<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 2000
REGISTRATION NO. 333-30178
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
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>
6 MORGAN, SUITE 100
IRVINE, CALIFORNIA 92618
(949) 837-8252
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
6 MORGAN, SUITE 100
IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR INTENDED PRINCIPAL PLACE OF BUSINESS)
PHILIP R. LADOUCEUR
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
FUTURELINK CORP.
6 MORGAN, SUITE 100
IRVINE, CALIFORNIA 92618
(949) 837-8252
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C> <C>
STEPHEN D. COOKE, ESQ. THOMAS R. POLLOCK, ESQ. PAMELA B. KELLY, ESQ.
PAUL, HASTINGS, JANOFSKY & WALKER LLP PAUL, HASTINGS, JANOFSKY & WALKER LLP LATHAM & WATKINS
695 TOWN CENTER DRIVE, 17TH FLOOR 399 PARK AVENUE, 31ST FLOOR 633 WEST 5TH STREET, SUITE 4000
COSTA MESA, CALIFORNIA 92626 NEW YORK, NEW YORK 10022-4697 LOS ANGELES, CALIFORNIA 90071-2007
(714) 668-6200 (212) 318-6000 (213) 485-1234
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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. [ ]
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.
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- --------------------------------------------------------------------------------
<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 WE ARE NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 3, 2000
PRELIMINARY PROSPECTUS
5,000,000 SHARES
[FUTURELINK LOGO]
COMMON STOCK
-------------------------
This is a public offering of 5,000,000 shares of common stock of FutureLink
Corp.
Our common stock currently trades on the Nasdaq National Market under the symbol
"FTRL."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 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.
-------------------------
<TABLE>
<CAPTION>
PER
SHARE TOTAL
-------- --------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to us............................ $ $
</TABLE>
-------------------------
Under certain circumstances, the underwriters may purchase up to an additional
750,000 shares of common stock from us at the public offering price, less
underwriting discounts and commissions.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York
on , 2000.
-------------------------
BEAR, STEARNS & CO. INC.
ROBERTSON STEPHENS
CIBC WORLD MARKETS
C. E. UNTERBERG, TOWBIN
The date of this prospectus is , 2000
<PAGE> 3
[FRONT COVER]
[INSERT GRAPHIC DISPLAYING LIGHT SWITCH, TELEPHONE OUTLET,
THERMOSTAT AND COMPUTER DISPLAYING HOW OUR SERVICES ARE
INTENDED TO BE OFFERED WITH THE RELIABILITY OF A UTILITY]
[INSIDE FRONT COVER]
[INSERT GRAPHIC SHOWING COMPONENTS OF APPLICATION HOSTING SERVICES, INCLUDING
THE METHODS OF DELIVERY OF SOFTWARE APPLICATIONS FROM OUR DATA CENTERS TO OUR
CUSTOMERS]
<PAGE> 4
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. 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.
The market for outsourced server-based computing and ASP services is
growing in response to the increasing complexity of information management
systems, the scarcity of information technology professionals and changes in the
use of telecommunications services and computer systems. The ASP market is
expected to grow to over $11.0 billion in 2003. We intend to leverage our
existing server-based computing capabilities to build our ASP business into a
larger portion of our business.
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 are able to reduce their information
technology staff and can 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 6 Morgan, Suite 100,
Irvine, California 92618. Our telephone number is (949) 837-8252. Our website
address is www.futurelink.net. Information contained on our website does not
constitute part of this prospectus.
-------------------------
This prospectus contains trademarks and names of persons other than
FutureLink, which are the property of their respective owners.
1
<PAGE> 5
THE OFFERING
The share numbers in the following table assume that we have issued all the
shares of our common stock included in the purchase price for Charon Systems
Inc. They do not include the following securities outstanding as of May 1, 2000:
(a) options to purchase 7,923,209 shares of our common stock at a weighted
average exercise price of $12.25 per share, (b) warrants to purchase 8,241,324
shares of our common stock at a weighted average exercise price of $11.78 per
share, and (c) debentures convertible into 67,965 shares of our common stock at
a conversion price of $1.15 per share.
Common stock being offered by us.... 5,000,000 shares
Common stock outstanding after this
offering............................ 67,548,591 shares assuming the
underwriters do not exercise their
over-allotment option to purchase
750,000 shares
Use of proceeds..................... We intend to use the net proceeds from
this offering to fund part of the cash
portion of current and possible future
acquisitions, to retire debt incurred
to finance our acquisitions, to fund
our operations, to develop our ASP data
centers and for working capital and
other general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market symbol....... FTRL
2
<PAGE> 6
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.
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 December 31, 1999:
- our pending and completed acquisitions,
- repayment of $14.0 million of shareholder notes issued to finance our
acquisitions of KNS Holdings Limited and Madison Group Holdings,
- Pequot Private Equity Fund II, L.P.'s and other investors' exercise of
warrants to purchase 2,401,041 shares of our common stock in February
2000,
- the payment of $5.0 million cash and the issuance of warrants to purchase
3,000,000 shares of our common stock for the March 2000 settlement of the
SmallCaps litigation,
- our $15.0 million private placement of equity securities with Pequot
Private Equity Fund II, L.P. and Pequot Endowment Fund, L.P. in April
2000, and
- conversion of $0.8 million of convertible debt
- this offering.
The pro forma column in the table of consolidated statements of operations data
gives effect to the items described below as if each had occurred on January 1,
1999:
- our $50.0 million private placement of equity securities with Pequot
Private Equity Fund II, L.P. and other investors in October 1999, and
- conversion of $22.5 million of convertible debt from August 23, 1999
through November 8, 1999.
- repayment of $14.0 million of shareholder notes issued to finance our
acquisitions of KNS Holdings Limited and Madison Group Holdings,
- conversion of $0.8 million of convertible debt
3
<PAGE> 7
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
ACTUAL PRO FORMA
--------------------------- ------------
1998 1999 1999
----------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue................................................. $ 2,437 $ 13,600 $ 114,959
Expenses:
Cost of hardware and software......................... 880 7,013 64,766
Cost of service delivery.............................. 1,548 10,527 24,793
Selling, general and administrative................... 3,064 12,611 39,290
Goodwill and other intangibles amortization........... 668 4,981 62,835
Depreciation and amortization......................... 203 1,709 1,919
--------- ---------- ----------
Loss from operations.................................... (3,926) (23,241) (78,644)
Interest expense, net(1)................................ 1,333 11,658 11,880
Equity in loss of investee.............................. 826 -- --
--------- ---------- ----------
Loss before benefit for income taxes and extraordinary
item.................................................. (6,085) (34,899) (90,524)
Provision (benefit) for income taxes.................... (205) -- 126
--------- ---------- ----------
Loss before extraordinary item.......................... (5,880) (34,899) (90,650)
Extraordinary item...................................... -- (845) --
--------- ---------- ----------
Net loss................................................ $ (5,880) $ (35,744) $ (90,650)
========= ========== ==========
Loss per share -- basic and diluted:
Loss before extraordinary item........................ $ (1.86) $ (2.44) $ (2.28)
Extraordinary item.................................... -- (0.06) --
--------- ---------- ----------
Net loss................................................ $ (1.86) $ (2.50) $ (2.28)
========= ========== ==========
Weighted average shares(2).............................. 3,169,413 14,279,647 39,701,069
========= ========== ==========
OTHER DATA:
EBITDA(3)............................................... $ (3,881) $ (16,551) $ (13,890)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
ACTUAL PRO FORMA
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 19,185 $ 77,612
Goodwill and other intangible assets........................ 186,866 300,196
Total assets................................................ 240,678 422,644
Total debt.................................................. 15,201 11,462
Stockholders' equity........................................ 202,748 385,848
</TABLE>
- -------------------------
(1) Includes amortization of deferred financing fees and debt discount.
(2) Gives effect to a 5 for 1 reverse stock split on June 1, 1999 as if it had
occurred as of January 1, 1999.
(3) EBITDA is defined as net loss plus:
- extraordinary items,
- provision (benefit) for income taxes,
- interest expense, net, and
- depreciation and amortization.
EBITDA is presented not as an alternative measure of operating results or
cash flows 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.
4
<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. Our ASP services were
introduced in March 1999 and are therefore 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 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,
- raise additional capital, and
- convince customers that we can provide reliable and cost-effective
services.
Because we have 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 prices may be adversely affected as well as
our ability to raise money in the future.
5
<PAGE> 9
WE HAVE A HISTORY OF SUBSTANTIAL LOSSES AND NEGATIVE CASH FLOWS. WE EXPECT THESE
LOSSES AND NEGATIVE CASH FLOWS TO CONTINUE AND INCREASE 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 the ongoing
implementation of our current business plan will increase our net losses and our
negative cash flows for the foreseeable future as we invest in personnel,
technology and other assets to support our expected growth. In addition, our
business plan includes expansion through acquisitions. As of December 31, 1999,
on a pro forma basis, after giving effect to our completed and pending
acquisitions, we had approximately $300 million in goodwill as a result of our
acquisitions. The respective amount from each acquisition will be amortized over
a five year period and will substantially increase our net losses. In addition,
acquisitions are likely to increase our cash needs. 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.
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 has only recently begun to develop and is
evolving rapidly. Future demand for these services 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 begun to identify 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 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.
6
<PAGE> 10
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 two lawsuits from individuals. In one case, the plaintiff
was employed by us, and in another case, the plaintiff provided managerial
services on a contractual basis to us. These persons seek damages of more than
$2.0 million which includes approximately 50,000 stock options and monetary
damages. We are currently aware of other former employees, consultants and
service providers who may make claims against us relating to the payment for
past services that represent, in the aggregate, $1.5 million in damages which
includes approximately 85,000 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.
PERSONS FORMERLY ASSOCIATED WITH OUR BUSINESS MAY HAVE ENGAGED IN UNLAWFUL
ACTIVITIES DESIGNED TO MANIPULATE OUR STOCK. WE MAY BE SUBJECT TO CRIMINAL AND
CIVIL SANCTIONS, FINES AND PENALTIES BECAUSE OF THEIR ACTIONS. IF WE ARE FOUND
TO HAVE LIABILITY RELATING TO THE ACTIVITIES OF THESE PERSONS, WE MAY HAVE TO
PAY SIGNIFICANT MONETARY FINES AND PENALTIES AND WE COULD BE SUBJECT TO MATERIAL
SANCTIONS THAT WOULD MATERIALLY ADVERSELY AFFECT BOTH OUR STOCK AND OUR ABILITY
TO OPERATE OUR BUSINESS.
In the past, persons formerly associated with us may have engaged in
activities as part of an effort to profit from unlawful trading activity in our
stock. As a result, 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 in our defense. If a court determined that
we participated in these activities, we could be liable for damages or penalties
that would have a material adverse effect on our financial condition.
WE HAVE GROWN AND PLAN TO CONTINUE TO GROW, IN PART, THROUGH THE ACQUISITION OF
OTHER COMPANIES. HOWEVER, WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE THE
COMPLETED AND PENDING ACQUISITIONS OR IDENTIFY, ACQUIRE AND SUCCESSFULLY
INTEGRATE FUTURE ACQUISITIONS INTO OUR OWN OPERATIONS, WHICH MAY MATERIALLY
ADVERSELY AFFECT OUR GROWTH AND OUR OPERATING RESULTS.
We have made a number of significant acquisitions within the last six
months. 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 pending and completed
acquisitions as if each had occurred as of January 1, 1999. We have a definitive
agreement to acquire Charon Systems Inc. However, this pending transaction may
not close. If the acquisition of Charon Systems Inc. does not close, pro forma
annual revenue for 1999 would decrease by $13.5 million. We have not yet fully
integrated any of these companies. We may not be able to successfully integrate
these acquisitions into our business. Our failure to acquire suitable companies
or to successfully integrate any acquired companies into our operations could
have a material adverse effect upon our business, operating results and
financial condition.
7
<PAGE> 11
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 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 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 TWO LOCATIONS, IRVINE, CALIFORNIA
AND CALGARY, CANADA, WHICH LEAVES US VULNERABLE TO DISRUPTIONS THAT AFFECT OUR
DATA CENTERS. IF 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 two
data centers located in Irvine, California, and in Calgary, Canada. We offer
back-up storage of data for customers that elect this service, including back-up
at our other data center. We plan to develop additional data centers in the
eastern United States and in Europe. 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
customer storing data at one of our data centers has not elected to back up
their data at the other data center, there is a risk that the data may be lost
if such data center is damaged. If either of our existing data centers were
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 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 software
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 software integrators may stop or substantially diminish
referring business to us or they may decide to cooperate with our competitors
and thereby adversely impacting or eliminating 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.
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
8
<PAGE> 12
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.
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.
9
<PAGE> 13
MANY OF OUR CONSULTING CONTRACTS HAVE FIXED PRICES, WHICH EXPOSE US TO COST
OVERRUNS. IF WE ARE NOT ABLE TO CONTROL COST OVERRUNS, OUR OPERATING RESULTS
COULD BE MATERIALLY ADVERSELY AFFECTED.
We undertake certain consulting projects on a fixed-price basis rather than
billing on a time and materials basis or on a per employee or user basis. The
failure to complete these projects without cost overruns would cause our
expenses to increase and materially adversely affect our business, operating
results and financial condition.
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 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.
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 officers. 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 are currently experiencing rapid growth in personnel and intend to continue
expanding. We have grown from over 100 employees as of December 31, 1998 to
approximately 500 employees as of April 3, 2000. We believe that we will need to
hire a significant number of additional personnel. Qualified technical 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 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
10
<PAGE> 14
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, 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.
11
<PAGE> 15
USE OF PROCEEDS
The net proceeds to us from this offering are estimated to be approximately
$61.8 million, or $71.1 million if the underwriters exercise their overallotment
option in full, after deducting underwriting discounts and commissions and
estimated offering expenses. We have allocated only $18.2 million of the net
proceeds from this offering for the following purposes:
- fund approximately $6.9 million of the purchase price for Charon Systems
Inc.,
- retire $4.0 million aggregate principal amount of indebtedness we
incurred to finance in part our acquisition of KNS Holdings Limited,
which is due and payable June 20, 2000 and bears interest at a rate equal
to the London Interbank Offering Rate plus 1%, and
- retire $7.3 million aggregate principal amount of indebtedness we
incurred to finance in part our acquisition of MicroLAN Systems, Inc. and
its affiliates, which is due and payable July 29, 2000 and bears interest
at a rate increasing from 9% to 12%.
We currently have no commitments as to how we will spend the remaining
$43.6 million of the net proceeds but our current estimates are:
- $12 million to fund our operations and working capital needs during 2000,
- $10 million to develop our ASP data centers,
- $16 million to acquire additional businesses, and
- $5.6 million for general corporate uses.
The amounts and timing of our actual expenditures of these proceeds will
depend upon numerous factors, including the number and size of our acquisitions,
our marketing activities, the response of the market to our introduction of
products and services and the amount of cash our operations generate. In
addition, because we have allocated only $18.2 million of the net proceeds from
this offering, our management will have significant flexibility in applying most
of the net proceeds of this offering with respect to the items set forth above
or for other purposes at their discretion. The failure of our management to use
such funds effectively could have a material adverse effect on our business,
financial condition and operating results. Pending application of the net
proceeds, we intend to invest the net proceeds of this offering in short-term,
investment-grade, interest-bearing securities.
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. 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.
12
<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
2nd Quarter (through April 28, 2000)....................... $21.50 $ 9.88
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 April 28, 2000, the last reported sale price of our common stock was
$13.88 per share. As of May 1, 2000, there were 61,475,651 shares of our common
stock issued and outstanding and approximately 700 holders of record of our
common stock.
Prior to this offering, the public market for our common stock has been
limited, sporadic and highly volatile. Between January 1, 1999 and April 28,
2000, the closing trading price of our common stock ranged from a low of $1.35
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.
13
<PAGE> 17
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.
14
<PAGE> 18
CAPITALIZATION
The following table sets forth at December 31, 1999:
- 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 December 31,
1999:
- our acquisitions completed subsequent to December 31, 1999,
- our pending acquisition of Charon Systems Inc.,
- repayment of $2.7 million of shareholder notes issued to finance in
part the acquisition of KNS Holdings Limited, and
- Pequot Private Equity Fund II, L.P.'s and other investors' exercise of
warrants to purchase 2,401,041 shares of our common stock,
- cash paid of $5.0 million for the March 2000 settlement of the
SmallCaps litigation,
- our $15.0 million private placement of equity securities with Pequot
Private Equity Fund II, L.P. and Pequot Endowment Fund, L.P. in April
2000, and
- conversion of $0.8 million of convertible debt.
- our cash and cash equivalents and capitalization, on the pro forma basis
described above, as adjusted to reflect:
- the estimated net proceeds from this offering after deducting
underwriting discounts and commissions and estimated offering
expenses,
- repayment of $11.3 million of shareholder notes to finance in part our
acquisitions of KNS Holdings Limited and Madison Group Holdings.
This table should be read with "Use of Proceeds," "Pro Forma Condensed
Consolidated Financial Information" and related notes and our consolidated
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 19,185 $ 27,120 $ 77,612
======== ======== ========
Total long-term obligations................................. $ 4,990 $ 5,427 $ 5,427
Stockholders' equity:
Preferred stock, no par value; 20,000,000 shares authorized,
none issued or outstanding................................ -- -- --
Common stock, $0.0001 par value, 300,000,000 shares
authorized, 52,743,169 issued and outstanding; 62,548,591
issued and outstanding, pro forma; and 67,548,591 issued
and outstanding, pro forma as adjusted.................... 7 7 7
Common stock issuable for completed acquisitions............ 42,636 42,636 42,636
Additional paid-in capital.................................. 146,150 266,662 328,454
Deferred compensation....................................... (1,393) (1,393) (1,393)
Loan receivable from officer................................ (1,500) (1,500) (1,500)
Issuable warrants........................................... 60,000 60,000 60,000
Accumulated deficit......................................... (43,075) (43,075) (43,075)
Cumulative foreign currency translation adjustment.......... (77) (77) (77)
-------- -------- --------
Total stockholders' equity.................................. 202,748 323,260 385,052
-------- -------- --------
Total capitalization.............................. $207,738 $328,687 $390,479
======== ======== ========
</TABLE>
15
<PAGE> 19
DILUTION
As of December 31, 1999, the net tangible book value per share of common
stock was $15.9 million or $0.30 per share and the pro forma net tangible book
value per share of common stock was $23.9 million or $0.38 per share. Net
tangible book value per share represents the amount of our stockholders' equity,
less intangible assets, divided by the number of shares of common stock
outstanding before this offering.
The pro forma net tangible book value per share of common stock as of
December 31, 1999 is based on the net tangible book value per share as of
December 31, 1999, as adjusted for:
- our acquisitions completed subsequent to December 31, 1999,
- our pending acquisition of Charon Systems Inc.,
- Pequot Private Equity Fund II, L.P.'s and other investors' exercise of
warrants to purchase 2,401,041 shares of our common stock,
- there payment of $14.0 million of shareholder notes issued to finance the
acquisitions of KNS Holdings Limited and Madison Group Holdings,
- cash paid of $5.0 million for the March 2000 settlement of the SmallCaps
litigation,
- our $15.0 million private placement of equity securities with Pequot
Private Equity Fund II, L.P. and Pequot Endowment Fund, L.P. in April
2000, and
- conversion of $0.8 million of convertible debt.
Pro forma net tangible book value dilution per share represents the
difference between the following:
- the amount purchasers of common stock pay per share in this offering, and
- the adjusted pro forma net tangible book value per share of purchasers of
common stock in this offering immediately after completion of this
offering
After giving effect to our sale of 5,000,000 shares of common stock in this
offering, our adjusted pro forma net tangible book value as of December 31,
1999, based on the initial public offering price of $ per share, was
$ or $ per share of common stock. This represents an immediate increase
in net tangible book value of $ per share to existing stockholders and an
immediate dilution of net tangible book value of $ per share to you. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Public offering price per share of common stock............. $
Pro forma net tangible book value per share of common stock
as of December 31, 1999................................... $
Net increase in net tangible book value per share of common
stock attributable to cash payment from this offering..... $
-----
Pro forma as adjusted net tangible book value per share as
of December 31, 1999 after giving effect to this
offering.................................................. $
-----
Immediate dilution per share to new investors............... $
=====
</TABLE>
In addition, the table above assumes no exercise of outstanding options or
warrants or conversion of debt. As of May 1, 2000, there were 7,923,209 shares
of common stock issuable upon exercise of outstanding options at a weighted
average exercise price of $12.25 per share, 8,241,324 shares of common stock
issuable upon exercise of outstanding warrants at a weighted average exercise
price of $11.78 per share and 67,965 shares of common stock issuable upon the
conversion of $78,160 aggregate principal amount of our convertible debentures
outstanding at a conversion price of $1.15 per share. The tables above also
assume no exercise of the underwriters' overallotment option. To the extent that
any shares are issued upon exercise or conversion of outstanding options,
warrants, convertible debentures or the underwriters' overallotment option, you
will experience further dilution.
16
<PAGE> 20
ACQUISITIONS
As part of our growth strategy, from October 15, 1999 through March 10,
2000, we acquired six businesses. In addition, we have announced a definitive
agreement to acquire Charon Systems Inc. The following table presents certain
information with respect to these completed and pending acquisitions.
<TABLE>
<CAPTION>
REVENUE FOR THE
YEAR ENDED
COMPLETED ACQUISITIONS 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.
PENDING ACQUISITION
- -----------------------------------------
Charon Systems Inc. Pending $31.2 $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.
COMPLETED ACQUISITIONS
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. 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.
17
<PAGE> 21
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, 1,298,705
shares of our common stock issued upon closing and contingent consideration of
439,850 shares of our common stock valued in the aggregate at $21.4 million, and
options to acquire 500,000 shares of our common stock valued at $7.6 million.
The selling shareholders earned the contingent shares as of December 31, 1999,
but we have not yet issued them the shares. 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. 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
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.
PENDING ACQUISITION
Charon Systems Inc.
We have a definitive agreement to acquire Charon Systems Inc. for a total
consideration of $31.2 million consisting of approximately $6.9 million in cash
and 1,072,940 shares of our common stock valued at $24.3 million. Charon Systems
Inc. was incorporated in Ontario, Canada in 1991 and is headquartered in
Toronto, Canada. Charon Systems Inc. is a leading server-based computing
integrator using Citrix products in central and eastern Canada.
18
<PAGE> 22
FUTURE ACQUISITIONS
As part of our general growth strategy, we intend to identify and acquire
other distributors and resellers of Citrix and other products. To successfully
grow our business through acquisitions, our management must:
- integrate any acquired businesses into our operations,
- identify appropriate acquisition candidates and negotiate acquisitions on
favorable terms,
- obtain financing on favorable terms,
- continue to operate our current businesses,
- retain and expand the key personnel and key customers of any acquired
company, and
- properly identify and account for all liabilities we assume in each
acquisition.
Our primary criterion in considering acquisition opportunities is the
financial return we expect to ultimately realize. Other specific factors we
consider in acquiring a company include:
- the customer base and the extent to which we believe we can leverage
those customers to build our ASP business,
- the market share held in a geographic region,
- revenues and operating cash flow,
- the qualifications and industry experience of management and key
employees, and
- the extent to which we believe we can successfully integrate the
operations of a company into our operations.
19
<PAGE> 23
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet (the
"Pro Forma Balance Sheet") has been prepared based upon the historical condensed
consolidated balance sheet of FutureLink Corp. as of December 31, 1999, and the
balance sheets as of December 31, 1999 of the companies whose acquisitions we
had completed or which were pending completion at April 3, 2000. The Pro Forma
Balance Sheet gives effect to the following as if each had occurred as of
December 31, 1999:
- our pending and completed acquisitions,
- repayment of $14.0 million shareholder notes issued to finance in part
our acquisitions of KNS Holdings Limited and Madison Group Holdings,
- Pequot Private Equity Fund II, L.P.'s and certain other investors'
exercise of warrants to purchase 2,401,041 shares of common stock in
February 2000,
- the payment of $5.0 million cash and the issuance of warrants to purchase
3,000,000 shares of common stock for the March 2000 settlement of the
SmallCaps litigation,
- our $15.0 million private placement of equity securities with Pequot
Equity Fund II, L.P. and Pequot Endowment Fund, L.P. in April 2000, and
- conversion of $0.8 million of convertible debt from January 1, 2000 to
April 29, 2000.
- this offering.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations (the
"Pro Forma Statement of Operations") for the year ended December 31, 1999 gives
effect to the following as if each had occurred as of January 1, 1999:
- the acquisitions we completed subsequent to December 31, 1999,
- our pending acquisition of Charon Systems Inc.,
- our $50.0 million private placement of equity securities with Pequot
Private Equity Fund II, L.P. and other investors in October 1999,
- conversion of $22.5 million of convertible debt from August 23, 1999
through November 8, 1999,
- repayment of $14.0 million of shareholder notes issued to finance in part
the acquisitions of KNS Holdings Limited and Madison Group Holdings,
- Pequot Private Equity Fund II, L.P.'s and certain other investors'
exercise of warrants to purchase 2,401,041 shares of common stock in
February 2000,
- the payment of $5.0 million cash and the issuance of warrants to purchase
3,000,000 shares of common stock for the March 2000 settlement of the
SmallCaps litigation,
- conversion of $0.8 million of convertible debt from January 31, 2000 to
April 29, 2000, and
- this offering.
Pro forma adjustments are described in the accompanying Notes to Unaudited
Pro Forma Condensed Consolidated Financial Information.
The 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 or pending 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 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" section of this prospectus, and the
financial statements and the notes to financial statements for us and our
completed or pending acquisitions included elsewhere in this prospectus.
20
<PAGE> 24
FUTURELINK CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPLETED PENDING
TRANSACTIONS PRO FORMA WITH TRANSACTION
-------------------- COMPLETED -----------
VERTICAL MADISON ACQUISITIONS CHARON
FUTURELINK SOFTWARE, GROUP PRO FORMA AND THIS SYSTEMS PRO FORMA
CORP. INC. HOLDINGS ADJUSTMENTS OFFERING INC. ADJUSTMENTS
---------- --------- -------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets.................... $ 42,068 $2,693 $7,446 $ 61,803(A) $114,010 $3,320 $(6,757)(C)
Property and equipment, net....... 10,972 141 410 -- 11,523 192 --
Goodwill and other intangibles.... 186,866 -- -- 82,940(A) 269,806 -- 30,390(C)
Other long-term assets............ 772 6 53 (500)(A) 331 -- (171)(C)
-------- ------ ------ -------- -------- ------ -------
Total assets.............. $240,678 $2,840 $7,909 $144,243 $395,670 $3,512 $23,462
======== ====== ====== ======== ======== ====== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Line of credit.................... $ 1,657 $ -- $2,900 $ -- $ 4,557 $ -- $ --
Other current liabilities......... 30,695 1,661 3,630 (11,685)(B) 24,301 2,664 --
Long-term debt, net of current
portion......................... 4,116 -- 437 -- 4,553 -- --
Convertible debentures, net....... 874 -- -- (796) 78 -- --
Deferred income taxes............. 588 -- -- -- 588 55 --
Stockholders' equity.............. 202,748 1,179 942 156,724(B) 361,593 793 23,462(D)
-------- ------ ------ -------- -------- ------ -------
Total liabilities and
stockholders' equity.... $240,678 $2,840 $7,909 $144,243 $395,670 $3,512 $23,462
======== ====== ====== ======== ======== ====== =======
<CAPTION>
PRO FORMA WITH
COMPLETED AND
PENDING
ACQUISITIONS
AND THIS
OFFERING
--------------
<S> <C>
ASSETS
Current assets.................... $110,573
Property and equipment, net....... 11,715
Goodwill and other intangibles.... 300,196
Other long-term assets............ 160
--------
Total assets.............. $422,644
========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Line of credit.................... $ 4,557
Other current liabilities......... 26,965
Long-term debt, net of current
portion......................... 4,553
Convertible debentures, net....... 78
Deferred income taxes............. 643
Stockholders' equity.............. 385,848
--------
Total liabilities and
stockholders' equity.... $422,644
========
</TABLE>
The Madison Group Holdings column reflects the consolidated amounts 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.
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 $1.4513 per U.S. $1.00, the exchange rate in effect at
December 31, 1999. We included gains and losses that result from translation
assets and liabilities into U.S. dollars in stockholders' equity as a cumulative
foreign currency translation adjustment.
21
<PAGE> 25
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>
PRO FORMA WITH PRO FORMA WITH
COMPLETED PENDING COMPLETED AND
ACQUISITIONS ACQUISITION PENDING
AND THIS ------------ ACQUISITIONS
OFFERING CHARON PRO FORMA AND THIS
(SCHEDULE 1) SYSTEMS INC. ADJUSTMENTS OFFERING
-------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Revenue:
Hardware and software.......................... $ 67,770 $ 9,807 $ -- $ 77,577
Service delivery............................... 33,713 3,669 -- 37,382
---------- --------- ------- ----------
101,483 13,476 -- 114,959
Operating expenses:
Cost of hardware and software.................. 56,413 8,353 -- 64,766
Cost of service delivery....................... 22,630 2,163 -- 24,793
Selling, general and administrative............ 36,621 2,669 -- 39,290
Depreciation and amortization.................. 58,635 41 6,078(F) 64,754
---------- --------- ------- ----------
Income (loss) from operations.................... (72,816) 250 (6,078) (78,644)
Interest expense, net............................ 11,875 5 -- 11,880
---------- --------- ------- ----------
Income (loss) before provision for income
taxes.......................................... (84,691) 245 (6,078) (90,524)
Provision for income taxes....................... 46 80 -- 126
---------- --------- ------- ----------
Income (loss) from continuing operations......... $ (84,737) $ 165 $(6,078) $ (90,650)
========== ========= ======= ==========
Loss per share from continuing operations --basic
and diluted.................................... $ (2.28)
==========
Weighted average shares.......................... 38,628,129 1,072,940 -- 39,701,069
==========
</TABLE>
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.
The amounts related to the pending acquisition of Charon Systems Inc.,
include amortization of deferred financing fees and debt discount.
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.
22
<PAGE> 26
SCHEDULE 1
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
---------------------------------------------------------------------------
EXECUTIVE
LAN CN ASYNC KNS VERTICAL MADISON
FUTURELINK MANAGEMENT, NETWORKS, TECHNOLOGIES, HOLDINGS SOFTWARE, GROUP
CORP. INC. INC. INC. LIMITED INC. HOLDINGS
---------- ----------- --------- ------------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Hardware and software................ $ 6,748 $ 11,204 $ 5,706 $ 6,540 $ 19,082 $ 8,357 $ 10,133
Service delivery..................... 6,852 6,181 1,233 1,232 -- 4,761 13,454
---------- --------- ------- --------- --------- --------- ---------
13,600 17,385 6,939 7,772 19,082 13,118 23,587
Operating expenses:
Cost of hardware and software........ 7,013 9,576 4,446 4,884 15,560 6,657 8,277
Cost of service delivery............. 10,527 1,720 414 696 -- 316 8,957
Selling, general and
administrative..................... 12,611 6,913 1,946 1,477 2,686 4,822 6,166
Depreciation and amortization........ 6,690 84 -- 35 -- 50 --
---------- --------- ------- --------- --------- --------- ---------
Income (loss) from operations......... (23,241) (908) 133 680 836 1,273 187
Interest expense, net................. 11,658 12 35 36 -- 3 131
---------- --------- ------- --------- --------- --------- ---------
Income (loss) before provision for
income taxes......................... (34,899) (920) 98 644 836 1,270 56
Provision for income taxes............ -- -- 27 -- -- -- 19
---------- --------- ------- --------- --------- --------- ---------
Income (loss)......................... $ (34,899) $ (920) $ 71 $ 644 $ 836 $ 1,270 $ 37
========== ========= ======= ========= ========= ========= =========
Loss per share -- basic and diluted... $ (2.44)
Weighted average shares............... 14,279,647 6,623,077 999,998 1,585,715 2,106,893 1,026,316 1,975,170
<CAPTION>
PRO FORMA
WITH
COMPLETED
ACQUISITIONS
PRO FORMA AND THIS
ADJUSTMENTS OFFERING
----------- ------------
<S> <C> <C>
Revenue:
Hardware and software................ $ -- $ 67,770
Service delivery..................... -- 33,713
--------- ----------
-- 101,483
Operating expenses:
Cost of hardware and software........ -- 56,413
Cost of service delivery............. -- 22,630
Selling, general and
administrative..................... -- 36,621
Depreciation and amortization........ 51,776(E) 58,635
--------- ----------
Income (loss) from operations......... (51,776) (72,816)
Interest expense, net................. -- 11,875
--------- ----------
Income (loss) before provision for
income taxes......................... (51,776) (84,691)
Provision for income taxes............ -- 46
--------- ----------
Income (loss)......................... $ (51,776) $ (84,737)
========= ==========
Loss per share -- basic and diluted...
Weighted average shares............... 10,031,313 38,628,129
</TABLE>
For acquisitions completed prior to December 31, 1999, the amounts
represent the statements of operations from January 1, 1999 to the date of
acquisition.
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.
The Statement of Operations for Madison Group Holdings 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.
Interest expense includes amortization of deferred financing fees and debt
discount.
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.
23
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
BALANCE SHEETS
We paid aggregate consideration of $85.1 million for the acquisitions
completed from January 1, 2000 through May 1, 2000 and will pay $31.2 million
for the acquisition of Charon Systems Inc. We have allocated the excess of the
purchase price over the book value of the net assets acquired for each of the
acquisitions to tangible and intangible assets, based on our estimate of the
fair value of the net assets acquired. It is not practicable at this time for us
to determine the fair value of each asset acquired and liability assumed in
these acquisitions. As a result, we have used the net book value of certain
assets and liabilities as an estimate of fair value for pro forma purposes.
Accordingly, the allocation of the aggregate purchase price illustrated below
should be considered preliminary and may be further adjusted upon completion of
all procedures necessary to determine the fair value of the assets acquired and
liabilities assumed (in millions).
Completed Acquisitions:
<TABLE>
<S> <C>
Current assets.............................................. $10.1
Property and equipment, net................................. 0.6
Goodwill.................................................... 82.9
Current liabilities......................................... (8.1)
Other long-term liabilities................................. (0.4)
-----
Purchase price of completed acquisitions.......... $85.1
=====
</TABLE>
Pending Acquisition:
<TABLE>
<S> <C>
Current assets.............................................. $ 3.3
Property and equipment, net................................. 0.2
Goodwill.................................................... 30.4
Current liabilities......................................... (2.7)
-----
Purchase price of pending acquisition............. $31.2
=====
</TABLE>
We have assumed our completed and pending acquisitions have been or will be
financed with cash, notes, common stock, exercise of warrants, net proceeds from
our 1999 private equity placement and this offering, as follows (in millions):
Completed Acquisitions:
<TABLE>
<S> <C>
Fair value of common stock issued........................... $63.3
Issuance of notes to former shareholders (Madison Group
Holdings)................................................. 7.2
Proceeds from the October 1999 Pequot private placement
offering.................................................. 12.2
Proceeds from exercise of Pequot warrants................... 2.4
-----
Purchase price of completed acquisitions.......... $85.1
=====
</TABLE>
24
<PAGE> 28
Pending Acquisition:
<TABLE>
<S> <C>
Fair value of common stock issued........................... $24.3
Proceeds from the public offering........................... 6.9
-----
Purchase price of pending acquisition............. $31.2
=====
</TABLE>
The accompanying Pro Forma Balance Sheet as of December 31, 1999 reflects
the following pro forma adjustments:
(A) Pro forma adjustments to assets consist of the following (in
millions):
<TABLE>
<CAPTION>
ASSETS GOODWILL
------ --------
<S> <C> <C>
Acquisition Adjustment:
Record goodwill related to acquired companies............... $ -- $82.9
------ -----
Total acquisition adjustments..................... -- 82.9
------ -----
Capital Financing Adjustments:
Receipt of funds from public equity offering, net of
offering costs............................................ 61.8 --
Proceeds from the April 2000 Pequot private placement....... 15.0 --
Proceeds received from exercise of warrants related to the
October 1999 Pequot private placement..................... 18.0 --
Cash paid for SmallCaps settlement.......................... (5.0) --
------ -----
Total capital financing adjustments............... 89.8 --
------ -----
Use of Proceeds Adjustments:
Record cash used in acquisition............................. (14.1) --
Reversal of deposits paid to acquired entities.............. (0.5) --
Cash paid for notes payable -- KNS Holdings Limited and
Madison Group Holdings.................................... (13.9) --
------ -----
Total use of proceeds adjustment.................. (28.5) --
------ -----
Total proforma adjustments........................ $ 61.3 $82.9
====== =====
</TABLE>
(B) Pro forma adjustments to liabilities and stockholders' equity
consist of the following (in millions):
<TABLE>
<CAPTION>
CURRENT CONVERTIBLE STOCKHOLDERS'
LIABILITIES DEBENTURES EQUITY
----------- ----------- -------------
<S> <C> <C> <C>
Acquisition Adjustments:
Eliminate equity of acquired companies.................... $ -- $ -- $ (2.2)
Note payable issued to Madison Group Holdings in
consideration for completed transaction................. 7.2 -- --
Stock issued as consideration for completed
acquisitions............................................ -- -- 63.3
------ ----- ------
Total acquisition adjustments................... 7.2 -- 61.1
------ ----- ------
Use of Proceeds Adjustments:
Cash paid for SmallCaps settlement........................ (5.0) -- --
Repayment of notes payable -- KNS Holdings Limited and
Madison Group Holdings.................................. (13.9) -- --
------ ----- ------
Total use of proceeds adjustments............... (18.9) $ -- $ --
------ ----- ------
</TABLE>
25
<PAGE> 29
<TABLE>
<CAPTION>
CURRENT CONVERTIBLE STOCKHOLDERS'
LIABILITIES DEBENTURES EQUITY
----------- ----------- -------------
<S> <C> <C> <C>
Capital Financing Adjustments:
Exercise of warrants to purchase 2,401,041 shares......... $ -- $ -- $ 18.0
Conversion of debt to common stock........................ -- (0.8) 0.8
Record common stock issued in the April 2000 Pequot
private placement....................................... -- 15.0
Record common stock issued in public offering, net........ -- 61.8
------ ----- ------
Total capital financing adjustments............. -- (0.8) 95.6
------ ----- ------
Total pro forma adjustments..................... $(11.7) $(0.8) $156.7
====== ===== ======
</TABLE>
(C) Pro forma adjustments to assets consist of the following (in
millions):
<TABLE>
<CAPTION>
ASSETS GOODWILL
------- --------
<S> <C> <C>
Acquisition Adjustments:
Record goodwill related to acquired company................. $ -- $30.4
Reversal of deposits paid to acquired company............... (0.2) --
----- -----
Total acquisition adjustments..................... (0.2) 30.4
----- -----
Use of Proceeds Adjustment:
Record cash used in acquisition............................. (6.7) --
----- -----
Total use of proceeds adjustment.................. (6.7) --
----- -----
Total pro forma adjustments....................... $(6.9) $30.4
===== =====
</TABLE>
(D) Pro forma adjustments to liabilities and stockholders' equity
consist of the following (in millions):
<TABLE>
<CAPTION>
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Acquisition Adjustments:
Eliminate equity of Charon Systems Inc. .................... $(0.8)
Stock issued as consideration for pending acquisition....... 24.3
-----
Total acquisition adjustments..................... 23.5
-----
Total pro forma adjustments....................... $23.5
=====
</TABLE>
STATEMENT OF OPERATIONS
Pro Forma Adjustments
The accompanying Pro Forma Statement of Operations for the 12 months ended
December 31, 1999 reflects the following pro forma adjustments (in millions):
<TABLE>
<CAPTION>
EXPENSES
--------
<S> <C> <C>
(E) To adjust goodwill amortization based on an amortization $51.8
rate of five years for the 12 months ended December 31, 1999
for closed acquisitions
(F) To adjust goodwill amortization based on an amortization $ 6.1
rate of five years for the 12 months ended December 31, 1999
for Charon Systems Inc.
