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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FUTURELINK CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 7371 95-4763404
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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:
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
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. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
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Common Stock, par value
$0.0001 per share........... 5,750,000(2) $22.75 $130,812,500 $34,535
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended,
and based on the average of the high and low closing prices as of February
9, 2000 as reported on the Nasdaq National Market.
(2) Includes 750,000 shares issuable upon exercise of the Underwriters'
overallotment option.
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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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 FEBRUARY 11, 2000
PRELIMINARY PROSPECTUS
5,000,000 SHARES
[FUTURELINK LOGO]
COMMON STOCK
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This is a public offering of 5,000,000 shares of common stock of FutureLink
Corp. The market price per share of our common stock after this offering may be
higher or lower than the price at which shares will be sold in this offering.
Our common stock currently trades on the Nasdaq National Market under the symbol
"FTRL." On February 10, 2000, the last reported sale price for our common stock
on the Nasdaq National Market was $22.50 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
PER
SHARE TOTAL
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Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to us............................ $ $
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The underwriters may, under certain circumstances, 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.
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BEAR, STEARNS & CO. INC.
ROBERTSON STEPHENS
CIBC WORLD MARKETS
C. E. UNTERBERG, TOWBIN
The date of this prospectus is , 2000
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[INSIDE FRONT COVER]
[INSERT GRAPHIC SHOWING DATA CENTERS AND USERS ACCESSING APPLICATIONS BY
DEDICATED TELECOM LINE, OVER THE INTERNET OR BY A WIRELESS CONNECTION]
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PROSPECTUS SUMMARY
This summary highlights certain information contained elsewhere in this
prospectus. This summary does not contain all of the information that you should
consider before investing in our common stock. 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. For our server-based computing customers, we
install and integrate software applications on our customers' servers using
Citrix server-based computing software. 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 introduced our ASP services in March
1999.
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.
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 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.
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,
- 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,
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- the growing demand for remote and shared access to software applications,
and
- the increasing number of software applications and types of computer
devices, requiring integration expertise that is not available to, or is
increasingly expensive for, many companies.
OUR 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 levels of service not easily
attainable by our customers.
- Reduced dependency on information technology staff. 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 thereby offer our customers significant cost
savings. Our ASP customers are better able to forecast and budget their
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.
- Ability to run on a variety of hardware systems. We can integrate
different computer systems and computing devices, allowing our customers
to implement our solutions without replacing existing computer hardware
and extend the useful life of their existing computer systems.
- Flexibility. We can accommodate virtually any software application. Our
customers have the flexibility to host some or all of their software
applications on our servers.
OUR STRATEGY
We seek to build a global ASP and continue to develop our server-based
computing business by:
- leveraging our existing server-based computing capabilities to build our
ASP business,
- rapidly penetrating the market through our third-party distribution
channels,
- broadening our software relationships, and
- expanding through acquisitions.
OUR ADDRESS AND TELEPHONE NUMBER
The address of our principal executive office is 6 Morgan, Suite 100,
Irvine, California 92618. Our telephone number is (888) 464-2768. Our website
address is www.futurelink.net. Information contained on our website does not
constitute part of this prospectus.
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This prospectus contains trademarks and names of persons other than
FutureLink, which are the property of their respective owners.
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THE OFFERING
Common stock being offered by us.... 5,000,000 shares(1)
Common stock outstanding after this
offering............................ 64,404,530 shares(1)(2)
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
in connection with our acquisitions, to
develop service offerings that enhance
and complement our current service
offerings, to expand our sales and
marketing efforts and for working
capital and other general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol....... FTRL
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(1) Excludes 750,000 shares to be sold by us if the underwriters' overallotment
option is exercised in full, as described in "Underwriting."
(2) Includes:
- 52,315,640 shares of our common stock outstanding as of January 31, 2000,
- 5,000,000 shares of our common stock being offered by us in this
offering,
- 1,975,170 shares of our common stock issuable upon the closing of our
pending acquisition of Madison Technology Group and its affiliates. We
cannot assure you that this pending acquisition will close,
- 1,072,940 shares of our common stock issuable upon the closing of our
acquisition of Charon Systems, Inc. We cannot assure you that this
pending acquisition will close,
- 2,401,040 shares of our common stock issuable upon the expected exercise
of outstanding warrants by Pequot Private Equity Fund II, L.P. and
certain other warrant holders. We cannot assure you that this transaction
will close,
- 1,200,000 shares of our common stock which we expect to issue to the
former shareholder of Micro Visions for the achievement of certain
performance criteria, and
- 439,740 shares (of a maximum of 519,481) of our common stock which we
expect to issue to the former shareholders of Async Technologies for the
achievement of certain performance criteria.
but excludes:
- 6,308,600 shares of our common stock issuable upon exercise of stock
options at a weighted average exercise price of $8.33 per share,
- 7,973,242 shares of our common stock issuable upon the exercise of
warrants at a weighted average exercise price of $11.93 per share (pro
forma for the expected exercise of outstanding warrants by Pequot Private
Equity Fund II, L.P. and certain other warrant holders), and
- 918,283 shares of our common stock issuable upon the conversion of $0.9
million aggregate principal amount of our convertible debentures at a
weighted average conversion price of $0.98 per share.
See "Capitalization," "Management -- Stock Option Plan," and the notes to
our consolidated financial statements.
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RISK FACTORS
For a description of certain risks that you should consider before buying
shares of our common stock, see "Risk Factors."
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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, 1997 and 1998
and the nine-month periods ended September 30, 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 thereto included elsewhere in this
prospectus, as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
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PRO PRO
ACTUAL FORMA(1) ACTUAL FORMA(1)
-------------------- ----------- ----------------------- -----------
1997 1998 1998 1998 1999 1999
------- ---------- ----------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue........................ $ -- $ 2,437 $ 78,548 $ 623 $ 5,037 $ 84,852
Expenses:
Cost of sales, excluding
depreciation............... -- 4,542 58,394 2,672 6,793 61,025
Selling, general and
administrative............. 737 1,860 20,505 933 6,626 28,912
Depreciation and amortization
of goodwill and other
intangible assets.......... -- 787 51,865 167 1,943 40,398
------- ---------- ----------- ---------- ---------- -----------
Loss from operations........... (737) (4,752) (52,216) (3,149) (10,325) (45,483)
Interest expense, net(2)....... -- 1,333 2,823 1,233 11,155 12,352
Loss before provision (benefit)
for income taxes and
extraordinary item........... (737) (6,085) (55,039) (4,382) (21,480) (57,835)
Provision (benefit) for income
taxes........................ -- (205) 802 (15) (356) 353
------- ---------- ----------- ---------- ---------- -----------
Loss before extraordinary
item......................... (737) (5,880) $ (55,841) (4,367) (21,124) $ (58,188)
=========== ===========
Extraordinary item............. -- -- -- (845)
------- ---------- ---------- ----------
Net loss....................... $ (737) $ (5,880) $ (4,367) $ (21,969)
======= ========== ========== ==========
Loss per share -- basic and
diluted:
Loss before extraordinary
item....................... $ (8.24) $ (1.86) $ (2.67) $ (1.61) $ (3.23) $ (0.90)
=========== ===========
Extraordinary item........... -- -- -- (0.13)
------- ---------- ---------- ----------
Net loss..................... $ (8.24) $ (1.86) $ (1.61) $ (3.36)
======= ========== =========== ========== ==========
Weighted average shares(3)... 89,489 3,169,413 20,724,357 2,715,793 6,534,575 64,404,350
======= ========== =========== ========== ========== ===========
OTHER DATA:
EBITDA(4)...................... $ (737) $ (3,965) $ (352) $ (2,982) $ (8,383) $ (5,085)
SEPTEMBER 30, 1999
-----------------------
PRO
ACTUAL FORMA(5)
------- --------
(DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 7,815 $127,155
Total assets................................................ 22,335 423,787
Total debt.................................................. 22,198 5,941
Stockholders' equity (deficit).............................. (3,795) 377,486
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(1) Gives effect to the following as if each had occurred on January 1, 1998:
(a) goodwill amortization related to acquisitions completed or pending
through February 11, 2000; (b) interest expense for shareholder notes for
KNS and Madison Group Holdings; (c) the pending and completed acquisitions;
and (d) our $50.0 million private placement of equity securities with Pequot
Private Equity Fund II, L.P. and certain other investors in October 1999.
(2) Includes amortization of deferred financing fees and debt discount.
(3) Weighted average shares gives retroactive effect to a reverse stock split of
5 to 1 on June 1, 1999.
(4) EBITDA is defined as net income plus (i) extraordinary items, (ii) provision
for income taxes, (iii) interest expense, and (iv) depreciation and
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.
(5) Gives effect to the following as if each had occurred at September 30, 1999:
(a) the acquisitions completed subsequent to September 30, 1999; (b) pending
acquisitions as of February 11, 2000; (c) our $50.0 million private
placement of equity securities with Pequot Private Equity Fund II, L.P. and
certain other investors in October 1999; (d) the conversion of certain
convertible debentures from October through December 1999; (e) the exercise
of warrants by Pequot Private Equity Fund II, L.P. and certain other
investors to purchase 2,401,040 shares of common stock; (f) cash paid of
$5.0 million and warrants issued to purchase 3,000,000 shares issued for the
February 2000 settlement of the SmallCaps litigation; and (g) this offering.
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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.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
in these statements. Factors that could contribute to these differences include
those discussed below and elsewhere in this prospectus. The cautionary
statements made in this prospectus should be read as being applicable to all
forward-looking statements wherever they appear.
WE HAVE A LIMITED OPERATING HISTORY AND OUR BUSINESS MODEL IS STILL EVOLVING,
WHICH MAKES IT DIFFICULT FOR YOU TO EVALUATE US AND OUR PROSPECTS.
Our business is new, evolving and unproven, and our range of services
continues to change. Our limited operating history and evolving business plan
make it difficult to evaluate our prospects. As a new business, we are subject
to a number of risks and expenses, including our ability to:
- 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.
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, we cannot assure you that our business plan will be
successful or that we will 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.
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 used in operating and investing activities 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. These acquisitions are likely to increase our cash needs.
As of September 30, 1999, after giving effect to our completed and pending
acquisitions, on a pro forma basis, we would have had over $200 million in
goodwill which we must amortize over the next five years as a result of our
acquisitions. We cannot assure you that we will 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.
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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.
Growth in the demand for our ASP services may be inhibited for a number of
reasons, including:
- any incompatibility between our ASP services and technology used by our
customers,
- any deficiencies in our ability to reliably deliver ASP services to our
customers,
- any failure by other ASP providers, which could diminish consumer
confidence in ASP services,
- defects beyond our control in software applications delivered from our
data centers,
- any inability to strengthen awareness of our brand and differentiate the
services we offer from those of our competitors,
- any inability to market our services in a cost-effective manner to new
customers,
- a lack of industry standards regarding levels of service, which may erode
our customers' confidence, and
- concerns over data security and user privacy.
We cannot be certain that the market for ASP services will become viable or
grow. 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
would be materially adversely affected.
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY MAY ADVERSELY AFFECT OUR BUSINESS.
Our growth has placed, and will continue to place, significant demands on
our management. If we are successful in implementing our growth strategy, we may
have difficulty responding to demand for our services and technical support in a
timely manner and in accordance with our customers' expectations. We expect
these demands to require the addition of new management, sales, technical and
other personnel and the purchase and installation of additional hardware,
software and telecommunications systems.
In addition, 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.
WE ARE INVOLVED IN LEGAL PROCEEDINGS WHICH, IF DETERMINED AGAINST US, COULD
MATERIALLY ADVERSELY AFFECT OUR BUSINESS OR SIGNIFICANTLY DILUTE OUR
STOCKHOLDERS.
On January 20, 2000, we commenced a lawsuit against Cameron Chell, the
founder and former chief executive officer of FutureLink, David Bolink, our
former director of business development, other former employees of our company,
and various entities organized by these former employees, including C Me Run
Corp. The suit alleges that the defendants, while many were employed by us,
misappropriated our plans to develop certain ASP services in breach of fiduciary
and contractual obligations. We seek, among other things, damages in the amount
of approximately $54 million. On January 27, 2000, Mr. Chell filed a
counterclaim for $28.7 million, alleging improper termination, interference of
ongoing economic interests, defamation of character and damages concerning his
ability to exercise 100,000 options to purchase our common stock which had
previously vested and an ability to enjoy the vesting of an additional 700,000
unvested options he claims to hold in our company. On January 31, 2000, C Me Run
filed a counterclaim
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for approximately $84 million, alleging conspiracy to cause economic harm,
unlawful interference with its economic interests, interference with contractual
relations and abuse of process. On February 7, 2000, Mr. Bolink, a current
employee of Chell.com, filed a counterclaim against us seeking 50,000 options
that he alleges were promised to him by us for working for us.
On January 26, 2000, Michael Chan, an individual who had provided
managerial services on a contractual basis for us in the past, commenced a
lawsuit against us and Cameron Chell seeking options to purchase 50,000 shares
of our common stock that he alleges Mr. Chell promised him for services he
allegedly provided to us or in the alternative approximately $1,500,000 in cash.
Mr. Chan also seeks general damages of approximately $200,000 and punitive
damages of approximately $200,000.
Each of the above lawsuits 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 the
lawsuits described above, one or more other former employees will make claims
for cash severance pay as well as options. We are aware that there are other
former employees and consultants who believe that they are entitled to options
in respect of services rendered to us in the past. To date, we are aware of
threatened claims with respect to an aggregate of approximately 250,000 options,
in addition to the filed claims described above. Other people may in the future
make similar claims. We believe future claims based on past employees and
contractors relationships with us could produce aggregate claims for options for
up to as many as 250,000 shares of common stock in addition to claims already
made or threatened as described above.
All of these types of litigation are likely to be expensive for us and, if
such suits are determined against us, our business, results of operations and
financial condition will be materially adversely affected if an award of a
material amount of cash damages is awarded. Our stockholders may suffer material
dilution if an award of a material number of options are awarded. See
"Litigation."
WE MAY BE SUBJECT TO MATERIAL LIABILITY RESULTING FROM THE ACTIONS OF PERSONS
FORMERLY ASSOCIATED WITH OUR BUSINESS. IF WE ARE SUBJECT TO ANY SUCH LIABILITY
OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WILL BE MATERIALLY
ADVERSELY AFFECTED.
In October 1998, the Securities and Exchange Commission 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 web site the purchase of approximately 25 microcap stocks which
were 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 a recommendation was made in The
Future Superstock newsletter, after which the prices of those stocks dropped
substantially. The SEC alleged that in making its recommendations, the internet
newsletter (1) failed to adequately disclose compensation it had received from
profiled companies, (2) failed to disclose that it had sold stock in many of the
issuers shortly after dissemination of recommendations that caused the prices of
those stocks to rise, (3) said that it had performed independent research and
analysis in evaluating the issuers profiled by the newsletter when it had
conducted little, if any research, and (4) made false and misleading statements
about the success of certain prior stock picks. According to press reports,
Jeffrey C. Bruss, claimed that he received $300,000 from 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
no payments were made by FutureLink to Mr. Bruss but may have been made by one
or more persons who were associated with the Company prior to 1998. 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. Other persons
associated with us may have engaged in other types of transactions that could
also give rise to liability to our stockholders. If one or more stockholders
were to have suffered losses as a result of these activities and it
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was determined that we participated in such activities, we could have liability
to such stockholders that would be materially adverse to our business, results
of operations and financial condition.
WE MAY NEED ADDITIONAL FINANCING TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH,
AND WE MAY NOT BE ABLE TO OBTAIN FINANCING ON TERMS ACCEPTABLE TO US OR AT ALL.
IF WE NEED AND ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, OUR GROWTH AND OUR
OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
We may require additional financing to fund our operations and our current
plans for expansion. This financing may involve incurring debt or selling equity
securities. There can be no assurance 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.
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 ADVERSELY
AFFECT OUR GROWTH AND OUR OPERATING RESULTS.
We have made a number of significant acquisitions within the last six
months. In October 1999, we acquired Executive LAN Management, Inc., also known
as Micro Visions. In November 1999, we acquired Async Technologies, Inc. and
Computer Networks, Inc. In December 1999, we acquired KNS Holdings Limited, also
known as KNS Distribution. In January 2000, we acquired Vertical Software, Inc.,
also known as VSI Technology Solutions. In February 2000, we announced
definitive agreements to acquire Microlan Systems, Inc. (doing business as
Madison Technology Group), Madison Consulting Resources, Inc., and Madison
Consulting Resources NJ, Inc. and Charon Systems, Inc. These acquisitions have
increased our revenue, from $0.6 million for the nine months ended September 30,
1998 to $84.9 million on a pro forma basis, after giving effect to our pending
and completed acquisition as if each had occurred as of January 1, 1999, for the
nine months ended September 30, 1999. We cannot assure you that the pending
acquisitions will close. We have not yet fully integrated any of these
companies. There is no assurance that we will successfully integrate these
acquisitions into our business. We intend to continue to pursue opportunities to
expand our business by acquiring selected companies in certain markets.
Growth by acquisitions involve a number of special risks. These risks
include the following:
- any inability to integrate any acquired businesses into our operations,
- any inability to identify appropriate acquisition candidates or negotiate
acquisitions on favorable terms,
- any inability to obtain financing on favorable terms or at all,
- any diversion of management's attention from operations to integrating
the acquired companies,
- any failure to successfully retain and expand the key personnel and key
customers of any acquired company, and
- the risk we may assume or acquire significant liabilities that we fail or
are unable to discover in connection with any acquisition.
In addition, there can be no assurance that if we acquire any businesses we
will achieve anticipated revenue and earnings. 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.
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IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGE IN OUR INDUSTRY, OUR BUSINESS COULD SUFFER.
Our industry is characterized by rapidly changing technology with
continuous improvements in both computer hardware and software, and rapid
obsolescence of current systems. Rapid change poses risks that we will be unable
to keep our server hardware, communications links and available software
offerings up to date. 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 are also subject to risks from technological changes in
the way software applications are marketed and delivered. Our future success
will depend, in part, on our ability to:
- develop new products and services that meet changing customer needs,
- continually improve the performance, features and reliability of our
existing services,
- effectively use and integrate leading technologies and software
applications,
- continue to develop our technical expertise, and
- influence and respond to emerging industry standards and other changes.
We cannot assure you that we will successfully develop or adopt new
technologies, introduce new services or enhance our existing services on a
timely basis, or that new technologies, new services or enhancements used or
developed by us will achieve market acceptance. If we fail to address these
developments, our business, operating results and financial condition could 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 ADVERSELY AFFECT OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Our ASP business strategy depends on the consistent performance of our 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
another data center. We plan to build 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 another
data center, there is a risk that the data may be lost if such data center is
damaged. Because we currently operate only two data centers, there is a risk
that the loss of data may affect a significant portion of our customers if
either data center were damaged. We have, from time to time, experienced
periodic systems disruptions 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
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customers, and our business, results of operations and financial condition would
be materially adversely affected.
WE RELY ON THIRD PARTIES FOR REFERRALS AND TO PROVIDE US WITH SERVICES AND
PRODUCTS, AND ANY FAILURE BY THESE THIRD PARTIES TO PROVIDE US WITH THESE
REFERRALS OR WITH SERVICES AND PRODUCTS IN A TIMELY MANNER AT AN ACCEPTABLE COST
COULD ADVERSELY AFFECT US.
We rely on referrals from software application and technology integrators
for a portion of our business. These integrators refer their customers to us
because we can provide an array of services which complements the products and
services they offer. However, we cannot assure you that these integrators will
continue to refer business to us or will not cooperate with our competitors.
