810
William and Janet Botti Living Trust Dated 3/26/98(7)....... 996,753 996,753
Robert Priddy(8)............................................ 3,498,815 959,594
</TABLE>
64
<PAGE> 67
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
BENEFICIALLY SHARES
OWNED PRIOR TO OFFERED
NAME OFFERING HEREBY
---- ---------------- ---------
<S> <C> <C>
Gerard Klauer Mattison & Co., Inc........................... 1,151,552 953,263
Edmund Shea................................................. 1,524,441 896,173
Adam Silverman(7)........................................... 861,813 861,813
Ira Silverman(9)............................................ 861,813 861,813
John Henry Bennett, Richard Bennett, Colin Ainslie
Matthissen and Quadrangle Trustee Company as trustee of
the various family settlements established by John
Bennett................................................... 758,540 758,540
Michael S. Falk(5).......................................... 3,603,427 747,424
Flynn Investment Corporation(10)............................ 726,873 726,873
Dimensional Partners, L.P. ................................. 690,035 690,035
J.F. Shea & Co. Inc. ....................................... 628,268 628,268
David Fung(11).............................................. 585,035 585,035
Curtis Eshelman(6).......................................... 513,158 513,158
James C. Harvey(12)......................................... 513,158 513,158
Inder Tallur................................................ 406,516 406,516
Michael Bollag.............................................. 401,245 387,529
Gallagher Investment Corporation............................ 355,936 355,936
Richard Bennett, John Henry Bennett, Colin Ainslie
Matthissen and Quadrangle Trustee Company as trustee of
the various family settlements established by Richard
Bennett................................................... 346,207 346,207
Arron Fu(6)................................................. 334,458 334,458
Wolfson Equities............................................ 330,294 330,294
Cameron Chell(13)........................................... 754,733 314,828
Porter Partners, L.P. ...................................... 305,263 305,263
Wexford Clearing CFMichael S. Falk IRA(5)................... 266,782 266,782
Keith M. Rosenbloom......................................... 2,800,319 261,098
Bank Morgan Stanley AG...................................... 238,486 238,486
A.G. Rappaport.............................................. 222,382 222,382
Nigel A.A. Hawley(6)........................................ 221,500 221,500
Rajan Mehta(6).............................................. 221,500 221,500
Yuri Pasea(14).............................................. 221,500 221,500
Charon Employees Trust...................................... 219,997 219,997
Mulkey II Limited Partnership............................... 210,937 210,937
GKM Partners I, L.P. ....................................... 198,289 198,289
Richard Silverman(6)........................................ 196,666 196,666
Michael A. Singer........................................... 187,379 187,379
Reese-Cole Partnership, Ltd. ............................... 186,789 186,789
C.E. Unterberg Towbin Capital Partners I, L.P.(15).......... 177,968 177,968
Edward Chi Wai Fung(6)...................................... 169,667 169,667
Ho Wai Fung(6).............................................. 169,667 169,667
Mark Palangio(6)............................................ 169,667 169,667
Douglas N. Runckel & Evelyn L. Runckel JT TEN............... 167,709 167,709
Hans C. Bodmer.............................................. 165,147 165,147
Conzett Europa Invest Ltd. ................................. 165,147 165,147
S. Marcus Finkle............................................ 165,147 165,147
Marshall Geller(16)......................................... 165,147 165,147
Kabuki Partners............................................. 165,147 165,147
Jed Manocherian TTEE FM Grandchildren's Trust DTD 7/18/96... 165,147 165,147
Raskin Cramer Associate Family Partners..................... 165,147 165,147
Walter F. Toombs............................................ 165,147 165,147
Allan Sherk(7).............................................. 161,597 161,597
Raghunath Kilambi(17)....................................... 570,563 160,563
Carl Kleidman............................................... 159,093 159,093
Ben Bollag.................................................. 299,593 157,894
</TABLE>
65
<PAGE> 68
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
BENEFICIALLY SHARES
OWNED PRIOR TO OFFERED
NAME OFFERING HEREBY
---- ---------------- ---------
<S> <C> <C>
Pharos Fund Limited......................................... 152,632 152,632
Frederick B. Epstein........................................ 150,570 150,570
Paul Russo & Sally Russo JT TEN............................. 140,375 140,375
BNB Investment Associates, L.P. ............................ 141,699 127,984
CPQ Holdings, Inc.(18)...................................... 112,590 112,590
Jay J. Shrager & Carole Shrager JT TEN...................... 112,473 112,473
Michael A. Poujol & Angela G. Poujol JTROS.................. 102,901 102,901
Davis Polk & Wardwell....................................... 102,817 102,817
Foothill Capital Corporation(19)............................ 100,000 100,000
Valor Capital Management, L.P. ............................. 95,394 95,394
Jonathan L. Glashow......................................... 95,368 95,368
Joe DaSilva(6).............................................. 90,491 90,491
Robert O'Sullivan........................................... 130,543 89,256
L. Wayne Johnson............................................ 88,984 88,984
David L. Cohen.............................................. 88,450 88,450
Alexandra Salas............................................. 88,418 88,418
David R. Nelson and Donna L. Nelson JT TEN.................. 87,918 87,918
James R. Malone............................................. 83,824 83,824
Richard N. Abrams........................................... 83,202 83,202
ComVest Capital Partners, LLC............................... 82,587 82,587
Howard Balter............................................... 82,574 82,574
John W. Beiser & Maureen W. Beiser JT TEN................... 82,574 82,574
J.A. Cardwell............................................... 82,574 82,574
Edward R. Downe, Jr. ....................................... 82,574 82,574
Joseph Esformes............................................. 82,574 82,574
Fleming (Jersey) Ltd. TTEE Gerlach and Company.............. 82,574 82,574
Mark Hatten................................................. 82,574 82,574
Peggy S. Jordan............................................. 82,574 82,574
Manhattan Group Funding..................................... 82,574 82,574
Stephen J. Meringoff........................................ 82,574 82,574
Amy L. Newmark.............................................. 82,574 82,574
Gregory P. Norman........................................... 82,574 82,574
George F. Pickett & Elizabeth H. Pickett JT TEN............. 82,574 82,574
Mark Reichenbaum............................................ 82,574 82,574
RHL Ventures LLC............................................ 82,574 82,574
Kim M. Schwenke............................................. 139,805 82,574
John J. McCarthy & Donna P. McCarthy JTROS.................. 81,322 81,322
Rodney A. Abrams............................................ 81,294 81,294
Layne Harris(7)............................................. 80,799 80,799
Edward Matheson(6).......................................... 80,799 80,799
Jason Yetman(6)............................................. 80,799 80,799
Peter Joseph Crozier........................................ 80,234 80,234
Michael John Dorward........................................ 80,234 80,234
Anthony P.M. Harrison-Wallace............................... 80,234 80,234
Robert Kell................................................. 80,234 80,234
Richard Rosenblatt.......................................... 79,444 79,444
Robert Bettlinger........................................... 78,495 78,495
EDJ Limited................................................. 76,315 76,315
Tropical Cave (Bahamas) Ltd. ............................... 76,314 76,314
Richard Corbin.............................................. 115,603 74,316
Ron Moschetta............................................... 73,635 73,635
Kensington Partners, L.P. .................................. 73,358 73,358
Alliance Equities, Inc. .................................... 72,469 72,469
Garo A. Partoyan............................................ 71,156 71,156
</TABLE>
66
<PAGE> 69
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
BENEFICIALLY SHARES
OWNED PRIOR TO OFFERED
NAME OFFERING HEREBY
---- ---------------- ---------
<S> <C> <C>
Wasson Capital Advisors Limited............................. 68,664 68,664
Vincent L. Romano, Jr.(20).................................. 118,079 68,000
Allen Notowitz.............................................. 67,807 67,807
Dean P. Schumacher(6)....................................... 64,935 64,935
Michael K. Schumacher....................................... 64,935 64,935
Jeffrey Markowitz........................................... 61,931 61,931
Richard Friedman............................................ 61,930 61,930
Bruce Glaser................................................ 61,460 61,460
Carmen Pecord............................................... 60,989 60,989
Kurt V. Reichelt & Laura M. Reichelt JT TEN................. 60,364 60,364
Rodney Schorlemmer & Vikki Schorlemmer TTEES Rodney &
Vikki Schorlemmer Trust DTD 10/29/93...................... 60,364 60,364
Joel L. Spivak.............................................. 60,364 60,364
Jerome Drefuss.............................................. 60,046 60,046
Gary D. Shultz & Barbara A. Schultz JT TEN.................. 60,046 60,046
Anna M. Pocisk.............................................. 57,801 57,801
John Piccolo................................................ 56,863 56,863
Jim G. Aukstuolis........................................... 56,550 56,550
Jeffrey Blomstedt & Susan La Scala.......................... 56,221 56,221
Robert A. McCleeary......................................... 56,221 56,221
Adam Fox(6)................................................. 54,878 54,878
Sicola, Martin, Koons & Frank, Inc. (21).................... 53,552 53,552
Robert J. Jahn.............................................. 52,106 52,106
F. Andrew Morfesis & Gail Morfesis JTROS.................... 52,106 52,106
James A. Davenport & Rebecca C. Davenport JT TEN............ 51,450 51,450
Ferdinand F. Anderson, Jr................................... 50,825 50,825
Kim M. Beretta TTEE Kim M. Beretta Trust DTD 10/12/94....... 50,825 50,825
Joseph T. Bolognue.......................................... 50,825 50,825
Ira Goldberg................................................ 50,825 50,825
Richard Palmer & Lynne Marie Palmer JT TEN.................. 50,825 50,825
James H. Rion............................................... 50,825 50,825
Stephen T. Skoly............................................ 50,825 50,825
Robert J. Spencer........................................... 50,825 50,825
Tom P. Briggs Profit Sharing Plan........................... 48,793 48,793
Jayakumar Patil & Purnima J. Patil JT TEN................... 47,697 47,697
Brian C. Lerner............................................. 47,338 47,338
Dennis Santolo & Thomas Santolo JT TEN...................... 47,010 47,010
Anthony M. Spigarelli & Nancy M. Spigarelli JT TEN.......... 45,501 45,501
David De Atkine, Jr......................................... 43,849 43,849
K and K Development......................................... 43,849 43,849
Childhood Resource Corp. ................................... 42,567 42,567
Avtar Sandhu................................................ 41,963 41,963
Just in Case, Ltd........................................... 41,793 41,793
Michael Appelbaum........................................... 47,362 41,639
Stuart Allen & Vivian Allen JT TEN.......................... 41,287 41,287
Michael Astor............................................... 41,287 41,287
Aulis & Co.................................................. 41,287 41,287
Harold Blue................................................. 41,287 41,287
Robert Blue & Ruth Blue JT TEN.............................. 41,287 41,287
James A. Cardwell, Jr. ..................................... 41,287 41,287
Grainne Coen................................................ 41,287 41,287
Wexford Clearing Services CF Richard Corbin IRA............. 41,287 41,287
Richard Feldman............................................. 41,287 41,287
William O.E. Henry.......................................... 41,287 41,287
</TABLE>
67
<PAGE> 70
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
BENEFICIALLY SHARES
OWNED PRIOR TO OFFERED
NAME OFFERING HEREBY
---- ---------------- ---------
<S> <C> <C>
S. Maurice Hicks, Jr. ...................................... 41,287 41,287
Andre W. Iseli.............................................. 41,287 41,287
Joan S. Kirsner TTEE Joan S. Kirsner Trust U/A DTD
7/10/85................................................... 41,287 41,287
Lloyd A. Moriber............................................ 41,287 41,287
Nano-Cap Hyper Growth Partnership, L.P...................... 41,287 41,287
Robert O'Sullivan & David O'Sullivan Co-TTEES Robert
O'Sullivan Family Trust U/A DTD 3/14/96................... 41,287 41,287
Howard Rosenbloom & Michelle G. Rosenbloom JT TEN........... 41,287 41,287
Adam Ross & Lisa Falk-Ross JT TEN(22)....................... 41,287 41,287
Monroe H. Schenker.......................................... 41,287 41,287
SJG Management Inc. Profit Sharing Plan..................... 41,287 41,287
William Smith............................................... 40,913 40,913
James Adametz TTEE Revocable Trust of James Adametz, DTD
2/27/97................................................... 40,660 40,660
Bill Arnett(23)............................................. 155,262 40,262
Beth Lipman................................................. 39,346 39,346
Melanie Berry(6)............................................ 38,961 38,961
Dataspec Telecom Multimedia, Inc............................ 38,776 38,776
John C. Clifford & Helen G. Clifford TTEES Esperanza Trust
U/A DTD 1/27/86........................................... 38,157 38,157
Gerald B. Cramer............................................ 38,157 38,157
Philip Friedman............................................. 38,157 38,157
Victor Friedman............................................. 38,157 38,157
Lighthouse Partners USA, L.P................................ 38,157 38,157
Charles J. Loegering........................................ 38,157 38,157
Radix Associates............................................ 38,157 38,157
Dale Rosenbloom............................................. 38,157 38,157
Donnie H. Russell........................................... 38,157 38,157
John J. Shaw................................................ 38,157 38,157
Kenneth B. Skolnick & Melissa S. Skolnick JT TEN............ 38,157 38,157
EMC(2) Corporation(24)...................................... 38,043 38,043
Vladik Vainberg............................................. 37,223 37,223
TBCC Funding Trust II(25)................................... 37,211 37,211
Mark Banninger(6)........................................... 36,970 36,970
Jeffrey A. Brambir(6)....................................... 35,714 35,714
Sharon L. Hutchins(6)....................................... 35,714 35,714
David F. Kenney(7).......................................... 35,714 35,714
Mark Kerridge............................................... 35,062 35,062
Nicola Kerridge............................................. 35,062 35,062
Cindy D. Roberts............................................ 34,953 34,953
Peter Fulton................................................ 34,688 34,688
Burton R. Abrams............................................ 34,685 34,685
Charles L. Friedlander...................................... 34,310 34,310
Fred B. Sheats.............................................. 34,310 34,310
Wexford Clearing Services CF Norman Kane IRA................ 33,529 33,529
John Belway................................................. 33,029 33,029
Felix Campos & Joyce Campos JT TEN.......................... 33,029 33,029
Edwin M. Glazier............................................ 33,029 33,029
Paul D. Goldenheim.......................................... 33,029 33,029
Patrick Keating............................................. 33,029 33,029
P. Tony Polyviou............................................ 33,029 33,029
William G. Sybesma & M. Jane Sybesma JT TEN................. 33,029 33,029
Jane Vandewalle TTEE Jane Vandewalle DOT DTD 2/18/93........ 33,029 33,029
Net Perceptions, Inc.(26)................................... 32,000 32,000
</TABLE>
68
<PAGE> 71
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
BENEFICIALLY SHARES
OWNED PRIOR TO OFFERED
NAME OFFERING HEREBY
---- ---------------- ---------
<S> <C> <C>
William O'Neill & Linda O'Neill............................. 31,436 31,436
Edwin J. Beattie............................................ 30,996 30,996
Birchtree Investments....................................... 30,182 30,182
August Piccolo.............................................. 28,901 28,901
Joseph P. Wynne............................................. 28,808 28,808
William C. Radichel......................................... 28,618 28,618
Jeffrey S. Cameron.......................................... 26,303 26,303
Louise Bell................................................. 26,053 26,053
Oliver T. Clark & Sharon L. Clark JT TEN.................... 26,053 26,053
George C. Sivak............................................. 26,053 26,053
Syd Verbin TTEE Syd Verbin Trust FBO Syd Verbin U/A DTD
12/20/88.................................................. 26,053 26,053
William R. Schoen & Barbara Schoen JT TEN................... 25,147 25,147
Ilya Gaba & Alice Gaba JT TEN............................... 24,797 24,797
Bryon Voigt & Jacelyn Voigt JT TEN.......................... 24,773 24,773
Lincoln Edward Black........................................ 24,772 24,772
Richard Dold................................................ 24,772 24,772
Hugh W. Downe............................................... 24,772 24,772
Burtt R. Ehrlich............................................ 43,849 24,772
Dave Morley Gary Peter Bellot Co-TTEES The Lenox Trust U/A
DTD 6/29/98............................................... 24,772 24,772
Paul Gubitosa & Linda Gubitosa JTROS........................ 24,772 24,772
M. Ponder Harrison.......................................... 24,772 24,772
Neekianund Khulpateea....................................... 24,772 24,772
Burjis N. Shroff............................................ 24,772 24,772
Jaswant Singh Pannu & Debra Bogner Pannu JTROS.............. 24,146 24,146
Timothy J. Herrmann......................................... 23,242 23,242
George Tsamutalis........................................... 22,377 22,377
Sloan d'Autremont........................................... 21,367 21,367
Peter Palmieri.............................................. 20,798 20,798
Annie Falk TTEE The Gianna Falk Trust DTD 7/9/96(27)........ 20,644 20,644
Annie Falk TTEE The Mikaela Falk Trust DTD 2/16/94(27)...... 20,644 20,644
Edward Ketcham.............................................. 20,644 20,644
Rong-Chung Lin.............................................. 20,332 20,332
Basil Ascuitto.............................................. 20,125 20,125
Seymour Wasserstrum......................................... 19,648 19,648
Charles Schwab FutureLink Corporation 401(k) Employee
Retirement Plan(28)....................................... 19,612 19,612
Howard Bernstein & Sandra Bernstein JT TEN.................. 19,077 19,077
Jack Bloom.................................................. 19,077 19,077
Burtt R. Ehrlich IRA........................................ 19,077 19,077
Jay J. Garcia & Loraine Garcia JT TEN....................... 19,077 19,077
Roger H. Grace.............................................. 19,077 19,077
Roland F. Hartman........................................... 19,077 19,077
Nasrollah Jahdi & Farahnaz Jahdi JT TEN..................... 19,077 19,077
Wexford Securities CF James R. Landers...................... 19,077 19,077
Stuart J. Levy.............................................. 19,077 19,077
Greg A. Nowak & Lynn M. Nowak TEN ENT....................... 19,077 19,077
Samuel R. Nussbaum.......................................... 19,077 19,077
Randy Prude................................................. 19,077 19,077
James A. Rasnick & Mary Ann Rasnick JT TEN.................. 19,077 19,077
RML Burwick Family L.P...................................... 19,077 19,077
Schwenke, LLC............................................... 19,077 19,077
Kim M. Schwenke & Paula F. Todd TEN ENT..................... 19,077 19,077
</TABLE>
69
<PAGE> 72
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
BENEFICIALLY SHARES
OWNED PRIOR TO OFFERED
NAME OFFERING HEREBY
---- ---------------- ---------
<S> <C> <C>
Lawrence Seftel & Rosylin Seftel JTROS...................... 19,077 19,077
Harlan B. Smith............................................. 19,077 19,077
William G. Sybesma.......................................... 52,106 19,077
Paula F. Todd & Kerry R. Schwenke TTEES Kim M. Schwencke
1989 Irrevocable Trust.................................... 19,077 19,077
Charles P. Wilkins.......................................... 19,077 19,077
Hui Zhu..................................................... 19,077 19,077
Charles H. Reynolds......................................... 18,620 18,620
Charles A. Barnes, Jr....................................... 18,433 18,433
Craig Blitz & Annette Blitz JT TEN.......................... 18,422 18,422
Jodi Abrams Engfer.......................................... 18,067 18,067
Karen A. Fox................................................ 17,920 17,920
Anthony J. Giardina......................................... 17,497 17,497
The Bald Eagle Fund Ltd. ................................... 17,458 17,458
Wexford Clearing Services CF Gerald I. Falke IRA............ 16,765 16,765
Mark Goldberg & Joanna Goldberg JT TEN...................... 16,765 16,765
Wexford Clearing CF William R. Schoen....................... 41,912 16,765
Marc G. Berman.............................................. 16,515 16,515
Ronald E. Bloom............................................. 16,515 16,515
Robert Burr & Catherine Burr TTEES The Burr Family Trust U/A
DTD 9/26/93............................................... 16,515 16,515
Bruce Corbin................................................ 16,515 16,515
Tony Di Fatta............................................... 16,515 16,515
John & Helen Fattorusso..................................... 16,515 16,515
Kevin Jackson............................................... 16,515 16,515
Jeffers Family Limited Partnership.......................... 16,515 16,515
Stephen Mallis.............................................. 16,515 16,515
Thomas M. Malone & Susan R. Malone JT TEN................... 16,515 16,515
Richard B. Mateer & Margaret J. Mateer JT TEN............... 16,515 16,515
Alan J. Meinershagen........................................ 16,515 16,515
Paul F. Petrus.............................................. 16,515 16,515
Fedele Staropoli............................................ 16,515 16,515
David B. Waxman............................................. 16,515 16,515
Blair Collins(6)............................................ 16,136 16,136
Donald Berglund............................................. 15,263 15,263
Jerome Messana.............................................. 15,188 15,188
Michael D. Steele........................................... 14,532 14,532
Mark C. Tansey.............................................. 13,355 13,355
David Stein................................................. 13,019 13,019
Daniel J. Dietrick(6)....................................... 12,987 12,987
Traci A. Gilli-Milheim(7)................................... 12,987 12,987
James A. Paull(6)........................................... 12,987 12,987
Hilaire F. Fernandes & Sandra Fernandes JT TEN.............. 12,387 12,387
Ed Jordan................................................... 12,387 12,387
Claude Moraes & Roshan Moraes JT TEN........................ 12,387 12,387
Merrill Lynch Canada Inc. ITF Doug Evans(29)................ 102,079 12,079
Ronald Pobiel............................................... 12,074 12,074
Craig Blitz................................................. 30,493 12,071
Ventana Partners, L.P. ..................................... 11,860 11,860
Steven Hart................................................. 11,614 11,614
Jonathan R. Cohen & Nancy D. Shapiro JT TEN................. 11,446 11,446
Mark Giannini(6)............................................ 10,996 10,996
Robert Missig(6)............................................ 10,996 10,996
Mark Oldani(6).............................................. 10,996 10,996
</TABLE>
70
<PAGE> 73
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
BENEFICIALLY SHARES
OWNED PRIOR TO OFFERED
NAME OFFERING HEREBY
---- ---------------- ---------
<S> <C> <C>
John Gruber................................................. 10,664 10,664
Kevin Voigt & Cindy Voigt JTROS............................. 10,493 10,493
Brian Beauchemin............................................ 10,229 10,229
Mody K. Boatright & Frances Boatright JT TEN................ 9,909 9,909
Jody Nelson................................................. 9,906 9,906
Roderick Beck............................................... 9,900 9,900
John A. Carver(6)........................................... 9,740 9,740
Kenneth Christ(6)........................................... 9,740 9,740
David A. Moscoe(7).......................................... 9,740 9,740
Richard A. Nash(6).......................................... 9,740 9,740
Bradley L. Tompkins(6)...................................... 9,740 9,740
Fiona McKone................................................ 9,603 9,603
Alya Al-Bahar............................................... 9,538 9,538
Shanthamalappa A. Ashok..................................... 9,538 9,538
Ben Franklin Financial, Inc................................. 9,538 9,538
Gary Blum................................................... 9,538 9,538
Michael Brummer & Mary Jo Brummer JT TEN.................... 9,538 9,538
C. Wyllys Cass IV & Ellen M. Cass JTROS..................... 9,538 9,538
Wexford Securities CF Bruce Cunningham...................... 9,538 9,538
Stephen Cunningham & Wendall Fleming JT TEN................. 9,538 9,538
Wexford Securities CF Irving Curtis......................... 9,538 9,538
Dominick Di Cesare.......................................... 9,538 9,538
Paul R. Doering............................................. 9,538 9,538
Richard W. Graves & Mary J. Graves JT TEN................... 9,538 9,538
Heinecken & Associates Ltd. Profit Sharing Plan............. 9,538 9,538
Kimber Johnson & Susan Johnson JT TEN....................... 9,538 9,538
Gary Kanuit................................................. 9,538 9,538
Lindsay Lewis............................................... 9,538 9,538
Leo F. Mazzocchi & Nancy T. Mazzocchi JT TEN................ 9,538 9,538
Gerald Jay Millstein........................................ 9,538 9,538
Vijaykumar S. Monie......................................... 9,538 9,538
Ryan Cassidy Morrow......................................... 9,538 9,538
Sanjiv M. Patel............................................. 9,538 9,538
Nagaraja Patil & Shantha Patil JTROS........................ 9,538 9,538
Gerald Richmond & Amy Richmond JT TEN....................... 9,538 9,538
John F. Scalo & Carole M. Scalo JT TEN...................... 9,538 9,538
Douglas C. Schwarzwaelder................................... 9,538 9,538
Robert Silverman............................................ 9,538 9,538
Sirhc Holdings Limited...................................... 9,538 9,538
Cheryl R. Sivak & Gary E. Sivak JT TEN...................... 9,538 9,538
Melvin Spielman............................................. 9,538 9,538
Patrick Sutton.............................................. 9,538 9,538
Glen Tachibana.............................................. 9,538 9,538
George L. Thompson.......................................... 9,538 9,538
John Joos Vandewalle........................................ 9,538 9,538
Richard Campanella.......................................... 12,497 9,240
May Shubash................................................. 8,895 8,895
Ora Zabloski(30)............................................ 28,895 8,895
Anders Carlegren............................................ 8,257 8,257
Sam E. Todywala & Lyla Todywala JT TEN...................... 8,257 8,257
Wexford Securities CF Richard Campanella IRA................ 8,257 8,257
Craig D. Leppla............................................. 8,050 8,050
Thomas D'Avanzo & Marie D'Avanzo JTROS...................... 7,631 7,631
Charles L. Wisseman III..................................... 7,631 7,631
</TABLE>
71
<PAGE> 74
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
BENEFICIALLY SHARES
OWNED PRIOR TO OFFERED
NAME OFFERING HEREBY
---- ---------------- ---------
<S> <C> <C>
Salvatore Trupiano.......................................... 7,103 7,103
Sheldon Misher.............................................. 6,750 6,750
Brian Cambier(6)............................................ 6,494 6,494
R. Michael Foster(6)........................................ 6,494 6,494
Duane Travis(6)............................................. 6,494 6,494
Michael Appelbaum & Fran Appelbaum JT TEN................... 5,723 5,723
Samuel M. Dell, III & Geraldine M. Dell JT TEN.............. 5,723 5,723
Timothy W. Hartman.......................................... 5,723 5,723
Edward L. Parrish........................................... 5,723 5,723
Manu Kalia.................................................. 5,150 5,150
Thomas J. Keegan............................................ 4,960 4,960
Zachary Malone.............................................. 4,931 4,931
Bette Jordan................................................ 4,769 4,769
Susan Hoffman............................................... 4,632 4,632
Kensington Partners II, L.P. ............................... 4,577 4,577
Eugene Mascarenhas.......................................... 4,448 4,448
M. Frank & Barbara J. Shrager JTROS......................... 4,375 4,375
Alan Ferraro................................................ 4,129 4,129
Edward M. Gaines & Marsha Gaines JT TEN..................... 3,817 3,817
Kenneth E. Higgins, Jr. .................................... 3,817 3,817
Eric Erdinch Ozada.......................................... 3,817 3,817
Brian Coventry.............................................. 3,250 3,250
Jennifer Bacus(7)........................................... 3,247 3,247
Jason Beers(7).............................................. 3,247 3,247
Joslyn Bush(6).............................................. 3,247 3,247
Gayle Morence(6)............................................ 3,247 3,247
Adrian Namou(6)............................................. 3,247 3,247
Chadwick Stayton(6)......................................... 3,247 3,247
Peter Weinbach.............................................. 2,670 2,670
Katelyn LoBue............................................... 2,350 2,350
Marlene Layne............................................... 2,130 2,130
Malcolm Robins(6)........................................... 2,077 2,077
Canaccord Capital Corporation ITF Kyle B.A. Scott
RRSP(30).................................................. 47,014 2,014
Karen Kelly Dacey........................................... 2,013 2,013
Cassandra R. Lim............................................ 2,013 2,013
Thomas Waye & Vanessa Waye JT TEN........................... 1,907 1,907
Linda Easterwood............................................ 1,956 1,956
Joseph Defini............................................... 1,587 1,587
Jeanine Ianazzi............................................. 1,587 1,587
Diana O'Toole............................................... 1,587 1,587
Nicole Swiatek.............................................. 1,587 1,587
Lorraine Verdino............................................ 1,587 1,587
Joseph J. Pallotta, Jr. .................................... 1,432 1,432
Jaimee Stecker.............................................. 1,254 1,254
Christopher Priddy(32)...................................... 1,000 1,000
Joseph Anzalone............................................. 983 983
Evelyn Apploff.............................................. 983 983
Else Falk................................................... 983 983
Richard C. Perreira......................................... 983 983
Dennis Fulton............................................... 950 950
James Fulton................................................ 950 950
Lindy Sin................................................... 920 920
Mark Danieli................................................ 855 855
Alvin Shrager, Deceased..................................... 853 853
</TABLE>
72
<PAGE> 75
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
BENEFICIALLY SHARES
OWNED PRIOR TO OFFERED
NAME OFFERING HEREBY
---- ---------------- ---------
<S> <C> <C>
Audrey Jiminez.............................................. 542 542
Thomas Waye................................................. 2,407 500
Peter Latour................................................ 437 437
Robert Beuret............................................... 108 108
</TABLE>
-------------------------
(1) Glen C. Holmes, is a current employee and one of our directors. He
previously served as our President, Chief Operating Officer. Mr. Holmes has
control over The Holmes Trust.
(2) Pequot Capital Management, Inc. manages the funds noted which own varying
amounts of our securities. Gerald A. Poch and James P. McNiel, each of whom
serves as directors, are a Managing Director and a Senior Vice President of
Pequot Capital Management, Inc., respectively. Pequot Capital Management,
Inc., which beneficially owns more than 5% of our common stock, and is one
of our largest stockholders, has agreed to pay Mr. Taylor, our Chief
Executive Officer and President, a signing bonus in connection with his
employment with us, in the amount of $650,000, to be paid in two equal
installments on each of January 1, 2000 and April 1, 2000. From September
2000 to November 2000, Mr. Taylor was a venture operating partner with
Pequot Capital Management, Inc.
(3) On February 11, 2000, we settled a lawsuit filed against us by SmallCaps
OnLine Group, LLC, seeking to recover fees we allegedly owed SmallCaps for
advisory and investor relations services. As part of the settlement we paid
SmallCaps $5.0 million in March 2000 and issued to SmallCaps warrants to
purchase an aggregate of 3,000,000 shares of our common stock at exercise
prices ranging from $8.50 to $22.50 per share, subject to anti-dilution
protection. Since the issuance of these warrants, their exercise prices
have been adjusted and now range from $8.33 to $22.05 per share and these
warrants currently entitle the holder to acquire 3,061,379 shares of our
common stock.
(4) Microsoft Corporation is one of our largest software manufacturers. We have
entered into a strategic partnership with Microsoft to develop a terminal
services certification lab.
(5) Michael S. Falk is one of our directors, and is Chariman and Chief
Executive Officer of Commonwealth Associates, L.P., one of our principal
stockholders. Mr. Falk also has control over the Michael S. Falk IRA.
(6) A current employee.
(7) William R. Botti, who serves as our Senior Vice President Professional
Services West, has control over the William and Janet Botti Living Trust
Dated 3/26/98.
(8) Mr. Priddy previously served as one of our directors.
(7) A prior employee.
(9) Mr. Silverman is our Senior Vice President, Professional Services East.
(10) Timothy Flynn, one of our directors, is the sole shareholder and President
of Flynn Investment Corporation.
(11) Mr. Fung serves as the President and Chief Operating Officer of our
Canadian Operations.
(12) Mr. Harvey, currently an employee, previously served as our Senior Vice
President, U.S. Sales.
(13) Mr. Chell formerly served as our Chief Executive Officer and as a director.
(14) Mr. Pasea serves as the President and Managing Director of our European
Operations.
(15) C.E. Unterberg Towbin Capital Partners I, L.P., is an affiliate of C.E.
Unterberg Towbin, one of the underwriters in our recent public offering of
common stock.
(16) Mr. Geller is one of our directors.
(17) Until November 2000, Mr. Kilambi served as our Executive Vice President and
Chief Financial Officer and as a director. He is currently an employee of
the Company, and will become a non-employee consultant to the Company
effective January 1, 2001.
(18) CPQ Holdings is a party to a Master Lease Agreement with us pursuant to
which CPQ Holdings has extended us a lease line of credit.
73
<PAGE> 76
(19) Foothill Capital Corporation is a party to a Loan and Security Agreement
with us pursuant to which Foothill Capital has extended us a line of
credit. Foothill Capital Corporation is also a party to a loan and security
agreement with our UK subsidiaries pursuant to which it has extend us,
through our subsidiaries, a line of credit.
(20) Mr. Romano previously served as our Executive Vice President, Special
Projects. He is no longer employed by us.
(21) Sicola, Martin, Koons & Frank, Inc. previously served as our public
relations firm.
(22) Lisa Falk-Ross is the sister of Michael Falk, one of our directors.
(23) Mr. Arnett previously served as the Chief Operating Officer of our Canadian
operations, however, is no longer employed by us.
(24) EMC(2) Corporation is a party to a Lease Agreement with us pursuant to
which CPQ Holdings has extended us a line of credit.
(25) TBCC Funding Trust II is an affiliate of Transamerica Bank which currently
provides us with equipment financing.
(26) In March 1999, FutureLink Distribution Corp., our predecessor in interest,
entered into a software reseller agreement with Net Perceptions, Inc.
(27) Annie Falk is the wife of Michael Falk, one of our directors.
(28) The Charles Schwab FutureLink Corporation 401(k) Employee Retirement Plan
is an employee benefit plan for the benefit of our employees. We are
permitted, but not required to make matching contributions to the Plan. In
August 2000 we issued 19,612 shares of our common stock as matching
contributions under the Plan.
(29) Mr. Evans previously served as Vice President of Business Practices of our
Canadian operations; however, he is no longer employed by us.
(30) Ms. Zabloski previously served as Vice President of Human Resources;
however, she is no longer employed by us.
(31) Kyle Scott is a consultant to the Company and is the former general counsel
and secretary of the Company.
(32) Mr. Priddy is the son of Robert Priddy, a former director.
74
<PAGE> 77
PLAN OF DISTRIBUTION
We are registering the shares of common stock offered for sale by this
prospectus on behalf of the selling stockholders. As used in this section,
"selling stockholders" includes donees, pledgees, distributees, transferees or
other successors-in-interest, including, without limitation, their respective
affiliates and limited or general partners, all of which are referred to as a
group below as transferees, or certain counterparties to derivative transactions
with the selling stockholders or transferees. The selling stockholders will act
independently of us in making decisions with respect to the timing, manner and
size of each sale. We will pay all costs, expenses and fees in connection with
the registration of the shares. The selling stockholders will pay all brokerage
commissions, underwriting discounts, commissions, transfer taxes and other
similar selling expenses, if any, associated with the sale of the shares of
common stock by them.
Shares of common stock may be sold by the selling stockholders from time to
time in one or more types of transactions (which may include block transactions)
on Nasdaq or on any other market on which our common stock may from time to time
be trading, in the over-the-counter market, in privately-negotiated
transactions, through put or call options transactions relating to the shares,
through short sales of such shares, or a combination of such methods of sale, at
market prices prevailing at the time of sale, fixed prices, varying prices
determined at the time of sale or at negotiated prices. The selling stockholders
will have the sole discretion not to accept any purchase offer or make any sale
of shares if they deem the purchase price to be unsatisfactory at any particular
time. Such transactions may or may not involve brokers or dealers. To the best
of our knowledge, none of the selling stockholders have entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of shares of common stock offered by this prospectus; however, the selling
stockholders may enter into agreements, understandings or arrangements with an
underwriter or broker-dealer regarding the sale of their shares in the future.
The selling stockholders may effect such transactions by selling shares of
common stock directly to purchasers or to or through broker-dealers, which may
act as agents or principals, or other agents. Such broker-dealers or other
agents may receive compensation in the form of discounts, concessions, or
commissions from the selling stockholders and/or the purchasers of shares of
common stock for whom such broker-dealers or other agents may act as agents or
to whom they sell as principal, or both (which compensation as to a particular
broker-dealer or other agent might be in excess of customary commissions).
Market makers and block purchasers purchasing the shares will do so for their
own account and at their own risk. It is possible that a selling stockholder
will attempt to sell shares of common stock in block transactions to market
makers or other purchasers at a price per share which may be below the then
market price. There can be no assurance that all or any part of the shares
offered hereby will be sold by the selling stockholders.
The selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions with respect to the shares. In
connection with these transactions, broker-dealers or other financial
institutions may engage in short sales of the shares in the course of hedging
the positions they assume with the selling stockholders. The selling
stockholders may also sell the shares short and redeliver the shares to close
out the short positions. The selling stockholders may also enter into option or
other transactions with broker-dealers or other financial institutions which
require the delivery to the broker-dealer or other financial institutions of the
shares. The selling stockholders may also loan or pledge the shares to a
financial institution or a broker-dealer and the financial institution or the
broker-dealer may sell the shares loaned or upon a default the financial
institution or the broker-dealer may effect sales of the pledged shares.
The selling stockholders and any brokers, dealers or agents that
participate in connection with the sale of shares of common stock might be
deemed to be "underwriters" within the meaning of the Securities Act of 1933,
and any commissions received by such brokers, dealers or agents and any profit
on the resale of the shares sold by them while acting as principals might be
deemed to be underwriting discounts or
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commissions under the Securities Act. We have agreed to indemnify some of the
selling stockholders against certain liabilities, including liabilities arising
under the Securities Act. The selling stockholders may agree to indemnify any
agent, dealer, broker-dealer or underwriter that participates in transactions
involving sales of the shares of common stock offered pursuant to this
prospectus against certain liabilities, including liabilities arising under the
Securities Act.
Because the selling stockholders may be deemed to be "underwriters" within
the meaning of the Securities Act, the selling stockholders will be subject to
the prospectus delivery requirements of the Securities Act and the rules
promulgated thereunder and they may be subject to certain statutory liabilities
under the Securities Act, including, but not limited to, Sections 11, 12 and 17
of the Securities Act and Rule 10b-5 under the Securities Exchange Act. In
addition, the selling stockholders and any other person participating in the
offering will be subject to applicable provisions of the Securities Exchange Act
and the rules and regulations thereunder, including Regulation M under the
Securities Exchange Act, which may limit the timing of purchases and sales.
These restrictions may affect the marketability of the common stock and the
ability of any person to engage in market-making activities with respect to the
common stock.
Any shares of common stock covered by this prospectus which qualify for
sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144
rather than under the terms of this prospectus. In addition, subject to
applicable state and foreign laws, the selling stockholders may sell their
common stock outside the United States pursuant to Rules 903 and 904 of
Regulation S under the Securities Act.
To comply with the securities laws of certain jurisdictions, the shares of
common stock offered by this prospectus may need to be offered or sold only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions, the shares of common stock may not be offered or sold unless they
have been registered or qualified for sale or an exemption is available and
complied with.
If a selling stockholder notifies us that any material arrangement has been
entered into with a broker-dealer for the sale of shares of common stock through
a block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker, dealer or underwriter, we will file a supplement to
this prospectus, if required, pursuant to Rule 424(b) under the Securities Act.
In addition, to the extent required, we will amend or supplement this prospectus
to disclose other material arrangements regarding the plan of distribution.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 300 million shares of common
stock, par value $0.0001 per share, and 20 million shares of preferred stock, no
par value.
The following is a summary of certain provisions of our common stock,
preferred stock, certificate of incorporation and bylaws. Copies of our articles
and bylaws are available from us upon request.
COMMON STOCK
As of December 4, 2000, there were 68,104,791 shares of common stock
outstanding, held by 732 shareholders of record. All outstanding shares of
common stock are, and the common stock to be issued in this offering will be,
fully paid and nonassessable.
Each share of our common stock has identical rights and privileges in every
respect. The holders of our common stock are entitled to vote upon all matters
submitted to a vote of our shareholders and are entitled to one vote for each
share of common stock held. There are no cumulative voting rights.
The holders of our common stock are entitled to share equally in dividends
and other distributions that our board of directors may declare from time to
time out of funds legally available for that purpose, if any, after the
satisfaction of any prior rights and preferences of any outstanding preferred
stock.
If we liquidate, dissolve or wind up, the holders of shares of common stock
will be entitled to share ratably in the distribution of all of our assets
remaining available for distribution after satisfaction of all our liabilities
and the payment of the liquidation preference of any outstanding preferred
stock.
The holders of our common stock have no preemptive or other subscription
rights to purchase shares of our stock, nor are they entitled to the benefits of
any redemption or sinking fund provisions.
PREFERRED STOCK
As of December 4, 2000, there were 1,428,571 shares of Series A preferred
stock outstanding, all held by Microsoft Corporation. In addition, we granted to
Microsoft Corporation a warrant to purchase 1,142,857 shares of Series A
preferred stock at a purchase price of $7.00 per share. The shares of
outstanding Series A preferred stock and the warrant to purchase additional
shares of Series A preferred stock are each subject to provisions which provide
anti-dilution protection. Each share of Series A preferred stock is initially
convertible into 1 share of common stock. Additionally, each share of Series A
preferred stock is entitled to a preferential distribution on liquidation of the
greater of $7.00 per share or their pro rata, as if converted into common stock,
value of the assets to be distributed, a cumulative preference on dividends of
$0.56 per annum and certain redemption rights. Both of these preferential
amounts are paid prior to any payment to the holders of common stock. The Series
A preferred stock is entitled to vote on all matters presented to the holders of
common stock as if the Series A preferred stock were converted into common
stock. Additionally, certain actions which impact the rights of the holders of
Series A preferred stock, require a 2/3 approval of all holders of Series A
preferred stock voting as a class.
Our board of directors has the authority to issue an additional 17,428,572
shares of preferred stock in one or more series, and fix for each series, the
designation of, and number of shares to be included in, each such series. Our
board of directors is also authorized to set the powers, privileges,
preferences, and relative participating, optional or other rights, if any, of
the shares of each such series and the qualifications, limitations or
restrictions of the shares of each such series.
Unless our board of directors provides otherwise, the shares of all series
of preferred stock will rank on a parity with respect to the payment of
dividends and to the distribution of assets upon liquidation. Any issuance by us
of shares of our preferred stock may have the effect of delaying, deferring or
preventing a change of our control or an unsolicited acquisition proposal. The
issuance of preferred stock also could
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decrease the amount of earnings and assets available for distribution to the
holders of common stock or could adversely affect the rights and powers,
including voting rights, of the holders of common stock.
REGISTRATION RIGHTS
The holders of an aggregate of 62,097,845 shares of common stock that are
either outstanding or issuable upon the exercise of warrants, or the exchange of
outstanding shares of one of our subsidiaries, or their transferees or the
conversion of other convertible securities are entitled to certain rights with
respect to the registration of such shares under the Securities Act. This
aggregate number of shares of common stock includes the shares of common stock
offered for sale by this prospectus.
Under the terms of various subscription agreements, we agreed to file a
registration statement by September 7, 1999, covering securities issued in May
1999 to Commonwealth Associates, L.P. and various other investors, and to use
our best efforts to cause such registration statement to become effective by
November 3, 1999. As of December 4, 2000, 16,407,963 shares of common stock and
234,533 shares of common stock issuable upon exercise of outstanding warrants
were subject to those rights. The effective registration statement of which this
prospectus is a part satisfies our obligation with respect to these shares.
Under the terms of certain other subscription agreements, we agreed to file
a registration statement by April 1, 2000 covering securities issued in July
1999 to Commonwealth Associates, L.P. and various other investors, and to use
our best efforts to cause such registration statement to become effective as
soon as practicable thereafter. As of December 4, 2000, 2,723,537 shares of
common stock and 3,219,770 shares of common stock issuable upon exercise of
warrants were entitled to those rights. The effective registration statement of
which this prospectus is a part satisfies our obligations with respect to these
shares.
The holders of 9,806,480 shares of common stock and warrants to purchase
452,916 shares of common stock issued to these investors in our October 1999 and
April 2000 private placements may make up to two demands after April 15, 2000
that we file a registration statement covering at least 3% of our outstanding
shares of common stock held by them, or the number of shares of common stock
that have a combined market value of at least $5.0 million. The holders of
3,450,174 shares of common stock and warrants to purchase 953,263 shares of
common stock acquired in October 1999 have the same registration rights as
Pequot Private Equity Fund II, L.P. and the other investors. The effective
registration statement of which this prospectus is a part satisfies our
obligations with respect to these shares.
At the same time we granted registration rights to Pequot Private Equity
Fund II, L.P. and other investors, we granted registration rights under the same
terms to the Holmes Trust and Glen C. Holmes, in respect of 8,400,000 securities
held by or currently issuable to them. The effective registration statement of
which this prospectus is a part satisfies our obligations with respect to these
shares.
We agreed to register 1,181,816 shares of common stock that the selling
stockholders of CN Networks, Inc. hold by November 5, 2000. The effective
registration statement of which this prospectus is a part satisfies our
obligations with respect to these shares.
We agreed to register 1,738,555 shares of our common stock that the selling
stockholders of Async Technologies, Inc. hold by November 26, 2000. The
effective registration statement of which this prospectus is a part satisfies
our obligations with respect to these shares.
We also agreed to register 1,026,316 shares of common stock that the
selling stockholders of Vertical Software, Inc. hold by January 31, 2001. The
effective registration statement of which this prospectus is a part satisfies
our obligations with respect to these shares.
We also agreed to register 1,975,170 shares of common stock that the
selling stockholders of MicroLAN Systems, Inc., doing business as Madison
Technology Group, Madison Consulting Resources, Inc., and Madison Consulting
Resources NJ, Inc. hold by February 28, 2001. The effective registration
statement of which this prospectus is a part satisfies our obligations with
respect to these shares.
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We granted registration rights to SmallCaps OnLine Group LLC with respect
to 3,084,494 shares of our common stock underlying warrants we originally issued
to SmallCaps. SmallCaps and its assignees are entitled to register all or a
portion of these shares to the same extent we register shares that Pequot
Private Investment Fund II, L.P., or Commonwealth Associates, L.P. hold upon
exercise of registration rights we previously granted to such limited
partnerships. The effective registration statement of which this prospectus is a
part satisfies our obligations with respect to these shares.
We agreed to register 2,199,965 shares of common stock issuable upon the
exchange of exchangeable shares issued by one of our Canadian subsidiaries to
the selling stockholders of Charon Systems Inc. by December 19, 2000. The
effective registration statement of which this prospectus is a part satisfies
our obligations with respect to these shares.
We granted Microsoft Corporation certain registration rights with respect
to the common stock issuable upon conversion of the 1,428,571 shares of Series A
preferred stock and upon the conversion of the shares of Series A preferred
stock issuable upon the exercise of a warrant to acquire an additional 1,142,857
shares of Series A convertible preferred stock. The effective registration
statement of which this prospectus is a part satisfies our obligations with
respect to these shares.
We granted Foothill Capital Corporation certain registration rights with
respect to 100,000 shares of common stock issuable upon the exercise of a
warrant to acquire common stock that we issued to Foothill Capital. The
effective registration statement of which this prospectus is a part satisfies
our obligations with respect to these shares.
WARRANTS
In December 2000, in connection with entering into a credit facility with
Foothill Capital Corporation, we granted Foothill Capital a warrant to purchase
100,000 shares of our common stock at an exercise price of $8.40 per share with
related registration rights.
In addition to the warrants that we granted to Microsoft Corporation and
Foothill Capital Corporation which are discussed above, as of December 4, 2000,
there were warrants outstanding to purchase 8,035,230 shares of our common
stock. The warrants have exercise prices ranging from $1.05 per share to $24.38
per share. The weighted average exercise price of all currently outstanding
warrants is $11.04 per share. The warrants have various expiration dates,
ranging from July 2001 to April 2006. Most outstanding warrants have
anti-dilution protection, and most provide for registration rights.
LISTING
We are listed for quotation in the Nasdaq National Market under the symbol
"FTRL."
TRANSFER AGENT AND REGISTRATION
American Stock Transfer & Trust, New York is the transfer agent and
registrar for our common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of a substantial amount of our common stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of our common stock. A reduction in the market price of our
common stock could lower the value of our common stock or other securities and
could impair our future ability to raise capital through the sale of equity
securities.
The following is a discussion of when and how most of our stock may become
publicly tradable in the future. Except as otherwise noted, all of the following
information is as of December 4, 2000.