</TABLE>
26
<PAGE> 30
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.,
and Madison Group Holdings 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
FOR YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
FutureLink.................................................. 14,279,647
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
Madison Group Holdings...................................... 1,975,170
Warrant exercises........................................... 2,401,041
April 2000 Pequot private placement......................... 1,764,704
Conversion of convertible debt.............................. 865,568
Public offering............................................. 5,000,000
----------
Total............................................. 38,628,129
==========
</TABLE>
BALANCE SHEET -- PENDING ACQUISITION
PENDING ACQUISITION
The weighted average number of shares outstanding has been further adjusted
to give effect to the shares issued upon acquisition of Charon Systems Inc. as
though they had been outstanding as at the beginning of the period. The weighted
average number of shares outstanding has been calculated as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
FOR YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Charon Systems Inc. ........................................ 1,072,940
=========
</TABLE>
27
<PAGE> 31
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
DECEMBER 31,
----------------------
1998 1999
--------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue..................................................... $ 2,437 $ 13,600
--------- ----------
Expenses:
Cost of hardware and software............................. 880 7,013
Cost of service delivery.................................. 1,548 10,527
Selling, general and administrative....................... 3,064 12,611
Goodwill and other intangibles amortization............... 668 4,981
Depreciation and amortization............................. 203 1,709
--------- ----------
Loss from operations........................................ (3,926) (23,241)
Interest expense, net(1).................................... 1,333 11,658
Equity in loss of investee.................................. 826 --
--------- ----------
Loss before benefit for income taxes and extraordinary
item...................................................... (6,085) (34,899)
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(2)................................ 3,169,413 14,279,647
========= ==========
OTHER DATA:
EBITDA(3)................................................. $ (3,881) $ (16,551)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 7 $ 19,185
Total assets................................................ 10,646 240,678
Total debt.................................................. 3,002 15,201
Stockholders' equity........................................ 2,837 202,748
</TABLE>
- -------------------------
(1) Includes amortization of deferred financing fees and debt discount.
(2) Gives effect to a reverse stock split of 5 to 1 on June 1, 1999 as if it had
occurred on January 1, 1999.
(3) EBITDA is defined as net loss plus:
- extraordinary items,
- benefit for income taxes,
- interest expense, net,
- depreciation and amortization, and
- goodwill and other intangibles amortization.
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.
28
<PAGE> 32
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,
and rent computing services to our customers for a monthly fee. 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 had no significant active operations in 1997.
On January 20, 1998, we acquired a 46% interest in FutureLink Distribution
Corp., a private Alberta corporation, which we refer to as FutureLink Alberta,
and changed our name from Core Ventures, Inc. to FutureLink Distribution Corp.
Effective November 23, 1998, we acquired a further 50.4% interest in FutureLink
Alberta, bringing our total ownership to 96.4%. FutureLink Alberta focused on
providing ASP services to mid-sized businesses. 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. As such, results from
operations for our 46% ownership percentage of FutureLink Alberta's losses is
included in our statement of operations under the caption "Equity in Loss of
Investee." Subsequent to November 23, 1998, FutureLink Alberta's results are
consolidated into our results. On February 26, 1999, FutureLink Alberta became
our wholly owned subsidiary when we acquired the remaining 3.6% minority shares.
Effective August 24, 1998, we acquired all of the outstanding shares of
Riverview Management Corporation, which we renamed FutureLink/SysGold Ltd. This
company was a western Canadian information technology services company focused
on outsourcing information technology services to mid-sized companies in the oil
and gas sector. We consolidated the results of operations of FutureLink/ SysGold
Ltd. into our results of operations upon our acquisition of FutureLink/SysGold
Ltd. on August 24, 1998.
On August 1, 1999, we merged FutureLink Alberta and FutureLink/SysGold Ltd.
into a single operating subsidiary continuing under the FutureLink Alberta name.
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 six acquisitions that we closed between October 15,
1999, and February 29, 2000. In addition, we have agreed to acquire one
additional company.
The completed and pending acquisitions will result in approximately $300
million of purchase price in excess of net assets acquired that we have
allocated to goodwill. We believe that in respect of our acquisitions we will be
able to 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 flow should change or our strategic business plan is not achieved, future
29
<PAGE> 33
analyses may indicate insufficient future undiscounted cash flows to recover the
carrying value the goodwill, in which case the goodwill would be written down to
fair value.
Our historical financial statements as of and for the year ended December
31, 1998 reflect FutureLink's historical Canadian consulting business and
Canadian ASP operations and only reflect the results of FutureLink Alberta and
FutureLink/SysGold Ltd. for the periods after our acquisition of them. Our
historical financial statements as of and for the two years ended December 31,
1999 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 above. These acquired businesses now represent a significant
portion of our revenue, operations and employees.
Our analysis of operations for the years ended December 31, 1998 and 1999
follows. We have omitted a comparison of operations from year to year as our
significant acquisition activity during 1999 distorts the comparison.
RESULTS OF OPERATIONS
We have and expect to continue to experience significant fluctuations in
our operating results because of a variety of factors, many of which are outside
of our control, including:
- size and timing of customer installations and related payments,
- fluctuations in data and voice communications costs,
- timing and magnitude of capital expenditures,
- costs relating to the expansion of operations,
- costs and revenue fluctuations due to acquisitions,
- the timing of delivery of services under new ASP contracts,
- customer discounts and credits,
- changes in our pricing policies or those of our competitors, and
- economic conditions specific to our industry, as well as general economic
conditions.
Our revenues are subject to further variations from period to period
because a large portion of our current revenues are non-recurring. For these and
other reasons, in some future periods, our results of operations may fluctuate
and fall below the expectations of securities analysts or investors, which could
materially adversely affect the market price of our common stock.
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
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<PAGE> 34
accounted for those results under the equity method of accounting and reflected
those results in 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 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 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 center and installing and supporting software applications
related to our ASP and information technology outsourcing businesses.
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.
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
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<PAGE> 35
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.
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.
Depreciation and Amortization of Goodwill and Other Intangible Assets
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>
Depreciation and amortization............................... $0.2 $1.7
Amortization of goodwill and other intangible assets........ 0.7 5.0
---- ----
$0.9 $6.7
==== ====
</TABLE>
Our amortization of intangible assets for the year ending 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> 36
RESULTS OF OPERATIONS -- PRO FORMA
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 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.
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.
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 $61.8 million as
compared to $64.8 million on a pro forma basis for the year ended December 31,
1999.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1999, we had net cash outflows from
operating activities of $16.4 million and utilized another $28.4 million for
acquisitions. These outflows related to the expansion of our ASP business,
expansion into the United States and significant acquisition activity. In
addition, during 1999 we invested $3.2 million in property and equipment, mostly
in building a new Canadian data center, 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 1998.
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<PAGE> 37
During the year ended December 31, 1999, we acquired four companies, and
have since acquired two more. The total consideration for these acquisitions was
$270.0 million consisting of $41.5 million cash; 16,482,164 shares of common
stock valued at $197.3 million; 1,475,000 options to acquire shares of common
stock valued at $17.2 million; and notes payable of $13.9 million, which are all
due in 2000. Shortly after this offering, we expect to file a registration
statement covering the sale of up to 5,000,000 shares of our common stock that
we may use in connection with our acquisition of other companies in the future.
We used the following sources of financing to fund operations, our
acquisitions, expansion of our ASP business, expansion into the United States,
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. We 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. Holders exercised these warrants in February 2000, resulting in net
proceeds to the Company of $18.0 million.
In April 2000, we completed a private placement of $15.0 million of common
equity with institutional private equity investors. As part of this placement,
we issued to the investors 1,764,704 shares of common stock and warrants to
purchase 441,176 shares of common stock.
Issuance of convertible debt and promissory notes -- During the year we
completed a number of convertible debt offerings as follows:
- in the first quarter of 1999, we issued $3.3 million aggregate principal
amount of our 10% convertible debenture financing, bringing the total
outstanding principal amount of these notes to $5.5 million. In April
1999, we repaid $1.5 million of these 10% convertible debentures, and
holders converted the balance into 4,170,759 shares of common stock;
- in April and May 1999, we issued $8.0 million aggregate principal amount
of our 8% senior subordinated convertible promissory notes. The net cash
proceeds of this issuance, after fees and expenses, were $7.3 million.
Holders converted substantially all of these notes into 8,579,019 shares
of our common stock in the second half of the year; and
- in July 1999, we issued $15.0 million aggregate principal amount of our
8% senior subordinated convertible promissory notes. The net cash
proceeds of this issuance of securities were $13.6 million after fees and
expenses. In October 1999, holders converted these convertible notes into
2,727,172 shares of our common stock plus warrants.
Lease Financing -- During the year ended December 31, 1999, we obtained
several capital asset lease lines with financial lenders and computer hardware
vendors. These lines allow us to lease up to $22.5 million of computer hardware
and related infrastructure. As of December 31, 1999, we have used $3.1 million
of these lines. Aggregate monthly payments under these lines are currently
$195,000, including interest implicit in the lease at rates ranging from 9% to
14% per annum. We have available borrowings of $19.4 million under the various
lease lines as of December 31, 1999. These lines have been partially used to
build our Irvine data center and expand and refinance our Canadian data center.
Bank Financing -- We have various lines of credit with banks and financial
institutions that allow us to borrow up to $5.4 million. As of December 31,
1999, we had aggregate borrowings outstanding of $1.7 million under the various
lines. The lines bear interest at various rates ranging from prime plus 1%, to
prime plus 3% per annum, and mature at various intervals ending November 30,
2000. The prime rate was 8.5% at December 31, 1999. Certificates of deposit
aggregating $3.1 million, receivables and other assets of certain of our
subsidiaries secure these lines. We have available borrowings of $3.7 million
under the various lines of credit as of December 31, 1999.
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<PAGE> 38
Upon completion of this offering, we believe that our available cash will
be sufficient to meet our anticipated cash needs to fund our operating losses,
working capital and capital expenditures for at least the next twelve months.
However, we may need additional capital to fund our operations and our
expansion. This financing may involve incurring debt or selling equity
securities. We cannot assure you that 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 could increase. If
we raise capital through the sale of equity securities, the percentage ownership
of our shareholders would be diluted. In addition, any new equity securities may
have rights, preferences or privileges senior to those of our common stock. If
we are unable to obtain additional financing, our ability to fund our operations
and meet our current plans for expansion could be materially adversely affected.
Foreign Currency Translation and Hedging
We are exposed to foreign currency fluctuations through our operations in
Canada and the United Kingdom. At December 31, 1999, on a pro forma basis
adjusted for all closed and pending acquisitions, approximately 24% of our
revenue and 18% of our receivables are in Canadian dollars and approximately 17%
of our revenue and 22% 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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<PAGE> 39
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, and rent
computing services to our customers for a monthly fee. 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 our 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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<PAGE> 40
OUR MARKET OPPORTUNITY
The ASP and server-based computing markets are growing and are expected to
continue to grow at a rapid rate. Forrester Research, Inc. projects that the ASP
market will grow to over $11 billion in 2003 from less than $1 billion in 1999.
Forrester Research, Inc. also projects that 22% of all U.S.-based application
revenue will flow through ASPs in 2003.
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 requires integration expertise that is not available to, or is
increasing expensive for, many companies.
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.
- 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 application on our servers.
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<PAGE> 41
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.
- Rapidly 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
rapidly 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.
- Expanding through acquisitions. We intend to expand our business through
both internal growth and strategic acquisitions in the United States and
abroad. Our acquisitions allow us to accelerate our penetration of key
geographical markets, broaden our service offerings, and expand our
trained technical staff and our sales force. Our acquisition plan is to
acquire leading Citrix resellers in several geographic areas that enable
us to gain the market presence, technical expertise, and superior
management capabilities of implementing this software that enables us to
connect customers to our software applications hosted in centrally
managed data centers.
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 and pending 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.
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<PAGE> 42
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 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 5 to 200
employees. Our customers are primarily in the oil and gas and in the financial
services industries. 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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<PAGE> 43
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 and
Era customer relationship management,
Vantage manufacturing resource planning
</TABLE>
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<PAGE> 44
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, palmtop or other device, 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-
to 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 10 software
application providers and over 60 independent resellers, software distributors
and applications integrators. Our direct sales force consists of over 50
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 currently plan to increase this amount to
approximately $8.0 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 will be initiating 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, as well as allocating over $1.0 million to our continued
participation in end user and channel-focused tradeshows. 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 Calgary, Canada and Irvine,
California 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 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 center.
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,
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- name recognition, and
- network security.
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.
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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 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
have commenced a lawsuit against Cameron Chell, our former Chief Executive
Officer, and certain other former employees, for misappropriation of our plans
to develop certain ASP services. We may need to commence additional 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.
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FACILITIES
In late 1999 we relocated our headquarters from Calgary, Alberta, Canada to
Irvine, California, where we currently lease approximately 35,000 square feet of
office space. We also lease approximately 1,000 square feet at another facility
in Irvine, which serves as our primary data center. We also lease office
facilities in Los Angeles and Pleasanton, California; Phoenix, Arizona; Atlanta,
Georgia; Ft. Lauderdale, Florida; Walled Lake, Michigan; Cincinnati and
Columbus, Ohio; Pittsburgh, Pennsylvania; Beltsville, Maryland; and Chantilly
and Richmond, Virginia. In addition, we lease a 2,500 square foot training
facility in Pleasanton, California. In Canada, we lease a facility that is
approximately 31,500 square feet and contains both our offices and our Calgary
data center. We also lease 9,000 square feet of office space in Newbury
Berkshire, United Kingdom. Our leases have expiration dates ranging from 2000 to
2004. We believe our facilities are adequate for our current operations and that
we can obtain additional leased space if needed.
EMPLOYEES
As of December 31, 1999, we employed a total of 321 persons, including 156
information technicians, 66 sales and marketing personnel and 99 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 litigation SmallCaps
OnLine Group LLC brought 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.
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 owe 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. Since the issuance of
these warrants, their exercise prices have been adjusted and now range from
$8.33 to $22.05 per share. We 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 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
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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 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 us, filed a lawsuit against us seeking $180,000 for the value of
lost stock options, salary and benefits we allegedly promised him, and other
damages he allegedly sustained as a result of our alleged actions. This lawsuit
has been filed under Canadian law. Canadian law provides for severance pay to
any employee of our 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 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 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 are in the process of reviewing Mr. Chan's claim.
In the past, persons formerly associated with us may have engaged in
activities as part of an effort to profit from unlawful trading activity in our
stock. As a result, 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 in our defense. If a court determined that
we participated in these activities, we could be liable for damages or penalties
that would have a material adverse effect on our financial condition.
We are aware of the following activities:
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.
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According to press reports, Jeffrey C. Bruss claimed that he received $300,000
from FutureLink to promote its stock. The SEC sought civil penalties against the
publisher of the newsletter. The SEC did not bring any action against
FutureLink. 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.
We recently received a subpoena from the SEC requesting any documentation
in our possession with respect to a confidential investigation regarding
internet newsletters. We have responded to the SEC's request for documents.
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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 Chairman, Chief Executive Officer and Director
Glen C. Holmes....................... 43 President, Chief Operating Officer and Director
Raghu N. Kilambi..................... 34 Executive Vice President, Chief Financial Officer and
Director
Vincent L. Romano, Jr................ 53 Executive Vice President, Application Service Provision
William R. Botti..................... 49 Senior Vice President, Server-Based Computing
Yuri M. Pasea........................ 38 Managing Director (Europe)
Solveig Whittle...................... 36 Senior Vice President, Marketing
Roger J. Gallego..................... 31 Senior Vice President, Operations Strategy
William V. Arnett.................... 45 Senior Vice President and Chief Operating Officer
(Canada)
Michael R. Krieger................... 49 Senior Vice President, Strategic Planning and Corporate
Development
James A. Smith, Jr................... 51 Senior Vice President, Operations
Richard M. White..................... 55 Vice President, Administration
Kyle B.A. Scott...................... 35 Vice President, Secretary and General Counsel
F. Bryson Farrill.................... 71 Director
Michael S. Falk...................... 38 Director
Timothy P. Flynn..................... 49 Director
Gerald A. Poch....................... 53 Director
James P. McNiel...................... 37 Director
</TABLE>
MR. LADOUCEUR has served as our Chairman since June 1999, Chief Executive
Officer since August 1999 and as a director since August 1998. 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. HOLMES was elected to our Board of Directors and has served as our
President and Chief Operating Officer since September 1999. 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. KILAMBI has served as our Executive Vice President since October 1999,
our Chief Financial Officer since March 1998 and as a director since June 1998.
From November 1995 to March 1998, Mr. Kilambi invested in and arranged equity
financing for high technology companies as President of New Economy Capital
Inc., a merchant banking firm. From May 1993 to November 1995, Mr. Kilambi was
an independent corporate finance consultant to public and private technology
companies. From October 1990 until May 1993, Mr. Kilambi was the Director,
Financial Services and Taxation and Corporate Secretary for Canada Starch
Company Inc., a subsidiary of CPC International, now known as Bestfoods. From
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November 1989 to July 1990, Mr. Kilambi was Chief Accountant of Morgan Financial
Corporation. From June 1987 to November 1989, Mr. Kilambi was an accountant with
Touche Ross & Co., now a part of Deloitte & Touche. Mr. Kilambi is a Chartered
Accountant (Canada).
MR. ROMANO has served as our Executive Vice President, Application Service
Provision since December 1999. Prior to that, Mr. Romano served as our Executive
Vice President, Sales and Marketing, from August 1999. From July 1998 to August
1999, Mr. Romano was Senior Vice President of World-Wide Sales at
USinternetworking, Inc. From March 1989 to July 1998, Mr. Romano was Vice
President and Director of Worldwide Sales Operations for Motorola's Computer
Group.
MR. BOTTI has served as our Senior Vice President, Server-Based Computing,
since November 1999. 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. PASEA has served as the Managing Director of our European Operations
since December 1999. Between March 1998 and December 1999, he served as Director
for KNS Holdings, Limited. From January 1992 to February 1998, Mr. Pasea served
as Associate Director for Kerridge Computer Company.
MS. WHITTLE has served as our Senior Vice President, Marketing since
January 2000. From October 1999 to December 1999, Ms. Whittle was a consultant
with Duke Communications. From April 1992 until October 1999, Ms. Whittle served
as Product Manager at Microsoft Corporation where she helped formulate
Microsoft's ASP products strategy, and also served as Lead Product Manager for
Microsoft's Terminal Server product line and as Product Manager for the Windows
NT product line. From 1984 to 1992, Ms. Whittle held various technical and
marketing positions at AT&T Bell Laboratories.
MR. GALLEGO has served as our Senior Vice President, Strategic Business
Unit, since October 1999. Between June 1992 and October 1999, he served in a
variety of roles with Micro Visions, including Executive Vice President.
MR. ARNETT has served as our Senior Vice President and Chief Operating
Officer (Canada) since March 1999. Mr. Arnett served as Vice President of
Operations for FutureLink Alberta from August 1998 through March 1999. He served
as Vice President for SysGold Ltd. from August 1996 through August 1998, when
FutureLink acquired it. From January 1995 to August 1996, Mr. Arnett served as
Manager, Information Technology, for Numac Energy Inc.
MR. KRIEGER has served as our Senior Vice President, Strategic Planning and
Corporate Development since February 2000. Previously, from December 1996 to
October 1999, he served as Vice President, PC Servers for Hitachi Data Systems.
From May 1996 to December 1996, Mr. Krieger served as Senior Vice President,
Business Development for J & L ChatCom, Inc. and from January 1996 to May 1996
he served as President and Chief Executive Officer of CommVision Corporation.
From June 1995 to December 1995 he was Vice President, Marketing for CommVision
Corporation and from May 1993 to May 1995 he was a Director for Ziff-Davis
Magazine Networks.
MR. SMITH has served as our Senior Vice President, Operations since the
beginning of February 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. WHITE has served as our Vice President, Administration since January
2000. From August 1997 to January 2000, he served as Vice President
Administration -- Telecommunications for AT&T Canada, which was formerly
MetroNet Communications Corp. Between October 1995 and 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.
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MR. SCOTT has served as Vice President since October 1999 and as our
Secretary and General Counsel since March 1999. From April 1998 to February
1999, Mr. Scott was an associate with the law firm of Howard Mackie, now Borden
Ladner Gervais LLP., specializing in corporate and securities law. From April
1997 to March 1998, Mr. Scott served with the Listings Department of The Alberta
Stock Exchange, now the Canadian Venture Exchange. From September 1996 to
February 1997, Mr. Scott served as Associate (Corporate Finance) with Oxbow
Capital Corporation, a venture capital company. From September 1993 to August
1996, Mr. Scott served as General Counsel for Kedon Waste Services.
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 until 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 a principal at Flynn 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. Since August 1998, Mr.
Poch has been a Manager Director/Portfolio Manager of Pequot Capital Management,
Inc. From August 1996 to August 1998, Mr. Poch acted as Chairman and President
of GE Capital Information Technology Solutions. From September 1992 to August
1998, Mr. Poch was President of AmeriData Technologies, Inc. Mr. Poch is
co-chairman and director of MessageMedia, Inc. and serves as a director of Brite
Smile, Inc. Channel Health, Inc., Elastic Networks, NewRiver Communications,
Lucent Digital Radio, Everest Broadband Networks, Online Retail Partners,
WatchMark and HomeSpace.com.
MR. MCNIEL has been a director since October 1999. Since July 1999, Mr.
McNiel has been a Senior Vice President at Pequot Capital Management. From May
1997 until joining Pequot, Mr. McNeil was President of McNeil Group Ltd., a
technology consulting and investment firm. From March 1990 until May 1997, Mr.
McNeil served at Cheyenne Software, initially as Vice President of Business
Development, then as Executive Vice President of Business Development and
ultimately as Executive Vice President of Corporate Development. Mr. McNeil is a
member of the board of directors for Netegrity, Inc. and Asia Online.
APPOINTMENT OF DIRECTORS
In an Agency Agreement we entered into with Commonwealth Associates on
April 14, 1999, we granted Commonwealth the right, until April 2001, to appoint
one person to serve on our board of directors. Commonwealth Associates also has
the right to appoint a majority of our directors if we fail to repay the
convertible debentures issued in the offerings of convertible debt Commonwealth
Associates managed in April and May of 1999.
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<PAGE> 55
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 the Agreement and Plan of Reorganization and Merger dated June 2, 1999,
between us, The Holmes Trust and various other parties relating to our
acquisition of Executive LAN Management, Inc., we agreed to elect to the board
one director that The Holmes Trust designates to serve until the next annual
meeting of shareholders or until a successor is appointed or elected.
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, payments of funds or issuances of securities
up to a level of $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 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.
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<PAGE> 56
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 and Mr. McNeil options to purchase 100,000 shares of common
stock with exercise prices ranging from $3.15 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................ 1999 $110,000 $200,000(3) -- 1,300,000
Executive Chairman and Chief
Executive Officer
Glen C. Holmes..................... 1999 $ 58,435 $ 90,000(4) -- 100,000
President and Chief Operating
Officer
Raghu N. Kilambi................... 1999 $146,771 $ 90,000(5) -- 500,000
Executive Vice President and 1998 $ 67,433 -- $ 4,700 100,000
Chief Financial Officer
Vincent L. Romano, Jr.............. 1999 $ 75,000 $185,000(6) $255,000 250,000
Executive Vice President,
Application Service Provision
</TABLE>
- -------------------------
(1) Mr. Chell served as Chief Executive Officer from April 1998 through August
1999 and was our President from March 1999 through 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) Accrued in 1999 but paid in 2000.
(4) Includes $50,000 accrued in 1999 but paid in 2000.
(5) Accrued in 1999 but paid in 2000.
(6) Includes $90,000 accrued in 1999 but paid in 2000.
53
<PAGE> 57
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 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) 3.0% $3.15 September 15, 2000 $ 55,125 $ 110,250
Philip R. Ladouceur.... 700,000 12.1% $3.15 June 1, 2004 $ 609,242 $1,346,153
600,000 10.3% $7.56 August 31, 2003 $ 977,508 $2,105,158
Glen C. Holmes......... 100,000 1.7% $5.00 June 1, 2004 $ 357,674 $ 582,256
Raghu N. Kilambi....... 500,000 8.6% $3.15 June 1, 2004 $ 435,172 $ 961,538
Vincent L. Romano,
Jr. ................. 250,000(2) 4.3% $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) 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.
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.
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<PAGE> 58
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) $ 6,283,750 $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.
(2) Mr. Romano exercised options to purchase 62,500 shares of common stock in
early January 2000.
EMPLOYMENT AGREEMENTS
We have entered into 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.
Our employment agreements with Mr. Ladouceur and Mr. Kilambi are at-will
and either party can terminate the agreement at any time. Mr. Romano's agreement
has a three-year term which expires on August 1, 2002. 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. 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. Holmes' employment agreement 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 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, or 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. Kilambi's employment agreement provides for an annual basic salary of
$180,000, and he is eligible to earn an annual bonus of up to $180,000.
Mr. Romano's employment agreement provides for an annual base salary of
$180,000. He is 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 provides for a separate loan
agreement between us and Mr. Romano under which we loaned Mr. Romano $2.0
million at an annual interest rate
55
<PAGE> 59
of 5.625% to purchase 232,829 shares of our common stock. The loan is 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.
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 and December
10, 1999. Our Stock Option Plan provides for the issuance of incentive and
non-qualified stock options. 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 recently fixed the maximum number of shares which
may be issued upon the exercise of options at 11,000,000.
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 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.
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 matching
contributions on behalf of all participants in the plan. Although we have not
made any contributions to the plan to date, 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. 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
56
<PAGE> 60
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 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.
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> 61
PRINCIPAL STOCKHOLDERS
The following table sets forth specified information with respect to the
beneficial ownership of our common stock as of May 1, 2000 by:
- each person or group of affiliated persons that we know beneficially owns
5% or more of our outstanding shares of common stock,
- each of our directors,
- each of our named executive officers, and
- all of our directors and executive officers as a group.
The number and percentage of shares beneficially owned are based on
61,475,651 shares of common stock outstanding as of May 1, 2000; 2,622,242
shares of common stock issuable upon the exercise of options exercisable within
60 days of May 1, 2000; 8,241,324 shares issuable upon the exercise of warrants
exercisable within 60 days of May 1, 2000 and 67,965 shares issuable upon the
conversion of convertible debentures convertible within 60 days of May 1, 2000.
Beneficial ownership is determined in accordance with the rules of the SEC. In
general, a person who has voting power or investment power with respect to
securities is treated as a beneficial owner of those securities. These rules
treat the person holding any options, warrants or rights of the beneficial owner
of the shares underlying these options, warrants or rights currently exercisable
or exercisable within 60 days of May 1, 2000 as the beneficial owner. We believe
the persons named in the table below have sole voting and investment power with
respect to all shares beneficially owned unless otherwise indicated and except
as otherwise may be affected by community property laws.
The amounts reflected in the Ownership After Offering column of the table,
assume the underwriters' overallotment option is not exercised and that we have
issued 1,072,940 shares for the acquisition of Charon Systems Inc. prior to the
completion of the offering. In the event that the underwriters' overallotment
option is exercised in full, an additional 750,000 shares of our common stock
will be sold in the offering.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR TO THE OWNERSHIP AFTER THE
OFFERING OFFERING
----------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
------------------------------------ ----------- -------- ---------- -------
<S> <C> <C> <C> <C>
The Holmes Trust(1)............................ 8,400,000 13.7% 8,400,000 12.4%
Glen C. Holmes(1)(2)........................... 8,475,000 13.8% 8,475,000 12.5%
Pequot Capital Management, Inc.(3)............. 10,247,656 16.6% 10,247,656 15.1%
Philip R. Ladouceur(4)......................... 998,000 1.6% 998,000 1.5%
Raghu N. Kilambi(5)............................ 570,563 0.9% 570,563 0.8%
F. Bryson Farrill(6)........................... 120,000 0.2% 120,000 0.2%
Michael S. Falk(7)............................. 3,602,146 5.8% 3,602,146 5.3%
Timothy P. Flynn(8)............................ 775,133 1.3% 775,133 1.1%
Gerald A. Poch(3)(9)........................... 10,272,656 16.6% 10,272,656 15.1%
James P. McNiel(3)(10)......................... 10,272,656 16.6% 10,272,656 15.1%
Vincent Romano, Jr............................. 345,408 0.6% 345,408 0.5%
Cameron Chell.................................. 929,733 1.5% 929,733 1.4%
Robert Priddy(11).............................. 3,495,885 5.7% 3,495,885 5.2%
All directors and executive officers as a group
(19 persons)(12)............................. 28,690,597 44.4% 28,690,597 40.6%
</TABLE>
- -------------------------
(1) The business address of Glen C. Holmes, the trustee of The Holmes Trust, is
6 Morgan, Suite 100, Irvine, California 92618.
(2) Includes 75,000 shares issuable upon the exercise of stock options
exercisable within 60 days of May 1, 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.
(3) Includes 441,176 shares issuable upon the exercise of currently exercisable
warrants held by Pequot Private Equity Fund II, L.P. and Pequot Endowment
Fund, L.P. The address of Pequot Capital
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<PAGE> 62
Management, Inc., Gerald A. Poch and James P. McNiel is 500 Nyala Farm
Road, Westport, Connecticut 06880.
(4) Includes 950,000 shares issuable upon the exercise of currently exercisable
stock options and 48,000 shares attributable to Mr. Ladouceur as a result
of his power to control Mardale Investments Ltd.
(5) Includes 350,000 shares issuable upon the exercise of stock options
exercisable within 60 days of May 1, 2000.
(6) Includes 75,000 shares issuable upon the exercise of stock options
exercisable within 60 days of May 1, 2000.
(7) Includes 50,000 shares issuable upon the exercise of stock options which
are exercisable within 60 days of May 1, 2000. Also includes 82,574 shares
attributable to Mr. Falk as a result of his control of the Michael Falk
IRA. Also includes 34,353 shares issuable upon the exercise of currently
exercisable warrants that Mr. Falk holds. Also includes 2,433,828 shares of
common stock and 104,198 shares issuable upon the exercise of warrants that
Commonwealth Associates, L.P. 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.
(8) Includes 50,000 shares issuable upon the exercise of stock options which
are exercisable within 60 days of May 1, 2000, and 213,021 shares issuable
upon the exercise of currently exercisable warrants.
(9) Includes 25,000 shares issuable upon the exercise of stock options which
are exercisable within 60 days of May 1, 2000. Includes 441,176 shares
issuable upon the exercise of currently exercisable warrants held by Pequot
Private Equity Fund II, L.P. and Pequot Endowment Fund, L.P. Also includes
9,806,480 shares of common stock that Pequot Private Equity Fund II, L.P.,
Pequot Partners Fund, L.P., Pequot International Fund, Inc. and Pequot
Endowment Fund, L.P. hold. Pequot Capital Management, Inc. manages these
entities. Mr. Poch is a principal of Pequot Capital Management, Inc. Mr.
Poch disclaims beneficial ownership of the shares attributed to Pequot
Capital Management, Inc.
(10) Includes 25,000 shares issuable upon the exercise of stock options which
are exercisable within 60 days of May 1, 2000. Includes 441,176 shares
issuable upon the exercise of currently exercisable warrants held by Pequot
Private Equity Fund II, L.P. and Pequot Endowment Fund, L.P. Also includes
9,806,480 shares of common stock that Pequot Capital Management, Inc.
manages. Mr. McNiel is a principal of Pequot Capital Management, Inc. Mr.
McNiel disclaims beneficial ownership of the shares attributed to Pequot
Capital Management, Inc.
(11) Includes 198,021 shares of common stock issuable upon the exercise of
currently exercisable warrants. Also includes 2,433,828 shares of common
stock and 104,198 shares issuable upon the exercise of warrants that
Commonwealth Associates holds. Mr. Priddy disclaims beneficial ownership of
the shares and warrants attributed to Commonwealth Associates, L.P.
(12) Includes shares listed in footnotes 4, 6-12, and 14 above, as well as
1,241,849 shares our other executives not listed in this table hold,
2,199,000 shares issuable upon the exercise of stock options which are
exercisable within 60 days of May 1, 2000 and 1,006,519 shares issuable on
exercise of currently exercisable warrants.
Upon completion of this offering, our executive officers, directors and
holders of over 5% of our common stock and their affiliates will own
approximately 41% of the outstanding shares of our common stock, or 40% if the
underwriters exercise their overallotment option in full. 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 control
of our company, and make some transactions more difficult or impossible without
the support of these shareholders. These transactions might include proxy
contests, mergers, tender offers, open market purchase programs or other
purchases of common stock that could give our shareholders the opportunity to
realize a premium over the then-prevailing market price of our common stock.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1997, Mr. Chell 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. Cameron 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 shareholder.
Mr. Chell resigned as our President and a director effective August 27, 1999.
Mr. Chell and Robert Kubbernus were directors and shareholders of both us
and JAWS Technology Inc. at the time we entered into an Alliance Partner
Agreement dated February 12, 1999.
On August 12, 1998, Mr. Chell loaned us approximately $145,000 at an annual
interest rate equal 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.
The conversion and exercise prices for these securities have since been reduced
from $1.50 per share to $1.335 per share due to the effect of anti-dilution
provisions.
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 Mr. Kilambi purchased
$127,500 of our units.
Michael Falk, Chief Executive Officer of Commonwealth Associates, 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.
As of December 31, 1999, we have 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 have
recently settled this account for $400,000. Cameron Chell was a director of both
companies at the time 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. Raghu 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, we loaned Vincent Romano, one of our executive officers,
$2.0 million, which he used to purchase 232,829 shares of our common stock. Mr.
Romano deposited the shares in escrow and the escrow agent releases
approximately 12.5% of the shares quarterly as the loan is forgiven in quarterly
installments of $250,000. We loaned the money to Mr. Romano under the terms of
his employment agreement. As of January 31, 2000, we have forgiven $500,000 of
this loan.
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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 FutureLink 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 $15.0 million 1,764,704 shares of common stock and
warrants to purchase at a purchase price of $9.25 per share 441,176 shares of
common stock. 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.
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 or 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 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.
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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 31, 1999, there were 52,743,169 shares of common stock
outstanding, held by approximately 700 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
There are no shares of preferred stock outstanding. Our board of directors,
however, has the authority to issue 20 million shares of preferred stock in one
or more series, and to fix for each series, the designation of, and number of
shares to be included in, each such series, and 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. Although we have
no present plans to issue any shares of or rights to purchase, preferred stock,
such issuance 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 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 59,649,200 shares of common stock that are
either outstanding or issuable upon the conversion of debentures or the exercise
of currently exercisable warrants or options, or their transferees, are entitled
to certain rights with respect to the registration of such shares under the
Securities Act.
We agreed to file a registration statement by April 30, 2000 in respect of
1,207,867 shares of common stock issued on exercise of warrants or issued for
services that Thomson Kernaghan & Co. Limited
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provided. Nearly all of these shares will be eligible for resale under Rule 144
as of April 26, 2000. Additional shares that this entity holds have registration
rights which must be waived if the underwriter of a public offering advises us
to limit such rights. After May 1, 2000, Thomson Kernaghan & Co. Limited may
demand that we file such a registration statement for their shares, and on or
thereafter we must use our reasonable best efforts to effect such registration.
As of May 2, 2000, Thomson Kernaghan and Co. Limited had not made such a demand.
We agreed to file a registration statement by June 29, 1999 in respect of
382,389 shares of our common stock underlying senior subordinated convertible
debentures and warrants we issued to Augustine Fund LP in March 1999 all of
which have converted into common stock. As of March 10, 2000, 26,553 of these
shares remained entitled to registration rights. Augustine has waived its
registration rights with respect to this offering and all penalties for failure
to register.