In addition, 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. If we fail to obtain these products or services in a timely manner and
at an acceptable cost, our business, results of operations and financial
condition could be materially adversely affected. Any disruptions to our
communications lines could materially harm our customers' business and adversely
affect demand for our services.
Furthermore, we depend on third-party software manufacturers agreeing to
allow their software applications to be hosted or run at our data centers and
provided to our customers. We have entered into non-exclusive agreements with
Microsoft, Onyx, Great Plains, SalesLogix and others that allow us to host some
of their software applications at our data centers or re-license their software
applications to our customers. Under most of these agreements, the software
manufacturer can terminate its relationship with us, for any reason, by giving
us as little as 30 days notice, and it 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.
We also rely on software applications licensed from third parties for
delivery of software applications to our customers. We cannot be sure that these
licenses will remain available to us on commercially reasonable terms. The loss
of such technology could require us to obtain substitute technology of lower
quality or performance standards or at greater cost, which could materially
adversely affect our business, results of operations and financial condition.
Also, software manufacturers we rely on are in a highly competitive market. If
they are unable to produce competitive products, we may encounter difficulties
locating suitable alternatives. In addition, if our competitors offer the same
or similar software applications with more competitive pricing and service or if
the software manufacturers we rely on stop supporting the software versions that
we currently license or are unable to adapt and respond to changing market
conditions, our business, operating results and financial condition could be
materially adversely affected.
IF WE ARE UNABLE TO OBTAIN CITRIX PRODUCTS, WE WOULD BE UNABLE TO DELIVER OUR
SERVICES, AND UNTIL WE REPLACE THESE PRODUCTS, OUR BUSINESS WOULD BE ADVERSELY
AFFECTED.
Citrix Systems, Inc. is one of our key suppliers. We use Citrix software
almost exclusively to connect our customers to software applications. Although
there are other competing software applications on the market, we believe that
Citrix software is currently best suited to serve this function. If we are
unable to obtain Citrix software in a timely manner, at an acceptable cost, or
at all, we would be unable to deliver our services, and until we replace these
products, our business, results from operations and financial condition could be
materially adversely affected.
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IF THE SOFTWARE WE UTILIZE CONTAINS DEFECTS OR IF OUR DELIVERY SYSTEM BECOMES
INCOMPATIBLE WITH OTHER PRODUCTS AND SERVICES, 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 AN 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, 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 caused by the manufacturer. 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.
We believe our ability to compete successfully depends on the continued
compatibility of our services with products, services and technology offered by
various vendors. Our failure to conform to prevailing industry standards, or the
failure of industry standards to emerge, could have a material adverse effect on
our business, results of operations and financial condition. Although we plan to
support emerging industry standards, we cannot be sure that industry standards
will develop or that any standards we adopt will not be made obsolete. We also
cannot be sure that we will be able to conform to these new standards quickly
enough to stay competitive.
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 created by the penetration of our
delivery system security. 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.
WE CANNOT BE SURE THAT WE WILL COMPETE SUCCESSFULLY WITH OUR PRESENT OR FUTURE
COMPETITORS. IF WE ARE UNABLE TO SUCCESSFULLY COMPETE, WE WILL NOT BE ABLE TO
STAY IN BUSINESS.
We face a large and growing number of competitors in a rapidly changing
industry. Our current and prospective competitors include systems integrators,
Internet service providers, hardware and software suppliers, telecommunications
companies, and other ASPs. 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. Additionally, we compete with our customers'
internal resources, particularly where these resources represent a fixed cost to
the customer. Such competition may impose additional pricing pressures on our
services. We cannot be sure that we will compete successfully with our existing
competitors or with any new competitors.
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MANY OF OUR CONSULTING CONTRACTS HAVE FIXED PRICES, WHICH EXPOSE US TO COST
OVERRUNS. IF WE ARE NOT ABLE TO CONTROL COSTS OVERRUNS, OUR OPERATING RESULTS
COULD BE 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 such projects on a timely basis and, in the case of
fixed-price projects, without cost overruns, could give rise to claims against
us or damage our reputation 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 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 could adversely affect our business, results of
operations and financial condition.
WE OPERATE IN AN INDUSTRY WHERE IT IS DIFFICULT TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL. WE DEPEND ON A LIMITED NUMBER OF KEY OFFICERS WHO WOULD BE DIFFICULT
TO REPLACE. 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 over
300 employees as of December 31, 1999. 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. There can be no assurance that we will 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.
Our success also depends in significant part on the continued services of
our key officers. Losing one or more of our key personnel could have a material
adverse effect on our business, results of operations and financial condition.
OUR QUARTERLY AND ANNUAL OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY IN THE
FUTURE. BECAUSE OF THESE FLUCTUATIONS, COMPARISONS OF OUR OPERATING RESULTS FROM
PERIOD TO PERIOD ARE NOT NECESSARILY MEANINGFUL AND SHOULD NOT BE RELIED UPON AS
AN INDICATOR OF FUTURE PERFORMANCE.
We 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.
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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
adversely affect the market price of our common stock.
OUR INTERNATIONAL PRESENCE EXPOSES US TO POTENTIAL DIFFICULTIES ASSOCIATED WITH
MANAGING DISTANT OPERATIONS AND TO REGULATORY, TARIFF, LICENSING AND CURRENCY
RISKS. ANY FAILURE TO ADDRESS EFFECTIVELY SUCH DIFFICULTIES COULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
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 the foregoing may have a material adverse effect on our current or
future international operations and, consequently, on our business, results of
operations and financial condition.
In order to safeguard the flow of personal information over the Internet,
we intend to offer our customers various forms of cryptographic technology. The
export of this technology is regulated by the U.S. government 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 cryptography. There is no guarantee that we will be able to
obtain the necessary permission to engage in our contemplated activities.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. IF WE
FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, THE VALUE OF SUCH
RIGHTS MAY DIMINISH AND OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE
ADVERSELY AFFECTED.
We rely on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect our
intellectual property. These protections may not be sufficient, and they do not
prevent independent third-party development of competitive products or services.
Further, the laws of many foreign countries do not protect our intellectual
property rights to the same extent as the laws of the United States. Based on
various governmental filings, we are aware that other companies have claimed
prior use of the name "FutureLink" in connection with 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 U.S., Canada and the United Kingdom.
However, we may not be able to obtain proprietary rights to the use of this
name.
We enter into agreements with many of our employees giving us proprietary
rights to certain technology developed by such employees while employed by us;
however, we cannot be sure a court will
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enforce these agreements. In addition, we may be inadequately protected against
the use of technology developed by employees who have not entered into such
agreements. 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, and we may need to commence
additional lawsuits from time to time to protect our intellectual property.
A failure or inability to protect our intellectual property could have a
material adverse effect on our business, financial condition and results of
operations.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US, EVEN IF WITHOUT MERIT,
COULD BE EXPENSIVE TO DEFEND AND DIVERT MANAGEMENT'S ATTENTION FROM OUR
BUSINESS.
We may incur expenses if called to defend our use of the "FutureLink" name
and liability if any company engaged in business in our industry were to assert
an infringement claim and could establish superior rights to the name and
damages caused by our use of it. Third parties may assert other infringement
claims against us. Any such 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. Any of these events could have a material adverse effect on our
business, financial condition and results of operations.
WE MAY INCUR LIABILITIES AS A RESULT OF OUR PREVIOUS ACTIVITIES.
We merged with a publicly-traded company that was engaged, prior to 1992,
in the natural resource exploration and development business, including mining
and oil and gas. We no longer own any mining or oil and gas-related assets. 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 could have a material adverse effect on our business, financial
condition and results of operations.
THE PUBLIC MARKET FOR OUR COMMON STOCK MAY BE VOLATILE. SUCH FLUCTUATIONS MAY
ADVERSELY AFFECT OUR ABILITY TO RAISE ADDITIONAL CAPITAL AND YOUR ABILITY TO
LIQUIDATE YOUR INVESTMENT AT A FAVORABLE PRICE.
Prior to this offering, the public market for our common stock has been
limited, sporadic and highly volatile. Between January 1, 1999 and December 31,
1999, the price of our common stock ranged from a low of $1.20 to a high of
$36.50 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 be subject to wide fluctuations in response to factors such
as:
- actual or anticipated variations in our revenues, earnings and cash flow,
- announcements of new products and services by us or our competitors and
consumer acceptance of such new products and services,
- changes in the information technology environment,
- announcements of mergers or acquisitions by ourselves or our competitors,
- sales of shares of our common stock by existing shareholders,
- financial estimates by securities analysts,
- fluctuations in the market price of our competitors' publicly-traded
stock,
- adoption of new accounting standards affecting our industry, and
- general market conditions and other factors.
Further, the stock markets have recently experienced extreme price and
volume fluctuations that have affected the market prices of equity securities of
many companies, including many companies in our
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industry, and that 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. In addition, general economic, political and
market conditions such as recessions, interest rate fluctuations or
international currency exchange rate fluctuations, may adversely affect the
market price of the common stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been instituted against such company. Any such litigation,
if instituted, could result in substantial costs and divert management's
attention and resources, which could have a material adverse effect on our
business, results of operations and financial condition.
OUR EXISTING SHAREHOLDERS WILL RETAIN SIGNIFICANT CONTROL.
Upon completion of this offering, our executive officers, directors and
holders of over 5% of our stock and their affiliates will own approximately 35%
of the outstanding shares of our common stock (or 34% if the underwriters
exercise their overallotment option in full). As a result, 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.
OUR STOCK PRICE MAY BE AFFECTED BY THE AVAILABILITY OF SHARES FOR SALE IN THE
NEAR FUTURE. THE FUTURE SALE OF LARGE AMOUNTS OF OUR STOCK, OR THE PERCEPTION
THAT SUCH SALES COULD OCCUR, COULD NEGATIVELY AFFECT OUR STOCK PRICE.
The market price of our common stock could drop as a result of sales of a
large number of shares of common stock in the market after this offering. After
this offering, we will have outstanding 64,404,530 shares of common stock, 91%
of which will be held by existing stockholders. This excludes 7,973,242 shares
issuable upon the exercise of outstanding warrants, 6,308,600 shares issuable
upon the exercise of stock options, 918,283 shares issuable upon the conversion
of our convertible debentures and 750,000 shares issuable if the underwriters
exercise their overallotment option.
In connection with this offering, certain executive officers, directors and
shareholders have agreed that, with certain exceptions, they will not sell any
shares of common stock or enter into similar transactions for 180 days after the
date of this prospectus without the consent of Bear, Stearns & Co. Inc. At the
expiration of the 180-day period following the date of this prospectus,
shares of our common stock held by existing stockholders will become
available for sale in the public market, subject to volume restrictions imposed
by federal securities laws.
In addition, the exercise of any outstanding options or warrants could
dilute the net tangible book value of our common stock. Further, the holders of
such options and warrants may exercise them at a time when we would otherwise be
able to obtain additional equity capital on terms more favorable to us.
FUTURE ISSUANCES OF PREFERRED STOCK COULD REDUCE THE VALUE OF OUR COMMON STOCK.
We are authorized to issue up to 20,000,000 shares of preferred stock, no
par value. The preferred stock may be issued in one or more series, on such
terms and with such rights, preferences and designations as our board of
directors may determine, without action by stockholders. No shares of preferred
stock are currently outstanding. However, the issuance of any preferred stock
could adversely affect the rights of the holders of common stock, and therefore
reduce the value of the common stock. In particular, specific rights granted to
future holders of preferred stock could be used to restrict our ability to
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merge with or sell our assets to a third party, thus making it more difficult
for a third party to acquire a majority of our outstanding voting stock. We have
no current plans to issue shares of preferred stock.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The public offering price of our common stock is substantially higher than
the net tangible book value of our common stock. Therefore, if you purchase our
common stock in this offering, you will incur immediate dilution of
approximately $ in the net tangible book value per share of common
stock from the public offering price of $ per share.
SINCE WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS FROM THIS OFFERING, WE
MAY USE THE PROCEEDS IN WAYS WITH WHICH YOU DISAGREE.
We have not allocated specific amounts of the net proceeds from this
offering for any specific purpose. Accordingly, our management will have
significant flexibility in applying the net proceeds of this offering. The
failure of our management to use such funds effectively could have a material
adverse effect on our business, financial condition and operating results.
WE HAVE NOT PAID DIVIDENDS, AND EXPECT TO RETAIN OUR EARNINGS FOR THE
FORESEEABLE FUTURE.
We have not paid cash dividends on our common stock since our inception. We
do not intend to pay cash dividends on our common stock in the foreseeable
future so that we may reinvest earnings, if any, in the development of our
business.
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USE OF PROCEEDS
The net proceeds to us from this offering are estimated to be approximately
$ million ($ million if the underwriters' overallotment option is
exercised in full), after deducting underwriting discounts and commissions and
estimated offering expenses. We intend to use the net proceeds from this
offering to:
- fund approximately $6.6 million of the purchase price for Charon Systems,
Inc. and to fund all or a portion of possible future acquisitions;
- retire $4.0 million aggregate principal amount of our unsecured loan
notes due June 20, 2000 issued in connection with our acquisition of KNS
Holdings, which notes are due on June 20, 2000, at par plus accrued
interest equal to the London interbank offered rate plus 1%;
- retire $7.3 million aggregate principal amount of indebtedness we expect
to incur in connection with our pending acquisition of Madison Technology
Group and its affiliates, which, if incurred, will be due and payable
five months from the closing of such acquisition and will bear interest
at a rate increasing from 9% to 12%;
- develop service offerings that enhance and complement our current service
offerings;
- expand our sales and marketing efforts; and
- fund working capital and other general corporate purposes.
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 generated by our
operations. 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.
19
23
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:
HIGH LOW
------ ------
2000
1st Quarter (through February 10, 2000).................... $30.00 $17.31
1999
4th Quarter................................................ $35.75 $ 8.50
3rd Quarter................................................ $ 9.31 $ 6.06
2nd Quarter................................................ $ 8.69 $ 1.33
1st Quarter................................................ $ 2.58 $ 1.48
1998
4th Quarter................................................ $ 4.00 $ 1.25
3rd Quarter................................................ $ 8.45 $ 1.95
2nd Quarter................................................ $21.10 $ 3.15
1st Quarter................................................ $20.45 $ 0.65
On February 10, 2000, the last reported sales price of our common stock was
$22.50. As of February 10, 2000, there were 52,378,890 shares of our common
stock issued and outstanding and approximately 700 holders of record of our
common stock.
20
24
CAPITALIZATION
The following table sets forth at September 30, 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 September 30,
1999: (a) the acquisitions that were completed subsequent to September
30, 1999; (b) pending acquisitions as of February 11, 2000; (c) the
October and November 1999 financings by Pequot Private Equity Fund II,
L.P. and its affiliates; and (d) the conversion of certain convertible
debentures from October through December 1999; and (e) the expected
exercise of warrants by Pequot Equity Fund II, L.P. and certain other
investors to purchase 2,401,040 shares of common stock.
- 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.
This table should be read in conjunction 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.
AS OF SEPTEMBER 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents................................. $ 7,815 $ 24,592 $127,155
======== ======== ========
Total long-term obligations............................... 22,198 1,096 1,096
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, 9,194,111 issued and outstanding;
59,404,530 issued and outstanding, pro forma; and
64,404,530 issued and outstanding, pro forma as
adjusted............................................. 3 6 6
Additional paid-in capital.............................. 27,434 245,839 348,402
Loan receivable from employee............................. (1,750) (1,750) (1,750)
Warrants.................................................. 60,000 60,000
Accumulated deficit....................................... (29,299) (28,946) (28,946)
Cumulative foreign currency translation adjustment........ (183) (190) (190)
-------- -------- --------
Total stockholders' equity (deficit)...................... (3,795) 274,959 377,522
-------- -------- --------
Total capitalization............................ $ 18,403 $276,055 $378,618
======== ======== ========
21
25
DILUTION
The net tangible book value of common stock as of September 30, 1999 was
$15.9 million or approximately $1.73 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.
Net tangible book value dilution per share represents the difference
between the following:
(1) the amount paid per share by purchasers of common stock in this
offering, and
(2) the adjusted 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 net tangible book value as of September 30, 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:
Public offering price per share of common stock............. $
Net tangible book value per share of common stock as of
September 30, 1999........................................ $
Net increase in net tangible book value per share of common
stock attributable to cash payment from this offering..... $
-----
Pro forma net tangible book value per share as of September
30, 1999 after giving effect to the offering.............. $
-----
Immediate dilution per share to new investors............... $
=====
The table above assumes no exercise of outstanding options, warrants or
convertible debt. As of January 31, 2000, there were 6,308,600 shares of common
stock issuable upon exercise of outstanding options at a weighted average
exercise price of $8.33 per share, 7,468,066 shares of common stock issuable
upon exercise of outstanding warrants at a weighted average exercise price of
$7.91 per share and 918,283 shares of common stock issuable upon the conversion
of $898,660 aggregate principal amount of our convertible debentures outstanding
at a weighted average conversion price of $0.98 per share. The tables above also
assume no exercise of the underwriters' overallotment option. To the extent that
any shares are issued in connection with outstanding options, warrants,
convertible debentures or the underwriters' overallotment option, you will
experience further dilution. See "Management" and "Underwriting."
22
26
ACQUISITIONS
As part of our growth strategy, from October 15, 1999 through February 2,
2000, we acquired five businesses. Since then, we have announced definitive
agreements to acquire two additional businesses. The following table presents
certain information with respect to these completed and pending acquisitions.
REVENUE FOR THE
NINE MONTHS ENDED
COMPLETED ACQUISITIONS CLOSING DATE PURCHASE PRICE(1) SEPTEMBER 30, 1999 PRIMARY MARKETS
---------------------- ------------ --------------------- --------------------- ---------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
Executive LAN Management, Inc. d/b/a October 15, 1999 $66.0(2) $16.6 Southern California
Micro Visions
CN Networks, Inc. November 5, 1999 $13.0 $ 5.9 Northern California
Async Technologies, Inc. November 29, 1999 $19.4(2) $ 6.2 Midwest
KNS Holdings Limited December 22, 1999 $44.0 $15.8 United Kingdom
Vertical Software, Inc. January 31, 2000 $26.0 $ 9.5 Mid-Atlantic
PENDING ACQUISITIONS
MicroLan Systems, Inc., d/b/a Madison $59.7 $16.7 New York and
Technology Group, Madison Consulting New Jersey
Resources, Inc. and Madison Consulting
Resources NJ, Inc.
Charon Systems, Inc. $31.2 $ 9.3 Canada
- -------------------------
(1) Total purchase price including cash and common stock has been determined
based on terms contained in the relevant acquisition agreements.
(2) Includes the value of common shares issuable to former shareholders upon
the satisfaction of certain performance criteria in 1999, which management
believes have been satisfied.
COMPLETED ACQUISITIONS
Micro Visions
On October 15, 1999, we acquired Executive LAN Management, Inc., which
conducted business as Micro Visions, for a purchase price of $12.0 million in
cash, 6.0 million shares of our common stock and contingent consideration of 2.4
million shares of our common stock, which management believes have been
satisfied. Micro Visions was among North America's leading server-based
computing integrators using Citrix products in 1998.
CN Networks
On November 5, 1999, we acquired CN Networks, Inc. for a purchase price of
$3.9 million in cash and 1,181,816 shares of our common stock. CN Networks is
one of the leading server-based computing integrators using Citrix products in
Northern California.
Async Technologies
On November 29, 1999, we acquired Async Technologies, Inc. for a purchase
price of $6.0 million in cash and 1,298,705 shares of our common stock. In
addition, the selling shareholders of Async may be issued up to an additional
519,481 shares of our common stock based on the satisfaction of certain
performance
23
27
criteria in 1999, which management believes have been satisfied. Async
Technologies is one of the leading server-based computing integrators using
Citrix products in the Great Lakes region of the United States.