OUTSTANDING COMMON STOCK
As of December 4, 2000, we had 68,104,791 shares of common stock issued and
outstanding, of which approximately 48.1 million shares are freely trading or
eligible to trade. The remaining 20.0 million shares are considered "restricted
securities" under the Securities Act; however, substantially all of these shares
are being registered for resale pursuant to the effective registration statement
of which this prospectus is a part. Of the 68,104,791 shares outstanding,
shares are subject to lock-up agreements which will be released in
stages as set forth in the table below:
<TABLE>
<CAPTION>
DATES NUMBER OF SHARES
----- ----------------
<S> <C>
December 26, 2000...........................................
January 19, 2001............................................ 342,106
February 28, 2001........................................... 987,585
January 19, 2002............................................ 342,105
February 28, 2002........................................... 493,792
January 19, 2003............................................ 342,105
February 28, 2003........................................... 493,793
</TABLE>
COMMON STOCK ISSUABLE UPON EXCHANGE OF SUBSIDIARY SHARES
Pursuant to the terms of the acquisition agreement for Charon Systems Inc.,
2.2 million shares of our common stock may be issued upon the exchange of shares
of our foreign subsidiary. These shares of common stock are "restricted
securities" under the Securities Act and are contractually restricted. They
represent a portion of the consideration we paid for such acquisition. The
shares are released from this contractual restriction in four stages from
December 2000 to May 2003. Of these shares, approximately 440,000 have been
released from contractual restrictions; approximately 550,000 shares will be
released from contractual restrictions on each of May 1, 2001 and May 1, 2002,
and the balance will be released from contractual restrictions on May 1, 2003.
We are required to register these shares for resale as they are released from
this restriction or until they are eligible for resale under Rule 144 whichever
occurs first. Therefore, immediately upon release, all the shares will be freely
trading or eligible to trade.
WARRANTS FOR COMMON STOCK
We have outstanding warrants entitling holders to purchase 8.1 million
shares of our common stock at exercise prices between $1.05 and $24.38 per
share, with a weighted average exercise price of $11.48 per share. Substantially
all of the shares of common stock underlying the warrants, are offered for
resale under this prospectus.
The common stock underlying the common stock warrants offered for resale
under this prospectus may not be sold until the warrants are exercised and the
underlying shares are issued. The shares of
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common stock issued pursuant to the exercise of the warrants are considered
"restricted securities" under the Securities Act. We do not anticipate that the
warrant holders will exercise their warrants unless and until the market price
of our common stock exceeds the exercise price of their respective warrants.
Most of these warrants have exercise prices above the trading price of our
common stock on December 4, 2000. However, the exercise price for most of the
warrants may be reduced under certain circumstances based upon various
anti-dilution protections applicable to most of the warrants.
The following table sets forth the distribution of the current exercise
prices for the warrants for the purchase of the common stock offered for sale
pursuant to this prospectus. The exercise price for most of the warrants may be
reduced under certain circumstances based upon various antidilution protections
applicable to most of the warrants.
<TABLE>
<CAPTION>
TOTAL
NUMBER OF PROCEEDS
EXERCISE PRICE SHARES TO COMPANY
-------------- --------- -----------
<S> <C> <C>
Less than $2.50............................................. 234,533 $ 253,336
$2.50 to $4.99.............................................. 20,000 $ 80,000
$5.00 to $7.49.............................................. 5,355 $ 35,986
$7.50 to $9.99.............................................. 5,271,887 $44,213,251
$10.00 or more.............................................. 2,588,455 $48,698,298
--------- -----------
Total............................................. 8,120,230 $93,280,871
========= ===========
</TABLE>
Only 15,000 shares of common stock underlying other warrants, which are
exercisable at $7.00 per share, do not have registration rights. Upon issuance,
they will be considered "restricted securities" under the Securities Act and may
only be sold pursuant to an exemption from registration, such as Rule 144.
COMMON STOCK ISSUABLE UPON CONVERSION OF SERIES A PREFERRED
There are 2,571,428 shares of Series A preferred stock which are either
outstanding or are issuable upon the exercise of warrants for the purchase of
Series A preferred stock shares. The 2.6 million shares of our common stock
issuable upon conversion of this preferred stock are offered for resale under
this prospectus.
OPTIONS
We have outstanding options to purchase 12.1 million shares of common stock
pursuant to employee benefit plans. However, these options may not be exercised
until vested. Options to purchase 3.1 million shares are currently exercisable.
The remaining options will vest and become exercisable from time to time prior
to December 2005. All of the shares of our common stock issuable upon exercise
of these options are registered, or will be registered, under the Securities Act
and, upon exercise, will be freely tradable, subject to certain limitations
under Rule 144 for our affiliates.
RULE 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted securities for at least one year, including
persons who may be deemed our "affiliates", would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the number of shares of common stock then outstanding or the average weekly
trading volume of the common stock on all exchanges and/or reported through the
automated quotation system of a registered securities association during the
four calendar weeks immediately preceding the SEC filing with respect to such
sale. Manner of sale provisions, notice requirements and the availability of
current public information about us also apply to these sales. These limitations
apply to both restricted and unrestricted shares held by persons who are our
affiliates. If a person is not deemed to have been our affiliate at any time
during the 90 days immediately preceding the sale, he or she may sell his or her
restricted shares under Rule 144(k) without regard to the limitations described
above if at least two years have elapsed since the later of the date the shares
were acquired from us or from our affiliate. This paragraph summarizes Rule 144
and is not intended to be a complete description of it.
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LEGAL MATTERS
Paul, Hastings, Janofsky & Walker LLP, Costa Mesa, California, will pass
upon the validity of the shares of common stock being registered under this
prospectus for us.
EXPERTS
The consolidated financial statements of FutureLink Corp. as of December
31, 1998 and 1999 and for each of the two years in the period ended December 31,
1999, appearing in this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere in this prospectus, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
The financial statements of Vertical Software, Inc. as of December 31,
1997, 1998 and 1999 and for each of the three years in the period ended December
31, 1999, appearing in this prospectus and registration statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere in this prospectus, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
The financial statements of Madison Consulting Resources, Inc. and MicroLAN
Systems, Inc. "DBA" Madison Technology Group as of December 31, 1998 and 1999
and for each of the two years in the period ended December 31, 1999 and Madison
Consulting Resources NJ, Inc. as of December 31, 1998, its initial year of
operations, appearing in this prospectus have been audited by Joel E. Sammet &
Co., independent auditors, as set forth in their reports with respect to such
audits appearing elsewhere in this prospectus, and are included in reliance upon
such reports given on the authority of such firm as experts in accounting and
auditing.
The financial statements of Executive LAN Management, Inc., dba Micro
Visions, as of December 31, 1997 and 1998 and for each of the two years in the
period ended December 31, 1998 and at September 30, 1999 and for the nine months
ended September 30, 1999, appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere in this prospectus, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The audited financial statements of CN Networks, Inc. included in this
registration statement as at December 31, 1997 and 1998 and for the years then
ended have been audited by Moreland & Davis, C.P.A.s, independent auditors, as
indicated in their report with respect to such audit, and are included in this
prospectus in reliance upon the authority of said firm as experts in accounting
and auditing.
The audited combined financial statements of Async Technologies, Inc. and
Async Technical Institute, Inc. included in this registration statement as at
December 31, 1997 and 1998 and for the years then ended have been audited by M.
Jevahirian & Co., independent auditors, as indicated in their report with
respect to such audit, and are included in this prospectus in reliance upon the
authority of said firm as experts in accounting and auditing.
The financial statements of KNS Holdings Limited as of February 28, 1998
and 1999 and for each of the two years in the period ended February 28, 1999,
appearing in this prospectus have been audited by Ernst & Young, independent
auditors and registered auditor, as set forth in their report thereon appearing
elsewhere in this prospectus, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2, of which this prospectus is a part, under the Securities
Act with respect to the shares of common stock being registered by this
prospectus. This prospectus does not contain all of the information included in
the registration statement. Statements contained in this prospectus concerning
the provisions of any document are not necessarily complete. You should refer to
the copy of these documents filed as an exhibit to the registration statement or
otherwise filed by us with the Securities and Exchange Commission for a more
complete understanding of the matter involved. Each statement concerning these
documents is qualified in its entirety by such reference.
We must comply with the informational requirements of the Securities
Exchange Act of 1934. In accordance with the Exchange Act, we file reports,
proxy statements and other information with the Securities and Exchange
Commission. The registration statement, including the attached exhibits and
schedules, may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the SEC located at Seven World Trade Center, New York, New York
10048, and 500 West Madison Street, Chicago, Illinois 60661. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information
about the public reference rooms. The Securities and Exchange Commission
maintains a website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission. Copies of the registration statement and the
reports, proxy and information statements and other information that we file
with the Securities and Exchange Commission may be obtained from the Securities
and Exchange Commission's Internet address at http://www.sec.gov.
You may request a copy of these documents, at no cost, by writing or
telephoning us at the following address:
FutureLink Corp.
2 South Pointe Drive
Lake Forest, CA 92630
(949) 672-3000
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FINANCIAL STATEMENTS OF FUTURELINK CORP.
December 31, 1998 and 1999................................ F-3
Report of Independent Auditors......................... F-4
Consolidated Balance Sheets............................ F-5
Consolidated Statements of Operations.................. F-6
Consolidated Statements of Stockholders' Equity........ F-7
Consolidated Statements of Cash Flows.................. F-8
Notes to Consolidated Financial Statements............. F-9
September 30, 1999 and 2000............................... F-31
Condensed Consolidated Balance Sheets.................. F-32
Unaudited Condensed Consolidated Statements of
Operations............................................ F-33
Unaudited Condensed Consolidated Statements of Cash
Flows................................................. F-34
Notes to Unaudited Condensed Consolidated Financial
Statements............................................ F-35
VERTICAL SOFTWARE, INC.
December 31, 1997, 1998 and 1999.......................... F-43
Report of Independent Auditors......................... F-44
Balance Sheets......................................... F-45
Statements of Operations............................... F-46
Statements of Stockholders' Equity..................... F-47
Statements of Cash Flows............................... F-48
Notes to Financial Statements.......................... F-49
MICROLAN SYSTEMS, INC. DBA MADISON TECHNOLOGY GROUP
December 31, 1998 and 1999................................ F-54
Independent Auditor's Report........................... F-55
Balance Sheets......................................... F-56
Statement of Operations................................ F-57
Statement of Stockholders' Equity...................... F-58
Statement of Cash Flows................................ F-59
Notes to Financial Statements.......................... F-60
MADISON CONSULTING RESOURCES, INC.
December 31, 1998 and 1999................................ F-65
Independent Auditor's Report........................... F-66
Balance Sheets......................................... F-67
Statements of Income................................... F-68
Statement of Shareholders' Equity...................... F-69
Statement of Cash Flows................................ F-70
Notes to Financial Statements.......................... F-71
MADISON CONSULTING RESOURCES NJ, INC.
December 31, 1998 and 1999................................ F-74
Independent Auditor's Report........................... F-75
Balance Sheets......................................... F-76
Statements of Income................................... F-77
Statement of Shareholders' Equity...................... F-78
Statement of Cash Flows................................ F-79
Notes to Financial Statements.......................... F-80
</TABLE>
F-1
<PAGE> 87
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
EXECUTIVE LAN MANAGEMENT, INC. DBA MICRO VISIONS
December 31, 1997 and 1998, and September 30, 1998 and
1999................................................... F-82
Report of Independent Auditors......................... F-83
Balance Sheets......................................... F-84
Statements of Operations............................... F-85
Statements of Shareholders' Equity..................... F-86
Statements of Cash Flows............................... F-87
Notes to Financial Statements.......................... F-88
CN NETWORKS, INC. DBA COMPUTER NETWORKS
December 31, 1997 and 1998................................ F-94
Report of Independent Auditors......................... F-95
Balance Sheets......................................... F-96
Statements of Income................................... F-97
Statements of Stockholders' Equity..................... F-97
Statements of Cash Flows............................... F-98
Notes to Financial Statements.......................... F-99
September 30, 1998 and 1999
Report of Independent Auditors......................... F-103
Balance Sheets......................................... F-104
Statements of Income and Retained Earnings............. F-105
Statements of Cash Flows............................... F-106
Notes to Financial Statements.......................... F-107
ASYNC TECHNOLOGIES, INC. AND ASYNC TECHNICAL INSTITUTE,
INC.
December 31, 1997 and 1998................................ F-111
Independent Auditors' Report........................... F-112
Combined Balance Sheets................................ F-113
Combined Statements of Operations and Retained
Deficit............................................... F-114
Combined Statements of Cash Flows...................... F-115
Notes to Combined Financial Statements................. F-116
September 30, 1998 and 1999
Report of Independent Public Accountants............... F-119
Combined Balance Sheets................................ F-120
Combined Statements of Operations and Retained
(Deficit) Earnings.................................... F-121
Combined Statements of Cash Flows...................... F-122
Notes to the Combined Financial Statements............. F-123
KNS HOLDINGS LIMITED
February 28, 1998 and 1999, and November 30, 1999......... F-127
Report of the Independent Auditors..................... F-129
Consolidated Profit and Loss Account................... F-130
Consolidated Balance Sheets............................ F-131
Consolidated Statement of Movements in Shareholders'
Funds................................................. F-132
Consolidated Cash Flow Statements...................... F-133
Reconciliation of Net Cash Flow to Movement in Net
Debt.................................................. F-134
Notes to the Accounts.................................. F-135
</TABLE>
F-2
<PAGE> 88
FUTURELINK CORP.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
F-3
<PAGE> 89
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
FutureLink Corp.
We have audited the accompanying consolidated balance sheets of FutureLink
Corp. as of December 31, 1998 and 1999, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
Since the date of completion of our audit of the accompanying consolidated
financial statements and initial issuance of our report thereon dated March 14,
2000, the Company, as discussed in Note 1, has experienced continuing net losses
and significantly increased cash outflows that adversely affect the Company's
current liquidity. Note 1 describes management's plans to address these issues.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of FutureLink
Corp. at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Orange County, California
March 14, 2000,
except for Note 13, as to which the date is
April 29, 2000,
Note 16, as to which the date is
June 29, 2000,
and Note 1, as to which the date is
December 15, 2000
F-4
<PAGE> 90
FUTURELINK CORP
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 7 $ 19,185
Restricted cash............................................. -- 3,099
Accounts receivable, less allowance for doubtful accounts of
$115 and $1,363 in 1998 and 1999, respectively............ 1,532 14,284
Inventory................................................... 22 4,964
Prepaid expenses............................................ 116 536
------- --------
Total current assets.............................. 1,677 42,068
Property and equipment, less accumulated depreciation of
$203 and $2,276 in 1998 and 1999, respectively............ 1,123 10,972
Goodwill and other intangibles, less accumulated
amortization of $668 and $6,033 in 1998 and 1999,
respectively.............................................. 7,846 186,866
Deposits for acquisitions................................... -- 543
Other assets................................................ -- 229
------- --------
Total assets...................................... $10,646 $240,678
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit............................................. $ 819 $ 1,657
Accounts payable and accrued liabilities.................... 3,595 15,811
Settlement payable.......................................... -- 5,000
Current portion of long-term debt........................... -- 8,554
Deferred revenue............................................ -- 1,330
------- --------
Total current liabilities......................... 4,414 32,352
Long-term debt, less current portion........................ 30 4,116
Convertible debentures, net................................. 2,153 874
Deferred taxes.............................................. 1,212 588
------- --------
Total liabilities................................. 7,809 37,930
Commitments and contingencies...............................
Stockholders' equity:
Preferred stock, no par value, 20,000,000 shares
authorized,
no shares issued and outstanding in 1998 and 1999...... -- --
Common stock, $.0001 par value, 300,000,000 shares
authorized,
4,908,072 and 52,743,169 shares issued and outstanding
at December 31, 1998 and 1999, respectively............ 2 7
Common stock issuable; 1,639,850 shares................... 2,600 42,636
Additional paid-in capital................................ 7,662 146,150
Issuable warrants......................................... -- 60,000
Deferred compensation..................................... -- (1,393)
Loan receivable from officer.............................. -- (1,500)
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustment..... (96) (77)
Accumulated deficit....................................... (7,331) (43,075)
------- --------
Total stockholders' equity........................ 2,837 202,748
------- --------
Total liabilities and stockholders' equity........ $10,646 $240,678
======= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 91
FUTURELINK CORP
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
Revenue:
Hardware and software....................................... $ 966 $ 6,748
Service delivery............................................ 1,471 6,852
---------- -----------
2,437 13,600
Expenses:
Cost of hardware and software............................... 880 7,013
Cost of service delivery.................................... 1,548 10,527
Selling, general and administration......................... 3,064 12,611
Goodwill and other intangibles amortization................. 668 4,981
Depreciation and amortization............................... 203 1,709
---------- -----------
6,363 36,841
---------- -----------
Loss from operations........................................ (3,926) (23,241)
Interest expense............................................ 1,333 12,095
Interest income............................................. -- (437)
Equity in loss of investee.................................. 826 --
---------- -----------
Loss before income taxes and extraordinary item............. (6,085) (34,899)
Provision (benefit) for income taxes........................ (205) --
---------- -----------
Loss before extraordinary item.............................. (5,880) (34,899)
Extraordinary item.......................................... -- (845)
---------- -----------
Net loss.................................................... $ (5,880) $ (35,744)
========== ===========
Loss per share -- basic and diluted
Loss before extraordinary item............................ $ (1.86) $ (2.44)
Extraordinary item........................................ -- (0.06)
---------- -----------
Net loss.................................................... $ (1.86) $ (2.50)
========== ===========
Weighted average shares..................................... 3,169,413 14,279,647
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 92
FUTURELINK CORP.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
LOAN ACCUMULATED
COMMON STOCK COMMON ADDITIONAL RECEIVABLE OTHER
------------------- STOCK PAID-IN ISSUABLE DEFERRED FROM COMPREHENSIVE
SHARES AMOUNT ISSUABLE CAPITAL WARRANTS COMPENSATION OFFICER LOSS
---------- ------ -------- ---------- -------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998..... 2,040,700 $1 $ -- $ 1,425 $ -- $ -- $ -- $ --
Issuance of common stock on
acquisitions................ 1,158,000 -- 2,550 15 -- -- -- --
Forgiveness of stockholder
debt........................ -- -- -- 70 -- -- -- --
Issuance of common stock...... 751,163 -- -- 2,963 -- -- -- --
Warrants issued with issuance
of convertible debt......... -- -- -- 563 -- -- -- --
Common stock issued, net...... 133,752 -- -- 763 -- -- -- --
Common stock to be issued upon
conversion of loan.......... -- -- 733 -- -- -- -- --
Issuance of common stock...... 824,457 1 (683) 1,907 -- -- -- --
Financing fees associated with
converted debentures........ -- -- -- (44) -- -- -- --
Foreign currency translation
adjustment.................. -- -- -- -- -- -- -- (96)
Net loss for the year......... -- -- -- -- -- -- -- --
---------- -- ------- -------- ------- ------- ------- -----
BALANCE AT DECEMBER 31, 1998... 4,908,072 2 2,600 7,662 -- -- -- (96)
Exchange of exchange shares... 424 -- (2,550) 2,550 -- -- -- --
Shares issued or issuable for
acquisitions................ 13,542,490 1 42,636 109,568 -- -- -- --
Shares issued for cash........ 9,203,499 1 -- 48,317 -- -- -- --
Shares issued upon conversion
of debt..................... 15,859,796 2 -- 22,496 -- -- -- --
Shares issued for services.... 95,431 -- (50) 525 -- -- -- --
Exercise of warrants.......... 8,648,256 1 -- 300 -- -- -- --
Equity components of
convertible debentures and
warrants.................... -- -- -- 7,290 -- -- -- --
Value of warrants issued with
convertible debentures...... -- -- -- 5,649 -- -- -- --
Value of options and warrants
issued for services......... -- -- -- 923 -- -- -- --
Shares issued under loan
agreement to officer........ 232,829 -- -- 2,000 -- -- (1,500) --
Shares issued upon exercise of
employee stock options...... 252,372 -- -- 1,103 -- -- -- --
Cost of warrants to be issued
on settlement............... -- -- -- (65,000) 60,000 -- -- --
Deferred compensation......... -- -- -- 2,767 -- (2,767) -- --
Amortization of deferred
compensation................ -- -- -- -- -- 1,374 -- --
Foreign currency translation
adjustment.................. -- -- -- -- -- -- -- 19
Net loss for the year......... -- -- -- -- -- -- -- --
---------- -- ------- -------- ------- ------- ------- -----
BALANCE AT DECEMBER 31, 1999... 52,743,169 $7 $42,636 $146,150 $60,000 $(1,393) $(1,500) $ (77)
========== == ======= ======== ======= ======= ======= =====
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
DEFICIT EQUITY LOSS
----------- ------------- -------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1998..... $ (1,451) $ (25) $ --
Issuance of common stock on
acquisitions................ -- 2,565 --
Forgiveness of stockholder
debt........................ -- 70 --
Issuance of common stock...... -- 2,963 --
Warrants issued with issuance
of convertible debt......... -- 563 --
Common stock issued, net...... -- 763 --
Common stock to be issued upon
conversion of loan.......... -- 733 --
Issuance of common stock...... -- 1,225 --
Financing fees associated with
converted debentures........ -- (44) --
Foreign currency translation
adjustment.................. -- (96) (96)
Net loss for the year......... (5,880) (5,880) (5,880)
-------- -------- --------
BALANCE AT DECEMBER 31, 1998... (7,331) 2,837 (5,976)
========
Exchange of exchange shares... -- -- --
Shares issued or issuable for
acquisitions................ -- 152,205 --
Shares issued for cash........ -- 48,318 --
Shares issued upon conversion
of debt..................... -- 22,498 --
Shares issued for services.... -- 475 --
Exercise of warrants.......... -- 301 --
Equity components of
convertible debentures and
warrants.................... -- 7,290 --
Value of warrants issued with
convertible debentures...... -- 5,649 --
Value of options and warrants
issued for services......... -- 923 --
Shares issued under loan
agreement to officer........ -- 500 --
Shares issued upon exercise of
employee stock options...... -- 1,103 --
Cost of warrants to be issued
on settlement............... -- (5,000) --
Deferred compensation......... -- -- --
Amortization of deferred
compensation................ -- 1,374 --
Foreign currency translation
adjustment.................. -- 19 19
Net loss for the year......... (35,744) (35,744) (35,744)
-------- -------- --------
BALANCE AT DECEMBER 31, 1999... $(43,075) $202,748 $(35,725)
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 93
FUTURELINK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(5,880) $(35,744)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 871 6,690
Deferred income taxes....................................... (205) --
Amortization of deferred compensation....................... -- 1,374
Warrants issued with convertible debt....................... -- 5,649
Common stock, warrants and options issued for services...... 2,125 1,898
Non-cash interest expense................................... 1,294 7,290
Loss on sale of assets...................................... 48 --
Change in operating assets and liabilities,
net of effect from business acquisitions:
Accounts receivable....................................... (1,406) 574
Inventory................................................. (22) (2,393)
Prepaid expenses.......................................... (116) (247)
Other assets.............................................. -- (229)
Accounts payable and accrued expenses..................... 2,302 (2,556)
Deferred revenue.......................................... -- 1,330
------- --------
Net cash used in operating activities..................... (989) (16,364)
------- --------
INVESTING ACTIVITIES
Purchases of property and equipment......................... (819) (3,244)
Disposition of assets....................................... 33 --
Business acquisitions, net of cash balances acquired........ (2,019) (28,413)
Deposits for acquisitions................................... (110) (543)
Cash advances to investees.................................. (990) --
Restricted cash............................................. -- (3,099)
Other....................................................... (69) --
------- --------
Net cash used in investing activities..................... (3,974) (35,299)
------- --------
FINANCING ACTIVITIES
Net cash advanced (paid) under lines of credit.............. 819 (119)
Proceeds from issuance of common shares, net................ 681 48,318
Proceeds from exercise of employee stock options............ -- 1,103
Proceeds from exercise of warrants.......................... -- 301
Repayment of capital lease obligations...................... (67) --
Issuance of common shares upon debt conversion, net of
costs..................................................... 2,447 22,498
Repayment of convertible debentures and promissory notes.... -- (1,279)
Other financing fees........................................ 89 --
Advances from stockholders.................................. 1,097 --
------- --------
Net cash provided by financing activities................. 5,066 70,822
------- --------
Effect of currency rate changes............................. (96) 19
------- --------
Increase in cash............................................ 7 19,178
Cash at beginning of period................................. -- 7
------- --------
CASH AT END OF PERIOD....................................... $ 7 $ 19,185
======= ========
NON CASH INVESTING AND FINANCING ACTIVITIES
Business acquisitions:
Assets acquired........................................... $ 8,999 $189,756
Liabilities assumed....................................... 2,934 2,453
Notes payable issued...................................... 436 6,685
Common stock and options issued........................... 3,610 152,205
------- --------
Cash paid for acquisitions.............................. $ 2,019 $ 28,413
======= ========
SmallCaps settlement payable................................ $ -- $ 5,000
Capital lease obligations................................... -- 5,763
Loan to officer for common stock............................ -- 2,000
SUPPLEMENTAL INFORMATION, CASH PAID FOR:
Interest.................................................... $ 38 $ 1,007
Income taxes................................................ 37 --
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 94
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BASIS OF PRESENTATION
THE COMPANY
FutureLink Corp. (the "Company") is a Delaware corporation headquartered in
Irvine, California. The Company provides server-based computing services, and is
an application services provider, or ASP. The Company's services enable software
applications to be deployed, managed, supported and upgraded from centrally
located servers, rather than on individual desktop computers. For server-based
computing customers, the Company installs and integrates software applications
on customers' servers. For our ASP customers, the Company hosts software
applications on servers at data centers, and rents computing services to
customers for a monthly fee. ASP customers connect to facilities over the
Internet, through a dedicated telecommunications line or by wireless connection.
ASP services were introduced in March 1999.
The Company has experienced net losses over the past two years and had an
accumulated deficit of approximately $43.1 million at December 31, 1999. Such
losses are attributable to both cash losses resulting from costs incurred in the
development of the Company's services and infrastructure, interest expense and
non cash amortization charges. The Company expects operating losses to continue
for the foreseeable future as it continues to develop and promote its services.
The Company's future liquidity will depend on its ability to successfully
restructure operations and to reduce operating losses. In October 2000,
consistent with the Company's plan to integrate recently acquired companies and
achieve more efficient operations, the Company closed 6 branch offices and
eliminated an aggregate of 75 positions company-wide through a combination of
reduction in force and attrition. As a result of these actions, the Company
expects to realize annualized cost savings of approximately $12 million by the
end of the fourth quarter of 2000. The Company is continuing to evaluate all
aspects of its operations with a view to reducing operating losses. This may
include: the elimination of certain unprofitable lines of business; further
staff and overhead reductions and the curtailment of further expansion of the
ASP business and infrastructure until such time as product becomes more readily
accepted by the market. The Company is also refocusing its efforts to improve
its margins in the server based computing business. The Company believes that
its available cash, cash equivalents, and available borrowings under its lease
and bank credit facilities may not be sufficient to meet anticipated cash needs
to fund operating losses, working capital, and capital expenditures through
2001, unless the Company is successful in raising additional debt or equity
financing and in continuing to reduce operating losses.
In November 2000, the Company entered into a loan and security agreement
with a financial institution relating to a revolving credit facility for
borrowings up to a maximum of $25 million. The amount the Company may borrow
will vary from time-to-time based on a percentage of eligible accounts
receivable. The credit facility is secured by substantially all the assets of
the Company, and has an initial term of three years. At December 15, 2000 the
maximum amount the Company could borrow under the credit facility was $6.5
million.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
F-9
<PAGE> 95
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company generates revenue from ASP services, information technology
services, outsourcing contract services, and from the resale of computer
hardware and software. Service revenue is recognized when the service is
delivered, or over the term of the applicable contracts. Payments received in
advance, even if non-refundable, are recorded as deferred revenue. ASP
implementation fees are generally paid in advance, and are deferred and
recognized ratably over the term of the ASP service contract, generally two to
five years. Revenue from the resale of computer hardware and software is
recorded upon shipment, or upon installation when required under contract terms.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consisting principally of cash, accounts receivable,
payables, accrued liabilities, and short-term and long-term obligations, and
their carrying values in the accompanying consolidated balance sheets
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.
CONCENTRATION OF CREDIT RISK AND KEY SUPPLIER
The Company sells the majority of its services and products throughout
North America. Sales to the Company's recurring customers are generally made on
an open account while sales to occasional customers may be made on a prepaid
basis. The Company performs periodic credit evaluations of its ongoing customers
and generally does not require collateral. Reserves are maintained for potential
credit losses.
Citrix Systems, Inc. ("Citrix") is one of the Company's key suppliers. The
Company uses Citrix software almost exclusively to connect its customers to
software applications.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of money market accounts and other
short-term investments with a maturity of three months or less when purchased.
INVENTORY
Inventory, consisting of computer hardware and software held for resale, is
recorded at the lower of cost (first in, first out) or market.
SOFTWARE LICENSES
The Company capitalizes the costs associated with the purchase of licenses
for major business process application software used in providing ASP services.
The licenses specify the maximum number of users permitted to utilize the
license in connection with the Company's service. All amounts are
non-refundable,
F-10
<PAGE> 96
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
regardless of the actual number of users assigned a license in connection with
ASP services. The licenses are amortized over the life of the contract.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation and amortization
are provided using the straight-line method over the assets' estimated useful
lives ranging from two to five years. Assets recorded under capital leases are
depreciated over the shorter of their estimated useful lives or the related
lease terms using the straight-line method. This depreciation is included in
depreciation and amortization in the accompanying consolidated financial
statements.
LONG-LIVED ASSETS
The Company follows Financial Accounting Standards Board Statement ("FAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present.
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
recoverability test is performed at the individual entity level based on
undiscounted cash flows. Based upon its analysis, the Company believes that no
impairment of the carrying value of its long-lived assets, inclusive of
goodwill, existed at December 31, 1999. The Company's analysis was based on an
estimate of future undiscounted cash flows using forecasts contained in the
Company's strategic plan. It is at least reasonably possible that the Company's
estimate of future undiscounted cash flows may change during 2000. If the
Company's estimate of future undiscounted cash flows should change or if the
strategic plan is not achieved, future analyses may indicate insufficient future
undiscounted cash flows to recover the carrying value of the Company's
long-lived assets, in which case such assets would be written down to estimated
fair value.
GOODWILL
Goodwill is recorded at cost and is being amortized using the straight-line
method over five years. The recoverability of goodwill is assessed periodically
based on management estimates of undiscounted future operating cash flows from
each of the acquired businesses to which the goodwill relates.
ASSEMBLED WORKFORCE
Assembled workforce represents the valuation placed on the knowledge,
expertise, and contacts of employees and consultants upon acquisition, and is
being amortized using the straight-line method over three years.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign operations are
generally translated into U.S. dollars at current exchange rates. Revenue and
expenses are translated at average exchange rates in effect for the year. The
resulting cumulative translation adjustments have been recorded as a separate
component of consolidated stockholders' equity. Foreign currency transaction
gains and losses, if any, are included in the consolidated net loss.
F-11
<PAGE> 97
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in FAS No. 109, "Accounting for Income Taxes." 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 of
assets and liabilities using enacted tax rates.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations and has adopted the disclosure-only
alternative of FAS No. 123, "Accounting for Stock-Based Compensation." Options
granted to consultants, independent representatives and other non-employees are
accounted for using the fair value method as prescribed by FAS No. 123.
STOCK SPLIT
On June 1, 1999, the Company completed a 5 for 1 reverse stock split of its
common stock. Accordingly, all share and per share amounts have been
retroactively restated in the consolidated financial statements to reflect this
split.
LOSS PER SHARE
Basic loss per share is calculated by dividing the net loss by the average
number of common shares outstanding during the year. Diluted loss per share is
calculated by adjusting outstanding shares, assuming any dilutive effects of
options, warrants, and convertible securities. For all years presented, the
effect of stock options, warrants, and convertible securities were not included
as the results would be anti-dilutive. Consequently, there is no difference
between the basic and dilutive net loss per share.
SEGMENTS OF A BUSINESS ENTERPRISE
FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
report information about operating segments in annual consolidated financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. FAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company operates in one segment, information technology
solutions.
COMPREHENSIVE INCOME
FAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and displaying comprehensive income and its components in the
consolidated financial statements. Comprehensive loss includes cumulative
translation adjustments for the years ended December 31, 1998 and 1999. These
adjustments are accumulated within the accompanying Consolidated Statements of
Stockholders' Equity under the caption "Comprehensive Loss."
F-12
<PAGE> 98
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued, which establishes new standards for recording
derivatives in interim and annual financial statements. This statement requires
recording all derivative instruments as assets or liabilities, measured at fair
value. Statement No. 133, as amended, is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. Management does not anticipate
the adoption of the new statement will have a significant impact on the
consolidated results of operations or financial position of the Company.
3. ACQUISITIONS
The Company completed the following acquisitions during the years ended
December 31, 1998 and 1999.
EXECUTIVE LAN MANAGEMENT, INC.
On October 15, 1999, the Company finalized an Agreement and Plan of
Reorganization and Merger with Executive LAN Management Inc. ("Micro Visions").
The agreement provided for a merger of Micro Visions with a subsidiary of the
Company such that all of Micro Visions' outstanding stock was sold to the
Company in exchange for total consideration of $86.0 million, consisting of
$12.0 million cash, 6,000,000 common shares issued upon closing, and a further
2,400,000 common shares earned during 1999 as contingent consideration valued in
the aggregate at $71.2 million and options to acquire 475,000 shares of common
stock valued at $2.8 million. Of the contingent shares, 1,200,000 were earned as
of December 31, 1999 but had not been issued. The value of the contingent
shares, determined based on the share price of $31.2 million when earned, is
included in stockholder's equity as common stock issuable. The acquisition was
accounted for by the purchase method of accounting, and the excess purchase
price of $85.9 million over the estimated fair value of net assets acquired was
allocated to goodwill and is being amortized over five years.
CN NETWORKS, INC.
On November 5, 1999, the Company finalized an Agreement and Plan of
Reorganization and Merger with CN Networks, Inc. ("CNI"). The agreement provides
for a merger of CNI with a subsidiary of the Company such that all of CNI's
outstanding stock was sold to the Company in exchange for total consideration of
$19.9 million consisting of $3.9 million cash and 1,181,816 common shares of the
Company's common stock valued at $9.1 million, and options to acquire 500,000
shares of common stock valued at $6.9 million. The acquisition was accounted for
by the purchase method of accounting, and the excess purchase price of $20.4
million over the estimated fair value of net assets acquired was allocated to
goodwill and is being amortized over five years.
ASYNC TECHNOLOGIES, INC.
On November 26, 1999, FutureLink finalized an Agreement and Plan of
Reorganization and Merger with Async Technologies, Inc. and Async Technical
Institute, Inc. The Agreement provides for an initial merger between Async
Technologies, Inc. and Async Technical Institute, Inc., with Async Technologies,
F-13
<PAGE> 99
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inc. ("Async") being the surviving entity, and then a subsequent merger of Async
with a subsidiary of the Company such that Async's outstanding stock was sold to
the Company in exchange for total consideration of $35.0 million consisting of
$6.0 million cash, 1,298,705 common shares issued upon closing, and a further
439,850 common shares earned during 1999 as contingent consideration valued in
the aggregate at $21.4 million, and options to acquire 500,000 shares of common
stock valued at $7.6 million. The contingent shares were earned as of December
31, 1999 but had not yet been issued. The value of the contingent shares of
$11.4 million, determined based on the share price when earned, has been
included in stockholders' equity as common stock issuable. The acquisition was
accounted for by the purchase method of accounting, and the excess purchase
price of $36.2 million over the estimated fair value of net assets acquired was
allocated to goodwill and is being amortized over five years.
KNS HOLDINGS LIMITED
On December 22, 1999, the Company finalized an Agreement for the Sale and
Purchase of the entire issued share capital of United Kingdom based KNS Holdings
Limited ("KNS"). The Agreement provided for a merger of KNS with a subsidiary of
the Company such that all of KNS' outstanding stock was sold to the Company. The
total purchase price was $44.0 million consisting of $5.0 million cash,
2,160,307 shares of the Company's common stock valued at $32.3 million and notes
payable in the amount of $2.7 million and $4.0 million due April 2000 and June
2000, respectively. The acquisition was accounted for by the purchase method of
accounting, and the excess purchase price of $42.7 million over the estimated
fair value of net assets acquired was allocated to goodwill and is being
amortized over five years.
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. 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.
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. FutureLink Alberta
was consolidated from November 24, 1998. From January 20, 1998 to November 23,
1998 the Company's share in FutureLink Alberta's loss, accounted for using the
equity method, was $860,000.
The following pro forma results of operations give effect to the
acquisition of the above companies as if the transactions had occurred January
1, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Revenue................................................ $ 46,112 $ 64,778
Net loss............................................... $(42,058) $(68,681)
Loss per share......................................... $ (13.27) $ (4.81)
</TABLE>
4. DEPOSITS ON ACQUISITIONS
On December 2, 1999, the Company entered into an Agreement and Plan of
Reorganization and Merger with Vertical Software, Inc. ("VSI"). The agreement
provides for a merger of VSI with a subsidiary of the Company such that all of
VSI's outstanding stock will be sold to the Company in
F-14
<PAGE> 100
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exchange for consideration of $27.6 million consisting of $8.1 million cash and
1,026,316 common shares of the Company's common stock valued at $19.5 million.
The transaction closed on January 31, 2000 (see Note 16). At December 31, 1999,
the Company paid $543,000 relating to deposits and acquisition costs on the
proposed acquisition of VSI.
5. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following at December 31, 1998
and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ -------
<S> <C> <C>
Computers and equipment................................... $ 606 $ 3,932
Software licenses......................................... 185 678
Office and other equipment................................ 181 1,136
Equipment under capital lease............................. 136 6,937
Leasehold improvements.................................... 218 565
------ -------
1,326 13,248
Less accumulated depreciation and amortization............ (203) (2,276)
------ -------
$1,123 $10,972
====== =======
</TABLE>
Included in accumulated depreciation at December 31, 1998 and 1999 is
$19,000 and $735,000 respectively, related to equipment under capital leases.
6. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangible assets are comprised of the following at
December 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ --------
<S> <C> <C>
Goodwill................................................. $5,314 $189,699
Assembled workforce...................................... 3,200 3,200
------ --------
8,514 192,899
Less accumulated amortization............................ (668) (6,033)
------ --------
$7,846 $186,866
====== ========
</TABLE>
7. LINE OF CREDIT AGREEMENTS
The Company and its subsidiaries have various lines of credit allowing
aggregate borrowings of $5.4 million. The lines bear interest at various rates
ranging from prime (8.5% at December 31, 1999) plus 1% to prime plus 3% per
annum, and mature at various intervals through November 30, 2000. The lines are
secured by certificates of deposits aggregating $3.1 million (reflected as
restricted cash on the accompanying consolidated balance sheet at December 31,
1999) and receivables and other assets of certain subsidiaries of the Company.
Aggregate borrowings under the line of credit agreements at December 31, 1998
and 1999 were $819,000 and $1.7 million, respectively. At December 31, 1999, the
aggregate unused amount under the agreements was approximately $3.7 million.
F-15
<PAGE> 101
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
---- -------
<S> <C> <C>
Capital lease obligations, net of original issue discount of
$727...................................................... $30 $ 5,985
Note payable to former KNS stockholders..................... -- 6,685
--- -------
30 12,670
Less current portion of long-term debt...................... -- 8,554
--- -------
Long-term debt.............................................. $30 $ 4,116
=== =======
</TABLE>
Capital lease obligations are for the lease of up to $22.5 million of
computer hardware and related infrastructure costs. Aggregate monthly payments
are currently $195,000 and are based upon thirty-six to forty-one month
amortization periods, including interest implicit in the lease at rates ranging
from 9% to 14% per annum. As of December 31, 1999, the Company had available
borrowings of $19.4 million under the various lease lines. In addition to the
lease payments, the Company issued to the lessors warrants valued at $727,000 to
acquire 42,553 shares of common stock at $8.50 per share. The value of the
warrants has been reflected as a discount of the related debt, and is being
amortized to interest expense over the life of the debt.
Notes payable to KNS consist of notes of $2.7 million and $4.0 million and
are due April 6, 2000 and June 30, 2000, respectively. The notes are unsecured
and bear interest at LIBOR plus 1% per annum which is payable at maturity.
Principal maturities of long-term debt outstanding, including original
issue discount of $727,000, at December 31, 1999 occur as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
------------ -------
<S> <C>
2000............................................ $ 8,706
2001............................................ 2,147
2002............................................ 2,177
2003............................................ 367
-------
Total........................................... $13,397
=======
</TABLE>
9. CONVERTIBLE DEBENTURES
Convertible debentures consist of the following at December 31, 1998 and
1999 (in thousands);
<TABLE>
<CAPTION>
1998 1999
------ ----
<S> <C> <C>
10% TK convertible debentures............................... $2,153 $ --
8% Senior subordinated convertible promissory notes......... -- 629
10% Convertible debentures.................................. -- 245
------ ----
$2,153 $874
====== ====
</TABLE>
F-16
<PAGE> 102
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10% TK CONVERTIBLE DEBENTURES
During 1998, the Company entered into a 10% convertible debenture agreement
with Thomson Kernaghan & Co. Ltd. ("TK") as agent, to provide up to $5.0 million
of financing. The financing included the issuance of 208,333 share purchase
warrants at an exercise price of $4.80 per share. During 1998, the Company
received an aggregate $2.7 million under the financing arrangement, and $500,000
of this debt plus accrued interest was converted into 374,955 common shares.
During 1999, the Company amended the terms of the 10% TK convertible
debentures which increased the total available financing from $5.0 million to
$6.0 million, of which the Company received an additional $3.3 million in 1999
bringing aggregate borrowings under the agreement to $5.5 million. An additional
129,534 warrants at an exercise price of $4.80 per share were issued in
connection with the increase in available funding. The fair value of these
warrants of $129,500 was recorded as additional paid-in capital with an
offsetting entry to original issue discount on debt.
Of the total principal amount of the debentures, approximately $1.7 million
has been attributed to the intrinsic value of the beneficial conversion option.
Of this amount, $911,990 related to debentures received during the year ended
December 31, 1999. The amount attributed to the beneficial conversion option has
been included in interest expense as the option was exercisable upon issuance.
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
previously issued warrants were re-priced such that the exercise price of $4.80
became $1.25 per common share. An amount of $1.2 million has been included in
additional paid-in capital as the estimated value attributed to the warrants as
they were exercisable upon issuance. The Company also issued an additional
warrant to purchase 862,132 shares of common stock at an exercise price of $1.25
per share such that a total of 1,200,000 warrants were outstanding related to
this convertible debenture agreement. An amount of $1.0 million attributable to
the intrinsic value of the conversion feature of the amended debt was included
as interest expense with a corresponding credit to additional paid-in capital as
the conversion option was exercisable upon issuance.
During 1999, $4.0 million of the convertible debentures were converted into
4,018,602 shares of common stock. In addition, the Company paid approximately
$1.9 million as consideration for the cancellation of $1.5 million of the
principal balance. The extinguishment of this debt resulted in an $844,552
extraordinary item during the year ended December 31, 1999. This amount includes
charges of $259,318 for unamortized finance fees, $174,000 for unamortized debt
discount associated with the $3.5 million of debt existing at the time, and
$411,000 relating to the cost of settling $1.5 million of debt.
During the year ended December 31, 1999, 1,291,921 shares of common stock
were issued on the exercise of all the outstanding warrants issued to TK. In
connection with the exercise of the warrants, the Company issued an additional
125,000 shares to the note holders for agreeing to a lock up provision.
8% SENIOR SUBORDINATED CONVERTIBLE PROMISSORY NOTES
During 1999, the Company completed an $8.0 million financing of 8% senior
subordinated convertible promissory notes, of which management and directors of
the Company purchased $433,000. The notes were convertible at the option of the
note holders at a conversion price of $1.00 per share, except those issued to
management and directors, that were convertible at $1.50 per share, subject to a
12-month lock up provision. Issue costs of $780,000 were paid relating to the
issuance of the debentures and were
F-17
<PAGE> 103
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recorded as original issue discount on debt. $7.4 million of the notes were
converted during the year ended December 31, 1999 into 8,579,019 shares of
common stock. The remaining balance of the notes due at December 31, 1999 of
$620,000 plus accrued interest is due April 30, 2000. An amount of $4.9 million
was attributed to the intrinsic value of the beneficial conversion option and
has been included in additional paid-in capital with an offsetting entry to
interest expense.
Upon entering into the agreement, the Company issued warrants to purchase
3,802,750 shares of common stock at $1.25 per share to the external holders of
the debentures and warrants to purchase 216,500 shares of common stock at $1.50
per share to directors and management of the Company. An amount of $2.4 million
based on the Black Scholes pricing model has been included in additional paid-in
capital as the estimated value of the warrants. During the year ended December
31, 1999, the board of directors offered the warrant holders an option to
exchange 100 warrants for 95 shares on a cashless basis. As such, 3,696,500 of
these warrants were exercised on a cashless basis and exchanged for 3,517,933
shares of common stock.
In addition, warrants to purchase 2,000,000 shares at an exercise price of
$1.25 per share were provided to the agent as a placement fee. An amount of $1.8
million based on the Black Scholes pricing model has been attributed to the
value of the warrants and has been recorded to additional paid-in capital. 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 additional paid-in
capital. On May 1, 1999, the Company entered into an agreement to retain the
holder of the majority of the notes as a financial 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 warrants to purchase 2,000,001 shares of
common stock at par value. A value of $1.2 million, based on the Black Scholes
pricing model, has been assigned as the estimated value of the warrants, which
is being amortized to consulting expense at the rate of $100,000 per month over
the one-year contract term. During the year ended December 31, 1999, the board
of directors offered the warrant holders an option to exchange 100 warrants for
95 shares on a cashless basis. As such, 4,000,001 warrants were exercised on a
cashless basis and exchanged for 3,799,974 shares of common stock.
The initial terms of the notes contained certain anti-dilution provisions.
The subsequent issuance of securities at terms and conditions preferential to
that of the promissory notes resulted in an additional 289,599 shares issued to
those noteholders. An amount of $246,000 was attributed to these additional
shares and has been included in contributed capital with an offsetting entry to
interest expense. These anti-dilution privileges also resulted in the remaining
$620,000 of unconverted notes at December 31, 1999 having a conversion price of
$0.89 for noteholders and $1.34 for management.
10% CONVERTIBLE DEBENTURE
During 1999, the Company issued a $275,000 promissory note that was
subsequently converted into a 10% debenture that can be converted into shares of
the Company's common stock at $1.15 per share. The note matures on April 20,
2002, and the Company may prepay upon 30 days advance notice. Accrued interest
of $18,000 at December 31, 1999 is due at maturity. In the accompanying
consolidated financial statements as of December 31, 1999, the balance due on
the convertible debt and the accrued interest is reflected net of $50,000
unamortized debt discount and finder's fee, which is being amortized to interest
expense over the life of the debenture.
An amount of $79,821 was attributed to the intrinsic value of the
beneficial conversion option and has been reflected as interest expense during
the year and included in additional paid-in capital. Upon entering the
agreement, the Company issued warrants to purchase 44,505 shares of common stock
of the Company at $1.25 per share to the holder of the debenture. The warrants
expire April 30, 2001. An amount of
F-18
<PAGE> 104
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$41,800 has been included in additional paid-in capital as the estimated value
of the warrants and debt discount.
10. STOCKHOLDERS' EQUITY
On October 15, 1999, the Company amended its authorized preferred shares
from 5,000,000 to 20,000,000 and its authorized common shares from 100,000,000
to 300,000,000.
ISSUANCE OF COMMON STOCK AND WARRANTS FOR CASH
During 1999, the Company completed a private placement which resulted in
net proceeds to the Company of $46.1 million through the issuance of 9,090,909
common shares and warrants to purchase 2,401,041 shares of common stock. The
warrants are exercisable for up to five years at an exercise price of $8.50 per
share. A finance fee of $3.0 million was paid to the placement agent. The
Company also issued 909,091 warrants to purchase shares of common stock to the
placement agent. The warrants are exercisable for up to five years at an
exercise price of $8.50 per share. Subsequent to year end, the warrant holders
exercised all the outstanding warrants (see Note 16).
During 1998, the Company issued 51,163 common shares and 51,163 warrants
for $847,000 cash. Of the warrants, 16,667 are exercisable at $15.50 on or
before January 29, 2000 (which have subsequently expired); 21,163 are
exercisable at $20.00 on or before April 20, 2000; and 13,333 are exercisable at
$16.25 on or before April 22, 2000. At December 31, 1999, none of the warrants
have been exercised.