We agreed to use our best efforts to file a registration statement by
January 31, 2000 covering 44,505 shares issuable upon exercise of warrants
issued to Global Equity Partners Limited. Global also held a $278,160 debenture
which has underlying shares also entitled to registration rights. Of this
debenture, $200,000 of principal plus accrued interest recently converted into
189,160 shares of common stock. Global agreed not to sell any stock until one
year following its initial investment on March 26, 1999. We are currently in
breach of these obligations.
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 May 1, 2000, 16,585,210 shares of common stock and
310,250 shares of common stock issuable upon exercise of outstanding warrants
were subject to those rights.
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 April 3, 2000, 2,727,172 shares of common
stock and 3,195,299 shares of common stock issuable upon exercise of warrants
were entitled to those rights.
We agreed to use our best efforts to file a registration statement by
January 31, 2000 in respect of 232,829 shares of common stock that Vincent
Romano owns and to use our best efforts to cause such registration statement to
become effective by March 31, 2000.
We agreed to file a registration statement by June 26, 2000 in respect of
2,160,307 shares of common stock that the former shareholders of KNS Holdings
Limited acquired, and to use commercially reasonable efforts to cause this
registration statement to become effective as soon after that date as
practicable and no later than December 22, 2000. All of the former shareholders
of KNS have waived their registration rights with respect to this offering.
The holders of 9,806,480 shares of common stock and warrants to purchase
441,176 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, or the number of shares of common stock that have a
combined market value of at least $5.0 million. If the holders make such a
demand, they may select the underwriters for the offering, provided we consent
to such selection. We also have granted these holders piggyback registration
rights allowing them to include their shares in a registered offering that we
make. The holders of 3,450,174 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 holders of warrants to purchase 1,655,593 shares of common
stock acquired in October 1999 have the same registration rights as Pequot
Private Equity Fund II, L.P. and the other Pequot investors. Pequot Private
Equity Fund II, L.P. and two other holders of shares or warrants issued in the
October 1999 and the April 2000 private placements have waived the registration
rights of all holders of such shares and warrants with regard to this offering.
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At the same time we granted piggyback 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. Mr. Holmes has waived his
registration rights with respect to this offering.
TBCC Funding Trust II has piggyback rights to require us to register 29,413
shares of common stock underlying its warrants if we file a registration
statement for our common stock. However, TBCC Funding Trust II has agreed to
waive any notice rights and any rights to participate in the offering. TBCC has
waived their registration rights with respect to this offering.
CPQ Holdings, Inc., has piggyback rights to require us to register 112,590
shares of common stock if we file a registration statement for our common stock.
Sicola, Martin, Koons & Frank, Inc., the holder of 53,552 shares of common
stock and warrants to purchase 33,467 shares of common stock, has the right to
request up to four times that we register their securities. Sicola, Martin,
Koons & Frank, Inc. has waived its registration rights with respect to this
offering.
EMC(2) Corporation has piggyback rights to require us to register 13,140
shares of common stock underlying warrants.
We agreed to register 1,181,816 shares of common stock that the selling
shareholders of CN Networks, Inc. hold by November 5, 2000. The principal
selling shareholder has waived its registration rights with respect to this
offering.
We agreed to register 1,738,555 shares of our common stock that the selling
shareholders of Async Technologies, Inc. hold by November 26, 2000.
We also agreed to register 1,026,316 shares of common stock that the
selling shareholders of Vertical Software, Inc. hold by January 31, 2001. The
selling shareholders of Vertical Software, Inc. have waived their registration
rights with respect to this offering.
We also agreed to register 1,975,170 shares of common stock that the
selling shareholders 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 selling shareholders of these
companies have waived their registration rights with respect to this offering.
We granted registration rights to SmallCaps OnLine Group LLC with respect
to 3,000,000 shares of our common stock underlying warrants we issued to
SmallCaps. SmallCaps is 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.
We intend to fulfill our registration obligations as described above
shortly after the offering. Even after registration, most shares will be
restricted under lock up agreements from further sale for at least six months
following the offering.
WARRANTS
As of May 1, 2000, there were warrants outstanding to purchase 8,241,324
shares of our common stock. The warrants have exercise prices ranging from $1.11
per share to $24.38 per share. The weighted average exercise price of all
currently outstanding warrants is $11.78 per share. The warrants have various
expiration dates, ranging from June 2000 to April 2006. Most outstanding
warrants have anti-dilution protection, and most provide for registration
rights.
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LISTING
We are listed for quotation in the Nasdaq National Market under the symbol
"FTRL."
TRANSFER AGENT AND REGISTRATION
General Securities Transfer Agency of Albuquerque, New Mexico is the
transfer agent and registrar for our common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market, or the
perception that such sales could occur, could adversely affect the market price
of our common stock and could impair our future ability to raise capital through
the sale of equity securities. Upon completion of this offering, we expect to
have an aggregate of 67,548,591 shares of our common stock outstanding, which
includes our anticipated issuance of 1,072,940 shares of our common stock
issuable upon the closing of our acquisition of Charon Systems Inc., but
excludes 750,000 shares issuable to the underwriters if they exercise their
overallotment option.
Upon completion of this offering, we also expect to have the following
options, warrants and convertible debentures outstanding:
- 7,923,209 shares of our common stock issuable upon exercise of stock
options at a weighted average exercise price of $12.25 per share as of
May 1, 2000,
- 8,241,324 shares of our common stock issuable upon the exercise of
warrants at a weighted average exercise price of $11.78 per share as of
May 1, 2000, and
- 67,965 shares of our common stock issuable upon the conversion of $78,160
aggregate principal amount of our convertible debentures at a conversion
price of $1.15 per share.
All of the shares sold in this offering will be freely tradable.
At this time, approximately 10.1 million shares of our common stock are
freely trading or eligible to trade. The remaining 51.4 million shares are
currently restricted. Approximately 2.2 million of these shares will become
freely tradeable between March 26 and December 15, 2000, and will not be subject
to any agreement restricting their sale. We currently plan to register under the
Securities Act most of the remaining 49.2 million shares within six months
following the date of this prospectus, and to keep this registration effective
for up to six months after the SEC declares it effective although 46.8 million
of such shares are either currently subject to or are expected to be subject to
lock-up restrictions limiting their resale in the public market until 180 days
after the date of this prospectus. We issued nearly 5.2 million shares of the
49.2 million shares we intend to register in recently completed acquisitions.
These shares are subject to escrow restrictions with release of such shares
staggered over the next three years. The earliest any of these shares may be
released from escrow is November 5, 2000. The nearly 1.1 million shares which we
expect to issue on closing of our proposed acquisition of Charon Systems Inc.
will be subject to similar release restrictions imposed by the escrow.
Most of the 7.9 million shares underlying our currently issued stock
options are registered for resale under the Securities Act, and we intend to
register the balance of the underlying shares under the Securities Act within
six months following the date of this prospectus. Just over 2.6 million options
are exercisable within 60 days of May 1, 2000 and 0.7 million currently
outstanding options will vest between May 10 and December 15, 2000. Of these 3.3
million options, senior officers and directors hold 2.6 million and such
securities will be locked up for a period of 180 days following the date of this
prospectus.
All of our currently outstanding warrants entitling holders to acquire 8.2
million shares of our common stock can now be exercised. Holders of warrants to
purchase 7.1 million shares of our common stock agreed that they will not trade
their warrants or underlying shares for a period of 180 days following the date
of this prospectus. Warrants to purchase another 0.2 million shares of our
common stock do not have registration rights and resales of the underlying
shares would be restricted under Rule 144 commencing on their exercise. The
remaining warrants to purchase 0.9 million shares are not subject to any lock-up
agreement and contain provisions which may allow their holders to accelerate
tradeability of the underlying stock in accordance with certain provisions of
Rule 144.
Of the 0.1 million shares issuable on conversion of outstanding convertible
debt securities, all are eligible for resale under Rule 144 as of May 7, 2000.
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Shortly after this offering, we expect to file a registration statement
covering the sale of up to 5,000,000 shares of our common stock that we may use
in connection with our acquisition of other companies in the future.
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. However, 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.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchases shares from us
pursuant to a compensatory stock or option plan or other written agreement is
eligible to resell such shares 90 days after the effective date of this offering
in reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
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UNDERWRITING
The underwriters named below have agreed to purchase from us upon the terms
and conditions of the underwriting agreement the number of shares of common
stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc.....................................
---------
Fleet Boston Robertson Stephens Inc. .......................
---------
CIBC World Markets Corp. ...................................
---------
C.E. Unterberg, Towbin......................................
---------
Total............................................. 5,000,000
=========
</TABLE>
The underwriters have agreed to purchase all of the shares of common stock
being sold upon the terms and conditions of the underwriting agreement if any of
such shares are purchased. This obligation does not apply to shares covered by
the overallotment option.
The underwriters have advised us that they propose to offer the common
stock to the public initially at the public offering price set forth on the
cover page of this prospectus and to certain dealers at such price less a
concession of not more than $ per share. Additionally, the underwriters may
allow, and such dealers may reallow, a discount of not more than $ per
share on sales to certain other dealers. After the public offering of the
shares, the underwriters may change the offering price and other selling terms.
We have granted the underwriters an option to purchase up to 750,000
additional shares of common stock at the public offering price, less the
underwriting discounts and commissions set forth on the cover page of this
prospectus, solely to cover overallotments, if any. This option may be exercised
in whole or in part at any time within 30 days after the date of this
prospectus. To the extent that the underwriters exercise this option, each
underwriter will have a firm commitment to purchase upon the satisfaction of
certain conditions a number of shares of common stock proportionate to such
underwriter's purchase obligations set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions we must pay to the underwriters. Such amounts are shown assuming
both no exercise and full exercise of the underwriters option to purchase
additional shares.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>
The offering of the shares is made for delivery, when, as and if accepted
by the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
Certain of our executive officers and directors, who beneficially own in
the aggregate shares of common stock, have agreed that they will
not, without the prior written consent of Bear, Stearns & Co. Inc., directly or
indirectly, issue, sell, offer or agree to sell, grant any option for the sale
of, pledge, make any short sale of, maintain any short position with respect to,
establish or maintain a "put equivalent position" with respect to, enter into
any swap, derivative transaction or other arrangement that transfers any of the
economic consequences of ownership of any shares of common stock or any
securities convertible into, exercisable into or exchangeable for common stock
they beneficially own during the 180-day period following the date of this
prospectus. For these purposes, "put equivalent position" has the meaning set
forth in Rule 16a-1(h) of the Securities Exchange Act of 1934.
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We have agreed that we will not, without the prior written consent of Bear,
Stearns & Co. Inc., directly or indirectly, issue, sell, offer or agree to sell,
grant any option for the sale of, pledge, make any short sale of, maintain any
short position with respect to, establish or maintain a "put equivalent
position" with respect to, enter into any swap, derivative transaction or other
arrangement that transfers any portion of the economic consequences of any
shares of common stock or any securities convertible into, exercisable into or
exchangeable for common stock during the 180-day period following the date of
this prospectus, except that we may issue shares of common stock and options to
purchase common stock under our stock option and stock purchase plans and upon
exercise of warrants issued and outstanding on the date of this prospectus, and
may issue stock as part of strategic relationships and to acquire businesses,
technologies or products complementary to those of our company, so long as the
recipients of such stock agree to be bound by a lock-up agreement for the
remainder of the 180-day lock-up period.
In August of 1998, Canadian Imperial Bank of Commerce, the parent company
of CIBC World Markets Corp., extended us a $680,000 credit line for general
business purposes. In August of 1999, The Canadian Imperial Bank of Commerce
increased our credit line to $1.4 million. The Canadian Imperial Bank of
Commerce received customary fees under these arrangements.
CEUT Capital Partners I, L.P., an affiliate of C.E. Unterberg, Towbin,
holds 128,028 shares of our common stock and warrants to purchase 49,364 shares
of our common stock. This resulted from the conversion of 8% senior subordinated
notes and warrants which CEUT Capital Partners I, L.P. purchased from us in
private offerings that Commonwealth Associates, Ltd. arranged between April and
July of 1999. CEUT Capital Partners I, L.P. made these purchases upon the same
terms and conditions as each of the other investors in the offerings.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The underwriters may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Exchange Act of 1934,
and to contribute to payments the underwriters may be required to make in
respect of these liabilities.
The underwriters have advised us that, under Regulation M promulgated under
the Securities Exchange Act of 1934, certain persons participating in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of our common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of pegging, fixing or maintaining the price of
the common stock. A "syndicate covering transaction" is a bid for or the
purchase of the common stock on behalf of the underwriters to reduce a short
position created as part of the offering process. The underwriters may also
cover all or a portion of such short position by exercising the overallotment
option. A "penalty bid" is an arrangement permitting the underwriters to reclaim
the selling concession otherwise accruing to an underwriter or syndicate member
as part of the offering if the common stock that such underwriter or syndicate
member originally sold is purchased by the underwriters in a syndicate covering
transaction and has therefore not been effectively placed by such underwriter or
syndicate member. The underwriters have advised us such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $2.1 million.
69
<PAGE> 73
LEGAL MATTERS
Paul, Hastings, Janofsky & Walker LLP, Costa Mesa, California, will pass
upon the validity of the shares of common stock offered by this prospectus for
us. Latham & Watkins, Los Angeles, California will pass upon certain legal
matters relating to this offering for the underwriters.
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, 1998, 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 Charon Systems Inc. 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 BDO
Dunwoody LLP, independent auditors and chartered accountants, as set forth in
their report with respect to such audit appearing elsewhere in this prospectus,
and are included in reliance upon such report given on the authority of such
firm as experts in account 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 financial statements of Async Technologies, 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.
70
<PAGE> 74
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 offered 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.
6 Morgan, Suite 100
Irvine, California, 92618
(949) 837-8252
71
<PAGE> 75
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FINANCIAL STATEMENTS OF FUTURELINK CORP. ................... F-3
December 31, 1998 and 1999
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
VERTICAL SOFTWARE, INC. .................................. F-29
December 31, 1997, 1998 and 1999
Report of Independent Auditors......................... F-30
Balance Sheets......................................... F-31
Statements of Operations............................... F-32
Statements of Stockholders' Equity..................... F-33
Statements of Cash Flows............................... F-34
Notes to Financial Statements.......................... F-35
MICROLAN SYSTEMS, INC. DBA MADISON TECHNOLOGY GROUP....... F-40
December 31, 1998 and 1999
Independent Auditor's Report........................... F-41
Balance Sheets......................................... F-42
Statement of Operations................................ F-43
Statement of Stockholders' Equity...................... F-44
Statement of Cash Flows................................ F-45
Notes to Financial Statements.......................... F-46
MADISON CONSULTING RESOURCES, INC. ....................... F-51
December 31, 1998 and 1999
Independent Auditor's Report........................... F-52
Balance Sheets......................................... F-53
Statements of Income................................... F-54
Statement of Shareholders' Equity...................... F-55
Statement of Cash Flows................................ F-56
Notes to Financial Statements.......................... F-57
MADISON CONSULTING RESOURCES NJ, INC. .................... F-60
December 31, 1998 and 1999
Independent Auditor's Report........................... F-61
Balance Sheets......................................... F-62
Statements of Income................................... F-63
Statement of Shareholders' Equity...................... F-64
Statement of Cash Flows................................ F-65
Notes to Financial Statements.......................... F-66
CHARON SYSTEMS INC. ...................................... F-68
December 31, 1998 and 1999
Auditors' Report....................................... F-69
Balance Sheets......................................... F-70
Statements of Operations and Retained Earnings......... F-71
Statements of Cash Flows............................... F-72
Summary of Significant Accounting Policies............. F-73
Notes to Financial Statements.......................... F-74
</TABLE>
F-1
<PAGE> 76
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
EXECUTIVE LAN MANAGEMENT, INC. DBA MICRO VISIONS.......... F-77
December 31, 1997 and 1998, and September 30, 1998 and
1999
Report of Independent Auditors......................... F-78
Balance Sheets......................................... F-79
Statements of Operations............................... F-80
Statements of Shareholders' Equity..................... F-81
Statements of Cash Flows............................... F-82
Notes to Financial Statements.......................... F-83
CN NETWORKS, INC. ........................................ F-89
December 31, 1997 and 1998
Report of Independent Auditors......................... F-90
Balance Sheets......................................... F-91
Statements of Income................................... F-92
Statement of Stockholders' Equity...................... F-92
Statements of Cash Flows............................... F-93
Notes to Financial Statements.......................... F-94
September 30, 1998 and 1999
Report of Independent Auditors......................... F-98
Balance Sheets......................................... F-99
Statements of Income and Retained Earnings............. F-100
Statements of Cash Flows............................... F-101
Notes to Financial Statements.......................... F-102
ASYNC TECHNOLOGIES, INC. AND ASYNC TECHNICAL INSTITUTE,
INC. .................................................. F-106
December 31, 1997 and 1998
Independent Auditors' Report........................... F-107
Combined Balance Sheets................................ F-108
Combined Statements of Operations and Retained
Deficit............................................... F-109
Combined Statements of Cash Flows...................... F-110
Notes to Combined Financial Statements................. F-111
September 30, 1998 and 1999
Report of Independent Public Accountants............... F-115
Combined Balance Sheets................................ F-116
Combined Statements of Operations and Retained
(Deficit) Earnings.................................... F-117
Combined Statements of Cash Flows...................... F-118
Notes to the Combined Financial Statements............. F-119
KNS HOLDINGS LIMITED...................................... F-123
February 28, 1998 and 1999, and November 30, 1999
Report of the Independent Auditors..................... F-125
Combined Balance Sheets................................
Consolidated Profit and Loss Account................... F-126
Consolidated Statement of Movements in Shareholders'
Funds................................................. F-128
Consolidated Cash Flow Statements...................... F-129
Reconciliation of Net Cash Flow to Movement in Net
Debt.................................................. F-130
Notes to the Accounts.................................. F-131
</TABLE>
F-2
<PAGE> 77
FUTURELINK CORP.
FINANCIAL STATEMENTS
F-3
<PAGE> 78
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.
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 Notes 13 and 16, as to which the date is
April 29, 2000
F-4
<PAGE> 79
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 revenues........................................... -- 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> 80
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> 81
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> 82
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> 83
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.
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.
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
F-9
<PAGE> 84
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 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.
F-10
<PAGE> 85
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-11
<PAGE> 86
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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."
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.
F-12
<PAGE> 87
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
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 6, 2000 and
June 30, 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,
F-13
<PAGE> 88
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-14
<PAGE> 89
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 will be
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.
F-15
<PAGE> 90
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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
F-16
<PAGE> 91
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-17
<PAGE> 92
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $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.
F-18
<PAGE> 93
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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; (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
F-19
<PAGE> 94
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-20
<PAGE> 95
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-21
<PAGE> 96
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-22
<PAGE> 97
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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-23
<PAGE> 98
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-24
<PAGE> 99
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.
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
F-25
<PAGE> 100
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 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
F-26
<PAGE> 101
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 is in the process of reviewing Mr. Chan's claim.
In the past, persons formerly associated with the Company 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 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.
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, $3.9
million in damages which includes approximately 272,000 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-27
<PAGE> 102
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 3, 2000, the Company entered into a definitive agreement to
acquire Charon Systems Inc. for $6.9 million in cash and 1,072,940 shares of
common stock.
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 $15.0 of
common equity with institutional private equity investors. As part of this
private 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 $9.25
per share.
On April 29, 2000, certain note holders of convertible debt converted
$796,000 of debt into 865,568 shares of common stock.
F-28
<PAGE> 103
VERTICAL SOFTWARE, INC.
FINANCIAL STATEMENTS
F-29
<PAGE> 104
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-30
<PAGE> 105
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-31
<PAGE> 106
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-32
<PAGE> 107
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-33
<PAGE> 108
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-34
<PAGE> 109
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
F-35
<PAGE> 110
VERTICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
amortizes such amounts as services are provided. The Company writes off
uncollectible accounts for customers who are provided credit terms based on
specific identification.
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-36
<PAGE> 111
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.
F-37
<PAGE> 112
VERTICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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-38
<PAGE> 113
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-39
<PAGE> 114
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
DECEMBER 31, 1998 AND 1999
F-40
<PAGE> 115
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-41
<PAGE> 116
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-42
<PAGE> 117
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-43
<PAGE> 118
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-44
<PAGE> 119
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-45
<PAGE> 120
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.
F-46
<PAGE> 121
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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>
F-47
<PAGE> 122
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 LOANS PAYABLE -- RELATED PARTIES (CONTINUED)
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 alledged that the Company took key
employees away from the plaintiff by offering them 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>
F-48
<PAGE> 123
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-49
<PAGE> 124
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 CONCENTRATION OF CREDIT RISK (CONTINUED)
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.
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-50
<PAGE> 125
MADISON CONSULTING RESOURCES, INC.
DECEMBER 31, 1998 AND 1999
F-51
<PAGE> 126
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-52
<PAGE> 127
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-53
<PAGE> 128
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-54
<PAGE> 129
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-55
<PAGE> 130
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-56
<PAGE> 131
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%
F-57
<PAGE> 132
MADISON CONSULTING RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 LINE OF CREDIT (CONTINUED)
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 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.
F-58
<PAGE> 133
MADISON CONSULTING RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 RELATED PARTY TRANSACTIONS (CONTINUED)
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>
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-59
<PAGE> 134
MADISON CONSULTING RESOURCES NJ, INC.
DECEMBER 31, 1998 AND 1999
F-60
<PAGE> 135
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-61
<PAGE> 136
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-62
<PAGE> 137
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-63
<PAGE> 138
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-64
<PAGE> 139
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-65
<PAGE> 140
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
F-66
<PAGE> 141
MADISON CONSULTING RESOURCES NJ, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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-67
<PAGE> 142
CHARON SYSTEMS INC.
FINANCIAL STATEMENTS
F-68
<PAGE> 143
AUDITORS' REPORT
To the Shareholders of
Charon Systems Inc.
We have audited the balance sheets of Charon Systems Inc. as at December
31, 1998 and 1999 and the statements of operations and retained earnings and
cash flows for the periods 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 conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1998 and 1999
and the results of its operations and its cash flows for the periods then ended
in accordance with generally accepted accounting principles in Canada.
/s/ BDO DUNWOODY LLP
Chartered Accountants
Markham, Ontario
February 14, 2000
F-69
<PAGE> 144
CHARON SYSTEMS INC.
BALANCE SHEETS
(CANADIAN $)
<TABLE>
<CAPTION>
FOR THE TWELVE MONTH
PERIODS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current
Cash...................................................... $ 173,727 $ 285,289
Accounts receivable....................................... 4,056,948 3,876,704
Inventory................................................. 196,097 552,466
Prepaid expenses and deposits............................. 13,885 104,311
---------- ----------
4,440,657 4,818,770
Equipment (Note 1).......................................... 161,343 277,802
---------- ----------
$4,602,000 $5,096,572
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities.................. $3,483,498 $3,828,805
Income taxes payable...................................... 204,692 37,096
Deferred income taxes..................................... -- 40,000
---------- ----------
3,688,190 3,905,901
Due to shareholder (Note 2)................................. 75,000 --
Deferred income taxes....................................... -- 40,000
---------- ----------
3,763,190 3,945,901
---------- ----------
Shareholders' equity
Share capital (Note 3).................................... 900 67,350
Retained earnings......................................... 837,910 1,083,321
---------- ----------
838,810 1,150,671
---------- ----------
$4,602,000 $5,096,572
========== ==========
</TABLE>
The accompanying summary of significant accounting policies and notes
are an integral part of these financial statements.
F-70
<PAGE> 145
CHARON SYSTEMS INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CANADIAN $)
<TABLE>
<CAPTION>
FOR THE TWELVE MONTH PERIODS
ENDED DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Sales
Sales -- computer hardware and software................... $14,347,093 $14,567,149
Sales -- services......................................... 3,091,484 5,450,937
----------- -----------
17,438,577 20,018,086
----------- -----------
Expenses
Cost of Hardware and Software............................. 12,232,182 12,408,256
Cost of Service Delivery.................................. 1,822,217 3,212,676
Selling, general and administrative....................... 2,829,474 3,964,585
Depreciation.............................................. 37,576 61,530
Interest and bank charges................................. 2,247 7,806
----------- -----------
16,923,696 19,654,853
----------- -----------
Income before income taxes.................................. 514,881 363,233
----------- -----------
Income taxes
Current................................................... 184,635 37,822
Deferred.................................................. -- 80,000
----------- -----------
184,635 117,822
----------- -----------
Net income for the period................................... 330,246 245,411
Retained earnings, beginning of period...................... 657,564 837,910
Premium paid on cancellation of shares previously issued and
outstanding............................................... (149,900) --
----------- -----------
Retained earnings, end of period............................ $ 837,910 $ 1,083,321
=========== ===========
</TABLE>
The accompanying summary of significant accounting policies and notes
are an integral part of these financial statements.
F-71
<PAGE> 146
CHARON SYSTEMS INC.
STATEMENTS OF CASH FLOWS
(CANADIAN $)
<TABLE>
<CAPTION>
FOR THE TWELVE MONTH PERIODS
ENDED DECEMBER 31,
----------------------------
1998 1999
------------- -----------
<S> <C> <C>
Cash provided by (used in)
Cash flows from operating activities
Net income for the period................................. $ 330,246 $ 245,411
Adjustments to reconcile net income to net cash provided
by operating activities
Deferred income taxes..................................... -- 80,000
Depreciation........................................... 37,576 61,530
Changes in non-cash working capital balances
Accounts receivable.................................. (1,928,095) 180,244
Inventory............................................ (52,589) (356,369)
Prepaid expenses and deposits........................ (3,955) (90,426)
Accounts payable and accrued liabilities............. 1,310,196 345,307
Income taxes......................................... 94,578 (167,596)
----------- ---------
(212,043) 298,101
----------- ---------
Cash flows from investing activities
Purchase of equipment..................................... (76,709) (177,989)
----------- ---------
Cash flows from financing activities
Payment on cancellation of common shares............... (75,000)
Issuance of common shares.............................. -- 16,450
Due to/from shareholder (net).......................... -- (25,000)
----------- ---------
(75,000) (8,550)
----------- ---------
Increase (decrease) in cash and short term investments
during the period......................................... (363,752) 111,562
Cash, beginning of period................................... 537,479 173,727
----------- ---------
Cash, end of period......................................... $ 173,727 $ 285,289
=========== =========
Supplemental Cash Flow Information
Cash paid for interest.................................... $ 2,247 $ 7,806
Cash paid for income taxes................................ $ 90,057 $ --
Non-Cash Transactions
Issuance of common shares................................. $ 50,000 $ 133,550
Cancellation of common shares............................. $ (75,000) $ --
Due from/to shareholder................................... $ 25,000 $(133,550)
=========== =========
</TABLE>
The accompanying summary of significant accounting policies and notes
are an integral part of these financial statements.
F-72
<PAGE> 147
CHARON SYSTEMS INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CANADIAN $)
FOR THE TWELVE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1999
INVENTORY Inventory is stated at the lower of cost and net
realizable value. Cost is generally determined based
on a specific item basis.
EQUIPMENT Equipment is stated at cost less accumulated
depreciation. Depreciation is provided based on the
estimated useful life as follows:
<TABLE>
<S> <C> <C>
Computer equipment -- 30% declining balance basis
Computer software -- 30% declining balance basis
Leasehold improvements -- 20% declining balance basis
Office furniture and fixtures -- 20% declining balance basis
</TABLE>
FOREIGN CURRENCY
TRANSLATION Foreign currency accounts are translated to Canadian
dollars as follows:
At the transaction date, each asset, liability,
revenue and expense is translated into Canadian
dollars by the use of the exchange rate in effect at
that date. At the year end date, monetary assets and
liabilities are translated into Canadian dollars by
using the exchange rate in effect at that date and
the resulting foreign exchange gains and losses are
included in income in the current period.
USE OF ESTIMATES The preparation of financial statements in
accordance with generally accepted accounting
principles requires management to make estimates
that affect 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 period. Actual results could
differ from management's best estimates as
additional information becomes available in the
future.
REVENUE RECOGNITION Revenue from product sales is generally recorded on
shipment. Service revenue is recognized when the
service is provided.
F-73
<PAGE> 148
CHARON SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
(CANADIAN $)
FOR THE TWELVE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1999
1. EQUIPMENT
<TABLE>
<CAPTION>
1998 1999
----------------------- -----------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Computer equipment.............................. $108,633 $ 55,266 $229,219 $ 89,364
Computer software............................... 7,363 5,485 -- --
Leasehold improvements.......................... 75,106 26,106 98,011 43,418
Office furniture and fixtures................... 82,218 25,121 124,080 40,726
-------- -------- -------- --------
$273,321 $111,978 $451,310 $173,508
-------- --------
Cost less accumulated depreciation.............. $161,343 $277,802
======== ========
</TABLE>
2. DUE TO SHAREHOLDER
The amount is non-interest bearing, with no specific terms of repayment.
3. SHARE CAPITAL
Authorized
Unlimited voting common shares
Unlimited non-voting common shares
<TABLE>
<CAPTION>
1998 1999
------- -------- --------- ---------
# #
<S> <C> <C> <C> <C>
ISSUED
Voting common shares.............................. 950,000 $ 50,900 1,055,000 $ 155,900
Non-voting common shares.......................... -- -- 45,000 45,000
------- -------- --------- ---------
950,000 50,900 1,100,000 200,900
Less: Share purchase loan......................... (50,000) (133,550)
-------- ---------
$ 900 $ 67,350
======== =========
</TABLE>
On January 8, 1999, pursuant to Articles of Amendment, the company revised
its authorized share capital to an unlimited number of voting and unlimited
non-voting common shares, from an unlimited number of common shares. All shares
that were previously considered common shares became voting common shares.
In 1999, 150,000 (1998 -- 50,000) common shares were issued for cash of
$16,450 (1998 -- nil) and share purchase loans of $133,550 (1998 -- $50,000). In
1998, the company redeemed 100,000 common shares (stated value of $100) for
$150,000.
The share purchase loans are non-interest bearing with no specific terms of
repayment.
F-74
<PAGE> 149
CHARON SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CANADIAN $)
FOR THE TWELVE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1999
4. RELATED PARTY TRANSACTIONS
The following table summarizes the company's related party transactions for
the periods:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Management fees paid to companies owned by shareholders
included in
consulting fees...................................... $445,010 $347,055
-------- --------
</TABLE>
The transactions were measured at the exchange amount.
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Accounts payable
Shareholders......................................... $ -- $ 25,157
Companies 100% owned by shareholders................. $ 22,400 $182,807
</TABLE>
5. COMMITMENTS
The Company has leased realty to December 2003 and equipment to January
2003.
Future minimum lease payments for the next four years are approximately as
follows:
<TABLE>
<S> <C>
2000........................................................ $204,050
2001........................................................ 193,561
2002........................................................ 153,124
2003........................................................ 62,134
--------
$612,869
========
</TABLE>
6. SUBSEQUENT EVENTS
On January 4, 2000 the company issued 50,000 options to acquire voting
shares at an exercise price of $2.50 per share. All 50,000 options were
exercised on January 24, 2000. On January 4, 2000 the company also issued 5,000
options to acquire voting shares and 45,000 options to acquire non-voting shares
for $1.00 per share which were exercised on January 24, 2000. On January 31,
2000 the company issued 25,300 options to acquire voting common shares at an
exercise price of $1.00 per share which were immediately exercised.
On February 2, 2000, pursuant to Articles of Amendment, the company revised
its authorized share capital to add 272,289, non-voting, cumulative preferred
shares at 8% of the paid-up amount, redeemable at $36.7257 per share plus unpaid
dividends.
On February 2, 2000, 882,981 outstanding voting common shares and 70,004
outstanding non-voting common shares were exchanged for 272,289 preference
shares of the company.
On February 2, 2000, 105,890 voting common shares were issued.
On February 4, 2000, FutureLink Corp., a public company in the United
States, signed an agreement to acquire 100% of the outstanding shares of the
company.
F-75
<PAGE> 150
CHARON SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CANADIAN $)
FOR THE TWELVE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1999
7. STOCK OPTIONS
The Company has a fixed stock option plan. The status of the stock option
plans as of December 31, 1998 and December 31, 1999, and changes during the
periods ending on those dates is presented below:
<TABLE>
<CAPTION>
EXERCISE PRICE
1998 1999 PER SHARE
---- -------- --------------
<S> <C> <C> <C>
Outstanding at beginning of period................... -- --
Granted during period................................ -- 150,000
Exercised during the period.......................... -- (150,000) $ 1
-- --------
Outstanding at end of period......................... -- --
== ========
</TABLE>
8. FINANCIAL INSTRUMENTS
Unless otherwise noted, it is management's opinion that the Company is not
exposed to significant interest, credit, or currency risks arising from its
financial instruments.
9. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. Although the change in date has occurred, it is not possible to conclude
that all aspects of the Year 2000 Issue that may affect the entity, including
those related to customers, suppliers, or other third parties, have been fully
resolved.
10. CANADIAN/U.S. GAAP RECONCILIATION
The financial statements of the company have been prepared in accordance
with Canadian generally accepted accounting principles which differ from U.S.
generally accepted accounting principles as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Net income per Canadian GAAP................................ $330,246 $245,411
Stock compensation expense.................................. -- (75,000)
-------- --------
330,246 170,411
Income tax effect --
Stock compensation expense................................ -- 33,000
-------- --------
Net income per U.S. GAAP.................................... $330,246 $203,411
======== ========
</TABLE>
Under Canadian GAAP, options issued at lower than fair value do not result
in a compensation expense. For U.S. GAAP, in accordance with APB 25 for
accounting for options issued to employees, the difference between fair value of
the shares of $1.50 and the exercise price is recorded as compensation expense.
The effect on the balance sheet would be to increase share capital by
$75,000, decrease income taxes payable by $33,000 and decrease retained earnings
by $42,000.
F-76
<PAGE> 151
EXECUTIVE LAN MANAGEMENT, INC.,
DBA MICRO VISIONS
FINANCIAL STATEMENTS
F-77
<PAGE> 152
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-78
<PAGE> 153
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-79
<PAGE> 154
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-80
<PAGE> 155
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-81
<PAGE> 156
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-82
<PAGE> 157
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-83
<PAGE> 158
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.
F-84
<PAGE> 159
EXECUTIVE LAN MANAGEMENT, INC.
DBA MICRO VISIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
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.
F-85
<PAGE> 160
EXECUTIVE LAN MANAGEMENT, INC.
DBA MICRO VISIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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-86
<PAGE> 161
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-87
<PAGE> 162
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-88
<PAGE> 163
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
FINANCIAL STATEMENTS
F-89
<PAGE> 164
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-90
<PAGE> 165
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-91
<PAGE> 166
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-92
<PAGE> 167
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-93
<PAGE> 168
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.
F-94
<PAGE> 169
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
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 -- 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>
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
F-95
<PAGE> 170
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
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-96
<PAGE> 171
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-97
<PAGE> 172
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.
MORELAND & DAVIS
Accountancy firm
Alameda County, California
November 3, 1999
F-98
<PAGE> 173
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-99
<PAGE> 174
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-100
<PAGE> 175
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-101
<PAGE> 176
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-102
<PAGE> 177
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-103
<PAGE> 178
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-104
<PAGE> 179
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-105
<PAGE> 180
ASYNC TECHNOLOGIES, INC. AND ASYNC TECHNICAL INSTITUTE, INC.
COMBINED FINANCIAL STATEMENTS
F-106
<PAGE> 181
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-107
<PAGE> 182
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-108
<PAGE> 183
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-109
<PAGE> 184
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-110
<PAGE> 185
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-111
<PAGE> 186
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.
F-112
<PAGE> 187
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
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>
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.
F-113
<PAGE> 188
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
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-114
<PAGE> 189
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-115
<PAGE> 190
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-116
<PAGE> 191
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-117
<PAGE> 192
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-118
<PAGE> 193
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-119
<PAGE> 194
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-120
<PAGE> 195
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-121
<PAGE> 196
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-122
<PAGE> 197
KNS HOLDINGS LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
F-123
<PAGE> 198
KNS HOLDINGS LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors.............................. F-125
Consolidated Profit and Loss Account........................ F-126
Consolidated Balance Sheets.................................
Consolidated Statement of Movements in Shareholders'
Funds..................................................... F-128
Consolidated Cash Flow Statements........................... F-129
Notes to the Accounts....................................... F-131
</TABLE>
F-124
<PAGE> 199
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-125
<PAGE> 200
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-126
<PAGE> 201
KNS HOLDING LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
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-127
<PAGE> 202
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-128
<PAGE> 203
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-129
<PAGE> 204
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-130
<PAGE> 205
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-131
<PAGE> 206
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-132
<PAGE> 207
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-133
<PAGE> 208
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-134
<PAGE> 209
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-135
<PAGE> 210
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-136
<PAGE> 211
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-137
<PAGE> 212
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-138
<PAGE> 213
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-139
<PAGE> 214
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-140
<PAGE> 215
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-141
<PAGE> 216
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-142
<PAGE> 217
[BACK COVER]
[INSERT GRAPHIC DISPLAYING COMPONENTS OF SERVER-BASED SERVICES, INCLUDING THE
METHODS OF DELIVERY OF SOFTWARE APPLICATIONS FROM OUR DATA CENTERS TO OUR
CUSTOMERS]
<PAGE> 218
================================================================================
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.......................... 5
Forward-Looking Statements............ 11
Use of Proceeds....................... 12
Dividend Policy....................... 12
Price Range of Our Common Stock....... 13
Capitalization........................ 15
Dilution.............................. 16
Acquisitions.......................... 17
Pro Forma Condensed Consolidated
Financial Information............... 20
Selected Consolidated Financial
Data................................ 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
Business.............................. 36
Management............................ 49
Principal Stockholders................ 58
Certain Relationships and Related
Transactions........................ 60
Description of Capital Stock.......... 62
Shares Eligible for Future Sale....... 66
Underwriting.......................... 68
Legal Matters......................... 70
Experts............................... 70
Where You Can Find More Information... 71
Index to Financial Statements......... F-1
</TABLE>
================================================================================
================================================================================
[FUTURELINK LOGO]
5,000,000 SHARES
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
BEAR, STEARNS & CO. INC.