KNS Holdings
On December 22, 1999, we acquired KNS Holdings Limited, which conducted
business as KNS Distribution, for a purchase price of $5 million in cash and
2,160,307 shares of our common stock. KNS is the largest distributor of Citrix
products and related services outside of the United States.
Vertical Software, Inc.
On January 31, 2000, we acquired Vertical Software, Inc. for $7.0 million
in cash and 1,026,316 shares of our common stock. VSI was the leading
server-based computing integrators using Citrix products in the D.C. metro area.
PENDING ACQUISITIONS
Madison Technology Group of Companies
We have a definitive agreement to acquire MicroLan Systems, Inc. (doing
business as Madison Technology Group), Madison Consulting Resources, Inc. and
Madison Consulting Resources NJ, Inc. for $6.5 million in cash, a promissory
note in the amount of $7.3 million and 1,975,170 shares of our common stock.
These companies are among the leading server-based computing integrators using
Citrix products in the New York and New Jersey markets.
Charon Systems, Inc.
We have a definitive agreement to acquire Charon Systems, Inc. for $7.0
million in cash and 1,072,940 shares of our common stock. Charon Systems is
headquartered in Toronto, Canada, and operates in eastern and central Canada.
24
28
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 September 30, 1999 and the
balance sheets as of September 30, 1999 of the acquisitions that were completed
or are pending completion through February 11, 2000. The Pro Forma Balance Sheet
gives effect to: (a) the acquisitions that were completed subsequent to
September 30, 1999; (b) pending acquisitions as of February 11, 2000; (c) the
October and November 1999 financings by Pequot Private Equity Fund II, L.P. and
its affiliates; (d) the conversion of certain convertible debentures from
October through December 1999; (e) the expected exercise of warrants by Pequot
Equity Fund II, L.P. and certain other investors to purchase 2,401,040 shares of
common stock; (f) $5.0 million in cash and issuance of warrants to SmallCaps for
equity placement services; and (g) this offering and the application of the net
proceeds as described under "Use of Proceeds," as if each had occurred as of
September 30, 1999. The Unaudited Pro Forma Condensed Consolidated Statement of
Operations (the "Pro Forma Statement of Operations" for the nine months ended
September 30, 1999, and for the year ended December 31, 1998, give effect to:
(a) goodwill amortization for acquisitions completed or pending completion
through February 11, 2000; and (b) interest expense for the shareholder notes
payable, as if each had occurred as of January 1, 1998. Pro forma adjustments
are described in the notes. See the accompanying Notes to Unaudited Pro Forma
Condensed Consolidated Financial Information.
The Pro Forma 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, 1998, 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 in conjunction with
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the financial statements and the
notes thereto for us and certain of our completed or pending acquisitions
included elsewhere in this prospectus.
23
29
FUTURELINK CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(IN THOUSANDS)
PRO FORMA WITH PRO FORMA WITH
COMPLETED PENDING ACQUISITIONS COMPLETED AND
ACQUISITIONS ----------------------- PENDING
AND THIS MADISON CHARON ACQUISITIONS
OFFERING GROUP OF SYSTEMS, PRO FORMA AND THIS
(SCHEDULE 1) COMPANIES(1) INC.(2) ADJUSTMENTS OFFERING
-------------- ------------ -------- ----------- --------------
ASSETS
Current assets............................. $161,405 $6,887 $2,422 $(13,257)(A) $157,457
Equipment and leasehold improvements,
net...................................... 4,651 351 193 -- 5,195
Goodwill, net.............................. 171,461 -- -- 89,273(A) 260,734
Other long-term assets..................... 515 59 -- (173)(A) 401
-------- ------ ------ -------- --------
Total assets........................... $338,032 $7,297 $2,615 $ 75,843 $423,787
======== ====== ====== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit............................. $ 2,245 $2,600 $ -- $ -- $ 4,845
Other current liabilities.................. 26,609 3,671 2,056 7,250(B) 39,586
Long-term debt, net of current portion..... 31 -- -- -- 31
Convertible debentures, net................ 948 -- -- 948
Deferred income taxes...................... 855 -- 36 -- 891
Stockholders' equity....................... 307,344 1,026 523 68,593(B) 377,486
-------- ------ ------ -------- --------
Total liabilities and stockholders'
equity............................... $338,032 $7,297 $2,615 $ 75,843 $423,787
======== ====== ====== ======== ========
- -------------------------
(1) 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.
(2) The functional currency of Charon is the Canadian Dollar. Accordingly, we
have translated the assets and liabilities into U.S. dollars at an exchange
rate of CDN $1.4674 per US $1.00, the exchange rate in effect at September
30, 1999. We include gains and losses that result from translation assets
and liabilities into U.S. dollars in stockholders' equity as a cumulative
foreign currency translation adjustment.
25
30
SCHEDULE 1
FUTURELINK CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(IN THOUSANDS)
PRO FORMA
COMPLETED ACQUISITIONS WITH
--------------------------------------------------------- COMPLETED
MICRO CN VERTICAL PRO FORMA ACQUISITIONS
FUTURELINK VISIONS NETWORKS ASYNC KNS(1) SOFTWARE INC ADJUSTMENTS AND OFFERING
---------- ------------ -------- ------ ------ ------------- ----------- ------------
ASSETS
Current assets............ $ 9,923 $4,964 $2,234 $1,796 $8,736 $2,556 $131,196(C) $161,405
Equipment and leasehold
improvements, net....... 2,597 1,019 37 128 716 154 -- 4,651
Goodwill.................. 6,452 -- -- -- -- -- 165,009(C) 171,461
Other long-term assets.... 3,363 44 47 7 538 6 (3,490)(C) 515
------- ------ ------ ------ ------ ------ -------- --------
Total assets..... $22,335 $6,027 $2,318 $1,931 $9,990 $2,716 $292,715 $338,032
======= ====== ====== ====== ====== ====== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Line of credit............ $ -- $1,394 $ 527 $ 324 $ -- $ -- $ -- $ 2,245
Other current
liabilities............. 3,077 4,226 1,269 1,528 8,481 1,448 6,580(D) 26,609
Long-term debt, net of
current portion......... 28 -- 3 -- -- -- -- 31
Convertible debentures,
net..................... 22,170 -- -- -- -- -- (21,222)(D) 948
Minority interest......... -- -- -- 346 -- (346)(D) --
Deferred income taxes..... 855 -- -- -- -- -- -- 855
Stockholders' equity
(deficit)............... (3,795) 407 519 79 1,163 1,268 307,703(D) 307,344
------- ------ ------ ------ ------ ------ -------- --------
Total liabilities and
stockholders' equity
(deficit)............... $22,335 $6,027 $2,318 $1,931 $9,990 $2,716 $292,715 $338,032
======= ====== ====== ====== ====== ====== ======== ========
- -------------------------
(1) The functional currency of KNS is the Pound Sterling. Accordingly, we have
translated the assets and liabilities into U.S. dollars at an exchange rate
of L0.6191 per US$1.00, the exchange rate in effect at September 30, 1999.
We include gains and losses that result from translating assets and
liabilities into U.S. dollars in stockholders' equity as a cumulative
foreign currency translation adjustment.
27
31
FUTURELINK CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
PENDING ACQUISITIONS
PRO FORMA WITH ------------------------- PRO FORMA WITH
COMPLETED MADISON CHARON COMPLETED AND
ACQUISITIONS GROUP OF SYSTEMS, PRO FORMA PENDING
(SCHEDULE 2) COMPANIES(1) INC.(2) ADJUSTMENTS ACQUISITIONS
-------------- ------------ ---------- ----------- --------------
Revenue.................................... $ 58,910 $ 16,648 $ 9,294 $ -- $ 84,852
----------- ---------- ---------- -------- -----------
Operating expenses:
Cost of sales, excluding depreciation.... 41,752 12,009 7,264 -- 61,025
Selling, general and administrative...... 23,308 3,754 1,850 -- 28,912
Depreciation and amortization of goodwill
and other intangible assets............ 26,974 -- 33 13,391(E) 40,398
----------- ---------- ---------- -------- -----------
Income (loss) from operations.............. (33,124) 885 147 (13,391) (45,483)
Interest expense, net(3)................... 11,792 175 4 381(H) 12,352
----------- ---------- ---------- -------- -----------
Income (loss) before provision (benefit)
for income taxes......................... (44,916) 710 143 (13,772) (57,835)
Provision (benefit) for income taxes....... 255 37 61 -- 353
----------- ---------- ---------- -------- -----------
Income (loss) from continuing operations... $ (45,171) $ 673 $ 82 $(13,772) $ (58,188)
=========== ========== ========== ======== ===========
Loss per share from continuing
operations -- basic and diluted.......... $ (0.90)
===========
Weighted average shares(4)................. 61,359,480 1,975,110 1,072,940 64,407,530
=========== ========== ========== ===========
- -------------------------
(1) 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.
(2) The functional currency of Charon is the Canadian Dollar. Accordingly, we
have translated the revenue and expenses into U.S. dollars at an exchange
rate of CDN$1.4867 per US$1.00, the average exchange rate during the period
translated.
(3) Includes amortization of deferred financing fees and debt discount.
(4) The weighted average number of shares outstanding and the loss per share
have been adjusted to reflect a reverse stock split of 5 to 1 on June 1,
1999.
27
32
SCHEDULE 2
FUTURELINK CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
COMPLETED ACQUISITIONS
---------------------------------------------------------------------
VERTICAL PRO FORMA
FUTURELINK MICRO VISIONS CN NETWORKS ASYNC KNS(1) SOFTWARE INC. ADJUSTMENTS
---------- ------------- ----------- ---------- ---------- ------------- ------------
Revenue........................ $ 5,037 $ 16,557 $ 5,899 $ 6,209 $ 15,855 $ 9,458 $ (105)(F)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Cost of sales, excluding
depreciation............. 6,793 10,774 3,825 4,244 11,177 4,939 --
Selling, general and
administrative........... 6,626 6,594 1,900 1,272 4,130 3,237 (451)(G)
Depreciation and
amortization of goodwill
and other intangible
assets................... 1,943 84 25 36 106 30 24,750(E)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations................... (10,325) (895) 149 657 442 1,252 (24,404)
Interest expense, net(2)....... 11,155 12 34 30 198 5 358(H)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes... (21,480) (907) 115 627 244 1,247 (24,762)
Provision (benefit) for income
taxes........................ (356) -- 34 -- 97 480 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations................. $ (21,124) $ (907) $ 81 $ 627 $ 147 $ 767 $ (24,762)
========== ========== ========== ========== ========== ========== ==========
Loss per share from continuing
operations -- basic and
diluted...................... $ (3.23)
==========
Weighted average shares(3)..... 6,534,575 7,200,000 1,181,818 1,298,705 2,160,307 1,026,316 41,957,759
========== ========== ========== ========== ========== ========== ==========
PRO FORMA
WITH
COMPLETED
ACQUISITIONS
AND OFFERING
------------
Revenue........................ $ 58,910
-----------
Operating expenses:
Cost of sales, excluding
depreciation............. 41,752
Selling, general and
administrative........... 23,308
Depreciation and
amortization of goodwill
and other intangible
assets................... 26,974
-----------
Income (loss) from
operations................... (33,124)
Interest expense, net(2)....... 11,792
-----------
Income (loss) before provision
(benefit) for income taxes... (44,916)
Provision (benefit) for income
taxes........................ 255
-----------
Income (loss) from continuing
operations................. $ (45,171)
===========
Loss per share from continuing
operations -- basic and
diluted...................... (0.74)
===========
Weighted average shares(3)..... 61,359,480
===========
- -------------------------
(1) The functional currency of KNS is the Pound Sterling. Accordingly, we have
translated the revenue and expenses into U.S. dollars at an exchange rate of
L0.6199 per US$1.00, the average exchange rate during the period translated.
(2) Includes amortization of deferred financing fees and debt discount.
(3) The weighted average number of shares outstanding and the loss per share
have been adjusted to reflect a reverse stock split of 5 to 1 on June 1,
1999.
29
33
FUTURELINK CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA WITH
PENDING ACQUISITIONS COMPLETE AND
PRO FORMA ----------------------- PENDING
WITH COMPLETED MADISON CHARON ACQUISITIONS
ACQUISITIONS GROUP OF SYSTEMS, PRO FORMA AND THIS
(SCHEDULE 3) COMPANIES(1) INC.(2) ADJUSTMENTS OFFERING
-------------- ------------ -------- ----------- --------------
Revenue............................. $ 55,901 $10,889 $11,758 $ -- $ 78,548
----------- ------- ------- -------- -----------
Operating expenses:
Cost of sales, excluding
depreciation.................... 41,021 7,741 9,632 -- 58,394
Selling, general and
administrative.................. 15,765 2,988 1,752 -- 20,505
Depreciation and amortization
goodwill and other intangible
assets.......................... 33,985 -- 25 17,855(I) 51,865
----------- ------- ------- -------- -----------
Income (loss) from operations....... (34,870) 160 349 (17,855) (52,216)
Interest expense, net(3)............ 2,215 98 2 508(j) 2,823
----------- ------- ------- -------- -----------
Income (loss) before provision
(benefit) for income taxes........ (37,085) 62 347 (18,363) (55,039)
Provision (benefit) for income
taxes............................. 669 9 124 -- 802
----------- ------- ------- -------- -----------
Income (loss) from continuing
operations........................ $ (37,754) $ 53 $ 223 $(18,363) $ (55,841)
=========== ======= ======= ======== ===========
Loss per share from continuing
operations -- basic and diluted... $ (.98)
===========
Weighted average shares(4).......... 54,197,271 1,975,110 1,072,940 57,245,321
===========
- -------------------------
(1) 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.
(2) The functional currency of Charon is the Canadian Dollar. Accordingly, we
have translated the revenue and expenses into U.S. dollars at the exchange
rate of $1.4831 per US $1.00, the average exchange rate during the period
translated.
(3) Includes amortization of deferred financing fees and debt discount.
(4) The weighted average number of shares outstanding and the loss per share
have been adjusted to reflect a reverse stock split of 5 to 1 on June 1,
1999.
29
34
SCHEDULE 3
FUTURELINK CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
COMPLETED ACQUISITIONS
------------------------------------------------------------------
MICRO VERTICAL
FUTURELINK VISIONS CN NETWORKS ASYNC KNS(1) SOFTWARE INC.
---------- ---------- ----------- ---------- ---------- -------------
Revenue................................ $ 2,437 $ 13,669 $ 5,568 $ 6,056 $ 18,382 $ 9,789
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Cost of sales, excluding
depreciation....................... 4,542 8,495 3,179 4,095 15,080 5,630
Selling, general and
administrative..................... 1,860 4,270 2,147 1,706 2,912 2,870
Depreciation and amortization of
goodwill and other intangible
assets............................. 787 39 83 38 -- 38
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations.......... (4,752) 865 159 217 390 1,251
Interest expense, net(2)............... 1,333 10 41 33 337 (16)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes........... (6,085) 855 118 184 53 1,267
Provision (benefit) for income taxes... (205) 178 37 60 116 483
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations........................... $ (5,880) $ 677 $ 81 $ 124 $ (63) $ 784
========== ========== ========== ========== ========== ==========
Loss per share from continuing
operations -- basic and diluted...... $ (1.86)
==========
Weighted average shares(3)............. 3,169,314 7,200,000 1,181,818 1,298,705 2,160,307 1,026,316
========== ========== ========== ========== ========== ==========
PRO FORMA
WITH
PRO FORMA COMPLETED
FUTURELINK ADJUSTMENTS ACQUISITIONS
---------- ----------- ------------
Revenue................................ $ 2,437 $ -- $ 55,901
---------- ---------- ----------
Operating expenses:
Cost of sales, excluding
depreciation....................... 4,542 -- 41,021
Selling, general and
administrative..................... 1,860 -- 15,765
Depreciation and amortization of
goodwill and other intangible
assets............................. 787 33,000(I) 33,985
---------- ---------- ----------
Income (loss) from operations.......... (4,752 (33,000) (34,870)
Interest expense, net(2)............... 1,333 477(J) 2,215
---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes........... (6,085 (33,477) (37,085)
Provision (benefit) for income taxes... (205 -- 669
---------- ---------- ----------
Income (loss) from continuing
operations........................... $ (5,880 $ (33,477) $ (37,754)
========== ========== ==========
Loss per share from continuing
operations -- basic and diluted...... $ (1.86 $ (2.14)
==========
Weighted average shares(3)............. 3,169,314 1,639,847 17,676,705
========== ========== ==========
- -------------------------
(1) Balance represents the twelve months ended February 28, 1999, which
represented KNS' historical fiscal year end. The functional currency of KNS
is the Pound Sterling. Accordingly, we have translated the revenue and
expenses into U.S. dollars at the exchange rate of L0.6207 per US$1.00, the
average exchange rate during the period translated.
(2) Includes amortization of deferred financing fees and debt discounts.
(3) The weighted average number of shares outstanding and the loss per share
have been adjusted to reflect a reverse stock split of 5 to 1 on June 1,
1999.
30
35
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
BALANCE SHEETS
We paid aggregate consideration for the acquisitions completed or are
pending through February 11, 2000 of $168.4 million and $90.9 million,
respectively, and incurred additional direct acquisition costs of approximately
$9.4 million for a total purchase price of completed acquisitions of $259.3. 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 (in millions) should be considered preliminary
and subject to further adjustment upon completion of all procedures necessary to
determine the fair values of the assets acquired and liabilities assumed.
Completed Acquisitions:
Current assets.............................................. $ 20.3
Equipment and leasehold improvements, net................... 2.0
Goodwill.................................................... 165.0
Other long-term assets...................................... 0.6
Current liabilities......................................... (19.2)
Other long-term liabilities................................. (0.3)
------
Purchase price of completed acquisitions.......... $168.4
======
Pending Acquisitions:
Current assets.............................................. $ 9.3
Equipment and leasehold improvements........................ 0.6
Goodwill.................................................... 89.3
Current liabilities......................................... (8.3)
-----
Purchase price of pending acquisitions............ $90.9
=====
We have assumed our completed and pending acquisitions to be financed with
cash, common stock, and the net proceeds from our 1999 private equity placement
and this offering, as follows (in millions):
Completed Acquisitions:
Fair value of common stock issued........................... $127.8
Issuance of notes to former shareholders (KNS).............. 6.7
Proceeds from the private placement offering................ 33.9
------
Purchase price of completed acquisitions.......... $168.4
======
31
36
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
Pending Acquisitions:
Fair value of common stock issued........................... $70.2
Issuance of notes to former shareholders (Madison Group).... 7.3
Proceeds from the public offering........................... 13.4
-----
Purchase price of pending acquisitions............ $90.9
=====
Financings:
During October and November, 1999, the Company completed a private
placement of $50.0 million gross proceeds through the issuance of 9,090,909
common shares and warrants to purchase 2,401,040 common shares. The warrants are
exercisable for up to five years at an exercise price of $8.50 per share. The
company received $30.0 million upon initial closing. $13.0 million was received
on November 5, 1999 after the satisfaction of conditions relating to the
conversion of existing debt. The remaining $7.0 million was received on November
12, 1999. A finance fee of 6% or $3.0 million was paid to the placement agent.
The Company also issued 909,091 common share purchase warrants to the placement
agent. The warrants are exercisable for up to five years at an exercise price of
$8.50 per share. Additional costs of the issue are expected to be $1.0 million.
In February 2000, the Company expects to receive proceeds of $18.1 million for
the exercise of warrants in connection with the $50.0 million private placement.