ISSUANCE OF COMMON STOCK UPON CONVERSION OF CONVERTIBLE DEBT
During 1999, the Company issued $301,241 aggregate principal amount of its
10% convertible debentures, due on June 30, 1999 in exchange for stockholders'
advances of $289,000 including interest existing at December 31, 1998. Upon
entering into the convertible debenture agreement, the Company issued warrants
to purchase 150,621 shares of common stock 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 additional paid-in capital as the estimated value attributed to the 150,621
warrants. During 1999, the Company repaid $253,000 of the principal amount and
$55,000 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.
During 1999, the Company issued $500,000 aggregate principal amount of its
8% convertible debentures, due February 28, 2002, convertible at $1.51 per
share. An amount of $125,000 was attributed to the intrinsic value of the
conversion option and was included in additional paid-in capital. 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 8%
convertible debentures at $1.88 per share. The warrants expire on February 28,
2001. An amount of $36,000 was reflected as original issue discount and included
in additional paid-in capital as the estimated value of the warrants. On August
21, 1999, $500,000 of principal and $37,000 of accrued interest and other fees
were converted into 355,836 common shares.
During 1999, the Company issued 8% senior subordinated convertible
promissory notes and warrants for gross proceeds of $15.0 million. In addition,
warrants to purchase 2,250,000 shares of common stock were issued to note
holders at an exercise price of $8.50 per common share. The notes were initially
due on the earlier of (i) July 19, 2001; (ii) the consummation of a public
offering of the Company's securities;
F-19
<PAGE> 105
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(iii) the completion of a private placement resulting in gross proceeds of at
least $15.0 million; 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 were
initially convertible into common stock at an exercise price of $8.50 per common
share. However, if prior to maturity, the Company completed a private placement
of debt or equity securities resulting in gross proceeds of at least $15.0
million, 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 were to be
converted at the same price and terms as that private placement. Concurrent with
the private placement described above, the notes were converted into 2,727,172
common shares. Additional warrants to purchase 711,818 shares of common stock
were also issued. The warrants are exercisable for up to five years at an
exercise price of $8.50 per common share. As part of the transaction, the
Company paid $1.4 million 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
warrants to purchase 2,475,000 shares of common stock initially 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,
no amount has been recorded to additional paid-in capital.
During 1999, the Company issued $8.0 million of 8% Senior Convertible
Promissory notes, of which $7.4 million of notes were converted into 8,579,019
shares of common stock. In addition, 7,696,501 warrants related to these notes
were exercised during 1999.
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. At
December 31, 1999, none of the warrants have been exercised.
LOAN RECEIVABLE FROM OFFICER
On August 1, 1999, the Company loaned $2.0 million to an executive with
recourse 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 (deficit). The shares have been 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. During the year ended December 31, 1999, the Company
recognized $500,000 as salary expense relating to the services received from the
employee in relation to the loan agreement.
ISSUANCE OF COMMON STOCK FOR SERVICES
On July 27, 1998, the Company issued 700,000 shares of common stock to
employees, officers and directors of the Company for $3,500. The fair value of
these shares at that time was approximately $2.1 million. The difference between
the fair value and the cash consideration received has been included as
additional paid-in capital and as salary expense for the year ended December 31,
1998.
F-20
<PAGE> 106
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1998, the Company entered into an agreement for consulting services
which provided for the settlement of fees with shares of the Company's common
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 NASD Over the Counter Bulletin Board. 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.
STOCK OPTION PLAN
The Company's Stock Option Plan (the "Plan") became effective on June 29,
1998, and was amended on November 30, 1998, September 23, 1999, November 17,
1999 and December 10, 1999. The Plan provides for the issuance of incentive and
non-qualified stock options. The aggregate number of shares which may be issued
pursuant to options under the Plan may not exceed twenty percent of our shares
of common stock issued and outstanding on a fully diluted basis. The maximum
number of shares which may be issued pursuant to options was fixed at 11,000,000
by the Company's board of directors.
The Plan is administered by the Company's board of directors. Generally,
the board may amend or terminate the Plan if it does not cause any adverse
effect on any then outstanding options or unexercised portions thereof. The
board of directors must obtain the consent of the stockholders to increase the
number of shares covered by the Plan, to change the class of persons eligible to
receive options, or to extend the term of the Plan beyond 10 years. The board of
directors sets the consideration for each option award. All options must
generally have an exercise price equal to at least 85% of the fair market value
of the underlying common stock on the date of the grant. Incentive stock options
must have an exercise price equal to at least 100% of the fair market value of
the underlying common stock on the date of the grant, and options granted to a
person who owns more than 10% of the voting power of our outstanding stock and
any outstanding stock of our subsidiaries must have an exercise price equal to
at least 110% of the fair market value of the underlying common stock on the
date of the grant.
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------
NUMBER WEIGHTED
OF PRICE PER AVERAGE
SHARES SHARE EXERCISE PRICE
--------- ------------ --------------
<S> <C> <C> <C>
Balance at January 1, 1998.................................. -- -- --
Options granted............................................. 872,500 $2.25-$ 5.85 $4.05
Options canceled............................................ (40,000) $3.80-$ 5.85 $4.31
--------- ------------ -----
Balance at December 31, 1998................................ 832,500 $2.25-$ 5.85 $4.05
Options granted............................................. 6,559,000 $1.40-$23.13 $7.90
Options expired............................................. (117,900) $1.40-$ 8.50 $3.90
Options exercised........................................... (252,600) $1.40-$ 5.85 $4.39
--------- ------------ -----
Balance at December 31, 1999................................ 7,021,000 $1.40-$23.13 $8.01
========= ============ =====
</TABLE>
F-21
<PAGE> 107
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average remaining contractual life and weighted average
exercise price of options outstanding and of options exercisable as of December
31, 1999 were as follows:
<TABLE>
<CAPTION>
WEIGHTED OPTIONS
WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED
RANGE OF OPTIONS AVERAGE REMAINING DECEMBER 31, AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE 1999 EXERCISE PRICE
--------------- ----------- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.40-$ 3.80 2,893,500 $ 3.10 2.81 1,054,166 $3.38
$ 5.00-$ 8.97 2,857,500 $ 6.76 4.11 672,500 $6.28
$ 14.69 500,000 $14.69 4.84 -- --
$22.69-$23.13 770,000 $23.01 4.94 -- --
</TABLE>
The price at which options were granted during 1998 and 1999 were generally
based upon the market value of the Company's common stock at the time of the
grants. At December 31, 1999, there were options to purchase 11,000,000 shares
of common stock available to grant.
The weighted average fair value of options granted during 1998 and 1999 was
$2.49 and $8.02 per share, respectively. Pursuant to FAS No. 123, the Company
has elected to continue using the intrinsic value method of accounting for
stock-based awards granted to employees and directors in accordance with APB
Opinion No. 25 and related Interpretations in accounting for its stock option
and purchase plans.
The Company recorded approximately $1.6 million of net deferred
compensation in the year ended December 31, 1999, for the difference between the
exercise price of certain of the Company's stock options granted under the Plan
and the fair market value of the underlying common stock. Such amount has been
presented as a reduction of stockholders' equity and is being amortized ratably
over the vesting period of the applicable options. The Company amortized an
aggregate of $524,000 of deferred compensation during 1999.
Accordingly, no compensation cost has been recognized for its stock option plans
and its stock purchase plan other than that described above. For pro forma
purposes, the estimated value of the Company's stock options to employees is
amortized over the vesting period of the underlying instruments. The results of
applying FAS No. 123 to the Company's options to employees would approximate the
following:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Net loss
As reported...................................... $ (5,880) $ (35,744)
Pro forma........................................ $ (7,197) $ (89,041)
Basic and fully diluted loss per share:
As reported...................................... $ (1.86) $ (2.50)
Pro forma........................................ $ (2.27) $ (6.23)
Basic and diluted weighted average common shares... 3,169,413 14,279,647
</TABLE>
The pro forma effect on net loss for 1998 and 1999 is not likely to be
representative of the effects on reported net loss for future years.
F-22
<PAGE> 108
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of options granted under the Company's stock option plan
during 1998 and 1999 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Weighted average risk-free interest rates............. 5.03% 5.03%
Expected years from vest date to exercise date........ 2.1 to 3.5 2.1 to 3.5
Expected stock volatility............................. 135.5% 135.5%
Dividend yield........................................ None None
</TABLE>
WARRANTS
The Company has issued warrants to purchase the Company's common stock to
certain individuals or organizations at December 31, 1999 as follows:
Warrants to acquire 225,448 shares of common stock. Each warrant entitles
the holders to purchase one common share at $6.25 by June 30, 2000.
Warrants to acquire 51,163 shares of common stock. 16,667 of the warrants
entitles the holders to purchase one common share at $15.50 by January 29, 2000
(which have subsequently expired); 21,163 of the warrants entitles the holders
to purchase one common share at $20.00 per share by April 20, 2000, and; 13,333
of the warrants entitle the holders to purchase one common share at $16.25 per
share by April 22, 2000.
Warrants to acquire 2,401,041 shares of common stock. Each warrant
initially entitled the holders to purchase one common share at $8.50 by June 30,
2000. However, to induce holders to exercise such warrants, subsequent to
December 31, 1999, the Company offered to pay each holder $0.95 per underlying
share of common stock to compensate such holders for committing their capital to
an early exercise of their warrants per share for aggregate net proceeds to the
Company of $18,008,000 (see Note 16).
Warrants to acquire 2,475,000 shares of common stock. Each warrant entitles
the holders to purchase one common share at $8.50 by July 27, 2001.
Warrants to acquire 310,250 shares of common stock, of which 27,750 are
owned by members of management. Each warrant entitles the holders to purchase
one common share at $1.11 or $1.34 by April 6, 2000, by management.
Warrants to acquire 1,620,909 shares of common stock. Each warrant entitles
the holders to purchase one common share at $8.50 by October 15, 2001.
Warrants to acquire 150,621 shares of common stock. Each warrant entitles
the holders to purchase one common share at $2.00 by February 23, 2013.
Warrants to acquire 261,124 shares of common stock. Each warrant entitles
the holders to purchase one common share at prices ranging from $1.25 to $8.50
through 2004.
F-23
<PAGE> 109
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMON STOCK ISSUABLE
At December 31, 1999, the following shares of common stock are issuable
for:
<TABLE>
<S> <C>
Warrants.................................................... 7,495,556
Common stock options........................................ 7,021,000
Convertible debentures...................................... 918,283
Acquisitions................................................ 4,074,426
----------
19,509,265
==========
</TABLE>
11. INCOME TAXES
The income tax benefit differs from the amount computed by applying the
U.S. federal statutory rate to the loss before income taxes as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
--------- ----------
<S> <C> <C>
Tax benefit at U.S. statutory rate (34%).................... $(2,069) $(11,866)
Increase (decrease) in taxes resulting from:
Valuation allowance....................................... 1,690 3,240
State taxes............................................... (121) --
Non deductible expenses................................... 541 5,717
Foreign tax rate differences and foreign losses without
benefit................................................ (258) 2,909
Other..................................................... 12 --
------- --------
Provision (benefit) for income taxes........................ $ (205) $ --
======= ========
</TABLE>
F-24
<PAGE> 110
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the deferred taxes are as follows at December 31, 1998 and 1999
(in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Deferred tax liability:
Assembled workforce....................................... $(1,212) $ (808)
Depreciation.............................................. -- (467)
Cash to accrual adjustment................................ -- (392)
------- -------
Total deferred tax liability........................... (1,212) (1,667)
------- -------
Deferred tax asset:
Net operating loss carryforwards.......................... 1,905 7,084
Bad debt reserve.......................................... -- 475
Inventory reserve......................................... -- 100
Deferred compensation..................................... -- 224
Other..................................................... 368 293
------- -------
Deferred tax assets......................................... 2,273 8,176
Valuation allowance......................................... (2,273) (7,097)
------- -------
-- 1,079
------- -------
Net deferred tax liability.................................. $(1,212) $ (588)
======= =======
</TABLE>
The Company has recorded a valuation allowance for the full amount of
deferred tax assets in light of its history of operating losses since its
inception. When recognized, $288,000 of the valuation allowance will reduce
goodwill. The remaining balance may be available to offset future tax expense.
The net change in the valuation allowance for deferred tax assets was an
increase of approximately $4.8 million resulting primarily from an increase in
net operating losses.
The Company has U.S. net operating losses carryforward of $8.7 million
which begins to expire in 2012. Certain Company 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 $10.6 million. These losses expire beginning in 2001.
12. RELATED PARTY TRANSACTIONS
On August 1, 1999, the Company loaned $2.0 million to an officer of the
Company that was used to purchase 232,829 shares of common stock (see Note 10).
During the year ended December 31, 1999, management of the Company
participated in the 8% senior subordinated convertible promissory note offering
by purchasing notes totaling $433,000 (see Note 9).
F-25
<PAGE> 111
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 1999, the Company provided services and
products of $78,000 to Jaws Technologies Inc., an entity of which a Director was
also a Director of the Company. An amount of $57,000 is owing from Jaws
Technologies Inc. at December 31, 1999. In addition, the Company obtained
services from Jaws Technologies Inc. in the amount of $12,000. At December 31,
1999, $2,000 remains owing by the Company.
During the year ended December 31, 1998, the Company provided services and
products of $40,000 to Jaws Technologies Inc. An amount of $37,000 was owing
from Jaws Technologies Inc. at December 31, 1998.
During the year ended December 31, 1999, the Company provided services and
products of $550,000 to Willson Stationers Ltd. and e-Supplies Inc., related
entities of which a previous Director was also a Director of these companies. At
December 31, 1999, $543,000 remained due from these entities. An allowance for
doubtful accounts has been recorded for the entire amount due to the uncertainty
of collection.
During the year ended December 31, 1998, the Company provided services and
products of $64,000 to Willson Stationers Ltd. At December 31, 1998, an amount
of $59,000 was owing from Willson Stationers Ltd. In addition, the Company
obtained $21,000 of products from Willson Stationers Ltd. during the period. At
December 31, 1999, $25,000 remains due to this entity.
During 1998, two of the Company's stockholders advanced the Company
$289,000. In addition, one of the Company's stockholders advanced the Company an
additional $17,000 which was outstanding at December 31, 1998. These amounts
were repaid during 1999.
13. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has various leases for office premises which expire on various
dates through 2004. The future minimum lease payments at December 31, 1999 under
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $1,515
2001........................................................ 1,081
2002........................................................ 399
2003........................................................ 165
2004........................................................ 71
------
Total future minimum lease payments......................... $3,231
======
</TABLE>
Rent expense was $118,000 and $937,000 for the years ended December 31,
1998 and 1999, respectively.
CONTINGENCIES
From time to time the Company is a defendant or plaintiff in litigation
arising in the ordinary course of business. To date, other than litigation
SmallCaps OnLine Group LLC brought and the subsequent settlement of that action,
no litigation has had a material effect on the Company and, the Company is not a
party to any material litigation except as described below.
In the past, persons formerly associated with the Company, which may
include one or more of our former executive officers or directors, may have
engaged in activities as part of an effort to profit from unlawful trading
activity in our stock. As a result, the Company may be subject to civil or
criminal actions, fines or penalties. If any proceedings are commenced against
the Company, the Company will need to spend significant money and management
time in the Company's defense. If a court determined
F-26
<PAGE> 112
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
that the Company participated in these activities, the Company could be liable
for damages or penalties that would have a material adverse effect on the
Company's financial condition and results of operation.
SmallCaps OnLine Group LLC, previously known as Bridge Technology Group
LLC, sued the Company on January 12, 2000 in the New York County Supreme Court
to recover fees the Company allegedly owed for advisory and investor relations
services. SmallCaps' complaint requested compensation for fees totaling $5.1
million, as well as warrants to purchase an aggregate of 3,289,689 shares of
common stock at exercise prices ranging from $1.00 to $8.50 per share. The total
value of the damages SmallCaps claimed was $110.0 million. On February 11, 2000,
the Company settled SmallCaps' complaint by agreeing to pay SmallCaps $5.0
million on or before March 14, 2000, and to issue to SmallCaps warrants to
purchase an aggregate of 3,000,000 shares of our common stock at exercise prices
ranging from $8.50 to $22.50 per share, subject to anti-dilution protection.
Since the issuance of these warrants, their exercise prices have been adjusted
and now range from $8.33 to $22.05 per share and these warrants currently
entitle the holder to acquire 3,061,379 shares of our common stock. The Company
issued the warrants to SmallCaps on March 1, 2000 and paid SmallCaps the $5.0
million on March 14, 2000. The total value of the settlement on February 11,
2000 was $65.0 million which has been recorded in the accompanying consolidated
balance sheets as a charge to paid-in capital.
On November 6, 1998, the Company's former Chief Executive Officer and a
director, Mr. Cameron Chell, entered into a Settlement Agreement with The
Alberta Stock Exchange to resolve a pending investigation into Mr. Chell's
alleged breaches of Alberta Stock Exchange rules and by-laws. As part of the
Settlement Agreement, Mr. Chell acknowledged that he had breached certain duties
of supervision, disclosure, or compliance relating to various offers and sales
of securities, and Mr. Chell was prohibited from receiving Alberta Stock
Exchange approval in any capacity for a five year period, subjected to a
CDN$25,000 fine and a three year period of enhanced supervision. The Company
cannot be certain that the Settlement Agreement with the Alberta Stock Exchange
ends all proceedings with regard to these matters.
On January 20, 2000, the Company commenced a proceeding in Canada against
Mr. Chell, various other former employees of and consultants to the Company and
various other defendants alleging that these defendants misappropriated a
corporate opportunity in breach of fiduciary and contractual obligations. Most
of these defendants made counterclaims seeking, among other things, damages for
interference with their economic interests and for severance compensation in the
form of cash and stock options. The Company entered into a settlement agreement
with the defendants effective April 26, 2000 that has the following key terms:
- Mr. Chell will be entitled to exercise options to acquire 175,000 shares
of common stock that were scheduled to vest June 1, 2000,
- Mr. Chell or his nominee shall pay to us $400,000 in settlement of a
related party debt that involved Mr. Chell, and
- All other claims have been dropped by all parties, who have provided
mutual releases, with the claim and counterclaims to be discontinued.
On January 7, 2000, Tony Bryson, an individual who had previously been
employed by the Company, filed a lawsuit against the Company seeking $180,000
for the value of lost stock options, salary and benefits the Company allegedly
promised him, and other damages he allegedly sustained as a result of alleged
actions by the Company. This lawsuit has been filed under Canadian law. Canadian
law provides for severance pay to any employee of the Company Canadian
operations in an amount that is appropriate based on, among other things, the
nature of the position held by the employee and the length of time the employee
worked for the company, unless the employer can establish that the termination
was for just
F-27
<PAGE> 113
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
cause. The exact amount of severance pay is often disputed between employers and
employees in Canada. Accordingly, there is a risk that in addition to this
lawsuit, one or more other former employees will make claims for cash severance
pay as well as options.
On January 26, 2000, Michael Chan filed a suit in the Court of Queen's
Bench of Alberta, Judicial District of Calgary alleging that FutureLink Alberta
breached its contract to deliver him options to purchase 250,000 shares of
FutureLink Alberta at $1.00 per share. Mr. Chan seeks 50,000 shares of common
stock or, alternatively, damages of approximately $1.5 million in cash, general
damages of approximately $200,000 and punitive damages of approximately
$200,000. We have filed a statement of defense in this action refuting Mr.
Chan's claims.
Under certain California State regulatory requirements, the Company was to
offer a rescission of certain options granted to California employees. The
Company applied for and has received an order from the State of California
approving the proposed terms of the rescission offer. The rescission offer was
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 exercised to date which offer will
remain open subsequent to December 31, 1999. In light of market prices for the
Company's common stock recently being significantly in excess of the exercise
price, the Company received rescission notices from only three option holders in
January 2000 for a total of 29,000 options. The Company paid $31,800 plus
interest to these option holders in exchange for cancellation of their options
under the rescission offer.
A claim has been filed against the Company in the amount of approximately
$340,000 plus costs for damages from alleged Company misrepresentations and
interference with contractual relations regarding a sale transaction between two
third parties involving shares of the Company's common stock. The Company has
entered into an indemnity agreement with a former principal of the Company
whereby the former principal defends this action on behalf of the Company, bears
the costs of legal counsel and agrees to indemnify the Company for any losses.
Management believes the claim is without merit.
A claim has been filed against the Company's subsidiary, FutureLink Alberta
in the amount of $194,000 plus costs for 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
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.
A claim was filed against the Company's subsidiary, SysGold (now merged
into FutureLink Alberta) by TAP Consulting Ltd. in the amount of approximately
$102,000 for damages and loss of compensation relating to services provided to
the Company. Management believes the claim is without merit. An indemnity
agreement has been obtained from the previous stockholders of SysGold.
The Company is currently aware of other former employees and consultants
who may make claims against the Company that represent, in the aggregate, $1.5
million in damages which includes approximately 95,000 stock options and
monetary damages. At this time, management is unable to determine an amount, if
any, it may ultimately be required to pay to settle these issues.
The Company's pending lawsuits involve complex questions of fact and law
and could require the expenditure of significant costs and diversion of
resources to defend. Although management believes the outcome of the Company's
outstanding legal proceedings, claims and litigation will not have a material
adverse effect on the Company's business, results of operations or financial
position, the results of litigation are inherently uncertain. The Company is
unable to make an estimate of the range of possible loss from outstanding
litigation, except as noted, and no amounts have been provided for such matters
in the consolidated financial statements.
F-28
<PAGE> 114
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT INFORMATION
The Company's activities are conducted in one operating segment with all
activities relating to the sales and support of information technology
solutions. These activities for all of 1998 and virtually all of 1999 were
carried out in two geographic segments, Canada and the United States. On
December 22, 1999, the Company acquired KNS which is located in the United
Kingdom.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------
CANADA U.S. EUROPE TOTAL
------ -------- ------ --------
<S> <C> <C> <C> <C>
Revenue..................................... $2,437 $ -- $ -- $ 2,437
Long-lived assets........................... $8,966 $ 3 $ -- $ 8,969
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------
CANADA U.S. EUROPE TOTAL
------ -------- ------ --------
<S> <C> <C> <C> <C>
Revenue..................................... $7,178 $ 6,215 $207 $ 13,600
Long-lived assets........................... $9,556 $187,560 $722 $197,838
</TABLE>
Long-lived assets consist of property and equipment, goodwill, and
assembled workforce.
15. 401(k) PLAN
The Company assumed several 401(k) plans in connection with the
acquisitions in 1999. Pursuant to these plans, employees may elect to reduce
their current compensation by up to the statutorily prescribed annual limit and
to have the amount of such reduction contributed to these plans. These plans
permit the Company, but do not require, additional matching contributions to
these plans on behalf of all participants in these plans. Through December 31,
1999, the Company has not made any contributions to these plans.
16. SUBSEQUENT EVENTS
On January 31, 2000, the Company completed the acquisition of Vertical
Software, Inc. and on February 29, 2000 the Madison Technology Group of
Companies for an aggregate purchase price of $85.1 million consisting of cash of
$14.6 million, a promissory note of $7.3 million due July 2000; and 3,001,486
shares of common stock valued at $63.2 million. The acquisitions will be
accounted for by the purchase method, and the estimated excess purchase price
over the estimated fair value of net assets acquired of $82.9 million will be
allocated to goodwill and amortized over five years.
On February 11 and February 29, 2000, warrant holders exercised their
rights to acquire 2,401,041 shares of common stock at an effective price of
$7.50 per share for aggregate net proceeds to the Company of $18.0 million. The
warrants had an adjusted (for anti-dilution) exercise price of $8.40 per share
and the holders of these warrants effectively paid $7.50 per share after
adjustment for a warrant exercise fee of $0.90 for each warrant exercised.
On April 28, 2000, the Company completed a private placement of
approximately $15 million of common equity with institutional private equity
investors. As part of this private placement, the Company issued to the
investors 1,764,704 shares of common stock and warrants to purchase 441,176
shares of common stock at $9.25 per share.
From January 1, 2000 through April 29, 2000, certain note holders of
convertible debt converted $796,000 of debt into 865,568 shares of common stock
in accordance with the terms contained in the convertible debt agreements.
On May 26, 2000, Glen Holmes, the Company's President and Chief Operating
Officer and one of its directors, granted to the Company an option to purchase
600,000 shares of the Company's common stock
F-29
<PAGE> 115
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
at $5.50 per share, the fair market value at the date of grant. The Company may
only exercise this option to the extent employees to whom the Company granted
reciprocal options exercise those options. On the same date, Mr. Holmes also
granted to two of the Company's employees options to purchase 2,400,000 shares
of the Company's common stock at $5.50 per share, the fair market value at the
date of grant. The options were granted covering shares personally owned by Mr.
Holmes to employees who were formerly employed at Executive LAN Management, Inc.
On June 19, 2000 the Company acquired Charon Systems Inc. for $0.7 million
in cash, a note payable in the amount of $4.3 million due the earlier of
December 31, 2000, or the completion of a placement of equity securities by the
Company in excess of $50 million, and exchangeable shares convertible into
2,199,973 shares of common stock.
On June 29, 2000, the Company entered into a definitive agreement with
Microsoft Corporation pursuant to which Microsoft will purchase 1,428,571 shares
of FutureLink Series A preferred stock, for a price of $7.00 per share. We will
also issue to Microsoft a warrant with a five-year term to purchase up to an
additional 1,142,857 shares of preferred stock at an exercise price of $7.00 per
share. The preferred stock will provide for the voluntary and, under certain
circumstances, mandatory conversion of the preferred stock into shares of common
stock on a one-for-one basis, subject to anti-dilution adjustments. In addition,
Microsoft will have the right to nominate one director for election to
FutureLink's Board of Directors. The Company expects to consummate the sale of
the preferred stock to Microsoft in July 2000.
F-30
<PAGE> 116
FUTURELINK CORP.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
F-31
<PAGE> 117
FUTURELINK CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 19,185 $ 21,877
Restricted cash............................................. 3,099 562
Accounts receivable, net.................................... 14,284 25,309
Inventory, net.............................................. 4,964 5,018
Prepaid expenses............................................ 536 2,791
-------- ---------
Total current assets.............................. 42,068 55,557
Property and equipment, net................................. 10,972 29,108
Goodwill and other intangibles, net......................... 186,866 254,112
Deferred offering and acquisition costs..................... 543 --
Other assets................................................ 229 950
-------- ---------
Total assets...................................... $240,678 $ 339,727
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit............................................. $ 1,657 $ 5,464
Accounts payable and accrued liabilities.................... 15,811 28,417
Settlement payable.......................................... 5,000 --
Current portion of long-term debt........................... 8,554 6,875
Deferred revenue............................................ 1,330 1,380
-------- ---------
Total current liabilities......................... 32,352 42,136
Long term debt, net of current portion...................... 4,116 11,764
Convertible debentures, net................................. 874 --
Deferred taxes.............................................. 588 588
-------- ---------
Total liabilities................................. 37,930 54,488
Commitments and contingencies
Stockholders' equity:
Preferred stock no par value 20,000,000 shares authorized,
2,571,428 shares of Series A Preferred Stock authorized
and 1,428,571 shares of Series A Preferred Stock,
issued and outstanding at September 30, 2000, and no
shares issued and outstanding at December 31, 1999..... -- 3,394
Common stock, $.0001 par value, 300,000,000 shares
authorized, 52,743,169 and 68,104,789 shares issued and
outstanding at December 31, 1999 and September 30,
2000, respectively..................................... 7 8
Common stock issuable; 1,639,850 and 2,199,965 shares at
December 31, 1999 and September 30, 2000,
respectively........................................... 42,636 16,369
Additional paid-in capital................................ 146,150 393,369
Warrants.................................................. 60,000 --
Deferred compensation..................................... (1,393) (1,752)
Loan receivable from officer.............................. (1,500) --
Accumulated other comprehensive loss...................... (77) (1,127)
Accumulated deficit....................................... (43,075) (125,022)
-------- ---------
Total stockholders' equity........................ 202,748 285,239
-------- ---------
Total liabilities and stockholders' equity........ $240,678 $ 339,727
======== =========
</TABLE>
See notes to condensed consolidated financial statements.
F-32
<PAGE> 118
FUTURELINK CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
1999 2000 1999 2000
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Hardware and software....................... $ 576 $ 23,867 $ 1,460 $ 66,043
Service delivery............................ 1,006 11,282 3,577 25,321
--------- ---------- --------- ----------
1,582 35,149 5,037 91,364
Expenses:
Cost of hardware and software............... 511 20,306 1,333 55,009
Cost of service delivery.................... 2,237 7,732 5,460 17,546
Selling, general and administration......... 3,655 18,623 6,627 51,428
Goodwill amortization....................... 461 15,620 1,421 42,071
Depreciation and other amortization......... 172 2,152 522 5,393
--------- ---------- --------- ----------
7,036 64,433 15,363 171,447
--------- ---------- --------- ----------
Loss from operations........................ (5,454) (29,284) (10,326) (80,083)
Interest expense............................ 2,341 825 11,214 2,057
Interest income............................. (59) (367) (59) (701)
--------- ---------- --------- ----------
Loss before income taxes and extraordinary
item...................................... (7,736) (29,742) (21,481) (81,439)
Provision (benefit) for income taxes........ (119) 2 (357) 27
--------- ---------- --------- ----------
Loss before extraordinary item.............. (7,617) (29,744) (21,124) (81,466)
Extraordinary item.......................... -- -- (845) --
--------- ---------- --------- ----------
Net loss.................................... $ (7,617) $ (29,744) $ (21,969) $ (81,466)
========= ========== ========= ==========
Other Comprehensive Income/(Loss):
Foreign currency translation adjustment..... (27) (308) 87 (1,050)
Comprehensive loss.......................... $ (7,644) $ (30,052) $ (21,882) $ (82,516)
Net loss before Series A Preferred Stock
dividends................................. (7,617) (29,744) (21,969) (81,466)
--------- ---------- --------- ----------
Dividends for Series A Preferred Stock...... -- (437) -- (437)
Net loss applicable to common stock......... (7,617) (30,181) (21,969) (81,903)
--------- ---------- --------- ----------
Basic and diluted loss per common share..... $ (1.00) $ (0.43) $ (3.36) $ (1.32)
========= ========== ========= ==========
Weighted average shares -- basic and
diluted................................... 7,594,083 69,737,487 6,534,575 62,054,083
========= ========== ========= ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-33
<PAGE> 119
FUTURELINK CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 2000
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(21,968) $(81,466)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 1,943 47,464
Loss on sale of assets...................................... -- 106
Deferred income taxes....................................... (357) --
Extinguishment of debt...................................... 433 --
Amortization of deferred compensation....................... 250 1,899
Amortization of finance fees................................ 3,335 --
Common stock, warrants and options issued for Services...... 1,144 250
Non-cash interest expense................................... 6,903 --
Change in operating assets and liabilities, net of effect of
business acquisitions:
Accounts receivable....................................... (298) (1,686)
Inventory................................................. (47) 1,479
Prepaid expenses and other current assets................. (94) (2,067)
Deferred offering and acquisition costs................... -- 543
Other assets.............................................. (58) (598)
Accounts payable and accrued expenses..................... (881) 3,781
Settlement payable........................................ -- (5,000)
Other current liabilities................................. 552 --
Deferred revenue.......................................... -- (733)
-------- --------
Net cash used in operating activities................. (9,143) (36,028)
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment......................... (1,863) (5,380)
Business acquisitions, net of cash balances acquired........ (3,304) (18,100)
Repayment of acquisition notes.............................. -- (18,356)
Decrease in restricted cash................................. -- 2,537
-------- --------
Net cash used in investing activities................. (5,167) (39,299)
-------- --------
FINANCING ACTIVITIES
Net cash advanced (paid) under lines of credit.............. (819) 307
Proceeds from issuance of common shares, net................ (5) 52,280
Proceeds from issuance of preferred shares, net............. -- 10,000
Proceeds from exercise of employee stock options............ 100 1,762
Proceeds from exercise of warrants.......................... 65 18,108
Repayment of capital lease obligation....................... (68) (3,215)
Issuance of convertible debentures, net of costs............ 24,771 --
Exchange of shares in settlement of employee advance........ -- (129)
Repayment of convertible debentures and promissory notes.... (1,839) --
-------- --------
Net cash provided by financing activities............. 22,205 79,113
-------- --------
Effect of currency rate changes............................. (87) (1,094)
Increase in cash............................................ 7,808 2,692
Cash at beginning of period................................. 7 19,185
-------- --------
CASH AT END OF PERIOD....................................... $ 7,815 $ 21,877
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of businesses:
Assets acquired........................................... $ 42 $120,852
Liabilities assumed....................................... -- 11,462
Notes payable issued...................................... -- 11,671
Common stock and options issued........................... 42 79,619
-------- --------
Cash paid for acquisitions............................ -- 18,100
Capital lease obligations................................... 66 15,567
Conversion of convertible debt to equity.................... 4,455 874
</TABLE>
See notes to condensed consolidated financial statements.
F-34
<PAGE> 120
FUTURELINK CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect the results of operations for FutureLink Corp. (the "Company") and its
wholly owned subsidiaries and have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals and
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three-month and nine-month periods ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in FutureLink's Annual
Report on Form 10-KSB for the year ended December 31, 1999 filed with the
Securities and Exchange Commission (SEC) on March 30, 2000.
FutureLink Corp. is a Delaware corporation headquartered in Lake Forest,
California. The Company is an application services provider, or ASP, and is in
the business of corporate ASP integration (previously known as server-based
computing). The Company's services enable software applications to be deployed,
managed, supported and upgraded from centrally located servers, rather than on
individual desktop computers. For its corporate ASP integration business, the
Company installs and integrates software applications on customers' servers. For
its ASP customers, the Company hosts software applications on servers at data
centers, and rents computing services to customers for a monthly fee. The
Company also provides remote management and maintenance of customers' servers
from its network operation centers. ASP customers connect to facilities over the
Internet, through a dedicated telecommunications line or by wireless connection.
ASP services were introduced in March 1999.
The Company has experienced net losses over the past two years and has an
accumulated deficit of approximately $125 million at September 30, 2000. Such
losses are attributable to both cash losses resulting from costs incurred in the
development of the Company's services and infrastructure, interest expense and
non-cash charges. The Company expects operating losses to continue for the
foreseeable future as it continues to develop and promote its services.
NOTE 2. ACQUISITIONS
Vertical Software, Inc.
On January 31, 2000, the Company acquired Vertical Software, Inc. ("VSI"),
a U.S. mid-Atlantic regional provider of system integration and information
technology services. The agreement provides for a merger of VSI with a
subsidiary of the Company such that all of VSI's outstanding stock was sold to
the Company in exchange for consideration of $27.6 million consisting of $8.1
million cash and 1,026,316 common shares of the Company's common stock valued at
$19.5 million. The acquisition was accounted for by the purchase method of
accounting, and the excess purchase price of $26.7 million over the estimated
fair value of net assets acquired was allocated to goodwill and is being
amortized over five years.
MicroLAN Systems, Inc.
On February 29, 2000, the Company acquired MicroLAN Systems, Inc., doing
business as Madison Technology Group, Madison Consulting Resources, Inc. and
Madison Consulting Resources NJ, Inc. The companies were acquired for total
consideration of $57.5 million, consisting of $6.5 million cash, a note payable
in the amount of $7.3 million that is secured by the Company's shares of a new
subsidiary formed
F-35
<PAGE> 121
FUTURELINK CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for the acquisition, and 1,975,170 shares of common stock valued at $43.7
million. The acquisition was accounted for by the purchase method of accounting.
In connection therewith, $12.4 million of the purchase price was allocated to
assembled workforce and is being amortized over three years, and $45.2 million
of the excess purchase price over the estimated fair value of net assets
acquired was allocated to goodwill and is being amortized over five years.
Charon Systems Inc.
On June 19, 2000, the Company acquired Charon Systems Inc. ("Charon") for
total consideration of $21.5 million, consisting of $0.7 million cash, a note
payable in the amount of $4.4 million which was paid on July 11, 2000 and
exchangeable shares convertible into 2,199,973 shares of the Company's common
stock valued at $16.4 million. The acquisition was accounted for by the purchase
method of accounting, and the excess purchase price of $20.7 million over the
estimated fair value of net assets acquired was allocated to goodwill and is
being amortized over five years.
The following pro forma results of operations give effect to all of the
Company's acquisitions in 1999 and 2000 as if the transactions had occurred on
January 1, 1999 (dollars in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 2000 1999 2000
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue......................................... $ 35.0 $ 35.1 $ 78.8 $103.8
Net loss........................................ (23.7) (29.7) (51.3) (89.1)
Loss per share.................................. $(0.86) $(0.43) $(1.92) $(1.37)
</TABLE>
NOTE 3. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangible assets are comprised of the following at
December 31, 1999 and June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
Goodwill................................................... $189,699 $287,010
Assembled workforce........................................ 3,200 15,166
-------- --------
Total............................................ 192,899 302,176
Less accumulated amortization.............................. (6,033) (48,064)
-------- --------
Goodwill and other intangibles............................. $186,866 $254,112
======== ========
</TABLE>
NOTE 4. LINE OF CREDIT AGREEMENTS
The Company has a credit facility agreement with a bank that allows
borrowings up to a maximum of $10 million based upon the Company meeting certain
performance criteria. Borrowings under the credit agreement at September 30,
2000 were $4.3 million and the Company had utilized an additional $0.7 million
to secure an outstanding letter of credit. The facility bears interest at rates
that vary from prime (9.5% at September 30, 2000) plus 1% to prime plus 3% per
annum based upon the Company maintaining certain operating performance levels,
and is payable on demand. The facility is secured by receivables and other
assets of certain subsidiaries of the Company, and guarantees and a pledge of a
percentage of the shares of those subsidiaries. The agreement contains certain
financial and other covenants or restrictions, including the maintenance of
certain financial ratios, limitations on the incurrence of indebtedness and
restrictions on dividends paid by the Company. As of September 30, 2000, the
F-36
<PAGE> 122
FUTURELINK CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company was either in compliance with, or had obtained waivers for, all
covenants, limitations and restrictions. At September 30, 2000, there were no
available borrowings under this credit facility.
The Company maintains lines of credit at two other banks that allow
aggregate borrowings of $1.7 million, of which $1.2 million was borrowed at
September 30, 2000. The lines bear interest at various rates ranging from prime
plus 1% to prime plus 3% per annum, and mature at various intervals through
November 30, 2000. The lines are secured by certain working capital assets of
the Company's United Kingdom subsidiary and a certificate of deposit of $0.6
million (reflected as restricted cash on the accompanying consolidated balanced
sheet at September 30, 2000). On October 30, 2000, the Company paid off its $0.6
million line and the certificate of deposit that was held as security by the
bank was returned.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1999 and September
30, 2000 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
Capital lease obligations, net of original issue discount of
$727 and $662, respectively............................... $ 5,985 $18,639
Notes payable to former KNS stockholders.................... 6,685 --
------- -------
12,670 18,634
Less current portion of long-term debt...................... (8,554) (6,875)
------- -------
Long-term debt.............................................. $ 4,116 $11,764
======= =======
</TABLE>
Capital lease obligations are for the lease of up to $25.9 million of
computer hardware and related infrastructure costs. Aggregate monthly payments
are currently $758,000 and are based upon twenty four to sixty month
amortization periods, including interest implicit in the lease at rates ranging
from 9% to 14% per annum. As of September 30, 2000, the Company had available
borrowings of $11.8 million under the various lease lines. In addition to the
lease payments, the Company issued to the lessors warrants valued at $833,000 to
acquire 72,599 shares of common stock. The value of the warrants has been
reflected as a discount of the related debt, and is being amortized to interest
expense over the life of the debt.
Notes payable to former KNS stockholders consisted of a note of $2.7
million, which was paid in May 2000, and a note of $4.0 million, of which $1.0
million was paid in June 2000 and the remainder of the note was subsequently
paid in July 2000.
NOTE 5. STOCKHOLDERS' EQUITY
Issuance of Common Stock and Warrants for Cash
On April 28, 2000, the Company completed a private placement of common
equity with institutional private equity investors for approximately $15
million. A total of 1,764,704 restricted shares of common stock and warrants to
purchase 441,176 shares of common stock at an exercise price of $9.25 per share
were issued. The warrants expire at the end of April 2003.
In July 2000, the Company completed a public offering of 6,250,000 shares
of its common stock at a price of $7 per share, resulting in net proceeds of
$37.4 million after deducting underwriting discounts and commissions and
offering costs.
F-37
<PAGE> 123
FUTURELINK CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Issuance of Preferred Stock and Warrants for Cash
On July 6, 2000, the Company sold to Microsoft Corporation, for proceeds of
$10 million, 1,428,571 shares of FutureLink Series A Redeemable Convertible
Preferred Stock ("Series A Preferred Stock") for a price of $7.00 per share. The
Company also issued to Microsoft a warrant with a five-year term to purchase up
to an additional 1,142,857 shares of Series A Preferred Stock at an exercise
price of $7.00 per share. The shares of outstanding Series A Preferred Stock and
the warrant to purchase additional shares of Series A Preferred Stock are each
subject to provisions which provide anti-dilution protection. Each share of
Series A Preferred Stock is initially convertible into 1 share of common stock.
Additionally, each share of Series A Preferred Stock is entitled to a
preferential distribution on liquidation of the greater of $7.00 per share or
their pro rata value, as if converted into common stock, of the assets to be
distributed, a cumulative preference on dividends of $0.56 per annum and certain
redemption rights. Both of these preferential amounts are paid prior to any
payment to the holders of common stock. The Series A Preferred Stock is entitled
to vote on all matters presented to the holders of common stock as if the Series
A Preferred Stock were converted into common stock. Additionally, certain
actions which impact the rights of the holders of Series A Preferred Stock,
require a 2/3 approval of all holders of Series A Preferred Stock voting as a
class. In addition, Microsoft has the right to nominate one director for
election to FutureLink's Board of Directors.
Cumulative annual dividends at a rate of 8% per annum are payable in cash
or shares of the Company's Series A Preferred Stock in an amount to be based on
the then current market price of the Company's common stock. Subject to the
application of anti-dilution provisions, Microsoft shall have the right to
convert all or a portion of the Series A Preferred Stock into common stock of
the Company on a one-for-one basis. If at any time, the common stock of the
Company trades at or above $25.50 per share for twenty consecutive days, the
Series A Preferred Stock shall automatically convert to common stock. Upon any
such automatic conversion, any warrants that remain outstanding, shall become
warrants to acquire common stock. After four years, the Company will redeem the
Series A Preferred Stock for either (i) cash or (ii) if the Company's common
stock is traded on a national exchange, in shares of the Company's common stock,
at the Company's option, at a redemption price per share equal to the original
purchase price of the Series A Preferred Stock plus all unpaid dividends. It's
the Company's intent to redeem stock for shares of Company's common stock. The
value of the shares used for repayment shall be the average price of the
Company's common stock over the ten trading days prior to the redemption date,
but no lower than $5.50 per share.
Issuance of Common Stock upon Exercise of Warrants
During the nine months ended September 30, 2000, warrant holders exercised
their rights to acquire 2,704,223 shares of common stock at an effective price
of $7.50 per share for aggregate net proceeds to the Company of $18.2 million.
The warrants had an adjusted (for anti-dilution) exercise price of $8.40 per
share and the holders of these warrants effectively paid $7.50 per share after
adjustment for a warrant exercise fee of $0.90 for each warrant exercised.
Issuance of Common Stock upon Conversion of Convertible Debt
On March 30, 2000 certain note holders of convertible debt and accrued
interest thereon converted approximately $217,000 of debt into 189,160 shares of
common stock.
On April 29, 2000, certain holders of convertible debt and accrued interest
thereon converted $621,000 of debt into 676,408 shares of common stock in
accordance with the terms contained in the convertible debt agreement. The
Company incurred approximately $96,000 of costs in connection with the
conversion.
F-38
<PAGE> 124
FUTURELINK CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Issuance and Exercise of Stock Options
On May 26, 2000, Glen Holmes, the Company's President and Chief Operating
Officer and one of its directors, granted to the Company an option to purchase
600,000 shares of the Company's common stock at $5.50 per share, the fair market
value at the date of grant. The Company may only exercise this option to the
extent employees to whom the Company granted reciprocal options exercise those
options. On the same date, Mr. Holmes also granted to two of the Company's
employees options to purchase 2,400,000 shares of the Company's common stock at
$5.50 per share, the fair market value at the date of grant. The options were
granted covering shares personally owned by Mr. Holmes to employees who were
formerly employed at Executive LAN Management, Inc.
During the nine months ended September 30, 2000, the Company recorded
approximately $2.3 million in deferred compensation for the difference between
the exercise price of certain of the Company's stock options and warrants that
were granted during the period and the fair market value of the underlying
common stock. Such amount has been presented as a reduction to stockholders'
equity and is being amortized ratably over the vesting period of the applicable
options. The Company amortized an aggregate of $1.9 million of deferred
compensation during the nine months ended September 30, 2000.
Loan Receivable from Officer
On August 1, 1999, the Company loaned $2.0 million to an executive with
recourse, which was then used by the executive to purchase 232,829 common shares
of the Company. The loan receivable was recorded as a reduction of stockholders'
equity, and $250,000 of the principal amount of the loan was to be forgiven on a
quarterly basis. The shares had been escrowed and were to be released from
escrow on a quarterly basis commencing January 1, 2000. The Company released
87,349 of these shares to the employee. During the nine months ended September
30, 2000, the Company recognized $250,000 as salary expense relating to the
services received from the employee in relation to the loan agreement. In
addition, the employee returned 14,212 of these shares to the Company valued at
the then current market price of $129,000 in settlement of an advance made to
the executive.
NOTE 7. CONTINGENCIES
LITIGATION AND OTHER PROCEEDINGS
From time to time the Company is a defendant or plaintiff in litigation
arising in the ordinary course of business. To date, other than the SmallCaps
OnLine Group LLC litigation and the subsequent settlement of that action, no
litigation has had a material effect on the Company and, as of the date of this
prospectus, it is not a party to any material litigation except as described
below.
In the past, persons formerly associated with the Company, which may
include one or more of its executive officers and directors, may have engaged in
activities as part of an effort to profit from unlawful trading activity in the
Company's stock. The Company is aware that in October 1998, the SEC announced
the filing of an enforcement action against the publisher of an Internet
newsletter called The Future Superstock, written by Jeffrey Bruss. According to
the SEC's litigation release, the SEC's complaint alleged that The Future
Superstock recommended to the newsletter's more than 100,000 subscribers and to
visitors to the newsletter's website the purchase of approximately 25 microcap
stocks which it predicted to double or triple in the next three to twelve
months. According to the SEC's release, in most instances, the prices of
recommended securities increased for a short period of time after The Future
Superstock
F-39
<PAGE> 125
FUTURELINK CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
newsletter made a recommendation, after which the prices of those stocks dropped
substantially. The SEC alleged that in making its recommendations, the Internet
newsletter:
- failed to adequately disclose compensation it had received from profiled
companies,
- failed to disclose that it had sold stock in many of the issuers it
recommended shortly after disseminating such recommendation,
- had conducted little, if any, research into companies it recommended, and
- made false and misleading statements about the success of certain prior
stock picks.
According to press reports, Jeffrey C. Bruss claimed that he received $300,000
from the Company to promote the Company's stock. The SEC sought civil penalties
against the publisher of the newsletter. The SEC did not bring any action
against the Company. The Company believes that it made no payments to Mr. Bruss,
but one or more persons who were associated with its predecessor company prior
to 1998 may have made payments. The Company is unable to determine whether, as a
result of the alleged activities of Mr. Bruss, any stockholder suffered any
losses for which it might be liable.
In addition, the Company recently received a subpoena from the SEC
requesting any documentation in its possession with respect to a confidential
investigation regarding Internet newsletters. This investigation relates to the
use of the Internet to engage in fraudulent transactions with respect to the
offer, purchase and sale of securities. The Company has responded to the SEC's
request for documents.
As a result of these activities, the Company may be subject to civil or
criminal actions, fines or penalties. If any proceedings are commenced against
the Company, it will need to spend significant money and management time on its
defense. If the Company participated in these activities, it could be liable for
damages or penalties that would have a material adverse effect on its financial
condition, results of operations and liquidity.
SmallCaps OnLine Group LLC, previously known as Bridge Technology Group
LLC, sued the Company on January 12, 2000 in the New York County Supreme Court
to recover fees it allegedly owed for advisory and investor relations services.