ROBERTSON STEPHENS
CIBC WORLD MARKETS
C.E. UNTERBERG, TOWBIN
, 2000
================================================================================
<PAGE> 219
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee........................................ $49,335
NASD filing fee............................................. 13,581
Blue Sky fees and expenses.................................. 7,500
Attorneys' fees and expenses................................
Accountants' fees and expenses..............................
Transfer Agent's and Registrar's fees and expenses..........
Printing and engraving fees.................................
Miscellaneous...............................................
-------
Total............................................. $
=======
</TABLE>
The amounts set forth above are estimates except for the SEC registration
fee and the NASD filing fee.
ITEM 14. 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.
The following is a description of our securities issuances since January
31, 1997.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 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.
II-1
<PAGE> 220
1. On June 9, 1997, we issued 6,000 shares of common stock to two non-U.S.
residents. In exchange for the issuance, we received total consideration of
$10,000. 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 that they are not U.S. persons, that they were not
acquiring the securities for the account or benefit of any U.S. person and
that they 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.
2. On July 23, 1997, we issued 10,000 shares of common stock to twenty-three
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.
Each 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.
3. 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.
4. 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.
5. 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.
6. 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
II-2
<PAGE> 221
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 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.
8. 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.
9. 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 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.
10. 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.
11. 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
II-3
<PAGE> 222
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.
12. 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 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 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.
14. 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.
II-4
<PAGE> 223
15. 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.
16. 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.
17. 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 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. 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.
18. 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. On March 30, 2000, this entity
elected to convert $200,000 of the principal amount of its convertible
debenture plus accrued interest into 189,160 shares of common stock. 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.
19. 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.
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<PAGE> 224
20. 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.
21. 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.
22. 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.
23. 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.
24. 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
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<PAGE> 225
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 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.
26. 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 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.
27. 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.
28. 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.
29. 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
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<PAGE> 226
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 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.
31. 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 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.
32. 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.
33. Between June 29, 1998 and March 10, 2000, we issued an aggregate of
8,972,500 stock options to directors, officers and employees at various
exercises prices of which 4,000,000 underlying shares were registered by our
registration statement on Form S-8 filed August 6, 1999 and 4,500,000
underlying shares were registered by our registration statement on Form S-8
filed February 29, 2000. We issued these securities under Rule 701 of
Regulation E under the Securities Act Rules.
34. 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.
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<PAGE> 227
35. On February 3, 2000 we entered into a definitive agreement to acquire all of
the outstanding shares of Charon Systems Inc., a foreign entity, from its 14
current shareholders, all of whom being non-US residents or entities. At
closing, we intend to issue 1,072,940 shares of common stock as part of the
consideration payable to these non-U.S. selling shareholders pursuant to an
exemption provided by Rule 903 of Regulation S under the Securities Act
Rules. The selling shareholders will be required to certify that they are
not U.S. persons, that they are not acquiring the securities for the account
or benefit of any U.S. person and that they will not resell the securities
in the U.S. for at least one year. When we issue these securities, we intend
to appropriately legend the certificates representing these securities to
reflect these restrictions and we will retain the right to refuse to
register any transfer of these securities not made in accordance with
Regulation S.
36. On April 28, 2000, we issued 1,746,704 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.
Except as otherwise set forth above, no underwriters were engaged in the
sales of securities described above.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
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(1)
2.2 Targetco Acquisition Agreement dated August 3, 1998 between
FutureLink Distribution Corp., a Colorado corporation, and
FutureLink Alberta(1)
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(3)
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(6)
2.5 Agreement and Plan of Merger dated August 1, 1999 between
FutureLink Distribution Corp. and FutureLink California
Acquisition Corporation, a Delaware corporation(8)
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.(9)
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.(10)
2.8 Certificate of Merger dated October 15, 1999 of FutureLink
Distribution Corp., a Colorado corporation, into FutureLink
California Acquisition Corp., a Delaware corporation(8)
</TABLE>
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<PAGE> 228
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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.(8)
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.(10)
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.(9)
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.(10)
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(11)
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.(10)
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(11)
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(13)
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(14)
3.1 Certificate of Incorporation of FutureLink Corp.(8)
3.2 Bylaws of FutureLink Corp.(8)
5.1* Opinion of Paul, Hastings, Janofsky & Walker LLP with
respect to the validity of the securities being offered
10.1 Stock Option Plan dated June 29, 1998(1)
10.2 First Amendment to Second Amended and Restated Stock Option
Plan dated December 10, 1999, as amended(12)
10.3 Agency Agreement dated April 14, 1999 between FutureLink
Distribution Corp. and Commonwealth(5)
10.4 Letter Agreement dated December 6, 1999 between FutureLink
Distribution Corp. and Thomson Kernaghan & Co. Limited(12)
10.5 Advisory Agreement dated May 1, 1999 between FutureLink
Distribution Corp. and Commonwealth Associates, L.P.(5)
10.6 Agency Agreement dated July 1, 1999 between FutureLink
Distribution Corp. and Commonwealth Associates, L.P.(7)
10.7 Loan Agreement dated August 1, 1999 between FutureLink Corp.
and Vincent L. Romano(7)
10.8 Securities Purchase Agreement dated October 15, 1999 between
FutureLink Corp., Pequot Private Equity Investment Fund II,
L.P. and certain other investors(8)
10.9** 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)
</TABLE>
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<PAGE> 229
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.10** Securities Purchase Agreement dated April 28, 2000 between
FutureLink Corp., Pequot Private Equity Investment Fund II,
L.P. and Pequot Endowment Fund, L.P.
10.11** Form of Warrant to Purchase Shares of Common Stock
10.12 Registration Rights Agreement dated December 6, 1999 between
FutureLink Corp. and CPQ Holdings, Inc.(12)
10.13 Securities Purchase Agreement dated December 6, 1999 between
FutureLink Corp. and CPQ Holdings, Inc.(12)
10.14 Employment Agreement dated June 1, 1999 between Philip R.
Ladouceur and FutureLink Distribution Corp.(12)(16)
10.15 Employment Agreement dated September 30, 1999 between Glenn
C. Holmes and FutureLink Corp.(12)
10.16 Employment Agreement dated August 1, 1999 between Vincent L.
Romano and FutureLink Corp.(12)
10.17 Client/Agency Agreement dated August 7, 1999 between Sicola,
Martin, Koons & Frank, Inc. and FutureLink Distribution
Corp., as revised(12)
10.18 Master Loan and Security Agreement dated November 3, 1999
between Transamerica Business Credit Corporation, FutureLink
Corp. and FutureLink Micro Visions Corp.(12)
10.19 Security Agreement dated November 3, 1999 between
Transamerica Business Credit Corporation and FutureLink
Distribution Corp.(12)
10.20 Master Lease and Financing Agreement dated November 15, 1999
between Compaq Financial Services and FutureLink Corp.(12)
10.21 Master Lease Agreement dated December 16, 1999 between
EMC(2) and FutureLink Corp.(12)
10.22 Revised Offer to Lease dated March 24, 1998 between Bow
Valley Square Management Ltd. and SysGold, Ltd., as amended,
for 250 6th Avenue, Calgary(1)
10.23 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(12)
10.24 Microsoft Certified Solution Provider Agreement dated
January 28, 2000 between Microsoft Corporation and
FutureLink Corp.(15)(17)
10.25 Microsoft Application Services Agreement dated December 23,
1999 between Microsoft Corporation and FutureLink
Corp.(12)(17)
10.26 Final Invoice/Enrollment Contract (MSCP) dated April 28,
1998 between Microsoft Corporation and FutureLink Corp.(1)
10.27 Direct Commercial Service License Agreement dated May 21,
1999 between Microsoft Corporation and FutureLink
Distribution Corp.(12)(17)
10.28 Service Agreement dated June 1, 1998 between Willson
Stationers Ltd. and FutureLink Alberta(1)
10.29 Solution Provider Contract dated July 27, 1998 between IBM
Canada Ltd. and FutureLink/ SysGold Ltd.(1)
10.30 Hosting Services Distributor Agreement (version 4) dated
November 12, 1998 between Onyx Software Corp. and FutureLink
Distribution Corp.(12)
10.31 Onyx Software License Agreement dated August 5, 1998 between
Onyx Software Corp. and FutureLink Distribution Corp.(12)
10.32 Alliance Partner Agreement dated October 26, 1998 between
Great Plains Software and FutureLink Distribution Corp.(12)
10.33 Citrix Solutions Network Gold Renewal Membership Agreement
dated July 16, 1999 between Citrix Systems, Inc. and
FutureLink Distribution Corp.(12)(17)
10.34 Citrix Solutions Network Platinum Renewal Membership
Agreement dated April 20, 1999 between Citrix Systems, Inc.
and Async Technologies, Inc.(12)(17)
</TABLE>
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<PAGE> 230
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.35 Information Systems Services Agreement dated January 19,
1999 between FutureLink Alberta and Numac Energy, Inc.(12)
10.36 Information Systems Services Agreement dated July 1, 1999
between Canadian Natural Resources, Ltd. and FutureLink
Alberta(12)
10.37 Alliance Partner Agreement dated February 12, 1999 between
FutureLink Alberta and JAWS Technologies, Inc.(1)
10.38 Master Consulting Agreement dated December 1, 1998 between
Ameriquest Mortgage Company and Micro Visions(12)
10.39 Internet Data Center Services Agreement dated May 7, 1999
between Exodus Communications, Inc. and Executive LAN
Management, Inc.(12)
10.40 Form of EMC(2) Corporation Software License Agreement(12)
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 (consent
included in 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 BDO Dunwoody LLP, Independent Auditors, Markham,
Ontario
23.6** Consent of Ernst & Young LLP, Independent Auditors, Orange
County, California
23.7** Consent of Moreland & Davis, Alameda County, California
23.8** Consent of M. Jevahirian and Co., Independent Auditors,
Birmingham, Michigan
23.9** Consent of Ernst & Young, Independent Auditors, Reading,
England
24.1 Power of Attorney(12) (included in signature page)
</TABLE>
- -------------------------
* To be filed in an amendment.
** Filed herewith.
(1) Included as an Exhibit to FutureLink's registration statement on Form SB-2
filed August 24, 1998.
(2) Included as an Exhibit to FutureLink's Amendment No. 1 to registration
statement on Form SB-2 filed October 23, 1998.
(3) Included as an Exhibit to FutureLink's Amendment No. 2 to registration
statement on Form SB-2 filed November 24, 1998.
(4) Included as an Exhibit to FutureLink's Amendment No. 3 to registration
statement on Form SB-2 filed December 14, 1998.
(5) Included as an Exhibit to FutureLink's Quarterly Report on Form 10-QSB for
period ended March 31, 1999, filed May 20, 1999.
(6) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
June 16, 1999.
(7) Included as an Exhibit to FutureLink's Quarterly Report on Form 10-QSB for
period ended June 30, 1999, filed August 18, 1999.
(8) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
October 27, 1999.
(9) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
November 23, 1999.
(10) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
December 8, 1999.
(11) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
January 6, 2000.
(12) Included as an Exhibit to FutureLink's registration statement on Form SB-2
filed February 11, 2000.
(13) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
February 14, 2000.
(14) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
March 15, 2000.
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<PAGE> 231
(15) Included as an Exhibit to FutureLink's First Amendment to Registration
Statement on Form SB-2 filed April 14, 2000.
(16) 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.
(17) Some of our subsidiaries are parties to agreements with the same party that
are substantially identical in all material respects.
(b) FINANCIAL STATEMENT SCHEDULES.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) To the extent that indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant under the above provisions or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities, other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding, is asserted by such director, officer or controlling person
in respect of the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant under Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered in that prospectus, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering of such securities.
II-13
<PAGE> 232
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this Amendment No. 2 to
Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Irvine, California on May 3, 2000.
FUTURELINK CORP.
By: /s/ K.B. SCOTT
------------------------------------
Kyle B.A. Scott
Attorney-in-Fact
II-14
<PAGE> 233
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to 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>
* Chairman, Chief Executive Officer and May 3, 2000
- --------------------------------------------- Director
Philip R. Ladouceur
* President, Chief Operating Officer and May 3, 2000
- --------------------------------------------- Director
Glen C. Holmes
/s/ RAGHU N. KILAMBI Executive Vice President, Chief May 3, 2000
- --------------------------------------------- Financial Officer, Principal
Raghu N. Kilambi Accounting Officer and Director
* Director May 3, 2000
- ---------------------------------------------
F. Bryson Farrill
* Director May 3, 2000
- ---------------------------------------------
Timothy P. Flynn
* Director May 3, 2000
- ---------------------------------------------
Michael S. Falk
* Director May 3, 2000
- ---------------------------------------------
Gerald A. Poch
* Director May 3, 2000
- ---------------------------------------------
James P. McNiel
/s/ K.B. SCOTT Vice President, Secretary and General May 3, 2000
- --------------------------------------------- Counsel
Kyle B.A. Scott
</TABLE>
*By: /s/ K.B. SCOTT
- --------------------------------
Kyle B.A. Scott
Attorney-in-Fact
II-15
<PAGE> 234
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
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(1)
2.2 Targetco Acquisition Agreement dated August 3, 1998 between
FutureLink Distribution Corp., a Colorado corporation, and
FutureLink Alberta(1)
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(3)
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(6)
2.5 Agreement and Plan of Merger dated August 1, 1999 between
FutureLink Distribution Corp. and FutureLink California
Acquisition Corporation, a Delaware corporation(8)
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.(9)
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.(10)
2.8 Certificate of Merger dated October 15, 1999 of FutureLink
Distribution Corp., a Colorado corporation, into FutureLink
California Acquisition Corp., a Delaware corporation(8)
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.(8)
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.(10)
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.(9)
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.(10)
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(11)
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.(10)
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(11)
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(13)
</TABLE>
<PAGE> 235
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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(14)
3.1 Certificate of Incorporation of FutureLink Corp.(8)
3.2 Bylaws of FutureLink Corp.(8)
5.1* Opinion of Paul, Hastings, Janofsky & Walker LLP with
respect to the validity of the securities being offered
10.1 Stock Option Plan dated June 29, 1998(1)
10.2 First Amendment to Second Amended and Restated Stock Option
Plan dated December 10, 1999, as amended(12)
10.3 Agency Agreement dated April 14, 1999 between FutureLink
Distribution Corp. and Commonwealth(5)
10.4 Letter Agreement dated December 6, 1999 between FutureLink
Distribution Corp. and Thomson Kernaghan & Co. Limited(12)
10.5 Advisory Agreement dated May 1, 1999 between FutureLink
Distribution Corp. and Commonwealth Associates, L.P.(5)
10.6 Agency Agreement dated July 1, 1999 between FutureLink
Distribution Corp. and Commonwealth Associates, L.P.(7)
10.7 Loan Agreement dated August 1, 1999 between FutureLink Corp.
and Vincent L. Romano(7)
10.8 Securities Purchase Agreement dated October 15, 1999 between
FutureLink Corp., Pequot Private Equity Investment Fund II,
L.P. and certain other investors(8)
10.9** 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)
10.10** Securities Purchase Agreement dated April 28, 2000 between
FutureLink Corp., Pequot Private Equity Investment Fund II,
L.P. and Pequot Endowment Fund, L.P.
10.11** Form of Warrant to Purchase Shares of Common Stock
10.12 Registration Rights Agreement dated December 6, 1999 between
FutureLink Corp. and CPQ Holdings, Inc.(12)
10.13 Securities Purchase Agreement dated December 6, 1999 between
FutureLink Corp. and CPQ Holdings, Inc.(12)
10.14 Employment Agreement dated June 1, 1999 between Philip R.
Ladouceur and FutureLink Distribution Corp.(12)(16)
10.15 Employment Agreement dated September 30, 1999 between Glenn
C. Holmes and FutureLink Corp.(12)
10.16 Employment Agreement dated August 1, 1999 between Vincent L.
Romano and FutureLink Corp.(12)
10.17 Client/Agency Agreement dated August 7, 1999 between Sicola,
Martin, Koons & Frank, Inc. and FutureLink Distribution
Corp., as revised(12)
10.18 Master Loan and Security Agreement dated November 3, 1999
between Transamerica Business Credit Corporation, FutureLink
Corp. and FutureLink Micro Visions Corp.(12)
10.19 Security Agreement dated November 3, 1999 between
Transamerica Business Credit Corporation and FutureLink
Distribution Corp.(12)
10.20 Master Lease and Financing Agreement dated November 15, 1999
between Compaq Financial Services and FutureLink Corp.(12)
10.21 Master Lease Agreement dated December 16, 1999 between
EMC(2) and FutureLink Corp.(12)
10.22 Revised Offer to Lease dated March 24, 1998 between Bow
Valley Square Management Ltd. and SysGold, Ltd., as amended,
for 250 6th Avenue, Calgary(1)
</TABLE>
<PAGE> 236
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.23 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(12)
10.24 Microsoft Certified Solution Provider Agreement dated
January 28, 2000 between Microsoft Corporation and
FutureLink Corp.(15)(17)
10.25 Microsoft Application Services Agreement dated December 23,
1999 between Microsoft Corporation and FutureLink
Corp.(12)(17)
10.26 Final Invoice/Enrollment Contract (MSCP) dated April 28,
1998 between Microsoft Corporation and FutureLink Corp.(1)
10.27 Direct Commercial Service License Agreement dated May 21,
1999 between Microsoft Corporation and FutureLink
Distribution Corp.(12)(17)
10.28 Service Agreement dated June 1, 1998 between Willson
Stationers Ltd. and FutureLink Alberta(1)
10.29 Solution Provider Contract dated July 27, 1998 between IBM
Canada Ltd. and FutureLink/ SysGold Ltd.(1)
10.30 Hosting Services Distributor Agreement (version 4) dated
November 12, 1998 between Onyx Software Corp. and FutureLink
Distribution Corp.(12)
10.31 Onyx Software License Agreement dated August 5, 1998 between
Onyx Software Corp. and FutureLink Distribution Corp.(12)
10.32 Alliance Partner Agreement dated October 26, 1998 between
Great Plains Software and FutureLink Distribution Corp.(12)
10.33 Citrix Solutions Network Gold Renewal Membership Agreement
dated July 16, 1999 between Citrix Systems, Inc. and
FutureLink Distribution Corp.(12)(17)
10.34 Citrix Solutions Network Platinum Renewal Membership
Agreement dated April 20, 1999 between Citrix Systems, Inc.
and Async Technologies, Inc.(12)(17)
10.35 Information Systems Services Agreement dated January 19,
1999 between FutureLink Alberta and Numac Energy, Inc.(12)
10.36 Information Systems Services Agreement dated July 1, 1999
between Canadian Natural Resources, Ltd. and FutureLink
Alberta(12)
10.37 Alliance Partner Agreement dated February 12, 1999 between
FutureLink Alberta and JAWS Technologies, Inc.(1)
10.38 Master Consulting Agreement dated December 1, 1998 between
Ameriquest Mortgage Company and Micro Visions(12)
10.39 Internet Data Center Services Agreement dated May 7, 1999
between Exodus Communications, Inc. and Executive LAN
Management, Inc.(12)
10.40 Form of EMC(2) Corporation Software License Agreement(12)
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 (consent
included in 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 BDO Dunwoody LLP, Independent Auditors, Markham,
Ontario
23.6** Consent of Ernst & Young LLP, Independent Auditors, Orange
County, California
23.7** Consent of Moreland & Davis, Alameda County, California
23.8** Consent of M. Jevahirian and Co., Independent Auditors,
Birmingham, Michigan
23.9** Consent of Ernst & Young, Independent Auditors, Reading,
England
24.1 Power of Attorney(12) (included in signature page)
</TABLE>
<PAGE> 237
- -------------------------
* To be filed in an amendment.
** Filed herewith.
(1) Included as an Exhibit to FutureLink's registration statement on Form SB-2
filed August 24, 1998.
(2) Included as an Exhibit to FutureLink's Amendment No. 1 to registration
statement on Form SB-2 filed October 23, 1998.
(3) Included as an Exhibit to FutureLink's Amendment No. 2 to registration
statement on Form SB-2 filed November 24, 1998.
(4) Included as an Exhibit to FutureLink's Amendment No. 3 to registration
statement on Form SB-2 filed December 14, 1998.
(5) Included as an Exhibit to FutureLink's Quarterly Report on Form 10-QSB for
period ended March 31, 1999, filed May 20, 1999.
(6) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
June 16, 1999.
(7) Included as an Exhibit to FutureLink's Quarterly Report on Form 10-QSB for
period ended June 30, 1999, filed August 18, 1999.
(8) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
October 27, 1999.
(9) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
November 23, 1999.
(10) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
December 8, 1999.
(11) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
January 6, 2000.
(12) Included as an Exhibit to FutureLink's registration statement on Form SB-2
filed February 11, 2000.
(13) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
February 14, 2000.
(14) Included as an Exhibit to FutureLink's Current Report on Form 8-K filed
March 15, 2000.
(15) Included as an Exhibit to FutureLink's First Amendment to Registration
Statement on Form SB-2 filed April 14, 2000.
(16) 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.
(17) Some of our subsidiaries are parties to agreements with the same party that
are substantially identical in all material respects.
<PAGE> 1
EXHIBIT 10.9
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the "Agreement")
dated as of April 28, 2000, by and among Futurelink Corp., a Delaware
corporation (the "Company") and the stockholders signatories hereto (each, a
"Stockholder" and collectively the "Stockholders").
Terms and Conditions
The Company and certain of its stockholders are parties to a
Registration Rights Agreement dated as of October 15, 1999 (the "Existing
Registration Rights Agreement"). Pequot Endowment Fund, L.P. ("PEF") wishes to
become a party to the Existing Registration Rights Agreement as a "Stockholder"
thereunder, and the Company and the Stockholders therefore have agreed to amend
and restate the Existing Registration Rights Agreement to include PEF as a
party.
In consideration of the mutual covenants and agreements contained in
this Agreement and the Purchase Agreement, and intending to be legally bound,
the parties hereto agree as follows:
Section 1. Definitions. As used in this Agreement, the following terms
have the meanings indicated below or in the referenced sections of this
Agreement:
"Common Stock." The Company's Common Stock, $.0001 par value per share,
as the same may be constituted from time to time.
"Demand Registration." As defined in Section 3(a) hereof.
"Exchange Act." The Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder.
"NASD." The National Association of Securities Dealers, Inc.
"Person." An individual, a partnership, a corporation, a limited
liability company or partnership, an association, a joint stock company, a
trust, a business trust, a joint venture, an unincorporated organization or a
government entity or any department, agency, or political subdivision thereof.
"Piggyback Registration." As defined in Section 4(a) hereof.
"Registrable Securities." Any shares of Common Stock of the Company held
by the Stockholders named on Schedule I hereto and any shares of Common Stock
that such Stockholder has the right to acquire, or does acquire, upon the
conversion or exercise of any option, warrant or other convertible security of
the Company or, in either case, their transferees; provided, that a Registrable
Security ceases to be a Registrable Security when (i) it is registered under the
Securities Act, (ii) it is sold or transferred in accordance with the
requirements of Rule
<PAGE> 2
144 (or similar provisions then in effect) promulgated by the SEC under the
Securities Act ("Rule 144"), or (iii) it is eligible to be sold or transferred
under Rule 144 without holding period or volume limitations.
"Registration Expenses." As defined in Section 7(a) hereof.
"SEC." The United States Securities and Exchange Commission.
"Securities Act." The Securities Act of 1933, as amended, and the rules
and regulations thereunder.
Section 2. Securities Subject to this Agreement.
(a) Holders of Registrable Securities. A Person is deemed to be a holder
of Registrable Securities whenever that Person owns, directly or beneficially,
or has the right to acquire Registrable Securities, disregarding any legal
restrictions upon the exercise of that right.
(b) Majority of Registrable Securities. As used in this Agreement, the
term "majority of the Registrable Securities" means 51% or more of the
Registrable Securities being registered unless the context indicates that it is
51% or more of the Registrable Securities then issued and outstanding.
Section 3. Demand Registration.
(a) Request for Registration. Subject to the provisions of Section 3(b),
at any time and from time to time any one or more holders of Registrable
Securities may demand that the Company register all or part of its Registrable
Securities under the Securities Act such number of times and with such
restrictions as set forth opposite such holders name in Schedule I hereto (a
"Demand Registration"), provided, that for any Demand Registration the aggregate
number of shares to be registered per Demand Registration shall (i) represent
not less than 3% of the then issued and outstanding shares of Common Stock of
the Company or (ii) have a market value of at least $5 million as measured by
the average of the closing bid and asked price of the Common Stock on the date
immediately preceding the date of the demand. Within ten (10) days after receipt
of a demand, the Company will notify in writing all holders of Registrable
Securities of the demand. Any holder who wants to include his or its Registrable
Securities in the Demand Registration must notify the Company within ten (10)
business days of receiving the notice of the Demand Registration. Except as
provided in this Section 3, the Company will include in all Demand Registrations
all Registrable Securities for which the Company receives the timely written
demands for inclusion and may include such newly issued shares as the Company
may desire. All demands made pursuant to this Section 3(a) must specify the
number of Registrable Securities to be registered and the intended method of
disposing of the Registrable Securities.
(b) Form of Registration. The Demand Registration will be on Form S-3
whenever the Company is permitted to use such form, unless the holders of a
majority of the Registrable Securities or the underwriter reasonably request
registration on an expanded form. The Company will use commercially reasonable
efforts to qualify for registration on Form S-3.
2
<PAGE> 3
(c) Registration Expenses. The Company will pay all Registration
Expenses for any Demand Registrations.
(d) Selection of Underwriters. The holders requesting the Demand
Registration shall select the investment banker(s) and manager(s) that will
administer the offering; provided, that the Company shall have given its prior
written consent to such selection (which consent shall not be unreasonably
delayed, conditioned or withheld). The Company and the holders of Registrable
Securities whose shares are being registered shall enter into a customary
underwriting agreement with such investment banker(s) and manager(s).
(e) Priority on Demand Restrictions. If the managing underwriter gives
the Company and the holders of the Registrable Securities being registered a
written opinion that the number of Registrable Securities requested to be
included in the Demand Registration exceeds the number of securities that can be
sold, the Company will include in the registration only the number of
Registrable Securities that the underwriters believe can be sold. The number of
securities registered shall be allocated, first to the Company, to the extent it
wishes to register newly issued shares, then to the holders requesting the
Demand Registration, and then pro rata among the other holders of Registrable
Securities, on the basis of the total number of Company securities requested to
be included in the registration. In addition, if the managing underwriter shall
advise the Company, in writing or otherwise, that an underwriters'
over-allotment option, not in excess of 15% of the total offering to be so
effected, is necessary or desirable for the marketing of such offering, all
Company securities which are to be included in such offering pursuant to this
Section 3(e) shall be allocated first to the primary portion of such offering
and then to the underwriters' over-allotment portion on the basis of the
priority described in the preceding sentence.
(f) Delay in Filing. Notwithstanding the foregoing, the Company may
delay in filing a registration statement in connection with a Demand
Registration and may withhold efforts to cause the registration statement to
become effective, if the Company determines in good faith that such registration
might (1) interfere with or affect the negotiation or completion of any
transaction or other material event that is being contemplated by the Company
(whether or not a final decision has been made to undertake such transaction) at
the time the right to delay is exercised, or (2) involve initial or continuing
disclosure obligations that might not be in the best interest of the Company's
stockholders. The Company may exercise such right to delay or withhold efforts
not more than twice in any twelve (12) month period and for not more than ninety
(90) days at a time. If, after a registration statement becomes effective, the
Company advises the holders of registered shares that the Company considers it
appropriate for the registration statement to be amended, the holders of such
shares shall suspend any further sales of their registered shares until the
Company advises them that the registration statement has been amended. The
180-day time period referred to in Section 6(a)(3) during which the registration
statement must be kept current after its effective date shall be extended for an
additional number of business days equal to the number of business days during
which the right to sell shares was suspended pursuant to the preceding sentence.
(g) Effective Demand Registration. A registration shall not constitute a
Demand Registration until it has become effective and remains continuously
effective for the lesser of (i) the period during which all Registrable
Securities registered in the Demand Registration are
3
<PAGE> 4
sold and (ii) 180 days; provided, however, that a registration shall not
constitute a Demand Registration if (w) after such Demand Registration has
become effective, such registration or the related offer, sale or distribution
of Registrable Securities thereunder is interfered with by any stop order,
injunction or other order or requirement of the SEC or other governmental agency
or court for any reason not attributable to the holders requesting the Demand
Registration or the holders of Registrable Securities requesting to be included
in such registration and such interference is not thereafter eliminated within
five (5) business days, or (x) the conditions specified in the underwriting
agreement, if any, entered into in connection with such Demand Registration are
not satisfied or waived, other than by reason of a failure on the part of the
holders requesting the Demand Registration or the holders of Registrable
Securities requesting to be included in such registration, or (y) the number of
Registrable Securities sold by the holders in such Demand Registration is less
than fifty percent (50%) of the number of Registrable Securities requested to be
included in such Demand Registration or (z) the number of Registrable Securities
registered by the Company in such Demand Registration is less than seventy-five
percent (75%) of the number of Registrable Securities requested to be included
in such Demand Registration.
(h) Requirement to Register. Notwithstanding anything else contained in
this Agreement to the contrary, to the extent a holder of Registrable Securities
has been delayed, restricted or otherwise prevented from registering any or all
such Registrable Securities as such holder may desire for a period of eighteen
(18) months from either (i) the date of this Agreement or (ii) if a Demand
Registration right has been exercised by such holder, from the effective date of
such registration statement filed pursuant to such Demand Registration due to,
among other things, any provisions contained in this Agreement or Schedule I
hereto, then (a) such holder shall be permitted to exercise any of its Demand
Registration or Piggyback Registration rights hereunder (subject to the
provisions hereof), (b) the Company shall be obligated to promptly upon exercise
of such rights, in accordance with the terms hereof, register all of such
Registrable Securities immediately without regard to any delaying, prioritizing
or restrictive provisions and (c) from the effective date of the registration
statement filed pursuant to such holder's Demand Registration or Piggyback
Registration until six (6) months following completion of the sale of such
Registrable Securities, the Company shall not register or make any public sale
or distribution of its equity securities (except pursuant to registrations on
Form S-8 or S-4 or any successor form).
Section 4 Piggyback Registrations.
(a) Right to Piggyback. Whenever the Company proposes to register
(including on behalf of a selling stockholder) any of its securities under the
Securities Act (except for the registration of securities to be offered pursuant
to an employee benefit plan on Form S-8, pursuant to a registration made on Form
S-4 or any successor forms then in effect) at any time other than pursuant to a
Demand Registration and the registration form to be used may be used for the
registration of the Registrable Securities (a "Piggyback Registration"), it will
so notify in writing all holders of Registrable Securities no later than the
earlier to occur of (i) the tenth (10th) day following the Company's receipt of
notice of exercise of other demand registration rights, or (ii) forty-five (45)
days prior to the anticipated filing date. Subject to the provisions of Section
4(c), the Company will include in the Piggyback Registration all Registrable
Securities, on a pro rata basis based upon the total number of Registrable
Securities with respect to which the
4
<PAGE> 5
Company has received written requests for inclusion within fifteen (15) business
days after the applicable holder's receipt of the Company's notice. Such
Registrable Securities may be made subject to an underwriters' over-allotment
option, if so requested by the managing underwriter. The holders of Registrable
Securities may withdraw all or any part of the Registrable Securities from a
Piggyback Registration at any time before ten (10) business days prior to the
effective date of the Piggyback Registration. The Company, the holders of
Registrable Securities and any Person who hereafter become entitled to register
its securities in a registration initiated by the Company must sell their
securities on the same terms and conditions. A registration of Registrable
Securities pursuant to this Section 4 shall not be counted as a Demand
Registration under Section 3.
(b) Piggyback Expenses. The Company shall pay to the holders of the
Registrable Securities included in a Piggyback Registration all Registration
Expenses of those holders (except to the extent prohibited by applicable state
securities laws).
(c) Priority on Piggyback Registrations. If the managing underwriter
gives the Company its written opinion that the total number or dollar amount of
securities requested to be included in the registration exceeds the number or
dollar amount of securities that can be sold, the Company will include the
securities in the registration in the following order of priority: (i) first,
all securities the Company or the holder for whom the Company is effecting the
registration, as the case may be, proposes to sell; (ii) second, up to the full
number or dollar amount of Registrable Securities requested to be included in
the registration (allocated pro rata among the holders of Registrable
Securities, on the basis of the dollar amount or number of Registrable
Securities requested to be included, as the case may be); and (iii) third, any
other securities (provided they are of the same class as the securities sold by
the Company) requested to be included, allocated among the holders of such
securities in such proportions as the Company and those holders may agree. In
the event that the managing underwriter advises the Company that an
underwriters' over-allotment option is necessary or advisable, the preceding
priority shall apply to the determination of which securities are to be included
in the primary portion of such registration.
(d) Selection of Underwriters. If any Piggyback Registration is an
underwritten offering, the Company will select the investment banker(s) and
manager(s) that will administer the offering. The Company and the holders of
Registrable Securities whose shares are being registered shall enter into a
customary underwriting agreement with such investment banker(s) and manager(s).
Section 5. Holdback Agreements.
(a) Restrictions on Public Sale by Securities Holders. Each Stockholder
agrees not to make any public sale or distribution of equity securities of the
Company (except as part of the underwritten registration effected pursuant to a
Demand Registration or a Piggyback Registration or pursuant to registration on
Form S-8 or any successor form), including a sale pursuant to Rule 144, during
such customary period prior to and following the effective date of any
underwritten Demand Registration or any underwritten Piggyback Registration as
any managing underwriter(s) of such underwriting may reasonably request.
5
<PAGE> 6
(b) Restrictions on Public Sale by the Company and Others. The Company
agrees not to make any public sale or distribution of its equity securities, or
any securities convertible into or exchangeable or exercisable for its equity
securities, including a sale under Regulation D under the Securities Act or
under any other exemption of the Securities Act (except as part of the
underwritten registration effected pursuant to a Demand Registration or a
Piggyback Registration or pursuant to registrations on Forms S-8 or S-4 or any
successor form), during such customary period prior to and following the
effective date of any underwritten Demand Registration or any underwritten
Piggyback Registration as any managing underwriter(s) of such underwriting may
reasonably request. The Company also agrees to use reasonable efforts to cause
each holder of at least 5% (on a fully-diluted basis) of its equity securities
(other than Registrable Securities) or any securities convertible into or
exchangeable or exercisable for its equity securities (other than Registrable
Securities), purchased from the Company at any time on or after the date of this
Agreement (other than in a registered public offering), to agree not to make any
public sale or distribution of those securities, including a sale pursuant to
Rule 144 (except as part of the underwritten registration, if permitted), during
the seven (7) days prior to and the 180 days after the effective date of the
registration unless the managing underwriter(s) agrees otherwise.
Section 6. Registration Procedures.
(a) Obligations of the Company. Whenever the holders of Registrable
Securities request the registration of any Registrable Securities pursuant to
this Agreement, the Company shall use its best efforts to register and to permit
the sale of the Registrable Securities in accordance with the intended method of
disposition. To carry out this obligation, the Company shall as expeditiously as
practicable:
(1) prepare and file with the SEC a registration statement on the
appropriate form and use commercially reasonable efforts to cause the
registration statement to become effective. At least ten (10) days
before filing a registration statement or prospectus or at least three
(3) business days before filing any amendments or supplements thereto,
the Company will furnish to the counsel of the holders of a majority of
the Registrable Securities being registered copies of all documents
proposed to be filed for that counsel's review and approval, which
approval shall not be unreasonably withheld or delayed;
(2) immediately notify each seller of Registrable Securities of
any stop order threatened or issued by the SEC and take all actions
reasonably required to prevent the entry of a stop order or if entered
to have it rescinded or otherwise removed;
(3) prepare and file with the SEC such amendments and supplements
to the registration statement and the corresponding prospectus necessary
to keep the registration statement effective for 180 days or such
shorter period as may be required to sell all Registrable Securities
covered by the registration statement; and comply with the provisions of
the Securities Act with respect to the disposition of all securities
covered by the registration statement during each period in accordance
with the sellers' intended methods of disposition as set forth in the
registration statement;
6
<PAGE> 7
(4) furnish to each seller of Registrable Securities a sufficient
number of copies of the registration statement, each amendment and
supplement thereto (in each case including all exhibits), the
corresponding prospectus (including each preliminary prospectus), and
such other documents as a seller may reasonably request to facilitate
the disposition of the seller's Registrable Securities;
(5) use its best efforts to register or qualify the Registrable
Securities under securities or blue sky laws of jurisdictions in the
United States of America as any seller requests and do any and all other
reasonable acts and things that may be necessary or advisable to enable
the seller to consummate the disposition of the seller's Registrable
Securities in such jurisdiction; provided, however, that the Company
shall not be obligated to qualify as a foreign corporation to do
business under the laws of any jurisdiction in which it is not then
qualified or to file any general consent to service of process;
(6) notify each seller of Registrable Securities, at any time
when a prospectus is required to be delivered under the Securities Act,
of any event as a result of which the prospectus or any document
incorporated therein by reference contains an untrue statement of a
material fact or omits to state any material fact necessary to make the
statements therein not misleading in light of the circumstances under
which such statements were made, and prepare a supplement or amendment
to the prospectus or any such document incorporated therein so that
thereafter the prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading in light of the circumstances under
which such statements were made;
(7) cause all registered Registrable Securities to be listed on
each securities exchange, if any, on which similar securities issued by
the Company are then listed;
(8) provide an institutional transfer agent and registrar and a
CUSIP number for all Registrable Securities on or before the effective
date of the registration statement;
(9) enter into such customary agreements (including an
underwriting agreement in customary form) and take all other actions in
connection with those agreements as the holders of the Registrable
Securities being registered or the underwriters, if any, reasonably
request to expedite or facilitate the disposition of the Registrable
Securities;
(10) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to
the registration statement, and any attorney, accountant, or other agent
of any seller or underwriter, all financial and other records, pertinent
corporate documents, and properties of the Company, and cause the
Company's officers, directors and employees to supply all information
requested by any seller, underwriter, attorney, accountant, or other
agent in connection with the registration statement; provided that an
appropriate and customary confidentiality agreement is executed by any
such seller, underwriter, attorney, accountant or other agent;
7
<PAGE> 8
(11) in connection with any underwritten offering, obtain a
"comfort" letter from the Company's independent public accountants in
customary form and covering those matters customarily covered by
"comfort" letters as the holders of Registrable Securities being
registered or the managing underwriter reasonably requests (and, if the
Company is able after using commercially reasonable efforts, the letter
shall be addressed to holders of the Registrable Securities, the Company
and the underwriters);
(12) in connection with any underwritten offering, furnish, at
the request of any holder of Registrable Securities being registered or
underwriter(s) of the offering, an opinion of counsel representing the
Company for the purposes of the registration, in the form and substance
customarily given to underwriters in an underwritten public offering and
reasonably satisfactory to counsel representing the holders of
Registrable Securities being registered and the underwriter(s) of the
offering, addressed to the underwriters and to the holders of the
Registrable Securities being registered;
(13) use its best efforts to comply with all applicable rules and
regulations of the SEC, and make available to its security holders, as
soon as reasonably practicable, an earnings statement complying with the
provisions of Section 11(a) of the Securities Act and covering the
period of at least twelve (12) months, but not more than eighteen (18)
months, beginning with the first month after the effective date of the
Registration Statement;
(14) cooperate with each seller of Registrable Securities and
each underwriter participating in the disposition of such Registrable
Securities and their respective counsel in connection with any filings
required to be made with the NASD; and
(15) take all other steps reasonably necessary to effect the
registration of the Registrable Securities contemplated hereby.