During October, 1999, $15,000,000 of 8% senior subordinated convertible
promissory notes converted into 2,727,172 common shares. Warrants, to purchase
an additional 711,805 common shares were also issued. The warrants are
exercisable for up to five years at an exercise price of $8.50 per common share.
In November 1999, 5,988,824 common shares were issued in relations to the
conversion of $5,090,500 of 8% senior subordinated convertible promissory notes.
In addition, 3,529,808 common shares were issued on the exercise of 3,709,000
warrants primarily on a non cash basis. These warrants were issued in connection
with the original issuance of the promissory notes.
In November 1999, 3,799,974 shares were issued on a non cash basis relating
to the exercise of 4,000,001 warrants. These warrants included 2,000,000
previously issued as a placement fee in relation to the issuance of 8% senior
subordinated convertible promissory notes, as well as 2,000,001 previously
issued for advisory services.
In December 1999, Thomson Kernaghan & Co. Limited (TK), agreed to convert
their remaining $1.5 million of 10% convertible debentures and their remaining
warrants to purchase 1,129,534 shares of common stock into 3,007,867 shares of
common stock.
32
37
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
The accompanying Pro Forma Balance Sheet as of September 30, 1999 reflects
the following pro forma adjustments:
(A) Pro forma adjustments to assets consist of the following (dollars
in millions):
ASSETS GOODWILL
------- --------
Acquisition Adjustments:
Record goodwill related to acquired companies............... $ -- $89.3
------ -----
Total acquisition adjustments..................... -- 89.3
====== =====
Use of Proceeds Adjustment
Record cash used in acquisition............................. (13.4) --
------ -----
Total use of proceeds adjustment.................. (13.4) --
------ -----
Total proforma adjustments........................ $(13.4) $89.3
====== =====
32.0.1
38
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
(B) Pro forma adjustments to liabilities and stockholders' equity
consist of the following (dollars in millions):
STOCKHOLDERS'
LIABILITIES EQUITY
----------- -------------
Acquisition Adjustments:
Reverse equity not assumed in connection with the probable
acquisitions.............................................. $ -- $ (1.6)
Record common stock issued to finance the probable
acquisitions.............................................. -- 70.2
Issuance of notes to shareholders due and payable in March
2000...................................................... 7.3 --
---- ------
Total acquisition adjustments..................... $7.3 $ 68.6
==== ======
32.1
39
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
(C) Pro forma adjustments to assets consist of the following (dollars in
millions):
CURRENT OTHER LONG-
ASSETS GOODWILL TERM ASSETS
------- -------- -----------
Acquisition Adjustments:
Record goodwill related to acquired companies, net.......... $ -- $165.0 $ --
Elimination of intercompany receivables..................... (0.1)
Reversal of deposits paid to acquired entities.............. -- -- (3.5)
------ ------ -----
Total acquisition adjustments..................... (0.1) 165.0 (3.5)
------ ------ -----
Capital Financing Adjustments:
Receipt of funds from public equity offering, net of fees... 102.6 -- --
$50 million private placement, net of offering costs........ 46.0 -- --
Proceeds received from exercise of warrants related to $50
million private placement. See "Financings.".............. 18.1 -- --
Record cash used in acquisitions............................ (30.4) -- --
Cash to SmallCaps for equity placement services............. (5.0) -- --
------ ------ -----
Total use of proceeds adjustment.................. 131.3 -- --
------ ------ -----
Total pro forma adjustments....................... $131.2 $165.0 $(3.5)
------ ------ -----
(D) Pro forma adjustments to liabilities and stockholders' equity
consist of the following (dollars in millions):
CURRENT CONVERTIBLE STOCKHOLDERS'
LIABILITIES DEBENTURES EQUITY
----------- ----------- -------------
Acquisition Adjustments:
Reverse equity not assumed in connection with the 1999
acquisitions we completed through December 31,
1999................................................. $ -- $ -- $ (3.3)
Elimination of intercompany payables................... (0.1) -- --
Note payable issued to KNS in consideration for
completed transaction payable in March 2000.......... 6.7 -- --
Conversion of convertible debentures. See
"Financings"......................................... -- (15.0) 15.0
Conversion of convertible debentures. See
"Financings"......................................... -- (4.7) 4.7
Exercise of 2,401,040 warrants. See "Financings"....... -- 18.2
Record net common stock issued in private equity
placement............................................ -- -- 46.0
Conversion of convertible debentures................... -- (1.6) 1.6
Stock issued as consideration for completed
acquisitions......................................... -- -- 127.9
Record common stock issued in public offering, net..... -- -- 102.6
Record buyout of minority interest..................... (0.3) -- --
Issuance of warrants to SmallCaps for equity placement
services -- $60 million.............................. -- -- --
Cash to SmallCaps for equity placement services........ -- -- (5.0)
----- ------ -------
Total acquisition adjustments................ 6.3 (21.3) 307.7
----- ------ -------
Total pro forma adjustments.................. $ 6.3 $(21.3) $ 307.7
===== ====== =======
33
40
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
STATEMENT OF OPERATIONS
Pro Forma Adjustments
The accompanying Pro Forma Statement of Operations for the nine months
ended September 30, 1999 reflects the following pro forma adjustments:
EXPENSES REVENUE
-------- --------
(E) To adjust goodwill amortization based on an amortization
rate of 5 years for the nine months ended September 30,
1999. $38,141 $ --
(F) During the nine months ended September 30, 1999, FutureLink
obtained services totaling $105,000 from Micro Visions. This
intercompany transaction has been eliminated by reducing
revenue by $105,000. -- (105)
(G) Reversal of $105,000 intercompany expenses as discussed in
pro forma adjustment (F) and the reversing of minority
interest related to KNS of $346,000. (451) --
(H) Interest expense for the nine months ended September 30,
1999 related to shareholder notes for KNS and Madison
acquisitions. 739 --
The accompanying Pro Forma Statement of Operations for the year ended
December 31, 1998 reflects the following pro forma adjustments:
(I) To adjust goodwill amortization based on an amortization
rate of 5 years for the twelve months ended December 31,
1998. 50,855 --
(J) Interest expense for the twelve months ended December 31,
1998 related to shareholders notes for KNS and Madison
acquisitions. 985 --
WEIGHTED AVERAGE SHARES
The weighted average number of shares outstanding has been adjusted to give
effect to the shares issued upon the acquisitions of Micro Visions, CNI, Async,
KNS and VSI 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 shares issued with respect to the private placement, conversion of debt and
exercise of warrants 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
37
41
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
consideration as if all performance criteria had been met. The weighted average
number of shares outstanding has been calculated as follows:
NUMBER OF SHARES
FOR NUMBER OF SHARES
NINE MONTHS ENDED FOR YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------- -----------------
FutureLink..................................... 4,035,021 4,035,021
Pequot......................................... 2,401,040 2,401,040
Micro Visions.................................. 8,400,000 8,400,000
Madison........................................ 1,975,170 1,975,170
CNI............................................ 1,181,816 1,181,816
GKM............................................ 9,090,909 9,090,909
Async.......................................... 1,738,445 1,738,445
KNS............................................ 2,160,307 2,160,307
Vertical Software.............................. 1,026,316 1,026,316
Charon......................................... 1,072,940 1,072,940
Commonwealth................................... 18,635,974 18,635,974
TK............................................. 5,527,383 5,527,383
Warrant exercise............................... 2,159,209 n/a
Offering....................................... 5,000,000 n/a
---------- ----------
Total................................ 64,404,530 57,245,321
---------- ----------
Diluted weighted average shares does not differ from basic earnings per
share.
BALANCE SHEET -- PENDING ACQUISITIONS
PENDING ACQUISITIONS
The weighted average number of shares outstanding has been further adjusted
to give effect to the shares issued upon acquisition of Microlan Systems, Inc.,
Madison Consulting Resources, Inc., Madison Consulting Resources NJ, Inc. and
Charon Systems, Inc. as though they had been outstanding as at the beginning of
the period. The weighted average number of shares outstanding includes all
contingent share consideration as all performance criteria had been met. The
weighted average number of shares outstanding has been calculated as follows:
NUMBER OF SHARES
FOR NINE MONTHS NUMBER OF SHARES
ENDED FOR YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
Madison Group:
Microlan Systems, Inc......................... 1,723,207 1,723,207
Madison Consulting Resources, Inc............. 86,680 86,680
Madison Consulting Resources NJ, Inc.......... 165,223 165,223
Charon Systems, Inc............................. 1,072,940 1,072,940
--------- ---------
Total................................. 3,048,050 3,048,050
========= =========
Diluted earnings per share does not differ from basic earnings per share.
38
42
SELECTED CONSOLIDATED FINANCIAL DATA
The following historical selected consolidated financial data are derived
from the consolidated financial statements of FutureLink Corp. contained
elsewhere in their Prospectus. Information at December 31, 1997 and 1998 and for
the years then ended and at September 30, 1999 and for the nine months then
ended have been derived from financial statements which have been audited by
Ernst & Young LLP, Independent Auditors and Chartered Accountants. The financial
data for the nine month period ended September 30, 1998 is derived from
unaudited financial statements. The unaudited financial statements include all
adjustments consisting of normal recurring accruals which we consider necessary
for a fair presentation of the financial position and the results of operations
for this period. Operating results for the nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999 or any future period. This data should be read in
conjunction with the consolidated financial statements, related notes, and other
financial information included in this Prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- ------------------------
1997 1998 1998 1999
-------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue..................................................... $ -- $ 2,437 $ 623 $ 5,037
------- ---------- ---------- ----------
Expenses:
Cost of sales, excluding depreciation..................... -- 4,542 2,672 6,793
Selling, general and administrative....................... 737 1,860 933 6,626
Depreciation, and amortization of goodwill and other
intangible assets....................................... -- 787 167 1,943
------- ---------- ---------- ----------
Loss from operations........................................ (737) (4,752) (3,149) (10,325)
Interest expense, net(1).................................. -- 1,333 1,233 11,155
------- ---------- ---------- ----------
Loss before benefit for income taxes and extraordinary
item...................................................... (737) (6,085) (4,382) (21,480)
Benefit for income taxes.................................... -- (205) (15) (356)
------- ---------- ---------- ----------
Loss before extraordinary item.............................. (737) (5,880) (4,367) (21,124)
Extraordinary item.......................................... -- -- -- (845)
------- ---------- ---------- ----------
Net loss.................................................... $ (737) $ (5,880) $ (4,367) $ (21,969)
======= ========== ========== ==========
Loss per share -- basic and diluted:
Loss before extraordinary item............................ $ (8.24) $ (1.86) $ (1.61) $ (3.23)
Extraordinary item........................................ -- -- -- (0.13)
------- ---------- ---------- ----------
Net loss.................................................. $ (8.24) $ (1.86) $ (1.61) $ (3.36)
======= ========== ========== ==========
Weighted average shares(2)................................ 89,489 3,169,413 2,715,793 6,534,575
======= ========== ========== ==========
OTHER DATA:
EBITDA(3)................................................. $ (737) $ (3,965) $ (2,982) $ (8,383)
DECEMBER 31,
----------------- SEPTEMBER 30,
1997 1998 1999
------ ------- -------------
(DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ -- $ 7 $ 7,815
Total assets................................................ -- 10,646 22,335
Total debt.................................................. -- 3,003 22,198
Stockholders' equity (deficit).............................. (24) 2,837 (3,795)
- -------------------------
(1) Includes amortization of deferred financing fees and debt discount.
(2) Weighted average shares gives retroactive effect to a reverse stock split of
5 to 1 on June 1, 1999.
(3) EBITDA is defined as net income (loss) plus (i) extraordinary items, (ii)
provision (benefit) for income taxes, (iii) interest expense, (iv)
depreciation and 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.
(4) No dividends have been declared or paid during any period presented.
39
43
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 in conjunction 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.
We introduced our ASP services in March 1999 and launched our sales program
for ASP services in July 1999. We have built our server-based computing business
through five acquisitions that we closed between October 20, 1999, and January
31, 2000. We also have signed definitive agreements to acquire two more
server-based computing integrators.
Our historical financial statements as of and for the year ended December
31, 1997 and 1998 and as of and for the nine-months ended September 30, 1998 and
1999 only reflect Futurelink's historical Canadian consulting business and
Canadian ASP business. Our historical financial statements do no reflect any
United States server-based computing business, ASP business or United Kingdom
server-based computing distribution business nor our recently closed or pending
acquisitions. The United States and United Kingdom businesses acquired since
September 30, 1999 now represent a significant portion of our revenues,
operations and employees.
We had no active operations in 1997. On January 20, 1998, we acquired a 46%
interest in FutureLink Alberta and changed our name from Core Ventures to
FutureLink Corp. Effective November 23, 1998, we acquired a further 50.4%
interest in FutureLink Alberta, bringing our total ownership in FutureLink
Alberta to 96.4%. FutureLink Alberta focused on providing mid-sized businesses
with ASP solutions. 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. FutureLink Alberta's results were consolidated into
the results of its parent, FutureLink, from November 24, 1998 to December 31,
1998. On February 26, 1999, FutureLink Alberta became a wholly-owned subsidiary
when FutureLink Corp. acquired the remaining 3.6% minority shares.
Effective August 24, 1998, we acquired all of the outstanding shares of
Riverview Management Corporation (renamed FutureLink/SysGold Ltd).
FutureLink/SysGold owned SysGold, a Western Canadian information technology
services company focused on outsourcing information technology services to
mid-sized companies in the oil and gas sector. FutureLink/SysGold's results were
consolidated into our results commencing August 24, 1998, when we acquired
Riverview Management Corporation.
Futurelink Alberta's results for the period January 20, 1998 to November
24, 1998 were not consolidated into our results because we did not own a control
position (greater than 50%) in Futurelink Alberta until November 24, 1998.
We included our 46% ownership percentage of Futurelink Alberta's losses in
our income statement in loss of investee.
Our historical financial statements have the following major components:
Revenue for the years ended December 31, 1997 and 1998 and the nine months
ended September 30, 1998 and 1999 were mainly comprised of Canadian information
technology outsourcing and business consulting revenues, related sale of
hardware and software and ASP-related services.
40
44
Cost of sales consists of costs of goods sold and cost of service delivery.
Cost of goods sold reflects costs of hardware and software purchased for resale
to customers. Cost of service delivery reflects personnel and operating costs
related to our ASP and information technology outsourcing businesses. Our
information technology outsourcing business cost of service delivery reflects
our payroll and benefit costs for our outsourcing consultants who support the
information technology activities of our clients. Our ASP cost of service
delivery reflects the costs of the technical people and operational costs
related to testing and operating our data center and installing and supporting
software applications.
41
45
Our selling general and administrative expenses include executive and
administrative, selling, marketing, legal, accounting, consulting and travel
expenses.
Our depreciation expense consists of depreciation of fixed assets over
their useful life (generally three years). Our fixed assets consist of servers
and office equipment. Our amortization expense reflects intangible assets and
goodwill related to acquisitions closed in 1998.
Our 1998 financial statements only consolidate the results of FutureLink
Alberta and SysGold for the periods after their acquisition by FutureLink.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Revenue
For the nine months ending September 30, 1999, we recorded total revenue of
$5.0 million. Revenues for the same period in 1998 were $0.6 million. The main
components of our revenue were:
SEPTEMBER 30,
---------------------
1999 1998
--------- ---------
(DOLLARS IN MILLIONS)
Information technology outsourcing, consulting and other.... $ 3.3 $ 0.4
ASP......................................................... 0.3 0.0
Sale of hardware/software................................... 1.4 0.2
------ ------
$ 5.0 $ 0.6
====== ======
Our Canadian information technology outsourcing and consulting revenues for
the nine months ended September 30, 1999 were related to providing services to
our mostly oil and gas industry customers. The revenues for the same period in
1998 do not reflect revenues for a full nine months, but only for the period
August 24 through September 30, 1998.
Cost of Goods Sold
Cost of goods sold of $0.1 million for the nine months ended September 30,
1998 reflects a gross margin percentage of 15%. These costs relate to the
SysGold operation that has only been consolidated for the period August 24, 1998
to September 30, 1998, and therefore the margins may not be indicative of
typical operations. Cost of goods sold of $1.3 million for the nine months ended
September 30, 1999 reflects a gross margin percentage of 9%.
Cost of Service Delivery
Our cost of service delivery increased from $2.5 million for the nine
months ended September 30, 1998 to $5.5 million for the nine months ended
September 30, 1999, because the 1998 nine month amount only includes amounts
related to the cost of service delivery of IT outsourcing for the period from
August 24, 1998 to September 30, 1998. In 1998, cost of service also included
direct cost related to the development of our ASP servicer. Such expenses were
further increased in 1999.
Selling, General and Administrative
Our selling, general and administrative expense of $6.6 million for the
nine months ended September 30, 1999 was $6.6 million and included travel,
staffing, operations, advising, advertising consulting and marketing expenses
related to the expansion of our ASP business, securing customers and business
partnerships, as well as meeting and developing relationships with industry
analysts and financiers. The selling, general and administrative expense
includes $0.8 million of non-cash consulting expense.
Our selling general and administrative expense for the nine months ended
September 30, 1998 of $0.1 million excludes costs related to the operations of
our subsidiary, FutureLink Alberta, whose results were not consolidated into our
results until November 1998.
42
46
Interest Expense and amortization of deferred financing fees and debt discount
Our interest expense and amortization of deferred financing fees and debt
discount of $11.2 million for the nine months ended September 30, 1999 reflects
non-cash charges of $10.6 million related to intrinsic values of debt conversion
features and amortization of deferred financing fees and debt discount. The cash
interest expense of $0.6 million relates to interest on outstanding promissory
notes.
Our interest expense of $1.2 million for the nine months ended September
30, 1998 consists primarily of non-cash interest amounts.
Depreciation and Amortization of goodwill and other intangible assets
Our depreciation and amortization costs for the nine months ended September
30, 1998 and 1999 are comprised of the following (dollars in millions):
1999 1998
----- -----
Depreciation................................................ $ 0.5 $ 0
Amortization of intangible assets........................... $ 1.4 $ 0.2
----- -----
$ 1.9 $ 0.2
===== =====
Our depreciation for the nine months ended September 30, 1999 increased
over the amount for the similar period in 1998 due to the significant addition
of capital assets in 1999 related to data center expansion, software user
licenses and office and leasehold improvements.
Our amortization of intangible assets expenses related to the amortization
of goodwill and employee asset base related to the acquisitions of FutureLink
Alberta and SysGold in 1998. The amortization does not include any goodwill
amounts related to the closed and pending acquisitions in 1999 and 2000. We
began amortizing our goodwill from these acquisitions commencing in October
1999.
Equity in loss of investee
We owned 46% of FutureLink Alberta from January 20, 1998 until November 23,
1998, when we acquired control of it. During this period, we accounted for our
46% interest in FutureLink Alberta using the equity method of accounting for
investments and included 46% of FutureLink Alberta's net loss on our income
statement is included in equity in loss of investee. Thus, in 1999 this line
item does not exist as FutureLink Alberta's income statement was consolidated
with our income statement.
43
47
Extraordinary Item
During the nine month period ending September 30, 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 our holders of
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 accounting loss of $0.8 million
related to the renegotiation and restructuring of the convertible debentures.
TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1997
Revenue
During the twelve months ending December 31, 1998, we recorded total
revenues of $2.4 million. We had no revenues in 1997 and had no active
operations.
Revenues for 1998 were comprised mostly of Canadian information technology
outsourcing and business consulting revenues and related sales of hardware and
software.
1998
---------------------
(DOLLARS IN MILLIONS)
Information technology outsourcing consulting............... $1.0
Sale of hardware and software............................... $1.5
----
$2.5
====
Our Canadian information technology outsourcing and consulting revenues in
1998 were related to providing services primarily to our oil and gas industry
customers but only for the period August 22, 1998 to September 30, 1999 where we
owned Riverview Management's information technology outsourcing business that we
acquired on August 22, 1998. We purchase and resell hardware and software to our
customers as part of our services.