SmallCaps' complaint requested compensation for fees totaling $5.1 million, as
well as warrants to purchase an aggregate of 3,289,689 shares of the Company's
common stock at exercise prices ranging from $1.00 to $8.50 per share. The total
value of the damages SmallCaps claimed was $110.0 million. On February 11, 2000,
the Company settled SmallCaps' complaint by agreeing to pay SmallCaps $5.0
million on or before March 14, 2000, and to issue to SmallCaps warrants to
purchase an aggregate of 3,000,000 shares of its common stock at exercise prices
ranging from $8.50 to $22.50 per share, subject to anti-dilution protection. The
Company issued the warrants to SmallCaps on March 1, 2000 and paid SmallCaps the
$5.0 million on March 14, 2000. Since the issuance of these warrants, their
exercise prices have been adjusted and now range from $8.33 to $22.05 per share
and these warrants currently entitle the holder to acquire 3,061,379 shares of
the Company's common stock. The total value of the settlement on February 11,
2000 was $65.0 million which has been recorded in the Company's financial
statements as a charge to paid-in capital.
On November 6, 1998, the Company's former Chief Executive Officer and a
director, Mr. Cameron Chell, entered into a Settlement Agreement with The
Alberta Stock Exchange to resolve a pending investigation into Mr. Chell's
alleged breaches of Alberta Stock Exchange rules and by-laws. As part of the
Settlement Agreement, Mr. Chell acknowledged that he had breached certain duties
of supervision, disclosure, or compliance relating to various offers and sales
of securities, and Mr. Chell was prohibited from receiving Alberta Stock
Exchange approval in any capacity for a five year period, subjected to a
CDN$25,000 fine and a three year period of enhanced supervision. The Company
cannot be certain that the Settlement Agreement with the Alberta Stock Exchange
ends all proceedings with regard to these matters.
F-40
<PAGE> 126
FUTURELINK CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On January 20, 2000, the Company commenced a proceeding in Canada against
Mr. Chell, various other former employees of and consultants to the Company and
various other defendants alleging that these defendants misappropriated a
corporate opportunity in breach of fiduciary and contractual obligations. Most
of these defendants made counterclaims against the Company seeking, among other
things, damages for interference with their economic interests and for severance
compensation in the form of cash and stock options. The Company entered into a
settlement agreement with the defendants effective April 26, 2000 that has the
following key terms:
- Mr. Chell will be entitled to exercise options to acquire 175,000 shares
of common stock that were scheduled to vest June 1, 2000,
- Mr. Chell or his nominee shall pay to the Company $400,000 in settlement
of a related party debt that involved Mr. Chell, and
- All other claims will be dropped by all parties, who have provided mutual
releases, with the claim and counterclaims to be discontinued.
On January 26, 2000, Michael Chan filed a suit in the Court of Queen's
Bench of Alberta, Judicial District of Calgary alleging that FutureLink Alberta
breached its contract to deliver him options to purchase 250,000 Class "A"
common shares of FutureLink Alberta at $1.00 per share. Mr. Chan seeks 50,000
shares of the Company's common stock or, alternatively, damages of approximately
$1.5 million in cash, general damages of approximately $200,000 and punitive
damages of approximately $200,000. The Company filed a Statement of Defense in
this action refuting Mr. Chan's claims.
On July 12, 2000, Integrated Solutions Corp. filed a Statement of Claim in
the Court of Queen's Bench of Alberta, Judicial District of Calgary, against
FutureLink Alberta and Brian Greenlaw, a former employee of Integrated
Solutions, Inc., and a current employee of FutureLink Alberta. The Statement of
Claim alleges that FutureLink Alberta induced Mr. Greenlaw to breach an
employment agreement with Integrated Solutions, Inc. and to disclose to
FutureLink Alberta confidential information. Integrated Solutions, Inc. is
seeking to recover $1.5 million from FutureLink Alberta and Mr. Greenlaw,
jointly.
NOTE 8. SUBSEQUENT EVENTS
Subsequent to September 30, 2000, the Company entered into a new credit
facility with Foothill Capital Corporation as follows:
In November 2000, we entered into a loan and security agreement with a
financial institution relating to a revolving credit facility that allows
borrowings up to a maximum of $25 million, which may be increased to $30 million
at our option subject to payment of additional fees. The amount that we are
permitted to borrow at any given time will vary from time-to-time based upon a
percentage of our eligible accounts receivable as described in the loan and
security agreement. In addition, there are limits as to how much we can borrow
against various categories of accounts receivable. For example, the most we can
borrow against our Canadian subsidiary accounts receivable is $10 million. The
percentage of our accounts receivable against which we can borrow may be reduced
if the amount of bad debt write-downs, advertising allowances, credits, or
similar reductions of our accounts receivable exceed 5% of the applicable
category of accounts receivable used for purposes of determining the maximum
borrowing amount. If at any time the amount we owe under the credit facility
exceeds the borrowing limits under the facility, we may immediately be required
to repay in cash the amount of such excess. Based upon our accounts receivable
as of November 30, 2000, the total amount we could borrow under the $25 million
credit facility was $15.3 million. The credit facility is secured by
substantially all of our assets, the receivables and other assets of certain of
our subsidiaries, and by guarantees and a pledge of a percentage of the shares
of those subsidiaries. The credit facility has an initial term of three years,
and will automatically be renewed for successive one-year terms, unless it is
terminated sooner. We can terminate the facility at any
F-41
<PAGE> 127
FUTURELINK CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
time upon 90 days prior notice, but if we terminate the credit facility during
the first three years, we will be required to pay a prepayment penalty. The
credit facility bears interest at prime or prime plus 1.5% per annum, depending
on the amount of our available unrestricted cash from time to time; however, at
no time will the interest rate charged by the lender be less than 8% per annum.
The credit facility contains certain financial and other covenants and
restrictions, including the maintenance of a minimum tangible net worth,
limitations on capital expenditures and the incurrence of indebtedness and
restrictions on the payment of dividends. The terms of the $25 million credit
facility also require us to follow cash management procedures. Specifically, we
are required to establish and maintain cash management bank accounts in the
lender's name, into which our collections on accounts receivable will be
deposited. So long as we are not in default under the credit facility and our
aggregate cash balances are at least $10 million, we may transfer funds from the
cash management accounts to our operating accounts. If we default under the
credit facility, or if our aggregate cash balances fall below $10 million, all
amounts in the cash management bank accounts will be forwarded by daily sweep to
the lender's account. After paying any amounts due to itself, the lender must
remit the remaining balance to us.
In December 2000, certain of our UK subsidiaries entered into a loan
agreement with the same financial institution relating to the revolving credit
facility for up to $5 million. Any amount we borrow under the UK facility will
reduce the available amount we can borrow under our $25 million credit facility.
The UK credit facility is secured by substantially all of the assets of our UK
subsidiaries, and by guarantees by us and certain of our subsidiaries. The terms
of the UK credit facility are substantially the same as the $25 million credit
facility.
F-42
<PAGE> 128
VERTICAL SOFTWARE, INC.
FINANCIAL STATEMENTS
F-43
<PAGE> 129
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Vertical Software, Inc.
We have audited the accompanying balance sheets of Vertical Software, Inc.
as of December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vertical Software, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
McLean, Virginia
January 28, 2000
F-44
<PAGE> 130
VERTICAL SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 206,178 $ 46,458
Accounts receivable:
Trade.................................................. 1,693,700 2,369,446
Related party.......................................... 51,056 67,782
Inventory................................................. 270,424 172,310
Employee advances and prepaid expenses.................... 12,092 37,150
---------- ----------
Total current assets.............................. 2,233,450 2,693,146
Property and equipment, net................................. 157,193 140,410
Other asset................................................. 5,547 6,142
---------- ----------
Total assets...................................... $2,396,190 $2,839,698
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand note payable....................................... $ - $ 400,000
Accounts payable:
Trade.................................................. 526,443 299,548
Related party.......................................... 17,395 26,600
Accrued expenses.......................................... 241,675 307,579
Customer deposits......................................... 148,026 120,032
Deferred revenue.......................................... 381,710 461,394
Demand notes payable -- related parties................... 201,623 45,092
---------- ----------
Total current liabilities......................... 1,516,872 1,660,245
Stockholders' equity:
Common stock -- $1 par value, 100,000 shares authorized,
102 shares issued and outstanding...................... 102 102
Additional paid-in capital................................ 898 898
Retained earnings......................................... 878,318 1,178,453
---------- ----------
Total stockholders' equity........................ 879,318 1,179,453
---------- ----------
Total liabilities and stockholders' equity........ $2,396,190 $2,839,698
========== ==========
</TABLE>
See accompanying notes.
F-45
<PAGE> 131
VERTICAL SOFTWARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Net revenues:
Equipment sales..................................... $3,220,679 $6,774,585 $ 8,357,469
Installation, services, and other fees.............. 1,897,846 3,014,287 4,760,548
---------- ---------- -----------
Total net revenues.................................... 5,118,525 9,788,872 13,118,017
Costs and expenses:
Costs of equipment sales............................ 2,501,350 5,382,931 6,656,798
Costs of services and other fees.................... 167,753 246,964 315,852
Sales and marketing................................. 192,573 360,156 732,960
General and administrative.......................... 1,406,058 2,499,222 4,084,556
Depreciation........................................ 31,323 37,737 49,853
---------- ---------- -----------
Total costs and expenses.............................. 4,299,057 8,527,010 11,840,019
---------- ---------- -----------
Income from operations................................ 819,468 1,261,862 1,277,998
Other expense:
Loss on disposal of equipment....................... (5,073) (11,115) (5,396)
Interest (expense) income, net...................... (3,818) 15,888 (2,967)
---------- ---------- -----------
(8,891) 4,773 (8,363)
Net income............................................ $ 810,577 $1,266,635 $ 1,269,635
========== ========== ===========
Unaudited pro forma information:
Pro forma income tax expense.......................... $ 313,353 $ 482,601 $ 491,845
========== ========== ===========
Pro forma net income.................................. $ 497,224 $ 784,034 $ 777,790
========== ========== ===========
</TABLE>
See accompanying notes.
F-46
<PAGE> 132
VERTICAL SOFTWARE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996....................... $102 $898 $ 182,610 $ 183,610
Net income..................................... - - 810,577 810,577
Distributions.................................. - - (449,304) (449,304)
---- ---- ---------- ----------
Balance, December 31, 1997....................... 102 898 543,883 544,883
Net income..................................... - - 1,266,635 1,266,635
Distributions.................................. - - (932,200) (932,200)
---- ---- ---------- ----------
Balance, December 31, 1998....................... 102 898 878,318 879,318
Net income..................................... -- -- 1,269,635 1,269,635
Distributions.................................. -- -- (969,500) (969,500)
---- ---- ---------- ----------
Balance, December 31, 1999....................... $102 $898 $1,178,453 $1,179,453
==== ==== ========== ==========
</TABLE>
See accompanying notes.
F-47
<PAGE> 133
VERTICAL SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................. $ 810,577 $1,266,635 $1,269,635
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation......................................... 31,323 37,737 49,853
Loss on disposal of equipment........................ 5,073 11,115 5,396
Changes in operating assets and liabilities:
Accounts receivable -- trade...................... (30,732) (1,089,788) (675,746)
Accounts receivable -- related party.............. -- (51,056) (16,726)
Inventory......................................... 109,533 (194,139) 98,114
Employee advances and prepaid expenses............ (422) 1,460 (25,058)
Accounts payable -- trade......................... (267,305) 386,561 (226,895)
Accounts payable -- related party................. -- 17,395 9,205
Accrued expenses.................................. 42,192 132,268 65,904
Customer deposits................................. 82,793 37,110 (27,994)
Deferred revenue.................................. 102,226 177,578 79,684
--------- ---------- ----------
Net cash provided by operating activities.............. 885,258 732,876 605,372
INVESTING ACTIVITIES
Proceeds from sale of equipment........................ -- 818 8,905
Purchases of property and equipment.................... (36,693) (101,382) (47,966)
--------- ---------- ----------
Net cash used in investing activities.................. (36,693) (100,564) (39,061)
FINANCING ACTIVITIES
Net borrowings (repayments) on credit line............. (245,000) -- 400,000
Proceeds from issuance of demand notes
payable -- related parties........................... 42,863 184,045 77,371
Payments on demand notes payable -- related parties.... (44,265) (75,379) (233,902)
Distributions to stockholders.......................... (449,304) (932,200) (969,500)
--------- ---------- ----------
Net cash used in financing activities.................. (695,706) (823,534) (726,031)
--------- ---------- ----------
Net (decrease) increase in cash........................ 152,859 (191,222) (159,720)
Cash at beginning of year.............................. 244,541 397,400 206,178
--------- ---------- ----------
Cash at end of year.................................... $ 397,400 $ 206,178 $ 46,458
========= ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest................................. $ 13,000 $ 8,000 $ 12,000
========= ========== ==========
</TABLE>
See accompanying notes.
F-48
<PAGE> 134
VERTICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Vertical Software, Inc. (the "Company") is a regional provider of system
integration and information technology services. The Company was incorporated in
1989 under the laws of the State of Maryland. The Company expects to continue to
focus on increasing its client base in Maryland, Virginia and Washington D.C.
and expand into the southern states market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories consist primarily of computer equipment purchased for specific
contracts and are carried at the lower of cost or market. Cost of inventories
purchased for contracts is determined on a specific identification basis.
Inventory also consists of computer equipment frequently used in fulfilling
installation contracts. These items are carried at the lower of cost or market,
under the first in first out method (FIFO).
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated
over the estimated useful lives of the assets ranging between five and seven
years for furniture and equipment and three years for computer software.
Maintenance and repairs are charged to expense as incurred and the costs of
improvements that extend the useful lives of assets are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the recoverability of long-lived assets whenever events
or changes in circumstances indicate that the carrying value of such assets may
not be recoverable. If the expected future cash flows from the use of such
assets (undiscounted and without interest charges) are less than the carrying
value, the Company's policy is to record a write-down that is determined based
on the difference between the carrying value of the asset and its estimated fair
value.
REVENUE RECOGNITION AND COST OF REVENUE
The Company provides services through time and material contracts and
effective October 1, 1999, through fixed fee contracts. For time and material
contracts, the Company recognizes equipment and software sales at the time of
shipment and installation revenue on a time-and-material basis based upon time
(at established rates) and direct costs as incurred. For fixed fee contracts,
the Company recognizes revenue on the percentage of completion method based on
costs incurred in relation to total estimated costs. The Company also offers
maintenance contracts for technical support services that are generally paid for
in advance by customers. The Company defers recognition of revenue on these
advance payments and amortizes such amounts as services are provided. The
Company writes off uncollectible accounts for customers who are provided credit
terms based on specific identification.
F-49
<PAGE> 135
VERTICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Costs of revenues consist primarily of computer equipment, software, and
labor costs inherent in the provision of network and Internet integration and
infrastructures services.
ADVERTISING COSTS
Advertising and promotion costs are expensed as incurred. For the years
ended December 31, 1997, 1998, and 1999, advertising and promotion costs were
$12,788, $56,845, and $80,126 respectively.
INCOME TAXES
Historically, the Company has elected, by the consent of its stockholders,
to be taxed under the provisions of Subchapter S of the Internal Revenue Code
(the "Code"). Under provisions of the Code, the stockholders include the
Company's corporate income in their personal income tax returns. The Company has
elected to be treated under similar provisions for state income tax reporting
purposes. Accordingly, the Company was not subject to federal and state
corporate income taxes during the period for which it was an S Corporation.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The carrying value of cash, accounts receivable, accounts payable and
accrued expenses approximates their fair value based on the liquidity of these
financial instruments or based on their short-term nature.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and accounts receivable.
The Company places its cash with its principal bank, which is a high credit
quality financial institution. Accounts receivable are subject to credit limits,
ongoing credit evaluations and account monitoring procedures to minimize the
risk of loss. In certain instances, customer deposits are obtained which would
also reduce the risk of loss. Collateral is generally not required. During the
years ended December 31, 1997, 1998, and 1999, four of the Company's clients
comprised approximately 34%, 39%, and 27%, respectively, of total revenue.
SOURCES OF SUPPLIES
The Company relies on computer and computer equipment distributors to
provide computer hardware, software and supplies. Although management believes
alternative suppliers could be found in a timely manner, any disruption of these
services could have an adverse effect on operating results. In addition, if the
suppliers are unable to meet the Company's needs as its business and market
share grow, then delays and increased costs in the expansion of the Company's
integration and information technology solutions service could potentially
result in an adverse effect on the Company's operating results.
BUSINESS SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (Statement No. 131), Disclosures About
Segments of an Enterprise and Related Information, which was required to be
adopted for the year ended December 31, 1998. Statement No. 131 changes the way
public companies report segment information in annual financial statements and
also requires those companies to report selected segment information in interim
reports to stockholders. The Company has only one reportable segment, system
integration and information technology services.
F-50
<PAGE> 136
VERTICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1999
-------- --------
<S> <C> <C>
Furniture, fixtures, and office equipment................... $204,804 $239,193
Vehicles.................................................... 50,308 29,769
Other....................................................... 4,874 6,201
-------- --------
259,986 275,163
Less accumulated depreciation............................... 102,793 134,753
-------- --------
$157,193 $140,410
======== ========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1999
-------- --------
<S> <C> <C>
Payroll and related costs................................... $176,505 $256,001
Sales tax payable........................................... 38,072 20,126
Employee benefits payable................................... 27,098 31,452
-------- --------
Total accrued expenses...................................... $241,675 $307,579
======== ========
</TABLE>
5. RELATED PARTY TRANSACTIONS
Commencing in 1998, the Company is reimbursed monthly from a commonly owned
affiliate for payroll and benefits provided to its employees by Vertical
Software, Inc. Amounts received from the related party were $37,675 and $280,091
for the years ended December 31, 1998 and 1999, respectively, and were netted
against the related expenses. The Company discontinued these activities with the
affiliate effective January 1, 2000. The Company also purchases computer
software, for resale, from this affiliate.
During August of 1999, the Company entered into a month to month agreement
for travel services with a party related by common ownership. The agreement
terms require monthly reimbursements of $1,000 for the Company's portion of
expenses.
The Company also has $201,623 and $45,092 of unsecured demand notes payable
to related parties at December 31, 1998 and 1999, respectively. These notes bear
interest in a range of 7 1/2% to 8%, per annum. Interest expense related to the
notes was $8,344 and $15,787 for the years ended December 31, 1998 and 1999,
respectively.
6. DEMAND NOTES PAYABLE
The Company maintains a $1 million ($520,000 at December 31, 1998) line of
credit with its principal bank. Borrowings against the line bear interest at
9 1/2% per annum. The line is secured by accounts receivable and inventory and
is personally guaranteed by the Company's stockholders. There were no borrowings
related to this line outstanding at December 31, 1998. Borrowings of $400,000
related to this line of credit were outstanding as of December 31, 1999.
During 1998, and 1999, the Company maintained a $275,000 line of credit
with a financial service corporation. This borrowing arrangement is secured by a
second collateral position in the Company's accounts receivable and inventory
and is used to make significant inventory purchases for contracts. No
F-51
<PAGE> 137
VERTICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
borrowings related to this line of credit were outstanding as of December 31,
1998 and 1999. The Company will terminate this arrangement in February, 2000.
7. RETIREMENT PLAN
The Company maintains a defined contribution pension plan covering
substantially all employees. Under this plan, participants may elect to defer a
portion of their wages subject to the annual limitations imposed by section 402
of the Internal Revenue Code. Matching and profit sharing contributions to the
plan are made at the discretion of the Board of Directors. Matching
contributions charged to expense, for the years ended December 31, 1997 and 1998
were $15,945 and $28,051, respectively. No contributions were made to this plan
in 1999.
Effective June 1, 1999, the Company adopted a qualified 401(k) profit
sharing plan for substantially all employees. Under this plan, participants can
elect to contribute a portion of their compensation, subject to limitations
imposed by the Internal Revenue Code, to the plan. The Company may make annual
discretionary matching and qualified non-elective contributions to the plan.
Matching 401(k) Plan contributions, charged to expense, for the year ended
December 31, 1999, were $77,058.
The Company intends to make all future contributions to the 401(k) profit
sharing plan and discontinue payments to the defined contribution pension plan.
8. COMMITMENTS AND CONTINGENCIES
The Company leases its office space under a non-cancelable operating lease
that expires on February 28, 2000. Rent expense was $70,280, $96,919, and
$106,338 for the years ended December 31, 1997, 1998 and 1999, respectively.
During 1999, the Company entered into two operating leases for office space in
Virginia. These leases require monthly rentals of $1,537 and expire through
October 2001. The Company has also entered into a new operating lease for its
Maryland offices commencing March 1, 2000 through February 28, 2010. This lease
requires initial monthly rentals of $14,720 that increase 3% each year.
Future minimum lease payments under all leases are:
<TABLE>
<S> <C>
2000........................................................ $ 181,816
2001........................................................ 190,476
2002........................................................ 186,472
2003........................................................ 192,072
2004........................................................ 197,834
Thereafter.................................................. 1,318,056
----------
Total....................................................... $2,266,726
==========
</TABLE>
F-52
<PAGE> 138
VERTICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAX
Upon consummation of an agreement to sell the outstanding stock of the
Company to FutureLink Corp. and FutureLink Maryland Acquisition Corp.
(collectively "FutureLink"; see Note 10), the Company's status as an S
Corporation under the Code will automatically terminate and normal Federal and
state corporate income tax rates will apply.
On a pro forma basis (unaudited), assuming the Company's status as an S
corporation terminated as of December 31, 1996, the Company would have had pro
forma federal and state income tax expense of $313,353, $482,601, and $491,845
for the years ended 1997, 1998, and 1999, respectively. The Company would have
had pro forma net deferred tax liabilities of approximately $91,000 and $148,000
at December 31, 1998 and 1999, respectively.
10. SUBSEQUENT EVENTS
The Company's stockholders have entered into an agreement to sell their
shares of capital stock in the Company to FutureLink. The Company's stockholders
will exchange their shares in the Company for cash and shares of common stock of
FutureLink. Upon consummation of the agreement, FutureLink will become the sole
stockholder of the Company. The related party unsecured demand note payable as
described in Note 5 will be paid upon consummation of the merger discussed
above.
F-53
<PAGE> 139
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
DECEMBER 31, 1998 AND 1999
F-54
<PAGE> 140
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Microlan Systems, Inc.
"DBA" Madison Technology Group
New York, New York
We have audited the accompanying balance sheets of Microlan Systems, Inc.
"DBA" Madison Technology Group as of December 31, 1998 and 1999 and the related
statements of operations, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We have conducted our audits in accordance with generally accepted audited
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Microlan Systems Inc. "DBA"
Madison Technology Group as of December 31, 1998 and 1999, and the results of
its operations and cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ JOEL E. SAMMET & CO.
Certified Public Accountants
New York, New York
February 14, 2000
F-55
<PAGE> 141
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents (Note 3)........................ $ 53,572 $ 31,867
Accounts receivable, less allowance for doubtful accounts
of $40,149 and $33,008 (Note 2)........................ 1,964,688 4,347,545
Inventory (Note 2)........................................ 278,747 462,145
Due from related parties.................................. 16,204 0
Other current assets...................................... 6,789 11,014
Due from shareholders (Note 7)............................ 0 550,000
---------- ----------
Total Current Assets.............................. 2,320,000 5,402,571
---------- ----------
Property and Other Assets
Property and equipment (net of accumulated depreciation of
$177,647 and $265,503)................................. 238,509 357,958
Other assets.............................................. 30,000 51,263
---------- ----------
Total Property, Equipment and Other Assets........ 268,509 409,221
---------- ----------
Total Assets...................................... $2,588,509 $5,811,792
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash overdraft............................................ $ 0 $ 86,749
Line of credit (Note 4)................................... 950,000 2,000,000
Loans payable -- due to related parties (Note 5).......... 150,000 269,775
Accounts payable.......................................... 742,755 1,780,574
Accrued purchases and expenses............................ 390,000 316,720
Legal settlement payable (Note 6)......................... 0 550,000
Other current liabilities (Note 2)........................ 0 209,883
---------- ----------
Total Current Liabilities......................... 2,232,755 5,213,701
---------- ----------
Shareholders' Equity
Capital stock, 200 shares authorized 100 shares issued and
outstanding............................................ 20,863 20,863
Additional paid-in capital (Note 7)....................... 0 550,000
Retained earnings......................................... 334,891 27,228
---------- ----------
Total Shareholders' Equity........................ 355,754 598,091
---------- ----------
Total Liabilities and Shareholders' Equity........ $2,588,509 $5,811,792
========== ==========
</TABLE>
See the Accompanying Notes to Financial Statements.
F-56
<PAGE> 142
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Revenue
Hardware and software..................................... $3,794,190 $10,132,508
Service and delivery...................................... 2,003,934 3,324,869
Cost of sales
Hardware and software..................................... 2,619,991 8,276,675
Service and delivery...................................... 1,290,483 1,657,068
Selling, general and administrative expenses................ 1,779,576 2,955,230
Legal settlement............................................ 0 744,293
---------- -----------
Income (Loss) from operations............................... 108,074 (175,889)
Interest income............................................. 1,947 1,300
Interest expense............................................ (99,521) (132,027)
---------- -----------
Income (Loss) before income taxes........................... 10,500 (306,616)
Provision for State and City taxes.......................... 7,581 1,047
---------- -----------
Net Income (Loss)........................................... $ 2,919 $ (307,663)
========== ===========
Unaudited pro forma information:
Pro forma provision for income taxes...................... $ 4,305 $ --
========== ===========
Pro forma net income...................................... $ 6,195 $ (307,663)
========== ===========
</TABLE>
See the Accompanying Notes to Financial Statements.
F-57
<PAGE> 143
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCES AS OF DECEMBER 31, 1997...... 100 $20,863 $ 0 $ 385,141 $ 406,004
Net income............................ 0 0 0 2,919 2,919
Distribution to shareholders.......... 0 0 0 (53,169) (53,169)
--- ------- -------- --------- ---------
BALANCES AS OF DECEMBER 31, 1998...... 100 20,863 0 334,891 355,754
--- ------- -------- --------- ---------
Net income............................ (307,663) (307,663)
Additional paid-in capital............ 0 0 550,000 0 550,000
--- ------- -------- --------- ---------
BALANCES AS OF DECEMBER 31, 1999...... 100 $20,863 $550,000 $ 27,228 $ 598,091
=== ======= ======== ========= =========
</TABLE>
See the Accompanying Notes to Financial Statements.
F-58
<PAGE> 144
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,919 $ (307,663)
Adjustments to reconcile net income to net cash used
provided by operating activities:
Provision for losses on accounts receivable............ 59,490 43,865
Depreciation........................................... 69,137 87,855
(Increase) decrease in operating assets:
Inventory............................................ (219,332) (183,398)
Accounts receivable.................................. 349,329 (2,426,721)
Due from related parties............................. (12,088) 16,204
Other current assets................................. (6,302) (4,225)
Other assets......................................... 10,000 (21,263)
Increase (decrease) in operating liabilities:
Accounts payable..................................... (294,957) 1,037,819
Accrued purchases and expenses....................... 205,256 (73,280)
Other current liabilities............................ (86,506) 209,883
Legal settlement payable............................. 0 550,000
--------- -----------
Net Cash Provided (Used) By Operating
Activities...................................... 76,946 (1,070,924)
--------- -----------
CASH FLOWS (USED BY) INVESTING ACTIVITIES:
Purchase of computers, office equipment and leasehold
improvements........................................... (65,993) (207,305)
--------- -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from line of credit.............................. 200,000 1,050,000
(Payments) proceeds of loans from shareholders and related
party.................................................. (90,539) 119,775
Distribution to shareholders.............................. (53,169) 0
--------- -----------
Net Cash Provided By Financing Activities......... 56,292 1,169,775
--------- -----------
Net increase (decrease) in cash............................. 67,245 (108,454)
Cash, at beginning of period................................ (13,673) 53,572
--------- -----------
Cash, at end of period...................................... $ 53,572 $ (54,882)
========= ===========
Comprised of:
Cash and checking (overdraft)............................. $ 23,034 $ (86,749)
Certificate of deposit.................................... 30,538 31,867
--------- -----------
Cash, at end of period...................................... $ 53,572 $ (54,882)
========= ===========
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Amounts due from shareholders for legal settlement........ $ 0 $ 550,000
========= ===========
</TABLE>
Cash paid for income taxes for the years ended December 31, 1998 and 1999 was
$14,325 and $1,895, respectively. Cash paid for interest for the years ended
December 31, 1998 and 1999 was $96,978 and $171,274, respectively.
See the Accompanying Notes to Financial Statements.
F-59
<PAGE> 145
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 1 NATURE OF BUSINESS
Microlan Systems, Inc. doing business as Madison Technology Group (the
"Company") installs, services and provides consultant, design and integration
services for computer hardware systems, software systems and networks. The
Company is an authorized dealer for Novell, Microsoft, Citrix, Cisco and various
other major companies.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from sales of computer hardware and software is recognized when
products are shipped or upon installation, when required under contract terms.
Revenue from training revenue is recognized when performed. Income from service
contracts is recognized over the life of the contract on a pro rata basis.
Revenue is reflected net of all provisions for estimated returns and allowances.
INVENTORY
Inventory consists primarily of hardware and software products and other
related parts. It is valued at the lower of cost or market on a first-in,
first-out basis. Market is current selling price.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The Company provides for
depreciation by charges to operations based upon estimated useful lives of the
assets using the straight-line method. Maintenance and repair costs are charged
to expense when incurred.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company reflects accounts receivable at net realizable value. There is
an allowance for doubtful accounts of $40,149 and $33,008 at December 31, 1998
and 1999, respectively.
INCOME TAXES
The Company has elected under the Internal Revenue Service Code to be taxed
as an S corporation which is also effective for state tax purposes. In lieu of
corporate income taxes, the shareholders of an S corporation are taxed on their
proportionate share of the company's taxable income. Therefore, no provision or
liability for federal income tax has been included in the financial statements.
However, state and city taxes calculated at the greater of minimum, regular or
alternative tax methods have been provided for in the financial statements.
Upon consummation of an agreement to sell the outstanding stock of the
Company to Futurelink Corp. (see Note 13), the Company's status as an S
corporation under the Code will automatically terminate and normal federal and
state corporate income tax rates will apply.
F-60
<PAGE> 146
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On a pro forma basis (unaudited), assuming the Company's status as an S
corporation terminated as of December 31, 1997, the Company would have had pro
forma federal and state tax expense of $4,305 and $0 for the years ended
December 31, 1998 and 1999, respectively.
DEFERRED SERVICE CONTRACT INCOME
The Company sells service contracts which may cover a period of time of one
year or more. At December 31, 1999 several service contracts were prepaid.
Management determines deferred service contract income based upon the contract
period. The amount of deferred service contract income is shown as other current
liabilities.
NOTE 3 CASH AND CASH EQUIVALENTS
Cash and cash equivalents include a certificate of deposit which represents
an investment in a three month certificate of deposit, which is being held as
collateral pursuant to the Company's line of credit arrangement (Note 4). The
investment is shown at cost. At December 31, 1998 and 1999, the Company held a
certificate of deposit of $30,538 and $31,867, respectively.
NOTE 4 LINE OF CREDIT
The Company has a line of credit with a bank, which is in the form of a
time secured loan maturing March 14, 2000. The loan is secured by eligible
accounts receivable and a certificate of deposit held with the bank (see Note
3). The Company can borrow up to 70% of eligible accounts receivable
(outstanding 90 days or less) up to $1,000,000 and $2,000,000 at December 31,
1998 and 1999, respectively. Interest is payable monthly at 1.50% over the
bank's prime rate which amounted to 10.00% at December 31, 1998 and 1999. As of
December 31, 1998 and 1999, outstanding borrowings under the line of credit are
$950,000 and $2,000,000, respectively. Loans payable to shareholders are
subordinated to this time secured loan.
NOTE 5 LOANS PAYABLE -- RELATED PARTIES
Loans payable to shareholders and related parties consists of borrowings
for working capital purposes and are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Shareholders........................................... $150,000 $150,000
Related Parties --
Madison Resources Consulting, Inc.................... 0 100,940
Madison Resources Consulting NJ, Inc................. 0 18,835
-------- --------
$150,000 $269,775
======== ========
</TABLE>
Loans payable to shareholders are unsecured, bear interest at a rate of
8.5%, and are subordinated to the bank line of credit. Loans from related
parties are unsecured and do not bear interest.
NOTE 6 LEGAL SETTLEMENT PAYABLE
In 1999, the Company agreed to pay a settlement in the amount of $550,000
relating to a lawsuit in which the plaintiff alleged that the Company took key
employees away from the plaintiff by offering them
F-61
<PAGE> 147
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 LEGAL SETTLEMENT PAYABLE (CONTINUED)
positions. The payment of this settlement is personally guaranteed by the
shareholders of the corporation. Additional capital has been contributed to the
corporation to fund this liability. $250,000 was paid in early 2000.
NOTE 7 ADDITIONAL PAID IN CAPITAL
The shareholders contributed additional capital of $550,000 for the purpose
of funding the payment due on the legal settlement (Note 6). This contribution
was still due to the corporation on December 31, 1999. $250,000 was contributed
in early 2000.
NOTE 8 RELATED PARTY TRANSACTIONS
During 1998 and 1999, the Company had transactions with affiliated
companies, Madison Consulting Resources, Inc., a Company which is owned by the
father of the shareholders of the Company and Madison Consulting Resources NJ,
Inc. During 1998 and 1999, the Company shared office space with these affiliated
companies, and charged overhead, primarily for rent and shared administrative
salaries. Management believes that the allocation of common expenses to the
affiliated companies are reasonable and consistent with what the expenses would
have been on a stand-alone basis.
Following is a summary of transactions and balances with these affiliated
companies for 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Sales....................................................... $435,558 $ 46,794
======== ========
Outsourced labor expenses................................... $ 0 $285,352
======== ========
Accounts receivable (included in the accompanying balance
sheets)................................................... $ 72,102 $ 1,108
======== ========
Due from affiliated company (included in the accompanying
balance sheets)........................................... $ 16,204 $ 0
======== ========
Account payable (included in the accompanying balance
sheets)................................................... $ 0 $107,616
======== ========
Due to affiliated company (included in the accompanying
balance sheets)........................................... $ 0 $119,775
======== ========
Overhead charged (included as a reduction to general and
administrative expenses)
Madison Consulting Resources, Inc......................... $202,912 $ 19,152
Madison Consulting Resources NJ, Inc...................... 15,291 22,848
-------- --------
$218,203 $ 42,000
======== ========
</TABLE>
NOTE 9 LEASES
The Company leases office space under an operating lease expiring in 2007.
Total rental expense recorded in the financial statements under this office
lease was $130,953 and $179,811 for 1998 and 1999, respectively.
F-62
<PAGE> 148
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 LEASES (CONTINUED)
Future minimum rental payments at December 31, 1999, under this operating
lease is as follows:
<TABLE>
<S> <C>
Year ended December 31,
2000...................................................... $ 273,726
2001...................................................... 273,726
2002...................................................... 273,726
2003...................................................... 273,726
2004...................................................... 212,296
Thereafter................................................ 349,267
----------
$1,656,467
==========
</TABLE>
There is an informal agreement with an affiliated company, Madison
Consulting Resources NJ, Inc. to share rent related to shared office space. In
1999, $51,614 of Madison Technology's lease payments were paid by this
affiliate.
NOTE 10 INCOME TAXES
Income tax expense for the years ended December 31, 1998 and 1999 is
comprised of the following:
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
New York State franchise tax............................... $ 325 $ 425
New York City corporation tax.............................. 7,256 622
------ ------
$7,581 $1,047
====== ======
</TABLE>
NOTE 11 PENSION PLAN
The Company has adopted a qualified pension plan (the "Plan") under
provisions of Section 401(k) of the Internal Revenue Code. Under the provisions
of the Plan, each participant is able to defer a percentage of his compensation
up to statutory maximums. The plan is administered by a professional retirement
plan consulting firm and assets are held in trust in mutual funds run by a major
insurance company. The Company has not made any contributions to the Plan for
the years ending December 31, 1998 and 1999, respectively.
NOTE 12 CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash equivalents
and trade receivables. The Company places its cash with federally insured
financial institutions and as of December 31, 1998 and 1999, the Company's
balances do not exceed federally insured limits. Fair value of these financial
instruments approximates their carrying values.
Trade receivables are primarily short-term receivables which arise in the
normal course of business. The Company generally does not require collateral,
and all of its trade receivables are unsecured. At December 31, 1999, the
Company had one customer which had an accounts receivable balance of
approximately 15% of the total accounts receivable balance. There were no other
customers that individually had accounts receivable balances exceeding 10% of
the total accounts receivable balance for the years ended December 31, 1998 and
1999, respectively.
F-63
<PAGE> 149
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 SUBSEQUENT EVENTS
On February 1, 2000, Microlan Systems, Inc., doing business as Madison
Technology Group, as well as sister companies Madison Consulting Resources Inc.
and Madison Consulting Resources of New Jersey (collectively "Madison"), entered
into an agreement to sell all of their existing and outstanding shares to
Futurelink Corp. ("Futurelink") Under the terms of the agreement, Futurelink
will pay total consideration of $57.5 million consisting of $6.5 million in
cash, $7.25 million in short term notes and 1.975 million common shares of
Futurelink for 100% of Madison. The transaction is expected to close by February
29, 2000.
F-64
<PAGE> 150
MADISON CONSULTING RESOURCES, INC.
DECEMBER 31, 1998 AND 1999
F-65
<PAGE> 151
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Madison Consulting Resources, Inc.
New York, New York
We have audited the accompanying balance sheets of Madison Consulting
Resources, Inc. as of December 31, 1998 and 1999, and the related statements of
income, shareholders equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. Our audits include examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our audits
also include assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Madison Consulting
Resources, Inc. as of December 31, 1998 and 1999, and the results of its
operations and cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ JOEL E. SAMMET & CO.
Certified Public Accountants
New York, New York
February 15, 2000
F-66
<PAGE> 152
MADISON CONSULTING RESOURCES, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 51,186 $ 4,448
Accounts receivable (less allowance for doubtful accounts
of $10,000 at December 31, 1999) (Note 2).............. 620,914 695,473
Due from affiliate (Note 6)............................... 0 100,940
Due from related party (Note 4)........................... 672,238 738,225
Prepaid expenses.......................................... 0 11,512
Other current assets...................................... 0 1,713
---------- ----------
Total Current Assets.............................. 1,344,338 1,552,311
Other assets.............................................. 7,000 1,185
---------- ----------
Total Assets...................................... $1,351,338 $1,553,496
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses..................... $ 154,556 $ 130,039
Due to affiliate (Note 6)................................. 16,204 0
Line of credit (Note 3)................................... 785,000 900,000
Income taxes payable...................................... 1,028 12,801
---------- ----------
Total Current Liabilities......................... 956,788 1,042,840
Long-Term Liabilities
Loan payable -- shareholder (Note 5)...................... 437,400 437,400
---------- ----------
Total Liabilities................................. 1,394,188 1,480,240
---------- ----------
Shareholders' Equity
Capital stock -- 50 shares issued and outstanding......... 20,000 20,000
Retained (deficit) earnings............................... (62,850) 53,256
---------- ----------
Total Shareholders' Equity........................ (42,850) 73,256
---------- ----------
Total Liabilities and Shareholders' Equity........ $1,351,338 $1,553,496
========== ==========
</TABLE>
See the Accompanying Notes to Financial Statements.
F-67
<PAGE> 153
MADISON CONSULTING RESOURCES, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Service revenues............................................ $2,577,819 $3,725,665
Cost of service revenues.................................... 1,980,654 2,534,937
Selling, general and administrative expenses................ 568,357 1,061,821
---------- ----------
Operating income before income taxes...................... 28,808 128,907
Provision for state and city taxes.......................... 1,028 12,801
---------- ----------
Net income.................................................. $ 27,780 $ 116,106
========== ==========
Unaudited pro forma information:
Pro forma provision for income taxes...................... $ 11,811 $ 52,852
========== ==========
Pro forma net income...................................... $ 16,997 $ 76,055
========== ==========
</TABLE>
See the Accompanying Notes to Financial Statements.
F-68
<PAGE> 154
MADISON CONSULTING RESOURCES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
----------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
------ ------- --------- --------
<S> <C> <C> <C> <C>
BALANCES AS OF DECEMBER 31, 1997.................... 50 $20,000 $(90,630) $(70,630)
Net income.......................................... 0 0 27,780 27,780
-- ------- -------- --------
BALANCES AS OF DECEMBER 31, 1998.................... 50 20,000 (62,850) (42,850)
Net income.......................................... 0 0 116,106 116,106
-- ------- -------- --------
BALANCES AS OF DECEMBER 31, 1999.................... 50 $20,000 $ 53,256 $ 73,256
== ======= ======== ========
</TABLE>
See the Accompanying Notes to Financial Statements.
F-69
<PAGE> 155
MADISON CONSULTING RESOURCES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income................................................ $ 27,780 $ 116,106
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for losses on accounts receivable............ 0 84,998
(Increase) decrease in operating assets:
Accounts receivable.................................. (370,062) (159,557)
Due from affiliate................................... 0 (100,940)
Prepaid expenses..................................... 0 (11,512)
Other current assets................................. 0 (1,713)
Other assets......................................... (7,000) 5,815
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses................ 35,089 (24,517)
Due to affiliate..................................... 12,088 (16,204)
Income taxes payable................................. 1,028 11,773
--------- ---------
Net Used By Operating Activities.................. (301,077) (95,751)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit.......................... 785,000 115,000
Amounts received on loans from shareholder................ 187,400 0
Payments on loans due from related party.................. (672,238) (65,987)
--------- ---------
Net Cash Provided By Financing Activities......... 300,162 49,013
--------- ---------
Net decrease in cash........................................ (915) (46,738)
Cash at January 1, 1998 and 1999............................ 52,101 51,186
--------- ---------
Cash at December 31, 1998 and 1999.......................... $ 51,186 $ 4,448
========= =========
</TABLE>
Cash paid for income taxes for the years ended December 31, 1998 and 1999 was
$625 and $1,028, respectively. Cash paid for interest for the years ended
December 31, 1998 and 1999 was $17,865 and $79,106, respectively.
See the Accompanying Notes to Financial Statements.
F-70
<PAGE> 156
MADISON CONSULTING RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 1 NATURE OF BUSINESS
Madison Consulting Resources, Inc. (the "Company") was formed in 1997 and
is a provider of information technology through placement of computer
consultants on a temporary and permanent basis to Fortune 1000 companies.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized from the temporary placement of computer consultants
as services are performed. Permanent placement revenues are recognized when
computer consultants are placed. Revenue is reflected net of estimated returns
and allowances.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company reflects accounts receivable at net realizable value. There is
no allowance for doubtful accounts at December 31, 1998. There is an allowance
for doubtful accounts at December 31, 1999 of $10,000.
INCOME TAXES
The Company has elected under the Internal Revenue Service Code to be taxed
as an S corporation, which is also effective for state tax purposes. In lieu of
corporate income taxes, the shareholders of an S corporation are taxed on their
proportionate share of the company's taxable income. Therefore, no provision or
liability for federal income tax has been included in the financial statements.
However, state and city taxes calculated at the greater of minimum, regular or
alternative tax methods have been provided for in the financial statements.
Upon consummation of an agreement to sell the outstanding stock of the
Company to Futurelink Corp. (see Note 8), the Company's status as an S
corporation under the Code will automatically terminate and normal federal and
state corporate income tax rates will apply.
On a pro forma basis (unaudited), assuming the Company's status as an S
corporation terminated as of December 31, 1997, the Company would have had pro
forma federal and state tax expense of $11,811 and $52,852 for the years ended
December 31, 1998 and 1999, respectively.
NOTE 3 LINE OF CREDIT
The Company has a line of credit with a bank, which is in the form of a
time secured loan maturing March 14, 2000. The loan is secured by eligible
accounts receivable. The Company can borrow up to 80% of eligible accounts
receivable (outstanding 90 days or less) up to $1,000,000 and $2,000,000 at
December 31, 1998 and 1999, respectively. Interest is payable monthly at 1.50%
over the bank's prime rate which amounted to 10.00% at December 31, 1998 and
1999. As of December 31, 1998 and 1999,
F-71
<PAGE> 157
MADISON CONSULTING RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 LINE OF CREDIT (CONTINUED)
outstanding borrowings under the line of credit was $785,000 and $900,000,
respectively. Loan payable to shareholder is subordinated to this time secured
loan.
NOTE 4 DUE FROM RELATED PARTY
During 1998 and 1999, the Company had transactions with an affiliated
company, Madison Consulting Resources NJ, Inc. ("MCR NJ") a company which is
majority owned by the sole shareholder of the Company. During 1998 and 1999, the
Company shared office expenses with MCR NJ, and charged it for common office and
administrative expenses paid for or incurred by the Company primarily based on
an allocation of monthly sales or outstanding accounts receivable balances. In
addition, the Company charged MCR NJ $120,000 for management services for the
year ended December 31, 1998. Management believes that the allocation of common
expenses from Microlan Systems, Inc. are reasonable and consistent with what the
expenses would have been on a stand-alone basis.
The Company also loaned MCR NJ amounts for working capital purposes. At
December 31, 1998 and 1999, the Company had balances due from MCR NJ in the
amount of $672,238 and $738,225, respectively.
NOTE 5 LOAN PAYABLE -- SHAREHOLDER
Loan payable to shareholder consists of borrowings for working capital
purposes and amounted to $437,400 at December 31, 1998 and 1999.
Loan payable to shareholder is unsecured and is subordinated to the bank
line of credit.
NOTE 6 RELATED PARTY TRANSACTIONS
During 1998 and 1999, the Company had transactions with an affiliated
company, Microlan Systems, Inc. DBA Madison Technology Group, a company which is
owned by the sons of the sole shareholder of the Company. During 1998 and 1999,
the Company shared office space with this affiliated company, and was charged
for overhead, primarily for rent and shared administrative salaries.
Following is a summary of transactions and balances with this affiliated
company for 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Sales....................................................... $ 0 $285,352
======== ========
Purchase of computer consultants labor (included in cost of
sales).................................................... $435,558 $ 46,784
======== ========
Accounts receivable (included in the accompanying balance
sheets)................................................... $ 0 $107,616
======== ========
Due from affiliated company (included in the accompanying
balance sheets)........................................... $ 0 $100,940
======== ========
Accounts payable (included in the accompanying balance
sheets)................................................... $ 72,102 $ 1,108
======== ========
Due to affiliated company (included in the accompanying
balance sheets)........................................... $ 16,204 $ 0
======== ========
Overhead charged, reduced by $15,291 and $22,848 in 1998 and
1999, respectively, for amounts allocated to MCR NJ
(included in general and administrative expenses)......... $202,912 $ 19,152
======== ========
</TABLE>
F-72
<PAGE> 158
MADISON CONSULTING RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash equivalents
and trade receivables. The Company places its cash with federally insured
financial institutions and as of December 31, 1998 and 1999, the Company's
balances do not exceed federally insured limits. Fair value of these financial
instruments approximates their carrying values.
Trade receivables are primarily short-term receivables which arise in the
normal course of business. The Company generally does not require collateral,
and all of its trade receivables are unsecured. At December 31, 1998,
approximately 38% of the Company's trade receivables were represented by two
customers, with one customer representing approximately 25% of the outstanding
trade receivable balance. At December 31, 1999, approximately 38% of the
Company's trade receivables were represented by two customers, with one customer
representing approximately 22% of the outstanding trade receivable balance.
There were no other customers that individually had accounts receivable balances
exceeding 10% of the total accounts receivable balance for the year ended
December 31, 1998 and 1999, respectively.
NOTE 8 SUBSEQUENT EVENTS
On February 1, 2000, Microlan Systems, Inc., doing business as Madison
Technology Group, as well as sister companies Madison Consulting Resources Inc.
and Madison Consulting Resources of New Jersey (collectively "Madison"), entered
into an agreement to sell all of their existing and outstanding shares to
Futurelink Corp. ("Futurelink") Under the terms of the agreement, Futurelink
will pay total consideration of $57.5 million consisting of $6.5 million in
cash, $7.25 million in short term notes and 1.975 million common shares of
Futurelink for 100% of Madison. The transaction is expected to close by February
29, 2000.
F-73
<PAGE> 159
MADISON CONSULTING RESOURCES NJ, INC.
DECEMBER 31, 1998 AND 1999
F-74
<PAGE> 160
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Madison Consulting Resources NJ, Inc.
New York, New York
We have audited the accompanying balance sheets of Madison Consulting
Resources NJ, Inc. as of December 31, 1998 and 1999, and the related statements
of income, shareholders' equity and cash flows for the year then ended and for
the period from inception January 22, 1998 to December 31, 1998. 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 have conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 Madison Consulting Resources
NJ, Inc. as of December 31, 1998 and 1999, and the results of its operations and
cash flows for the year and the initial period then ended in conformity with
generally accepted accounting principles.
/s/ JOEL E. SAMMET & CO.