(b) Seller Information. In the event of any registration by the Company,
from time to time, the Company may require each seller of Registrable Securities
subject to the registration to furnish to the Company information regarding such
seller and the distribution of the securities subject to the registration, and
such seller shall furnish all such information requested by the Company.
(c) Notice to Discontinue. Each holder of Registrable Securities agrees
by acquisition of such securities that, upon receipt of any notice from the
Company of any event of the kind described in Section 6(a)(6), the holder will
discontinue disposition of Registrable Securities until the holder receives
copies of the supplemented or amended prospectus contemplated by Section
6(a)(6). In addition, if the Company requests, the holder will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in the holder's possession, of the prospectus covering the Registrable
Securities current at the time of receipt of the notice. If the Company gives
any such notice, the time period mentioned in Section 6(a)(3) shall be extended
by the number of days elapsing between the date of notice and the date that each
seller receives the copies of the supplemented or amended prospectus
contemplated in Section 6(a)(6).
8
<PAGE> 9
(d) Notice by Holders. Whenever the holders of Registrable Securities
have requested that any Registrable Securities be registered pursuant to this
Agreement, those holders shall notify the Company, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event, which as to any holder of Registrable Securities is (i)
to his or its respective knowledge, (ii) solely within his or its respective
knowledge and (iii) solely as to matters concerning that holder of the
Registrable Securities, as a result of which the prospectus included in the
registration statement contains an untrue statement of a material fact or omits
to state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Section 7. Registration Expenses.
(a) Generally. All Registration Expenses incident to the Company's
performance of or compliance with this Agreement shall be paid as provided in
this Agreement. The term "Registration Expenses" includes without limitation all
registration filing fees, reasonable professional fees and other reasonable
expenses of the Company's compliance with federal, state and other securities
laws (including fees and disbursements of counsel for the underwriters in
connection with state or other securities law qualifications and registrations),
printing expenses, messenger, telephone and delivery expenses; reasonable fees
and disbursements of counsel for the Company; reasonable fees and disbursement
of all independent certified public accountants (including the expenses of any
audit or "comfort" letters required by or incident to performance of the
obligations contemplated by this Agreement); fees and expenses of the
underwriters (excluding discounts and commissions); fees and expenses of any
special experts retained by the Company at the request of the managing
underwriters in connection with the registration; and applicable stock exchange
and NASD registration and filing fees. The term "Registration Expenses" does not
include the Company's internal expenses (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit and the fees and expenses
incurred in connection with the listing of the securities to be registered on
each securities exchange on which similar securities issued by the Company are
then listed, all of which shall be paid by the Company, nor does it include
underwriting fees or commissions or transfer taxes, all of which shall be paid
by the sellers of Registrable Securities.
(b) Other Expenses. To the extent the Company is not required to pay
Registration Expenses, each holder of securities included in any registration
will pay those Registration Expenses allocable to the holder's securities so
included, and any Registration Expenses not allocable will be borne by all
sellers in proportion to the number of securities each registers.
Section 8. Indemnification.
(a) Indemnification by Company. In the event of any registration of
Registrable Securities under the Securities Act pursuant to this Agreement, to
the full extent permitted by law, the Company agrees to indemnify each holder of
Registrable Securities, its officers, directors, trustees, partners, employees,
advisors and agents, and each Person who controls the holder (within the meaning
of the Securities Act and the Exchange Act) against all losses, claims, damages,
liabilities and expenses caused by any untrue or allegedly untrue statement of
material fact contained in any registration statement under which such
Registrable Securities were
9
<PAGE> 10
registered under the Securities Act, any prospectus or preliminary prospectus
contained therein or any omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which such statements were made,
except to the extent the untrue or allegedly untrue statement or omission or
alleged omission resulted from information that the holder furnished in writing
to the Company expressly for use therein. In connection with a firm or best
efforts underwritten offering, to the extent customarily required by the
managing underwriter, the Company will indemnify the underwriters, their
officers and directors and each Person who controls the underwriters (within the
meaning of the Securities Act and the Exchange Act), to the extent customary in
such agreements.
(b) Indemnification by Holders of Securities. In connection with any
registration statement, each participating holder of Registrable Securities will
furnish to the Company in writing such information and affidavits as the Company
reasonably requests for use in connection with any registration statement or
prospectus and each holder agrees to indemnify, to the extent permitted by law,
the Company, its directors, officers, trustees, partners, employees, advisors
and agents, and each Person who controls the Company (within the meaning of the
Securities Act and the Exchange Act) against any losses, claims, damages,
liabilities and expenses resulting from any untrue or allegedly untrue statement
of a material fact or any omission or alleged omission to state a material fact
required to be stated in the registration statement or prospectus or any
amendment thereof or supplement thereto necessary to make the statements therein
not misleading in light of the circumstances under which such statements were
made, but only to the extent that the untrue or allegedly untrue statement or
omission or alleged omission is contained in or omitted from any information or
affidavit the holder furnished in writing to the Company expressly for use
therein and only in an amount not exceeding the net proceeds received by the
holder with respect to securities sold pursuant to such registration statement.
In connection with a firm or best efforts underwritten offering, to the extent
customarily required by the managing underwriter, each participating holder of
Registrable Securities will indemnify the underwriters, their officers and
directors and each Person who controls the underwriters (within the meaning of
the Securities Act and the Exchange Act), to the extent customary in such
agreements.
(c) Indemnification Proceedings. Any Person entitled to indemnification
under this Agreement will (i) give prompt notice to the indemnifying party of
any claim with respect to which it seeks indemnification and (ii) unless in the
indemnified party's reasonable judgment a conflict of interest may exist between
the indemnified and indemnifying parties with respect to the claim, permit the
indemnifying party to assume the defense of the claim with counsel reasonably
satisfactory to the indemnified party. If the indemnifying party does not assume
the defense, the indemnifying party will not be liable for any settlement made
without its consent (but that consent may not be unreasonably withheld). No
indemnifying party will consent to entry of any judgment or will enter into any
settlement that does not include as an unconditional term thereof the claimant's
or plaintiff's release of the indemnified party from all liability concerning
the claim or litigation. An indemnifying party who is not entitled to or elects
not to assume the defense of a claim will not be under an obligation to pay the
fees and expenses of more than one counsel for all parties indemnified by the
indemnifying party with respect to the claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between the
indemnified party and any other indemnified party with respect to the claim, in
10
<PAGE> 11
which event the indemnifying party shall be obligated to pay the fees and
expenses of no more than one additional counsel for the indemnified parties.
(d) Contribution. If the indemnification provided for in Section 8(a) or
(b) is unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or expenses referred to therein, then each indemnifying
party thereunder shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the Company and the participating holders of Registrable Securities in
connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the Company and the
participating holders of Registrable Securities shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the participating holders
of Registrable Securities and the parties' relative intent and knowledge.
The parties hereto agree that it would not be just and equitable if
contribution pursuant this Section 8(d) were determined by pro rata allocation
or by any other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph.
Notwithstanding anything herein to the contrary, no participating holder of
Registrable Securities shall be required to contribute any amount in excess of
the amount by which the net proceeds of the offering (before deducting expenses,
if any) received by such participating holder exceeds the amount of any damages
that such participating holder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
Section 9. Rule 144. The Company covenants that it will file the
reports required to be filed by it under the Securities Act and the Exchange Act
and the rules and regulations adopted by the SEC thereunder, and it will take
such further action as any holder of Registrable Securities reasonably may
request, all to the extent required from time to time, to enable such holder to
sell Registrable Securities without registration under the Securities Act within
the limitation of the exemptions provided by (i) Rule 144 under the Securities
Act, or (ii) any similar rule or regulation hereafter adopted by the SEC. Upon
the request of any holder of Registrable Securities, the Company will deliver to
such holder a written statement as to whether it has complied with Rule 144's or
any successor rule's requirements. The Company also covenants that in such event
it will provide all such information and it will take such further action as any
holder of Registrable Securities reasonably may request to enable such holder to
sell Registrable Securities without registration under the Securities Act within
the limitation of Rule 144 under the Securities Act or any successor rule
requirements.
Section 10. Participation in Underwritten Registration. No Person may
participate in any underwritten registration without (a) agreeing to sell
securities on the basis provided in underwriting arrangements approved by the
Persons entitled hereunder to approve such arrangements (the holders of the
Registrable Securities in a Demand Registration pursuant to Section 3(d) and the
Company in a Piggyback Registration pursuant to Section 4(d)), and (b)
11
<PAGE> 12
completing and executing all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required by the underwriting
arrangements.
Section 11. Miscellaneous.
(a) Recapitalizations, Exchanges, etc. The provisions of this Agreement
shall apply to the full extent set forth herein with respect to (i) the shares
of Common Stock held by the Stockholders, (ii) any and all shares of voting
common stock of the Company into which the shares of such Common Stock are
converted, exchanged or substituted in any recapitalization or other capital
reorganization by the Company and (iii) any and all equity securities of the
Company or any successor or assign of the Company (whether by merger,
consolidation, sale of assets or otherwise) which may be issued in respect of,
in conversion of, in exchange for or in substitution of, such shares of Common
Stock and shall be appropriately adjusted for any stock dividends, splits,
reverse splits, combinations, recapitalizations and the like occurring after the
date hereof. The Company shall use its best efforts to cause any successor or
assign (whether by sale, merger or otherwise) to enter into a new registration
rights agreement with the holders of Registrable Securities on terms
substantially the same as this Agreement as a condition of any such transaction.
(b) Amendment. This Agreement may be amended or modified only by a
written agreement executed by the Company and the Stockholders.
(c) Attorneys' Fees. In any legal action or proceeding brought to
enforce any provision of this Agreement, the prevailing party shall be entitled
to recover all reasonable expenses, charges, court costs and attorneys' fees in
addition to any other available remedy at law or in equity.
(d) Benefit of Parties; Assignment. All of the terms and provisions of
this Agreement shall be binding on and inure to the benefit of the parties and
their respective successors and assigns, including without limitation all
subsequent holders of securities entitled to the benefits of this Agreement who
agree in writing to become bound by the terms of this Agreement. Without
limiting the generality of the foregoing, this Agreement and the rights and
obligations of a holder of Registrable Securities hereunder may be assigned, in
whole or in part, upon notice to the Company, to a Person who owns, or
simultaneously with the assignment of the rights under this Agreement to such
Person, will own, shares of capital stock of the Company.
(e) Captions. The captions of the sections and subsections of this
Agreement are solely for convenient reference and shall not be deemed to affect
the meaning or interpretation of any provision of this Agreement.
(f) Cooperation. The parties agree that after execution of this
Agreement they will from time to time, upon the request of any other party and
without further consideration, execute, acknowledge and deliver in proper form
any further instruments and take such other action as any other party may
reasonably require to carry out effectively the intent of this Agreement.
(g) Counterparts; Facsimile Execution. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of
12
<PAGE> 13
which together shall constitute one and the same agreement. Facsimile execution
and delivery of this Agreement shall be legal, valid and binding execution and
delivery for all purposes.
(h) Entire Agreement. This Agreement contains the entire understanding
of the parties with respect to the subject matter of this Agreement and
supersedes all prior agreements and understandings between the parties with
respect thereto. There are no promises, covenants or undertakings other than
those expressly set forth or provided for in this Agreement.
(i) Governing Law. The internal law of the State of New York will govern
the interpretation, construction, and enforcement of this Agreement and all
transactions and agreements contemplated hereby, notwithstanding any state's
choice of law rules to the contrary.
(j) No Inconsistent Agreements. The Company represents and warrants that
it has not granted to any Person the right to request or require the Company to
register any securities issued by the Company other than the rights contained
herein. Except with the prior written consent of the holders of Registrable
Securities, the Company will not enter into any agreement with respect to its
securities that shall grant to any Person registration rights that in any way
conflict with or are prior in right to the rights provided under this Agreement.
(k) Notices. All notices, requests, demands, or other communications
that are required or may be given pursuant to the terms of this Agreement shall
be in writing and delivery shall be deemed sufficient in all respects and to
have been duly given on the date of service if delivered personally to the party
to whom notice is to be given, or upon receipt if mailed by first class mail,
return receipt requested, postage prepaid, and properly addressed to the
addresses of the parties set forth in the Purchase Agreement or to such other
address(es) as the respective parties hereto shall from time to time designate
to the other(s) in writing.
(l) Specific Performance. Each of the parties agrees that damages for a
breach of or default under this Agreement would be inadequate and that in
addition to all other remedies available at law or in equity that the parties
and their successors and assigns shall be entitled to specific performance or
injunctive relief, or both, in the event of a breach or a threatened breach of
this Agreement.
(m) Validity of Provisions. Should any part of this Agreement for any
reason be declared by any court of competent jurisdiction to be invalid, that
decision shall not affect the validity of the remaining portion, which shall
continue in full force and effect as if this Agreement had been executed with
the invalid portion eliminated, it being the intent of the parties that they
would have executed the remaining portion of the Agreement without including any
part or portion that may for any reason be declared invalid.
13
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
FUTURELINK CORP.
By: /s/ Raghu N. Kilambi
--------------------------------------------
Name:
Title:
PEQUOT PRIVATE EQUITY FUND II, L.P.
By: Pequot Capital Management, Inc., its
investment manager
By: /s/ David J. Malat
------------------------------------------
David J. Malat, Chief Financial Officer
PEQUOT INTERNATIONAL FUND, INC.
By: Pequot Capital Management, Inc., its
investment advisor
By: /s/ David J. Malat
------------------------------------------
David J. Malat, Chief Financial Officer
PEQUOT PARTNERS FUND, L.P.
By: Pequot Capital Management, Inc., its
investment manager
By: /s/ David J. Malat
------------------------------------------
David J. Malat, Chief Financial Officer
14
<PAGE> 15
PEQUOT ENDOWMENT FUND, L.P.
By: Pequot Capital Management, Inc., its
investment manager
By: /s/ DAVID J. MALAT
---------------------------------------
David J. Malat, Chief Financial Officer
DIMENSIONAL PARTNERS LTD.
By: JDS Capital Management, Inc.,
its investment management and subadvisor
By: /s/ JOSEPH SAMBERG
---------------------------------------
Joseph Samberg, President
DIMENSIONAL PARTNERS L.P.
By: JDS Capital Management, Inc.,
its investment manager and subadvisor
By: /s/ JOSEPH SAMBERG
------------------------------------------
Joseph Samberg, President
/s/ GLEN C. HOLMES
------------------------------------------
Glen C. Holmes
GERARD KLAUER MATTISON & CO., INC.
By:
---------------------------------
Name:
Title:
15
<PAGE> 16
SCHEDULE I
<TABLE>
<CAPTION>
Name and Address Number of Demand Other
of Stockholder Registrations Restrictions
---------------- ---------------- ------------
<S> <C> <C>
1. Pequot Private Equity Fund II Two Demand Registrations on No Demand Registrations
Pequot International Fund, Form S-1 in the aggregate may be requested prior to
Inc. for all Investors; April 15, 2000
Pequot Partners Fund, L.P. Unlimited number of Demand
Pequot Endowment Fund, L.P. Registrations on Form S-3
Dimensional Partners Ltd.
Dimensional Partners L.P.
(collectively, the
"Investors")
2. Glen Holmes None
3. Gerard Klauer Mattison & Co., None
Inc.
</TABLE>
16
<PAGE> 1
EXHIBIT 10.10
[EXECUTION COPY]
==============================================================
SECURITIES PURCHASE AGREEMENT
BY AND AMONG
FUTURELINK CORP.,
PEQUOT PRIVATE EQUITY FUND II, L.P.
AND
PEQUOT ENDOWMENT FUND, L.P.
DATED AS OF
APRIL 28, 2000
==============================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE I
Definitions
Section 1.1 "Action".............................................................1
Section 1.2 "Affiliate"..........................................................1
Section 1.3 "Agreement"..........................................................1
Section 1.4 "Benefit Arrangements"...............................................1
Section 1.5 "Blue Sky Laws"......................................................1
Section 1.6 "Board"..............................................................1
Section 1.7 "Business Day".......................................................1
Section 1.8 "Buyers".............................................................2
Section 1.9 "Change of Control"..................................................2
Section 1.10 "Closing"............................................................2
Section 1.11 "Closing Date".......................................................2
Section 1.12 "Code"...............................................................2
Section 1.13 "Commitment".........................................................2
Section 1.14 "Company"............................................................2
Section 1.15 "Company Charter"....................................................2
Section 1.16 "Company Common Stock"...............................................2
Section 1.17 "Company Plans"......................................................2
Section 1.18 "Company Preferred Stock"............................................2
Section 1.19 "Company Properties".................................................2
Section 1.20 "Company Reports"....................................................2
Section 1.21 "Company Securities".................................................2
Section 1.22 "Company Stock"......................................................3
Section 1.23 "Company Warrants"...................................................3
Section 1.24 "Controlled Group Liability".........................................3
Section 1.25 "Convertible Debt"...................................................3
Section 1.26 "Debt Instruments"...................................................3
Section 1.27 "Employee Benefit Plans".............................................3
Section 1.28 "Employees"..........................................................3
Section 1.29 "Employment Agreements"..............................................3
Section 1.30 "Environmental Laws".................................................3
Section 1.31 "Equity Securities"..................................................3
Section 1.32 "ERISA"..............................................................3
Section 1.33 "ERISA Affiliates"...................................................3
Section 1.34 "Exchange Act".......................................................3
Section 1.35 "Fully Diluted Basis"................................................3
Section 1.36 "GAAP"...............................................................4
Section 1.37 "Government Authority"...............................................4
Section 1.38 "HSR Act"............................................................4
</TABLE>
i
<PAGE> 3
<TABLE>
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Section 1.39 "Indemnified Party"..................................................4
Section 1.40 "Insurance Policies".................................................4
Section 1.41 "IRS"................................................................4
Section 1.42 "Liabilities"........................................................4
Section 1.43 "Liens"..............................................................5
Section 1.44 "Loss and Expenses"..................................................5
Section 1.45 "Material Adverse Effect"............................................5
Section 1.46 "Pension Plans"......................................................5
Section 1.47 "Permitted Liens"....................................................5
Section 1.48 "person".............................................................5
Section 1.49 "PPE II".............................................................5
Section 1.50 "Public Offering"....................................................5
Section 1.51 "Registration Rights Agreement"......................................5
Section 1.52 "Regulatory Filings".................................................5
Section 1.53 "SEC"................................................................6
Section 1.54 "Securities Act".....................................................6
Section 1.55 "Securities Laws"....................................................6
Section 1.56 "Subsidiaries".......................................................6
Section 1.57 "Tax"................................................................6
Section 1.58 "Tax Return".........................................................6
Section 1.59 "Welfare Plans"......................................................6
ARTICLE II
Purchase and Sale of Company Securities; Closing
Section 2.1 Purchase and Sale....................................................6
Section 2.2 Consideration........................................................7
Section 2.3 Additional Agreements and Closing Deliveries.........................7
Section 2.4 Time and Place of Closing............................................7
Section 2.5 Right to Assign......................................................8
ARTICLE III
Representations and Warranties of the Company
Section 3.1 Organization and Qualification; Subsidiaries.........................8
Section 3.2 Authority Relative to Agreements; Board Approval.....................9
Section 3.3 Capital Stock........................................................9
Section 3.4 No Conflicts; No Defaults; Required Filings and Consents............10
Section 3.5 SEC and Other Documents; Financial Statements.......................11
Section 3.6 Litigation; Compliance With Law.....................................11
Section 3.7 Absence of Certain Changes or Events................................12
Section 3.8 Tax Matters.........................................................12
Section 3.9 Compliance with Agreements; Material Agreements.....................13
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Section 3.10 Financial Records; Company Charter and By-laws; Corporate Records...15
Section 3.11 Properties; Capital Expenditures; Other Assets......................16
Section 3.12 Environmental Matters...............................................17
Section 3.13 Employees and Employee Benefit Plans................................17
Section 3.14 Labor Matters.......................................................19
Section 3.15 Affiliate Transactions..............................................20
Section 3.16 Insurance...........................................................20
Section 3.17 Delaware Takeover Law...............................................20
Section 3.18 Brokers or Finders..................................................20
Section 3.19 Y2K Matters.........................................................20
Section 3.20 Knowledge Defined...................................................20
Section 3.21 No Change of Control................................................20
Section 3.22 Intellectual Property...............................................21
Section 3.23 Liability Insurance.................................................23
Section 3.24 No Undisclosed Liabilities..........................................23
Section 3.25 Disclosure..........................................................23
ARTICLE IV
Representations and Warranties of Buyers
Section 4.1 Organization........................................................23
Section 4.2 Due Authorization...................................................23
Section 4.3 Conflicting Agreements and Other Matters............................24
Section 4.4 Acquisition for Investment; Sophistication..........................24
Section 4.5 Resources...........................................................25
Section 4.6 Brokers or Finders..................................................25
Section 4.7 Investment Company Matters..........................................25
ARTICLE V
Covenants Relating to Closing
Section 5.1 Taking of Necessary Action..........................................25
Section 5.2 Registration Rights Agreement.......................................25
Section 5.3 Public Announcements; Confidentiality...............................25
Section 5.4 Notification of Certain Matters.....................................26
ARTICLE VI
Certain Additional Covenants
Section 6.1 Use of Proceeds.....................................................26
Section 6.2 Actions Requiring Consent of the Buyers.............................26
Section 6.3 Preemptive Right....................................................27
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ARTICLE VII
Conditions to Closing
Section 7.1 Conditions of Closing...............................................27
Section 7.2 Conditions of Sale..................................................29
ARTICLE VIII
Survival; Indemnification
Section 8.1 Survival............................................................30
Section 8.2 Indemnification.....................................................30
Section 8.3 Third-Party Claims..................................................31
ARTICLE IX
Termination
Section 9.1 Termination.........................................................32
Section 9.2 Procedure and Effect of Termination.................................32
Section 9.3 Expenses............................................................32
ARTICLE X
Miscellaneous
Section 10.1 Counterparts........................................................33
Section 10.2 Governing Law.......................................................33
Section 10.3 Entire Agreement....................................................33
Section 10.4 Notices.............................................................33
Section 10.5 Successors and Assigns..............................................34
Section 10.6 Headings............................................................34
Section 10.7 Amendments and Waivers..............................................34
Section 10.8 Interpretation; Absence of Presumption..............................35
Section 10.9 Severability........................................................35
Section 10.10 Further Assurances..................................................35
Section 10.11 Specific Performance................................................35
Section 10.12 Several Liability...................................................35
Section 10.13 Interpretation of Schedules.........................................35
EXHIBITS
Exhibit A Form of Warrant
Exhibit B Registration Rights Agreement
Exhibit C Board Resolutions
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THIS SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of
April 28, 2000, is made by and between FUTURELINK CORP., a Delaware corporation
(the "Company"), Pequot Private Equity Fund II, L.P., a Delaware limited
partnership, and Pequot ENDOWMENT Fund, L.P., a Delaware limited partnership
("Buyers").
RECITALS:
WHEREAS, Buyers wish to purchase from the Company, and the
Company wishes to sell to Buyers, for an aggregate purchase price of $14,999,984
in cash, 1,764,704 shares of the Company's common stock, par value $0.0001 per
share (the "Company Common Stock"), and warrants (the "Company Warrants") in the
form of Exhibit A hereto to purchase 441,176 shares of Company Common Stock, on
the terms set forth herein;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the parties
hereto hereby agree as follows:
ARTICLE I
Definitions
As used in this Agreement, the following terms shall have the
following respective meanings:
Section 1.1 "Action" shall mean any action, suit, arbitration,
inquiry, proceeding or investigation by or before any Government Authority.
Section 1.2 "Affiliate" shall have the meaning ascribed thereto
in Rule 12b- 2 promulgated under the Exchange Act, and as in effect on the date
hereof.
Section 1.3 "Agreement" shall have the meaning set forth in the
first paragraph hereof.
Section 1.4 "Benefit Arrangements" shall have the meaning set
forth in Section 3.13(i).
Section 1.5 "Blue Sky Laws" shall have the meaning set forth in
Section 3.4(e).
Section 1.6 "Board" shall mean the Board of Directors of the
Company.
Section 1.7 "Business Day" shall mean any day other than a
Saturday, a Sunday or a bank holiday in New York, N.Y.
<PAGE> 7
Section 1.8 "Buyers" shall have the meaning set forth in the
first paragraph hereof, together with the successors and assigns of such
entities.
Section 1.9 "Change of Control" shall mean any transaction as a
result of which any person, group or entity (i) shall acquire beneficial
ownership, or the right to acquire beneficial ownership, of 30% or more of the
outstanding shares of Company Common Stock or (ii) shall have the right or the
ability to elect, or shall have elected, more than one half of the members of
the Company's Board.
Section 1.10 "Closing" shall mean the closing of the purchase and
sale of the Purchased Securities hereunder on the date hereof or at such other
place and time as the parties may mutually agree.
Section 1.11 "Closing Date" shall mean the date on which a
Closing shall occur.
Section 1.12 "Code" shall mean the Internal Revenue Code of 1986,
as amended, and any successor thereto, including all of the Treasury regulations
promulgated thereunder.
Section 1.13 "Commitment" shall have the meaning set forth in
Section 3.7.
Section 1.14 "Company" shall mean FutureLink Corp., a Delaware
corporation, and its predecessors, including Futurelink Distribution Corp., a
Colorado corporation ("FutureLink Colorado").
Section 1.15 "Company Charter" shall mean the Certificate of
Incorporation of the Company and any amendment or supplement thereto, as in
effect on the date hereof.
Section 1.16 "Company Common Stock" shall have the meaning set
forth in the second paragraph hereof.
Section 1.17 "Company Plans" shall have the meaning set forth in
Section 3.13(b).
Section 1.18 "Company Preferred Stock" shall have the meaning set
forth in Section 3.3(a).
Section 1.19 "Company Properties" shall have the meaning set
forth in Section 3.11(a).
Section 1.20 "Company Reports" shall have the meaning set forth
in Section 3.5(a).
Section 1.21 "Company Securities" shall mean the shares of
Company Common Stock and the Company Warrants purchased by Buyers pursuant
hereto.
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Section 1.22 "Company Stock" shall mean, collectively, the
Company Common Stock and any other shares of capital stock of the Company.
Section 1.23 "Company Warrants" shall have the meaning set forth
in the second paragraph hereof.
Section 1.24 "Controlled Group Liability" shall have the meaning
set forth in Section 3.13(h).
Section 1.25 "Convertible Debt" shall mean indebtedness
convertible into or exchangeable for Equity Securities.
Section 1.26 "Debt Instruments" shall mean all notes, loan
agreements, mortgages, deeds of trust or similar instruments which evidence or
secure any indebtedness owing by the Company or any of its Subsidiaries.
Section 1.27 "Employee Benefit Plans" shall have the meaning set
forth in Section 3.13(i).
Section 1.28 "Employees" shall have the meaning set forth in
Section 3.13(h).
Section 1.29 "Employment Agreements" shall have the meaning set
forth in Section 3.7.
Section 1.30 "Environmental Laws" shall mean U.S. and Canadian
federal, state, provincial and local laws, ordinances, common law, orders,
statutes, and regulations relating to the pollution or protection of the
environment or of flora or fauna or their habitat or of human health and safety,
or to the cleanup or restoration of the environment.
Section 1.31 "Equity Securities" shall mean any Company Common
Stock, any securities exercisable or exchangeable for or convertible into
Company Common Stock or Company Preferred Stock and any rights, options or
warrants to acquire any of the foregoing.
Section 1.32 "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended, and any successor thereto.
Section 1.33 "ERISA Affiliates" shall mean any entity which is
under "common control" with the Company, within the meaning of Section
4001(b)(1) of ERISA.
Section 1.34 "Exchange Act" shall have the meaning set forth in
Section 3.4(e).
Section 1.35 "Fully Diluted Basis" shall mean a calculation that
includes (i) then outstanding Company Common Stock, (ii) Company Common Stock
issuable in
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exchange for Company Warrants, (iii) Company Common Stock issuable under the
Convertible Debt, (iv) Company Common Stock issuable under option or other
equity-incentive plans listed on Schedule 3.13(b) and awards issued pursuant
thereto, and (v) Company Common Stock issuable pursuant to any other security,
agreement or arrangement, all of which are described on Schedule 3.3(a).
Section 1.36 "GAAP" shall have the meaning set forth in Section
3.5(b).
Section 1.37 "Government Authority" shall mean any government or
state (or any subdivision thereof) of or in the United States, or Canada, or any
agency, authority, bureau, commission, department or similar body or
instrumentality thereof, or any governmental court or tribunal.
Section 1.38 "HSR Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
Section 1.39 "Indemnified Party" shall mean Buyer or the Company,
as the context may require.
Section 1.40 "Insurance Policies" shall have the meaning set
forth in Section 3.16.
Section 1.41 "IRS" shall mean the Internal Revenue Service.
Section 1.42 "Liabilities" shall mean, as to any person, all
debts, adverse claims, liabilities and obligations, direct, indirect, absolute
or contingent of such person, whether known or unknown, accrued, vested or
otherwise, whether in contract, tort, strict liability or otherwise and whether
or not actually reflected, or required by GAAP to be reflected, in such person's
or entity's balance sheets or other books and records, including, without
limitation, (i) obligations arising from non-compliance with any law, rule or
regulation of any Government Authority or imposed by any court or any arbitrator
of any kind, (ii) all indebtedness or liability of such person for borrowed
money, or for the purchase price of property or services (including trade
obligations), (iii) all obligations of such person as lessee under leases,
capital or other, (iv) liabilities of such person in respect of plans covered by
Title IV of ERISA, or otherwise arising in respect of plans for Employees or
former Employees or their respective families or beneficiaries, (v)
reimbursement obligations of such person in respect of letters of credit, (vi)
all obligations of such person arising under acceptance facilities, (vii) all
liabilities of other persons or entities, directly or indirectly, guaranteed,
endorsed (other than for collection or deposit in the ordinary course of
business) or discounted with recourse by such person or with respect to which
the person in question is otherwise directly or indirectly liable, (viii) all
obligations secured by any Lien on property of such person, whether or not the
obligations have been assumed, and (ix) all other items which have been, or in
accordance with GAAP would be, included in determining total liabilities on the
liability side of the balance sheet.
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Section 1.43 "Liens" shall mean all liens, mortgages, deeds of
trust, deeds to secure debt, security interests, pledges, claims, charges,
easements and other encumbrances of any nature whatsoever.
Section 1.44 "Loss and Expenses" shall have the meaning set forth
in Section 8.2(a).
Section 1.45 "Material Adverse Effect" shall mean a material
adverse effect on the financial condition, results of operations, business or
prospects of the Company and its Subsidiaries taken as a whole.
Section 1.46 "Pension Plans" shall have the meaning set forth in
Section 3.13(h).
Section 1.47 "Permitted Liens" shall mean (i) Liens (other than
Liens imposed under ERISA or any Environmental Law or in connection with any
Environmental Claim) for taxes or other assessments or charges of Governmental
Authorities that are not yet delinquent or that are being contested in good
faith by appropriate proceedings, in each case, with respect to which adequate
reserves are being maintained by the Company or its Subsidiaries to the extent
required by GAAP, (ii) statutory Liens of landlords, carriers, warehousemen,
mechanics, materialmen and other Liens (other than Liens imposed under ERISA or
any Environmental Law or in connection with any Environmental Claim) imposed by
law and created in the ordinary course of business for amounts not yet overdue
or which are being contested in good faith by appropriate proceedings, in each
case, with respect to which adequate reserves or other appropriate provisions
are being maintained by the Company or its Subsidiaries to the extent required
by GAAP, all of which Permitted Liens do not exceed $100,000 in the aggregate.
Section 1.48 "person" shall mean any individual, corporation,
partnership, limited liability company, joint venture, trust, unincorporated
organization, other form of business or legal entity or Government Authority.
Section 1.49 "PPE II" shall mean Pequot Private Equity II, L.P.,
and its successors or assigns.
Section 1.50 "Public Offering" means the sale of Common Stock to
the public pursuant to an effective registration statement (other than a
registration statement on Form S-4 or S-8 or any similar or successor form or
forms) filed under the Securities Act.
Section 1.51 "Registration Rights Agreement" shall mean the
Amended and Restated Registration Rights Agreement dated as of April 28, 2000
among the Company, the Buyers and certain other investors.
Section 1.52 "Regulatory Filings" shall have the meaning set
forth in Section 3.4(e).
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Section 1.53 "SEC" shall mean the Securities and Exchange
Commission.
Section 1.54 "Securities Act" shall have the meaning set forth in
Section 3.4(e).
Section 1.55 "Securities Laws" shall have the meaning set forth
in Section 3.5(a).
Section 1.56 "Subsidiaries" shall mean with respect to any
person, any corporation, partnership, limited liability company, joint venture,
business trust or other entity, of which such person, directly or indirectly,
owns or controls 50% or more of the securities or other interests entitled to
vote in the election of directors or others performing similar functions with
respect to such corporation or other organization, or to otherwise control such
corporation, partnership, limited liability company, joint venture, business
trust or other entity. Without limiting the generality of the foregoing, the
Company's Subsidiaries include each of the entities set forth on Schedule
3.1(d).
Section 1.57 "Tax" means any federal, state, local, or foreign
income, gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under Code
Section 59A), customs duties, capital stock, franchise, profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not. The term "Tax"
also includes any amounts payable pursuant to any tax sharing agreement to which
any relevant entity is liable as a successor or pursuant to contract.
Section 1.58 "Tax Return" means any return, declaration, report,
claim for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof.
Section 1.59 "Welfare Plans" shall have the meaning set forth in
Section 3.13(h).
ARTICLE II
Purchase and Sale of Company Securities; Closing
Section 2.1 Purchase and Sale. Subject to the terms and
conditions hereof, the Company will sell, convey, assign, transfer, and deliver,
and Buyers will purchase and acquire from the Company,
(a) an aggregate of 1,764,704 shares of Company Common Stock (the
"Purchased Shares"), and
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(b) an aggregate of 441,176 Company Warrants to purchase shares
of Company Common Stock at an exercise price of $9.25 per share (the "Purchased
Warrants," and, together with the Purchased Shares, the "Purchased Securities"),
The Purchased Securities shall be sold to and purchased by the
Buyers in the amounts set forth on Schedule 1.
Section 2.2 Consideration. Subject to the terms and conditions
hereof, at each Closing, each Buyer shall deliver to the Company the amount set
forth opposite its name on Schedule 1 by wire transfer of immediately available
funds in U.S. dollars to the account or accounts specified by the Company.
Section 2.3 Additional Agreements and Closing Deliveries.
(a) At the Closing, the Company, each Buyer and certain other
investors shall enter into an amended and restated registration rights agreement
substantially in the form attached as Exhibit B (the "Registration Rights
Agreement").
(b) In addition to the other things required to be done hereby,
at the Closing, the Company shall deliver, or cause to be delivered, to each
Buyer the following: (i) a certificate representing the number of Purchased
Shares and a certificate representing the number of Purchased Warrants to be
issued and delivered to such Buyer at the Closing, free and clear of all Liens,
with all necessary share transfer and other documentary stamps attached, (ii) a
certificate, dated the Closing Date and validly executed on behalf of the
Company, as contemplated by Section 7.1(a), (iii) evidence or copies of any
consents, approvals, orders, qualifications or waivers required pursuant to
Article VII, (iv) all certificates and other instruments and documents required
by this Agreement to be delivered by the Company to such Buyer at or prior to
the Closing, and (v) such other instruments reasonably requested by such Buyer,
as may be necessary or appropriate to confirm or carry out the provisions of
this Agreement.
(c) In addition to the delivery of its portion of the Purchase
Price and the other things required to be done hereby, at the Closing, each
Buyer shall deliver, or cause to be delivered, to the Company the following: (i)
a certificate, dated the Closing Date and validly executed by Buyer, as
contemplated by Section 7.2(a), (ii) if not previously delivered to the Company,
all other certificates, documents, instruments and writings required pursuant
hereto to be delivered by or on behalf of such Buyer, and (iii) such other
instruments reasonably requested by the Company, as may be necessary or
appropriate to confirm or carry out the provisions of this Agreement.