We recorded 1998 ASP revenues in our FutureLink Alberta subsidiary of
approximately $0.1 million. However, only a small portion of these ASP revenues
were reported as part of our consolidated revenues, as FutureLink Alberta only
became our subsidiary for accounting purposes in November 1998.
Cost of Goods Sold
Hardware and software costs of $0.9 million for the year ended December 31,
1998 resulted in a gross margin on hardware and software sales of 9%.
Cost of Service Delivery
Our 1998 cost of service delivery amount includes delivery costs related to
the information technology outsourcing revenue for the period August 24, 1998 to
December 31, 1998. The cost of delivery of ASP services reflects as FutureLink's
development work on the delivery of computer utility and ASP services, including
operating a "beta" data center with test customers.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses in 1998 significantly
increased from these expenses in 1997 as we acquired FutureLink Alberta and
FutureLink/SysGold and commenced active operations. Our consolidated selling,
general and administrative expenses include FutureLink/SysGold's selling,
general and administrative expenses for the period from August 24, 1998 to
December 31, 1998 and FutureLink Alberta's selling, general and administrative
expenses for the period November 23, 1998 to December 31, 1998.
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Our 1997 selling, general and administrative expense relate principally to
a deposit on a proposed acquisition that we forfeited when we did not complete
the acquisition.
Interest Expense and amortization of deferred financing fees and debt discount
Our 1998 interest expense of $1.3 million includes a significant non-cash
charge related to amortization of deferred financing fees of $1.2 million.
Depreciation and Amortization of Intangible Assets
Our 1998 consolidated depreciation and amortization is comprised of the
following:
1998
---------------------
(DOLLARS IN MILLIONS)
Depreciation from consolidated subsidiaries................. $0.1
Amortization of goodwill and employee and consultants base
from 1998 Acquisition..................................... 0.7
----
Total....................................................... $0.8
Our depreciation figure excludes depreciation from FutureLink Alberta
operations for the period January 20, 1998 to September 30, 1998, when
FutureLink Alberta was not an accounting subsidiary of FutureLink. Our
amortization expense reflects amortization of intangible assets from 1998
acquisitions.
Equity in Loss of Investee
We owned 46% of FutureLink Alberta from January 20, 1998 until November 23,
1998, when we acquired control of it. During this period, we accounted for our
46% interest in FutureLink Alberta using the equity method of accounting for
investments and included 46% of FutureLink Alberta's net loss on our income
statement. FutureLink Alberta had revenues of approximately $0.2 million and a
net loss of approximately $1.8 million during the period January 20,1998 to
November 23, 1998. We recognized 46% of that loss as our equity in loss of
investee.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Used in Operations
For the nine months ended September 30, 1999, we had net cash outflows from
operating activities of $8.3 million related to the expansion of our ASP
business, expansion into the United States and significant acquisition and
financing activity. These net cash outflows are significantly greater than net
cash outflows for the same period in 1998 and reflect a significant increase in
operating activities.
For the twelve months ended December 31, 1998, we had net operating cash
outflows of $1.1 million that related to operating cash needs of Futurelink and
its consolidated subsidiaries during 1998.
Capital Investments and Capital Lease Lines
In 1999, through September 30, 1999, we have invested $2.0 million in fixed
assets, mostly in building a new Calgary data center to host our ASP customers.
This capital investment was funded from equity and convertible debt raised in
1998 and 1999.
In the third and fourth quarter of 1999, we secured capital asset lease
lines with financial lenders and computer hardware vendor. These lines have been
partially used to build the Irvine data center, expand the Calgary data Center
and refinance the Calgary server farm:
SOURCE OF MATERIAL CAPITAL ASSET LEASE LINES LEASE LINE SIZE USE OF LEASE ONE BALANCE 31/12/99
- -------------------------------------------- --------------- ------------------ ----------------
Financial Lenders......................... $2.8 Million Computer hardware $1.3 Million
and related
infrastructure
assets
Compaq Financial Services................. $20.0 Million Compaq servers and $2.1 Million
other Compaq
equipment
EMC....................................... $3.3 Million EMC storage $3.3 Million
equipment
IBM....................................... $5.0 Million IBM equipment $0.0 Million
Acquisitions
We have financed our acquisitions to date with mostly stock consideration
and some cash consideration. We have funded the cash portion of our acquisitions
from equity financings. In 1999 and 2000 to date, the cash and deferred cash
portion of our closed and pending acquisitions totalled approximately $65
million.
Recent Equity and Equity-Related Financing
In October and November 1999, we completed a private placement of $50.0
million of common equity with institutional private equity investors. We
received net proceeds of approximately $46.0 million after deducting commissions
and fees. We have used the net proceeds to complete the acquisitions of Micro
Visions, CNI, Async, KNS and VSI and to fund our operating activities commencing
in the fourth quarter of 1999.
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, which were used to fund deposits on
acquisitions that were subsequently completed and to fund our operating
activities. In October 1999, these convertible notes were converted into
2,727,273 common shares.
In April and May 1999, we issued $8.0 million aggregate principle amount of
our 8% senior subordinated convertible promissory notes. The net cash proceeds
of this issuance, were $7.3 million, after fees and expenses. The net proceeds
were used to fund operating activities, capital investments and a
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$1.0 million deposit on the Micro Visions acquisition. Between August and
November 1999, substantially all of these notes were converted to common shares.
In the first quarter of 1999, we received $3.5 million aggregate principal
amount of our 10% convertible debenture financing, shareholder loans and
short-term promissory notes that were subsequently repaid. The net proceeds of
these financings were used to fund operating activities in early 1999 as the
company expanded its operations and focused on building its ASP business. In
1999, all of the 10% convertible debentures were converted to common equity.
In October 1999, we issued warrants to purchase 2,475,000 shares of our
common stock to Pequot Private Equity Fund II, L.P. and certain other investors
in our common stock in connection with a private offering. On February 8, 2000,
in order to induce such holders of our warrants to exercise such warrants, we
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. The warrants have an exercise price of $8.45 per share. We
expect to receive net proceeds of $5,392,163 from the early exercise by
Dimensional Partners Ltd. and Dimensional Partners L.P. of warrants to purchase
718,955 shares of common stock. Pequot Capital Management has indicated that it
will exercise warrants to acquire 1,668,976 shares of our common stock on
similar terms prior to the end of February 2000, which will result in net
proceeds to us of $12,517,322.
Short-term Debt Financing
Futurelink's operating subsidiaries have various working capital lines of
credit in place to fund Futurelink's operating activities.
BALANCE
FUTURELINK OPERATING SUBSIDIARY LINE OF CREDIT SIZE USE OF LINE SECURITY 12/31/99
------------------------------- ------------------- ----------- -------- ----------------
Futurelink Alberta................ $1.3 million Working Assets of $0.0 Million
capital Futurelink
Alberta
Futurelink MicroVisions........... $2.5 Million Inventory for Certificate of $0.5 Million
resale deposit
Futurelink Pleasanton............. $1 Million Working Certificate of $0.8 Million
capital deposit
Futurelink Michigan............... $0.6 Million Working Certificate of $0.4 Million
capital deposit
Upon completion of this offering, we believe that our available cash will
be sufficient to meet our anticipated cash needs for operating losses, working
capital and capital expenditures for at least the next twelve months. However,
we may need additional capital to meet such cash needs or to possibly make
additional acquisitions. If additional capital is needed, there can be no
assurance that such funding will be available on terms satisfactory to us, if at
all.
Foreign Currency Translation and Hedging
We are exposed to foreign currency fluctuations (through our operations in
Canada and the United Kingdom). Approximately 5% of our revenues (including all
1999/2000 closed and pending acquisitions) and corresponding receivables are in
Canadian dollars. Approximately 15% of our revenues and corresponding
receivables are on 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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Adjustments arising from translating from subsidiaries financial statements
into United States dollars are recorded in stockholders' equity as a cumulative
translation adjustment.
Settlement
On February 11, 2000 we entered into an agreement with SmallCaps Online
Group LLC to settle litigation commenced against us by SmallCaps. SmallCaps had
brought this action claiming fees for financial advisory services. Our
settlement agreement obligates us to pay SmallCaps $5.0 million by March 14,
2000. We are also obligated to issue to SmallCaps warrants to purchase 2,000,000
shares of our common stock at $20.50 per share, 500,000 shares of our common
stock at $8.50 per share and 500,000 shares of our common stock at $22.50 per
share. The warrants are exercisable at any time prior to March 14, 2005 and are
subject to adjustment for stock splits, stock dividends, reorganizations, below
market issuances and similar transactions. SmallCaps may not transfer the
warrants until the sooner of 180 days from the effective date of this
registration statement or February 11, 2001. We are obligated to register the
shares underlying SmallCaps' warrants no later than 180 days from the effective
date of this registration statement.
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BUSINESS
OUR COMPANY
We provide server-based computing services and are an application service
provider, or ASP. Our services enable software applications to be deployed,
managed, supported and upgraded from centrally located data centers, rather than
on individual desktop computers. For our server-based computing customers, we
install and integrate software applications on our customers' servers using
Citrix server-based computing software. 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.
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.
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.
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,
- 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.
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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 not
easily attainable by our customers.
- 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 thereby 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.
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 software relationships. We have established relationships
with software application providers in key application areas, including
Microsoft, Great Plains Software, Onyx Software, SalesLogix and Galleon
Distributed Technologies. Our agreements with software application
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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 SERVICE OFFERINGS
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. 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 used by the customer. Our service contracts have
multi-year terms, typically three years.
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. 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.
Depending on the type and length of the project, pricing for these services
is provided to customers at 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. Our server-based computing services are sold by our direct
sales force.
Other Services
We provide video conferencing for our European customers. We also provide
consulting and other complementary services to our customers, usually as a
supplementary service to our server-based computing and ASP offerings.
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SOFTWARE APPLICATIONS
We have assisted our server-based computing customers with the hosting and
delivery of the following software applications, among others:
SOFTWARE APPLICATION
PROVIDER PRODUCT TYPE OF SOFTWARE APPLICATION
-------------------- ------- ----------------------------
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 ERP (Enterprise Resource Planning)
Lotus Lotus Notes Messaging
Microsoft Exchange Messaging
FoxPro Database
Microsoft Office Office productivity suite
Microsoft Publisher Desktop publishing
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
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:
SOFTWARE APPLICATION
PROVIDER PRODUCT TYPE OF SOFTWARE APPLICATION
-------------------- ------- ----------------------------
Corel WordPerfect, QuattroPro, Corel Word processing, spreadsheet, graphics
Draw and other office productivity tools
Great Plains Dynamics, e Enterprise Integrated accounting software
Microsoft Office 2000 Office productivity software, including
Exchange Project word processing, Email, Data Base,
SQL Visio charting and Project planning
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
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KEY RELATIONSHIPS
In implementing our growth strategy, we have developed important commercial
relationships with the following:
CITRIX. Citrix Systems, Inc. provides technology that enables users to
access software applications from virtually any computing device, including
desktops, mobile computers, network computers, terminals, information
appliances, 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
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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 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. 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,
Great Plains Software, Onyx Software, SalesLogix and Epicor Software. 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.
- 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.
- 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.
- SalesLogix. We have been approved to host SalesLogix software
applications.
- Great Plains. We have been approved to host Great Plains software
applications.
- Epicor Software. We have been approved to host Epicor's Clientelle, Era
and Vantage Software packages.
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
systems 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 systems
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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 million
to build our brand name and create market awareness. We plan to use both
traditional advertising and direct mail to target the customer base, as well as
focus on specific horizontal and vertical industries through our sales channels.
We also plan to leverage our relationships with brand name companies such as
Microsoft and Compaq through co-marketing arrangements to extend the reach of
our marketing message.
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 system is monitored on a continual
basis by our personnel in Irvine, California. We combine internally created
technology innovations with technologies from leading software and hardware
providers, including, among others, computer servers made by Compaq, IBM and Sun
MicroSystems, routers and firewall protection software supplied by Cisco
Systems, and storage devices from EMC(2). 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, which operates on an Intel/PC platform.
Our delivery system is 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 X.28 connections in more than 105 countries,
- 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.
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COMPETITION
The markets for our services are extremely competitive. The tremendous
growth and potential size of these markets have attracted many start-ups, as
well as extensions of existing businesses from different industries. The
principal competitive factors in this market include:
- quality of service, including performance, scalability, reliability and
functionality,
- customer service and support,
- variety of services offered,
- price,
- name recognition, and
- network security.
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
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traditional telecommunications carriers. Many of these telecommunications
carriers, in addition to their substantially greater network coverage, market
presence, and financial, technical and personnel resources, also have large
existing commercial customer bases. We believe that our local presence, our
strong technical and data-oriented sales force and our offering a single source
computing solution are important features distinguishing us from the
telecommunications companies.
OTHER POTENTIAL COMPETITORS. It is possible that new competitors or
alliances may emerge and gain market share. Such competitors could materially
affect our ability to obtain new contracts. Further, competitive pressure could
require us to reduce the price of our products and services thus affecting our
business, financial condition and results from operations.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
As a result, certain of these competitors may be able to develop and expand
their 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 developed by such employees while employed by us.
We cannot assure you that a court will enforce these agreements. In addition, we
may be inadequately protected against the use of technology developed by
employees 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,"
"Information Utility," "Application Portal," "The Computer Utility Company" and
"Computer Utility" and for our various logos in both Canada and the United
States. 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. 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.
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. See "Litigation."
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.
FACILITIES
We recently 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, California; Pleasanton, California; Phoenix, Arizona;
Atlanta, Georgia; Ft. Lauderdale,
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Florida; Detroit and Bloomfield 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 10,000 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
From time to time we are a defendant or plaintiff in litigation arising in
the ordinary course of our business. To date, other than the Small Caps lawsuit
and subsequent settlement none of these actions 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.
On January 20, 2000, we commenced a proceeding in the Court of Queen's
Bench of Alberta against Cameron Chell, our former chief executive officer,
various other former employees of and consultants to our company, C Me Run
Corp., a company organized by these former employees and various other
defendants. The suit alleges that the defendants while many were still employed
by us, misappropriated our plans to develop ASP services for individual computer
users, small offices, home offices, and hotel guests and traveling computer
users, in breach of fiduciary and contractual obligations. We seek, among other
things, a permanent injunction restraining the defendants from developing and
marketing the plans, an accounting for all revenues earned from the plans and
damages in the amount of approximately $54 million. On January 27, 2000, Mr.
Chell filed a counterclaim for $28.7 million, alleging interference of ongoing
economic interests, defamation of character and damages concerning his ability
to exercise options he claims to hold in our company. On January 31, 2000, C Me
Run filed a counterclaim for approximately $84 million, alleging conspiracy to
cause economic harm, unlawful interference with its economic interests,
interference with contractual relations and abuse of process. On February 7,
2000, David Bolink, one of our former employees that we sued in this lawsuit,
also counterclaimed, seeking $0.8 million in damages relating to the alleged
loss of stock options. We believe these counterclaims are without merit, and we
intend to contest such counterclaims in full while pursuing our action. It is
possible that other defendants in our lawsuit may also assert counterclaims. We
will vigorously defend against any such counterclaims.
On November 6, 1998, Mr. Chell entered into a Settlement Agreement with The
Alberta Stock Exchange to resolve a pending investigation into alleged breaches
by Mr. Chell of Alberta Stock Exchange rules and by-laws. As part of the
Settlement Agreement, (i) Mr. Chell acknowledged that he had breached certain
duties of supervision, disclosure, or compliance in connection with various
offers and sales of securities and (ii) Mr. Chell was prohibited from receiving
Alberta Stock Exchange approval for a five year period, subjected to a
CDN$25,000 fine and a three year period of enhanced supervision. The Company is
not entirely certain whether the Settlement Agreement with the Alberta Stock
Exchange represents "closure" with regard to these matters.
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 $1,500,000 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.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Our executive officers, key employees and directors are as follows:
NAME AGE POSITION
---- --- --------
Philip R. Ladouceur.................. 58 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................ 54 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...................... 35 Senior Vice President, Marketing
Roger J. Gallego..................... 29 Senior Vice President, Operations Strategy
William V. Arnett.................... 44 Senior Vice President and Chief Operating Officer
(Canada)
Michael R. Krieger................... 49 Senior Vice President, Strategic Planning and Corporate
Development
James Smith.......................... 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....................... 52 Director
James P. McNiel...................... 37 Director
MR. LADOUCEUR has served as our Chairman and Chief Executive Officer since
August 1999 and has served 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 was acquired by IBM Global Services. 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
November 1989 to July 1990, Mr. Kilambi was Chief Accountant of Morgan Financial
Corporation. From
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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 thereto, 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 April 1992 until joining us, 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 serve
as Vice President for SysGold Ltd. from August 1996 through August 1998, when it
was acquired by FutureLink. From January 1993 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 (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 (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.
MR. SCOTT has served as Vice President since October 1999 and as our
Secretary and General Counsel since March 1999. From April 1998 to March 1999,
Mr. Scott was an associate with the law firm of Howard Mackie, specializing in
corporate and securities law. From April 1997 to March 1998, Mr. Scott
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served with the Listings Department of The Alberta Stock Exchange, now the
Canadian Venture Exchange. From August 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 MGC Communications Inc.
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
Pursuant to 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
managed by Commonwealth Associates in April and May of 1999. The outstanding
debt owed from these offerings is less than $1 million.
Pursuant to the Securities Purchase Agreement we entered into with Pequot
Private Equity Fund II, L.P. and certain other investors on October 15, 1999 in
connection with 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
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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 pursuant to the Securities Purchase Agreement of October
15, 1999.
Pursuant to the Agreement and Plan of Reorganization and Merger dated June
2, 1999, between us, The Holmes Trust and various other parties in connection
with our acquisition of Micro Visions, we agreed to elect to the board one
director designated by The Holmes Trust 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 (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 (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 (Chairman), Philip R.
Ladouceur, Glen C. Holmes and Michael S. Falk. The executive committee has the
authority to approve (1) our daily operational matters, (2) our corporate
policies and strategy, and (3) our contractual commitments, payments of funds or
issuances of securities up to a level of $1,000,000.
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. Outside directors are also reimbursed for expenses in
connection with 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, Mr.
Ladouceur's service company, Mardale Investments Ltd., was paid a fee of $68,000
and Mr. Ladouceur was granted options to purchase 100,000 shares of common stock
at an exercise price of $3.80 per share.
We have granted options to each of the outside directors of the Company
upon their election to our board of directors. Mr. Falk, Mr. Farrill, Mr. Flynn,
Mr. Poch and Mr. McNeil were each granted 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.
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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 $100,000 for services rendered
in all capacities to us and our subsidiaries during 1999. We refer to these
individuals as our named executive officers in other parts of this prospectus.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------
---------------------------------- OTHER ANNUAL SHARES UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION OPTIONS(#)
--------------------------- ----------- --------- -------- ------------ -----------------
Cameron B. Chell(1)................ 1999 $149,658 -- -- 175,000(2)
Former Chairman, President and 1998 $ 84,291 -- $ 7,000 100,000
Chief Executive Officer
Philip R. Ladouceur(3)............. 1999 $110,000 $200,000(4) -- 1,300,000
Executive Chairman and Chief
Executive Officer
Glen C. Holmes(5).................. 1999 $ 58,435 $ 90,000(6) -- 100,000
President and Chief Operating
Officer
Raghu N. Kilambi(7)................ 1999 $146,771 $ 90,000(8) -- 500,000
Executive Vice President and 1998 $ 67,433 -- $ 4,700 100,000
Chief Financial Officer
Vincent L. Romano, Jr.(9).......... 1999 $ 75,000 $ 90,000(10) $255,000 250,000
Executive Vice President,
Application Service Provision
- -------------------------
(1) Mr. Chell served as Chief Executive Officer from April 1998 through August
1999 and was our President from March 1999 through August 1999. He is no
longer employed by us in any capacity. Other annual compensation for 1998
includes consulting fees.