Certified Public Accountants
New York, New York
February 15, 2000
F-75
<PAGE> 161
MADISON CONSULTING RESOURCES NJ, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 43,320 $ 3,442
Accounts receivable -- trade (less allowance for doubtful
accounts of $10,000 at December 31, 1999).............. 670,738 1,159,172
Loan receivable -- shareholder............................ 8,000 25,500
Due from affiliate (Note 4)............................... 0 18,835
Prepaid expenses.......................................... 0 22,447
Other current assets...................................... 0 305
-------- ----------
Total Current Assets.............................. 722,058 1,229,701
-------- ----------
Property and Other Assets
Property and equipment (net of accumulated depreciation of
$11,772)............................................... 0 52,347
Other assets.............................................. 0 442
-------- ----------
Total Property, Equipment and Other Assets........ 0 52,789
-------- ----------
Total Assets...................................... $722,058 $1,282,490
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses..................... $ 7,920 $ 263,460
Loan payable -- shareholder............................... 0 5,000
Income taxes payable...................................... 200 4,796
Due to related party (Note 3)............................. 672,238 738,225
-------- ----------
Total Current Liabilities......................... 680,358 1,011,481
-------- ----------
Shareholders' Equity
Capital stock -- 200 shares issued and outstanding........ 20,000 20,000
Retained earnings......................................... 21,700 251,009
-------- ----------
Total Shareholders' Equity........................ 41,700 271,009
-------- ----------
Total Liabilities and Shareholders' Equity........ $722,058 $1,282,490
======== ==========
</TABLE>
See the Accompanying Notes to Financial Statements.
F-76
<PAGE> 162
MADISON CONSULTING RESOURCES NJ, INC.
STATEMENTS OF INCOME
FROM INCEPTION JANUARY 22, 1998 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Service revenues............................................ $2,512,757 $6,404,652
Cost of service revenues.................................... 1,850,451 4,765,283
Selling, general and administrative expenses................ 640,406 1,405,064
---------- ----------
Income before income taxes................................ 21,900 234,305
Provision for state taxes................................... 200 4,996
---------- ----------
Net income.................................................. $ 21,700 $ 229,309
========== ==========
Unaudited pro forma information:
Pro forma income tax expense.............................. $ 8,979 $ 96,065
========== ==========
Pro forma net income...................................... $ 12,921 $ 133,244
========== ==========
</TABLE>
See the Accompanying Notes to Financial Statements.
F-77
<PAGE> 163
MADISON CONSULTING RESOURCES NJ, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FROM INCEPTION JANUARY 22, 1998 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
<S> <C> <C> <C> <C>
Common stock issued................................. 200 $20,000 $ 0 $ 20,000
Net income.......................................... 0 0 21,700 21,700
--- ------- -------- --------
BALANCES AS OF DECEMBER 31, 1998.................... 200 20,000 21,700 41,700
Net income.......................................... 0 0 229,309 229,309
--- ------- -------- --------
BALANCES AS OF DECEMBER 31, 1999.................... 200 $20,000 $251,009 $271,009
=== ======= ======== ========
</TABLE>
See the Accompanying Notes to Financial Statements.
F-78
<PAGE> 164
MADISON CONSULTING RESOURCES NJ, INC.
STATEMENT OF CASH FLOWS
FROM INCEPTION JANUARY 22, 1998 TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 21,700 $ 229,309
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for losses on accounts receivable............ 0 13,923
Depreciation........................................... 0 11,772
(Increase) decrease in operating assets:
Accounts receivable.................................. (670,738) (502,357)
Due from affiliate................................... 0 (18,835)
Prepaid expenses..................................... 0 (22,447)
Other current assets................................. 0 (305)
Other assets......................................... 0 (442)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses................ 7,920 255,540
Income taxes payable................................. 200 4,596
--------- ---------
Net Cash Used By Operating Activities............. (640,918) (29,246)
CASH FLOWS (USED BY) INVESTING ACTIVITIES:
Purchase of computers, office equipment and furniture and
fixtures............................................... 0 (64,119)
--------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Payments on loan receivable to shareholder................ (8,000) (17,500)
Amounts received from loan payable to shareholder......... 0 5,000
Amounts received on loan payable to related party......... 672,238 65,987
Proceeds from issuance of capital stock................... 20,000 0
--------- ---------
Net Cash Provided By Financing Activities......... 684,238 53,487
--------- ---------
Net increase (decrease) in cash............................. 43,320 (39,878)
Cash at January 1, 1998 and 1999............................ 0 43,320
--------- ---------
Cash at December 31, 1998 and 1999.......................... $ 43,320 $ 3,442
========= =========
</TABLE>
Cash paid for income taxes for the years ended December 31, 1998 and 1999 was
$-0- and $400, respectively. Cash paid for interest for the years ended December
31, 1998 and 1999 was $-0- and $96,958, respectively.
See the Accompanying Notes to Financial Statements.
F-79
<PAGE> 165
MADISON CONSULTING RESOURCES NJ, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 1 NATURE OF BUSINESS
Madison Consulting Resources NJ, Inc. (the "Company") was formed in 1998
and is a top provider of information technology through placement of computer
consultants on a temporary and permanent basis to Fortune 1000 companies.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized from the temporary placement of computer consultants
as services are performed. Permanent placement revenues are recognized when
computer consultants are placed. Revenue is reflected net of estimated returns
and allowances.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company reflects accounts receivable at net realizable value. There is
no allowance for doubtful accounts at December 31, 1998. There is an allowance
for doubtful accounts at December 31, 1999 of $10,000.
INCOME TAXES
The Company has elected under the Internal Revenue Service Code to be taxed
as an S corporation. In lieu of corporate income taxes, the shareholders of an S
corporation are taxed on their proportionate share of the company's taxable
income. Therefore, no provision or liability for federal income tax has been
included in the financial statements. However, state taxes calculated at the
greater of minimum, regular or alternative tax methods have been provided for in
the financial statements.
Upon consummation of an agreement to sell the outstanding stock of the
Company to Futurelink Corp. (see Note 6), the Company's status as an S
corporation under the Code will automatically terminate and normal federal and
state corporate income tax rates will apply.
On a pro forma basis (unaudited), assuming the Company's status as an S
corporation terminated as of December 31, 1997, the Company would have had pro
forma federal and state tax expense of $8,979 and $96,065 for the years ended
December 31, 1998 and 1999.
NOTE 3 DUE TO RELATED PARTY
During 1998 and 1999, the Company had transactions with an affiliated
company, Madison Consulting Resources, Inc. ("MCR"), a company which is owned by
the majority shareholder of the Company. During 1998 and 1999, the Company
shared office expenses with MCR, and was charged for common office and
administrative expenses paid or incurred by MCR primarily based on an allocation
of monthly sales or outstanding accounts receivable balances. In addition, MCR
charged the Company $120,000 for management services for the year ended December
31, 1998.
F-80
<PAGE> 166
MADISON CONSULTING RESOURCES NJ, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company also had borrowings from MCR for working capital purposes. At
December 31, 1998 and 1999, the Company had balances due to MCR in the amount of
$672,238 and $738,225, respectively.
NOTE 4 RELATED PARTY TRANSACTIONS
During 1998 and 1999, the Company was allocated with overhead charges by
MCR from an affiliated company, Microlan Systems, Inc. DBA Madison Technology
Group, a company which is owned by the sons of the majority shareholder of the
Company. For the year ending December 31, 1998 and 1999, overhead allocated by
MCR from this affiliate amounted to $15,291 and $22,848, respectively, and is
included in general and administrative expenses in the accompanying statements
of income. Management believes that the allocation of common expenses from
Microlan Systems, Inc. are reasonable and consistent with what the expenses
would have been on a stand-alone basis.
At December 31, 1999, the Company had a balance due from this affiliated
company in the amount of $18,835.
NOTE 5 CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash equivalents
and trade receivables. The Company places its cash with federally insured
financial institutions and as of December 31, 1998 and 1999, the Company's
balances do not exceed federally insured limits. Fair value of these financial
instruments approximates their carrying values.
Trade receivables are primarily short-term receivables which arise in the
normal course of business. The Company generally does not require collateral,
and all of its trade receivables are unsecured. At December 31, 1998,
approximately 75% of the Company's trade receivables were represented by three
customers, with one customer representing approximately 40% of the outstanding
trade receivable balance. At December 31, 1999, approximately 70% of the
Company's trade receivables were represented by two customers, with one customer
representing approximately 52% of the outstanding trade receivable balance.
There were no other customers that individually had accounts receivable balances
exceeding 10% of the total accounts receivable balance for the year ended
December 31, 1998 and 1999, respectively.
NOTE 6 SUBSEQUENT EVENTS
On February 1, 2000, Microlan Systems, Inc., doing business as Madison
Technology Group, as well as sister companies Madison Consulting Resources Inc.
and Madison Consulting Resources of New Jersey (collectively "Madison"), entered
into an agreement to sell all of their existing and outstanding shares to
Futurelink Corp. ("Futurelink") Under the terms of the agreement, Futurelink
will pay total consideration of $57.5 million consisting of $6.5 million in
cash, $7.25 million in short term notes and 1.975 million common shares of
Futurelink for 100% of Madison. The transaction is expected to close by February
29, 2000.
F-81
<PAGE> 167
EXECUTIVE LAN MANAGEMENT, INC.,
DBA MICRO VISIONS
FINANCIAL STATEMENTS
F-82
<PAGE> 168
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Executive LAN Management, Inc., dba Micro Visions
We have audited the accompanying balance sheets of Executive LAN
Management, Inc., dba Micro Visions (the "Company") as of December 31, 1997 and
1998 and September 30, 1999, and the related statements of operations,
shareholders' equity, and cash flows for the years ended December 31, 1997 and
1998 and the nine months 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Executive LAN Management,
Inc., dba Micro Visions at December 31, 1997 and 1998 and September 30, 1999,
and the results of its operations and its cash flows for the years ended
December 31, 1997 and 1998 and the nine months ended September 30, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Orange County, California
November 17, 1999
F-83
<PAGE> 169
EXECUTIVE LAN MANAGEMENT, INC.,
DBA MICRO VISIONS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.................................... $ 690,000 $ 157,000 $ 234,000 $ 135,000
Accounts receivable, less allowance for
doubtful accounts of $79,000 and
$115,000 at December 31, 1997 and
1998, respectively, and $50,000 and
$531,000 at September 30, 1998 and
1999, respectively................... 1,052,000 2,063,000 2,679,000 4,235,000
Inventories............................. 231,000 815,000 501,000 594,000
Advances due from officers.............. 72,000 2,000 -- --
Other current assets.................... 1,000 15,000 15,000 --
---------- ---------- ---------- ----------
Total current assets................. 2,046,000 3,052,000 3,429,000 4,964,000
Property and equipment, less accumulated
depreciation of $83,000 and $122,000 at
December 31, 1997 and 1998,
respectively, and $93,000 and $206,000
at September 30, 1998 and 1999,
respectively............................ 83,000 389,000 323,000 1,019,000
Other assets.............................. 33,000 146,000 77,000 44,000
---------- ---------- ---------- ----------
Total assets.............................. $2,162,000 $3,587,000 3,829,000 $6,027,000
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 169,000 $ 797,000 $ 511,000 $2,333,000
Line of credit.......................... 150,000 261,000 588,000 1,394,000
Income taxes payable.................... 237,000 153,000 218,000 --
Deferred income taxes................... 235,000 435,000 487,000 588,000
Bonuses payable......................... 141,000 -- -- 444,000
Commissions payable..................... 40,000 157,000 168,000 306,000
Payroll taxes payable................... -- -- -- 186,000
Other accrued expenses and other
liabilities.......................... 251,000 307,000 129,000 245,000
Deferred revenue........................ 90,000 73,000 303,000 124,000
---------- ---------- ---------- ----------
Total current liabilities................. 1,313,000 2,183,000 2,404,000 5,620,000
Commitments
Shareholders' equity:
Common stock, no par value:
Authorized shares -- 1,000,000
Issued and outstanding shares -- 200
in 1999, 1998, and 1997............ 10,000 10,000 10,000 10,000
Retained earnings....................... 839,000 1,394,000 1,415,000 397,000
---------- ---------- ---------- ----------
Total shareholders' equity........... 849,000 1,404,000 1,425,000 407,000
---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity.................................. $2,162,000 $3,587,000 $3,829,000 $6,027,000
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-84
<PAGE> 170
EXECUTIVE LAN MANAGEMENT, INC.,
DBA MICRO VISIONS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Hardware and software.................. $6,450,000 $ 8,071,000 $4,071,000 $10,458,000
Service delivery....................... 3,115,000 5,598,000 5,445,000 6,099,000
---------- ----------- ---------- -----------
9,565,000 13,669,000 9,516,000 16,557,000
---------- ----------- ---------- -----------
Costs and expenses:
Cost of hardware and software.......... 5,749,000 6,687,000 4,515,000 9,123,000
Cost of service delivery............... 758,000 1,808,000 2,254,000 1,651,000
Selling, general and administrative.... 2,158,000 4,270,000 1,909,000 6,594,000
Depreciation and amortization.......... 20,000 39,000 10,000 84,000
Interest expense....................... 10,000 44,000 -- 19,000
Interest income........................ (63,000) (34,000) -- (7,000)
---------- ----------- ---------- -----------
8,632,000 12,814,000 8,688,000 17,464,000
---------- ----------- ---------- -----------
(Loss) income before income taxes........ 933,000 855,000 828,000 (907,000)
Provision for income taxes............... 395,000 178,000 252,000 --
---------- ----------- ---------- -----------
Net income (loss)........................ $ 538,000 $ 677,000 $ 576,000 $ (907,000)
========== =========== ========== ===========
Unaudited pro forma information:
Pro forma income tax expense
(benefit)........................... $ 395,000 $ 329,000 $ 317,000 $ (357,000)
========== =========== ========== ===========
Pro forma net income (loss)............ $ 538,000 $ 526,000 $ 511,000 $ (550,000)
========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-85
<PAGE> 171
EXECUTIVE LAN MANAGEMENT, INC.,
DBA MICRO VISIONS
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996.................... 200 $10,000 $ 301,000 $ 311,000
Net income.................................... -- -- 538,000 538,000
--- ------- ---------- ----------
Balance at December 31, 1997.................... 200 10,000 839,000 849,000
--- ------- ---------- ----------
Net income (unaudited)........................ -- -- 576,000 576,000
Distributions to shareholders (unaudited)..... -- -- -- --
--- ------- ---------- ----------
Balance at September 30, 1998 (unaudited)....... 200 10,000 1,415,000 1,425,000
--- ------- ---------- ----------
Net income (unaudited)........................ -- -- 101,000 101,000
Distribution to shareholders (unaudited)...... -- -- (122,000) (122,000)
--- ------- ---------- ----------
Balance at December 31, 1998.................... 200 10,000 1,394,000 1,404,000
--- ------- ---------- ----------
Net loss...................................... -- -- (907,000) (907,000)
Distributions to shareholders................. -- -- (90,000) (90,000)
--- ------- ---------- ----------
Balance at September 30, 1999................... 200 $10,000 $ 397,000 $ 407,000
=== ======= ========== ==========
</TABLE>
See accompanying notes.
F-86
<PAGE> 172
EXECUTIVE LAN MANAGEMENT, INC.,
DBA MICRO VISIONS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income........................ $ 538,000 $ 677,000 $ 576,000 $ (907,000)
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Depreciation and amortization....... 20,000 39,000 10,000 84,000
Change in operating assets and
liabilities:
Accounts receivable............... (495,000) (1,011,000) (1,627,000) (2,172,000)
Inventories....................... (183,000) (584,000) (270,000) 221,000
Other current assets.............. -- (14,000) (14,000) 15,000
Advance due from officers......... (72,000) 70,000 72,000 2,000
Other assets...................... (25,000) (113,000) (44,000) 102,000
Accounts payable and accrued
expenses....................... 281,000 660,000 207,000 2,253,000
Income taxes payable.............. 237,000 (84,000) (19,000) (153,000)
Deferred income taxes............. 141,000 200,000 252,000 153,000
Deferred revenue.................. 90,000 (17,000) 213,000 51,000
--------- ----------- ----------- ------------
Net cash (used in) provided by
operating activities......... 532,000 (177,000) (644,000) (351,000)
INVESTING ACTIVITIES
Purchases of equipment................... (50,000) (345,000) (250,000) (714,000)
FINANCING ACTIVITIES
Distribution to shareholders............. -- (122,000) -- (90,000)
Net borrowings (repayment) from/of line
of credit.............................. (93,000) 111,000 438,000 1,133,000
--------- ----------- ----------- ------------
Net cash provided by (used in) financing
activities............................. (93,000) (11,000) 438,000 1,043,000
--------- ----------- ----------- ------------
Increase (decrease) in cash.............. 389,000 (533,000) (456,000) (22,000)
Cash at beginning of period.............. 301,000 690,000 690,000 157,000
--------- ----------- ----------- ------------
Cash at end of period.................... $ 690,000 $ 157,000 $ 234,000 $ 135,000
========= =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid............................ $ 11,000 $ 4,000 $ 3,000 $ 19,000
Income taxes paid........................ 17,000 62,000 55,000 800
</TABLE>
See accompanying notes.
F-87
<PAGE> 173
EXECUTIVE LAN MANAGEMENT, INC.
DBA MICRO VISIONS
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Executive LAN Management, Inc., dba Micro Visions (the "Company") was
incorporated in California in 1993 and is a leading reseller and service
provider of thin client/server-based computing systems. The Company also
provides a full line of information technology consulting services including
internet/intranet consulting, LAN/WAN implementation, internetworking analysis
and design, application deployment and desktop management, and Year 2000
consulting. The Company's principal markets are in the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
REVENUE RECOGNITION
The Company recognizes service delivery revenue upon delivery of service.
Hardware and software revenue is recognized upon delivery, or upon installation
when required under contract terms.
UNBILLED ACCOUNTS RECEIVABLES
Unbilled accounts receivable, representing unbilled consulting services, of
$65,000 and $89,000 at December 31, 1997 and 1998, respectively, and $88,000 and
$0 at September 30, 1998 and 1999, respectively, are billable upon attainment of
performance milestones and included in accounts receivable on the accompanying
balance sheets. The Company expects such amounts to be billed and collected
within twelve months of each respective balance sheet date.
INVENTORY
Inventory is stated at the lower of cost (first in, first out) or market
and primarily consists of prepackaged third-party computer software.
F-88
<PAGE> 174
EXECUTIVE LAN MANAGEMENT, INC.
DBA MICRO VISIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of the related
assets which range from five to seven years. Leasehold improvements are
amortized using the straight-line method over seven years. Property and
equipment were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Office furniture......................... $ 15,000 $ 90,000 $ 47,000 $ 124,000
Computer equipment....................... 149,000 376,000 329,000 978,000
Computer software........................ -- -- -- 52,000
Leasehold improvements................... 2,000 45,000 40,000 71,000
-------- --------- -------- ----------
166,000 511,000 416,000 1,225,000
Less accumulated depreciation and
amortization........................... (83,000) (122,000) (93,000) (206,000)
-------- --------- -------- ----------
$ 83,000 $ 389,000 $323,000 $1,019,000
======== ========= ======== ==========
</TABLE>
LONG-LIVED ASSETS
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121"), Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present. Implementation of SFAS No. 121 was
immaterial to the financial statements of the Company.
INCOME TAXES
Prior to July 1, 1998, the Company utilized the liability method to account
for income taxes as set forth in SFAS No. 109, Accounting for Income Taxes.
Under the liability method, deferred taxes are determined based on differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates.
Effective July 1, 1998, the shareholders of the Company elected, under
Subchapter S of the Internal Revenue Code, to include the Company's income in
their own income for federal income tax purposes. Accordingly, the Company is
generally not subject to federal income taxes.
The unaudited pro forma information included on the accompanying Statements
of Operations is presented to show the pro forma income tax expense (benefit) on
the separate return basis for periods subsequent to July 1, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash,
receivables, payables, and borrowings. The Company believes all the financial
instruments' recorded values approximate current values.
CONCENTRATION OF CREDIT RISK
The Company sells the majority of its products and provides services to
various customers, which include a variety of large companies and distributors
throughout the United States. In 1997, sales to the Company's two largest
customers accounted for 47% and 19% of total sales. Accounts receivable from
F-89
<PAGE> 175
EXECUTIVE LAN MANAGEMENT, INC.
DBA MICRO VISIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
those customers aggregated 44% of total accounts receivable at December 31,
1997. In 1998, sales to the Company's largest customer accounted for 10% of
total sales. Accounts receivable from that customer represented 12% of total
accounts receivable at December 31, 1998. In 1999, there were no individual
customers which accounted for 10% of total sales. The Company provides for
uncollectible amounts upon recognition of revenue and when specific credit
problems arise. The Company performs credit evaluations on all new customers.
During 1998, the Company did not perform credit evaluations on its customers,
however, the Company required a twenty-five percent deposit for its first time
customers. The Company generally does not require collateral on its accounts
receivable.
ADVERTISING
The Company expenses advertising costs as incurred. These costs include
promotional literature, direct mailing brochures, telemarketing and trade shows.
Advertising expense for the years ended December 31, 1997 and 1998 was $11,000
and $106,000, respectively, and $71,000 and $80,000 for the nine months ended
September 30, 1998 and 1999, respectively.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. The Company
did not have any components of comprehensive income as defined by SFAS No. 130
for any period presented.
SEGMENTS OF A BUSINESS ENTERPRISE
Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS 131 superseded
SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the results of operations or
financial position of the Company. The Company views its business as a single
segment, a network service solution company, and therefore has no reportable
segments under FAS 131. All segment disclosures are included in or can be
derived from the Company's financial statements.
CERTAIN RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform to the current period presentation.
INTERIM FINANCIAL INFORMATION
The unaudited financial statements for the nine month period ended
September 30, 1998 included herein are unaudited; however, they contain all
normal recurring accruals and adjustments which, in the opinion of management,
are necessary to present fairly the consolidated financial position of the
Company at September 30, 1998 and the results of its operations and cash flows
for the nine months ended September 30, 1998.
F-90
<PAGE> 176
EXECUTIVE LAN MANAGEMENT, INC.
DBA MICRO VISIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INCOME TAXES
Provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Current:
Federal.......................... $201,000 $(22,000) $ -- $--
State............................ 53,000 -- -- --
-------- -------- -------- --
254,000 (22,000) -- --
Deferred:
Federal.......................... 120,000 162,000 180,000 --
State............................ 21,000 38,000 72,000 --
-------- -------- -------- --
141,000 200,000 252,000 --
-------- -------- -------- --
Total provision for income taxes... $395,000 $178,000 $252,000 $--
======== ======== ======== ==
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Depreciation............................ $ 1,000 $ 1,000 $ 1,000 $ --
Other................................... -- -- 151,000 --
--------- --------- --------- ---------
Total deferred tax assets................. 1,000 1,000 152,000 --
Deferred tax liabilities:
Inventory adjustment.................... (92,000) (213,000) (167,000) (213,000)
Accrual to cash adjustment.............. (144,000) (223,000) (472,000) (223,000)
Other................................... -- -- -- (152,000)
--------- --------- --------- ---------
Net deferred tax liabilities.............. (236,000) (436,000) (639,000) (588,000)
--------- --------- --------- ---------
Total net deferred tax liabilities........ $(235,000) $(435,000) $(487,000) $(588,000)
========= ========= ========= =========
</TABLE>
On July 1, 1998, the Company changed its tax status, as defined by the
Internal Revenue Code, to Subchapter S, which eliminated the requirement for the
Company to pay federal income taxes as net income is passed through and taxable
to the individual shareholders. A state provision for income taxes will be
recorded based on a California statutory rate of 1.5% for Subchapter S
Corporations.
F-91
<PAGE> 177
EXECUTIVE LAN MANAGEMENT, INC.
DBA MICRO VISIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income tax benefit computed at the statutory federal income tax rate (34%)
and income tax expense provided in the financial statements differ as follows:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Benefit computed at the statutory
rate................................ $317,000 $ 291,000 $ 282,000 $(308,000)
S Corporation income not subject to
tax................................. -- (111,000) (24,000) 308,000
Nondeductible expenses................ 6,000 (6,000) (6,000) --
State income tax, net of federal
income tax benefit.................. 54,000 19,000 -- --
Other................................. 18,000 (15,000) -- --
-------- --------- --------- ---------
Income tax expense.................... $395,000 $ 178,000 $ 252,000 $ --
======== ========= ========= =========
</TABLE>
3. LINE OF CREDIT
The Company entered into a $2.5 million line of credit agreement with a
financial institution to finance its inventory purchases. The available credit
line is based on a percentage of the Company's eligible accounts receivable
balance, less the outstanding balance owed to the financial institution. The
outstanding balance bears interest at prime (8.25% at September 30, 1999) plus
3.03%. At September 30, 1999, the unused credit line was $1,106,000.
Substantially all of the Company's assets are collateral under the line of
credit agreement. This debt is guaranteed by the shareholders of the Company.
4. COMMITMENTS
The Company has entered into various operating leases ranging from three to
five years for its facilities. Rentals under certain leases have rent escalation
clauses as set forth in their respective lease agreements. Future minimum rental
commitments as of September 30, 1999 are as follows:
<TABLE>
<S> <C>
1999..................................................... $ 117,000
2000..................................................... 382,000
2001..................................................... 267,000
2002..................................................... 182,000
2003..................................................... 91,000
----------
$1,039,000
==========
</TABLE>
Rent expense was $36,000 and $135,000 for the years ended December 31, 1997
and 1998, respectively, and $105,000 and $206,000 for the nine months ended
September 30, 1998 and 1999, respectively.
5. RELATED PARTY TRANSACTIONS
During 1997 and 1998, the Company made various advances to its officers.
Advances in 1997 aggregated $72,000, including one advance to a shareholder in
the amount of $68,000. This advance was canceled by the Company in 1998 and
recorded as a bonus payment. Outstanding advances to officers at December 31,
1997 and 1998 was $72,000 and $2,000, respectively, and $0 and $0 at September
30, 1998 and 1999, respectively.
F-92
<PAGE> 178
EXECUTIVE LAN MANAGEMENT, INC.
DBA MICRO VISIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During the period ended September 30, 1999, the Company entered into
transactions with FutureLink Distribution Corp. ("FutureLink"). At September 30,
1999, there was a receivable from FutureLink of $107,000, which is included in
accounts receivable on the accompanying balance sheet (see Note 7).
6. PENSION PLANS
The Company has three defined contribution pension plans covering employees
over the age of 21 years with one year of service. The Company's contribution
requirements under these plans range from zero percent to one hundred percent of
participants' eligible annual compensation as defined in the plan documents. The
Company's combined contributions to these plans for the years ended December 31,
1997 and 1998 were $15,000 and $108,000, respectively, and $54,000 and $104,000
for the nine months ended September 30, 1998 and 1999, respectively.
7. SUBSEQUENT EVENTS
On June 2, 1999, the Company and the Company's shareholders signed an
Agreement and Plan of Reorganization and Merger (the "Agreement") with
FutureLink. The Agreement provides for a merger of the Company with a subsidiary
of FutureLink such that the Company's outstanding stock shall be converted into
and become a right to receive the consideration as set forth in the agreement.
On October 15, 1999, the Agreement was approved and finalized. In addition,
the name of the Company was changed from Executive LAN Management, Inc. dba
Micro Visions to FutureLink Micro Visions Corporation.
8. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company has
completed an assessment of their IT systems as well as the software and hardware
sold to its customers noting that they are Year 2000 compliant. The Company's IT
systems primarily consist of its financial reporting system. In July 1998, the
Company purchased and implemented a Year 2000 compliant financial reporting
software package totaling $42,000. The Company's non-IT systems primarily
consist of heating, sprinklers and security equipment at the Company's
facilities. The Company has completed its review and remediation of its non-IT
systems and its IT systems other than the financial reporting system. The
Company estimates that the total remaining costs to complete any required
modifications, upgrades or replacements of its IT and non-IT systems will not
have a material adverse effect on its business or results of operations. The
Company has obtained Year 2000 compliant certification letters from its major
software and hardware vendors noting that their software and hardware sold by
the Company are Year 2000 compliant. However, the failure of the Company's other
vendors and suppliers to be fully Year 2000 compliant with regards to their
products by January 1, 2000 could result in interruptions in the Company's
normal business work operations. The Company has completed contingency plans to
address the year 2000 issues that may pose a significant risk to the Company's
ongoing operations.
F-93
<PAGE> 179
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
FINANCIAL STATEMENTS
F-94
<PAGE> 180
To The Board of Directors
CN Networks, Inc.
dba Computer Networks
Pleasanton, California
We have audited the accompanying balance sheets of Computer Networks, Inc.
as of December 31, 1997 and 1998 and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We have conducted our audits in accordance with generally accepted audited
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CN Networks, Inc. dba
Computer Networks as of December 31, 1997 and 1998, and the results of its
operations and cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ MORELAND & DAVIS
Livermore, California
August 30, 1999
F-95
<PAGE> 181
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Current Assets
Cash..................................................... $ 13,913 $ 37,628
Accounts Receivable...................................... 1,077,401 1,060,736
Prepaid Federal Taxes.................................... 0 6,805
Inventory, at cost....................................... 229,783 206,672
---------- ----------
Total Current Assets............................. 1,321,096 1,311,840
---------- ----------
Property, Plant & Equipment
Property, Plant & Equipment, at cost..................... 209,409 226,832
Accumulated Depreciation................................. (99,642) (182,534)
---------- ----------
Total Property, Plant & Equipment................ 109,767 44,297
---------- ----------
Other assets
Lease Security Deposits.................................. 10,383 11,440
Deferred Tax Asset....................................... 7,923 14,635
---------- ----------
Total Other Assets............................... 18,306 26,075
---------- ----------
Total Assets..................................... $1,449,169 $1,382,213
========== ==========
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable......................................... $ 605,072 $ 381,923
Notes Payable, Current Portion (See Note 3).............. 402,564 509,381
Sales Tax Payable........................................ 23,389 34,224
Federal Income Taxes Payable............................. 13,900 0
State Franchise Taxes Payable............................ 3,031 584
Deferred Tax Liability................................... 1,055 0
---------- ----------
Total Current Liabilities........................ 1,049,011 926,112
---------- ----------
Notes Payable, Long Term (See Note 3).................... 41,899 17,119
---------- ----------
Total Liabilities................................ 1,090,910 943,231
---------- ----------
Stockholders' Equity
Common Stock, no par, 1,000,000 Shares Authorized, 10,000
Shares Issued and Outstanding......................... 10,000 10,000
Retained Earnings........................................ 348,258 428,981
---------- ----------
Total Stockholders' Equity....................... 358,258 438,981
---------- ----------
Total Liabilities and Equity..................... $1,449,169 $1,382,213
========== ==========
</TABLE>
See Accompanying Notes to the Financial Statements.
F-96
<PAGE> 182
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Revenue
Net Sales................................................. $6,439,637 $5,540,938
Sales Discounts........................................... (3,802) (2,703)
Freight................................................... 40,645 30,003
---------- ----------
Total Revenue.......................................... 6,476,480 5,568,238
---------- ----------
Cost of Sales............................................... 4,308,540 3,179,433
Purchase Returns............................................ (147) 0
---------- ----------
Gross Profit........................................... 2,168,087 2,388,805
General and Administrative Expenses......................... 1,964,094 2,229,931
---------- ----------
Net Income from Operations............................. 203,993 158,874
---------- ----------
Other Income and (Expense)
Miscellaneous Income...................................... 1,570 187
Interest Expense.......................................... (44,092) (41,176)
---------- ----------
Total Other Income and (Expense)....................... (42,521) (40,989)
---------- ----------
Earnings Before Income Taxes........................... 161,471 117,885
Provision for Income Taxes
Federal Income Taxes...................................... 43,337 24,885
State Franchise Taxes..................................... 14,863 12,277
---------- ----------
Net Income............................................. $ 103,271 $ 80,723
========== ==========
</TABLE>
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Balances as of December 31, 1996................ 1,000,000 $10,000 $244,987 $254,987
Net Income.................................... -- -- 103,271 103,271
--------- ------- -------- --------
Balances as of December 31, 1997................ 1,000,000 $10,000 348,258 358,258
Net Income.................................... -- -- 80,723 80,723
--------- ------- -------- --------
Balances as of December 31, 1998................ 1,000,000 $10,000 $428,981 $438,981
========= ======= ======== ========
</TABLE>
See Accompanying Notes to the Financial Statements.
F-97
<PAGE> 183
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income................................................ $103,271 $ 80,723
Adjustments to Reconcile Net Income to Net Cash (Used)
Provided by Operating Activities
Depreciation........................................... 58,339 82,892
Deferred Income Tax.................................... (9,931) (7,767)
(Increase) Decrease In:
Accounts Receivable.................................... (332,659) 16,664
Inventory.............................................. (153,611) 23,111
Other Assets........................................... 15 (1,057)
Prepaid Income Taxes................................... 0 (6,805)
Increase (Decrease) In:
Accounts Payable....................................... 169,757 (223,149)
Sales Tax Payable...................................... 16,855 10,835
Income Taxes Payable................................... 3,992 (16,347)
-------- ----------
Net Cash (Used) by Operating Activities................ (143,971) (40,899)
-------- ----------
Cash Flows from Investing Activities
Acquisition of Property and Equipment..................... (126,554) (17,423)
-------- ----------
Net Cash (Used) by Investing Activities................ (126,554) (17,423)
-------- ----------
Cash Flows from Financing Activities Acquisition of Debt.... 618,707 410,000
Repayment of Debt......................................... (364,387) (327,962)
-------- ----------
Net Cash Provided by Financing Activities.............. 254,320 82,038
-------- ----------
Net (Decrease) Increase in Cash............................. (16,205) 23,716
Cash at January 1, 1997 and 1998............................ 30,118 13,913
-------- ----------
Cash at December 31, 1997 and 1998.......................... $ 13,913 $ 37,628
======== ==========
</TABLE>
Cash paid for income taxes for the years ended December 31, 1997 and 1998 was
$51,210 and $68,081, respectively. Cash paid for interest for the years ended
December 31, 1997 and 1998 was $44,092 and $41,176, respectively.
See Accompanying Notes to the Financial Statements.
F-98
<PAGE> 184
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
NOTE 1 -- ORGANIZATION
Organization and Purpose
CN Networks, Inc., doing business as Computer Networks, Inc. (the Company)
was founded in 1991 and incorporated under the laws of the State of California
in 1994 with its main office located in Pleasanton, California. The Company
provides expert consulting, design and integration services for corporate remote
LAN access and dial-out needs.
The Company is governed by a Board of Directors, comprised of the president
and corporate secretary. Financial Statements are prepared in-house and reviewed
by the directors on a monthly basis.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments with an initial maturity of three months or less to be
cash equivalents. At the financial statement date, the Company had no
investments other than cash on the books.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined by the average cost method, market being replacement cost.
Property, Plant & Equipment
The cost of property, plant, and equipment is depreciated over the
estimated useful lives of the related assets. For financial reporting purposes,
the useful lives of assets are 18 to 24 months for Computer Hardware and three
years for Office Furniture and Certain Software. Useful lives for tax purposes
are five years for Computer Hardware and Software and seven years for Office
Furniture. Depreciation is computed on the straight line method for financial
reporting purposes and on the double declining balance for income tax purposes.
Maintenance and repairs are charged to operations when incurred. Betterments and
renewals are capitalized.
Advertising Costs
Advertising costs are charged to operations when incurred.
Revenue Recognition
Revenue from sales of computer and hardware sales are recognized when
products are shipped or upon installation, where applicable. Revenues from
support contracts are recognized based on the terms of the contracts, and
training revenue is recognized when performed. Revenue is reflected net of
estimated returns and allowances.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109). SFAS 109
requires, among other things, that deferred income taxes be provided for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities as part of the income tax provisions.
F-99
<PAGE> 185
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
NOTE 3 -- INVENTORIES
Inventories at December 31, 1997 and 1998 consist of:
<TABLE>
<S> <C>
Hardware.................. $ 87,318
Software.................. 142,465
--------
Total................ $229,783
========
Hardware.................. $ 75,347
Software.................. 131,325
--------
Total................ $206,672
========
</TABLE>
NOTE 4 -- LONG-TERM DEBT
Following is a summary of long-term debt at December 31, 1997 and 1998:
<TABLE>
<S> <C> <C>
10.5% note payable to bank in monthly principal installments
of $1,370 plus
interest, through November 19, 2000, secured by the assets
of the Company............................................ $ 47,934 $ 31,494
10.5% note payable to bank in monthly principal installments
of $695 plus interest, through March 18, 2000, secured by
the assets of the Company................................. 18,745 10,405
11.0% note payable to bank in monthly principal installments
of $564 plus interest, through May 18, 1998, secured by
the assets of the Company................................. 2,808 0
Line of credit with bank, maturing March 31, 1999. Interest
payable monthly at 10%, maximum line of credit is $700,000
in 1997 and $1,000,000 in 1998. Secured by accounts
receivable, expected to be refinanced. The line of credit
was renewed March 23, 1999 in the amount of $1,000,000
maturing March 31, 2000 with a rate of 9.75%.............. 374,976 484,601
--------- ---------
444,463 526,500
Less: Current maturities included in current liabilities.... (402,564) (509,381)
--------- ---------
$ 41,899 $ 17,119
========= =========
</TABLE>
Following are maturities of long-term debt for each of the next two years:
<TABLE>
<S> <C>
Year ended December 31,
1999.................................................... $509,381
2000.................................................... 17,119
--------
$526,500
========
</TABLE>
F-100
<PAGE> 186
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
NOTE 5 -- LEASES
The Company leases it's main office and a training facility under operating
leases expiring in 2001. The Company has entered into a new lease agreement for
it's main office effective September 1, 1999 and expiring 2004. Total rental
expense recorded in the financial statements for the years under these leases
was $96,514 for 1997 and $113,893 for 1998. In addition, on February 3, 1999 the
Company signed a lease for additional space to accommodate an expansion of the
training facility. Occupancy is scheduled for April, 1999. The Company also pays
lease payments on an automobile effective February, 1997 for 60 months. The
automobile lease expense recorded in the financial statements was $24,775 for
1997 and $19,551 for 1998. Future minimum rental payments under these operating
leases are as follows:
<TABLE>
<S> <C>
Year ended December 31,
1999................................................... $ 209,133
2000................................................... 245,329
2001................................................... 254,259
2002................................................... 211,691
2003................................................... 210,062
----------
$1,130,474
==========
</TABLE>
NOTE 6 -- INCOME TAXES
Income tax expense for the year ended December 31, 1997 and 1998 is
comprised of the following:
<TABLE>
<CAPTION>
1997 1998
--------------------------- ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal.................................... 48,538 5,201 43,337 31,505 6,620 24,885
State...................................... 16,010 1,147 14,863 14,485 2,208 12,277
------ ----- ------ ------ ----- ------
64,548 6,348 58,200 45,990 8,828 37,162
====== ===== ====== ====== ===== ======
</TABLE>
Deferred tax (liabilities) assets comprise the following at December 31,
1997 and 1998:
<TABLE>
<S> <C> <C>
Depreciation.............................................. $(1,055) $ 0
Gross deferred tax liabilities............................ (1,055) 0
State taxes, net of federal benefit......................... 5,808 4,564
Depreciation................................................ 2,115 10,071
Gross deferred tax assets................................. 7,923 14,635
------- -------
Net deferred tax assets................................... $ 6,868 $14,635
======= =======
</TABLE>
The net deferred tax asset represents temporary differences for future tax
deductions which can generally be realized by carryback to taxable income in
prior years.
The provisions for income taxes differ from the amount of income tax
determined by applying the applicable U.S. statutory income tax rate to pre-tax
income as follows for the years ended December 31, 1997 and 1998:
<TABLE>
<S> <C> <C>
Federal statutory rate...................................... 30% 25%
State income taxes, net of federal tax benefit and
credits................................................... 6% 7%
--- ---
36% 32%
=== ===
</TABLE>
F-101
<PAGE> 187
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
NOTE 7 -- CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash equivalents
and trade receivables. The Company places its cash with federally insured
financial institutions and as of December 31, 1997 and 1998, the Company's
balances do not exceed federally insured limits. Fair value of these financial
instruments approximates their carrying values.
The Company believes any risk of accounting loss is significantly reduced
due to the diversity of its services, end customers, and geographic sales areas.
The Company performs credit evaluations of its customers' financial condition
whenever necessary. The Company generally does not require cash collateral or
other security to support customer receivables and has historically had little
problems with collecting their accounts receivable. For the year ended December
31, 1997 the Company had two customers that individually had accounts receivable
balances exceeding 10% of the total accounts receivable balance. For the year
ended December 31, 1998 no individual customer exceeded 10% of the total
accounts receivable balance.
F-102
<PAGE> 188
To The Board of Directors
CN Networks, Inc.
dba Computer Networks, Inc.
Pleasanton, California
We have reviewed the accompanying balance sheets of CN Networks, Inc. dba
Computer Networks as of September 30, 1998 and 1999 and the related statements
of income and retained earnings and cash flows for the nine months then ended,
in accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of CN Networks, Inc.
A review consists principally of inquiries of company personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements in order for them to be
in conformity with generally accepted accounting principles.
/s/ MORELAND & DAVIS
Accountancy firm
Alameda County, California
November 3, 1999
F-103
<PAGE> 189
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 146,665 $ 272,314
Accounts Receivable....................................... 916,227 1,759,730
Inventory, at cost........................................ 263,537 201,807
---------- ----------
Total Current Assets................................. 1,326,428 2,233,850
---------- ----------
Property, Plant & Equipment
Property, Plant & Equipment, at cost...................... 209,409 242,570
Accumulated Depreciation.................................. (166,729) (205,273)
---------- ----------
Total Property, Plant & Equipment.................... 42,680 37,297
---------- ----------
Other Assets
Lease Security Deposits................................... 10,383 28,389
Deferred Tax Asset........................................ 10,976 18,188
---------- ----------
Total Other Assets................................... 21,359 46,577
---------- ----------
Total Assets......................................... $1,390,468 $2,317,724
========== ==========
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable.......................................... $ 444,091 $1,143,632
Notes Payable, Current Portion (See Note 3)............... 454,670 549,186
Sales Tax Payable......................................... 30,237 51,983
Payroll Taxes Payable..................................... 19,676 36,456
Federal Income Taxes Payable.............................. 354 11,970
State Franchise Taxes Payable............................. 2,329 2,516
---------- ----------
Total Current Liabilities............................ 951,358 1,795,743
---------- ----------
Notes Payable, Long Term (See Note 3)..................... 23,314 2,724
---------- ----------
Total Liabilities.................................... 974,672 1,798,467
---------- ----------
Stockholders' Equity
Common Stock, no par, 1,000,000 Shares Authorized, 10,000
Shares Issued and Outstanding.......................... 10,000 10,000
Retained Earnings......................................... 405,796 509,257
---------- ----------
Total Stockholders' Equity........................... 415,796 519,257
---------- ----------
Total Liabilities and Equity......................... $1,390,468 $2,317,724
========== ==========
</TABLE>
See Accountant's Review Report and Accompanying Notes.
F-104
<PAGE> 190
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue
Net Sales................................................. $3,962,871 $5,862,391
Sales Discounts........................................... (2,101) (1,012)
Freight................................................... 17,055 38,068
---------- ----------
Total Revenue.......................................... 3,977,825 5,899,447
---------- ----------
Cost of Sales............................................... 2,229,366 3,850,358
---------- ----------
Gross Profit........................................... 1,748,459 2,049,089
General and Administrative Expenses......................... 1,630,072 1,899,508
---------- ----------
Net Income from Operations........................... 118,387 149,581
---------- ----------
Other Income and (Expense)
Miscellaneous Income...................................... 187 --
Interest Expense.......................................... (28,362) (34,527)
---------- ----------
Total Other Income and (Expense)....................... (28,175) (34,527)
---------- ----------
Earnings Before Income Taxes........................... 90,212 115,054
Provision for Income Taxes
Federal Income Taxes...................................... 22,117 20,663
State Franchise Taxes..................................... 10,558 14,116
---------- ----------
32,675 34,779
---------- ----------
Net Income............................................. 57,537 80,275
Retained Earnings at Beginning of Year...................... 348,259 428,982
---------- ----------
Retained Earnings at End of Year............................ $ 405,796 $ 509,257
========== ==========
</TABLE>
See Accountant's Review Report and Accompanying Notes.
F-105
<PAGE> 191
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
STATEMENTS OF CASH FLOWS
SEPTEMBER 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income................................................ $ 57,537 $ 80,275
Adjustments to Reconcile Net Income to Net
Cash (Used) Provided by Operating Activities
Depreciation......................................... 67,087 22,739
Deferred Income Tax.................................. (3,053) (3,553)
(Decrease) Increase In:
Accounts Receivable.................................. 161,174 (698,995)
Inventory............................................ (33,754) 4,865
Other Assets......................................... -- (16,949)
Prepaid Income Taxes................................. -- 6,805
(Decrease) Increase In:
Accounts Payable..................................... (160,981) 761,709
Sales Tax Payable.................................... 6,848 17,759
Payroll Taxes Payable................................ 19,676 36,456
Income Taxes Payable................................. (15,303) 13,902
--------- ---------
Net Cash Provided by Operating Activities......... 99,231 225,014
--------- ---------
Cash Flows from Investing Activities
Acquisition of Property and Equipment..................... -- (15,738)
--------- ---------
Net Cash (Used) by Investing Activities........... -- (15,738)
--------- ---------
Cash Flows from Financing Activities
Acquisition of Debt....................................... 54,914 42,819
Repayment of Debt......................................... (21,393) (17,409)
--------- ---------
Net Cash Provided by Financing Activities......... 33,521 25,410
--------- ---------
Net Increase (Decrease) in Cash............................. 132,752 234,686
Cash at January 1, 1998 and 1999............................ 13,913 37,628
--------- ---------
Cash at September 30, 1998 and 1999......................... $ 146,665 $ 272,314
========= =========
</TABLE>
Cash paid for income taxes for the nine months ended September 30, 1998 and 1999
was $34,100 and $23,216, respectively. Cash paid for interest for the nine
months ended September 30, 1998 and 1999 was $28,362 and $34,527, respectively.
See Accountant's Review Report and Accompanying Notes.
F-106
<PAGE> 192
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Organization and Purpose
CN Networks, Inc., doing business as Computer Networks, Inc. (the Company)
was founded in 1991 and incorporated under the laws of the State of California
in 1994 with its main office located in Pleasanton, California. The Company
provides expert consulting, design and integration services for corporate remote
LAN access and dial-out needs.
The Company is governed by a Board of Directors, comprised of the president
and corporate secretary. Financial Statements are prepared in-house and reviewed
by the directors on a monthly basis.
The interim financial statements included herein are unaudited; however,
they contain all normal recurring accruals and adjustments which, in the opinion
of management, are necessary to present fairly the financial position of the
Company at September 30, 1998 and 1999 and for the nine months ended September
30, 1998 and 1999. It should be understood that accounting measurements at
interim dates inherently involve greater reliance on estimates than at year end.
The results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments with an initial maturity of three months or less to be
cash equivalents. At the financial statement date, the Company had no
investments other than cash on the books.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined by the average cost method, market being replacement cost.
Property, Plant & Equipment
The cost of property, plant, and equipment is depreciated over the
estimated useful lives of the related assets. For financial reporting purposes,
the useful lives of assets are 18 to 24 months for Computer Hardware and three
years for Office Furniture and Certain Software. Useful lives for tax purposes
are five years for Computer Hardware and Software and seven years for Office
Furniture. Depreciation is computed on the straight line method for financial
reporting purposes and on the double declining balance for income tax purposes.
Maintenance and repairs are charged to operations when incurred. Betterments and
renewals are capitalized.
See Accountant's Review Report
F-107
<PAGE> 193
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
Advertising Costs
Advertising costs are charged to operations when incurred.
Revenue Recognition
Revenue from computer hardware and software sales are recognized when
products are shipped, or upon installation, where applicable. Revenues from
support contracts are recognized based on the terms of the contracts, and
training revenue is recognized when performed. Losses on returns and contract
costs are recorded when they occur. Revenue is reflected net of estimated
returns and allowances.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109). SFAS 109
requires, among other things, that deferred income taxes be provided for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities as part of the income tax provisions.