Section 2.4 Time and Place of Closing. The Closing shall take
place at 10:00 a.m. New York time on the first business day following
satisfaction or waiver of all conditions to the obligations of the parties
hereunder (other than conditions relating to deliveries of instruments,
certificates and opinions to be delivered by the parties or their
representatives at the Closing itself), at the offices of Dewey Ballantine LLP,
1301 Avenue of the Americas, New York, New York, or at such other place and time
as the Company and Buyers shall mutually agree.
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Section 2.5 Right to Assign. Each Buyer may assign its rights
and delegate its obligations created hereby to purchase Company Securities to
any fund managed by Pequot Capital Management, Inc.
ARTICLE III
Representations and Warranties of the Company
The Company hereby represents and warrants to Buyers as follows:
Section 3.1 Organization and Qualification; Subsidiaries.
(a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware. The
Company has all requisite corporate power and authority to own, operate, lease
and encumber its properties and carry on its business as now conducted, and to
enter into this Agreement, the Registration Rights Agreement and the Company
Warrants and to perform its obligations hereunder and thereunder.
(b) Each of the Subsidiaries of the Company is a corporation,
partnership or limited liability company duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization, and has the corporate, partnership or limited liability company
power and authority to own its properties and to carry on its business as it is
now being conducted.
(c) Except as set forth on Schedule 3.1(c), each of the Company
and its Subsidiaries is duly qualified to do business and in good standing in
each jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for any failures to be so qualified
or to be in good standing as would not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.
(d) Schedule 3.1(d) sets forth the name of each Subsidiary of the
Company (whether owned, directly or indirectly, through one or more
intermediaries). All of the outstanding shares of capital stock of, or other
equity interest in, each of the Subsidiaries owned by the Company are duly
authorized, validly issued, fully paid and nonassessable, and are owned,
directly or indirectly, by the Company free and clear of all Liens, except as
set forth in Schedule 3.1(d). The following information for each Subsidiary is
set forth in Schedule 3.1(d), if applicable: (i) its name and jurisdiction of
incorporation or organization, (ii) the type of and percentage interest held by
the Company in the Subsidiary and the names of and percentage interest held by
the other interest holders, if any, in the Subsidiary, and (iii) any loans from
the Company to, or priority payments due to the Company from, the Subsidiary,
and the rate of return thereon. Except as contemplated hereby and as set forth
on Schedule 3.1(d), there are no existing options, warrants, calls,
subscriptions, convertible securities or other rights, agreements or commitments
which obligate the Company or any of the Subsidiaries to
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issue, transfer or sell any shares of capital stock or equity interests in any
of the Subsidiaries.
Section 3.2 Authority Relative to Agreements; Board Approval.
(a) The execution, delivery and performance of this Agreement,
the Registration Rights Agreement and the Company Warrants have been duly and
validly authorized by all necessary corporate action on the part of the Company.
This Agreement, the Registration Rights Agreement and the Company Warrants have
been duly executed and delivered by the Company for itself and constitute the
valid and legally binding obligations of the Company, enforceable against the
Company in accordance with their terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights or
general principles of equity.
(b) The Board of Directors of the Company has approved this
Agreement, the Registration Rights Agreement, the Company Warrants and the
transactions contemplated hereby and thereby.
(c) The shares of Company Common Stock to be acquired pursuant to
this Agreement, and the shares of Company Common Stock issuable upon exercise of
the Purchased Warrants, have been duly authorized for issuance, and upon
issuance will be duly and validly issued, fully paid and nonassessable.
(d) Neither the issue and sale of the shares of the Purchased
Securities hereunder nor the issuance of Company Common Stock upon exercise of
the Company Warrants will give any person the right to demand payment for its
shares or give rise to any preemptive or similar rights.
(e) The Purchased Stock and the Common Stock issuable upon
exercise of the Purchased Warrants will constitute "Registrable Securities"
within the meaning of the Registration Rights Agreement.
Section 3.3 Capital Stock.
(a) The authorized capital stock of the Company as of the date
hereof consists of 300,000,000 shares of Company Common Stock, par value $0.0001
per share, and 20,000,000 shares of Preferred Stock, no par value (the "Company
Preferred Stock"). As of the close of business on April 21, 2000, there were
59,064,164 shares of Company Common Stock issued and outstanding and no shares
of Company Preferred Stock issued and outstanding. All such issued and
outstanding shares of Company Common Stock are duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights. Except as set forth on
Schedule 3.3(a), the Company has no outstanding bonds, debentures, notes or
other obligations the holders of which have the right to vote (or which are
convertible into or exercisable for securities the holders of which have the
right to vote) with the stockholders of the Company on any matter. As of the
close of business on April 21, 2000, except as set forth in Schedule 3.3(a) to
this Agreement, there were no options, warrants, calls, subscriptions,
convertible securities, or other rights, agreements or commitments which
obligate the Company to issue, transfer or sell any shares of
9
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capital stock or other equity interests of the Company. No person has any
preemptive rights with respect to the issuance of the Purchased Shares, the
Purchased Warrants, or the Company Common Stock issuable upon exercise of the
Purchased Warrants.
(b) Except for interests in the Subsidiaries of the Company and
except as set forth in Schedule 3.3(b), none of the Company or any of its
Subsidiaries owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, limited liability company,
joint venture, business, trust or entity (other than investments in short-term
investment securities).
Section 3.4 No Conflicts; No Defaults; Required Filings and
Consents.
(a) Neither the execution and delivery by the Company hereof nor
the consummation by the Company of the transactions contemplated hereby in
accordance with the terms hereof will:
(i) conflict with or result in a breach of any provision of the
Company Charter or the by-laws of the Company;
(ii) result in a breach or violation of, a default under, or the
triggering of any payment or other obligations pursuant to, or, except
as set forth in Schedule 3.9(g), accelerate vesting under, any
employment agreement, any compensation plan or any grant or award made
under any of the foregoing;
(iii) violate or conflict with any statute, regulation, judgment,
order, writ, decree or injunction applicable to the Company or its
Subsidiaries;
(iv) subject to the Company obtaining the third party consents
set forth in Schedule 3.4(a)(iv), violate or conflict with or result in
a breach of any provision of, or constitute a default (or any event
which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination or in a right of termination or
cancellation of, or accelerate the performance required by, or result in
the creation of any Lien upon any of the properties of the Company or
its Subsidiaries under, or result in being declared void, voidable or
without further binding effect, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust or any
license, franchise, permit, lease, contract, agreement or other
instrument, commitment or obligation to which the Company or its
Subsidiaries is a party, or by which the Company or its Subsidiaries or
any of their properties is bound or affected; or
(v) require any consent, approval or authorization of, or
declaration, filing or registration with, any Government Authority,
other than any filings required under the Securities Act of 1933, as
amended (the "Securities Act"), the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and state securities laws ("Blue Sky
Laws").
(b) Subject to the accuracy of the representations and warranties
of the Buyers contained in Article IV, neither the Company nor any agent acting
for it has
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offered any of the securities being sold hereunder or solicited offers to buy
such securities in violation of the Securities Act or any applicable state "blue
sky" securities laws (and without limitation of the foregoing, neither the
Company nor any of its agents have offered such securities through any general
solicitation or advertising); and neither the Company nor any of its agents
shall take any action which would cause the offer and sale of securities as
contemplated by this Agreement to be in violation of such laws.
Section 3.5 SEC and Other Documents; Financial Statements.
(a) The Company has delivered or made available to Buyer each
registration statement, report, proxy statement or information statement and all
exhibits, amendments and supplements thereto prepared by it or relating to its
properties since December 31, 1999, which are listed in Schedule 3.5(a), each in
the form (including exhibits and any amendments and supplements thereto) filed
with the SEC (collectively, the "Company Reports"). Except as set forth on
Schedule 3.5(a), the Company Reports were filed with the SEC in a timely manner
and constitute all forms, reports and documents required to be filed by the
Company under the Securities Act, the Exchange Act and the rules and regulations
promulgated thereunder (the "Securities Laws"). Except as set forth on Schedule
3.5(a), as of their respective dates, the Company Reports (i) complied as to
form in all material respects with the applicable requirements of the Securities
Laws and (ii) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. There is no unresolved violation asserted by any
Government Authority with respect to any of the Company Reports.
(b) Each of the balance sheets included in or incorporated by
reference into the Company Reports (including the related notes and schedules)
fairly presented the financial position of the entity or entities to which it
relates as of its date and each of the statements of operations, stockholders'
equity (deficit) and cash flows included in or incorporated by reference into
the Company Reports (including any related notes and schedules) fairly presented
the results of operations, retained earnings or cash flows, as the case may be,
of the entity or entities to which it relates for the periods set forth therein,
in each case in accordance with United States generally accepted accounting
principles ("GAAP") consistently applied during the periods involved, except as
may be noted therein and except, in the case of the unaudited statements, for
the absence of notes thereto, and subject to normal recurring year-end
adjustments which have not been and will not be material in nature or amount.
Section 3.6 Litigation; Compliance With Law.
(a) Except as set forth on Schedule 3.6, there are no Actions
pending or, to the Company's knowledge, threatened against the Company or any of
its Subsidiaries that could, individually or in the aggregate, result in a
Material Adverse Effect, or which question the validity hereof or any action
taken or to be taken in connection herewith. Except as disclosed in Schedule
3.6(a) or in the Company Reports there are no continuing orders, injunctions or
decrees of any Government Authority to
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which the Company or any of its Subsidiaries is a party or by which any of its
properties or assets are bound.
(b) None of the Company or its Subsidiaries is in violation of
any statute, rule, regulation, order, writ, decree or injunction of any
Government Authority or any body having jurisdiction over them or any of their
respective properties which, if enforced, could, individually or in the
aggregate, result in a Material Adverse Effect.
Section 3.7 Absence of Certain Changes or Events. Except as
disclosed in the Company Reports filed with the SEC prior to the date hereof or
in Schedule 3.7, since December 31, 1999, the Company and each of its
Subsidiaries has conducted its business only in the ordinary course, and there
has not been (a) any change, circumstance or event that could reasonably be
expected to result in a Material Adverse Effect, (b) any declaration, setting
aside or payment of any dividend or other distribution with respect to the
Company Common Stock, (c) any commitment, contractual obligation, borrowing,
capital expenditure or transaction (each, a "Commitment") entered into by the
Company or any of its Subsidiaries outside the ordinary course of business, or
(d) any material change in the Company's accounting principles, practices or
methods.
Section 3.8 Tax Matters.
(a) Except as set forth on Schedule 3.8(a), the Company and each
of its Subsidiaries has timely filed with the appropriate taxing authority all
Tax Returns required to be filed by it or has timely requested extensions and
any such request has been granted and has not expired. Each such Tax Return is
complete and accurate in all respects. All Taxes shown as owed by the Company or
any of its Subsidiaries on any Tax Return or claimed or asserted to be due, from
or with respect to any of them, have been paid, except for Taxes being contested
in good faith and for which adequate reserves have been taken. The Company and
each of its Subsidiaries have properly made due and sufficient accruals for all
Taxes for such periods subsequent to the periods covered by such Tax Returns as
required by GAAP. The Company and each of its Subsidiaries have made all
required current estimated Tax payments sufficient to avoid any understatement
penalties. None of the Company or any of its Subsidiaries has executed or filed
with the IRS or any other taxing authority any agreement now in effect extending
the period for assessment or collection of any Tax. Except as set forth in
Schedule 3.8(a), none of the Company or any of its Subsidiaries is being audited
or examined by any taxing authority with respect to any Tax or is a party to any
pending action or proceedings by any taxing authority for assessment or
collection of any Tax, and no claim for assessment or collection of any Tax has
been asserted against it. No audit or investigation report has been issued in
the five years prior to the date of this Agreement relating to Taxes due from or
with respect to the Company or any of its Subsidiaries, their perspective
incomes, assets or operations. True and complete copies of all federal, state
and local income or franchise Tax Returns filed by the Company and each of its
Subsidiaries for 1997 and 1998 and all communications relating thereto have been
delivered to Buyer or made available to representatives of Buyer prior to the
date hereof. No claim has been made in writing or, to the Company's knowledge,
otherwise by an authority in a jurisdiction where the Company or any of its
Subsidiaries does not
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<PAGE> 18
file Tax Returns that it is or may be subject to taxation by that jurisdiction.
Except as set forth in Schedule 3.8(a), there is no dispute or claim concerning
any Tax liability of the Company or any of its Subsidiaries, (i) claimed or
raised by any taxing authority in writing or (ii) as to which the Company or any
of its Subsidiaries has knowledge.
(b) Any amount or other entitlement that could be received
(whether in cash or property or the vesting of property) as a result of any of
the transactions contemplated hereby by any Employee, officer, or director of
the Company or any of its Affiliates who is a "disqualified individual" (as such
term is defined in proposed Treasury Regulation Section 1.280G-1) under any
employment, severance or termination agreement, other compensation arrangement
or plan currently in effect would not be characterized as an "excess parachute
payment" (as such term is defined in Section 280G(b)(1) of the Code).
(c) The disallowance of a deduction under Section 162(m) of the
Code for employee remuneration will not apply to any amount paid or payable by
the Company or any of its Subsidiaries (or any issuance of stock pursuant to the
exercise of any stock option) under any contract, stock plan, program,
arrangement or understanding currently in effect.
(d) None of the Company or any of its Subsidiaries is a party to,
bound by, or obligated under, any Tax sharing agreement (whether or not
written).
(e) All Taxes that the Company or the Subsidiaries have been or
are required by law to withhold or to collect for payment have been duly
withheld and collected, and have been paid over to the appropriate taxing
authority.
(f) There are no liens for Taxes upon the assets of the Company
or any of the Subsidiaries, except for liens arising as a matter of law relating
to current Taxes not yet due.
(g) None of the Company nor any of its Subsidiaries has issued or
will issue any indebtedness which constitutes "corporate acquisition
indebtedness" within the meaning of Section 279 of the Code or the Treasury
Regulations thereunder.
Section 3.9 Compliance with Agreements; Material Agreements.
(a) Neither the Company nor any of its Subsidiaries is in default
under or in violation of any provision of its charter or by-laws (or equivalent
documents).
(b) The Company and each of its Subsidiaries have filed all
material reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file with
any Government Authority and all other material reports and statements required
to be filed by them, including any report or statement required to be filed
pursuant to the laws, rules or regulations of the United States and Canada, and
have paid all fees or assessments due and payable in connection therewith
(provided that this representation does not cover tax matters, which
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<PAGE> 19
are addressed in Section 3.8 above). No regulatory agency has asserted that the
Company or any Subsidiary is in violation of any requirement of law.
(c) The Company Reports or Schedule 3.9(c) set forth (i) a
description of all material indebtedness of the Company and each of its
Subsidiaries, whether unsecured, or secured or collateralized by mortgages,
deeds of trust or other security interests in any assets of the Company and each
of its Subsidiaries, or otherwise and (ii) each Commitment entered into by the
Company or any of its Subsidiaries (including any guarantees of any third
party's debt or any obligations in respect of letters of credit issued for the
Company's or any Subsidiary's account) which may result in total payments or
liability in excess of $100,000. True and complete copies of the documents
relating to the foregoing have been delivered or made available to Buyers prior
to the date hereof. Neither the Company nor any of its Subsidiaries is in
default, and, to the Company's knowledge, no event has occurred which, with the
giving of notice or the lapse of time or both, would constitute a default, under
any of the documents described in clause (i) or (ii) of this paragraph or in
respect of any payment obligations thereunder. All joint venture and partnership
agreements to which the Company or any of its Subsidiaries is a party as of the
date hereof are set forth in Schedule 3.9(c), all of which are in full force and
effect as against the Company or such Subsidiary and, to the Company's
knowledge, as against the other parties thereto, and none of the Company or any
of its Subsidiaries is in default, and, to the Company's knowledge, no event has
occurred which, with the giving of notice or the lapse of time or both, would
constitute a default, with respect to any obligations thereunder, except as
would not, individually or in the aggregate, reasonably be expected to result in
a Material Adverse Effect. To the Company's knowledge, the other parties to such
agreements are not in breach of any of their respective obligations thereunder,
except as would not, individually or in the aggregate, reasonably be expected to
result in a Material Adverse Effect. There is no condition with respect to the
Company's Subsidiaries (including with respect to the partnership agreements for
the Company's Subsidiaries that are partnerships) that could, individually or in
the aggregate, result in a Material Adverse Effect.
(d) Schedule 3.9(d) sets forth a complete and accurate list of
all material agreements to which the Company or any of its Subsidiaries is a
party relating to (i) the purchase or lease of computer or telecommunications
hardware, software or services from third parties; (ii) the provision of
computer or telecommunication hardware, software or services to customers; and
(iii) any agency agreements relating to any of the foregoing. True and complete
copies of such agreements have been provided to Buyers.
(e) Schedule 3.9(e) sets forth a complete and accurate list of
all material agreements entered into by the Company as of the date hereof which
are not listed in any other Schedule hereto, including material Debt
Instruments.
(f) Except as set forth on Schedule 3.9(f), each agreement set
forth in Schedules 3.9(d) and 3.9(e) is in full force and effect as against the
Company or its Subsidiaries, as applicable, and to the Company's knowledge, as
against the other parties thereto; no payments, if any, thereunder are
delinquent; the Company is not in default
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<PAGE> 20
thereunder; and no notice of default thereunder has been sent or received by the
Company or any of its Subsidiaries. Except as set forth on Schedule 3.9(f), no
event has occurred which, with notice or lapse of time or both, would constitute
a default by the Company under any agreement set forth in Schedules 3.9(d) and
3.9(e). To the Company's knowledge, the other parties to such agreements are not
in breach of their respective obligations thereunder, except as could not,
individually or in the aggregate, result in a Material Adverse Effect. True and
complete copies of each such agreement have been provided to Buyers prior to the
date hereof.
(g) Schedule 3.9(g) sets forth a complete and accurate list of
all agreements of the Company in effect on the date hereof relating to
transactions with affiliates and potential conflicts of interest. Each agreement
or arrangement set forth in Schedule 3.9(g) is in full force and effect, and the
Company, each of its Subsidiaries, and, to the Company's knowledge, the other
parties thereto are in compliance with such agreements. True and complete copies
of each such agreement or arrangement have been provided to Buyer.
(h) Subject to the Company's obtaining the third party consents
set forth in Schedule 3.4(d), and except as set forth on Schedule 3.9(h), there
are no change of control or similar provisions in any employment, severance,
stock option, stock incentive, or other agreement or arrangement to which the
Company or any of its Subsidiaries is a party which would be triggered by the
transactions contemplated by this Agreement. Schedule 3.9(h) identifies the
obligations (including any payment or other obligation, forgiveness of debt,
other release from obligations, or acceleration of vesting) which are created,
accelerated, triggered, modified or released by the execution, delivery or
performance of this Agreement or the consummation of the transactions
contemplated hereby.
Section 3.10 Financial Records; Company Charter and By-laws;
Corporate Records.
(a) The books of account and other financial records of the
Company and each of its Subsidiaries are in all respects true and complete, have
been maintained in accordance with good business practices, and are accurately
reflected in all respects in the financial statements included in the Company
Reports.
(b) The Company has previously delivered to Buyers true and
complete copies of the Company Charter and the By-laws of the Company, as
amended to date, and the charter, by-laws, organization documents, partnership
agreements and joint venture agreements of its Subsidiaries, and all amendments
thereto. All such documents are listed in Schedule 3.10(b).
(c) The minute books and other records of corporate or
partnership proceedings of the Company and each of its Subsidiaries contain in
all material respects accurate records of all meetings and accurately reflect in
all material respects all other corporate action of the stockholders and
directors and any committees of the Board of
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<PAGE> 21
Directors of the Company and their Subsidiaries which are corporations and all
actions of the partners of the Subsidiaries which are partnerships.
Section 3.11 Properties; Capital Expenditures; Other Assets.
(a) Schedule 3.11(a) sets forth a complete and accurate list and
the address of all real property leased by the Company or any of its
Subsidiaries or otherwise used by the Company or its Subsidiaries in the conduct
of their respective businesses or operations (collectively, and together with
the land at each address referenced in Schedule 3.11(a) and all buildings,
structures and other improvements and fixtures located on or under such land and
all easements, rights and other appurtenances to such land, the "Company
Properties"). Neither the Company nor any of its Subsidiaries owns, holds or
occupies any real property or any interest in real property other than such
leasehold interests. All of such leases are in full force and effect with no
default by the Company or any Subsidiary and, to the Company's knowledge, no
material default by any other party thereto.
(b) Except as set forth in Schedule 3.11(b), the Company has no
knowledge (i) that any currently required certificate, permit or license
(including building permits and certificates of occupancy for tenant spaces)
from any Government Authority having jurisdiction over any Company Property or
any agreement, easement or other right which is necessary to permit the lawful
use, occupancy or operation of the existing buildings, structures or other
improvements which constitute a part of any of the Company Properties or which
are necessary to permit the lawful use and operation of utility service to any
Company Property or of any existing driveways, roads or other means of egress
and ingress to and from any of the Company Properties has not been obtained or
is not in full force and effect, or of any pending modification or cancellation
of any of same, or (ii) of any violation by any Company Property of any United
States or Canadian federal, state or municipal law, ordinance, order, regulation
or requirement, including any applicable zoning law or building code, as a
result of the use or occupancy of such Company Property or otherwise. The
Company has no knowledge of uninsured physical damage to any Company Property.
(c) The Company has no knowledge that any condemnation, eminent
domain or rezoning proceedings are pending or threatened with respect to any of
the Company Properties.
(d) Schedule 3.11(d) sets forth the Company's and each
Subsidiary's capital expenditure budget and schedule, which describes the
capital expenditures which the Company or any Subsidiary has made since December
31, 1999 or anticipates making through December 31, 2000.
(e) The Company and each of its Subsidiaries have good and
sufficient title to all the personal and non-real properties and assets
reflected in their books and records as being owned by them (including those
reflected in the balance sheets of the Company and its Subsidiaries as of
December 31, 1999, except as since sold or otherwise
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disposed of in the ordinary course of business), free and clear of all Liens
other than Permitted Liens and as set forth on Schedule 3.11(e).
Section 3.12 Environmental Matters. Each of the Company and its
Subsidiaries has obtained, and now maintains as currently valid and effective,
all permits, certificates of financial responsibility and other governmental
authorizations required to be obtained by the Company or any Subsidiary under
the Environmental Laws (the "Environmental Permits") in connection with the
operation of its businesses and properties. Except as set forth on Schedule
3.12, each of the Company and its Subsidiaries, and each Company Property is and
has been in compliance with all terms and conditions of the Environmental
Permits and all Environmental Laws and no liability exists under any
Environmental Laws or otherwise with respect to prior operations or activities.
Except as set forth on Schedule 3.12, the Company has no knowledge of any
circumstances or conditions that may prevent or interfere with such compliance
in the future.
Section 3.13 Employees and Employee Benefit Plans.
(a) Schedule 3.13(a)(i) sets forth a complete and accurate list
of all employment agreements between the Company or any of its Subsidiaries and
directors, officers or employees of the Company or any of its Subsidiaries that
are not substantially on the terms reflected in the form of agreement attached
as Schedule 3.1(a)(ii) or that contain any change of control provisions or
provide for any severance benefits above statutory minimums. Except for the
employees who are parties to such employment agreements, all of the employees of
the Company and each of its Subsidiaries are employed on an at-will basis
(except for restrictions or limitations on the at-will basis of such employees
imposed by law or equity or general principles of law or equity).
(b) The Company Reports or Schedule 3.13(b) sets forth a complete
and accurate list of all Employee Benefit Plans and all material Benefit
Arrangements which cover Employees of the Company or any of its Subsidiaries
with respect to their employment relationship with the Company or any of its
Subsidiaries (the "Company Plans"). Such Schedule identifies as such each
Employee Benefit Plan that is intended to be qualified under section 401(a) of
the Code. With respect to each Company Plan, the Company will make available to
Buyer true and complete copies of: (i) the plans and related trust documents and
amendments thereto, (ii) the most recent summary plan descriptions, if any, and
the most recent annual report, if any, and (iii) the most recent actuarial
valuation (to the extent applicable). In the case of any unwritten Plan, the
Company will make available a written description thereof.
(c) With respect to each Company Plan, (i) the Company and each
of its Subsidiaries is in compliance in all material respects with the terms of
each Company Plan and with the requirements prescribed by all applicable
statutes, orders or governmental rules or regulations, (ii) the Company and each
of its Subsidiaries has contributed to each Pension Plan included in the Company
Plans not less than the amounts accrued for such plan for all plan periods for
which payment is due, and (iii) none of the Company or any of its Subsidiaries
has any funding commitment or other
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accrued liabilities except as set forth on Schedule 3.13(c) or as reserved for
in the financial statements in or incorporated by reference into the Company
Reports. As to each Employee Benefit Plan intended to be qualified under section
401(a) of the Code, the Company has received a favorable determination letter
from the Internal Revenue Service and nothing has occurred since the date of
such letter to impair its continued validity and effectiveness, assuming that
the Plan is amended on a timely basis to comply with any changes in legislative,
regulatory or administrative requirements as to which the remedial amendment
period has not yet ended.
(d) Except as set forth on Schedule 3.13(d), none of the Company
or any of its Subsidiaries has made any commitment to establish any new Employee
Benefit Plan, to modify any Employee Benefit Plan, or to increase benefits or
compensation of Employees of the Company or any of its Subsidiaries (except for
normal increases in compensation consistent with past practices), and no
intention to do so has been communicated to Employees of the Company or any of
its Subsidiaries.
(e) There are no pending or, to the Company's knowledge,
anticipated claims (excluding routine claims for benefits made in the ordinary
course of Company Plan activities) against or otherwise involving any of the
Company Plans or any fiduciaries thereof with respect to their duties to the
Company Plans and no suit, action or other litigation has been brought against
or with respect to any such Company Plans.
(f) Neither the Company nor any of the ERISA Affiliates has, at
any time after September 25, 1980, contributed to, or been required to
contribute to, any "multiemployer plan" (as defined in Sections 3(37) and
4001(a)(3) of ERISA).
(g) Except as required by the continuation coverage requirements
of Section 601 et seq. of ERISA and Section 4980B of the Code or requirements of
state law and regulations and except as set forth on Schedule 3.13(g), the
Company and its Subsidiaries do not maintain or contribute to any plan or
arrangement which provides or has any liability to provide life insurance,
medical or other employee welfare benefits described in Section 3(1) of ERISA to
any Employee or former Employee following his retirement or termination of
employment and, to the Company's knowledge, the Company and its Subsidiaries
have never represented, promised or contracted (whether in oral or written form)
to any Employee or former Employee that such benefits would be provided.
(h) For purposes hereof, "Employee Benefit Plans" means each and
all "employee benefit plans" as defined in Section 3(3) of ERISA maintained or
contributed to by the Company or a Subsidiary or in which the Company or a
Subsidiary participates or participated and which provides benefits to
Employees, including (i) any such plans that are "employee welfare benefit
plans" as defined in Section 3(1) of ERISA, including retiree medical and life
insurance plans ("Welfare Plans"), and (ii) any such plans that constitute
"employee pension benefit plans" as defined in Section 3(2) of ERISA ("Pension
Plans"). "Benefit Arrangements" means life and health insurance,
hospitalization, savings, bonus, deferred compensation, incentive compensation,
holiday, vacation, severance pay, sick pay, sick leave, disability, tuition
refund, service award,
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company car, scholarship, relocation, patent award, fringe benefit, individual
employment, consultancy or severance contracts and other polices or practices of
the Company or a Subsidiary providing employee or executive compensation or
benefits to Employees maintained or contributed to by the Company or a
Subsidiary, other than Employee Benefit Plans. "Employees" mean all current
employees, former employees and retired employees of the Company or any of its
Subsidiaries, including employees on disability, layoff or leave status.
"Controlled Group Liability" means any and all liabilities (other than such
liabilities that arise solely out of, or relate solely to, the Company Plans) of
the ERISA Affiliates (other than the Company and its Subsidiaries) under (i)
Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and 4971 of the
Code, (iv) the continuation coverage requirements of Section 601 et seq. of
ERISA and Section 4980B of the Code, and (v) corresponding or similar provisions
of foreign laws or regulations.
(i) With respect to each Company Plan that is subject to Title IV
or Section 302 of ERISA or Section 412 or 4971 of the Code: (i) there does not
exist any accumulated funding deficiency within the meaning of Section 412 of
the Code or Section 302 of ERISA, whether or not waived, (ii) the fair market
value of the assets of such plan equals or exceeds the actuarial present value
of all accrued benefits under such plan, on a termination basis, (iii) no
reportable event within the meaning of Section 4043(c) of ERISA has occurred,
with respect to which notice has not been waived, and the consummation of the
transactions contemplated by this Agreement will not result in the occurrence of
any such reportable event, and (iv) all premiums due to the Pension Benefit
Guaranty Corporation have been timely paid in full.
(j) There does not now exist, nor do any circumstances exist that
could result in, any Controlled Group Liability that would be a liability of the
Company or a Subsidiary following the Closing. Without limiting the generality
of the foregoing, neither the Company nor any ERISA Affiliate has engaged in any
transaction described in Section 4069 or Section 4204 of ERISA.
(k) Except as set forth in Schedule 3.13(k), neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (either alone or in conjunction with any
other event other than a termination of employment with respect to which the
employee being terminated receives payments or benefits that he would have
received if he had terminated or been terminated and without regard to the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby) result in, cause the accelerated vesting or delivery of, or
increase the amount or value of, any payment or benefit to any employee of the
Company.
Section 3.14 Labor Matters. Except as set forth in Schedule 3.14,
none of the Company or any of its Subsidiaries is a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There is no unfair labor
practice or labor arbitration proceeding pending or, to the knowledge of the
Company, threatened against the Company or any of its Subsidiaries. To the
knowledge of the Company, there are no organizational efforts
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with respect to the formation of a collective bargaining unit presently being
made or threatened involving employees of the Company or any of its
Subsidiaries.
Section 3.15 Affiliate Transactions. Schedule 3.15 sets forth a
complete and accurate list of all transactions, series of related transactions
or currently proposed transactions or series of related transactions entered
into by the Company or any of its Subsidiaries since January 1, 1997 which are
of the type required to be disclosed by the Company pursuant to Item 404 of
Regulation S-K of the Securities Laws. True and complete copies of all
agreements or contracts relating to such transactions have been provided to
Buyers prior to the date hereof.
Section 3.16 Insurance. The Company maintains insurance policies,
including liability policies, covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company and
each of its Subsidiaries (collectively, the "Insurance Policies"), which are of
a type and in amounts customarily carried by persons conducting businesses
similar to those of the Company and its Subsidiaries. There is no material claim
by the Company or any of its Subsidiaries pending under any of the material
Insurance Policies as to which coverage has been questioned, denied or disputed
by the underwriters of such policies.
Section 3.17 Delaware Takeover Law. The terms of Section 203 of
the Delaware General Corporation Law will not apply to any transaction
contemplated hereby or to the ownership of the Purchased Shares, the Purchased
Warrants or the Company Common Stock to be issued to Buyers upon exercise of the
Purchased Warrants.
Section 3.18 Brokers or Finders. No agent, broker, investment
banker or other firm or person, including any of the foregoing that is an
Affiliate of the Company, is or will be entitled to any broker's or finder's fee
or any other commission or similar fee from the Company or any Buyer in
connection with this Agreement or any of the transactions contemplated hereby.
Section 3.19 Y2K Matters. Except as set forth on Schedule 3.19,
neither the Company nor any Subsidiary has any obligation under warranty
agreements, service agreements or otherwise to remedy any information technology
defect relating to the transition to the year 2000.
Section 3.20 Knowledge Defined. As used herein, the phrase "to
the Company's knowledge" (or words of similar import) means the actual knowledge
of any of Philip Ladouceur, Glen Holmes, Raghu Kilambi and Kyle Scott and
includes any facts, matters or circumstances set forth in any written notice
from any Government Authority or any other material written notice received by
the Company or any of its Subsidiaries, and also including any matter of which
any Buyer informs the Company in writing.
Section 3.21 No Change of Control. Except as set forth on
Schedule 3.21, since June 30, 1999 no Change of Control of the Company has
occurred and to the
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Company's knowledge no event has occurred which is reasonably likely to lead to
a Change of Control.
Section 3.22 Intellectual Property.(a) For purposes of this
Section 3.22, "Intellectual Property" shall mean, collectively: (x) all U.S. and
foreign registered, unregistered and pending (i) trade names, trade dress,
trademarks, service marks, assumed names, business names and logos, and all
registrations and applications therefor, together with all goodwill symbolized
thereby, (ii) computer software, data files, source and object codes, user
interfaces, manuals and other specifications and documentation and all know-how
relating thereto, except generally available off-the-shelf programs
(collectively, the "Computer Software"), (iii) copyrights (including, without
limitation, those in Computer Software, and all registrations and applications
therefor), (iv) utility and design patents, registered designs and invention
disclosures (including, without limitation, those relating to Computer
Software), and all grants, registrations and applications therefor
(collectively, the "Patents"), (v) trade secrets, inventions, processes,
formulae, know-how, concepts, ideas, research and development, designs, business
plans, strategies, marketing and other information and customer lists
(collectively, the "Trade Secrets"), and (vi) other intellectual property,
including, without limitation, adequate research and development facilities; and
(y) all license, assignment, distribution or other agreements relating to any of
the items set forth in clause (x) above (collectively, the "Contracts").
(b) Schedule 3.22(b) sets forth a complete and accurate list of
(I) all material Intellectual Property in which the Company or any of its
Subsidiaries has an ownership interest, indicating the owner thereof, and all
applications, registrations and grants with respect thereto (collectively, the
"Owned Property"), provided that such list need not identify non-material
unregistered copyrights unless such copyrights relate to proprietary Computer
Software, (II) all Intellectual Property (other than the Owned Property) which
is used in or relates to the Business (including the business of any
Subsidiary), indicating the owner thereof, and (III) all material Contracts with
respect to the Intellectual Property referred to in clauses (I) and (II) above.
The Intellectual Property included in clauses (I) and (II) above is collectively
referred to herein as the "Company Intellectual Property".
(c) Except as set forth on Schedule 3.22(b), the Company or a
Subsidiary is the sole and exclusive owner of the Owned Property, and is listed
in the records of the appropriate U.S. and/or foreign governmental agencies as
the sole and exclusive owner of record for each registration, grant and
application listed in Schedule 3.22(b).
(d) Except as set forth on Schedule 3.22(b), no act has been done
or omitted to be done by the Company or any Subsidiary, or any licensee thereof,
which has had or could have the effect of impairing or dedicating to the public,
or entitling any U.S. or foreign governmental authority or any other Person to
cancel, forfeit, modify or consider abandoned, any Owned Property, or give any
Person any rights with respect thereto (other than pursuant to a Contract listed
in Schedule 3.22), and all of the Company's or a Subsidiary's rights in the
Company Intellectual Property are valid,
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enforceable and free of defects. Neither the Company nor any Subsidiary has any
knowledge of any facts or claims which cause or would cause any Patent included
in the Company Intellectual Property to be invalid or unenforceable, and neither
the Company nor any Subsidiary has received any notice that any Person may bring
such a claim.
(e) Except as set forth on Schedule 3.22, the Company and each of
its Subsidiaries owns or otherwise has the valid right to use through a Contract
listed on Schedule X any and all Intellectual Property that is used in or is
necessary or advisable for the conduct of the Business as currently conducted
and as contemplated to be conducted, free and clear of any lien, encumbrance,
royalty or other payment obligations (except for royalties payable in respect of
off-the-shelf Computer Software at standard commercial rates and ordinary course
payments made under software hosting and reselling agreements in connection with
the Company's provision of application service provider services) and otherwise
on commercially reasonable terms.
(f) None of the Company, any of its Subsidiaries or their
businesses as currently conducted or as contemplated to be conducted, is in
conflict with or in violation or infringement of, nor has the Company or any of
its Subsidiaries received any notice of any conflict with or violation or
infringement of, nor are proceedings or claims pending, nor have any such
proceedings or claims been instituted or asserted in writing against the Company
or any of its Subsidiaries, nor are any proceedings threatened, alleging any
violation, nor is there any valid basis for any such proceeding or claim, of any
rights or asserted rights of any other Person with respect to any Intellectual
Property of such other Person.
(g) No proceedings or claims in which the Company or any of its
Subsidiaries alleges that any Person is infringing upon, or otherwise violating,
any Company Property are pending, and none have been served by, instituted or
asserted by the Company or any such Subsidiary, nor are any proceedings
threatened alleging any such violation or infringement, nor does the Company or
any such Subsidiary know of any valid basis for any such proceeding or claim.
(h) Neither the Company nor any of its Subsidiaries has, prior to
the date hereof, divulged, furnished to or made accessible to any Person, any
Trade Secrets included in the Company Property without prior thereto having
obtained an enforceable agreement of confidentiality from such Person, and all
such confidentiality agreements are listed on Schedule 3.22.
(i) The Company and each of its Subsidiaries have obtained from
all individuals who participated in any respect in the invention or authorship
of any Owned Property (as employees of the Company or one of its Subsidiaries,
as consultants, as employees of consultants or otherwise) effective waivers of
any and all ownership rights of such individuals in such Owned Property, and
assignments to the Company or one of its Subsidiaries of all rights with respect
thereto, other than from such individuals whose copyrightable works the Company
hereby represent to be "works made for hire" within the meaning of Section 101
of the Copyright Act of 1976. No officer or employee of the Company or any
Subsidiary is subject to any agreement with any other Person or entity
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which gives to any other Person any interest in inventions or other intellectual
property of a type that are related to the types of businesses currently
conducted by the Company or any Subsidiary, or requires such officer or employee
to keep confidential any trade secrets, proprietary data, customer lists or
other business information or which restricts such officer or employee from
engaging in competitive activities or solicitation of customers.