(2) Excludes 525,000 shares underlying options granted in 1999 which expired
under our Stock Option Plan when Mr. Chell's employment with us terminated.
(3) Mr. Ladouceur served as Chairman from June 1999 to October 1999, and as
interim Chief Executive Officer and President from August 1999 to October
1999, when he became our Executive Chairman and Chief Executive Officer.
Mr. Ladouceur's current annual base salary is $200,000. He is eligible to
earn an annual performance bonus of up to $400,000.
(4) Accrued in 1999 but paid in 2000.
(5) Mr. Holmes has served as our President and Chief Operating Officer since
October 1999. His current annual base salary is $200,000. He is entitled to
receive a minimum bonus of $50,000 per quarter and is eligible for a
discretionary bonus to be determined by the board of directors.
(6) Includes $50,000 accrued in 1999 but paid in 2000.
(7) Mr. Kilambi has served as Executive Vice President since October 1999 and
as Chief Financial Officer since March 1998. Mr. Kilambi's current annual
base salary is $180,000. He is eligible to earn an annual bonus of up to
$180,000. Other annual compensation for 1998 includes consulting fees.
(8) Accrued in 1999 but paid in 2000.
(9) Mr. Romano served as Executive Vice President, Sales and Marketing from
August 1999 through December 1999, at which time he was named Executive
Vice President, Application Service Provision. Mr. Romano's current annual
base salary is $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
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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 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, the first
installment of $250,000 of this loan was forgiven, comprising most of Mr.
Romano's "other compensation" in 1999.
(10) Accrued in 1999 but paid in 2000.
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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 pursuant to our Amended and
Restated Stock Option Plan. We granted options to purchase 6,549,000 shares of
our common stock to our employees and directors in 1999. All options were
granted at an exercise price equal to the fair market value of our common stock
on the date of grant as determined by the closing price of our common stock on
the day preceding the grant, except options granted on May 6, 1999 to Messrs.
Chell, Ladouceur and Kilambi and the options granted to Mr. Holmes on May 14,
1999, which grants have an exercise price based on the average closing bid and
ask prices for the ten trading days prior to the date of the relevant grant. The
options granted on May 6, 1999 have an exercise price that is 50% of the market
value of the common stock on such date, on which date the average closing bid
and ask price was $6.22. 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 IN LAST FISCAL YEAR
------------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES
OPTIONS OF STOCK PRICE
NUMBER OF GRANTED TO APPRECIATION FOR
SECURITIES EMPLOYEES EXERCISE OPTION TERM(2)
UNDERLYING OPTIONS IN FISCAL PRICE PER -----------------------
NAME GRANTED(1) YEAR SHARE EXPIRATION DATE 5% 10%
---- ------------------ ---------- --------- --------------- ---------- ----------
Cameron B. Chell......... 275,000(3) 3.0% $3.15 March 14, 2000 $ 597,188 $ 651,875
Philip R. Ladouceur...... 700,000 12.1% $3.15 June 1, 2004 $2,388,750 $2,607,500
600,000 10.3% $7.56 August 31, 2003 $ 228,375 $ 455,250
Glen C. Holmes........... 100,000 1.7% $5.00 June 1, 2004 $ 205,495 $ 239,090
Raghu N. Kilambi......... 500,000 8.6% $3.15 June 1, 2004 $1,706,250 $1,862,500
Vincent L. Romano, Jr. .. 250,000(4) 4.3% $6.08 June 30, 2004 $ 169,844 $ 250,313
- -------------------------
(1) The options set forth in the table above vest in either three or four yearly
increments and expire between March 2000 and June 2004.
(2) The potential realizable value represents 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 rules
promulgated by the Securities and Exchange Commission 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.
(3) 525,000 of the options granted to Mr. Chell in 1999 expired under the Stock
Option Plan when Mr. Chell's employment with us terminated. See
"Litigation."
(4) Mr. Romano exercised options to purchase 62,500 shares of common stock in
early January 2000.
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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 covered by 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.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Cameron B. Chell............ 0 0 275,000 0(2) $ 6,218,750 $ 0
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.(3)... 0 0 62,500 187,500 $ 1,245,000 $3,735,000
- -------------------------
(1) 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.
(2) During 1999, Mr. Chell held an additional 525,000 options that expired under
the terms of our Stock Option Plan when Mr. Chell's employment with us
terminated. See "Litigation."
(3) 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 determined by the compensation committee or the board of
directors.
Our employment agreements with Mr. Ladouceur and Mr. Kilambi are at-will
and can be terminated by either party 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
thereof, 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 (1) 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 (2) provide him with up to $10,000 in
relocation and financial consulting services or, at his option, pay him $10,000.
Our agreement with Mr. Romano provides for an award of 250,000 stock
options and the payment of a $95,000 signing bonus which have been granted and
paid.
Our agreement with Mr. Holmes provides for a minimum quarterly bonus of
$50,000. This agreement provides for 18 months severance pay (including the
minimum bonus for such period), if (1) we terminate Mr. Holmes without cause,
(2) his employment is terminated within 18 months of a change of control of our
Company,
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or (3) 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.
STOCK OPTION PLAN
Our Stock Option Plan became effective on June 29, 1998, and was amended on
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 pursuant to
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. The maximum
number of shares which may be issued pursuant to options was recently fixed at
11,000,000 by our board of directors.
Our Stock Option Plan is administered by our board of directors. 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 thereof.
Our board of directors must obtain the consent of the stockholders to increase
the number of shares covered by the Stock Option Plan, 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 in connection with our acquisitions in
1999. These 401(k) plans cover our full-time U.S. employees. These plans are
intended to qualify under Section 401(k) of the Internal Revenue Code of 1986,
as amended, so that we can deduct any contributions that we make to these plans,
at the time they are made. 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 us, but do not require us to make, additional matching
contributions to these plans on behalf of all participants in these plans. We
have not made any contributions to these plans to date, and we do not currently
have any plan to make contributions. 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
permitted by the Delaware General Corporation Law, 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 is not eliminated by this provision of our certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to us for acts or omissions which are found by a
court of competent jurisdiction 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
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redemptions that are prohibited by Delaware law. 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 in
connection with 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 permitted by that
law shall not be deemed 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 permitted by the Delaware General Corporation
Law, any person against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with 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 secured insurance on behalf of any person who is our director,
officer, employee or agent or is or was 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 are subject to the provisions of Section
203 of the Delaware General Corporation Law, an anti-takeover law. 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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PRINCIPAL STOCKHOLDERS
The following table sets forth specified information with respect to the
beneficial ownership of our common stock as of January 31, 2000 by:
- each person (or group of affiliated persons) who is known by us to
beneficially own 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
52,315,640 shares of common stock outstanding as of January 31, 2000; 2,090,166
shares of common stock issuable upon the exercise of options exercisable within
60 days of January 31, 2000; 10,374,282 shares issuable upon the exercise of
warrants exercisable within 60 days of January 31, 2000 and 918,283 shares
issuable upon the conversion of convertible debentures convertible within 60
days of January 31, 2000.
OWNERSHIP PRIOR TO OWNERSHIP AFTER
OFFERING OFFERING(2)
--------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER(1) PERCENT NUMBER PERCENT
------------------------------------ ---------- ------- ---------- -------
The Holmes Trust(3)............................ 8,400,000 15.7% 8,400,000 13.0%
Glen C. Holmes(4).............................. 8,450,000 15.8% 8,450,000 13.1%
Pequot Capital Management, Inc.(5)............. 8,041,776 14.9% 8,041,776 12.2%
Philip R. Ladouceur(6)......................... 998,000 1.9% 998,000 1.5%
Raghu N. Kilambi(7)............................ 445,563 0.9% 445,563 0.7%
F. Bryson Farrill(8)........................... 107,500 0.2% 107,500 0.2%
Michael S. Falk(9)............................. 3,468,298 6.6% 3,468,298 5.4%
Timothy P. Flynn(10)........................... 735,133 1.4% 735,133 1.1%
Gerald A. Poch(11)............................. 8,066,776 14.9% 8,066,776 12.2%
James P. McNiel(12)............................ 8,066,776 14.9% 8,066,776 12.2%
Vincent Romano, Jr............................. 282,908 0.5% 282,908 0.4%
Cameron Chell(13).............................. 780,689 1.5% 780,689 1.2%
Robert Priddy(14).............................. 3,411,489 6.5% 3,411,489 5.3%
All directors and executive officers as a group
(19 persons)(15)............................. 25,780,325 44.8% 25,780,325 37.6%
- -------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In general, a person who has voting
power or investment power with respect to securities is treated as a
beneficial owner of those securities. Shares subject to options, warrants
or rights currently exercisable or exercisable within 60 days of January
31, 2000 are considered beneficially owned by the person holding such
options, warrants or rights. Unless otherwise indicated, and subject to
community property laws where applicable, we believe the persons named in
the table have sole voting and investment power with respect to all shares
beneficially owned.
(2) Assumes the underwriter's overallotment option is not exercised. In the
event that the underwriter's overallotment option is exercised in full, an
additional 750,000 shares of our common stock will be sold in the offering.
Also assumes the issuance of 1,975,170 shares for the acquisition of the
Madison Group of Companies, 1,072,940 shares for the acquisition of Charon
Systems, Inc, 2,401,040 shares issued on the exercise of warrants currently
held by Pequot Equity Partners Fund II, LP and certain other investors,
1,200,000 shares likely to be issued to the former shareholder of Micro
Visions and 439,740 shares currently estimated to be issuable to the former
shareholders of Async Technologies, Inc, all prior to the completion of the
offering.
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(3) Includes 1,200,000 shares issuable to The Holmes Trust upon the
satisfaction of certain performance criteria in connection with our
acquisition of Micro Visions, which management believes have been
satisfied.
(4) Includes 50,000 shares issuable upon the exercise of currently exercisable
stock options. Also includes 7,200,000 shares of common stock held by The
Holmes Trust as a result of Mr. Holmes' power to control The Holmes Trust
and 1,200,000 shares issuable to The Holmes Trust upon the satisfaction of
certain performance criteria in connection with our acquisition of Micro
Visions, which management believes have been satisfied.
(5) Includes 1,678,139 shares issuable upon the exercise of currently
exercisable warrants attributable to Pequot Capital Management, Inc. as a
result of its power to control Pequot Private Equity Fund
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II, L.P., Pequot Partners Fund and Pequot International Fund. The address
of Pequot Capital Management, Inc. is 500 Nyala Farm Road, Westport,
Connecticut 06880.
(6) 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.
(7) Includes 225,000 shares issuable upon the exercise of stock options
exercisable within 60 days of January 31, 1999.
(8) Includes 62,500 shares issuable upon the exercise of stock options within
60 days of January 31, 1999.
(9) Includes 25,000 shares issuable upon the exercise of stock options which
are exercisable within 60 days of January 31, 2000. Also includes 82,574
shares attributable to Mr. Falk as a result of his control of the Michael
Falk IRA. Also includes 9,901 shares issuable upon the exercise of warrants
held by Mr. Falk. Also includes 2,433,828 shares of common stock and 19,802
shares issuable upon the exercise of warrants held by Commonwealth
Associates. Mr. Falk is Chairman and Chief Executive Officer of
Commonwealth Associates. Mr. Falk disclaims beneficial ownership of the
shares and warrants held by Commonwealth Associates.
(10) Includes 25,000, shares issuable upon the exercise of stock options which
are exercisable within 60 days of January 31, 2000, and 198,021 shares
issuable upon the exercise of currently exercisable warrants.
(11) Includes 25,000, shares issuable upon the exercise of stock options which
are exercisable within 60 days of January 31, 2000. Also includes 6,363,637
shares of common stock and 1,678,139 shares issuable upon the exercise of
currently exercisable warrants held by Pequot Private Equity Fund II, L.P.,
Pequot Partners Fund and Pequot International Fund, which are controlled by
Pequot Capital Management, Inc. Mr. Poch is a principal of Pequot Capital
Management, Inc. Mr. Poch disclaims beneficial ownership of the shares and
warrants attributed to Pequot Capital Management, Inc.
(12) Includes 25,000 shares issuable upon the exercise of stock options which
are exercisable within 60 days of January 31, 2000. Also includes 6,363,637
shares of common stock and 1,678,139 shares issuable upon the exercise of
warrants held by Pequot Capital Management, Inc. Mr. McNiel is a principal
of Pequot Capital Management, Inc. Mr. McNeil disclaims beneficial
ownership of the shares and warrants attributed to Pequot Capital
Management, Inc.
(13) Includes 275,000 shares issuable upon the exercise of stock options which
are exercisable within 60 days of January 31, 2000 and 75,311 shares
issuable upon the exercise of currently exercisable warrants.
(14) 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 19,802 shares issuable upon the exercise of warrants held by
Commonwealth Associates. Mr. Priddy disclaims beneficial ownership of the
shares and warrants attributed to Commonwealth Associates.
(15) Includes shares listed in footnotes 4, 6-12, and 14 above, as well as
1,218,253 shares held by other executives not listed in this table,
1,867,500 shares issuable upon the exercise of stock options which are
exercisable within 60 days of January 31, 2000, and 3,238,613 shares
issuable on exercise of currently exercisable warrants.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1997, Mr. Chell loaned FutureLink Distribution Corp., an Alberta
corporation ("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.
Cameron Chell and Robert Kubbernus were directors and shareholders of both
JAWS Technology Inc. and our company 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 (adjusted for our five-for-one reverse stock
split), for a total of 75,310 shares. Mr. Chell also received a warrant to
acquire 75,311 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 $66,614.57 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. These
securities are subject to a lock up agreement for a minimum of one year.
In May 1999, in connection with a private offering placed by Commonwealth
Associates of our units consisting of 8% senior subordinated convertible notes
convertible to shares of common stock at $1.00 per share (post-split) and
warrants to purchase 500 shares of common stock at $1.25 per share (post-split)
for each $1,000 invested, Mr. Chell purchased $250,000 of our units (see above)
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
Commonwealth Associates was retained by us as our placement agent. Commonwealth
Associates was subsequently retained as placement agent on July 1, 1999.
As of September 30, 1999, we provided $267,439 in services and products to
Willson Stationers Ltd. and e-Supplies Inc. As at September 30, 1999, $488,135
remains owing from these entities. An allowance for doubtful accounts of
$473,922 has been recorded due to the uncertainty of collection. 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.
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. The
shares were deposited in escrow and approximately 12.5% of the shares are
released quarterly as the loan is forgiven quarterly in installments of
$250,000. We loaned the money to Mr. Romano pursuant to his employment
agreement. As of January 31, 2000, $500,000 of this loan has been forgiven.
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In October 1999, we issued 1,678,139 warrants to Pequot Private Equity Fund
II, L.P., Pequot Partners Fund and Pequot International Fund which currently
entitle the holders to purchase common stock at $8.40 per share. On February 8,
2000, to induce those funds to exercise such warrants, we offered to pay each
holder $0.90 for each warrant exercised.
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The funds have indicated their intent to exercise warrants to acquire all
1,678,139 shares of our common stock on similar terms prior to the end of
February 2000. Pequot Capital Management, Inc. manages the funds and therefore
has the power to direct the vote of the common stock held by the funds, which
constitute more than 5% of our outstanding common stock. In addition, Jim
McNiel, one of our directors, is a Senior Vice President at Pequot Capital
Management, Inc., and Jerry Poch, also a director, is a Manager
Director/Portfolio Manager at Pequot Capital Management, Inc.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consist 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. See "Where You Can Find More
Information."
COMMON STOCK
As of December 31, 1999, there were 51,065,007 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.
Subject to the prior rights and preferences, if any, applicable to any
outstanding preferred stock, the holders of our common stock are entitled to
share equally in dividends and other distributions as may be declared from time
to time by the board of directors out of funds legally available for that
purpose, if any.
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 authorized the issuance of 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 thereof.
Unless otherwise provided by our board of directors, 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 control in 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 52,106,156 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
3,007,867 shares of common stock warrants and senior subordinated convertible
debentures issued to Thomas Kernaghan & Co. After May 1, 2000, Thomson Kernaghan
& Co. Limited may demand that we file such a registration statement, and on or
thereafter use our reasonable best efforts to effect such registration.
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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. We also agreed to pay penalties for each
month thereafter that a registration statement is not filed. Since June 29,
1999, we have paid Augustine an aggregate of $23,000 in penalties, which we
offset from amounts owed to us upon the conversion of the debentures and the
exercise of the warrants. We continue to pay $7,000 in penalties each month
until the beginning of March 2000. Augustine has waived its registration rights
with respect to this offering.
We agreed to use our best efforts to file a registration statement by
January 31, 2000 covering 44,505 warrants issued to Global Equity Partners
Limited in conjunction with their debenture investment which has underlying
shares also subject to registration rights in May 1999. We are currently in
breach of our obligations under those warrants.
Pursuant to 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 7, 1999. As of January 31, 2000, 15,908,802 shares of common stock and
310,250 warrants were subject to those rights. Pursuant to 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
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 January 31, 2000, 2,727,272 shares of common stock and 3,186,805 warrants
were subject to those rights. We are currently in breach of those subscription
agreements.
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 owned by Vincent
Romano 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 acquired by the former shareholders of KNS
Holding Limited, and to cause such registration statement to become effective as
soon thereafter as practicable.
The holders of 9,090,909 shares of common stock and warrants that currently
allow their holders to purchase 3,320,979 shares of common stock acquired in an
October 1999 investment by Pequot Private Equity Fund II L.P. and certain other
investors, may demand 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 such a demand is made, the holders may, subject to our consent,
select the underwriters for the offering. We also granted those holders
piggyback registration rights allowing them to include their shares in a
registered offering made by us. At the same time, we granted piggyback
registration rights under the same terms, to Glen C. Holmes in respect of
8,500,000 securities owned or beneficially owned by him, including 7,200,000
shares held by the Holmes Trust, 1,200,000 shares issuable to the Holmes Trust
upon the satisfaction of certain performance criteria which management believes
have been satisfied, and 100,000 shares issuable to Mr. Holmes upon the exercise
of stock options. Mr. Holmes has waived his registration rights.
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.
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EMC 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 held by the selling
shareholders of CN Networks, Inc. by November 5, 2000.
We agreed to register 1,738,554 shares of our common stock held by the
selling shareholders of Async Technologies Inc. by November 26, 2000.
We also agreed to register 1,206,316 shares of common stock held by the
selling shareholders of Vertical Software, Inc. by January 31, 2001.
WARRANTS
There are currently warrants outstanding to purchase 7,973,242 shares of
our common stock. The warrants have exercise prices ranging from $1.11 per share
to $25.00 per share. The weighted average exercise price of all currently
outstanding warrants is $11.93 per share. The warrants have various expiration
dates, ranging from April 2000 to April 2006. Most outstanding warrants have an
anti-dilution clause, and most provide for registration rights.
LISTING
We are listed for quotation in the Nasdaq National Market under the symbol
"FTRL."