NOTE 3 -- LONG-TERM DEBT
Following is a summary of long-term debt at September 30, 1998 and 1999:
<TABLE>
<S> <C> <C>
10.5% note payable to bank in monthly principal installments
of $1,370.00 plus interest, through November 19, 2000,
secured by the assets of the Company........................ $ 35,604 $ 20,369
10.5% note payable to bank in monthly principal installments
of $695.00 plus interest, through March 18, 2000, secured by
the assets of the Company................................... 12,490 4,120
Line of credit with bank, maturing March 31, 1999. Interest
payable monthly at 10%, maximum line of credit is
$700,000.00 in 1997 and $1,000,000.00 in 1998. Secured by
accounts receivable, expected to be refinanced.............. 429,890 527,420
--------- ---------
477,984 551,909
Less: Current maturities included in current liabilities.... (454,670) (549,185)
--------- ---------
$ 23,314 $ 2,724
========= =========
</TABLE>
Following are maturities of long-term debt for each of the next two years:
<TABLE>
<S> <C>
Year ended September 30,
2000.................................................... $549,215
2001.................................................... 2,724
--------
$551,939
========
</TABLE>
NOTE 4 -- LEASES
The Company leases it's main office and a training facility under operating
leases expiring in 2001. The Company has entered into a new lease agreement for
it's main office effective September 1, 1999 and expiring 2004. Total rental
expense recorded in the financial statements for the nine months ended
See Accountant's Review Report
F-108
<PAGE> 194
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
September 30, under these leases was $87,835 for 1998 and $123,585 for 1999. In
addition, on February 3, 1999 the Company signed a lease for additional space to
accommodate an expansion of the training facility. Occupancy is scheduled for
April, 1999. The Company also pays lease payments on an automobile effective
February, 1997 for 60 months. The automobile lease expense recorded in the
financial statements was $24,775 for 1998 and $19,551 for 1999. Future minimum
rental payments under these operating leases are as follows:
<TABLE>
<S> <C>
Year ended December 31,
1999................................................... $ 209,133
2000................................................... 245,329
2001................................................... 254,259
2002................................................... 211,691
2003................................................... 210,062
----------
$1,130,474
==========
</TABLE>
NOTE 5 -- INCOME TAXES
Income tax expense for the period ended September 30, 1998 and 1999 is
comprised of the following:
<TABLE>
<CAPTION>
1998 1999
----------------------------- -----------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal.......................... 25,894 3,777 22,117 26,966 6,303 20,663
State............................ 10,889 331 10,558 11,366 (2,750) 14,116
------ ----- ------ ------ ------ ------
36,783 4,108 32,675 38,332 3,553 34,779
====== ===== ====== ====== ====== ======
</TABLE>
Deferred tax (liabilities) assets comprise the following at September 30,
1998 and 1999:
<TABLE>
<S> <C> <C>
Depreciation................................................ $ 0 $ 0
Gross deferred tax liabilities............................ 0 0
State taxes, net of federal benefit......................... 3,423 3,650
Depreciation................................................ 7,553 14,538
------- -------
Gross deferred tax assets................................. 10,976 18,188
------- -------
Net deferred tax assets................................... $10,976 $18,188
======= =======
</TABLE>
The net deferred tax asset represents temporary differences for future tax
deductions which can generally be realized by carryback to taxable income in
prior years.
The provisions for income taxes differ from the amount of income tax
determined by applying the applicable U.S. statutory income tax rate to pretax
income as follows for the periods ended September 30, 1998 and 1999:
<TABLE>
<S> <C> <C>
Federal statutory rate...................................... 27% 28%
State income taxes, net of federal tax benefit and
credits................................................... 10% 3%
--- ---
37% 31%
=== ===
</TABLE>
See Accountant's Review Report
F-109
<PAGE> 195
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
NOTE 6 -- CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash equivalents
and trade receivables. The Company places its cash with federally insured
financial institutions and as of September 30, 1998 and 1999, the Company's
balances do not exceed federally insured limits. Fair value of these financial
instruments approximates their carrying values.
The Company believes any risk of accounting loss is significantly reduced
due to the diversity of its services, end customers, and geographic sales areas.
The Company performs credit evaluations of its customers' financial condition
whenever necessary. The Company generally does not require cash collateral or
other security to support customer receivables and has historically had little
problems with collecting their accounts receivable. For the periods ended
September 30, 1998 and 1999 the Company had one customer that individually had
an accounts receivable balance exceeding 10% of the total accounts receivable
balance.
See Accountant's Review Report.
F-110
<PAGE> 196
ASYNC TECHNOLOGIES, INC. AND ASYNC TECHNICAL INSTITUTE, INC.
COMBINED FINANCIAL STATEMENTS
F-111
<PAGE> 197
INDEPENDENT AUDITORS' REPORT
To the Director and Shareholders
Async Technologies, Inc.
Async Technical Institute, Inc.
Walled Lake, Michigan
We have audited the accompanying combined balance sheets of Async
Technologies, Inc. (a Michigan corporation) and Async Technical Institute, Inc.
(a Michigan corporation) as of December 31, 1997 and 1998, and the related
combined statements of operations, retained deficit, and cash flows for the
years then ended. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Async Technologies,
Inc. and Async Technical Institute, Inc. as of December 31, 1997 and 1998, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ M. JEVAHIRIAN & CO.
Birmingham, Michigan
February 3, 2000
F-112
<PAGE> 198
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 5,981 $ 13,478
Accounts receivable....................................... 557,867 1,541,773
Inventory
Purchased from unrelated parties....................... 73,983 220,673
Purchased from related parties......................... -- 8,970
Prepaid expenses.......................................... 12,223 --
Other current assets...................................... -- 2,264
--------- ----------
Total Current Assets.............................. 650,054 1,787,158
Property and equipment, net................................. 57,925 77,638
Other assets................................................ 2,952 4,702
--------- ----------
Total Assets...................................... $ 710,931 $1,869,498
========= ==========
LIABILITIES AND SHAREHOLDER EQUITY
Current Liabilities
Line of credit............................................ $ 234,067 $ 518,689
Accounts payable
Due to unrelated parties............................... 321,534 1,119,220
Due to related parties................................. 20,199 76,153
Accrued wages and other current liabilities............... 62,418 106,295
Deferred revenue.......................................... 238,444 322,295
--------- ----------
Total Current Liabilities......................... 876,662 2,142,652
--------- ----------
Shareholder Equity
Common stock
Async Technologies, Inc. (60,000 shares authorized;
1,000 shares issued and outstanding; no par value).... 1,000 1,000
Async Technical Institute, Inc. (60,000 shares
authorized; 100 shares issued and outstanding; no par
value)................................................ -- 100
Retained deficit.......................................... (166,731) (274,254)
--------- ----------
Total Shareholder Equity.......................... (165,731) (273,154)
--------- ----------
Total Liabilities and Shareholder Equity.......... $ 710,931 $1,869,498
========= ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-113
<PAGE> 199
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
COMBINED STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Revenue:
Hardware and software..................................... $ 3,984,151 $ 5,076,079
Service delivery.......................................... 614,408 980,159
----------- -----------
Total revenue........................................ 4,598,559 6,056,238
----------- -----------
Cost of sales:
Hardware and software
Purchased from unrelated parties....................... (2,988,661) (4,015,660)
Purchased from related parties......................... -- (79,703)
Service delivery.......................................... (237,988) (266,559)
----------- -----------
Total cost of sales.................................. (3,226,649) (4,361,922)
----------- -----------
Selling, general and administrative expenses
Provided by unrelated parties............................. (1,013,840) (1,162,506)
Provided by related parties............................... (124,732) (260,351)
----------- -----------
Total selling, general and administrative expenses... (1,138,572) (1,422,857)
----------- -----------
Depreciation................................................ (41,185) (37,982)
----------- -----------
Income from Operations............................... 192,153 233,477
Interest income............................................. 131 8
Interest expense............................................ (39,539) (33,453)
Other....................................................... (5,621) (16,988)
----------- -----------
Net Income................................................ 147,124 183,044
Retained deficit -- Beginning of year....................... (170,985) (166,731)
Shareholder distributions, net............................ (142,870) (290,567)
----------- -----------
Retained deficit -- End of year............................. $ (166,731) $ (274,254)
=========== ===========
Unaudited pro forma information:
Pro forma income tax expense.............................. $ 46,256 $ 61,074
=========== ===========
Pro forma net income...................................... $ 100,868 $ 121,970
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-114
<PAGE> 200
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 147,124 $183,044
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 41,185 37,982
Other.................................................. 5,621 16,988
Changes in working capital:
Accounts receivable.................................... 125,828 (983,906)
Inventory
Unrelated parties.................................... 40,007 (146,690)
Related parties...................................... -- (8,970)
Prepaid expenses....................................... (9,403) 12,223
Other current assets................................... -- (2,264)
Accounts payable
Unrelated parties.................................... (235,063) 777,487
Related parties...................................... -- 76,153
Accrued wages and other current liabilities............ (16,307) 43,877
Deferred revenue....................................... 166,188 83,851
--------- --------
Net Cash Provided by Operating Activities................. 265,180 89,775
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment....................... (28,630) (75,433)
Proceeds from disposal of property and equipment.......... -- 750
Payments for other assets................................. (320) (1,750)
--------- --------
Net Cash Used in Investing Activities..................... (28,950) (76,433)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................. -- 100
Proceeds from (payments on) line of credit, net........... (149,933) 284,622
Distributions to shareholder, net......................... (142,870) (290,567)
--------- --------
Net Cash Used in Financing Activities..................... (292,803) (5,845)
--------- --------
Net (Decrease) Increase in Cash............................. (56,573) 7,497
Cash -- Beginning of year................................... 62,554 5,981
--------- --------
Cash -- End of year......................................... $ 5,981 $ 13,478
========= ========
Supplemental Cash Flow Information:
Cash paid for interest during the year.................... $ 37,170 $ 34,539
========= ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-115
<PAGE> 201
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1. DESCRIPTION OF BUSINESS
Async Technologies, Inc. ("ATI") provides computer software and hardware
installation and maintenance services to medium and large businesses located in
the mid-western United States. Certain sales involve installations to multiple
locations reaching international markets.
The financial statements are prepared on a combined basis with Async
Technical Institute, Inc. ("ATII"), a company under common control. ATII began
operations in September, 1998, and provides technical training to customers of
ATI.
As described in Note 11 to the combined financial statements, the companies
were merged on October 7, 1999. The combined entities are hereinafter referred
to as the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Company's combined financial statements are prepared in accordance with
generally accepted accounting principles.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Allowance for Doubtful Accounts
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is reported.
Inventory
Inventory consists primarily of software products and is valued at the
lower of cost or market on a first-in, first-out basis. Market is current
selling price less estimated selling costs.
Property and Equipment
Property and equipment are recorded at cost. The Company provides for
depreciation by charges to operations based upon estimated useful lives of the
assets using the straight-line method. Maintenance and repair costs are charged
to expense when incurred.
Income Taxes
Historically each company, with the consent of the shareholder, has elected
under the Internal Revenue Code to be taxed as an S corporation. In lieu of
corporate income taxes, the shareholders of an S corporation are taxed on their
proportionate share of the company's taxable income. Therefore, no provision or
liability for federal income tax has been included in the combined financial
statements.
F-116
<PAGE> 202
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
Deferred Revenue
The Company sells maintenance contracts and recognizes the related revenue
over the life of the contract.
Revenue Recognition
Revenue from the sale and installation of computer software and hardware is
recognized at the point of delivery, or upon installation when required under
contract terms.
3. NOTES RECEIVABLE
At December 31, 1998, the Company has non-interest bearing notes receivable
in the amount of $2,264 from an employee which are due on demand. The notes
receivable are included in other current assets in the attached financial
statements.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Computer equipment.......................................... $111,802 $ 98,224
Furniture and fixtures...................................... 8,151 13,110
Leasehold improvements...................................... 9,110 9,110
-------- --------
129,063 120,444
Accumulated depreciation.................................... (71,138) (42,806)
-------- --------
Property and equipment, net.......................... $ 57,925 $ 77,638
======== ========
</TABLE>
5. LINE OF CREDIT
The Company has a $550,000 line of credit with a bank, which is due on
demand, secured by all assets, and personally guaranteed by the shareholder.
Interest is payable monthly at 1.50% over the bank's prime rate which amounted
to 9.50% and 10.00% at December 31, 1997 and 1998, respectively. As of December
31, 1997 and 1998, outstanding borrowings under the line of credit are $234,067
and $518,689, respectively.
6. ADVERTISING COSTS
The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising costs for the years ended December 31, 1997 and
1998 amounted to $16,001 and $25,348, respectively.
7. OPERATING LEASE
The Company has entered into a non-cancelable operating lease for its
corporate facilities which expires July 31, 2002. Scheduled payments for the
term of the lease are as follows:
<TABLE>
<S> <C>
1999...................................................... $ 31,212
2000...................................................... 105,834
2001...................................................... 110,283
2002...................................................... 61,610
</TABLE>
F-117
<PAGE> 203
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
Rent expense for the years ended December 31, 1997 and 1998 amounted to
$47,956 and $55,444, respectively.
8. PENSION PLAN
Effective January 1, 1998, the Company adopted a qualified pension plan
(the "Plan") under provisions of Section 401(k) of the Internal Revenue Code.
Under the provisions of the Plan, each participant is able to defer up to 20% of
their compensation. The Company has not made any contributions to the Plan for
the year ending December 31, 1998.
9. RELATED PARTY TRANSACTIONS
The Company purchases products and services from certain related parties.
Management and administrative services are purchased from Intelligent
Signage, Inc., an entity owned by the shareholder's parent.
The Company also purchases computer software products developed by Lakeside
Software, Inc., an entity owned by the shareholder's brother.
10. INCOME TAXES
Upon consummation of an Agreement and Plan of Reorganization and Merger
with FutureLink Michigan Acquisition Corp. (see Note 11), the Company's status
as an S corporation under the Internal Revenue Code will automatically terminate
and normal federal corporate income tax rates will apply.
On a proforma basis (unaudited), assuming the Company's status as an S
corporation terminated as of December 31, 1996, the Company would have proforma
federal income tax expense of $46,256 and $61,074 for the years ended December
31, 1997 and 1998, respectively.
11. SUBSEQUENT EVENTS
Effective August 30, 1999, Async Technologies, Inc. authorized 60,000
additional shares of common stock. The total authorized shares (120,000) are
divided into two equal classes of voting and non-voting shares. ATI also
authorized the issuance of 54,000 shares during September and October, 1999.
Effective October 7, 1999, ATI entered into a Plan of Merger with ATII.
Under the terms of the merger, all of the outstanding shares of ATII will be
converted into voting shares of ATI. Upon consummation of the merger, the
separate corporate existence of ATII shall terminate.
Effective September 7, 1999, and subject to the consummation of the above
described events, the Company entered into an Agreement and Plan of
Reorganization and Merger with Futurelink Michigan Acquisition Corp., a wholly
owned subsidiary of Futurelink Distribution Corp. (the "Parent"). Under the
terms of the agreement, all outstanding shares of the Company will be exchanged
for cash and common stock of the Parent. Upon consummation of the merger, the
separate corporate existence of the Company shall terminate.
F-118
<PAGE> 204
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Director and Shareholders
Async Technologies, Inc.
Async Technical Institute, Inc.
Walled Lake, Michigan
We have reviewed the accompanying combined balance sheets of Async
Technologies, Inc. (a Michigan corporation) and Async Technical Institute, Inc.
(a Michigan corporation) as of September 30, 1998 and 1999 and the related
combined statements of operations and retained (deficit) earnings and cash flows
for the nine months then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these combined financial
statements is the representation of the management of Async Technologies, Inc.
and Async Technical Institute, Inc.
A review consists principally of inquiries of company personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying combined financial statements in order for
them to be in conformity with generally accepted accounting principles.
/S/ M. JEVAHIRIAN & CO.
Birmingham, Michigan
February 3, 2000
F-119
<PAGE> 205
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 54,930 $ 68,958
Accounts receivable....................................... 914,807 1,409,200
Inventory
Purchased from unrelated parties....................... 198,397 316,179
Purchased from related parties......................... 41,860 --
Other current assets...................................... 2,264 1,709
---------- ----------
Total Current Assets................................. 1,212,258 1,796,046
Property and equipment, net................................. 82,296 128,187
Other assets................................................ 4,552 6,890
---------- ----------
Total Assets......................................... $1,299,106 $1,931,123
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit............................................ $ 405,989 $ 323,989
Accounts payable
Due to unrelated parties............................... 573,513 1,102,714
Due to related parties................................. 10,129 --
Accrued wages and other current liabilities............... 55,557 120,985
Deferred revenue.......................................... 334,794 303,874
---------- ----------
Total Current Liabilities............................ 1,379,982 1,851,562
---------- ----------
Shareholders' Equity
Common stock
Async Technologies, Inc.
(120,000 shares authorized; 1,000 and 36,900 shares
issued and outstanding; no par value)................. 1,000 1,000
Async Technical Institute, Inc.
(60,000 shares authorized; 100 shares issued and
outstanding; no par value)............................ 100 100
Retained (deficit) earnings............................... (81,976) 78,461
---------- ----------
Total Shareholders' Equity........................... (80,876) 79,561
---------- ----------
Total Liabilities and Shareholders' Equity........... $1,299,106 $1,931,123
========== ==========
</TABLE>
(The accompanying notes are an integral part of these combined financial
statements.)
(See accountants' review report.)
F-120
<PAGE> 206
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
COMBINED STATEMENTS OF OPERATIONS AND RETAINED (DEFICIT) EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Revenue:
Hardware and software..................................... $ 3,157,009 $ 5,050,090
Service delivery.......................................... 679,337 1,158,375
----------- -----------
Total revenue........................................ 3,836,346 6,208,465
----------- -----------
Cost of sales:
Hardware and software
Purchased from unrelated parties....................... (2,320,534) (3,749,366)
Purchased from related parties......................... (40,365) (33,134)
Service delivery.......................................... (192,334) (461,140)
----------- -----------
Total cost of sales.................................. (2,553,233) (4,243,640)
----------- -----------
Selling, general and administrative expenses
Provided by unrelated parties............................. (821,886) (1,158,402)
Provided by related parties............................... (155,873) (113,033)
----------- -----------
Total selling, general and administrative expenses... (977,759) (1,271,435)
----------- -----------
Depreciation................................................ (28,934) (36,061)
----------- -----------
Income from Operations.................................... 276,420 657,329
Interest income............................................. 8 --
Interest expense............................................ (21,711) (30,266)
Other....................................................... (12,553) --
----------- -----------
Net Income................................................ 242,164 627,063
Retained deficit -- Beginning of period..................... (166,731) (274,254)
Shareholder distributions, net............................ (157,409) (274,348)
----------- -----------
Retained (deficit) earnings -- End of period................ $ (81,976) $ 78,461
=========== ===========
Unaudited pro forma information
Pro forma income tax expense.............................. $ 80,221 $ 215,509
=========== ===========
Pro forma net income...................................... $ 161,943 $ 411,554
=========== ===========
</TABLE>
(The accompanying notes are an integral part of these combined financial
statements.)
(See accountants' review report.)
F-121
<PAGE> 207
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 242,164 $ 627,063
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 28,934 36,061
Other.................................................. 12,553 --
Changes in working capital:
Accounts receivable.................................... (356,940) 132,573
Inventory
Unrelated parties.................................... (124,414) (95,506)
Related parties...................................... (41,860) 8,970
Prepaid expenses....................................... 12,223 --
Other current assets................................... (2,264) 555
Accounts payable
Unrelated parties.................................... 251,979 (16,506)
Related parties...................................... (10,070) (76,153)
Accrued wages and other current liabilities............ (6,861) 14,690
Deferred revenue....................................... 96,350 (18,421)
--------- ---------
Net Cash Provided By Operating Activities......... 101,794 613,326
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment....................... (66,608) (86,610)
Proceeds from disposal of property and equipment.......... 750 --
Payments for other assets................................. (1,600) (2,188)
--------- ---------
Net Cash Used in Investing Activities............. (67,458) (88,798)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................. 100 --
Proceeds from (payments on) line of credit, net........... 171,922 (194,700)
Distributions to shareholder, net......................... (157,409) (274,348)
--------- ---------
Net Cash Provided By (Used in) Financing
Activities...................................... 14,613 (469,048)
--------- ---------
NET INCREASE IN CASH........................................ 48,949 55,480
Cash -- Beginning of period................................. 5,981 13,478
--------- ---------
Cash -- End of period....................................... $ 54,930 $ 68,958
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest during the period.................. $ 20,162 $ 31,688
========= =========
</TABLE>
(The accompanying notes are an integral part of these combined financial
statements.)
(See accountants' review report.)
F-122
<PAGE> 208
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Async Technologies, Inc. ("ATI") provides computer software and hardware
installation and maintenance services to medium and large businesses located in
the mid-western United States. Certain sales involve installations to multiple
locations reaching international markets.
The financial statements are prepared on a combined basis with Async
Technical Institute, Inc. ("ATII"), a company under common control. ATII began
operations in September, 1998, and provides technical training to customers of
ATI.
As described in Note 12 to the combined financial statements, the companies
were merged on October 7, 1999. The combined entities are hereinafter referred
to as the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Company's combined financial statements are prepared in accordance with
generally accepted accounting principles.
The interim financial statements included herein are unaudited; however,
they contain all normal recurring accruals and adjustments which, in the opinion
of management, are necessary to present fairly the financial position of the
Company at September 30, 1998 and 1999 and the results of operations and cash
flows for the nine months ended September 30, 1998 and 1999. The results of
operations for the nine months ended September 30, 1998 and 1999 are not
necessarily indicative of the results to be expected for the full years.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Allowance for Doubtful Accounts
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is reported.
Inventory
Inventory consists primarily of software products and is valued at the
lower of cost or market on a first-in, first-out basis. Market is current
selling price less estimated selling costs.
(See accountants' review report.)
F-123
<PAGE> 209
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
Property and Equipment
Property and equipment are recorded at cost. The Company provides for
depreciation by charges to operations based upon estimated useful lives of the
assets using the straight-line method. Maintenance and repair costs are charged
to expense when incurred.
Income Taxes
Historically, each company has elected under the Internal Revenue Code to
be taxed as an S corporation. In lieu of corporate income taxes, the
shareholders of an S corporation are taxed on their proportionate share of the
company's taxable income. Therefore, no provision or liability for federal
income tax has been included in the combined financial statements.
Deferred Revenue
The Company sells maintenance contracts and recognizes the related revenue
over the life of the contract.
Revenue Recognition
Revenue from the sale and installation of computer software and hardware is
recognized at the point of delivery, or upon installation when required under
contract terms.
3. NOTES RECEIVABLE
At September 30, 1998, the Company has non-interest bearing notes
receivable in the amount of $2,264 from an employee which are due on demand. The
notes receivable are included in other current assets in the attached financial
statements.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Computer equipment.......................................... $108,895 $155,920
Furniture and fixtures...................................... 13,521 22,248
Leasehold improvements...................................... 9,110 19,776
-------- --------
131,526 197,944
Accumulated depreciation.................................... (49,230) (69,757)
-------- --------
Property and equipment, net.......................... $ 82,296 $128,187
======== ========
</TABLE>
5. LINE OF CREDIT
The Company has a $550,000 line of credit with a bank, which is due on
demand, secured by all assets, and personally guaranteed by the shareholder.
Interest is payable monthly at 1.50% over the bank's prime rate which amounted
to 10.14% and 9.89% at September 30, 1998 and 1999, respectively. As of
(See accountants' review report.)
F-124
<PAGE> 210
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
September 30, 1998 and 1999, outstanding borrowings under the line of credit are
$405,989 and $323,989, respectively.
6. ADVERTISING COSTS
The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising costs for the nine months ended September 30,
1998 and 1999 amounted to $21,136 and $6,609, respectively.
7. OPERATING LEASE
The Company has entered into a non-cancelable operating lease for its
corporate facilities which expires July 31, 2002. Scheduled payments for the
term of the lease are as follows:
<TABLE>
<S> <C>
2000...................................................... $ 95,565
2001...................................................... 117,342
2002...................................................... 102,278
</TABLE>
Rent expense for the nine months ended September 30, 1998 and 1999 amounted
to $36,934 and $47,541, respectively.
8. PENSION PLAN
Effective January 1, 1998, the Company adopted a qualified pension plan
(the "Plan") under provisions of Section 401(k) of the Internal Revenue Code.
Under the provisions of the Plan, each participant is able to defer up to 20% of
their compensation. The Company has not made any contributions to the Plan for
the periods ending September 30, 1998 and 1999.
9. RELATED PARTY TRANSACTIONS
The Company purchases products and services from certain related parties.
Management and administrative services are purchased from Intelligent
Signage, Inc., an entity owned by the shareholders' parent.
The Company also purchases computer software products developed by Lakeside
Software, Inc., an entity owned by a shareholder of the Company.
10. ISSUANCE OF COMMON STOCK
Effective August 30, 1999, Async Technologies, Inc. authorized 60,000
additional shares of common stock. The total authorized shares (120,000) are
divided into two equal classes of voting and non-voting shares.
(See accountants' review report.)
F-125
<PAGE> 211
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
Under a non-compensatory agreement, 35,900 shares of ATI common stock were
issued to the existing shareholders and other related parties of the Company.
The shares were issued during September, 1999, as follows:
<TABLE>
<CAPTION>
SHARES
----------------
<S> <C> <C>
Beginning balance of common stock -- all Class A............ 1,000
Class A Common Stock -- with full voting rights........... 32,900
Class B Common Stock -- with no voting rights............. 3,000
------
35,900
------
Ending balance of common stock.............................. 36,900
======
</TABLE>
An additional 16,200 shares of Class B Common Stock and 1,900 of Class C
Common Stock (with limited voting rights) were issued to employees of the
Company during October, 1999.
11. INCOME TAXES
Upon consummation of an Agreement and Plan of Reorganization and Merger
with FutureLink Michigan Acquisition Corp. (see Note 12), the Company's status
as an S corporation under the Internal Revenue Code will automatically terminate
and normal federal corporate income tax rates will apply.
On a proforma basis (unaudited), assuming the Company's status as an S
corporation terminated as of December 31, 1996, the Company would have proforma
federal income tax expense of $80,221 and $215,509 for the periods ended
September 30, 1998 and 1999, respectively.
12. SUBSEQUENT EVENTS
Effective October 7, 1999, ATI entered into a Plan of Merger with ATII.
Under the terms of the merger, all of the outstanding shares of ATII will be
converted into voting shares of ATI. Upon consummation of the merger, the
separate corporate existence of ATII shall terminate.
Effective September 7, 1999, and subject to the consummation of the above
described events, the Company entered into an Agreement and Plan of
Reorganization and Merger with Futurelink Michigan Acquisition Corp., a wholly
owned subsidiary of Futurelink Distribution Corp. (the "Parent"). Under the
terms of the agreement, all outstanding shares of the Company will be exchanged
for cash and common stock of the Parent. Upon consummation of the merger, the
separate corporate existence of the Company shall terminate.
(See accountants' review report.)
F-126
<PAGE> 212
KNS HOLDINGS LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
F-127
<PAGE> 213
KNS HOLDINGS LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of the Independent Auditors.......................... F-129
Consolidated Profit and Loss Account........................ F-130
Consolidated Balance Sheets................................. F-131
Consolidated Statement of Movements in Shareholders'
Funds..................................................... F-132
Consolidated Cash Flow Statements........................... F-133
Reconciliation of Net Cash Flow to Movement in Net Debt..... F-134
Notes to the Accounts....................................... F-135
</TABLE>
F-128
<PAGE> 214
REPORT OF THE INDEPENDENT AUDITORS
To the directors of KNS Holdings Limited
We have audited the consolidated balance sheets of KNS Holdings Limited as
at February 28, 1998 and February 28, 1999, and the related consolidated profit
and loss accounts and statements of movements in invested capital and cash flows
for the periods then ended. These financial statements are the responsibility of
KNS Holdings Limited's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with United Kingdom auditing
standards which do not differ in any significant respect from 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 that our audits provide a
reasonable basis of our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of KNS Holdings
Limited at February 28, 1998 and February 28, 1999 and the consolidated results
of its operations and its consolidated cash flows for the periods then ended in
conformity with accounting principles generally accepted in the United Kingdom
which differ in certain respects from those generally accepted in the United
States (see Note 21 of Notes to the Financial Statements).
/S/ ERNST & YOUNG
Registered Auditor
Reading, England
March 28, 2000
F-129
<PAGE> 215
KNS HOLDING LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
NOTE 1998 1999 1999
---- ------------ ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
TURNOVER.................................. 2 $947,872 $18,324,373 $17,391,380
Cost of sales............................. 786,042 14,979,474 12,499,410
-------- ----------- -----------
161,830 3,344,899 4,891,970
GROSS PROFIT
Distribution expenses..................... 3,911 99,947 37,383
Selling and marketing expenses............ 80,515 1,650,021 3,423,314
Establishment expenses.................... 13,618 367,561 266,782
Administration expenses................... 36,044 593,427 421,404
-------- ----------- -----------
OPERATING PROFIT.......................... 3 27,742 633,943 743,087
Exception Item: continuing operations
Profit/(loss) on disposal of fixed asset
investments............................. -- (283,387) 99,884
Profit on disposal of fixed assets........ -- -- 11,459
Other income.............................. 5 853 57,528 98,640
Interest payable and similar charges...... 6 (17,290) (336,892) (200,383)
-------- ----------- -----------
PROFIT ON ORDINARY ACTIVITIES BEFORE
TAXATION................................ 11,305 71,192 752,687
Taxation on profit on ordinary
activities.............................. (7,447) (116,127) (249,528)
-------- ----------- -----------
PROFIT/(LOSS) ON ORDINARY ACTIVITIES AFTER
TAXATION................................ 3,858 (44,935) 503,159
Minority interests: equity................ -- (17,884) (150,948)
-- -------- ----------- -----------
PROFIT FOR THE FINANCIAL YEAR ATTRIBUTABLE
TO MEMBERS OF THE PARENT COMPANY (i).... $ 3,858 $ (62,819) $ 352,211
======== =========== ===========
</TABLE>
There are no recognized gains or losses other than the loss of $62,819 for
the year ended February 28, 1999 and profit of $3,858 for the year ended
February 28, 1998.
-------------------------
(i) A summary of the significant adjustments to profit for the year that would
be required if US generally accepted accounting principles were to be
applied instead of those generally in the United Kingdom is set forth in
Note 21 to the Financial Statements.
F-130
<PAGE> 216
KNS HOLDING LIMITED
CONSOLIDATED BALANCE SHEETS
FOR THE YEAR ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
NOTE 1998 1999 1999
---- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
FIXED ASSETS
Tangible fixed assets........................ 8 $ 410,109 $ 694,643 $ 732,376
Investments.................................. 9 344,935 522,882 99
---------- ---------- ----------
755,044 1,217,525 732,475
CURRENT ASSETS
Stocks....................................... 10 1,998,377 2,093,636 1,624,828
Debtors...................................... 11 3,537,736 3,592,460 7,046,317
Cash at bank and in hand..................... 1,221,645 539,999 1,014,813
---------- ---------- ----------
6,757,758 6,226,095 9,685,958
CREDITORS: amounts falling due within one
year....................................... 12 6,271,137 5,902,080 8,541,019
---------- ---------- ----------
NET CURRENT ASSETS......................... 486,621 324,015 1,144,939
---------- ---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES...... 1,241,665 1,541,540 1,877,414
PROVISIONS FOR LIABILITIES & CHARGES....... 13 -- 12,959 --
ACCRUALS AND DEFERRED INCOME............... 14 297,644 379,163 238,120
---------- ---------- ----------
944,021 1,149,418 1,639,294
MINORITY INTERESTS: EQUITY................. -- 291,739 421,794
---------- ---------- ----------
944,021 857,679 1,217,500
========== ========== ==========
CAPITAL AND RESERVES
Called up share capital...................... $ 237,096 $ 237,096 $ 237,096
Other reserves............................... 703,056 421,022 421,022
Profit & loss account........................ 3,858 224,428 576,639
Cumulative translation adjustment............ 11 (24,867) (17,257)
---------- ---------- ----------
Total shareholders' funds.................. $ 944,021 $ 857,679 $1,217,500
========== ========== ==========
</TABLE>
-------------------------
(i) A summary of the adjustments to invested capital that would be required if
US generally accepted accounting principles were to be applied is set forth
in Note 21 of Notes to the Financial Statements.
F-131
<PAGE> 217
KNS HOLDING LIMITED
CONSOLIDATED STATEMENT OF MOVEMENTS IN SHAREHOLDERS' FUNDS
AT FEBRUARY 28, 1999
<TABLE>
<CAPTION>
9 MONTHS
PERIOD ENDED YEAR ENDED ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Recognized profit/(loss)............................ $ 3,858 $(62,819) $ 352,211
Other movements:
New shares issued................................. 940,152 -- --
Exchange movements................................ 11 (23,523) 7,610
-------- -------- ----------
Total movements in the periods............ 944,021 (86,342) 359,821
Shareholders' funds at March 1...................... -- 944,021 857,679
-------- -------- ----------
Shareholders' funds at February 28/November 30...... $944,021 $857,679 $1,217,500
======== ======== ==========
</TABLE>
F-132
<PAGE> 218
KNS HOLDING LIMITED
CONSOLIDATED CASH FLOW STATEMENTS
AT FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
NOTES 1998 1999 1999
----- ------------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET CASH (OUTFLOW)/INFLOW FROM OPERATING
ACTIVITIES................................... 17 $ (62,432) $1,133,929 $(1,876,157)
--------- ---------- -----------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received............................ -- 57,528 98,640
Interest paid................................ -- (336,892) (200,383)
--------- ---------- -----------
Net cash outflow from returns on investments
and servicing of finance..................... -- (279,364) (101,743)
--------- ---------- -----------
TAXATION
Corporation tax paid......................... -- (142,101) (49,364)
--------- ---------- -----------
Tax paid....................................... -- (142,101) (49,364)
--------- ---------- -----------
INVESTING ACTIVITIES
Payments to acquire tangible fixed assets.... (87,190) (554,350) (336,663)
Receipts from sales of tangible fixed
assets.................................... -- 47,499 101,119
Receipts from sale of fixed asset
investment................................ -- -- 626,390
Loan to fixed asset investment............... (259,404) (193,394) --
--------- ---------- -----------
Net cash (outflow)inflow from investing
activities................................... (346,594) (700,245) 390,846
--------- ---------- -----------
Net cash (outflow)/inflow before financing..... (409,026) 12,219 (1,636,418)
--------- ---------- -----------
FINANCING
Other loan advances.......................... 959,246 -- 2,120,728
Loan repayments.............................. -- (682,064) --
--------- ---------- -----------
Net cash inflow from financing................. 959,246 (682,064) 2,120,728
--------- ---------- -----------
Increase/(decrease) in cash and cash
equivalents.................................. 17... $ 550,220 $ (669,845) $ 484,310
========= ========== ===========
</TABLE>
F-133
<PAGE> 219
KNS HOLDING LIMITED
CONSOLIDATED CASH FLOW STATEMENTS
AT FEBRUARY 28, 1999
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
NOTES 1998 1999 1999
----- ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Increase/(decrease) in cash................ $ 550,220 $ (669,845) $ 484,310
Cash inflow from increase in loans......... (959,246) -- (2,120,728)
Repayment of loans......................... -- 682,064 --
----------- ----------- -----------
Change in net debt resulting from cash
flows.................................... (409,026) 12,219 (1,636,418)
Exchange differences....................... (7,888) 75,923 37,376
Other movements............................ (2,406,528) -- --
----------- ----------- -----------
Movement in Net Debt....................... (2,823,442) 88,142 (1,599,042)
Net Debt at March 1........................ -- (2,823,442) (2,735,300)
----------- ----------- -----------
Net Debt at February 28/November 30........ $(2,823,442) $(2,735,300) $(4,334,342)
=========== =========== ===========
</TABLE>
F-134
<PAGE> 220
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS
AT FEBRUARY 28, 1999
1. ACCOUNTING POLICIES
Basis of accounting
The accounts have been prepared under the historical cost convention and in
accordance with all applicable accounting standards.
KNS Holdings Limited was incorporated on November 25, 1997 and had no
operations until its acquisition of KNS Limited, on January 15, 1998. The
accompanying financial statements for the period ended February 28, 1998 consist
of the operations of KNS Limited for the period January 15, 1998 to February 28,
1998. On November 12, 1998, the company granted options to three directors of
KNS Limited to purchase from the company 50,000 L1 ordinary shares each in KNS
Limited. These options were exercised by the directors on November 12, 1998.
Consequently, KNS Holdings Limited now owns 70% of KNS Limited.
The interim financial statements included herein are unaudited; however,
they contain all normal recurring accruals and adjustments which, in the opinion
of the directors, are necessary to present fairly the financial position of the
company at November 30, 1999 and for the nine months ended November 30, 1999. It
should be understood that accounting measurements at interim dates inherently
involve greater reliance on estimates than at year end. The results of
operations for the nine months ended November 30, 1999 are not necessarily
indicative of the results to the expected for the full year.
Turnover
Turnover represents the net invoiced value of goods and services excluding
Value Added Tax.
Fixed assets
Depreciation is provided to write off the cost of the assets over their
expected useful lives at the following annual rates/lives on a straight line
basis:
<TABLE>
<S> <C>
Computers and other equipment............................... 25%
Motor vehicles.............................................. 25%
Office equipment............................................ 25%
</TABLE>
Stocks
Stocks and work in progress are stated at the lower of cost and net
realizable value, having made appropriate provisions for obsolete or slow moving
items. Cost represents the net purchase price of stock less trade discounts and
allowances.
Leased assets and hire purchase agreements
Where assets are financed by leasing or hire purchase agreements which give
risks and rewards approximating to ownership (finance leases) they are treated
as if they had been purchased outright on credit. They are therefore initially
recorded as a fixed asset and a liability at a sum equal to the fair value of
the asset. Leasing payments on such assets are regarded as consisting of a
capital element which reduces the outstanding liability and an interest charge.
All other asset leases are regarded as operating leases and the total
payments made under them are charged to the profit and loss account on a
straight line basis over the lease term.
F-135
<PAGE> 221
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
1. ACCOUNTING POLICIES (CONTINUED)
Use of estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles in the United Kingdom requires management to make
estimates and assumptions that affect reported revenues, expenses, assets and
liabilities. Actual amounts could differ from such estimates.
Pension schemes
The company operates defined contribution pension schemes on behalf of the
directors and employees. Contributions payable for the period are charged to the
profit and loss account.
Foreign currency translation
The functional currency of the group is sterling (StgL).
Transaction gains or losses arising on changes in the exchange rates
between the functional currency and foreign currencies are included in net
income/(loss) for the period.
Translation adjustments arising from the translation of the results, assets
and liabilities of the group into US dollars (US$) are reported as a component
of shareholders' funds.
2. TURNOVER
The turnover and profit on ordinary activities before taxation are
attributable to the one principal activity of the company.
An analysis of turnover is given below:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
United Kingdom............................... $937,320 $18,075,874 $17,150,888
Europe....................................... 3,845 109,738 104,122
Rest of world................................ 6,707 138,761 136,370
-------- ----------- -----------
$947,872 $18,324,373 $17,391,380
======== =========== ===========
</TABLE>
F-136
<PAGE> 222
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
3. OPERATING PROFIT
The operating profit is stated after charging:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Depreciation of tangible fixed assets......... $22,489 $213,227 $104,721
Rent on buildings held under operating
lease....................................... 7,427 184,843 204,843
Hire on other assets.......................... 2,510 8,395 8,502
Exchange loss................................. 1,934 54,822 24,432
Auditors' remuneration:
-- audit services........................... $ 2,736 $ 13,135 $ 14,525
======= ======== ========
</TABLE>
4. DIRECTORS AND EMPLOYEES
Staff costs during the period were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Wages and salaries................ $286,351 $2,724,882 $2,331,542
Value of benefits in kind......... 21,936 211,746 41,347
Social security costs............. 29,834 277,627 241,573
Other pension costs............... 12,586 121,923 96,027
-------- ---------- ----------
$350,707 $3,336,178 $2,710,489
======== ========== ==========
</TABLE>
The average weekly number of employees of the company, included above, was
as follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
FEBRUARY 28 FEBRUARY 28
1998 1999
------------ -----------
<S> <C> <C>
Office and management............................. 5 5
Production and sales.............................. 19 34
-- --
24 39
== ==
</TABLE>
Remuneration in respect of directors of the company, included above, was
payable by the company as follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
FEBRUARY 28 FEBRUARY 28
1998 1999
------------ -----------
<S> <C> <C>
Emoluments........................................ $63,051 $754,571
Pension contributions............................. 2,579 26,394
------- --------
$65,630 $780,965
======= ========
</TABLE>
F-137
<PAGE> 223
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
4. DIRECTORS AND EMPLOYEES (CONTINUED)
Pension contributions are payable under defined contributions schemes on
behalf of three directors.
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
FEBRUARY 28 FEBRUARY 28
1998 1999
------------ -----------
<S> <C> <C>
Highest paid director
Emoluments...................................... $21,466 $256,199
Pension contributions........................... 789 8,303
------- --------
$22,255 $264,502
======= ========
</TABLE>
5. OTHER INCOME
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Loan interest receivable.................. $853 $33,311 $98,640
Bank interest receivable.................. -- 24,217 --
---- ------- -------
$853 $57,528 $98,640
==== ======= =======
</TABLE>
6. INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Loan interest payable..................... $17,290 $334,347 $200,383
======= ======== ========
</TABLE>
7. TAXATION ON PROFIT ON ORDINARY ACTIVITIES
The tax charge on the profit on ordinary activities for the year was as
follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
UK Corporation tax........................ $7,447 $102,291 $262,583
Deferred tax.............................. -- 12,959 (13,055)
------ -------- --------
$7,447 $115,250 $249,528
====== ======== ========
</TABLE>
F-138
<PAGE> 224
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
8. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
COMPUTERS
AND OTHER MOTOR OFFICE EQUIPMENT,
EQUIPMENT VEHICLES FIXTURES & FITTINGS TOTAL
--------- -------- -------------------- ----------
<S> <C> <C> <C> <C>
Cost:
At March $1, 1998............ $233,320 $325,100 $ 30,289 $ 588,709
Additions.................... 234,756 165,402 154,192 554,350
Disposals.................... (4,636) (31,907) (8,780) (45,323)
Difference on exchange....... (13,593) (13,015) (5,425) (32,033)
-------- -------- -------- ----------
At February 28, 1999......... 449,847 445,580 170,276 1,065,703
-------- -------- -------- ----------
Depreciation:
At March 1, 1998............. 89,517 84,640 4,443 178,600
Provided during year......... 86,302 98,526 28,399 213,227
Disposals.................... (83) (8,459) (943) (9,485)
Difference on exchange....... (5,151) (5,142) (989) (11,282)
-------- -------- -------- ----------
At February 28, 1999......... 170,585 169,565 30,910 371,060
-------- -------- -------- ----------
Net book value:
At February 28, 1999......... 279,262 276,015 139,366 694,643
======== ======== ======== ==========
At March 1, 1998............. 143,803 240,460 25,846 410,109
======== ======== ======== ==========
At November 30, 1999
(unaudited)............... $229,648 $387,147 $115,581 $ 732,376
======== ======== ======== ==========
</TABLE>
9. INVESTMENTS
<TABLE>
<CAPTION>
LOAN TO
INVESTMENT FIXED ASSET
IN SHARES INVESTMENT TOTAL
---------- ----------- --------
<S> <C> <C> <C>
Cost
At March 1, 1998............................... $99 $344,836 $344,935
Additions...................................... -- 193,394 193,394
Difference on exchange......................... -- (15,447) (15,447)
--- -------- --------
At February 28, 1999........................... 99 522,783 522,882
=== ======== ========
At November 30, 1999 (unaudited)............... $99 $ -- $ 99
=== ======== ========
</TABLE>
The investment in shares relates to 30% holding in the issued ordinary
share capital of Panic Systems Limited. Panic Systems Limited is incorporated in
England and Wales and its principal activity is the design and manufacture of
communications equipment. The company's accounting date is 31 March.
The following information was taken from the Panic Systems Limited accounts
for the year end 31 March 1998.
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Loss for the financial year........................... $(293,100) $(60,831)
========= ========
Aggregate capital & reserves.......................... $(343,486) $(44,004)
========= ========
</TABLE>
F-139
<PAGE> 225
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
10. STOCKS
<TABLE>
<CAPTION>
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goods for resale............................. $1,998,377 $2,093,636 $1,624,828
========== ========== ==========
</TABLE>
11. DEBTORS
<TABLE>
<CAPTION>
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade debtors................................ $3,457,846 $3,281,822 $6,085,923
Prepayments.................................. 79,890 221,624 114,530
Other debtors................................ -- 89,014 845,864
---------- ---------- ----------
$3,537,736 $3,592,460 $7,046,317
========== ========== ==========
</TABLE>
12. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade creditors.............................. $2,136,434 $2,490,899 $2,287,506
Other creditors.............................. 4,045,087 3,275,299 5,851,577
Social security & other taxes................ -- 86,801 142,721
Corporation tax.............................. 89,616 49,082 259,215
---------- ---------- ----------
$6,271,137 $5,902,081 $8,541,019
========== ========== ==========
</TABLE>
13. PROVISIONS FOR LIABILITIES AND CHARGES
Deferred taxation provided in the accounts and amounts not provided are as
follows:
<TABLE>
<CAPTION>
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
PROVIDED
Capital allowances in advance of
depreciation............................... $ -- $12,959 $ --
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
NOT PROVIDED
Capital allowances in advance of
depreciation............................... $(14,069) $ -- $(36,908)
======== ======= ========
</TABLE>
F-140
<PAGE> 226
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
14. ACCRUALS AND DEFERRED INCOME
<TABLE>
<CAPTION>
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accruals........................................... $161,047 $310,053 $140,809
Deferred income.................................... 136,597 69,110 97,311
-------- -------- --------
$297,644 $379,163 $238,120
======== ======== ========
</TABLE>
15. SHARE CAPITAL
<TABLE>
<CAPTION>
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Authorized:
Ordinary shares of L0.01p each..................... $237,096 $237,096 $237,096
======== ======== ========
Allotted, issued and fully paid:
Ordinary shares of L0.01p each..................... $237,096 $237,096 $237,096
======== ======== ========
</TABLE>
16. MOVEMENTS IN RESERVES
<TABLE>
<CAPTION>
CUMULATIVE TOTAL
SHARE OTHER PROFIT & TRANSLATION SHAREHOLDERS'
CAPITAL RESERVES LOSS ACCOUNT ADJUSTMENT FUNDS
-------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
At March 1, 1997.................... $ -- $ -- $ -- $ -- $ --
Arising on share issues........... 237,096 703,056 -- -- 940,152
Retained profit................... -- -- 3,858 -- 3,858
Exchange gain..................... -- -- -- 11 11
-------- --------- -------- -------- ----------
At February 28, 1998................ 237,096 703,056 3,858 11 944,021
Retained loss..................... -- -- (62,819) -- (62,819)
Exchange loss..................... -- -- -- (23,523) (23,523)
Transfer from other reserves...... -- (282,034) 283,389 (1,355) --
-------- --------- -------- -------- ----------
At February 28, 1999................ 237,096 421,022 224,428 (24,867) 857,679
======== ========= ======== ======== ==========
At November 30, 1999 (unaudited).... $237,096 $ 421,022 $576,639 $(17,257) $1,217,500
======== ========= ======== ======== ==========
</TABLE>
F-141
<PAGE> 227
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
17. NOTES TO THE STATEMENT OF CASH FLOWS
(a) Reconciliation of operating profit to net cash inflow from operating
activities
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Operating profit.......................... $ 22,743 $ 633,945 $ 743,088
Depreciation.............................. 22,489 213,227 204,843
Profit on sale of fixed assets............ -- (11,667) --
(Increase)/decrease in debtors............ 502,848 (154,152) (3,520,967)
(Increase)/decrease in stocks............. (560,965) (155,256) 462,733
Increase/(decrease) in creditors.......... (54,547) 607,832 234,146
--------- ---------- -----------
Net cash inflow from operating
activities.............................. $ (62,432) $1,133,929 $(1,876,157)
========= ========== ===========
</TABLE>
(b) Analysis of net debt
<TABLE>
<CAPTION>
AT AT
MARCH 1 CASH EXCHANGE FEBRUARY 28
1998 FLOW DIFFERENCES 1999
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Cash at bank and in hand......... $ 1,221,645 $(669,845) $(11,801) $ 539,999
Loans............................ (4,045,087) 682,064 87,724 (3,275,299)
----------- --------- -------- -----------
$(2,823,442) $ 12,219 $ 75,923 $(2,735,300)
=========== ========= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
AT
AT 30 NOVEMBER
MARCH 1 CASH EXCHANGE 1999
1999 FLOW DIFFERENCES (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash at bank and in hand........ $ 539,999 $ 484,310 $(9,496) $ 1,014,813
Loans........................... (3,275,299) (2,120,728) 46,872 (5,349,155)
----------- ----------- ------- -----------
$(2,735,300) $(1,636,418) $37,376 $(4,334,342)
=========== =========== ======= ===========
</TABLE>
18. RELATED PARTY TRANSACTIONS
The group's ultimate controlling parties are the Bennett family
settlements.