(j) The Company and each of its Subsidiaries have taken all
actions which are necessary or advisable in order to fully protect the Company
Property in a manner consistent with prudent commercial practice in the computer
services industry.
Section 3.23 Liability Insurance. The Company maintains liability
insurance for its directors and officers under policies with Reliance Insurance
and Chubb Inc., copies of which policies (together with all endorsements,
amendments, supplements and related materials) have been provided to Buyers.
Section 3.24 No Undisclosed Liabilities. Except as and to the
extent set forth in the Company Reports and the Company's financial statements
filed with the SEC or in any Schedule hereto, none of the Company or any of its
Subsidiaries has any Liabilities (nor do there exist any circumstance which are
likely to give rise to Liabilities) other than Liabilities incurred in the
ordinary course of business and consistent with past practice since December 31,
1999.
Section 3.25 Disclosure. Neither this Agreement nor any
certificate, instrument or written statement furnished or made to Buyers by or
on behalf of the Company pursuant to this Agreement contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein and therein in light of the
circumstances under which they were made not misleading. No changes have
occurred that would require any amendment or supplement to the Company Reports
if Company Securities were being offered publicly as of the date hereof or as of
the date of the Closing.
ARTICLE IV
Representations and Warranties of Buyers
Each Buyer hereby represents and warrants to the Company as
follows:
Section 4.1 Organization. Such Buyer is a the type of entity
indicated on Schedule 1, duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization. Such Buyer has all requisite
power and authority to carry on its business as now conducted, and to enter into
this Agreement and the Registration Rights Agreement and to perform its
obligations hereunder and thereunder.
Section 4.2 Due Authorization. The execution, delivery and
performance of this Agreement and the Registration Rights Agreement have been
duly and validly authorized by all necessary action on the part of such Buyer.
This Agreement
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has been duly executed and delivered by such Buyer and constitutes the valid and
legally binding obligations of such Buyer, enforceable against such Buyer in
accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights or general
principles of equity.
Section 4.3 Conflicting Agreements and Other Matters. Neither the
execution and delivery of this Agreement nor the performance by such Buyer of
its obligations hereunder will conflict with, result in a breach of the terms,
conditions or provisions of, constitute a default under, result in the creation
of any mortgage, security interest, encumbrance, lien or charge of any kind upon
any of the properties or assets of such Buyer pursuant to, or require any
consent, approval or other action by or any notice to or filing with any
Government Authority pursuant to, the organizational documents or agreements of
such Buyer or any agreement, instrument, order, judgment, decree, statute, law,
rule or regulation by which such Buyer is bound, except for filings after the
Closing under Section 13(d) or Section 16 of the Exchange Act.
Section 4.4 Acquisition for Investment; Sophistication.
(a) Such Buyer is acquiring the Company Securities being
purchased by it for its own account for the purpose of investment and not with a
view to or for sale in connection with any distribution thereof, and such Buyer
has no present intention or plan to effect any distribution of shares of Company
Common Stock, provided that the disposition of Company Common Stock owned by
such Buyer shall at all times be and remain within its control, subject to the
provisions of this Agreement and the Registration Rights Agreement. The
certificates representing the Purchased Securities shall bear a prominent legend
with respect to the restrictions on transfer under the Securities Act and under
applicable state securities laws. Prior to any proposed transfer of any
Purchased Securities, unless such transfer is made pursuant to an effective
registration statement under the Securities Act, such Buyer will deliver to the
Company an opinion of counsel, reasonably satisfactory in form and substance to
the Company, to the effect that the Purchased Securities may be sold or
otherwise transferred without registration under the Securities Act. The Company
will remove the legend relating to Securities Act restrictions from any
Purchased Securities at any time two years after issuance if such Buyer delivers
to the Company an opinion of counsel, reasonably satisfactory in form and
substance to the Company, to the effect that such Purchased Securities are no
longer subject to transfer restrictions under the Securities Act. Upon original
issuance thereof, and until such time as the same shall have been registered
under the Securities Act or sold pursuant to Rule 144 promulgated thereunder (or
any similar rule or regulation) each certificate for the Purchased Securities
shall bear any restricted securities legend required hereby, unless such legend
is no longer required hereunder. Such Buyer is able to bear the economic risk of
the acquisition of Purchased Securities pursuant hereto and can afford to
sustain a total loss on such investment, and has such knowledge and experience
in financial and business matters that it is capable of evaluating the merits
and risks of the proposed investment.
(b) Such Buyer is an "accredited investor" as such term is
defined in Regulation D promulgated under the Securities Act.
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Section 4.5 Resources. Such Buyer has requisite cash, cash
equivalents, equity commitments or other sources of financing available to
consummate the transactions contemplated hereby.
Section 4.6 Brokers or Finders. Such Buyer has not engaged any
agent, broker, investment banker or other firm or person that will be entitled
to any broker's or finder's fee or any other commission or similar fee in
connection with this Agreement or any of the transactions contemplated hereby
for which the Company or any of its Affiliates will be responsible.
Section 4.7 Investment Company Matters. Such Buyer is not, and
after giving effect to the purchase of Company Common Stock contemplated hereby
will not be, an "investment company" or an entity "controlled" by an "investment
company", as such terms are defined in the Investment Company Act of 1940, as
amended.
ARTICLE V
Covenants Relating to Closing
Section 5.1 Taking of Necessary Action. Each party hereto agrees
to use its commercially reasonable best efforts promptly to take or cause to be
taken all action and promptly to do or cause to be done all things necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement and the Registration
Rights Agreement subject to the terms and conditions hereof and thereof,
including all actions and things necessary to cause all conditions precedent set
forth in Article 7 to be satisfied.
Section 5.2 Registration Rights Agreement. At the Closing, the
Company and each Buyer shall enter into the Registration Rights Agreement.
Section 5.3 Public Announcements; Confidentiality.
(a) Subject to each party's disclosure obligations imposed by law
and any stock exchange or similar rules and the confidentiality provisions
contained in Section 5.3(b), the Company and each Buyer will cooperate with each
other in the development and distribution of all news releases and other public
information disclosures with respect to this Agreement and any of the
transactions contemplated hereby or thereby. If a party is required by law or
any stock exchange or similar rule to issue a news release or other public
announcement, it shall advise the other party in advance thereof and use
reasonable best efforts to cause a mutually agreeable release or announcement to
be issued.
(b) Each Buyer agrees that all information provided to it or any
of its representatives pursuant to this Agreement shall be kept confidential,
and such Buyer shall not (x) disclose such information to any persons other than
the directors, officers, employees, financial advisors, investors, lenders,
legal advisors, accountants, consultants and Affiliates of such Buyer who
reasonably need to have access to the confidential
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information and who are advised of the confidential nature of such information
or (y) use such information in a manner which would be detrimental to the
Company; provided, however, the foregoing obligation of each Buyer shall not (i)
relate to any information that (1) is or becomes generally available to the
public other than as a result of unauthorized disclosure by such Buyer or by
persons to whom such Buyer has made such information available, (2) is or
becomes available to such Buyer on a non-confidential basis from a third party
that is not, to such Buyer's knowledge, bound by any other confidentiality
agreement with the Company, or (ii) prohibit disclosure of any information if
required by law, rule, regulation, court order or other legal or governmental
process, provided that in such event the party which believes it is so required
to make any such disclosure shall (x) give the Company reasonable advance notice
thereof to the extent practicable, (y) to the extent practicable, give the
Company the opportunity, at its expense, to oppose any such required disclosure
or seek confidential treatment thereof by the recipient of such information and
(z) cooperate with the Company in connection therewith. Buyers acknowledge that
United States securities laws restrict trading in securities while in possession
of material non-public information, and they shall not, directly or indirectly,
alone or with others, in any manner acquire or attempt to acquire or dispose of
any securities of the Company in violation of such laws.
Section 5.4 Notification of Certain Matters. Each of Buyer and
the Company shall use its good faith efforts to notify the other party in
writing of its discovery of any matter that would render any of such party's or
the other party's representations and warranties contained herein untrue or
incorrect in any material respect, but the failure of either party to so notify
the other party shall not be deemed a breach of this Agreement.
ARTICLE VI
Certain Additional Covenants
Section 6.1 Use of Proceeds. The Company shall use the funds
received pursuant hereto for the funding of the Company's infrastructure, for
working capital for the Company's current business and for pending and proposed
acquisitions, provided that the Company shall be allowed to hold the funds in
short term investments pending such use.
Section 6.2 Actions Requiring Consent of the Buyers. (a) Until
the earlier to occur of (i) the date Buyers (together with the Buyers under the
Securities Purchase Agreement dated as of October 15, 1999 by and among the
Company, PPE II and certain other investors (the "1999 Securities Purchase
Agreement")) collectively hold Equity Securities representing less than 5% of
the Equity Securities outstanding on a Fully-Diluted Basis, (ii) the date the
right to nominate any persons for election as director of the Company pursuant
to Section 6.4 of the 1999 Securities Purchase Agreement ceases to exist in
accordance with such Section 6.4, and (iii) October 15, 2002, the Company shall
not and shall not permit any material direct or indirect Subsidiary any of
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the following actions without the prior written consent of the holders of a
majority of the Company Securities then held by Buyers:
(b) effect any merger, amalgamation, corporate reorganization or
business combination or otherwise acquire or dispose of any assets in a single
transaction or series of related transactions if, as a result of such
transactions the assets or revenues of the Company and its Subsidiaries taken as
a whole are, or are reasonably likely to be, increased or decreased by 25% or
more; or redeem or repurchase any Equity Securities with a fair market value in
excess of $5,000,000; or
(c) engage in any new line of business (other than natural
extensions of the Company's current businesses) or otherwise materially alter
the business, operations or activities of the Company and its Subsidiaries as
currently conducted.
Section 6.3 Preemptive Right. (a) For a period of eighteen (18)
months following October 15, 1999, if the Company shall propose to issue any
Equity Securities for cash (other than issuances with respect to employee
benefit plans or in connection with a Public Offering), then each Buyer shall
have the right to subscribe in cash on the proposed terms for any amount up to
its Preemptive Right Pro Rata Share of such Equity Securities. The "Preemptive
Right Pro Rata Share" of a Buyer shall be, at any given time, (i) such number of
Equity Securities proposed to be issued for cash multiplied by (ii) a fraction,
the numerator of which is the number of Equity Securities then held by such
Buyer and the denominator of which is the total number of Equity Securities
issued and outstanding on a Fully-Diluted Basis before giving effect to the new
issuance.
(b) In the event that a preemptive right arises this Section 6.3,
the Company shall give each Buyer written notice (the "Preemptive Notice") of
its intention to issue Equity Securities for cash, the price, the identity of
the proposed subscriber, the principal terms upon which the Company proposes to
issue the same and any other material information given to the proposed
subscriber which has not already been provided to Buyers. Each Buyer shall have
fifteen Business Days from the delivery date of any Preemptive Notice to agree
to subscribe for a number of Equity Securities, as the case may be, up to its
Preemptive Right Pro Rata Share (in each case calculated prior to the issuance)
for the price and upon the terms specified in the Preemptive Notice by giving
written notice to the Company and stating therein the number of Equity
Securities, as the case may be, to be subscribed.
ARTICLE VII
Conditions to Closing
Section 7.1 Conditions of Closing. The obligation of each Buyer
to purchase and pay for the Purchased Securities to be purchased by it hereunder
is subject to satisfaction or waiver of each of the following conditions
precedent:
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(a) Representations and Warranties; Covenants. The
representations and warranties of the Company contained herein shall have been
true and correct in all respects on and as of the date hereof, and shall be true
and correct in all respects on and as of the time of the Closing, with the same
effect as though such representations and warranties had been made on and as of
the Closing Date (except for representations and warranties that speak as of a
specific date or time other than the Closing Date (which need only be true and
correct in all respects as of such date or time)), other than, in all such
cases, such failures to be true and/or correct as would not in the aggregate
reasonably be expected to have a Material Adverse Effect; provided, however,
that if any of the representations and warranties is already qualified in any
respect by materiality or as to Material Adverse Effect for purposes of this
Section 7.1(a) such materiality or Material Adverse Effect qualification will be
in all respects ignored (but subject to the overall standard as to Material
Adverse Effect set forth immediately prior to this proviso). The covenants and
agreements of the Company to be performed on or before the date of the Closing
in accordance with this Agreement shall have been duly performed in all
respects, other than (except for the covenants set forth in Sections 5.1, 5.2
and 5.3, as to which the proviso set forth in this other-than clause shall not
apply) for such failures to have been performed as would not in the aggregate
reasonably be expected to have a Material Adverse Effect (provided, however,
that if any such covenant or agreement is already qualified in any respect by
materiality or as to Material Adverse Effect for purposes of determining whether
this condition has been satisfied, such materiality or Material Adverse Effect
qualification will be in all respects ignored and such covenant or agreement
shall have been performed in all respects without regard to such qualification
(but subject to the overall exception as to Material Adverse Effect set forth
immediately prior to this proviso)). The Company shall have delivered to Buyer
at the Closing a certificate of an appropriate officer in form and substance
reasonably satisfactory to Buyer dated the Closing Date to such effect.
In making any determination as to Material Adverse Effect under
this Section 7.1(a), the matters referred to in such Section shall be aggregated
and considered together.
(b) No Material Adverse Change. Since December 31, 1999 there
shall not have been any change, circumstance or event which has had, or presents
a substantial possibility of, a Material Adverse Effect.
(c) Registration Rights Agreement. The Registration Rights
Agreement shall have been executed and delivered by the parties thereto.
(d) No Injunction, etc. There shall not be in effect any final
order, decree or injunction of a court or Governmental Authority of competent
jurisdiction which enjoins or prohibits consummation of the transactions
contemplated hereby; there shall be no threatened or pending Action by any
Governmental Authority seeking to enjoin or prohibit such consummation; and
there shall be no pending or threatened Actions which would reasonably be
expected to have a material adverse effect on the Company or any Subsidiary or
on the ability of the Company to consummate the transactions contemplated hereby
or to issue the Company Securities.
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(e) Simultaneous Purchases by Other Buyers. Each other Buyer
shall be prepared to proceed with the Closing on a simultaneous basis.
(f) Legal Opinion. Each Buyer shall have received on opinion or
opinions from the Company's legal counsel in form and substance satisfactory to
such Buyer.
(g) No Defaults. The Company shall not have taken any action or
omitted to take any action which action or omission shall have caused a material
default or breach of its covenants or agreements hereunder.
Section 7.2 Conditions of Sale. The obligations of the Company to
issue and sell the Company Securities are subject to satisfaction or waiver of
each of the following conditions precedent:
(a) Representations and Warranties; Covenants. The
representations and warranties of each Buyer contained herein shall have been
true and correct in all respects on and as of the date hereof, and shall be true
and correct in all respects on and as of the Closing Date with the same effect
as though such representations and warranties had been made on and as of the
Closing Date (except for representations and warranties that speak as of a
specific date or time other than the Closing Date (which need only be true and
correct in all respects as of such date or time)), other than, in all such
cases, such failures to be true and/or correct as would not in the aggregate
reasonably be expected to have a Material Adverse Effect on the Company or
Buyer's ability to consummate the transactions contemplated hereby; provided,
however, that if any of the representations and warranties is already qualified
in any respect by materiality or as to Material Adverse Effect for purposes of
this Section 7.4(a) such materiality or Material Adverse Effect qualification
will be in all respects ignored (but subject to the overall standard as to
Material Adverse Effect set forth immediately prior to this proviso). The
covenants and agreements of each Buyer to be performed on or before the Closing
Date in accordance with this Agreement shall have been duly performed in all
respects, other than (except for each Buyer's obligation to pay the relevant
Purchase Price at the Closing, except for Buyer's covenants set forth in
Sections 5.2 and 5.3, as to which the proviso set forth in this other-than
clause shall not apply) for such failures to have been performed as would not in
the aggregate reasonably be expected to have a Material Adverse Effect on the
Company or such Buyer's ability to consummate the transactions contemplated
hereby (provided, however, that if any such covenant or agreement is already
qualified in any respect by materiality or as to Material Adverse Effect for
purposes of determining whether this condition has been satisfied, such
materiality or Material Adverse Effect qualification will be in all respects
ignored and such covenant or agreement shall have been performed in all respects
without regard to such qualification (but subject to the overall exception as to
Material Adverse Effect set forth immediately prior to this proviso)). Buyer
shall have delivered to the Company at the Closing a certificate of an
appropriate officer in form and substance reasonably satisfactory to the Company
dated the Closing Date to such effect.
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(b) No Injunction. There shall not be in effect any final order,
decree or injunction of a court or Governmental Authority of competent
jurisdiction which enjoins or prohibits consummation of the transactions
contemplated hereby.
ARTICLE VIII
Survival; Indemnification
Section 8.1 Survival. Other than the representations contained in
Sections 3.1, 3.2, 3.3, 3.4, 3.5, 3.8 and 3.12 (which shall survive
indefinitely) all representations, warranties and covenants and agreements of
the parties contained herein, including indemnity or indemnification agreements
contained herein, or in any Schedule or Exhibit hereto, or any certificate,
document or other instrument delivered in connection herewith shall survive the
Closing until 5:00 p.m. New York time on April 28, 2003. No Action or proceeding
may be brought with respect to any of the representations and warranties, or any
of the covenants or agreements which survive until April 28, 2003, unless
written notice thereof, setting forth in reasonable detail the claimed
misrepresentation or breach of warranty or breach of covenant or agreement,
shall have been delivered to the party alleged to have breached such
representation or warranty or such covenant or agreement on or prior to April
28, 2003.
Section 8.2 Indemnification.
(a) Subject to Section 8.1, from and after the Closing Date, each
Buyer shall indemnify and hold harmless the Company, its successors and assigns,
from and against any and all damages, claims, losses, expenses, costs,
obligations, and liabilities, including liabilities for all reasonable
attorneys' fees and expenses (including attorney and expert fees and expenses
incurred to enforce the terms of this Agreement) (collectively, "Loss and
Expenses") suffered, directly or indirectly, by the Company by reason of, or
arising out of, (i) any breach as of the date made or deemed made (including the
date of the Closing) or required to be true of any representation or warranty
made by such Buyer in or pursuant to this Agreement, or (ii) any failure by such
Buyer to perform or fulfill any of its covenants or agreements set forth herein.
(b) Subject to Section 8.1, from and after the Closing Date, the
Company shall indemnify and hold harmless each Buyer, its successors and
assigns, from and against any and all Loss and Expenses, suffered, directly or
indirectly, by such Buyer by reason of, or arising out of, (i) any breach as of
the date made or deemed made (including the date of the Closing) or required to
be true of any representation or warranty made by the Company in or pursuant to
this Agreement and any statements made in any certificate, schedule or other
document delivered by or on behalf of the Company pursuant to this Agreement, or
(ii) any failure by the Company to perform or fulfill any of its covenants or
agreements set forth herein.
(c) Notwithstanding the foregoing, neither any Buyer nor the
Company shall be responsible for any Loss and Expenses as provided by paragraphs
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(a) and (b), respectively, of this Section 8.2 until the cumulative aggregate
amount of such Loss and Expenses suffered by all Buyers or the Company, as the
case may be, exceeds $50,000, after which point all Loss and Expenses incurred
in excess of $50,000 shall be recoverable, provided that the recovery of each
Buyer shall be capped at 100% of the amount invested by it hereunder except in
the case of fraud or willful breach. Except with respect to third-party claims
being defended in good faith or claims for indemnification with respect to which
there exists a good faith dispute, the indemnifying party shall satisfy its
obligations hereunder within 30 days of receipt of a notice of claim under this
Article 8. For the purposes of calculating Loss and Expenses relating to any
breach of a representation or warranty, the representations and warranties shall
be read as if they did not include any qualifiers relating to materially or
Material Adverse Effect.
(d) Notwithstanding anything to the contrary contained herein,
the rights of the parties to be indemnified under this Article VIII with respect
to this Agreement and the transactions contemplated thereby are the sole and
exclusive remedies of the parties with respect to any claims relating to or
arising from this Agreement or the transactions contemplated hereby. In
connection with the transactions contemplated hereby, none of the Company's
officers, directors, shareholders or representatives shall have any liability
hereunder and the Company shall have no liability (including for claims based
upon federal or state securities laws or common law) except pursuant hereto.
Section 8.3 Third-Party Claims. If a claim by a third party is
made against an Indemnified Party and if such Indemnified Party intends to seek
indemnity with respect thereto under this Article, such Indemnified Party shall
promptly notify the indemnifying party in writing of such claims setting forth
such claims in reasonable detail; provided, however, the foregoing
notwithstanding, the failure of any Indemnified Party to give any notice
required to be given hereunder shall not affect such Indemnified Party's right
to indemnification hereunder except to the extent the indemnifying party from
whom such indemnity is sought shall have been prejudiced in its ability to
defend the claim or action for which such indemnification is sought by reason of
such failure. The indemnifying party shall have 20 days after receipt of such
notice to undertake, through counsel of its own choosing and at its own expense,
the settlement or defense thereof, and the Indemnified Party shall cooperate
with it in connection therewith; provided, however, that the Indemnified Party
may participate in such settlement or defense through counsel chosen by such
Indemnified Party, provided that the fees and expenses of such counsel shall be
borne by such Indemnified Party. The Indemnified Party shall not pay or settle
any claim which the indemnifying party is contesting without the consent of the
indemnifying party, which shall not be unreasonably withheld. If the
indemnifying party does not notify the Indemnified Party within 20 days after
the receipt of the Indemnified Party's notice of a claim of indemnity hereunder
that it elects to undertake the defense thereof, the Indemnified Party shall
have the right to contest, settle or compromise the claim but shall not thereby
waive any right to indemnity therefor pursuant to this Agreement.
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ARTICLE IX
Termination
Section 9.1 Termination.
(a) This Agreement may be terminated at any time prior to the
Closing by:
(i) the mutual consent of the Company and each Buyer;
(ii) any Buyer (if it is not in breach of any of its material
obligations hereunder) in the event of a breach or failure by the
Company that is material in the context of the transactions contemplated
hereby of any representation, warranty, covenant or agreement by the
Company contained herein which has not been, or cannot be, cured within
10 Business Days after written notice of such breach is given to the
Company; or
(iii) the Company (if it is not in breach of any of its material
obligations hereunder) in the event of a breach or failure by Buyer that
is material in the context of the transactions contemplated hereby of
any representation, warranty, covenant or agreement by Buyer contained
herein which has not been, or cannot be, cured within 10 Business Days
after written notice of such breach is given to Buyer.
Section 9.2 Procedure and Effect of Termination. In the event of
termination of this Agreement by either or both of the Company and Buyer
pursuant to Section 9.1(a), written notice thereof shall forthwith be given by
the terminating party to the other party hereto, and this Agreement shall
thereupon terminate and become void and have no effect, and the transactions
contemplated hereby shall be abandoned without further action by the parties
hereto, except that the provisions of Sections 5.4 (Public Announcements;
Confidentiality), 9.3 (Expenses), and Article X (as it relates to any other
surviving provisions), and any related definitional, interpretive or other
provisions necessary for the logical interpretation of such provisions, shall
survive the termination of this Agreement; provided, however, that such
termination shall not relieve any party hereto of any liability for any breach
of this Agreement.
Section 9.3 Expenses.
(a) Except as set forth in this Agreement, whether or not any
Stock Purchase is consummated, all legal and other costs and expenses incurred
in connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such costs and expenses; provided, however, that
if the Closing does not occur due to Buyer's termination of this Agreement, then
the Company shall pay Buyer's reasonable out of pocket expenses, which shall
serve as liquidated damages and be Buyer's sole remedy in such event, except
that if the Closing shall not occur due to a willful breach by the Company, the
Company shall pay all of Buyer's damages resulting therefrom. If the Closing
shall occur the Company shall, at the Closing, reimburse
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<PAGE> 38
Buyers for their out-of-pocket expenses in connection with the transactions
contemplated hereby.
ARTICLE X
Miscellaneous
Section 10.1 Counterparts. This Agreement may be executed in one
or more counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more counterparts have been
signed by each party hereto and delivered to each other party. Copies of
executed counterparts transmitted by telecopy, telefax or other electronic
transmission service shall be considered original executed counterparts for
purposes of this Section, provided receipt of copies of such counterparts is
confirmed.
Section 10.2 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York without
reference to the choice of law principles thereof.
Section 10.3 Entire Agreement. This Agreement (including
agreements referenced herein) and the Schedules and Exhibits hereto contain the
entire agreement between the parties with respect to the subject matter hereof
and there are no agreements, understandings, representations or warranties
between the parties other than those set forth or referred to herein, except as
set forth in the Pequot/FLNK Agreement dated the date hereof. This Agreement is
not intended to confer upon any person not a party hereto (and their successors
and assigns) any rights or remedies hereunder. The confidentiality agreement
relating to the transactions contemplated hereby is superseded hereby.
Section 10.4 Notices. All notices and other communications
hereunder shall be sufficiently given for all purposes hereunder if in writing
and delivered personally, sent by documented overnight delivery service or, to
the extent receipt is confirmed, telecopy, telefax or other electronic
transmission service to the appropriate address or number as set forth below.
Notices to the Company shall be addressed to:
33
<PAGE> 39
Futurelink Corp.
6 Morgan, Suite 100
Irvine, California 92618
Attention: Raghu Kilambi
Telecopy: 949-837-4433
with a copy to:
Paul, Hastings, Janofsky & Walker
399 Park Avenue
31st Floor
New York, New York 10022-4697
Attention: Tom Pollock
Telecopy: 212-319-4090
or at such other address and to the attention of such other person as the
Company may designate by written notice to Buyers. Notices to Buyers shall be
addressed to:
Pequot Capital Management Inc.
500 Nyala Farm Road
Westport, Connecticut 06880
Attention: Carol Holley
David J. Malat
Telecopy: 203-429-2420
with a copy to:
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Attention: William J. Phillips
Telecopy: 212-259-6333
Section 10.5 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, provided the rights of Buyers under Sections 2.5 and 6.4
may only be assigned to the extent permitted by such Sections and the rights of
Buyers under the other provisions hereof shall not be binding upon or inure to
the benefit of any transferee in a public offering or in a Rule 144 sale.
Section 10.6 Headings. The Section, Article and other headings
contained in this Agreement are inserted for convenience of reference only and
will not affect the meaning or interpretation of this Agreement. All references
to Sections or Articles contained herein mean Sections or Articles of this
Agreement unless otherwise stated.
Section 10.7 Amendments and Waivers. This Agreement may not be
modified or amended except by an instrument or instruments in writing signed by
the
34
<PAGE> 40
party against whom enforcement of any such modification or amendment is sought.
Either party hereto may, only by an instrument in writing, waive compliance by
the other party hereto with any term or provision hereof on the part of such
other party hereto to be performed or complied with. The waiver by any party
hereto of a breach of any term or provision hereof shall not be construed as a
waiver of any subsequent breach.
Section 10.8 Interpretation; Absence of Presumption.
(a) For the purposes hereof, (i) words in the singular shall be
held to include the plural and vice versa and words of one gender shall be held
to include the other gender as the context requires, (ii) the terms "hereof",
"herein", and "herewith" and words of similar import shall, unless otherwise
stated, be construed to refer to this Agreement as a whole (including all of the
Schedules and Exhibits hereto) and not to any particular provision of this
Agreement, and Article, Section, paragraph, Exhibit and Schedule references are
to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement
unless otherwise specified, (iii) the word "including" and words of similar
import when used in this Agreement shall mean "including, without limitation,"
unless the context otherwise requires or unless otherwise specified, (iv) the
word "or" shall not be exclusive, and (v) provisions shall apply, when
appropriate, to successive events and transactions.
(b) This Agreement shall be construed without regard to any
presumption or rule requiring construction or interpretation against the party
drafting or causing any instrument to be drafted.
Section 10.9 Severability. Any provision hereof which is invalid
or unenforceable shall be ineffective to the extent of such invalidity or
unenforceability, without affecting in any way the remaining provisions hereof.
Section 10.10 Further Assurances. The Company and each Buyer
agree that, from time to time, whether before, at or after any Closing Date,
each of them will execute and deliver such further instruments of conveyance and
transfer and take such other action as may be necessary to carry out the
purposes and intents hereof.
Section 10.11 Specific Performance. Each Buyer and the Company
acknowledge that, in view of the uniqueness of the parties hereto, the parties
hereto would not have an adequate remedy at law for money damages in the event
that this Agreement were not performed in accordance with its terms, and
therefore agree that the parties hereto shall be entitled to specific
enforcement of the terms hereof in addition to any other remedy to which the
parties hereto may be entitled at law or in equity.
Section 10.12 Several Liability. The obligations and liabilities
of Buyers under or in connection with this Agreement are several and not joint
(or joint and several).
Section 10.13 Interpretation of Schedules. Any matter set forth
on any Schedule shall be deemed to be referred to on all other Schedules to
which such matter logically relates and where such reference would be
appropriate and can reasonably be
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<PAGE> 41
inferred from the matters disclosed on the first Schedule as if set forth on
such other Schedules.
[Remainder of Page Intentionally Left Blank]
36
<PAGE> 42
IN WITNESS WHEREOF, this Agreement has been signed by or on
behalf of each of the parties hereto as of the day first above written.
FUTURELINK CORP.
By: /s/ K.B. SCOTT
--------------------------------------
Name: Kyle B.A. Scott
Title: Secretary
PEQUOT PRIVATE EQUITY FUND II, L.P.
By: Pequot Capital Management, Inc.,
Its Investment Manager
By: /s/ DAVID J. MALAT
---------------------------------------
David J. Malat, Chief Financial Officer
PEQUOT ENDOWMENT FUND, L.P.
By: Pequot Capital Management, Inc.,
Its Investment Manager
By: /s/ DAVID J. MALAT
---------------------------------------
David J. Malat, Chief Financial Officer
37
<PAGE> 43
SCHEDULE 1
TO THE SECURITIES PURCHASE AGREEMENT
DATED AS OF APRIL 28, 2000
PURCHASED SECURITIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
TOTAL CASH
BUYERS AT CLOSING RECEIVED
- ------------------------------------------------------------------------------------
COMMON STOCK
AT
$8.50 WARRANTS
PER SHARE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
PEQUOT PRIVATE EQUITY FUND II, L.P. 882,352 220,588 $ 7,499,992
Pequot Capital Management, Inc.
500 Nyala Farm Road
Westport, CT 06880
Jurisdiction of Organization:
Delaware
- ------------------------------------------------------------------------------------
PEQUOT ENDOWMENT FUND, L.P. 882,352 220,588 $ 7,499,992
Pequot Capital Management, Inc.
500 Nyala Farm Road
Westport, CT 06880
Jurisdiction of Organization:
Delaware
- ------------------------------------------------------------------------------------
TOTAL SECURITIES PURCHASED 1,764,704 441,176
- ------------------------------------------------------------------------------------
TOTAL CASH RECEIVED $14,999,984
- ------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 44
EXHIBIT A
FORM OF WARRANT
39
<PAGE> 45
EXHIBIT B
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
40
<PAGE> 46
EXHIBIT C
BOARD RESOLUTIONS
41
<PAGE> 1
EXHIBIT 10.11
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO, AND ARE
TRANSFERABLE ONLY UPON COMPLIANCE WITH, THE PROVISIONS OF A SECURITIES PURCHASE
AGREEMENT DATED AS OF APRIL 28, 2000 AMONG FUTURELINK CORP. AND CERTAIN OF ITS
STOCKHOLDERS AND THE RESTRICTIONS ON TRANSFER CONTAINED HEREIN. A COPY OF THE
ABOVE REFERENCED AGREEMENT IS ON FILE AT THE OFFICES OF FUTURELINK CORP.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE
SECURITIES LAWS, AND MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT
TO PURCHASE ________ SHARES OF COMMON STOCK OF
FUTURELINK CORP.
No. ______ Dated April 28, 2000
THIS CERTIFIES THAT, for value received, _____________ or
(subject to the restrictions on transfer contained herein and the provisions of
the Securities Purchase Agreement (as hereinafter defined)) its registered
assigns (the "Holder") is entitled to purchase from Futurelink Corp., a Delaware
corporation (the "Company"), at any time or from time to time after 9:00 a.m.,
New York City time, on the date hereof and prior to 5:00 p.m., New York City
time, on April 28, 2003 (the "Expiration Date"), at the place where the Warrant
Agency (as hereinafter defined) is located, at the Exercise Price (as
hereinafter defined), the number of shares of common stock, $.0001 par value
(the "Common Stock"), of the Company specified above, all subject to adjustment
and upon the terms and conditions as hereinafter provided.
Capitalized terms used and not otherwise defined in this Warrant
shall have the meanings set forth in Article IV hereof.
<PAGE> 2
ARTICLE I
EXERCISE OF WARRANTS
1.1. Method of Exercise. To exercise this Warrant in whole or in
part, the Holder shall deliver to the Company at the Warrant Agency, (a) this
Warrant, (b) a written notice, substantially in the form of the subscription
notice attached hereto as Annex 1, of such Holder's election to exercise this
Warrant, which notice shall specify the number of shares of Common Stock to be
purchased, the denominations of the share certificate or certificates desired
and the name or names of the Eligible Holder(s) in which such certificates are
to be registered, and (c) payment of the Exercise Price with respect to such
shares of Common Stock. Such payment may be made, at the option of the Holder,
by cash, money order, certified or bank cashier's check or wire transfer;
provided, however, that the Holder shall have the right (the "Right of Cashless
Exercise"), at its election, in lieu of delivering the Exercise Price in cash,
to instruct the Company in the form of subscription notice to retain, in payment
of the Exercise Price, a number of shares of Common Stock (the "Payment Shares")
equal to the quotient of the aggregate Exercise Price of the shares as to which
this Warrant is then being exercised divided by the Average Closing Price as of
the date of exercise and to deduct the Payment Shares from the shares to be
delivered to the Holder.
The Company shall, as promptly as practicable and in any event
within five (5) Business Days thereafter, execute and deliver or cause to be
executed and delivered, in accordance with such subscription notice, a
certificate or certificates representing the aggregate number of shares of
Common Stock specified in said notice (less the number of Payment Shares, if
applicable). The share certificate or certificates so delivered shall be in such
denominations as may be specified in such notice (or, if such notice shall not
specify denominations, one certificate shall be issued) and shall be issued in
the name of the Holder or such other name or names of Eligible Holder(s) as
shall be designated in such notice. Such certificate or certificates shall be
deemed to have been issued, and such Holder or any other person so designated to
be named therein shall be deemed for all purposes to have become holders of
record of such shares, as of the date the aforementioned notice is received by
the Company. If this Warrant shall have been exercised only in part, the Company
shall, at the time of delivery of the certificate or certificates, deliver to
the Holder a new Warrant evidencing the right to purchase the remaining shares
of Common Stock called for by this Warrant, which new Warrant shall in all other
respects be identical with this Warrant. The Company shall pay all expenses
payable in connection with the preparation, issuance and delivery of share
certificates and new Warrants as contemplated by Section 2.6 below (other than
transfer or similar taxes in connection with the transfer of securities), except
that, if share certificates or new Warrants shall be registered in a name or
names other than the name of the Holder, funds sufficient to pay all transfer
taxes payable as a result of such transfer shall be paid by the Holder at the
time of delivering the aforementioned notice or promptly upon receipt of a
written request of the Company for payment.
If this Warrant shall be surrendered for exercise within any
period during which the transfer books for shares of the Common Stock of the
Company or other securities purchasable upon the exercise of this Warrant are
closed for any purpose, the Company shall not
2
<PAGE> 3
be required to make delivery of certificates for the securities purchasable
upon such exercise until the date of the reopening of said transfer books.
1.2. Shares To Be Fully Paid and Nonassessable. All shares of
Common Stock issued upon the exercise of this Warrant shall be validly issued,
fully paid and nonassessable.
1.3. No Fractional Shares To Be Issued. The Company shall not be
required to issue fractions of shares of Common Stock upon exercise of this
Warrant. If any fraction of a share would, but for this Section, be issuable
upon any exercise of this Warrant, in lieu of such fractional share the Company
shall pay to the Holder, in cash, an amount equal to the same fraction of the
Average Closing Price per share of outstanding shares of Common Stock on the
Business Day immediately prior to the date of such exercise.
1.4. Securities Laws; Share Legend. The Holder, by acceptance of
this Warrant, agrees that this Warrant and all shares of Common Stock issuable
upon exercise of this Warrant will be disposed of only in accordance with the
Securities Act of 1933, as amended (the "Securities Act") and the rules and
regulations of the Securities and Exchange Commission (the "Commission")
promulgated thereunder, as well as any restrictions contained in the Securities
Purchase Agreement. In addition to any other legend which the Company may deem
advisable under the Securities Act and applicable state securities laws, all
certificates representing shares of Common Stock (as well as any other
securities issued hereunder in respect of any such shares) issued upon exercise
of this Warrant shall be endorsed as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO, AND ARE TRANSFERABLE ONLY UPON COMPLIANCE WITH, THE
PROVISIONS OF A SECURITIES PURCHASE AGREEMENT DATED AS OF APRIL
28, 2000, AMONG FUTURELINK CORP. AND CERTAIN OF ITS STOCKHOLDERS.
A COPY OF THE ABOVE REFERENCED AGREEMENT IS ON FILE AT THE
OFFICES OF FUTURELINK CORP.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD
OR OFFERED FOR SALE OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS
NOT REQUIRED.
Any certificate issued at any time in exchange or substitution
for any certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Securities Act) shall also bear such legend unless, in the opinion of
counsel (in form and substance reasonably satisfactory to the Company) selected
by the Holder of such certificate and reasonably acceptable to the Company, the
3
<PAGE> 4
securities represented thereby need no longer be subject to restrictions on
resale under the Securities Act.