TRANSFER AGENT AND REGISTRATION
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 common stock and could impair our future ability to raise capital through the
sale of equity securities. Upon completion of this offering, we will have an
aggregate of 57,315,641 shares of our common stock outstanding, assuming no
exercise of the underwriters' overallotment option. In addition, we anticipate
issuing the following shares:
- 1,975,170 shares of our common stock issuable upon the closing of our
pending acquisition of Madison Technology Group and its affiliates,
- 1,072,940 shares of our common stock issuable upon the closing of our
acquisition of Charon Systems, Inc.,
- 2,426,102 shares of our common stock issuable upon the expected exercise
of outstanding warrants by Pequot Private Equity Fund II, LP and certain
other warrant holders,
- 2,400,000 shares of our common stock to the former shareholder of Micro
Visions pursuant to the agreement under which we acquired Micro Visions
for the achievement of certain performance criteria, and
- 439,740 shares of our common stock to the former shareholders of Async
Technologies pursuant to the agreement under which we acquired Async for
the achievement of certain performance criteria.
Upon completion of this offering, we will also have the following options,
warrants and convertible debentures outstanding:
- stock options for the purchase of 6,308,600 shares of our common stock at
a weighted average exercise price of $8.33 per share,
- warrants for the purchase of 8,041,963 shares of our common stock at a
weighted average exercise price of $7.72 per share (pro forma for the
expected exercise of outstanding warrants by Pequot Private Equity Fund
II, L.P. and certain other warrant holders), and
- 918,283 shares of our common stock issuable upon the conversion of $0.9
million aggregate principal amount of our convertible debentures at a
weighted average conversion price of $0.98 per share.
See "Capitalization," "Management -- Stock Option Plan," and the notes to
our consolidated financial statements.
All of the shares sold in this offering will be freely tradable, except
that any shares held by "affiliates" (as that term is defined in Rule 144 under
the Securities Act) may only be sold in the public market only if registered or
if they qualify for an exemption from registration under Rule 144, the
Securities Act, which is summarized below. The remaining 52,315,641 shares of
common stock that are currently outstanding and all of the shares described
above that we anticipate issuing will be deemed "restricted securities" as
defined in Rule 144.
After the date of this prospectus, 7,092,471 shares of our common stock
which are not being sold in this offering will be immediately eligible for sale
into the public market. The remaining 45,223,170 shares of our common stock will
eligible for sale into the public market at various times after the expiration
of one-year holding periods. Most of the restricted shares that will be
available for public resale after 180 days after the effective date will be
subject to volume and other resale restrictions pursuant to Rule 144 because the
holders are our affiliates.
LOCK-UP AGREEMENTS
Our officers, directors and stockholders holding an aggregate of
shares have agreed not to transfer or dispose of, directly or indirectly, any
shares of our common stock or any securities convertible into or exercisable or
exchangeable for shares of our common stock without the prior written consent of
Bears, Stearns & Co. Inc. for a period of 180 days after the date of this
prospectus.
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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. Such sales are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about us.
However, if a person (or persons whose shares are aggregated) 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. The foregoing is a summary of Rule 144 and is not intended to be a
complete description of it.
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RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
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 in
connection with 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.
69.1
84
UNDERWRITING
The underwriters named below have agreed, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock set forth opposite its name below:
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
Bear, Stearns & Co. Inc.....................................
---------
Fleet Boston Robertson Stephens Inc. .......................
---------
CIBC World Markets Corp. ...................................
---------
C.E. Unterberg, Towbin......................................
---------
Total............................................. 5,000,000
=========
Subject to the terms and conditions of the underwriting agreement, the
underwriters have agreed to purchase all of the shares of common stock being
sold pursuant to the underwriting agreement if any of such shares are purchased
(excluding 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 offering price and other selling terms may be changed by the
underwriters.
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, subject to certain conditions, to
purchase a number of shares of common stock proportionate to such underwriter's
purchase obligations set forth in the foregoing table.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us. Such amounts are shown
assuming both no exercise and full exercise of the underwriters option to
purchase additional shares.
NO EXERCISE FULL EXERCISE
----------- -------------
Per share................................................... $ $
Total....................................................... $ $
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" (within the meaning of Rule
16a-1(h) under the Securities Exchange Act of 1934, as amended) 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 beneficially owned by them during the 180-day period following the date of
this prospectus.
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"
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(within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934,
as amended) 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 in connection with strategic relationships and in connection
with acquisitions of 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 128,029 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
connection with private offerings placed by Commonwealth Associates, Ltd.,
between April and July of 1999. These purchases were made upon the same terms
and conditions as were made with each of the other investors in the offerings.
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
thereof.
The underwriters have advised us that, pursuant to 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 in connection with the offering. 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
in connection with the offering if the common stock originally sold by such
underwriter or syndicate member 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 $1.5 million.
72
86
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Paul, Hastings, Janofsky & Walker LLP, Costa Mesa, California.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Latham & Watkins, Los Angeles, California.
EXPERTS
The consolidated financial statements of FutureLink Corp. 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 and chartered accountants, as set forth
in their report thereon appearing elsewhere herein, 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 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 herein, 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 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 thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The audited financial statements of Async Technologies 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 thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The financial statements of KNS Holding 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 and Registration Statement have been audited by
Ernst & Young, independent auditors and registered auditor, as set forth in
their report thereon appearing elsewhere herein, 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,
1996, 1997 and 1998 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 herein, 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, 1997 and 1998
and for each of the two years in the period ended December 31, 1998 and Madison
Consulting Resources NJ, Inc. as of December 31, 1998, its initial year of
operations, appearing in this Prospectus and Registration Statement have been
audited by Joel E. Sammet & Co., independent auditors, as set forth in their
reports thereon appearing elsewhere herein, 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 July 31, 1998 and
1999 and for each of the two years in the period ended July 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 thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in account and
auditing.
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87
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 hereby. 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 are also subject to 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
85
88
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
FINANCIAL STATEMENTS OF FUTURELINK CORP..................... F-4
December 31, 1997 and 1998, and September 30, 1999
Report of Independent Auditors......................... F-5
Consolidated Balance Sheets............................ F-6
Consolidated Statements of Operations.................. F-7
Consolidated Statements of Changes in Stockholders'
Equity (Deficit)...................................... F-8
Consolidated Statements of Cash Flows.................. F-9
Notes to Consolidated Financial Statements............. F-10
FINANCIAL STATEMENTS OF COMPLETED ACQUISITIONS:
EXECUTIVE LAN MANAGEMENT, INC. DBA MICRO VISIONS.......... F-34
December 31, 1997 and 1998, and September 30, 1999
Report of Independent Auditors......................... F-35
Balance Sheets......................................... F-36
Statements of Operations............................... F-37
Statements of Shareholders' Equity..................... F-38
Statements of Cash Flows............................... F-39
Notes to Financial Statements.......................... F-40
CN NETWORKS, INC. ........................................ F-46
December 31, 1997 and 1998
Report of Independent Accountants...................... F-47
Balance Sheets......................................... F-48
Statements of Income................................... F-49
Statements of Stockholders' Equity..................... F-
Statements of Cash Flows............................... F-50
Notes to Financial Statements.......................... F-51
September 30, 1999 and 1998
Report of Independent Accountants...................... F-55
Balance Sheets......................................... F-56
Statements of Income and Retained Earnings............. F-57
Statements of Cash Flows............................... F-58
Notes to Financial Statements.......................... F-59
ASYNC TECHNOLOGIES, INC. AND ASYNC TECHNICAL INSTITUTE,
INC. .................................................. F-63
December 31, 1997 and 1998
Independent Auditors' Report........................... F-64
Combined Balance Sheets................................ F-65
Combined Statements of Operations and Retained
Deficit............................................... F-66
Combined Statements of Cash Flows...................... F-67
Notes to Combined Financial Statements................. F-68
September 30, 1999 and 1998
Report of Independent Public Accountants............... F-71
Combined Balance Sheets................................ F-72
Combined Statements of Operations and Retained
(Deficit) Earnings.................................... F-73
Combined Statements of Cash Flows...................... F-74
Notes to the Combined Financial Statements............. F-75
KNS HOLDINGS LIMITED...................................... F-79
February 28, 1999 and 1998
Report of Independent Auditors......................... F-80
Combined Balance Sheets................................ F-81
Combined Profit and Loss Accounts...................... F-82
F-1
89
PAGE
-----
Combined Statement of Movements in Shareholders'
Funds................................................. F-83
Combined Cash Flow Statements.......................... F-84
Reconciliation of Net Cash Flow to Movement in Net
Debt.................................................. F-85
Notes to the Accounts.................................. F-86
VERTICAL SOFTWARE, INC.................................... F-98
December 31, 1996, 1997 and 1998 and September 30, 1999
(Unaudited)
Report of Independent Auditors......................... F-99
Balance Sheets......................................... F-100
Statements of Operations............................... F-101
Statements of Stockholders' Equity..................... F-102
Statements of Cash Flows............................... F-103
Notes to Financial Statements.......................... F-104
MACROLAN SYSTEMS, INC. DBA MADISON TECHNOLOGY GROUP....... F-109
December 31, 1997 and 1998
Independent Auditor's Report........................... F-110
Balance Sheets......................................... F-111
Statements of Income................................... F-112
Statements of Stockholders' Equity..................... F-113
Statements of Cash Flows............................... F-114
Notes to the Financial Statements...................... F-115
September 30, 1999 and 1998
Independent Auditor's Report........................... F-119
Balance Sheets......................................... F-120
Statements of Income................................... F-121
Statements of Retained Earnings........................ F-122
Statements of Cash Flows............................... F-123
Notes to the Financial Statements...................... F-124
MADISON CONSULTING RESOURCES, INC......................... F-128
December 31, 1997 and 1998
Independent Auditor's Report........................... F-129
Balance Sheets......................................... F-130
Statements of Income................................... F-131
Statements of Shareholders' Equity..................... F-132
Statements of Cash Flows............................... F-133
Notes to Financial Statements.......................... F-134
September 30, 1999 and 1998
Independent Accountant's Review Report................. F-137
Balance Sheets......................................... F-138
Statements of Income................................... F-139
Statements of Retained Earnings (Deficit).............. F-140
Statements of Cash Flows............................... F-141
Notes to Financial Statements.......................... F-142
MADISON CONSULTING RESOURCES NJ, INC...................... F-145
December 31, 1998
Independent Auditor's Report........................... F-146
Balance Sheet.......................................... F-147
Statement of Income.................................... F-148
Statement of Stockholders' Equity...................... F-149
Statement of Cash Flows................................ F-150
F-2
90
PAGE
-----
Notes to Financial Statements.......................... F-151
September 30, 1999 and 1998
Independent Accountant's Review Report................. F-153
Balance Sheets......................................... F-154
Statements of Income................................... F-155
Statements of Retained Earnings........................ F-156
Statements of Cash Flows............................... F-157
Notes to Financial Statements.......................... F-158
CHARON SYSTEMS, INC....................................... F-160
September 30, 1999 and 1998 (Unaudited) and July 31, 1999
and 1998
Auditors' Report....................................... F-161
Balance Sheets......................................... F-162
Statements of Operations and Retained Earnings......... F-163
Statements of Cash Flows............................... F-164
Summaries of Significant Accounting Policies........... F-165
Notes to the Financial Statements...................... F-166
F-3
91
FUTURELINK CORP.
FINANCIAL STATEMENTS
F-4
92
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
FutureLink Corp.
We have audited the accompanying consolidated balance sheets of FutureLink
Corp. as at December 31, 1997, December 31, 1998, and September 30, 1999 and the
related consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years ended December 31, 1997 and December 31,
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 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 for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FutureLink Corp. as at
December 31, 1997, December 31, 1998, and September 30, 1999 and the results of
its operations and its cash flows for the years ended December 31, 1997,
December 31, 1998, and the nine months ended September 30, 1999 in conformity
with accounting principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Chartered Accountants
Calgary, Canada
November 16, 1999,
except for Note 21 (g) as to which the date is
January 13, 2000, and Notes 21 (h) and (i) as
to which the date is February 11, 2000
F-5
93
FUTURELINK CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1997 1998 1999
----------- ----------- -------------
ASSETS
Current assets:
Cash........................................................ $ -- $ 6,651 $ 7,814,600
Accounts receivable......................................... -- 1,458,316 1,772,052
Due from related parties.................................... -- 73,781 57,784
Prepaid expenses and other current assets................... -- 116,218 209,624
Inventory................................................... -- 22,205 68,844
----------- ----------- ------------
Total current assets.................................. -- 1,677,171 9,922,904
----------- ----------- ------------
Equipment and leasehold improvements, net................... -- 1,122,923 2,597,222
Deposits on acquisitions.................................... -- -- 3,304,975
Investments................................................. -- -- --
Intangible assets........................................... -- 7,845,717 6,451,619
Other....................................................... -- -- 58,375
----------- ----------- ------------
Total assets.......................................... $ -- $10,645,811 $ 22,335,095
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank indebtedness........................................... $ -- $ 819,217 $ --
Accounts payable and accrued liabilities.................... 23,932 2,787,383 2,525,916
Due to related parties...................................... -- 44,816 135,776
Other current liabilities................................... -- 453,711 416,165
Stockholder advance......................................... -- 319,071 --
----------- ----------- ------------
23,932 4,424,198 3,077,857
----------- ----------- ------------
Capital lease obligations................................... -- 30,262 27,612
Convertible debentures...................................... -- 2,153,457 22,170,366
Notes payable............................................... -- -- --
Deferred taxes.............................................. -- 1,211,634 854,673
----------- ----------- ------------
23,932 7,819,551 26,130,508
----------- ----------- ------------
Minority interest........................................... -- (11,141) --
Commitments and Contingencies
Stockholders' equity (deficit)
Preferred Stock, no par value:
Authorized shares -- 20,000,000
Issued and outstanding shares -- None................... -- -- --
Common Stock, $0.0001 par value
Authorized shares -- 300,000,000
Issued and outstanding shares -- 2,040,700, 4,908,072,
and 9,194,111 at December 31, 1997, December 31, 1998,
and September 30, 1999, respectively.................. 1,020 2,018 3,401
Common stock issuable; 23,051 shares...................... -- 50,000 --
Exchangeable shares of subsidiary......................... -- 2,550,000 --
Additional paid-in capital................................ 1,425,211 7,662,308 28,483,651
Loan receivable from employee............................. -- -- (1,750,000)
Unearned compensation..................................... -- -- (1,050,000)
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustment...... -- (96,468) (183,107)
Accumulated deficit....................................... (1,450,163) (7,330,457) (29,299,358)
----------- ----------- ------------
Total stockholders' equity (deficit).................. (23,932) 2,837,401 (3,795,413)
----------- ----------- ------------
Total liabilities and stockholders' equity
(deficit).......................................... $ -- $10,645,811 $ 22,335,095
=========== =========== ============
See accompanying notes.
F-6
94
FUTURELINK CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ --------------------------
1997 1998 1998 1999
---------- ----------- ----------- ------------
(UNAUDITED)
Revenue:
Hardware and software..................... $ -- $ 965,452 $ 169,324 $ 1,459,987
Service delivery.......................... -- 1,471,206 453,530 3,576,728
---------- ----------- ----------- ------------
-- 2,436,658 622,854 5,036,715
---------- ----------- ----------- ------------
Costs and expenses:
Cost of hardware and software............. -- 879,927 143,991 1,332,891
Cost of service delivery.................. -- 3,661,606 2,527,457 5,460,470
Selling general and administrative........ 737,049 1,034,020 126,617 6,626,266
---------- ----------- ----------- ------------
Loss before interest, taxes, depreciation
and amortization of intangibles......... (737,049) (3,138,895) (2,175,211) (8,382,912)
---------- ----------- ----------- ------------
Interest expense and amortization of
deferred financing fees and debt
discount................................ -- 1,332,796 1,232,912 11,155,100
Depreciation and amortization of goodwill
and other intangible assets............. -- 786,852 166,856 1,943,297
Equity in loss of investee................ -- 826,360 807,279 --
---------- ----------- ----------- ------------
(737,049) (2,946,008) (2,207,047) (13,098,397)
---------- ----------- ----------- ------------
Loss before income taxes and extraordinary
item.................................... -- (6,084,903) (4,382,258) (21,481,309)
Deferred tax benefit...................... -- (204,609) (15,504) (356,960)
---------- ----------- ----------- ------------
Loss before extraordinary item............ (737,049) (5,880,294) (4,366,754) (21,124,349)
Extraordinary item........................ -- -- -- (844,552)
---------- ----------- ----------- ------------
Net loss.................................. $ (737,049) $(5,880,294) $(4,366,754) $(21,968,901)
========== =========== =========== ============
Loss per share -- basic and diluted
Loss before extraordinary item.......... $ (8.24) $ (1.86) $ (1.61) $ (3.23)
Extraordinary item...................... -- -- -- (.13)
---------- ----------- ----------- ------------
Net loss.................................. $ (8.24) $ (1.86) $ (1.61) $ (3.36)
========== =========== =========== ============
Weighted average shares................... 89,489 3,169,413 2,715,793 6,534,575
========== =========== =========== ============
See accompanying notes.