During the year the group undertook the following transactions with
Kerridge Computer Limited, a company which is controlled by the same parties as
KNS Holdings Limited:
- The group sold good and services totaling $679,229 of which a balance of
$91,809 was outstanding at the period end.
- The group bought goods and services totaling $122,695 of which a balance
of $74,519 was outstanding at the period end.
- Kerridge Computer Company Limited incurred expenditure totaling
$2,189,876 on behalf of the group which has not been repaid at the period
end.
F-142
<PAGE> 228
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
18. RELATED PARTY TRANSACTIONS (CONTINUED)
- Kerridge Computer Company Limited has charged a management charge
amounting to $111,677 which was outstanding at the period end.
- Kerridge Computer Company Limited has charged interest on the loan
amounting to $336,892 which was outstanding at the period end.
- KNS Limited has loaned Panic Systems Limited $160,083 to assist in the
development of a new product. KNS Limited has charged interest of $33,310
on this loan. The loan and accrued interest are outstanding at the period
end.
19. COMMITMENTS UNDER OPERATING LEASES
At February 28, 1999 the group had annual commitments under non-cancelable
operating leases as set out below:
<TABLE>
<CAPTION>
1998 1999
------------------- --------------------
LAND & LAND &
BUILDINGS OTHER BUILDINGS OTHER
--------- ------ --------- -------
<S> <C> <C> <C> <C>
Operating leases which expire:
within one year.......................... $ -- $2,282 $ -- $ --
within two to five years................. 189,348 -- 184,230 10,525
-------- ------ -------- -------
$189,348 $2,282 $184,230 $10,525
======== ====== ======== =======
</TABLE>
20. PENSION SCHEMES
The group operates defined contribution pension schemes on behalf of the
directors and employees, the assets of which are held separately from those of
the group in independently administered funds. Pension costs are charged to the
profit and loss account as incurred. At February 28, 1999 unpaid contributions
totaled $nil.
21. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United Kingdom ("UK GAAP") which
differ in certain respects from those generally accepted in the United States
("US GAAP"). The significant differences applicable to KNS Holdings Limited are
described below.
Deferred taxation
Under UK GAAP provision is made for deferred taxation using the liability
method on short-term timing differences and all material timing differences
which are not expected to continue in the future. Under US GAAP, deferred
taxation is provided on a full liability basis on all temporary differences
between the tax and book bases of assets and liabilities including the
differences between the assigned fair values and tax bases of assets and
liabilities acquired. Future tax benefits are recognized as deferred tax assets,
subject to a valuation allowance to the extent that it is more likely than not
that any part will be realized.
F-143
<PAGE> 229
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
21. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
PROFIT FOR THE PERIOD
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Profit/(loss) for the period as reported
in the consolidated profit and loss
account under UK GAAP................... $3,858 $(62,819) $352,211
------ -------- --------
Adjustments:
Deferred taxation Methodology........... 1,169 -- 36,908
------ -------- --------
Net income as adjusted to accord with US
GAAP.................................... $5,027 $(62,819) $389,119
====== ======== ========
</TABLE>
INVESTED CAPITAL
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Invested capital as reported in the
consolidated balance sheet under UK
GAAP.................................... $944,021 $857,679 $1,217,500
-------- -------- ----------
Adjustments:
Deferred taxation methodology........... 14,069 -- 36,423
-------- -------- ----------
Invested capital as adjusted to accord
with US GAAP............................ $958,090 $857,679 $1,253,923
======== ======== ==========
</TABLE>
REVENUE RECOGNITION
The group recognizes revenues in accordance with American Institute of
Certified Public Accountants statement of Position 97-2, Software Revenue
Recognition, as amended. Accordingly, no adjustment is necessary under US GAAP.
CONSOLIDATED STATEMENT OF CASH FLOWS
The consolidated statements of cash flows prepared under UK GAAP present
substantially the same information as those required under US GAAP but they
differ, however, with regard to classification of items within them and as
regards the definition of cash and cash equivalents.
Under UK GAAP, cash is defined as cash in hand and at bank and deposits
repayable on demand less bank overdrafts. Under US GAAP, cash and cash
equivalents would not include bank overdrafts but would include cash deposits
repayable within three months at inception. Under UK GAAP, cash flows are
presented separately for operating activities, returns on investments and
servicing of finance, taxation,
F-144
<PAGE> 230
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
21. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
capital expenditure and financial investment, acquisitions, equity dividends,
management of liquid resources and financing. US GAAP require only three
categories of cash flow activity to be reported: operating, investing and
financing. Cash flows from taxation and returns on investments and servicing of
finance shown under UK GAAP would be included in the determination of cash flows
from operating activities under US GAAP. Under US GAAP, the payment of dividends
would be included as a financing activity and capital expenditure and financial
investment and acquisitions would be included within investing activities.
The categories of cash flow activity under US GAAP can be summarized as
follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Cash (outflow)/inflow from operating
activities.............................. $ (62,432) $ 712,464 $(2,027,264)
Cash (outflow)/inflow on investing
activities.............................. (346,594) (700,245) 390,846
Cash inflow/(outflow) from financing
activities.............................. 959,246 (682,064) 2,120,728
--------- --------- -----------
Increase/(Decrease) in cash and cash
equivalents............................. $ 550,220 $(669,845) $ 484,310
========= ========= ===========
</TABLE>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
KNS Holdings Limited has no amounts which, under US GAAP, would be reported
as other comprehensive income.
CONCENTRATIONS OF CREDIT RISK
KNS Holdings Limited did not consider there to be any significant
concentration of credit risk at February 28, 1999.
FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the material financial instruments
of KNS Holdings Limited which comprise cash and external borrowings, approximate
their carrying amounts. KNS Holdings Limited has not utilized derivatives.
F-145
<PAGE> 231
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
21. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
DEFERRED TAXATION
The analysis of the deferred taxation balance under US GAAP is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 NOVEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
--------------
<S> <C> <C> <C>
Deferred taxation liabilities
Excess of book value over taxation value
of fixed assets......................... $ -- $(12,959) $ --
------- -------- -------
-- (12,959) --
------- -------- -------
Deferred taxation assets
Excess of taxation value over book value
of fixed assets...................... 14,069 -- 36,423
------- -------- -------
14,069 -- 36,423
------- -------- -------
Net deferred taxation asset/(liability)... $14,069 $(12,959) $36,423
======= ======== =======
</TABLE>
INVESTMENT IN PANIC SYSTEMS LIMITED
Under US GAAP, the investment in Panic Systems is accounted for under the
equity method. In the opinion of the directors, no write down is required
against the investment under this method.
F-146
<PAGE> 232
------------------------------------------------------
------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION.
THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY SHARES
OF OUR COMMON STOCK IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS
PROSPECTUS OR ANY SALE OF OUR COMMON STOCK.
-------------------------
TABLE OF CONTENTS
-------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 6
Forward-Looking Statements............ 12
Use of Proceeds....................... 13
Dividend Policy....................... 13
Price Range of Our Common Stock....... 14
Capitalization........................ 15
Acquisitions.......................... 16
Unaudited Pro Forma Condensed
Consolidated Financial
Information......................... 18
Selected Consolidated Financial
Data................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 35
Management............................ 48
Principal Stockholders................ 58
Certain Relationships and Related
Transactions........................ 61
Selling Stockholders.................. 64
Plan of Distribution.................. 75
Description of Capital Stock.......... 77
Shares Eligible for Future Sale....... 80
Legal Matters......................... 82
Experts............................... 82
Where You Can Find More Information... 83
Index to Financial Statements......... F-1
</TABLE>
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[FUTURELINK LOGO]
62,117,457 SHARES
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
December , 2000
------------------------------------------------------
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<PAGE> 233
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides, in summary,
that directors and officers of Delaware corporations are entitled, under certain
circumstances, to be indemnified against all expenses and liabilities, including
attorneys' fees, incurred by them as a result of suits brought against them in
their capacity as a director or officer, if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful; provided that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the Company,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, they are fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Any such indemnification may be made by the Company only as authorized
in each specific case upon a determination by the shareholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct.
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by the laws of the State of Delaware, as the same may be
amended from time to time, a director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director.
The Certificate of Incorporation and By-Laws provide for indemnification of
its directors and officers to the fullest extent permitted by Delaware law, as
the same may be amended from time to time.
In addition, the Company maintains liability insurance for its directors
and officers.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 16,548
Attorneys' fees and expenses................................ 95,000
Accountants' fees and expenses.............................. 30,000
Printing and engraving fees................................. 75,000
--------
Total............................................. $216,548
========
</TABLE>
The amounts set forth above are estimates except for the SEC registration
fee. We will pay substantially all costs and expenses associated with the
registration of the shares of common stock covered by this registration
statement. The selling stockholders will pay all underwriting discounts,
commissions, transfer taxes and other expenses associated with the sale of
common stock by them.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since September 21, 1997, we have issued the following securities without
registration under the Securities Act. Each of the disclosures take into account
the stock splits referred to in the prospectus.
1. On December 18, 1997, we issued 2,000,000 shares of common stock to
twenty-five non-U.S. residents. In exchange for the issuance, we received
total consideration of $100,000. We issued these securities under an
exemption provided by Rule 903 of Regulation S under the Securities Act
Rules. We made no directed selling efforts of these securities within the
United States. The purchasers of the securities certified they are not U.S.
persons, and were not acquiring the securities for the account or benefit of
any U.S. person.
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2. On January 20, 1998, we issued 308,000 shares of common stock to 5 non-US
residents. In exchange for the issuances, we received 1,540,000 Class A
Common Voting shares of FutureLink Alberta. We also issued 700,000 shares of
common stock to 18 entities or individuals who were officers, directors, or
employees of FutureLink Alberta, or their nominees, in exchange for prior
services. We issued these securities under an exemption provided by Rule 903
of Regulation S under the Securities Act Rules. We made no directed selling
efforts of these securities within the United States. Each recipient of
these securities certified that it is not a U.S. person, was not acquiring
the securities for the account or benefit of any U.S. person and would not
resell the securities in the U.S. for at least one year. The securities
issued by us were appropriately legended to reflect these restrictions and
we have the right to refuse to register any transfer of these securities not
made in accordance with Regulation S.
3. On January 29, 1998, we issued 16,666 shares of common stock and a warrant
to purchase up to 16,666 shares of common stock, which is now expired, to a
non-U.S. entity. In exchange for this issuance, we received total
consideration of $250,000. We issued these securities under an exemption
provided by Rule 903 of Regulation S under the Securities Act Rules. We made
no directed selling efforts of these securities within the United States.
The purchaser of the securities certified that it is not a U.S. person, was
not acquiring the securities for the account or benefit of any U.S. person
and would not resell the securities in the U.S. for at least one year. The
securities issued by us were appropriately legended to reflect these
restrictions and we have the right to refuse to register any transfer of
these securities not made in accordance with Regulation S.
4. On April 3, 1998, we issued 13,696 shares of common stock and a warrant to
purchase up to 13,696 shares of common stock to a non-U.S. entity. In
exchange for the issuances, we received total consideration of $256,000. We
issued these securities under an exemption provided by Rule 903 of
Regulation S under the Securities Act Rules. We made no directed selling
efforts of these securities within the United States. The purchaser of the
securities certified that it is not a U.S. person, was not acquiring the
securities for the account or benefit of any U.S. person and would not
resell the securities in the U.S. for at least one year. The securities
issued by us were appropriately legended to reflect these restrictions and
we have the right to refuse to register any transfer of these securities not
made in accordance with Regulation S.
5. On April 3, 1998, we issued 7,467 shares of common stock and a warrant to
purchase up to 7,467 shares of common stock to a non-U.S. entity. In
exchange for the issuances, we received total consideration of $140,000. We
issued these securities under an exemption provided by Rule 903 of
Regulation S under the Securities Act Rules. We made no directed selling
efforts of these securities within the United States. The purchaser of the
securities certified that it is not a U.S. person, was not acquiring the
securities for the account or benefit of any U.S. person and would not
resell the securities in the U.S. for at least one year. The securities
issued by us were appropriately legended to reflect these restrictions and
we have the right to refuse to register any transfer of these securities not
made in accordance with Regulation S.
6. On April 22, 1998, we issued 9,333 shares of common stock and a warrant to
purchase up to 9,333 shares of common stock to a non-U.S. entity. In
exchange for the issuances, we received total consideration of $140,000. We
issued these securities under an exemption provided by Rule 903 of
Regulation S under the Securities Act Rules. We made no directed selling
efforts of these securities within the United States. The purchaser of the
securities certified that it is not a U.S. person, was not acquiring the
securities for the account or benefit of any U.S. person and would not
resell the securities in the U.S. for at least one year. The securities
issued by us were appropriately legended to reflect these restrictions and
we have the right to refuse to register any transfer of these securities not
made in accordance with Regulation S.
7. On April 24, 1998, we issued 4,000 shares of common stock and a warrant to
purchase up to 4,000 shares of common stock to a non-U.S. entity. In
exchange for the issuances, we received total
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consideration of $60,000. We issued these securities under an exemption
provided by each of Rule 903 of Regulation S under the Securities Act Rules.
We made no directed selling efforts of these securities within the United
States. The purchaser of the securities certified that it is not a U.S.
person, was not acquiring the securities for the account or benefit of any
U.S. person and would not resell the securities in the U.S. for at least one
year. The securities issued by us were appropriately legended to reflect
these restrictions and we have the right to refuse to register any transfer
of these securities not made in accordance with Regulation S.
8. On April 29, 1998, we issued 117,756 shares of common stock and a warrant to
purchase up to 117,756 shares of common stock to a non-U.S. entity. In
exchange for this issuance, we received total consideration of $382,706. We
also issued 107,692 shares of common stock and a warrant to purchase up to
107,692 shares of common stock to a second non-US entity. In exchange for
this issuance, we received total consideration of $350,000. We issued all of
these securities under an exemption provided by Rule 903 of Regulation S
under the Securities Act Rules. We made no directed selling efforts of these
securities within the United States. Each purchaser of these securities
certified that it is not a U.S. person, was not acquiring the securities for
the account or benefit of any U.S. person and would not resell the
securities in the U.S. for at least one year. The securities issued by us
were appropriately legended to reflect these restrictions and we have the
right to refuse to register any transfer of these securities not made in
accordance with Regulation S.
9. On August 14, 1998, we financed, with Thomson Kernaghan & Co. Limited, a
non-U.S. entity, a $5 million convertible debenture facility consisting of
10% convertible debentures and warrants to subscribe for 208,333 shares of
common stock. We placed in an escrow account 3,800,000 shares of common
stock underlying the convertible debenture and warrants. We also compensated
Thomson Kernaghan & Co. Limited for acting as a financial consultant to us
by issuing it 64,703 shares of common stock. In February 1999, we increased
the total of this debenture facility to $6,000,000. On April 26, 1999, we
repriced the warrants and set a new fixed conversion price for the
debentures. At that time, we also issued to Thomson Kernaghan & Co. Limited
additional warrants to purchase 1,121,201 shares of common stock. On June 1,
1999, we issued 36,706 shares of common stock to Thomson Kernaghan & Co.
Limited to cover interest accrued on $1,470,000 of outstanding convertible
debentures which had been called by us in accordance with the April 26, 1999
amendment. Effective December 7, 1999, we entered into another agreement
with Thomson Kernaghan & Co. Limited its remaining $1.53 million of
convertible debentures and exercised its remaining warrants, under which it
converted these debentures the accrued interest on the debentures plus these
warrants into 2,882,867 shares of common stock and received an additional
125,000 shares. A portion of the securities were registered under Amendment
No. 4 to our registration statement on Form SB-2 filed December 21, 1998.
The rest of the securities were issued under an exemption provided by Rule
903 of Regulation S under the Securities Act Rules. We made no directed
selling efforts of these securities within the United States. Thomson
Kernaghan & Co. Limited certified that it is not a U.S. person, was not
acquiring the securities for the account or benefit of any U.S. person and
would not resell the securities in the U.S. for at least one year, except in
accordance with the registration statement. The securities issued by us were
appropriately legended to reflect these restrictions and we have the right
to refuse to register any transfer of these securities not made in
accordance with Regulation S. Rule 506 of Regulation D under the Securities
Act Rules could also be relied upon to exempt this transaction from
registration requirements.
10. On August 24, 1998, we issued 4,250,000 exchangeable shares convertible into
850,000 shares of common stock to two non-US residents. In exchange for the
issuance, we received all of the outstanding stock of Riverview Management
Corporation, (renamed FutureLink/SysGold Ltd. at closing) and, indirectly,
its wholly-owned subsidiaries SysGold Inc., and SysGold Ltd. We issued these
securities under an exemption provided by Rule 903 of Regulation S under the
Securities Act Rules. We made no directed selling efforts of these
securities within the United States. Both purchasers of the securities
certified that they are not U.S. persons, were not acquiring the securities
for the account or benefit of any U.S. person and would not resell the
securities in the U.S. for at
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<PAGE> 236
least one year. The securities issued by us were appropriately legended to
reflect these restrictions and we have the right to refuse to register any
transfer of these securities not made in accordance with Regulation S.
11. On November 23, 1998, we issued 334,755 shares of common stock to 77
non-U.S. investors. In exchange for the issuances, we received 1,673,775
shares of Class A Common Voting shares of FutureLink Alberta, giving us
96.4% of FutureLink Alberta's voting stock. We issued these securities under
an exemption provided by Rule 903 of Regulation S under the Securities Act
Rules. We made no directed selling efforts of these securities within the
United States. The purchasers of the securities certified that they are not
U.S. persons, were not acquiring the securities for the account or benefit
of any U.S. person and would not resell the securities in the U.S. for at
least one year. The securities issued by us were appropriately legended to
reflect these restrictions and we have the right to refuse to register any
transfer of these securities not made in accordance with Regulation S.
12. On February 22, 1999, we issued a $150,620.62 convertible debenture to two
non-U.S. residents, and granted to each of these persons warrants to
purchase up to 75,310 shares of common stock. The issuances were made in
exchange for the satisfaction of the principal and interest due on loans of
$144,632 that each purchaser had made to us on August 11, 1998. On August
18, 1999, we issued 27,431 shares to one of the purchasers on conversion of
the remaining $54,862 of debenture principal outstanding. During February
2000, we issued 144,742 shares to these purchasers upon the exercise of
their warrants. We issued these securities under an exemption provided by
Rule 903 of Regulation S under the Securities Act Rules. We made no directed
selling efforts of these securities within the United States. The purchasers
of the securities certified that they are not U.S. persons, were not
acquiring the securities for the account or benefit of any U.S. person and
would not resell the securities in the U.S. for at least one year. The
securities issued by us were appropriately legended to reflect these
restrictions and we have the right to refuse to register any transfer of
these securities not made in accordance with Regulation S.
13. On February 26, 1999, we issued an aggregate of 23,500 shares of our common
stock to the remaining 12 minority shareholders of FutureLink Alberta, all
of whom are non-US residents. In exchange for the issuances, we received the
final 107,500 Class A Common Voting Shares of FutureLink Alberta which we
did not already own. We issued these securities under an exemption provided
by Rule 903 of Regulation S under the Securities Act Rules. We made no
directed selling efforts of these securities within the United States. The
purchasers of the securities certified that they were not U.S. persons, were
not acquiring the securities for the account or benefit of any U.S. person
and would not resell the securities in the U.S. for at least one year. The
securities issued by us were appropriately legended to reflect these
restrictions and we have the right to refuse to register any transfer of
these securities not made in accordance with Regulation S.
14. On March 2, 1999, we issued an aggregate of $500,000 in 8% convertible
debentures, and warrants to purchase up to 26,553 shares of common stock to
a U.S.-based entity. In exchange for this issuance, we received total
consideration of $500,000. In August 1999, we issued 355,836 shares to such
entity upon conversion of the principal amount of the debenture together
with interest and penalties. In December 1999, this entity it exercised its
warrants to acquire 26,553 shares of common stock. We issued these
securities under an exemption provided by Rule 506 of Regulation D under the
Securities Act Rules. The purchaser of these securities certified that it
was an "accredited investor" as defined in Rule 501 of Regulation D, was
acquiring the securities as an investment and not with a view to
distribution, and would not resell the securities unless they became
registered or another exemption from registration was available. The
securities issued by us were appropriately legended to reflect these
restrictions.
15. Between April 29 and May 7, 1999, we issued 8% Senior Subordinated
Convertible Notes totaling $8,038,500 to various investors, including
$433,000 in notes to certain members of management. We also issued warrants
to acquire up to 3,802,750 shares of common stock to the various investors
and
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warrants to purchase 216,500 shares to members of our management.
Commonwealth Associates, L.P. acted as our placement agent and advisor in
the offering in exchange for $723,465 (9% of the gross proceeds of the
offering) and 4,000,001 agent's warrants. Between August 23, 1999 and
November 8, 1999 we issued 8,579,020 shares upon the conversion of
$7,418,000 of principal outstanding on the notes. We also issued 7,329,782
shares upon the exercise of 7,709,001 warrants and agent's warrants.
Effective April 29, 2000, the remaining $620,500 of notes converted into
676,408 shares of our common stock. Between May 1 and May 31, 2000, 20,704
shares of common stock were issued upon the exercise of a further 22,500
warrants. These securities were issued by us pursuant to an exemption from
registration requirements provided by Rule 506 of Regulation D under the
Securities Act Rules. The purchasers of these securities certified that they
were "accredited investors" as defined in Rule 501 of Regulation D, were
acquiring the securities as an investment and not with a view to
distribution, and would not resell the securities unless they became
registered or another exemption from registration was available. The
securities issued by us were appropriately legended to reflect these
restrictions.
16. On May 7, 1999, we issued a 10% convertible debenture in the amount of
$278,160 and a warrant to purchase up to 44,505 shares of common stock to a
non-U.S. entity. We made these issuances in satisfaction of a debt in the
amount of $278,160 owed to that entity. We issued these securities pursuant
to an exemption provided by Rule 903 of Regulation S under the Securities
Act Rules. We made no directed selling efforts of these securities within
the United States. The purchaser of the securities certified that it is not
a U.S. person, was not acquiring the securities for the account or benefit
of any U.S. person and would not resell the securities in the U.S. for at
least one year. The securities issued by us were appropriately legended to
reflect these restrictions and we have the right to refuse to register any
transfer of these securities not made in accordance with Regulation S. On
March 30, 2000, the same non-U.S. entity referenced above elected to convert
$200,000 of the principal amount of its convertible debenture plus accrued
interest into 189,160 shares of common stock. On August 30, 2000, we amended
and restated the above-referenced convertible debenture which had a
remaining principal amount of $78,160 to provide an incentive to the holder
to elect early conversion and we amended and restated the above-referenced
warrant to provide for a net exercise provision. On August 30, 2000, the
non-U.S. entity elected to convert the remaining principal amount of the
debenture plus interest into 81,558 shares of common stock and exercised the
warrant in full utilizing the net exercise provision therein to acquire
36,558 shares of common stock. These issuances of securities, including the
transactions amending and restating the convertible debenture and the
warrant, were made pursuant to the exemption provided by Section 3(a)(9)
under the Securities Act. The securities were issued in exchange for
outstanding securities, and no commission or remuneration was paid in
connection with the exchange.
17. On June 1, 1999, we effected a one-for-five reverse stock split. We issued
227 new shares to round fractional shares up to the nearest whole share as
directed by the Securities and Exchange Commission.
18. On July 27, 1999, we issued $15 million in units, consisting of 8% senior
subordinated convertible notes and warrants to purchase up to 2,250,000
shares of common stock, to various investors. In exchange for those
issuances, we received gross proceeds of $15 million. Commonwealth
Associates, L.P. acted as our placement agent and advisor in the offering in
exchange for commissions and placement fees equal to $1,350,000 (9% of the
gross proceeds of the offering) and 225,000 agent's warrants. In October
1999, we issued 2,727,172 shares and warrants which currently entitle their
holders to purchase an additional 727,042 shares of common stock upon the
automatic conversion of the notes. We issued these securities under an
exemption provided by Rule 506 of Regulation D under the Securities Act
Rules. The purchaser of these securities certified that they were
"accredited investors" as defined in Rule 501 of Regulation D, were
acquiring the securities as an investment and not with a view to
distribution, and would not resell the securities unless they became
registered or another exemption from registration was available. The
securities issued by us were appropriately legended to reflect these
restrictions.
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19. On August 1, 1999, we issued 232,829 shares of common stock to Vincent L.
Romano and delivered such shares to an escrow account. In exchange for the
issuance, Mr. Romano agreed to serve as our Executive Vice President of
Sales and Marketing. We issued these securities to Mr. Romano under an
exemption provided by Rule 506 of Regulation D under the Securities Act
Rules. Mr. Romano certified that he was an "accredited investor" as defined
in Rule 501 of Regulation D, was acquiring the securities as an investment
and not with a view to distribution, and would not resell the securities
unless they became registered or another exemption from registration was
available. The securities issued by us were appropriately legended to
reflect these restrictions.
20. Effective August 7, 1999, we issued 53,552 shares of common stock and 33,467
warrants to purchase shares of common stock to a U.S. entity. In exchange
for the issuances and certain other consideration, we retained that entity
to provide us with marketing and advertising services. We issued these
securities under an exemption provided by Rule 506 of Regulation D under the
Securities Act Rules. The purchaser of these securities certified that it
was an "accredited investor" as defined in Rule 501 of Regulation D, was
acquiring the securities as an investment and not with a view to
distribution, and would not resell the securities unless they became
registered or another exemption from registration was available. The
securities issued by us were appropriately legended to reflect these
restrictions.
21. On October 15, 1999, we issued 7,200,000 shares of common stock to the
Holmes Trust, a trust formed pursuant to the laws of California. In exchange
for this issuance and certain other consideration, we acquired all of the
outstanding shares of Executive LAN Management, Inc., doing business as
Micro Visions. Pursuant to our agreement to acquire Micro Visions, on April
14, 2000 we issued a further 1,200,000 shares of common stock to the Holmes
Trust. We issued these securities under an exemption provided by Rule 506 of
Regulation D under the Securities Act Rules. The Holmes Trust certified that
it was an "accredited investor" as defined in Rule 501 of Regulation D, was
acquiring the securities as an investment and not with a view to
distribution, and would not resell the securities unless they became
registered or another exemption from registration was available. The
securities issued by us were appropriately legended to reflect these
restrictions.
22. On October 15, 1999, we issued 9,090,909 shares of common stock and warrants
to purchase up to 2,372,727 shares of common stock to various U.S.-based
investment funds. In exchange for the issuances, we received total
consideration of $50 million. During February 2000, we issued 2,401,041
shares of common stock to such investment funds upon the conversion of these
warrants, which gives effect to antidilution since their issuance. Gerard
Klauer Mattison & Co., Inc. acted as our placement agent in the offering and
received commissions and placement fees equal to $3 million (6% of the gross
proceeds of the offering) and agent's warrants which currently allow that
firm to acquire 928,551 shares of common stock. We issued these securities
under an exemption provided by Rule 506 of Regulation D under the Securities
Act Rules. Each purchaser of these securities certified that it was an
"accredited investor" as defined in Rule 501 of Regulation D, was acquiring
the securities as an investment and not with a view to distribution, and
would not resell the securities unless they became registered or another
exemption from registration was available. The securities issued by us were
appropriately legended to reflect these restrictions.
23. On November 3, 1999, we issued warrants to purchase up to 29,413 shares of
our common stock to TBCC Funding Trust. The issuance was made at the same
time as a lease financing arrangement with Transamerica Business Credit
Corporation. We issued these securities under an exemption provided by Rule
506 of Regulation D under the Securities Act Rules. TBCC Funding Trust
certified that it was an "accredited investor" as defined in Rule 501 of
Regulation D, was acquiring the securities as an investment and not with a
view to distribution, and would not resell the securities unless they became
registered or another exemption from registration was available. The
securities issued by us were appropriately legended to reflect these
restrictions.
24. On November 5, 1999, we issued 1,181,816 shares of our common stock to the
11 former shareholders of CN Networks, Inc. In exchange for the issuances
and certain other consideration, we acquired all of CN Networks, Inc.'s
outstanding shares. We issued these securities under an
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exemption provided by Rule 506 of Regulation D under the Securities Act
Rules. Of the selling shareholders, all of whom reside in California, one
was accredited and 10 were non-accredited. The non-accredited investors were
furnished with information on our company in compliance with the provisions
of Rule 502(b) of Regulation D. The single accredited investor certified to
us that it is an "accredited investor" as defined in Rule 501 of Regulation
D. All of the former shareholders of CN Networks, Inc. certified that they
were acquiring the securities as an investment and not with a view to
distribution and would not resell the securities unless they became
registered or another exemption from registration was available. The
securities issued by us were appropriately legended to reflect these
restrictions.
25. On November 26, 1999, we issued 1,298,705 shares of our common stock to the
16 former shareholders of Async Technologies, Inc. In exchange for the
issuances and certain other consideration, we acquired all of the
outstanding shares of Async Technologies, Inc. Pursuant to our agreement to
acquire Async Technologies, Inc., on April 7, 2000 we issued a further
439,850 shares of common stock to certain former shareholders of Async
Technologies, Inc. We issued these securities under an exemption provided by
Rule 506 of Regulation D under the Securities Act Rules of the selling
shareholders, all of whom reside in Michigan, two were accredited and 14
were non-accredited. The non-accredited investors were furnished with
information on our company in compliance with the provisions of Rule 502(b)
of Regulation D. The accredited investors certified to us that they were
"accredited investors" as defined in Rule 501 of Regulation D. All of the
former shareholders of Async Technologies, Inc. certified that they were
acquiring the securities as an investment and not with a view to
distribution and would not resell the securities unless they became
registered or another exemption from registration was available. The
securities issued by us were appropriately legended to reflect these
restrictions.
26. On December 12, 1999, we issued 112,590 shares of common stock to a U.S.
entity. In exchange for the issuance, we received total consideration of
$2.2 million. We issued these securities under an exemption provided by Rule
506 of Regulation D under the Securities Act Rules. The purchaser of these
securities certified that it was an "accredited investor" as defined in Rule
501 of Regulation D, was acquiring the securities as an investment and not
with a view to distribution, and would not resell the securities unless they
became registered or another exemption from registration was available. The
securities issued by us were appropriately legended to reflect these
restrictions.
27. On December 16, 1999, we issued a warrant to acquire up to 13,140 shares of
common stock to EMC(2) Corporation. The issuance was made as partial
consideration for an equipment financing arrangement. We issued these
securities under an exemption provided by Rule 506 of Regulation D under the
Securities Act Rules. EMC(2) Corporation certified that it was an
"accredited investor" as defined in Rule 501 of Regulation D, was acquiring
the securities as an investment and not with a view to distribution, and
would not resell the securities unless they became registered or another
exemption from registration was available. The securities issued by us were
appropriately legended to reflect these restrictions.
28. On December 22, 1999, we issued 2,160,307 shares of common stock to the
selling shareholders of KNS Holdings Limited, a foreign entity, all of such
selling shareholders being non-U.S. residents or entities. In exchange for
the issuances and certain other consideration, we acquired all of the
outstanding shares of KNS Holdings Limited. We issued these securities under
an exemption provided by Rule 903 of Regulation S under the Securities Act
Rules. We made no directed selling efforts of these securities within the
United States. The purchasers of the securities certified that they were not
U.S. persons, were not acquiring the securities for the account or benefit
of any U.S. person and would not resell the securities in the U.S. for at
least one year. The securities issued by us were appropriately legended to
reflect these restrictions and we have the right to refuse to register any
transfer of these securities not made in accordance with Regulation S.
29. On January 31, 2000, we issued 1,026,316 shares of common stock to the two
selling shareholders of Vertical Software, Inc. d.b.a VSI Technology
Solutions. In exchange for the issuances and certain
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other consideration, we acquired all of the outstanding shares of VSI
Technology Solutions. We issued these securities under an exemption provided
by Rule 506 of Regulation D under the Securities Act Rules both selling
shareholders were accredited investors and certified to us that they
complied with Rule 501 of Regulation D. These former shareholders of
Vertical Software, Inc. certified that they were acquiring the securities as
an investment and not with a view to distribution and would not resell the
securities unless they became registered or another exemption from
registration was available. The securities issued by us were appropriately
legended to reflect these restrictions.
30. On February 29, 2000, we issued 1,975,170 shares of common stock to the
four selling shareholders of MicroLAN Systems, Inc., doing business as
Madison Technology Group, Madison Consulting Resources, Inc. and Madison
Consulting Resources NJ, Inc. to acquire all of the outstanding shares of
such companies. We issued these securities pursuant to an exemption
provided by Rule 506 of Regulation D under the Securities Act Rules. All
four selling shareholders certified to us that they are "accredited
investors" as defined in Rule 501 of Regulation D. All of the former
shareholders of these companies also certified that they were acquiring the
securities as an investment and not with a view to distribution and would
not resell the securities unless they became registered or another
exemption from registration was available. The securities issued by us were
appropriately legended to reflect these restrictions. The shares were
issued under a stock purchase agreement that was entered into prior to the
filing of this registration statement and had no conditions to closing for
the selling shareholders that were within their control.
31. On February 11, 2000 we agreed to, and on March 1, 2000 did issue, warrants
to acquire, in the aggregate, up to 3,000,000 shares of common stock to a
U.S. entity to settle litigation commenced against us by such entity
claiming fees for financial advisory services earned between April 1999 and
November 1999. We issued these securities under an exemption provided for
Rule 506 of Regulation D under the Securities Act Rules. The party to whom
we issued these securities is an "accredited investor" as defined in Rule
501 of Regulation D, acquired the securities as an investment and not with a
view to distribution, and has agreed to not resell the securities unless
they became registered or another exemption from registration was available.
The securities issued by us were appropriately legended to reflect these
restrictions.
32. On April 28, 2000, we issued 1,764,704 shares of common stock and warrants
to purchase up to 441,176 shares of common stock to two U.S.-based
investment funds. In exchange for the issuances, we received total
consideration of $15.0 million. We issued these securities under an
exemption provided by Rule 506 of Regulation D under the Securities Act
Rules. Each purchaser of these securities certified that it was an
"accredited investor" as defined in Rule 501 of Regulation D, was acquiring
the securities as an investment and not with a view to distribution, and
would not resell the securities unless they became registered or another
exemption from registration was available. The securities issued by us were
appropriately legended to reflect these restrictions.
33. On June 19, 2000, one of our Canadian subsidiaries issued 2,199,965
exchangeable shares convertible into shares of our common stock to the
selling shareholders of Charon Systems Inc. In exchange for the issuances
and certain other consideration, we acquired all of the outstanding shares
of Charon Systems Inc. We issued these securities under an exemption
provided by Rule 903 of Regulation S under the Securities Act Rules. We made
no directed selling efforts of these securities within the United States.
The purchasers of the securities certified that they were not U.S. persons,
were not acquiring the securities for the account or benefit of any U.S.
person and would not resell the securities in the U.S. for at least one
year. The securities issued by us were appropriately legended to reflect
these restrictions and we have the right to refuse to register any transfer
of these securities not made in accordance with Regulation S.
34. On July 10, 2000, we issued 1,428,591 shares of Series A preferred stock and
warrants to purchase up to 1,142,857 of Series A preferred stock to
Microsoft Corporation. In exchange for the issuances, we received total
consideration of $10.0 million. We issued these securities under an
exemption provided
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<PAGE> 241
by Rule 506 of Regulation D under the Securities Act Rules. The purchaser of
these securities certified that it was an "accredited investor" as defined
in Rule 501 of Regulation D, acquired the securities as an investment and
not with a view to distribution, and has agreed to not resell the securities
unless they became registered or another exemption from registration was
available. The securities issued by us were appropriately legended to
reflect these restrictions.
35. On July 11, 2000, we issued warrants to purchase up to 5,143 shares of our
common stock to TBCC Funding Trust. The issuance was made in connection with
a lease financing arrangement with Transamerica Business Credit Corporation.
We issued these securities under an exemption provided by Rule 506 of
Regulation D under the Securities Act Rules. TBCC Funding Trust certified
that it was an "accredited investor" as defined in Rule 501 of Regulation D,
was acquiring the securities as an investment and not with a view to
distribution, and would not resell the securities unless they became
registered or another exemption from registration was available. The
securities issued by us were appropriately legended to reflect these
restrictions.
36. On July 28, 2000, and August 18, 2000 we issued warrants to acquire up to,
respectively, 20,000 shares and 4,903 shares, of common stock to EMC(2)
Corporation. The issuances were made as partial consideration for an
equipment financing arrangement. We issued these securities under an
exemption provided by Rule 506 of Regulation D under the Securities Act
Rules. EMC(2) Corporation certified that it was an "accredited investor" as
defined in Rule 501 of Regulation D, was acquiring the securities as an
investment and not with a view to distribution, and would not resell the
securities unless they became registered or another exemption from
registration was available. The securities issued by us were appropriately
legended to reflect these restrictions.
37. On August 15, 2000 we issued warrants to acquire up to, respectively, 10,000
shares and 5,000 shares of common stock to Magnus Diversified Inc. and Cyber
Asylum Inc. These issuances were made as partial consideration for
settlement of a claim made by Magnus Diversified Inc. and Cyber Asylum Inc.
We issued these securities under an exemption provided by Rule 903 of
Regulation S under the Securities Act Rules. We made no directed selling
efforts of these securities within the United States. The purchasers of the
securities certified that they were not U.S. persons, were not acquiring the
securities for the account or benefit of any U.S. person and would not
resell the securities in the U.S. for at least one year. The securities
issued by us were appropriately legended to reflect these restrictions and
we have the right to refuse to register any transfer of these securities not
made in accordance with Regulation S.
38. On August 28, 2000, we issued 19,612 shares of our common stock to the
trustee of our employee 401(k) plan to meet our contribution obligations for
the period January 1 through June 30, 2000. We issued these shares of common
stock pursuant to an exemption from the registration requirements provided
by Rule 506 of Regulation D. The recipient of these shares of common stock
had previously certified that it was an "accredited investor" as defined in
Rule 501 of Regulation D, it was acquiring the securities as an investment
and not with a view to distribution, and would not resell the securities
unless it became registered or another exemption from registration is
available. The common stock issued was appropriately legended to reflect
these restrictions.
39. On November 16, 2000, we issued warrants to purchase up to 100,000 shares of
our common stock to Foothill Capital Corporation. The issuance was made at
the same time as a loan and security agreement with Foothill Capital
Corporation. We issued these securities under an exemption provided by Rule
506 of Regulation D under the Securities Act Rules. Foothill Capital
Corporation certified that it was an "accredited investor" as defined in
Rule 501 of Regulation D, was acquiring the securities as an investment and
not with a view to distribution, and would not resell the securities unless
they became registered or another exemption from registration was available.
The securities issued by us were appropriate legended to reflect these
restrictions.
Except as otherwise set forth above, no underwriters were engaged in the
sales of securities described above.
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<PAGE> 242
ITEM 27. EXHIBITS.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
2.1 Share Purchase Agreement dated August 4, 1998 between
FutureLink Distribution Corp., a Colorado corporation,
Donald A. Bialik, Olivia B. Bialik, Bialik Family Trust,
Riverview Management Corporation, SysGold Ltd., and
FutureLink Distribution Corp., an Alberta corporation,
previously filed with the Commission on August 24, 1998 as
Exhibit 4.1.2 to the Company's Registration Statement on
Form SB-2, Registration No. 333-62133, which is incorporated
herein by reference.
2.2 Targetco Acquisition Agreement dated August 3, 1998 between
FutureLink Distribution Corp., a Colorado corporation, and
FutureLink Alberta, previously filed with the Commission on
August 24, 1998 as Exhibit 4.1.3 to the Company's
Registration Statement on Form SB-2, Registration No.
333-62133, which is incorporated herein by reference.
2.3 Amending Agreement to Share Purchase Agreement dated August
21, 1998 between FutureLink Distribution Corp., a Colorado
corporation, Donald A. Bialik, Olivia B. Bialik, Bialik
Family Trust, Riverview Management Corporation, SysGold
Ltd., and FutureLink Alberta, previously filed with the
Commission on November 24, 1998 as Exhibit 2.1 to Amendment
No. 2 to the Company's Registration Statement on Form SB-2,
Registration No. 333-62133, which is incorporated herein by
reference.
2.4 Agreement and Plan of Reorganization and Merger dated June
2, 1999 between FutureLink Distribution Corp., FutureLink
California Acquisition Corp., Executive LAN Management,
Inc., dba Micro Visions, and the selling shareholders of
Micro Visions, previously filed with the Commission as
Exhibit 10.1 to the Company's Current Report on Form 8-K, on
June 16, 1999, which is incorporated herein by reference.
2.5 Agreement and Plan of Merger dated August 1, 1999 between
FutureLink Distribution Corp. and FutureLink California
Acquisition Corporation, a Delaware corporation, previously
filed with the Commission on October 27, 1999 as Exhibit 2.1
to the Company's Current Report on Form 8-K, which is
incorporated herein by reference.
2.6 Agreement and Plan of Reorganization and Merger dated
September 7, 1999 between FutureLink Distribution Corp.,
FutureLink Pleasanton Acquisition Corp., CN Networks, Inc.,
and the selling shareholders of CN Networks, Inc.,
previously filed with the Commission on November 23, 1999 as
Exhibit 2.1 to the Company's Current Report on Form 8-K,
which is incorporated herein by reference.
2.7 Agreement and Plan of Reorganization and Merger dated
September 7, 1999 between FutureLink Distribution Corp.,
FutureLink Michigan Acquisition Corp., Async Technologies,
Inc., and the selling shareholders of Async Technologies,
Inc., previously filed with the Commission on December 8,
1999 as Exhibit 2.1 to the Company's Current Report on Form
8-K, which is incorporated herein by reference.
2.8 Certificate of Merger dated October 15, 1999 of FutureLink
Distribution Corp., a Colorado corporation, into FutureLink
California Acquisition Corp., a Delaware corporation,
previously filed with the Commission on October 27, 1999 as
Exhibit 2.2 to the Company's Current Report on Form 8-K,
which is incorporated herein by reference.
2.9 Amending Agreement dated October 15, 1999 to Agreement and
Plan of Reorganization and Merger between FutureLink Corp.,
FutureLink California Acquisition Corp., and the selling
shareholders of Executive LAN Management, Inc., previously
filed with the Commission on October 27, 1999 as Exhibit 2.3
to the Company's Current Report on Form 8-K, which is
incorporated herein by reference.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.10 Amending Agreement dated October 29, 1999 to Agreement and
Plan of Reorganization and Merger, between FutureLink
Distribution Corp., FutureLink Michigan Acquisition Corp.,
Async Technologies, Inc., and the selling shareholders of
Async Technologies, Inc., previously filed with the
Commission on December 27, 1999 as Exhibit 2.2 to the
Company's Current Report on Form 8-K, which is incorporated
herein by reference.
2.11 Amending Agreement dated October 31, 1999 to Agreement and
Plan of Reorganization and Merger between FutureLink Corp.,
FutureLink Pleasanton Acquisition Corp., CN Networks, Inc.
and the selling shareholders of CN Networks, Inc.,
previously filed with the Commission on November 23, 1999 as
Exhibit 2.2 to the Company's Current Report on Form 8-K,
which is incorporated herein by reference.
2.12 Amending Agreement dated November 14, 1999 to Agreement and
Plan of Reorganization and Merger between FutureLink Corp.,
FutureLink Michigan Acquisition Corp., Async Technologies,
Inc., and the selling shareholders of Async Technologies,
Inc., previously filed with the Commission on December 8,
1999 as Exhibit 2.3 to the Company's Current Report on Form
8-K, which is incorporated herein by reference.
2.13 Agreement for the Sale and Purchase of the Entire Issued
Share Capital of KNS Holdings Limited dated November 15,
1999 between FutureLink Corp. and the selling shareholders
of KNS Holdings Limited, previously filed with the
Commission on January 6, 2000 as Exhibit 2.1 to the
Company's Current Report on Form 8-K, which is incorporated
herein by reference.
2.14 Amending Agreement dated November 26, 1999 to Agreement and
Plan of Reorganization and Merger between FutureLink Corp.,
FutureLink Michigan Acquisition Corp., Async Technologies,
Inc., and the selling shareholders of Async Technologies,
Inc., previously filed with the Commission on December 8,
1999 as Exhibit 2.4 to the Company's Current Report on Form
8-K, which is incorporated herein by reference.
2.15 Supplemental Agreement dated December 20, 1999 to Agreement
for Sale and Purchase of the Entire Issued Share Capital of
KNS Holdings Limited, between FutureLink Corp. and the
selling shareholders of KNS Holdings Limited, previously
filed with the Commission on January 6, 2000 as Exhibit 2.2
to the Company's Current Report on Form 8-K, which is
incorporated herein by reference.
2.16 The Agreement and Plan of Reorganization and Merger dated
December 2, 1999 by and among FutureLink Corp., FutureLink
Maryland Acquisition Corp., Vertical Software, Inc., Curtis
Eshelman and James C. Harvey, previously filed with the
Commission on February 14, 2000 as Exhibit 2.1 to the
Company's Current Report on Form 8-K, which is incorporated
herein by reference.
2.17 The Agreement and Plan of Reorganization and Merger dated
February 1, 2000 by and among FutureLink Corp., FutureLink
Delaware Acquisition Corp., MicroLAN Systems Inc., Madison
Consulting Resources Inc., Madison Consulting Resources (NJ)
Inc., Ira Silverman, Richard Silverman, Adam Silverman and
Adam Fox, previously filed with the Commission on May 15,
2000 as Exhibit 2.1 to the Company's Current Report on Form
8-K, which is incorporated herein by reference.
2.18 Acquisition and Amalgamation Agreement dated June 16, 2000
between and among FutureLink Corp., FutureLink Distribution
Corp. 3045207 Nova Scotia Company, 1423280 Ontario Inc.,
1423281 Ontario Inc., Charon Systems Inc., Allan Sherk,
Edward Mathewson, Joe Da Silva, Layne Harris, Jason Yetman,
David Fung, Blair Collins, Arron Fu, Mark Palangio, Ho Wai
Fung, Edward Chi Wai Fung, Malcolm Robins, Dataspec Telecom
Multimedia Inc. and The Charon Employee Trust, previously
filed with the Commission on June 30, 2000 as Exhibit 2.1 to
the Company's Current Report on Form 8-K, which is
incorporated herein by reference.
</TABLE>
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<PAGE> 244
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Amended Certificate of Incorporation of FutureLink Corp.,
previously filed with the Commission on September 28, 2000
as Exhibit 3.1 to the Company's Registration Statement on
Form SB-2, Registration No. 333-46778, which is incorporated
herein by reference.
3.2 Bylaws of FutureLink Corp., previously filed with the
Commission on October 27, 1999 as Exhibit 3.2 to the
Company's Current Report on Form 8-K, which is incorporated
herein by reference.
5.1** Opinion of Paul, Hastings, Janofsky & Walker LLP with
respect to the validity of the securities being offered.
10.1 Stock Option Plan, previously filed with the Commission on
August 24, 1998 as Exhibit 10.1.29 to the Company's
Registration Statement on Form SB-2, Registration No.
333-62133, which is incorporated herein by reference.
10.2 First Amendment to Second Amended and Restated Stock Option
Plan, previously filed with the Commission on February 11,
2000 as Exhibit 10.2 to the Company's Registration Statement
on Form SB-2, Registration No. 333-30178, which is
incorporated herein by reference.
10.3 Second Amendment to Second Amended and Restated Stock Option
Plan, previously filed with the Commission on June 13, 2000
as Exhibit C to the Company's Definitive Proxy Statement
dated, which is incorporated herein by reference.
10.4 Agency Agreement dated April 14, 1999 between FutureLink
Distribution Corp. and Commonwealth, previously filed with
the Commission on May 23, 1999 as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-QSB for the period
ended March 31, 1999, which is incorporated herein by
reference.
10.5 Letter Agreement dated December 6, 1999 between FutureLink
Distribution Corp. and Thomson Kernaghan & Co. Limited,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.4 to the Company's Registration Statement on Form
SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.6 Advisory Agreement dated May 1, 1999 between FutureLink
Distribution Corp. and Commonwealth Associates, L.P.,
previously filed with the Commission on June 13, 2000 as
Exhibit 10.6 to the Company's Quarterly Report on Form
10-QSB for the period ended March 31, 1999, which is
incorporated herein by reference.