ARTICLE II
WARRANT AGENCY; TRANSFER, EXCHANGE AND
REPLACEMENT OF WARRANT
2.1. Warrant Agency. Until such time, if any, as an independent
agency shall be appointed by the Company to perform services described herein
with respect to this Warrant (the "Warrant Agency"), the Company shall perform
the obligations of the Warrant Agency provided herein at its principal office
address or such other address as the Company shall specify by prior written
notice to the Holder.
2.2. Ownership of Warrant. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by any person
other than the Company) for all purposes and shall not be affected by any notice
to the contrary, until presentation of this Warrant for registration of transfer
as provided in this Article II.
2.3. Transfer of Warrant. This Warrant may only be transferred to
a purchaser subject to and in accordance with this Section 2.3, and any
attempted transfer which is not in accordance with this Section 2.3 shall be
null and void and the transferee shall not be entitled to exercise any of the
rights of the holder of this Warrant. The Company agrees to maintain at the
Warrant Agency books for the registration of such transfers of Warrants, and
transfer of this Warrant and all rights hereunder shall be registered, in whole
or in part, on such books, upon surrender of this Warrant at the Warrant Agency
in accordance with this Section 2.3, together with a written assignment of this
Warrant, substantially in the form of the assignment attached hereto as Annex 2,
duly executed by the Holder or its duly authorized agent or attorney-in-fact,
with signatures guaranteed by a bank or trust company or a broker or dealer
registered with the NASD, and funds sufficient to pay any transfer taxes payable
upon such transfer. Upon surrender of this Warrant in accordance with this
Section 2.3, the Company (subject to being satisfied that such transfer is in
compliance with Section 1.4) shall execute and deliver a new Warrant or Warrants
of like tenor and representing in the aggregate the right to purchase the same
number of shares of Common Stock in the name of the assignee or assignees and in
the denominations specified in the instrument of assignment, and this Warrant
shall promptly be canceled. Notwithstanding the foregoing, a Warrant may be
exercised by a new holder without having a new Warrant issued. The Company shall
not be required to pay any Federal or state transfer tax or charge that may be
payable in respect of any transfer of this Warrant or the issuance or delivery
of certificates for Common Stock in a name other than that of the registered
holder of this Warrant.
2.4. Division or Combination of Warrants. This Warrant may be
divided or combined with other Warrants, in connection with the partial exercise
of this Warrant, upon surrender hereof and of any Warrant or Warrants with which
this Warrant is to be combined at
4
<PAGE> 5
the Warrant Agency, together with a written notice specifying the names and
denominations in which the new Warrant or Warrants are to be issued, signed by
the holders hereof and thereof or their respective duly authorized agents or
attorneys-in-fact. Subject to compliance with Section 2.3 as to any transfer
which may be involved in the division or combination, the Company shall execute
and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to
be divided or combined in accordance with such notice.
2.5. Loss, Theft, Destruction of Warrant Certificates. Upon
receipt by the Company of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant and, in the case of any
such loss, theft or destruction, upon receipt of indemnity or security (in
customary form) reasonably satisfactory to the Company, or, in the case of any
such mutilation, upon surrender and cancellation of such Warrant and upon
reimbursement of the Company's reasonable incidental expenses, the Company will
make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant,
a new Warrant of like tenor and representing the right to purchase the same
aggregate number of shares of Common Stock.
2.6. Expenses of Delivery of Warrants. Except as otherwise
expressly provided herein, the Company shall pay all expenses (other than
transfer taxes as described in Section 2.3) and other charges payable in
connection with the preparation, issuance and delivery of Warrants hereunder and
shares of Common Stock upon the exercise hereof.
ARTICLE III
ANTIDILUTION PROVISIONS
3.1. Adjustments Generally. The Exercise Price and the number of
shares of Common Stock (or other securities or property) issuable upon exercise
of this Warrant shall be subject to adjustment from time to time upon the
occurrence of certain events, as provided in this Article III.
3.2. Common Share Reorganization. If the Company shall subdivide
its outstanding shares of Common Stock into a greater number of shares or
consolidate its outstanding shares of Common Stock into a smaller number of
shares (any such event being called a "Common Share Reorganization"), then (a)
the Exercise Price shall be adjusted, effective immediately after the record
date at which the holders of shares of Common Stock are determined for purposes
of such Common Share Reorganization, to a price determined by multiplying the
Exercise Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
on such record date before giving effect to such Common Share Reorganization and
the denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such Common Share Reorganization, and (b) the
number of shares of Common Stock subject to purchase upon exercise of this
Warrant shall be adjusted, effective at such time, to a number determined by
multiplying the number of shares of Common Stock subject to purchase immediately
before such Common Share Reorganization by a fraction, the numerator of which
shall be the number of shares outstanding after giving effect to such Common
Share Reorganization and the
5
<PAGE> 6
denominator of which shall be the number of shares of Common Stock outstanding
immediately before such Common Share Reorganization.
3.3. Common Share Distribution. (a) If, other than in an Exempt
Distribution, the Company shall issue or otherwise sell any shares of its Common
Stock (any such issuance or sale other than an Exempt Distribution, including
any event described in paragraphs (b) and (c) of this Section 3.3, hereafter
being called a "Common Share Distribution"), the Exercise Price shall be reduced
to the price (calculated to the nearest cent) determined by multiplying the
Exercise Price in effect immediately prior to such Common Share Distribution by
a fraction, the numerator of which shall be the sum of (A) the number of shares
of Common Stock outstanding immediately prior to such Common Share Distribution
multiplied by the Appraised Fair Market Value on the date of such Common Share
Distribution plus (B) the consideration received by the Company upon such Common
Share Distribution, and the denominator of which shall be the product of (1) the
total number of shares of Common Stock outstanding immediately after such Common
Share Distribution, multiplied by (2) the Appraised Fair Market Value on the
date of such Common Share Distribution.
No adjustment of the Exercise Price shall be made in an amount
less than 1% of such Exercise Price, but any such lesser adjustment shall be
carried forward and shall be made at the time of, and together with, the next
subsequent adjustment which together with any adjustments so carried forward
shall aggregate an amount equal to or greater than 1% of such Exercise Price.
If any Common Share Distribution shall require an adjustment to
the Exercise Price pursuant to the foregoing provisions of this Section 3.3,
then effective at the time such adjustment is made, the number of shares of
Common Stock subject to purchase upon exercise of this Warrant shall be
increased to a number determined by multiplying the number of shares of Common
Stock subject to purchase immediately before such Common Share Distribution by a
fraction, the numerator of which shall be the number of shares outstanding
immediately after giving effect to such Common Share Distribution and the
denominator shall be the sum of the number of shares outstanding immediately
before giving effect to such Common Share Distribution plus the number of shares
of Common Stock which the aggregate consideration received by the Company with
respect to such Common Share Distribution would purchase at the Appraised Fair
Market Value on the date of such Common Share Distribution (before giving effect
to such Common Share Distribution). The provisions of this Section 3.3 shall not
operate to increase the Exercise Price or reduce the number of shares of Common
Stock subject to purchase upon exercise of this Warrant.
(b) If, other than in an Exempt Distribution, the Company shall
issue, sell, distribute or otherwise grant in any manner (whether directly or by
assumption in a merger or otherwise) any rights to subscribe for or to purchase,
or any warrants or options for the purchase of, Common Stock or any stock or
securities convertible into or exchangeable for Common Stock (such rights,
warrants or options being herein called "Options" and such convertible or
exchangeable stock or securities being herein called "Convertible Securities"),
whether or not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per share for
which shares of Common Stock are issuable upon
6
<PAGE> 7
exercise of such Options or upon conversion or exchange of such Convertible
Securities (determined by dividing (i) the aggregate amount, if any, received or
receivable by the Company as consideration for the granting of such Options,
plus the minimum aggregate amount of additional consideration payable to the
Company upon the exercise of all such Options, plus, in the case of Options to
acquire Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the Appraised
Fair Market Value on the date of granting such Options (before giving effect to
such grant), then, for purposes of paragraph (a) above, the total maximum number
of shares of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of all such Convertible Securities issuable upon the
exercise of such Options shall be deemed to have been issued as of the date of
granting of such Options and thereafter shall be deemed to be outstanding and
the Company shall be deemed to have received as consideration such price per
share, determined as provided above, therefor, provided, however upon the
expiration or termination of Convertible Securities or Options, if any thereof
shall not have been converted, exchanged or exercised, the number of shares of
Common Stock deemed to be issued and outstanding pursuant to this subsection (b)
shall be reduced by such number of shares as to which Convertible Securities or
Options shall have expired or terminated unexercised, and such shares shall no
longer be deemed to be issued and outstanding, and the Exercise Price then in
effect shall be readjusted and thereafter be the price which it would have been
had adjustment been made on the basis of the issuance only of shares actually
issued pursuant to such Convertible Securities or Options. Except as otherwise
provided in paragraph (d) below, no additional adjustment of the Exercise Price
shall be made upon the actual exercise of such Options or upon conversion or
exchange of such Convertible Securities.
(c) If, other than in an Exempt Distribution, the Company shall
issue, sell or otherwise distribute (whether directly or by assumption in a
merger or otherwise) any Convertible Securities, whether or not the rights to
exchange or convert thereunder are immediately exercisable, and the price per
share for which shares of Common Stock are issuable upon such conversion or
exchange (determined by dividing (i) the aggregate amount received or receivable
by the Company as consideration for the issue, sale or distribution of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of Common Stock issuable
upon the conversion or exchange of all such Convertible Securities) shall be
less than the Appraised Fair Market Value on the date of such issue, sale or
distribution (before giving effect to such issue, sale or distribution), then,
for purposes of paragraph (a) above, the total maximum number of shares of
Common Stock issuable upon conversion or exchange of all such Convertible
Securities shall be deemed to have been issued as of the date of the issue, sale
or distribution of such Convertible Securities and thereafter shall be deemed to
be outstanding and the Company shall be deemed to have received as consideration
such price per share, determined as provided above, therefor, provided, however
upon the expiration or termination of Convertible Securities or Options, if any
thereof shall not have been converted, exchanged or exercised, the number of
shares of Common Stock deemed to be issued and outstanding pursuant to this
subsection (c) shall be reduced by such number of shares as to which
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<PAGE> 8
Convertible Securities or Options shall have expired or terminated unexercised,
and such shares shall no longer be deemed to be issued and outstanding, and the
Exercise Price then in effect shall be readjusted and thereafter be the price
which it would have been had adjustment been made on the basis of the issuance
only of shares actually issued pursuant to such Convertible Securities or
Options. Except as otherwise provided in paragraph (d) below, no additional
adjustment of the Exercise Price shall be made upon the actual conversion or
exchange of such Convertible Securities, and, if any such issue, sale or
distribution of such Convertible Securities is made upon exercise of any Options
to purchase any such Convertible Securities for which adjustments to the
Exercise Price have been or are to be made pursuant to other provisions of this
Section 3.3, no further adjustment of the Exercise Price shall be made by reason
of such issue, sale or distribution.
(d) If the purchase price provided for in any Option referred to
in paragraph (b) above, the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in paragraph
(b) or (c) above, or the rate at which any Convertible Securities referred to in
paragraph (b) or (c) above are convertible into or exchangeable for Common Stock
shall change at any time (other than under or by reason of provisions designed
to protect against dilution upon an event which results in a related adjustment
pursuant to this Article III), the Exercise Price then in effect shall forthwith
be readjusted (effective only with respect to any exercise of this Warrant after
such readjustment) to the Exercise Price which would then be in effect had the
adjustment made upon the issue, sale, distribution or grant of such Options or
Convertible Securities been made based upon such changed purchase price,
additional consideration or conversion rate, as the case may be; provided,
however, that such readjustment shall give effect to such change only with
respect to such Options and Convertible Securities as then remain outstanding.
(e) If any shares of Common Stock, Options or Convertible
Securities shall be issued, sold or distributed for cash, the consideration
received therefor shall be deemed to be the amount received by the Company
therefor, after deduction therefrom of any expenses incurred and any
underwriting commission or concessions paid or allowed by the Company in
connection therewith. If any shares of Common Stock, Options or Convertible
Securities shall be issued, sold or distributed for a consideration other than
cash, the amount of the consideration other than cash received by the Company
shall be deemed to be the Fair Market Value of such consideration, after
deduction of any expenses incurred and any underwriting commissions or
concessions paid or allowed by the Company in connection therewith. If any
shares of Common Stock, Options or Convertible Securities shall be issued in
connection with any merger in which the Company is the surviving corporation,
the amount of consideration therefor shall be deemed to be the Fair Market Value
of such portion of the assets and business of the nonsurviving corporation as
shall be attributable to such shares of Common Stock, Option or Convertible
Securities, as the case may be. If any Options shall be issued in connection
with the issue and sale of other securities of the Company, together comprising
one integral transaction in which no specific consideration is allocated to such
Options by the parties thereto, such Options shall be deemed to have been issued
for an amount of consideration equal to the Fair Market Value thereof.
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<PAGE> 9
3.4. Capital Reorganization. If there shall be any consolidation
or merger to which the Company is a party, other than a consolidation or a
merger in which the Company is a continuing corporation and which does not
result in any reclassification of, or change (other than a Common Share
Reorganization or a change in par value) in, outstanding shares of Common Stock,
or any sale or conveyance of the property of the Company as an entirety or
substantially as an entirety (any such event being called a "Capital
Reorganization"), then, effective upon the effective date of such Capital
Reorganization, the Holder shall have the right to purchase, upon exercise of
this Warrant, the kind and amount of shares of stock and other securities and
property (including cash) which the Holder would have owned or have been
entitled to receive after such Capital Reorganization if this Warrant had been
exercised immediately prior to such Capital Reorganization. As a condition to
effecting any Capital Reorganization, the Company or the successor or surviving
corporation, as the case may be, shall execute and deliver to the Holder and to
the Warrant Agency an agreement as to the Holder's rights in accordance with
this Section 3.4, providing for subsequent adjustments as nearly equivalent as
may be practicable to the adjustments provided for in this Article III. The
provisions of this Section 3.4 shall similarly apply to successive Capital
Reorganizations.
3.5. Adjustment Rules. (a) Any adjustments pursuant to this
Article III shall be made successively whenever an event referred to herein
shall occur.
(b) No adjustment shall be made pursuant to this Article III in
respect of the issuance from time to time of shares of Common Stock upon the
exercise of this Warrant.
(c) If the Company shall set a record date to determine the
holders of shares of Common Stock for purposes of a Common Stock Reorganization
or Capital Reorganization and shall legally abandon such action prior to
effecting such action, then no adjustment shall be made pursuant to this Article
III in respect of such action.
3.6. Proceeding Prior to Any Action Requiring Adjustment. As a
condition precedent to the taking of any action which would require an
adjustment pursuant to this Article III, the Company shall take any action which
may be necessary, including obtaining regulatory approvals or exemptions, in
order that the Company may thereafter validly and legally issue as fully paid
and nonassessable all shares of Common Stock which the Holder is entitled to
receive upon exercise hereof.
3.7. Notice of Dividends, Distributions and Adjustments. The
Company shall give notice to the Holder at least 15 days prior to any record
date in respect of the payment of dividends or other distributions on the Common
Stock, or in respect of any Common Share Reorganization or Capital
Reorganization describing, in each case, such event in reasonable detail and
specifying such record date. In addition, no later than 15 days after the
effective date or record date, as the case may be, of any Common Share
Reorganization, Common Share Distribution or Capital Reorganization or any other
action that requires an adjustment pursuant to this Article III or any grant,
issuance or sale covered by Section 3.9, the Company shall give notice to the
Holder of such event, describing such event in reasonable detail and specifying
the record date or effective date, as the case may be, and, if determinable, the
required adjustment and the computation thereof. If the required adjustment is
not determinable at the time of such
9
<PAGE> 10
notice, the Company shall give notice to the Holder of such adjustment and
computation promptly after such adjustment becomes determinable.
3.8. Dividends Not Paid Out of Earnings or Earned Surplus. In the
event the Company shall declare a dividend upon the Common Stock (other than a
dividend payable in Common Stock) payable otherwise than out of earnings or
earned surplus, determined in accordance with generally accepted accounting
principles, including the making of appropriate deductions for minority
interests, if any, in subsidiaries (herein referred to as "Liquidating
Dividends"), then, as soon as possible after the exercise of this Warrant, the
Company shall pay to the person exercising such Warrant an amount equal to the
aggregate value at the time of such exercise of all Liquidating Dividends
(including but not limited to the Common Stock which would have been issued at
the time of such earlier exercise and all other securities which would have been
issued with respect to such Common Stock by reason of stock splits, stock
dividends, mergers or reorganizations, or for any other reason). For the
purposes of this Paragraph 3.8, a dividend other than in cash shall be
considered payable out of earnings or earned surplus only to the extent that
such earnings or earned surplus are charged an amount equal to the fair value of
such dividend as determined in good faith by the Board of Directors of the
Company.
3.9 Grant, Issue or Sale of Options, Convertible Securities, or
Rights. If at any time or from time to time the Company shall grant, issue or
sell any Options, Convertible Securities or rights to purchase property (the
"Purchase Rights") pro rata to the record holders of any class of Common Stock
of the Company and such grants, issuances or sales do not result in an
adjustment of the Purchase Price under Section 3.3 hereof, then the holder of
this Warrant shall be entitled to acquire (within thirty (30) days after the
later to occur of the initial exercise date of such Purchase Rights or receipt
by such holder of the notice concerning Purchase Rights as to which such holder
may be entitled under Paragraph 3.7) and upon the terms applicable to such
Purchase Rights either:
(i) the aggregate Purchase Rights which such holder could have
acquired if it had held the number of shares of Common Stock acquirable
upon exercise of this Warrant immediately before the grant, issuance or
sale of such Purchase Rights; provided that if any Purchase Rights were
distributed to holders of Common Stock without the payment of additional
consideration by such holders, the corresponding Purchase Rights shall
be distributed to the exercising holder of this Warrant as soon as
possible after such exercise and it shall not be necessary for the
exercising holder of this Warrant specifically to request delivery of
such rights; or
(ii) in the event that any such Purchase Rights shall have
expired or shall expire prior to the end of said thirty (30) day period,
the number of shares of Common Stock or the amount of property which
such holder could have acquired upon such exercise at the time or times
at which the Company granted, issued or sold such expired Purchase
Rights.
3.10 Adjustment by Board of Directors. If any event occurs as to
which, in the opinion of the Board of Directors of the Company, the provisions
of this Article III are not
10
<PAGE> 11
strictly applicable or if strictly applicable would not fairly protect the
rights of the holder of this Warrant in accordance with the essential intent and
principles of such provisions, then the Board of Directors shall make an
adjustment in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such rights as aforesaid, but
in no event shall any adjustment have the effect of increasing the Exercise
Price or decreasing the number of shares of Common Stock into which the Warrant
is exercisable as otherwise determined pursuant to any of the provisions of this
Article III except in the case of a combination of shares of a type contemplated
in Paragraph 3.2 and then in no event to an amount larger than the Exercise
Price as adjusted pursuant to Paragraph 3.2.
ARTICLE IV
DEFINITIONS
The following terms, as used in this Warrant, have the following
respective meanings:
"Appraised Fair Market Value" means, as of any date, in respect
of shares of Common Stock, the Average Closing Price, if clauses (i), (ii) or
(iii) of the definition of Average Closing Price applies or, if clause (iv) of
such definition obtains, the Fair Market Value per share of Common Stock, as
determined by a qualified independent appraiser of national standing having not
less than five (5) years' experience in the valuation of securities, the
selection of which is mutually agreed by the Holder and the Company. In all
cases where Appraised Fair Market Value is determined by an independent
appraiser, as aforesaid, one half of such appraiser's fees and expenses shall be
paid by each of the Holder and the Company. For the purposes of this definition,
the agreement of the Holders of a majority in interest of the Warrants issued
pursuant to the Securities Purchase Agreement shall be deemed to be approval of
all Holders of Warrants issued pursuant to the Securities Purchase Agreement.
"Average Closing Price" means, as of any date, (i) if shares of
Common Stock are listed on a national securities exchange, the average of the
closing sale prices per share therefor on the largest securities exchange on
which such shares are traded on the last ten (10) trading days before such date,
(ii) if such shares are listed on The Nasdaq National Market but not on any
national securities exchange, the average of the average of the closing bid and
asked prices per share therefor on The Nasdaq National Market on the last ten
(10) trading days before such date, (iii) if such shares are not listed on
either a national securities exchange or The Nasdaq National Market, the average
of the average of the closing bid and asked prices per share therefor in the
over the counter market on the last twenty (20) trading days before such date
or, (iv) if no such sales prices are available, the Fair Market Value of the
Company per share of outstanding Common Stock as of such date.
"Business Days" means each day in which banking institutions in
New York, New York are not required or authorized by law or executive order to
close.
"Capital Reorganization" has the meaning set forth in Section
3.4.
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<PAGE> 12
"Common Share Distribution" has the meaning set forth in Section
3.3(a).
"Common Share Reorganization" has the meaning set forth in
Section 3.2.
"Common Stock" has the meaning set forth in the first paragraph
of this Warrant.
"Company" has the meaning set forth in the first paragraph of
this Warrant.
"Convertible Securities" has the meaning set forth in Section
3.3(b).
"Eligible Holder" means the Holder and any permitted transferee
of the Holder pursuant to and in accordance with this Warrant and the Securities
Purchase Agreement.
"Exempt Distribution" means an issuance or other sale by the
Company of any shares of its Common Stock:
(i) pursuant to a Common Share Reorganization;
(ii) (a) to the Company's officers or directors or (b) to
the Company's officers, directors or employees pursuant to employee
stock option, benefit or incentive plans established for their benefit,
whether in existence on the date hereof or approved by the Board of
Directors of the Company after the date hereof, provided that the number
of shares of Common Stock issued from and after April 21, 2000 pursuant
to all issuances and sales pursuant to this subparagraph (ii) does not
exceed, in the aggregate, ten percent (10%) of the Fully Diluted Capital
of the Company as of April 21, 2000;
(iii) at a price per share of more than the greater of (a)
the Exercise Price or (b) eighty percent (80%) of the Appraised Fair
Market Value, which in the case of an issuance in connection with a
merger or acquisition shall be measured on the date of the execution of
the definitive documentation with respect to such merger of acquisition;
(iv) upon the conversion or exercise of any options,
warrants or other convertible securities of the Company outstanding on
April 21, 2000 and disclosed on the disclosure schedules to the
Securities Purchase Agreement; or
(v) to the Holder or any Affiliate thereof other than an
issuance pursuant to the exercise of preemptive rights of such Holder.
"Exercise Price" means US$9.25 per share of Common Stock, subject
to adjustment pursuant to Article III.
"Expiration Date" has the meaning set forth in the first
paragraph of this Warrant.
"Fair Market Value" means the fair market value of the business,
property or assets in question as determined in good faith by the Board of
Directors of the Company and
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<PAGE> 13
unless waived by a majority in interest of the Holders of the Warrants issued
pursuant to the Securities Purchase Agreement confirmed by an independent
nationally recognized financial advisor with expertise in valuing companies of
this type, or determined as otherwise specifically provided herein.
"Fully Diluted Capital" means, on any given date:
(i) all shares, units and other participation interests,
however denominated, of any Common Stock issued and outstanding on such
date; and
(ii) all shares, units and other participation interests,
however denominated, of any Common Stock declared as a dividend or
distribution on any Common Stock, but unpaid as of such date; and
(iii) all shares, units and other participation interests,
however denominated, of any Common Stock issuable upon exercise or
conversion of or in exchange for any option, subscription right or
convertible security, or any other contractual right, however
denominated, entitling the holder thereof to acquire from the Company
any Common Stock.
Fully Diluted Capital shall include all Common Stock issuable upon exercise of
this Warrant. With respect to any Common Stock issuable as provided in paragraph
(iii) above and which is indeterminable as to amount by virtue of any condition
or contingency thereon, Fully Diluted Capital shall include the greatest amount
of Common Stock that may reasonably be issuable thereon.
"Holder" has the meaning set forth in the first paragraph of this
Warrant.
"NASD" means The National Association of Securities Dealers, Inc.
"Options" has the meaning set forth in Section 3.3(b).
"Payment Shares" has the meaning set forth in Section 1.1.
"Right of Cashless Exercise" has the meaning set forth in Section
1.1.
"Securities Act" means the Securities Act of 1933, as amended,
and any successor Federal statute, and the rules and regulations of the
Securities and Exchange Commission (or its successor) thereunder, all as the
same shall be in effect from time to time.
"Securities Purchase Agreement" means the Securities Purchase
Agreement dated as of April 28, 2000 by and among the Company, Pequot Private
Equity Fund II, L.P. and Pequot Endowment Fund, L.P.
"Warrant Agency" has the meaning set forth in Section 2.1.
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<PAGE> 14
"Warrants" means this Warrant and the other Warrants issued
pursuant to the Securities Purchase Agreement.
ARTICLE V
MISCELLANEOUS
5.1. Governing Law. This Warrant shall be governed in all
respects by the laws of the State of New York, without reference to its
conflicts of law principles.
5.2. Covenants To Bind Successor and Assigns. All covenants,
stipulations, promises and agreements contained in this Warrant by or on behalf
of the Company shall bind its successors and assigns, whether or not so
expressed.
5.3. Entire Agreement. This Warrant constitutes the full and
entire understanding and agreement between the parties with regard to the
subject matter hereof and no party shall be liable or bound to any other party
in any manner by any warranties, representations, or covenant except as
specifically set forth herein or therein.
5.4. Waivers and Amendments. No failure or delay of the Holder in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of such right or power, or any abandonment
or discontinuance of steps to enforce such a right or power, preclude any other
or further exercise thereof or the exercise of any other right or power. The
rights and remedies of the Holder are cumulative and not exclusive of any rights
or remedies which it would otherwise have. The provisions of this Warrant may be
amended, modified or waived with (and only with) the written consent of the
Company and the Holders of a majority in interest of the Warrants then
outstanding; provided, however, that no such amendment, modification or waiver
shall, without the written consent of the Holders of any Warrant, (a) change the
number of shares of Common Stock subject to purchase upon exercise of such
Warrant, the Exercise Price or provisions for payment thereof or (b) amend,
modify or waive the provisions of Section 5.4 or Article III of such Warrant.
Any such amendment, modification or waiver effected pursuant to
this Section shall be binding upon the Holders of all Warrants and upon the
Company, except as provided in the proviso to the last sentence of the preceding
paragraph. In the event of any such amendment, modification or waiver the
Company shall give prompt notice thereof to all holders of Warrants and, if
appropriate, notation thereof shall be made on all Warrants thereafter
surrendered for registration of transfer or exchange.
5.5. Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be mailed by express,
registered or certified mail, postage
14
<PAGE> 15
prepaid, return receipt requested, sent by telecopy (with confirmation of
transmission received and followed by the posting of a "hard copy" of the notice
or communication by first-class U.S. mail), or by courier service guaranteeing
overnight delivery with charges prepaid, or otherwise delivered by hand or by
messenger, and shall be conclusively deemed to have been received by a party
hereto and to be effective on the day on which delivered or telecopied to such
party at its address set forth below (or at such other address as such party
shall specify to the other parties hereto in writing), or, if sent by registered
or certified mail, on the third business day after the day on which mailed,
addressed to such party at such address.
In the case of the Holder, such notices and communications shall
be addressed to its address as shown on the books maintained by the Warrant
Agency, unless the Holder shall notify the Company and the Warrant Agency in
writing that notices and communications should be sent to a different address,
in which case such notices and communications shall be sent to the address
specified by the Holder. In the case of the Company, such notices and
communications shall be addressed as follows: Attention: Raghu Kilambi,
Futurelink Corp., 6 Morgan Street, Suite 100, Irvine, California 92618.
5.6. Survival of Agreements; Representations and Warranties, etc.
All warranties, representations and covenants made by the Company herein shall
be considered to have been relied upon by the Holder and shall survive the
issuance and delivery of the Warrant, regardless of any investigation made by
the Holder, and shall continue in full force and effect so long as this Warrant
is outstanding.
5.7. Severability. In case any one or more of the provisions
contained in this Warrant shall be held to be invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired
thereby. The parties shall endeavor in good faith negotiations to replace the
invalid, illegal or unenforceable provisions with valid provisions the economic
effect of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
5.8. Section Headings. The section headings used herein are for
convenience of reference only, do not constitute a part of this Warrant and
shall not affect the construction of or be taken into consideration in
interpreting this Warrant.
5.9. No Rights as Stockholder; No Limitations on Company Action.
This Warrant shall not entitle the Holder to any rights as a stockholder of the
Company. No provision of this Warrant and no right or option granted or
conferred hereunder shall in any way limit, affect or abridge the exercise by
the Company of any of its corporate rights or powers to recapitalize, amend its
certificate of incorporation, reorganize, consolidate or merge with or into
another corporation or to transfer all or any part of its property or assets, or
the exercise of any other of its corporate rights or powers.
15
<PAGE> 16
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its duly authorized representative.
FUTURELINK CORP.
By:______________________________
Raghunath Kilambi, Executive Vice
President and Chief Financial Officer
16
<PAGE> 17
Annex 1
SUBSCRIPTION NOTICE
Dated:________________
The undersigned hereby irrevocably elects to exercise the right
of purchase evidenced by the attached Warrant for, and to purchase thereunder,
__________ shares of Common Stock of Futurelink Corp. as provided for therein.
The undersigned:
[ ] tenders herewith payment of the Exercise Price (as defined in the
attached Warrant) for such shares in the form of cash, money order,
certified or bank cashier's check or wire transfer.
[ ] hereby instructs you to retain, in payment of the Exercise Price for
such shares, a number of shares of Common Stock (the "Payment Shares")
equal to the quotient of the aggregate Exercise Price for such shares
divided by the Average Closing Price (as defined in the attached
Warrant) as of the date hereof and to deduct the Payment Shares from the
shares to be delivered.
(Please check box to indicate method of payment of the Exercise Price.)
INSTRUCTIONS FOR REGISTRATION OF COMMON STOCK
Please issue a certificate or certificates for such shares of
Common Stock in the following name or names and denominations:
Name:_____________________________________________
(Please typewrite or print in block letters.)
Address:__________________________________________
Denomination:_____________________________________
REPRESENTATIONS AND WARRANTIES
In connection with the exercise of the attached Warrant, the
undersigned hereby represents and warrants that:
(i) unless registered pursuant to a registration rights agreement
or otherwise, it recognizes that the shares of Common Stock issuable pursuant to
the attached Warrant have not been registered under the Securities Act of 1933,
as amended (the "Securities Act") or any
<PAGE> 18
applicable state securities laws, and may not transferred, sold, or offered for
sale unless registered pursuant to the Securities Act and all applicable state
securities laws or unless an exemption from such registration in available and
the Company has received an opinion to that effect from counsel reasonably
satisfactory to the Company;
(ii) it recognizes that the shares of Common Stock issuable
pursuant to the attached Warrant are subject to, and are transferable only upon
compliance with, the provisions of the Securities Purchase Agreement;
(iii) if the undersigned is an individual, the undersigned is an
"accredited investor" as that term is defined in Rule 501(a)(5) or (6) of
Regulation D promulgated under the Securities Act by reason that the undersigned
is an individual (i) having an individual net worth, or a joint net worth with
the undersigned's spouse, at the time of the purchase that exceeds $1,000,000,
or (ii) who had an individual income in excess of $200,000 in each of the two
most recent years or joint income with the undersigned's spouse in excess of
$300,000 in each of those years and has a reasonable expectation of reaching the
same income level in the current year; or if the undersigned is a corporation or
other entity, the undersigned is an "accredited investor" as that term is
defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D promulgated under the
Securities Act; and
(iv) it is purchasing the shares of Common Stock for investment
and not with a view to resale or distribution or any present intention to resell
or distribute, except in compliance with the Securities Act and all applicable
state securities laws.
ISSUANCE OF NEW WARRANT
If said number of shares shall not be all the shares issuable
upon exercise of the attached Warrant, a new Warrant is to be issued in the name
of the undersigned for the balance remaining of such shares less any fraction of
a share paid in cash.
Signature:__________________________
Note: The above signature should correspond exactly with the
name on the face of the attached Warrant or with the name
of the assignee appearing in the assignment form below.
ii
<PAGE> 19
Annex 2
ASSIGNMENT
For value received, the undersigned hereby sells, assigns and
transfers unto:
Name:____________________________________________
(Please typewrite or print in block letters)
Address:_________________________________________
the right to purchase Common Stock (as defined in the attached Warrant)
represented by the attached Warrant to the extent of _______________ shares as
to which such right is exercisable and does hereby irrevocably constitute and
appoint ______________________________________________________________________
__________________________________________________, attorney-in-fact, to
transfer said Warrant on the books of Futurelink Corp., with full power of
substitution in the premises.
Dated:____________________
Signature:_________________________
Note: The above signature should correspond exactly with
the name on the face of the attached Warrant.
<PAGE> 1
EXHIBIT 15.1
March 29, 2000
The Board of Directors and Stockholders
FutureLink Corp.
We are aware of the inclusion in Amendment No. 1 to the Registration Statement
(Form SB-2 No. 333-30178) of FutureLink Corp. for the registration of 5,000,000
shares of its common stock of our report dated November 3, 1999 relating to the
unaudited financial statements of CN Networks, Inc. as of September 30, 1998 and
1999 and for the nine months then ended.
/s/ Moreland & Davis
Alameda County, California
March 28, 2000
<PAGE> 1
EXHIBIT 15.2
March 29, 2000
The Board of Directors and Stockholders
FutureLink Corp.
We are aware of the inclusion in Amendment No. 1 to the Registration Statement
(Form SB-2 No. 333-30178) of FutureLink Corp. for the registration of 5,000,000
shares of its common stock of our report dated February 3, 2000 relating to the
unaudited combined financial statements of Async Technologies, Inc. and Async
Technical Institute, Inc. as of September 30, 1998 and 1999 and for the nine
months then ended.
/s/ M. Jevahirian & Co.
Birmingham, Michigan
March 29, 2000
<PAGE> 1
EXHIBIT 21.0
LIST OF SUBSIDIARIES
We currently have the following wholly-owned subsidiaries:
1. FutureLink Micro Visions Corp., a Delaware corporation, doing business
as FutureLink
2. FutureLink Pleasanton Corp., a Delaware corporation, doing business as
FutureLink
3. FutureLink Async Corp., a Delaware corporation, doing business as
FutureLink
4. FutureLink VSI Corp., a Maryland corporation, doing business as
FutureLink
5. FutureLink Madison Corp., a Delaware corporation, doing business as
FutureLink
6. FutureLink Distribution Corp., an Alberta corporation, doing business
as FutureLink
7. FutureLink Europe Limited, a U.K. corporation, doing business as
FutureLink
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
March 14, 2000, except for Notes 13 and 16, as to which the date is April 29,
2000, in Amendment No. 2 to the Registration Statement (Form SB-2 No. 333-30178)
and related Prospectus of FutureLink Corp. dated May 3, 2000.
/s/ ERNST & YOUNG LLP
Orange County, California
May 1, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 28, 2000, with respect to the financial
statements of Vertical Software, Inc. included in Amendment No. 2 to the
Registration Statement (Form SB-2 No. 333-30178) and related Prospectus of
FutureLink Corp. dated May 3, 2000.
/S/ ERNST & YOUNG LLP
MCLEAN, VIRGINIA
MAY 1, 2000
<PAGE> 1
EXHIBIT 23.4
CONSENT OF JOEL E. SAMMET & CO., INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 14, 2000, with respect to the financial
statements of Microlan Systems, Inc. "DBA" Madison Technology Group, and
February 15, 2000 with respect to the financial statements of Madison Consulting
Resources, Inc. and Madison Consulting Resources NJ, Inc. included in the
Registration Statement (Form SB-2 No. 333-30178, Amendment No. 2) and related
Prospectus of FutureLink Corp. dated May 3, 2000.
/s/ JOEL E. SAMMET & CO.
New York, New York 10005
May 1, 2000
<PAGE> 1
EXHIBIT 23.5
CONSENT OF BDO DUNWOODY LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 14, 2000, with respect to the financial
statements of Charon Systems Inc. included in the Registration Statement (Form
SB-2) and related Prospectus of FutureLink Corporation dated May 3, 2000.
/s/ BDO DUNWOODY LLP
Markham, Ontario
May 2, 2000
<PAGE> 1
EXHIBIT 23.6
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 17, 1999, with respect to the financial
statements of Executive LAN Management, Inc., dba Micro Visions included in
Amendment No. 2 to the Registration Statement (Form SB-2 No. 333-30178) and
related Prospectus of FutureLink Corp. dated May 3, 2000.
/s/ ERNST & YOUNG LLP
Orange County, California
May 1, 2000
<PAGE> 1
EXHIBIT 23.7
CONSENT OF MORELAND & DAVIS, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 30, 1999, with respect to the financial
statements of CN Networks, Inc., included in Amendment No. 2 to the Registration
Statement (Form SB-2 No. 333-30178) and related Prospectus of FutureLink Corp.
dated May 3, 2000.
/s/ MORELAND & DAVIS
Alameda County, California
May 2, 2000
<PAGE> 1
EXHIBIT 23.8
CONSENT OF M. JEVAHIRIAN & CO., INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 3, 2000, with respect to the combined
financial statements of Async Technologies, Inc. and Async Technical Institute,
Inc. included in the Registration Statement (Form SB-2) and related Prospectus
of FutureLink Corp. dated May 3, 2000.
/s/ M. JEVAHIRIAN & CO.
Birmingham, Michigan
May 1, 2000
<PAGE> 1
EXHIBIT 23.9
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 4, 2000, with respect to the financial
statements of KNS Holdings Limited included in Amendment No. 2 to the
Registration Statement (Form SB-2 No. 333-30178) and related Prospectus of
FutureLink Corporation dated May 3, 2000.
/s/ ERNST & YOUNG
Reading, England
May 1, 2000