10.7 Agency Agreement dated July 1, 1999 between FutureLink
Distribution Corp. and Commonwealth Associates, L.P.,
previously filed with the Commission on August 18, 1999 as
Exhibit 10.9 to the Company's Quarterly Report on Form
10-QSB for the period ended June 30, 1999, which is
incorporated herein by reference.
10.8 Loan Agreement dated August 1, 1999 between FutureLink Corp.
and Vincent L. Romano, previously filed with the Commission
on August 18, 1999 as Exhibit 10.10 to the Company's
Quarterly Report on Form 10-QSB for the period ended June
30, 1999, which is incorporated herein by reference.
10.9 First Amendment to Loan Agreement dated November 15, 1999
between FutureLink Corp. and Vincent L. Romano, previously
filed with the Commission on September 28, 2000 as Exhibit
10.9 to the Company's Registration Statement on Form SB-2,
Registration No. 333-46778, which is incorporated herein by
reference.
10.10 Loan Termination Agreement dated June 30, 2000 between
FutureLink Corp. and Vincent L. Romano, previously filed
with the Commission on September 28, 2000 as Exhibit 10.10
to the Company's Registration Statement on Form SB-2,
Registration No. 333-46778, which is incorporated herein by
reference.
10.11 Securities Purchase Agreement dated October 15, 1999 between
FutureLink Corp., Pequot Private Equity Investment Fund II,
L.P. and certain other investors, previously filed with the
Commission on October 27, 1999 as Exhibit 2.4 to the
Company's Current Report on Form 8-K, which is incorporated
herein by reference.
</TABLE>
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<PAGE> 245
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.12 Amended and Restated Registration Rights Agreement dated
April 28, 2000 between FutureLink Corp., Pequot Private
Investment Fund II, L.P., and certain other investors
(blacklined to the Registration Rights Agreement dated
October 15, 1999 between the parties which was filed as an
Exhibit to the Registration Statement on Form SB-2 filed on
February 11, 2000), previously filed with the Commission on
May 3, 2000 as Exhibit 10.9 to Amendment No. 2 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.
10.13 Securities Purchase Agreement dated April 28, 2000 between
FutureLink Corp., Pequot Private Equity Investment Fund II,
L.P. and Pequot Endowment Fund, L.P., previously filed with
the Commission on May 3, 2000 as Exhibit 10.10 to Amendment
No. 2 to the Company's Registration Statement on Form SB-2,
Registration No. 333-30178, which is incorporated herein by
reference.
10.14 Form of Warrant to Purchase Shares of Common Stock,
previously filed with the Commission on May 3, 2000 as
Exhibit 10.11 to Amendment No. 2 to the Company's
Registration Statement on Form SB-2, Registration No.
333-30178, which is incorporated herein by reference.
10.15 Registration Rights Agreement dated December 6, 1999 between
FutureLink Corp. and CPQ Holdings, Inc., previously filed
with the Commission on February 11, 2000 as Exhibit 10.10 to
the Company's Registration Statement on Form SB-2,
Registration No. 333-30178, which is incorporated herein by
reference.
10.16 Securities Purchase Agreement dated December 6, 1999 between
FutureLink Corp. and CPQ Holdings, Inc., previously filed
with the Commission on February 11, 2000 as Exhibit 10.11 to
the Company's Registration Statement on Form SB-2,
Registration No. 333-30178, which is incorporated herein by
reference.
10.17 Employment Agreement dated June 1, 1999 between Philip R.
Ladouceur and FutureLink Distribution Corp., previously
filed with the Commission on February 11, 2000 as Exhibit
10.12 to the Company's Registration Statement on Form SB-2,
Registration No. 333-30178, which is incorporated herein by
reference.(1)
10.18 Employment Agreement dated September 30, 1999 between Glenn
C. Holmes and FutureLink Corp., previously filed with the
Commission on February 11, 2000 as Exhibit 10.13 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.
10.19 Employment Agreement dated August 1, 1999 between Vincent L.
Romano and FutureLink Corp., previously filed with the
Commission on February 11, 2000 as Exhibit 10.14 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.
10.20 First Amendment to Employment Agreement dated November 15,
2000 between Vincent L. Romano and FutureLink Corp.,
previously filed with the Commission on September 28, 2000
as Exhibit 10.20 to the Company's Registration Statement on
Form SB-2, Registration No. 333-46778, which is incorporated
herein by reference.
10.21 Termination of Employment Agreement dated July 31, 2000
between Vincent L. Romano and FutureLink Corp., previously
filed with the Commission on September 28, 2000 as Exhibit
10.21 to the Company's Registration Statement on Form SB-2,
Registration No. 333-46778, which is incorporated herein by
reference.
10.22 Client/Agency Agreement dated August 7, 1999 between Sicola,
Martin, Koons & Frank, Inc. and FutureLink Distribution
Corp., as revised, previously filed with the Commission on
February 11, 2000 as Exhibit 10.15 to the Company's
Registration Statement on Form SB-2, Registration No.
333-30178, which is incorporated herein by reference.
</TABLE>
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<PAGE> 246
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.23 Master Loan and Security Agreement dated November 3, 1999
between Transamerica Business Credit Corporation, FutureLink
Corp. and FutureLink Micro Visions Corp., previously filed
with the Commission on February 11, 2000 as Exhibit 10.16 to
the Company's Registration Statement on Form SB-2,
Registration No. 333-30178, which is incorporated herein by
reference.
10.24 Security Agreement dated November 3, 1999 between
Transamerica Business Credit Corporation and FutureLink
Distribution Corp., previously filed with the Commission on
February 11, 2000 as Exhibit 10.17 to the Company's
Registration Statement on Form SB-2, Registration No.
333-30178, which is incorporated herein by reference.
10.25 Master Lease and Financing Agreement dated November 15, 1999
between Compaq Financial Services and FutureLink Corp.,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.18 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.26 Master Lease Agreement dated December 16, 1999 between
EMC(2) and FutureLink Corp., previously filed with the
Commission on February 11, 2000 as Exhibit 10.19 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.
10.27 Revised Offer to Lease dated March 24, 1998 between Bow
Valley Square Management Ltd. and SysGold, Ltd., as amended,
for 250 6th Avenue, Calgary, previously filed with the
Commission on August 24, 1998 as Exhibit 10.18 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-62133, which is incorporated herein by reference.
10.28 Lease Agreement dated September 23, 1999 between Kilroy
Realty, L.P., Kilroy Realty Corporation, and FutureLink
Distribution Corporation for 220 Technology Drive, Irvine
and assignment of Lease Agreement dated October 15, 1999,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.21 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.29 Lease Agreement dated April 27, 2000 between Olen Commercial
Realty Corp. and Futurelink Micro Visions Corporation for 2
South Pointe Dr., Lake Forest, Ca. 92630, previously filed
with the Commission on September 28, 2000 as Exhibit 10.29
to the Company's Registration Statement on Form SB-2,
Registration No. 333-46778, which is incorporated herein by
reference.
10.30 Lease Agreement dated August 8, 2000 between Transwestern
Lexington, LLC and FutureLink Corp. for 360 Lexington
Avenue, New York, previously filed with the Commission on
September 28, 2000 as Exhibit 10.30 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.31 Microsoft Certified Solution Provider Agreement dated
January 28, 2000 between Microsoft Corporation and
FutureLink Corp., previously filed with the Commission on
April 14, 2000 as Exhibit 10.22 to Amendment No. 1 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.(2)
10.32 Microsoft Application Services Agreement dated December 23,
1999 between Microsoft Corporation and FutureLink Corp.,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.23 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.(2)
10.33 Final Invoice/Enrollment Contract (MSCP) dated April 28,
1998 between Microsoft Corporation and FutureLink Corp.,
previously filed with the Commission on August 24, 1998 as
Exhibit 10.1.20 to the Company's Registration Statement on
Form SB-2, Registration No. 333-62133, which is incorporated
herein by reference.
10.34 Direct Commercial Service License Agreement dated May 21,
1999 between Microsoft Corporation and FutureLink
Distribution Corp., previously filed with the Commission on
February 11, 2000 as Exhibit 10.25 to the Company's
Registration Statement on Form SB-2, Registration No.
333-30178, which is incorporated herein by reference.(2)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
10.35 Service Agreement dated June 1, 1998 between Willson
Stationers Ltd. and FutureLink Alberta, previously filed
with the Commission on August 24, 1998 as Exhibit 10.1.21 to
the Company's Registration Statement on Form SB-2,
Registration No. 333-62133, which is incorporated herein by
reference.
10.36 Solution Provider Contract dated July 27, 1998 between IBM
Canada Ltd. and FutureLink/SysGold Ltd., previously filed
with the Commission on August 24, 1998 as Exhibit 10.1.16 to
the Company's Registration Statement on Form SB-2,
Registration No. 333-62133, which is incorporated herein by
reference.
10.37 Hosting Services Distributor Agreement (version 4) dated
November 12, 1998 between Onyx Software Corp. and FutureLink
Distribution Corp., previously filed with the Commission on
February 11, 2000 as Exhibit 10.28 to the Company's
Registration Statement on Form SB-2, Registration No.
333-30178, which is incorporated herein by reference.
10.38 Onyx Software License Agreement dated August 5, 1998 between
Onyx Software Corp. and FutureLink Distribution Corp.,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.29 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.39 Alliance Partner Agreement dated October 26, 1998 between
Great Plains Software and FutureLink Distribution Corp.,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.30 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.40 Citrix Solutions Network Gold Renewal Membership Agreement
dated July 16, 1999 between Citrix Systems, Inc. and
FutureLink Distribution Corp., previously filed with the
Commission on February 11, 2000 as Exhibit 10.31 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.(2)
10.41 Citrix Solutions Network Platinum Renewal Membership
Agreement dated April 20, 1999 between Citrix Systems, Inc.
and Async Technologies, Inc., previously filed with the
Commission on February 11, 2000 as Exhibit 10.32 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.(2)
10.42 Information Systems Services Agreement dated January 19,
1999 between FutureLink Alberta and Numac Energy, Inc.,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.33 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.43 Information Systems Services Agreement dated July 1, 1999
between Canadian Natural Resources, Ltd. and FutureLink
Alberta, previously filed with the Commission on February
11, 2000 as Exhibit 10.34 to the Company's Registration
Statement on Form SB-2, Registration No. 333-30178, which is
incorporated herein by reference.
10.44 Master Consulting Agreement dated December 1, 1998 between
Ameriquest Mortgage Company and Micro Visions, previously
filed with the Commission on February 11, 2000 as Exhibit
10.36 to the Company's Registration Statement on Form SB-2,
Registration No. 333-30178, which is incorporated herein by
reference.
10.45 Internet Data Center Services Agreement dated May 7, 1999
between Exodus Communications, Inc. and Executive LAN
Management, Inc., previously filed with the Commission on
February 11, 2000 as Exhibit 10.37 to the Company's
Registration Statement on Form SB-2, Registration No.
333-30178, which is incorporated herein by reference.
10.46 Form of EMC(2) Corporation Software License Agreement,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.38 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.47 Securities Purchase Agreement dated June 29, 2000 between
FutureLink Corp. and Microsoft Corporation, previously filed
with the Commission on September 28, 2000 as Exhibit 10.50
to the Company's Registration Statement on Form SB-2,
Registration No. 333-46778, which is incorporated herein by
reference.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
10.48 Debenture and Warrant Purchase Agreement dated March 2, 1999
between Augustine Fund, LP and FutureLink Distribution
Corp., previously filed with the Commission on September 28,
2000 as Exhibit 10.51 to the Company's Registration
Statement on Form SB-2, Registration No. 333-46778, which is
incorporated herein by reference.
10.49 Form of Warrant to Purchase Common Stock as issued in
connection with FutureLink Distribution Corp.'s April 1999
private placement, previously filed with the Commission on
September 28, 2000 as Exhibit 10.52 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.50 Form of Subscription Agreement between FutureLink
Distribution Corp. and certain investors as executed in
connection with FutureLink Distribution Corp.'s April 1999
private placement, previously filed with the Commission on
September 28, 2000 as Exhibit 10.53 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.51 Registration Rights Agreement dated September 8, 1999
between Sicola, Martin, Koons & Frank, Inc. and FutureLink
Distribution Corp., previously filed with the Commission on
September 28, 2000 as Exhibit 10.54 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.52 Warrant No. 1 to Purchase Common Stock issued to TBCC
Funding Trust II on November 3, 1999, previously filed with
the Commission on September 28, 2000 as Exhibit 10.55 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-46778, which is incorporated herein by reference.
10.53 Warrant No. 2 to Purchase Common Stock issued to TBCC
Funding Trust II on November 3, 1999, previously filed with
the Commission on September 28, 2000 as Exhibit 10.56 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-46778, which is incorporated herein by reference.
10.54 Registration Rights Agreement dated December 20, 1999
between certain selling shareholders of KNS Holdings Limited
and FutureLink Corp., previously filed with the Commission
on September 28, 2000 as Exhibit 10.57 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.55 Amendment No. 1 to Registration Rights Agreement dated June
19, 2000 between certain selling shareholders of KNS
Holdings Limited and FutureLink Corp., previously filed with
the Commission on September 28, 2000 as Exhibit 10.58 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-46778, which is incorporated herein by reference.
10.56 Warrant to Purchase Common Stock issued to TBCC Funding
Trust II on July 11, 2000, previously filed with the
Commission on September 28, 2000 as Exhibit 10.59 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-46778, which is incorporated herein by reference.
10.57 Warrant to Purchase Common Stock issued to EMC Corporation
on December 16, 1999, previously filed with the Commission
on September 28, 2000 as Exhibit 10.60 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.58 Warrant to Purchase Common Stock issued to EMC Corporation
on July 28, 2000, previously filed with the Commission on
September 28, 2000 as Exhibit 10.61 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
</TABLE>
II-16
<PAGE> 249
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.59 Warrant to Purchase Common Stock issued to EMC Corporation
on August 8, 2000, previously filed with the Commission on
September 28, 2000 as Exhibit 10.62 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.60** Loan and Security Agreement dated November 16, 2000 by and
among Foothill Capital Corporation, FutureLink Corp. and
certain of its Subsidiaries.
10.61** Amendment Number One to Loan and Security Agreement dated
December 14 by and between and Foothill Capital Corporation,
FutureLink Corp. and certain of its Subsidiaries
10.62** Warrant Agreement dated November 16, 2000 by and between
FutureLink Corp. and Foothill Capital Corporation.
10.63** Registration Rights Agreement dated November 16, 2000 by and
between FutureLink Corp. and Foothill Capital Corporation.
10.64** Stock Pledge Agreement dated November 16, 2000 by and
between FutureLink Corp. and Foothill Capital Corporation.
10.65** General Security Agreement dated December 14, 2000 by and
between FutureLink Canada Corp. and Foothill Capital
Corporation.
10.66** Guarantee and Postponement of Claim dated December 14, 2000
by and between FutureLink Canada Corp. and Foothill Capital
Corp.
10.67** Share Pledge Agreement dated December 14, 2000 by and among
1423280 Ontario Inc., FutureLink Corp. and Foothill Capital
Corp.
10.68** General Security Agreement dated December 14, 2000 by and
between 1423280 Ontario Inc. and Foothill Capital
Corporation.
10.69** Guarantee and Postponement of Claim dated December 14, 2000
by and between 1423280 Ontario Inc. and Foothill Capital
Corporation.
10.70** Share Pledge Agreement dated December 14, 2000 by and among
FutureLink Canada Corp., 1423280 Ontario Inc. and Foothill
Capital Corporation.
10.71** Hypothec on Movable Property (General) dated December 14,
2000 by and between FutureLink Canada Corp. and Foothill
Capital Corporation.
10.72** General Security Agreement dated December 14, 2000 by and
between 3045207 Nova Scotia Company and Foothill Capital
Corporation.
10.73** Guarantee and Postponement of Claim dated December 14, 2000
by and between 3045207 Nova Scotia Company and Foothill
Capital Corporation.
10.74** Share Pledge Agreement dated December 14, 2000 by and among
3045207 Nova Scotia Company, Foothill Capital Corporation
and 1423280 Ontario Inc.
10.75** Share Pledge Agreement dated December 14, 2000 by and among
FutureLink Corp., Foothill Capital Corporation and 3045207
Nova Scotia Company.
10.76** Loan and Security Agreement dated December 13, 2000 by and
between FutureLink Europe Limited and Foothill Capital
Corporation.
10.77** Debenture dated December 14, 2000 by and among Foothill
Capital Corporation, KNS Holdings Limited and FutureLink
Europe Limited.
10.78** Continuing General Guaranty dated December 13, 2000 by and
among Foothill Capital Corp. FutureLink Corp. and certain of
its Subsidiaries.
10.79** Share Charge dated December 14, 2000 by and between
FutureLink Corp. and Foothill Capital Corporation.
10.80** Security Agreement dated December 13, 2000 among Foothill
Capital Corporation, FutureLink Corp. and certain of its
Subsidiaries.
10.81** Summary of Terms of Employment Relationship with Howard E.
Taylor.
10.82** Employment Agreement dated January 3, 2000 between
FutureLink Corp. and Richard M. White.
15.1** Letter of Acknowledgement, Moreland & Davis, Alameda County,
California.
15.2** Letter of Acknowledgement, M. Jevahirian & Co., Birmingham,
Michigan.
</TABLE>
II-17
<PAGE> 250
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
21.0** List of Subsidiaries.
23.1** Consent of Paul, Hastings, Janofsky & Walker LLP (included
in Exhibit 5.1).
23.2** Consent of Ernst & Young LLP, Independent Auditors, Orange
County, California.
23.3** Consent of Ernst & Young LLP, Independent Auditors, McLean,
Virginia.
23.4** Consents of Joel E. Sammet & Co., Certified Public
Accountants.
23.5** Consent of Ernst & Young LLP, Independent Auditors, Orange
County, California.
23.6** Consent of Moreland & Davis, Alameda County, California.
23.7** Consents of M. Jevahirian and Co., Independent Auditors,
Birmingham, Michigan.
23.8** Consent of Ernst & Young, Independent Auditors, Reading,
England.
24.1** Power of Attorney (included in signature page).
</TABLE>
-------------------------
** Filed herewith.
(1) We entered into an employment agreement with Raghu Kilambi on June 1, 1999,
which we amended on October 8, 1999 that is substantially identical in all
material respects to our employment agreement with Mr. Ladouceur, except as
to salary and bonus provisions. Mr. Kilambi's base salary is $180,000 per
year and he is entitled to receive a performance bonus of up to $180,000.
(2) Some of our subsidiaries are parties to agreements with the same party that
are substantially identical in all material respects.
(b) FINANCIAL STATEMENT SCHEDULES.
None required.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
a. Include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
b. Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) (sec. 230.424(b) of this chapter) if,
in the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
c. Include any additional or changed material information on the plan of
distribution.
2. That, for determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at the time to be the initial bona
fide offering.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-18
<PAGE> 251
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this Registration Statement on Form
SB-2 to be signed on its behalf by the undersigned, thereunto duly authorized,
in Lake Forest, California on December 18, 2000.
FUTURELINK CORP.
By: /s/ HOWARD E. TAYLOR
------------------------------------
Howard E. Taylor
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Howard E. Taylor and Ross D. Vincenti, as
such person's true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and any other regulatory
authority, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as such
person might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or such persons' substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form SB-2 has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ PHILIP R. LADOUCEUR Executive Chairman and a Director December 18, 2000
---------------------------------------------
Philip R. Ladouceur
/s/ HOWARD E. TAYLOR President and Chief Executive December 18, 2000
--------------------------------------------- Officer (Principal Executive
Howard E. Taylor Officer)
/s/ RICHARD M. WHITE Executive Vice President, Chief December 18, 2000
--------------------------------------------- Financial Officer (Principal
Richard M. White Financial and Accounting Officer)
/s/ GLEN C. HOLMES Director December 18, 2000
---------------------------------------------
Glen C. Holmes
/s/ F. BRYSON FARRILL Director December 18, 2000
---------------------------------------------
F. Bryson Farrill
/s/ TIMOTHY P. FLYNN Director December 18, 2000
---------------------------------------------
Timothy P. Flynn
</TABLE>
II-19
<PAGE> 252
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ MICHAEL S. FALK Director December 18, 2000
---------------------------------------------
Michael S. Falk
/s/ GERALD A. POCH Director December 18, 2000
---------------------------------------------
Gerald A. Poch
/s/ JAMES P. MCNIEL Director December 18, 2000
---------------------------------------------
James P. McNiel
/s/ MARSHALL S. GELLER Director December 18, 2000
---------------------------------------------
Marshall S. Geller
</TABLE>
II-20
<PAGE> 253
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Share Purchase Agreement dated August 4, 1998 between
FutureLink Distribution Corp., a Colorado corporation,
Donald A. Bialik, Olivia B. Bialik, Bialik Family Trust,
Riverview Management Corporation, SysGold Ltd., and
FutureLink Distribution Corp., an Alberta corporation,
previously filed with the Commission on August 24, 1998 as
Exhibit 4.1.2 to the Company's Registration Statement on
Form SB-2, Registration No. 333-62133, which is incorporated
herein by reference.
2.2 Targetco Acquisition Agreement dated August 3, 1998 between
FutureLink Distribution Corp., a Colorado corporation, and
FutureLink Alberta, previously filed with the Commission on
August 24, 1998 as Exhibit 4.1.3 to the Company's
Registration Statement on Form SB-2, Registration No.
333-62133, which is incorporated herein by reference.
2.3 Amending Agreement to Share Purchase Agreement dated August
21, 1998 between FutureLink Distribution Corp., a Colorado
corporation, Donald A. Bialik, Olivia B. Bialik, Bialik
Family Trust, Riverview Management Corporation, SysGold
Ltd., and FutureLink Alberta, previously filed with the
Commission on November 24, 1998 as Exhibit 2.1 to Amendment
No. 2 to the Company's Registration Statement on Form SB-2,
Registration No. 333-62133, which is incorporated herein by
reference.
2.4 Agreement and Plan of Reorganization and Merger dated June
2, 1999 between FutureLink Distribution Corp., FutureLink
California Acquisition Corp., Executive LAN Management,
Inc., dba Micro Visions, and the selling shareholders of
Micro Visions, previously filed with the Commission as
Exhibit 10.1 to the Company's Current Report on Form 8-K, on
June 16, 1999, which is incorporated herein by reference.
2.5 Agreement and Plan of Merger dated August 1, 1999 between
FutureLink Distribution Corp. and FutureLink California
Acquisition Corporation, a Delaware corporation, previously
filed with the Commission on October 27, 1999 as Exhibit 2.1
to the Company's Current Report on Form 8-K, which is
incorporated herein by reference.
2.6 Agreement and Plan of Reorganization and Merger dated
September 7, 1999 between FutureLink Distribution Corp.,
FutureLink Pleasanton Acquisition Corp., CN Networks, Inc.,
and the selling shareholders of CN Networks, Inc.,
previously filed with the Commission on November 23, 1999 as
Exhibit 2.1 to the Company's Current Report on Form 8-K,
which is incorporated herein by reference.
2.7 Agreement and Plan of Reorganization and Merger dated
September 7, 1999 between FutureLink Distribution Corp.,
FutureLink Michigan Acquisition Corp., Async Technologies,
Inc., and the selling shareholders of Async Technologies,
Inc., previously filed with the Commission on December 8,
1999 as Exhibit 2.1 to the Company's Current Report on Form
8-K, which is incorporated herein by reference.
2.8 Certificate of Merger dated October 15, 1999 of FutureLink
Distribution Corp., a Colorado corporation, into FutureLink
California Acquisition Corp., a Delaware corporation,
previously filed with the Commission on October 27, 1999 as
Exhibit 2.2 to the Company's Current Report on Form 8-K,
which is incorporated herein by reference.
2.9 Amending Agreement dated October 15, 1999 to Agreement and
Plan of Reorganization and Merger between FutureLink Corp.,
FutureLink California Acquisition Corp., and the selling
shareholders of Executive LAN Management, Inc., previously
filed with the Commission on October 27, 1999 as Exhibit 2.3
to the Company's Current Report on Form 8-K, which is
incorporated herein by reference.
2.10 Amending Agreement dated October 29, 1999 to Agreement and
Plan of Reorganization and Merger, between FutureLink
Distribution Corp., FutureLink Michigan Acquisition Corp.,
Async Technologies, Inc., and the selling shareholders of
Async Technologies, Inc., previously filed with the
Commission on December 27, 1999 as Exhibit 2.2 to the
Company's Current Report on Form 8-K, which is incorporated
herein by reference.
</TABLE>
<PAGE> 254
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.11 Amending Agreement dated October 31, 1999 to Agreement and
Plan of Reorganization and Merger between FutureLink Corp.,
FutureLink Pleasanton Acquisition Corp., CN Networks, Inc.
and the selling shareholders of CN Networks, Inc.,
previously filed with the Commission on November 23, 1999 as
Exhibit 2.2 to the Company's Current Report on Form 8-K,
which is incorporated herein by reference.
2.12 Amending Agreement dated November 14, 1999 to Agreement and
Plan of Reorganization and Merger between FutureLink Corp.,
FutureLink Michigan Acquisition Corp., Async Technologies,
Inc., and the selling shareholders of Async Technologies,
Inc., previously filed with the Commission on December 8,
1999 as Exhibit 2.3 to the Company's Current Report on Form
8-K, which is incorporated herein by reference.
2.13 Agreement for the Sale and Purchase of the Entire Issued
Share Capital of KNS Holdings Limited dated November 15,
1999 between FutureLink Corp. and the selling shareholders
of KNS Holdings Limited, previously filed with the
Commission on January 6, 2000 as Exhibit 2.1 to the
Company's Current Report on Form 8-K, which is incorporated
herein by reference.
2.14 Amending Agreement dated November 26, 1999 to Agreement and
Plan of Reorganization and Merger between FutureLink Corp.,
FutureLink Michigan Acquisition Corp., Async Technologies,
Inc., and the selling shareholders of Async Technologies,
Inc., previously filed with the Commission on December 8,
1999 as Exhibit 2.4 to the Company's Current Report on Form
8-K, which is incorporated herein by reference.
2.15 Supplemental Agreement dated December 20, 1999 to Agreement
for Sale and Purchase of the Entire Issued Share Capital of
KNS Holdings Limited, between FutureLink Corp. and the
selling shareholders of KNS Holdings Limited, previously
filed with the Commission on January 6, 2000 as Exhibit 2.2
to the Company's Current Report on Form 8-K, which is
incorporated herein by reference.
2.16 The Agreement and Plan of Reorganization and Merger dated
December 2, 1999 by and among FutureLink Corp., FutureLink
Maryland Acquisition Corp., Vertical Software, Inc., Curtis
Eshelman and James C. Harvey, previously filed with the
Commission on February 14, 2000 as Exhibit 2.1 to the
Company's Current Report on Form 8-K, which is incorporated
herein by reference.
2.17 The Agreement and Plan of Reorganization and Merger dated
February 1, 2000 by and among FutureLink Corp., FutureLink
Delaware Acquisition Corp., MicroLAN Systems Inc., Madison
Consulting Resources Inc., Madison Consulting Resources (NJ)
Inc., Ira Silverman, Richard Silverman, Adam Silverman and
Adam Fox, previously filed with the Commission on May 15,
2000 as Exhibit 2.1 to the Company's Current Report on Form
8-K, which is incorporated herein by reference.
2.18 Acquisition and Amalgamation Agreement dated June 16, 2000
between and among FutureLink Corp., FutureLink Distribution
Corp. 3045207 Nova Scotia Company, 1423280 Ontario Inc.,
1423281 Ontario Inc., Charon Systems Inc., Allan Sherk,
Edward Mathewson, Joe Da Silva, Layne Harris, Jason Yetman,
David Fung, Blair Collins, Arron Fu, Mark Palangio, Ho Wai
Fung, Edward Chi Wai Fung, Malcolm Robins, Dataspec Telecom
Multimedia Inc. and The Charon Employee Trust, previously
filed with the Commission on June 30, 2000 as Exhibit 2.1 to
the Company's Current Report on Form 8-K, which is
incorporated herein by reference.
3.1 Amended Certificate of Incorporation of FutureLink Corp.,
previously filed with the Commission on September 28, 2000
as Exhibit 3.1 to the Company's Registration Statement on
Form SB-2, Registration No. 333-46778, which is incorporated
herein by reference.
3.2 Bylaws of FutureLink Corp., previously filed with the
Commission on October 27, 1999 as Exhibit 3.2 to the
Company's Current Report on Form 8-K, which is incorporated
herein by reference.
</TABLE>
<PAGE> 255
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
5.1** Opinion of Paul, Hastings, Janofsky & Walker LLP with
respect to the validity of the securities being offered.
10.1 Stock Option Plan, previously filed with the Commission on
August 24, 1998 as Exhibit 10.1.29 to the Company's
Registration Statement on Form SB-2, Registration No.
333-62133, which is incorporated herein by reference.
10.2 First Amendment to Second Amended and Restated Stock Option
Plan, previously filed with the Commission on February 11,
2000 as Exhibit 10.2 to the Company's Registration Statement
on Form SB-2, Registration No. 333-30178, which is
incorporated herein by reference.
10.3 Second Amendment to Second Amended and Restated Stock Option
Plan, previously filed with the Commission on June 13, 2000
as Exhibit C to the Company's Definitive Proxy Statement
dated, which is incorporated herein by reference.
10.4 Agency Agreement dated April 14, 1999 between FutureLink
Distribution Corp. and Commonwealth, previously filed with
the Commission on May 23, 1999 as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-QSB for the period
ended March 31, 1999, which is incorporated herein by
reference.
10.5 Letter Agreement dated December 6, 1999 between FutureLink
Distribution Corp. and Thomson Kernaghan & Co. Limited,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.4 to the Company's Registration Statement on Form
SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.6 Advisory Agreement dated May 1, 1999 between FutureLink
Distribution Corp. and Commonwealth Associates, L.P.,
previously filed with the Commission on June 13, 2000 as
Exhibit 10.6 to the Company's Quarterly Report on Form
10-QSB for the period ended March 31, 1999, which is
incorporated herein by reference.
10.7 Agency Agreement dated July 1, 1999 between FutureLink
Distribution Corp. and Commonwealth Associates, L.P.,
previously filed with the Commission on August 18, 1999 as
Exhibit 10.9 to the Company's Quarterly Report on Form
10-QSB for the period ended June 30, 1999, which is
incorporated herein by reference.
10.8 Loan Agreement dated August 1, 1999 between FutureLink Corp.
and Vincent L. Romano, previously filed with the Commission
on August 18, 1999 as Exhibit 10.10 to the Company's
Quarterly Report on Form 10-QSB for the period ended June
30, 1999, which is incorporated herein by reference.
10.9 First Amendment to Loan Agreement dated November 15, 1999
between FutureLink Corp. and Vincent L. Romano, previously
filed with the Commission on September 28, 2000 as Exhibit
10.9 to the Company's Registration Statement on Form SB-2,
Registration No. 333-46778, which is incorporated herein by
reference.
10.10 Loan Termination Agreement dated June 30, 2000 between
FutureLink Corp. and Vincent L. Romano, previously filed
with the Commission on September 28, 2000 as Exhibit 10.10
to the Company's Registration Statement on Form SB-2,
Registration No. 333-46778, which is incorporated herein by
reference.
10.11 Securities Purchase Agreement dated October 15, 1999 between
FutureLink Corp., Pequot Private Equity Investment Fund II,
L.P. and certain other investors, previously filed with the
Commission on October 27, 1999 as Exhibit 2.4 to the
Company's Current Report on Form 8-K, which is incorporated
herein by reference.
10.12 Amended and Restated Registration Rights Agreement dated
April 28, 2000 between FutureLink Corp., Pequot Private
Investment Fund II, L.P., and certain other investors
(blacklined to the Registration Rights Agreement dated
October 15, 1999 between the parties which was filed as an
Exhibit to the Registration Statement on Form SB-2 filed on
February 11, 2000), previously filed with the Commission on
May 3, 2000 as Exhibit 10.9 to Amendment No. 2 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.
</TABLE>
<PAGE> 256
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.13 Securities Purchase Agreement dated April 28, 2000 between
FutureLink Corp., Pequot Private Equity Investment Fund II,
L.P. and Pequot Endowment Fund, L.P., previously filed with
the Commission on May 3, 2000 as Exhibit 10.10 to Amendment
No. 2 to the Company's Registration Statement on Form SB-2,
Registration No. 333-30178, which is incorporated herein by
reference.
10.14 Form of Warrant to Purchase Shares of Common Stock,
previously filed with the Commission on May 3, 2000 as
Exhibit 10.11 to Amendment No. 2 to the Company's
Registration Statement on Form SB-2, Registration No.
333-30178, which is incorporated herein by reference.
10.15 Registration Rights Agreement dated December 6, 1999 between
FutureLink Corp. and CPQ Holdings, Inc., previously filed
with the Commission on February 11, 2000 as Exhibit 10.10 to
the Company's Registration Statement on Form SB-2,
Registration No. 333-30178, which is incorporated herein by
reference.
10.16 Securities Purchase Agreement dated December 6, 1999 between
FutureLink Corp. and CPQ Holdings, Inc., previously filed
with the Commission on February 11, 2000 as Exhibit 10.11 to
the Company's Registration Statement on Form SB-2,
Registration No. 333-30178, which is incorporated herein by
reference.
10.17 Employment Agreement dated June 1, 1999 between Philip R.
Ladouceur and FutureLink Distribution Corp., previously
filed with the Commission on February 11, 2000 as Exhibit
10.12 to the Company's Registration Statement on Form SB-2,
Registration No. 333-30178, which is incorporated herein by
reference.(1)
10.18 Employment Agreement dated September 30, 1999 between Glenn
C. Holmes and FutureLink Corp., previously filed with the
Commission on February 11, 2000 as Exhibit 10.13 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.
10.19 Employment Agreement dated August 1, 1999 between Vincent L.
Romano and FutureLink Corp., previously filed with the
Commission on February 11, 2000 as Exhibit 10.14 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.
10.20 First Amendment to Employment Agreement dated November 15,
2000 between Vincent L. Romano and FutureLink Corp.,
previously filed with the Commission on September 28, 2000
as Exhibit 10.20 to the Company's Registration Statement on
Form SB-2, Registration No. 333-46778, which is incorporated
herein by reference.
10.21 Termination of Employment Agreement dated July 31, 2000
between Vincent L. Romano and FutureLink Corp., previously
filed with the Commission on September 28, 2000 as Exhibit
10.21 to the Company's Registration Statement on Form SB-2,
Registration No. 333-46778, which is incorporated herein by
reference.
10.22 Client/Agency Agreement dated August 7, 1999 between Sicola,
Martin, Koons & Frank, Inc. and FutureLink Distribution
Corp., as revised, previously filed with the Commission on
February 11, 2000 as Exhibit 10.15 to the Company's
Registration Statement on Form SB-2, Registration No.
333-30178, which is incorporated herein by reference.
10.23 Master Loan and Security Agreement dated November 3, 1999
between Transamerica Business Credit Corporation, FutureLink
Corp. and FutureLink Micro Visions Corp., previously filed
with the Commission on February 11, 2000 as Exhibit 10.16 to
the Company's Registration Statement on Form SB-2,
Registration No. 333-30178, which is incorporated herein by
reference.
10.24 Security Agreement dated November 3, 1999 between
Transamerica Business Credit Corporation and FutureLink
Distribution Corp., previously filed with the Commission on
February 11, 2000 as Exhibit 10.17 to the Company's
Registration Statement on Form SB-2, Registration No.
333-30178, which is incorporated herein by reference.
</TABLE>
<PAGE> 257
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.25 Master Lease and Financing Agreement dated November 15, 1999
between Compaq Financial Services and FutureLink Corp.,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.18 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.26 Master Lease Agreement dated December 16, 1999 between
EMC(2) and FutureLink Corp., previously filed with the
Commission on February 11, 2000 as Exhibit 10.19 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.
10.27 Revised Offer to Lease dated March 24, 1998 between Bow
Valley Square Management Ltd. and SysGold, Ltd., as amended,
for 250 6th Avenue, Calgary, previously filed with the
Commission on August 24, 1998 as Exhibit 10.18 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-62133, which is incorporated herein by reference.
10.28 Lease Agreement dated September 23, 1999 between Kilroy
Realty, L.P., Kilroy Realty Corporation, and FutureLink
Distribution Corporation for 220 Technology Drive, Irvine
and assignment of Lease Agreement dated October 15, 1999,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.21 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.29 Lease Agreement dated April 27, 2000 between Olen Commercial
Realty Corp. and Futurelink Micro Visions Corporation for 2
South Pointe Dr., Lake Forest, Ca. 92630, previously filed
with the Commission on September 28, 2000 as Exhibit 10.29
to the Company's Registration Statement on Form SB-2,
Registration No. 333-46778, which is incorporated herein by
reference.
10.30 Lease Agreement dated August 8, 2000 between Transwestern
Lexington, LLC and FutureLink Corp. for 360 Lexington
Avenue, New York, previously filed with the Commission on
September 28, 2000 as Exhibit 10.30 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.31 Microsoft Certified Solution Provider Agreement dated
January 28, 2000 between Microsoft Corporation and
FutureLink Corp., previously filed with the Commission on
April 14, 2000 as Exhibit 10.22 to Amendment No. 1 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.(2)
10.32 Microsoft Application Services Agreement dated December 23,
1999 between Microsoft Corporation and FutureLink Corp.,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.23 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.(2)
10.33 Final Invoice/Enrollment Contract (MSCP) dated April 28,
1998 between Microsoft Corporation and FutureLink Corp.,
previously filed with the Commission on August 24, 1998 as
Exhibit 10.1.20 to the Company's Registration Statement on
Form SB-2, Registration No. 333-62133, which is incorporated
herein by reference.
10.34 Direct Commercial Service License Agreement dated May 21,
1999 between Microsoft Corporation and FutureLink
Distribution Corp., previously filed with the Commission on
February 11, 2000 as Exhibit 10.25 to the Company's
Registration Statement on Form SB-2, Registration No.
333-30178, which is incorporated herein by reference.(2)
10.35 Service Agreement dated June 1, 1998 between Willson
Stationers Ltd. and FutureLink Alberta, previously filed
with the Commission on August 24, 1998 as Exhibit 10.1.21 to
the Company's Registration Statement on Form SB-2,
Registration No. 333-62133, which is incorporated herein by
reference.
10.36 Solution Provider Contract dated July 27, 1998 between IBM
Canada Ltd. and FutureLink/SysGold Ltd., previously filed
with the Commission on August 24, 1998 as Exhibit 10.1.16 to
the Company's Registration Statement on Form SB-2,
Registration No. 333-62133, which is incorporated herein by
reference.
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
10.37 Hosting Services Distributor Agreement (version 4) dated
November 12, 1998 between Onyx Software Corp. and FutureLink
Distribution Corp., previously filed with the Commission on
February 11, 2000 as Exhibit 10.28 to the Company's
Registration Statement on Form SB-2, Registration No.
333-30178, which is incorporated herein by reference.
10.38 Onyx Software License Agreement dated August 5, 1998 between
Onyx Software Corp. and FutureLink Distribution Corp.,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.29 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.39 Alliance Partner Agreement dated October 26, 1998 between
Great Plains Software and FutureLink Distribution Corp.,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.30 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.40 Citrix Solutions Network Gold Renewal Membership Agreement
dated July 16, 1999 between Citrix Systems, Inc. and
FutureLink Distribution Corp., previously filed with the
Commission on February 11, 2000 as Exhibit 10.31 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.(2)
10.41 Citrix Solutions Network Platinum Renewal Membership
Agreement dated April 20, 1999 between Citrix Systems, Inc.
and Async Technologies, Inc., previously filed with the
Commission on February 11, 2000 as Exhibit 10.32 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-30178, which is incorporated herein by reference.(2)
10.42 Information Systems Services Agreement dated January 19,
1999 between FutureLink Alberta and Numac Energy, Inc.,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.33 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.43 Information Systems Services Agreement dated July 1, 1999
between Canadian Natural Resources, Ltd. and FutureLink
Alberta, previously filed with the Commission on February
11, 2000 as Exhibit 10.34 to the Company's Registration
Statement on Form SB-2, Registration No. 333-30178, which is
incorporated herein by reference.
10.44 Master Consulting Agreement dated December 1, 1998 between
Ameriquest Mortgage Company and Micro Visions, previously
filed with the Commission on February 11, 2000 as Exhibit
10.36 to the Company's Registration Statement on Form SB-2,
Registration No. 333-30178, which is incorporated herein by
reference.
10.45 Internet Data Center Services Agreement dated May 7, 1999
between Exodus Communications, Inc. and Executive LAN
Management, Inc., previously filed with the Commission on
February 11, 2000 as Exhibit 10.37 to the Company's
Registration Statement on Form SB-2, Registration No.
333-30178, which is incorporated herein by reference.
10.46 Form of EMC(2) Corporation Software License Agreement,
previously filed with the Commission on February 11, 2000 as
Exhibit 10.38 to the Company's Registration Statement on
Form SB-2, Registration No. 333-30178, which is incorporated
herein by reference.
10.47 Securities Purchase Agreement dated June 29, 2000 between
FutureLink Corp. and Microsoft Corporation, previously filed
with the Commission on September 28, 2000 as Exhibit 10.50
to the Company's Registration Statement on Form SB-2,
Registration No. 333-46778, which is incorporated herein by
reference.
10.48 Debenture and Warrant Purchase Agreement dated March 2, 1999
between Augustine Fund, LP and FutureLink Distribution
Corp., previously filed with the Commission on September 28,
2000 as Exhibit 10.51 to the Company's Registration
Statement on Form SB-2, Registration No. 333-46778, which is
incorporated herein by reference.
10.49 Form of Warrant to Purchase Common Stock as issued in
connection with FutureLink Distribution Corp.'s April 1999
private placement, previously filed with the Commission on
September 28, 2000 as Exhibit 10.52 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
10.50 Form of Subscription Agreement between FutureLink
Distribution Corp. and certain investors as executed in
connection with FutureLink Distribution Corp.'s April 1999
private placement, previously filed with the Commission on
September 28, 2000 as Exhibit 10.53 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.51 Registration Rights Agreement dated September 8, 1999
between Sicola, Martin, Koons & Frank, Inc. and FutureLink
Distribution Corp., previously filed with the Commission on
September 28, 2000 as Exhibit 10.54 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.52 Warrant No. 1 to Purchase Common Stock issued to TBCC
Funding Trust II on November 3, 1999, previously filed with
the Commission on September 28, 2000 as Exhibit 10.55 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-46778, which is incorporated herein by reference.
10.53 Warrant No. 2 to Purchase Common Stock issued to TBCC
Funding Trust II on November 3, 1999, previously filed with
the Commission on September 28, 2000 as Exhibit 10.56 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-46778, which is incorporated herein by reference.
10.54 Registration Rights Agreement dated December 20, 1999
between certain selling shareholders of KNS Holdings Limited
and FutureLink Corp., previously filed with the Commission
on September 28, 2000 as Exhibit 10.57 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.55 Amendment No. 1 to Registration Rights Agreement dated June
19, 2000 between certain selling shareholders of KNS
Holdings Limited and FutureLink Corp., previously filed with
the Commission on September 28, 2000 as Exhibit 10.58 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-46778, which is incorporated herein by reference.
10.56 Warrant to Purchase Common Stock issued to TBCC Funding
Trust II on July 11, 2000, previously filed with the
Commission on September 28, 2000 as Exhibit 10.59 to the
Company's Registration Statement on Form SB-2, Registration
No. 333-46778, which is incorporated herein by reference.
10.57 Warrant to Purchase Common Stock issued to EMC Corporation
on December 16, 1999, previously filed with the Commission
on September 28, 2000 as Exhibit 10.60 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.58 Warrant to Purchase Common Stock issued to EMC Corporation
on July 28, 2000, previously filed with the Commission on
September 28, 2000 as Exhibit 10.61 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.59 Warrant to Purchase Common Stock issued to EMC Corporation
on August 8, 2000, previously filed with the Commission on
September 28, 2000 as Exhibit 10.62 to the Company's
Registration Statement on Form SB-2, Registration No.
333-46778, which is incorporated herein by reference.
10.60** Loan and Security Agreement dated November 16, 2000 by and
among Foothill Capital Corporation, FutureLink Corp. and
certain of its Subsidiaries.
10.61** Amendment Number One to Loan and Security Agreement dated
December 14 by and between and Foothill Capital Corporation,
FutureLink Corp. and certain of its Subsidiaries
10.62** Warrant Agreement dated November 16, 2000 by and between
FutureLink Corp. and Foothill Capital Corporation.
10.63** Registration Rights Agreement dated November 16, 2000 by and
between FutureLink Corp. and Foothill Capital Corporation.
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EXHIBIT
NUMBER DESCRIPTION
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10.64** Stock Pledge Agreement dated November 16, 2000 by and
between FutureLink Corp. and Foothill Capital Corporation.
10.65** General Security Agreement dated December 14, 2000 by and
between FutureLink Canada Corp. and Foothill Capital
Corporation.
10.66** Guarantee and Postponement of Claim dated December 14, 2000
by and between FutureLink Canada Corp. and Foothill Capital
Corp.
10.67** Share Pledge Agreement dated December 14, 2000 by and among
1423280 Ontario Inc., FutureLink Corp. and Foothill Capital
Corp.
10.68** General Security Agreement dated December 14, 2000 by and
between 1423280 Ontario Inc. and Foothill Capital
Corporation.
10.69** Guarantee and Postponement of Claim dated December 14, 2000
by and between 1423280 Ontario Inc. and Foothill Capital
Corporation.
10.70** Share Pledge Agreement dated December 14, 2000 by and among
FutureLink Canada Corp., 1423280 Ontario Inc. and Foothill
Capital Corporation.
10.71** Hypothec on Movable Property (General) dated December 14,
2000 by and between FutureLink Canada Corp. and Foothill
Capital Corporation.
10.72** General Security Agreement dated December 14, 2000 by and
between 3045207 Nova Scotia Company and Foothill Capital
Corporation.
10.73** Guarantee and Postponement of Claim dated December 14, 2000
by and between 3045207 Nova Scotia Company and Foothill
Capital Corporation.
10.74** Share Pledge Agreement dated December 14, 2000 by and among
3045207 Nova Scotia Company, Foothill Capital Corporation
and 1423280 Ontario Inc.
10.75** Share Pledge Agreement dated December 14, 2000 by and among
FutureLink Corp., Foothill Capital Corporation and 3045207
Nova Scotia Company.
10.76** Loan and Security Agreement dated December 13, 2000 by and
between FutureLink Europe Limited and Foothill Capital
Corporation.
10.77** Debenture dated December 14, 2000 by and among Foothill
Capital Corporation, KNS Holdings Limited and FutureLink
Europe Limited.
10.78** Continuing General Guaranty dated December 13, 2000 by and
among Foothill Capital Corp. FutureLink Corp. and certain of
its Subsidiaries.
10.79** Share Charge dated December 14, 2000 by and between
FutureLink Corp. and Foothill Capital Corporation.
10.80** Security Agreement dated December 13, 2000 among Foothill
Capital Corporation, FutureLink Corp. and certain of its
Subsidiaries.
10.81** Summary of Terms of Employment Relationship with Howard E.
Taylor.
10.82** Employment Agreement dated January 3, 2000 between
FutureLink Corp. and Richard M. White.
15.1** Letter of Acknowledgement, Moreland & Davis, Alameda County,
California.
15.2** Letter of Acknowledgement, M. Jevahirian & Co., Birmingham,
Michigan.
21.0** List of Subsidiaries.
23.1** Consent of Paul, Hastings, Janofsky & Walker LLP (included
in Exhibit 5.1).
23.2** Consent of Ernst & Young LLP, Independent Auditors, Orange
County, California.
23.3** Consent of Ernst & Young LLP, Independent Auditors, McLean,
Virginia.
23.4** Consents of Joel E. Sammet & Co., Certified Public
Accountants.
23.5** Consent of Ernst & Young LLP, Independent Auditors, Orange
County, California.
23.6** Consent of Moreland & Davis, Alameda County, California.
23.7** Consents of M. Jevahirian and Co., Independent Auditors,
Birmingham, Michigan.
23.8** Consent of Ernst & Young, Independent Auditors, Reading,
England.
24.1** Power of Attorney (included in signature page).
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<PAGE> 261
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** Filed herewith.
(1) We entered into an employment agreement with Raghu Kilambi on June 1, 1999,
which we amended on October 8, 1999 that is substantially identical in all
material respects to our employment agreement with Mr. Ladouceur, except as
to salary and bonus provisions. Mr. Kilambi's base salary is $180,000 per
year and he is entitled to receive a performance bonus of up to $180,000.
(2) Some of our subsidiaries are parties to agreements with the same party that
are substantially identical in all material respects.