F-7
95
FUTURELINK CORP.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
LOAN
COMMON STOCK COMMON ADDITIONAL RECEIVABLE
------------------ STOCK EXCHANGEABLE PAID-IN FROM UNEARNED
SHARES AMOUNT ISSUABLE SHARES CAPITAL EMPLOYEE COMPENSATION
--------- ------ --------- ------------ ----------- ----------- ------------
BALANCE JANUARY 1, 1997.... 500 $ 25 $ -- -- $ 1,216,712 $ -- $ --
Issuance of common
stock................... 200 10 -- -- 9,990 -- --
Change of par value from
.01 to .0001............ -- (35) -- -- 35 -- --
Issuance of common stock
for cash................ 2,040,000 1,020 -- -- 158,980 -- --
Forgiveness of stockholder
debt.................... -- -- -- -- 39,494 -- --
Loss for the year......... -- -- -- -- -- -- --
--------- ------ --------- ----------- ----------- ----------- -----------
BALANCE DECEMBER 31,
1997...................... 2,040,700 1,020 -- -- 1,425,211 -- --
Issuance of common stock
on acquisitions......... 1,158,000 154 -- 2,550,000 15,246 -- --
Forgiveness of stockholder
debt.................... -- -- -- -- 60,200 -- --
Issuance of common
stock................... 751,163 376 -- -- 2,963,924 -- --
Warrants issued with
issuance of convertible
debentures.............. -- -- -- -- 562,500 -- --
Common stock issued,
net..................... 133,752 67 -- -- 762,600 -- --
Common stock to be issued
on conversion of loan... -- -- 732,706 -- -- -- --
Forgiveness of stockholder
debt.................... -- -- -- -- 10,125 -- --
Issuance of common
stock................... 824,457 401 (682,706) -- 1,907,027 -- --
Financing fees associated
with converted
debentures.............. -- -- -- -- (44,525) -- --
Foreign currency
translation
adjustment.............. -- -- -- -- -- -- --
Loss for the year......... -- -- -- -- -- -- --
--------- ------ --------- ----------- ----------- ----------- -----------
BALANCE DECEMBER 31,
1998...................... 4,908,072 2,018 50,000 2,550,000 7,662,308 -- --
Additional shares due to
rounding on common share
reverse split........... 227 -- -- -- -- -- --
Equity components of
convertible debentures
and promissory notes,
net..................... -- -- -- -- 6,952,497 -- --
Warrants issued with
issuance of convertible
debentures and
promissory notes........ -- -- -- -- 6,353,767 -- --
Shares issued on
conversion of
convertible debt and
accrued interest........ 3,871,542 866 -- -- 4,455,561 -- --
Financing fees associated
with converted
debentures and
promissory notes........ -- -- -- -- (3,936,620) -- --
Discount associated with
converted debentures.... -- -- -- -- (26,747) -- --
Issuance of shares........ 101,858 486 (50,000) (2,550,000) 2,793,179 -- --
Warrants issued for
advisory services....... -- -- -- -- 2,069,270 -- (1,050,000)
Exercise of employee stock
options................. 27,500 3 -- -- 100,622 -- --
Exercise of warrants...... 52,083 5 -- -- 65,099 -- --
Common stock issued under
loan receivable from
employee................ 232,829 23 -- -- 1,999,977 (2,000,000) --
Forgiveness of loan
receivable from
employee................ -- -- -- -- -- 250,000 --
Issuance of 8% senior
subordinated convertible
promissory notes........ -- -- -- -- -- -- --
Share issue costs......... -- -- -- -- (5,262) -- --
Foreign currency
translation
adjustment.............. -- -- -- -- -- -- --
Loss for the period....... -- -- -- -- -- -- --
--------- ------ --------- ----------- ----------- ----------- -----------
BALANCE SEPTEMBER 30,
1999...................... 9,194,111 $3,401 $ -- -- $28,483,651 $(1,750,000) $(1,050,000)
========= ====== ========= =========== =========== =========== ===========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED COMPREHENSIVE
LOSS DEFICIT TOTAL LOSS
------------- ------------ ------------ -------------
BALANCE JANUARY 1, 1997.... $ -- $ (713,114) $ 503,623 $ --
Issuance of common
stock................... -- -- 10,000 --
Change of par value from
.01 to .0001............ -- -- -- --
Issuance of common stock
for cash................ -- -- 160,000 --
Forgiveness of stockholder
debt.................... -- -- 39,494 --
Loss for the year......... -- (737,049) (737,049) (737,049)
--------- ------------ ------------ ------------
BALANCE DECEMBER 31,
1997...................... -- (1,450,163) (23,932) (737,049)
Issuance of common stock
on acquisitions......... -- -- 2,565,400 --
Forgiveness of stockholder
debt.................... -- -- 60,200 --
Issuance of common
stock................... -- -- 2,964,300 --
Warrants issued with
issuance of convertible
debentures.............. -- -- 562,500 --
Common stock issued,
net..................... -- -- 762,667 --
Common stock to be issued
on conversion of loan... -- -- 732,706 --
Forgiveness of stockholder
debt.................... -- -- 10,125 --
Issuance of common
stock................... -- -- 1,224,722 --
Financing fees associated
with converted
debentures.............. -- -- (44,525) --
Foreign currency
translation
adjustment.............. (96,468) -- (96,468) (96,468)
Loss for the year......... -- (5,880,294) (5,880,294) (5,880,294)
--------- ------------ ------------ ------------
BALANCE DECEMBER 31,
1998...................... (96,468) (7,330,457) 2,837,401 (6,713,811)
Additional shares due to
rounding on common share
reverse split........... -- -- -- --
Equity components of
convertible debentures
and promissory notes,
net..................... -- -- 6,952,497 --
Warrants issued with
issuance of convertible
debentures and
promissory notes........ -- -- 6,353,767 --
Shares issued on
conversion of
convertible debt and
accrued interest........ -- -- 4,456,427 --
Financing fees associated
with converted
debentures and
promissory notes........ -- -- (3,936,620) --
Discount associated with
converted debentures.... -- -- (26,747) --
Issuance of shares........ -- -- 193,665 --
Warrants issued for
advisory services....... -- -- 1,019,270 --
Exercise of employee stock
options................. -- -- 100,625 --
Exercise of warrants...... -- -- 65,104 --
Common stock issued under
loan receivable from
employee................ -- -- -- --
Forgiveness of loan
receivable from
employee................ -- -- 250,000 --
Issuance of 8% senior
subordinated convertible
promissory notes........ -- -- -- --
Share issue costs......... -- -- (5,262) --
Foreign currency
translation
adjustment.............. (86,639) -- (86,639) (86,639)
Loss for the period....... -- (21,968,901) (21,968,901) (21,968,901)
--------- ------------ ------------ ------------
BALANCE SEPTEMBER 30,
1999...................... $(183,107) $(29,299,358) $ (3,795,413) $(28,769,351)
========= ============ ============ ============
See accompanying notes.
F-8
96
FUTURELINK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- --------------------------
1997 1998 1998 1999
--------- ----------- ----------- ------------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss.................................................... $(737,049) $(5,880,294) $(4,366,754) $(21,968,901)
Adjustments to reconcile net loss to net cash used in
operating activities
Write off mining related assets......................... 515,000 -- -- --
Equity in loss of investee.............................. -- -- 807,279 --
Non cash interest expense............................... -- 1,294,098 1,205,357 7,321,543
Non cash consulting expense............................. -- 10,109 -- 875,000
Non cash expense included with contracts, payroll and
benefits expense...................................... -- 2,114,000 2,114,000 --
Depreciation............................................ -- 786,853 6,396 522,262
Amortization of deferred financing fees and debt
discount.............................................. -- 29,052 -- 3,334,982
Amortization of intangible assets....................... -- -- 160,460 1,421,035
Non cash compensation expense........................... -- -- -- 250,000
Loss on sale of assets.................................. -- 47,596 -- --
Extraordinary item...................................... -- -- -- 432,952
Other................................................... 100,000 125,832 -- 81,445
Deferred tax benefit.................................... -- (204,609) -- (356,961)
Net change in non-cash working capital.................. 17,059 1,187,747 (571,839) (193,349)
Non cash working capital acquired........................... -- (518,076) -- --
Other....................................................... -- (96,468) -- (58,376)
--------- ----------- ----------- ------------
Net cash flows used in operating activities............. (104,990) (1,104,160) (645,101) (8,338,368)
INVESTING ACTIVITIES
Advances to FutureLink Alberta.............................. -- -- (1,694,879) --
Purchases of equipment and leasehold improvements........... -- (818,699) (20,266) (2,273,412)
Disposition of assets....................................... -- 33,411 -- --
Cash consideration on acquisition of subsidiaries........... -- (2,019,149) (2,019,149) --
Deposits on acquisitions.................................... -- (109,923) -- (3,304,975)
Cash advances to investees.................................. -- (990,305) -- --
Other....................................................... (100,000) (69,435) -- (125,193)
--------- ----------- ----------- ------------
Net cash flows used in investing activities............. (100,000) (3,974,100) (3,734,294) (5,703,580)
FINANCING ACTIVITIES
Cash received/(paid) under line of credit................... -- 819,217 564,754 (819,217)
Issuance of common shares, net.............................. 170,000 681,308 764,885 (5,262)
Exercise of employee stock option........................... -- -- -- 100,625
Exercise of warrants........................................ -- -- -- 65,104
Repayment of capital lease obligations...................... -- (67,404) -- (30,604)
Issuance of convertible debentures, net of costs............ -- 2,465,916 2,025,000 24,771,320
Issuance of notes payable, net of issue costs............... -- -- -- 125,000
Repayment of convertible debentures and promissory notes.... -- -- -- (1,838,725)
Repayment of note payable................................... -- -- -- (381,033)
Other financing fees........................................ -- 89,000 -- (137,311)
Advances from stockholders.................................. 39,990 1,096,874 1,024,824 --
--------- ----------- ----------- ------------
Net cash flows provided by financing activities......... 204,990 5,084,911 4,379,463 21,849,897
INCREASE IN CASH............................................ -- 6,651 68 7,807,949
Cash at beginning of period................................. -- -- -- 6,651
--------- ----------- ----------- ------------
Cash at end of period....................................... $ -- $ 6,651 $ 68 $ 7,814,600
========= =========== =========== ============
Cash interest paid.......................................... $ -- $ -- $ 15,701 $ 230,707
========= =========== =========== ============
See accompanying notes.
F-9
97
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
1. BASIS OF PRESENTATION
THE COMPANY
The Company, a Delaware corporation, is the successor to a Colorado
corporation incorporated in 1955.
The Company is an information technology service provider focusing on
providing utility-like computing services to businesses, and is a computer
hardware and software reseller.
The Company has experienced net losses over the past three years and as of
September 30, 1999, had an accumulated deficit of approximately $29.3 million.
Such losses are attributable to both cash losses resulting from costs incurred
in the development of the Company's services and infrastructure and non cash
interest and amortization charges. The Company expects operating losses to
continue for the foreseeable future as it continues to develop and promote its
services. See Subsequent Events note to the consolidated financial statements.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, FutureLink Distribution Corp. ("FutureLink
Alberta") which is the result of mergers effective August 1, 1999 of FutureLink
Distribution Corp. ("Alberta"), FutureLink Acquisition Corp., and
FutureLink/SysGold Ltd. ("SysGold"). 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.
CONCENTRATION OF CREDIT RISK AND KEY SUPPLIER
The Company sells the majority of its services and products throughout
North America. Sales to the Company's recurring customers are generally made on
an open account while sales to occasional customers may be made on a prepaid
basis. The Company performs periodic credit evaluations of its ongoing customers
and generally does not require collateral. Reserves are maintained for potential
credit losses, and such losses have been minimal and within management's
expectations.
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.
INVENTORY
Inventory, consisting of computer hardware and software held for re-sale,
is recorded at the lower of actual cost or net realizable value.
F-10
98
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost. Depreciation and
amortization are provided on the straight-line method over the assets' estimated
useful lives ranging from 1 to 5 years.
LONG-LIVED ASSETS
The Company follows Financial Accounting Standards Board Statement 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.
INTANGIBLE ASSETS
EMPLOYEE AND CONSULTANTS BASE
The employee and consultants base recorded on the acquisition of SysGold is
recorded at cost and is being amortized on a straight-line basis over three
years.
GOODWILL
Goodwill is recorded at cost and is being amortized on a straight-line
basis over five years. The recoverability of goodwill is assessed periodically
based on management estimates of undiscounted future operating income from each
of the acquired businesses to which the goodwill relates.
FINANCING FEES
Financing fees consisting of cash paid and warrants issued associated with
that portion of convertible debentures classified as debt are deferred and
amortized over the life of the debentures, unless the debentures have been
converted. Financing fees associated with that portion of the convertible
debentures classified as contributed surplus is charged to that account. The pro
rata portion of unamortized financing fees associated with converted debentures
is charged to share capital in excess of par value.
CAPITAL LEASES
Leases in which substantially all the benefits and risks of ownership are
transferred to the Company are capitalized with an offsetting amount recorded as
a liability.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's subsidiaries as at September 30,
1999 is the Canadian Dollar. Adjustments arising from translating the
subsidiaries' financial statements into United States dollars are recorded in
stockholders' equity as a cumulative translation adjustment.
REVENUE
Revenue from information technology services and outsourcing contracts is
recognized when the service is delivered over the term of the applicable
contracts. Revenue from the resale of computer hardware and software is recorded
upon delivery.
F-11
99
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Company records its provision for income taxes using the liability
method. Under this method, deferred tax assets and liabilities are recognized
based on the anticipated future tax effects arising from the differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases.
RELATED PARTY TRANSACTIONS
Related party transactions are recorded at the amounts agreed to by the
parties.
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 Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation."
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated by dividing net income (loss)
by the average number of common shares outstanding during the year. Diluted
earnings per share is calculated by adjusting outstanding shares, assuming any
dilutive effects of options, warrants, and convertible securities.
The following table sets forth the computation of loss per share:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------------------
1997 1998 1998 1999
--------- ----------- ----------- ------------
Numerator: net loss........... $(737,049) $(5,880,294) $(4,336,754) $(21,968,901)
--------- ----------- ----------- ------------
Denominator for basic and
diluted loss per common
share:
Weighted-average shares..... 89,489 3,169,413 2,715,793 6,534,575
========= =========== =========== ============
Loss per share -- basic and
diluted
Loss before extraordinary
item..................... $ (8.24) $ (1.86) $ (1.61) $ (3.23)
Extraordinary item.......... -- -- -- (.13)
--------- ----------- ----------- ------------
Net loss...................... $ (8.24) $ (1.86) $ (1.61) $ (3.36)
========= =========== =========== ============
SEGMENTS OF A BUSINESS ENTERPRISE
Financial Accounting Standards Board Statement 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. Statement 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.
F-12
100
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME
We adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") in the first quarter of 1998. SFAS 130
establishes standards for the reporting and display of comprehensive income.
Components of comprehensive income include net earnings (loss), foreign currency
translation adjustments and changes in minimum pension liability. The adoption
of SFAS 130 required additional disclosures but did not have a material effect
on our financial position, results of operations or liquidity.
RECLASSIFICATIONS
Certain amounts in the comparative financial statements have been
reclassified to conform to the current period presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," 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 that the adoption of the new
statement will have a significant impact on the consolidated results of
operations or financial positions of the Company.
3. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following at:
DECEMBER 31,
---------------------- SEPTEMBER 30,
1997 1998 1999
-------- ---------- -------------
Accounts receivable........................... $ -- $1,515,416 $1,946,502
Allowance for doubtful accounts............... -- (57,100) (174,450)
-------- ---------- ----------
$ -- $1,458,316 $1,772,052
======== ========== ==========
4. OTHER CURRENT LIABILITIES
Other current liabilities is comprised of the following at:
DECEMBER 31,
-------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
Deferred revenues............................... $ -- $ -- $ 50,000
Notes payable................................... -- 387,795 --
Interest payable................................ -- -- 328,203
Capital lease obligations....................... -- 65,916 37,962
-------- -------- --------
$ -- $453,711 $416,165
======== ======== ========
F-13
101
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEPOSITS ON ACQUISITIONS
As at September 30, 1999, the Company paid the following amounts relating
to deposits and acquisition costs on the proposed acquisitions of Executive LAN
Management, Inc. ("Micro Visions"), CN Networks, Inc. ("CNI"), and Async
Technologies, Inc. ("Async"):
ACQUISITION
DEPOSITS COSTS TOTAL
---------- ----------- ----------
Micro Visions.................................. $2,000,000 $268,235 $2,268,235
CNI............................................ 390,000 20,665 410,665
Async.......................................... 600,000 26,075 626,075
---------- -------- ----------
$2,990,000 $314,975 $3,304,975
========== ======== ==========
PROPOSED ACQUISITION OF MICRO VISIONS
On June 2, 1999, the Company signed an Agreement and Plan of Reorganization
and Merger with Micro Visions. The agreement provided for a merger of Micro
Visions with a subsidiary of the Company such that all of Micro Visions'
outstanding stock shall be sold to the Company in exchange for $12,000,000 cash
and 6,000,000 common shares, as well as contingent consideration of 2,400,000
common shares subject to the achievement of certain targets. On October 15,
1999, all conditions set forth in the Agreement had been satisfied or waived and
the acquisition and merger were completed.
The additional share consideration is based upon the achievement of the
following performance criteria as described in the agreement for the period from
January 1, 1999 to December 31, 1999 of which items (ii) and (iii) have been
achieved thus far:
(i) 1,200,000 common shares to be issued if Micro Visions achieves
sales in excess of $18,000,000;
(ii) 720,000 common shares to be issued if Micro Visions enlists 100
new customers; and
(iii) 480,000 common shares to be issued if Micro Visions installs and
integrates at least 200 new servers.
The acquisition will be accounted for by the purchase method. The purchase
price will be allocated to the net assets acquired based on their estimated fair
values. As at September 30, 1999, the purchase allocation would be as follows:
NET ASSETS ACQUIRED
Working capital deficiency.................................. $ (656,000)
Equipment and leasehold improvements and other assets....... 1,063,000
Goodwill.................................................... 52,017,673
-----------
NET ASSETS ACQUIRED......................................... $52,424,673
===========
CONSIDERATION:
Cash........................................................ $12,000,000
7,200,000 common shares..................................... 40,049,673
Estimated acquisition costs................................. 375,000
-----------
$52,424,673
===========
F-14
102
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The remaining consideration has not been reflected, as the outcome of the
contingency cannot be reasonably determined at this time. The additional share
consideration will be recorded as additional purchase price consideration
(goodwill) if and when it becomes payable.
PROPOSED ACQUISITION OF CNI
On September 7, 1999, the Company entered into an Agreement and Plan of
Reorganization and Merger with CNI. The Agreement provides for a merger of CNI
with a subsidiary of the Company such that all of CNI's outstanding stock shall
be sold to the Company in exchange for $3,900,000 cash and 1,181,816 common
shares. On November 5, 1999 all conditions set forth in the Agreement had been
satisfied or waived, the merger was completed, 1,181,816 shares were issued, and
the remaining $3,510,000 cash was paid.
The acquisition will be accounted for by the purchase method. The purchase
price will be allocated to the net assets acquired based on their estimated fair
values. As at September 30, 1999, the purchase allocation would be as follows:
NET ASSETS ACQUIRED
Working capital............................................. $ 435,383
Equipment and leasehold improvements and other assets....... 83,874
Goodwill.................................................... 13,005,743
-----------
NET ASSETS ACQUIRED......................................... $13,525,000
===========
CONSIDERATION:
Cash........................................................ $ 3,900,000
1,181,816 common shares..................................... 9,100,000
Estimated acquisition costs................................. 525,000
-----------
$13,525,000
===========
PROPOSED ACQUISITION OF ASYNC
On September 7, 1999, FutureLink entered into an Agreement and Plan of
Reorganization and Merger with Async and Async Technical Institute, Inc.
("ATII"). The Agreement provides for an initial merger between Async and ATII,
with Async being the surviving entity, and then a subsequent merger of Async
with a subsidiary of the Company such that Async's outstanding stock shall be
sold to the Company in exchange for $6,000,000 cash and 1,298,705 common shares.
F-15
103
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The acquisition, upon completion [See Note 21(g)] will be accounted for by
the purchase method. The purchase price will be allocated to the net assets
acquired based on their estimated fair values. As at September 30, 1999, the
purchase allocation would be as follows:
NET ASSETS ACQUIRED
Working capital deficiency.................................. $ (331,424)
Equipment and leasehold improvements and other assets....... 135,077
Goodwill.................................................... 16,721,347
-----------
NET ASSETS ACQUIRED......................................... $16,525,000
===========
CONSIDERATION:
Cash........................................................ $ 6,000,000
1,298,705 common shares..................................... 10,000,000
Estimated acquisition costs................................. 525,000
-----------
$16,525,000
===========
6. INVESTMENTS
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.
As a result of these two transactions the Company acquired 96.4% of
FutureLink Alberta for a total purchase price of $1,059,145, including
acquisition costs of $56,218. Net assets acquired were as follows:
NET ASSETS ACQUIRED
Working capital deficiency.................................. $ (338,825)
Equipment and leasehold improvements........................ 350,619
Goodwill.................................................... 2,037,656
Tax loss carryforwards...................................... 288,194
Valuation allowance......................................... (288,194)
Other obligations........................................... (990,305)
----------
NET ASSETS ACQUIRED......................................... $1,059,145
==========
FutureLink Alberta was consolidated from November 24, 1998. From January
20, 1998 to November 23, 1998 the Company's share in FutureLink Alberta's loss,
accounted for using the equity method, was ($860,131). Futurelink had income
from a minority interest of $33,771.
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. The difference
between the actual and pro forma information is not significant.
F-16
104
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RIVERVIEW MANAGEMENT CORPORATION
Effective August 24, 1998, the Company acquired all of the outstanding
shares of Riverview Management Corporation ("SysGold"), an information
technology outsourcing and services firm. The consideration for the purchase,
totaling $5,003,887, including acquisition costs of $53,705, consisted of a cash
payment of $2,019,149, promissory notes payable for $381,033 ($585,000 Canadian)
payable on demand on or before 90 days after August 24, 1998, and 4,250,000
SysGold exchangeable shares which are exchangeable into 850,000 common shares of
the Company. The exchangeable shares had an ascribed value of $2,550,000. The
common shares issued are exchangeable shares in SysGold which are convertible at
any time into shares of the Company. The acquisition was accounted for using the
purchase method. Net assets acquired were as follows:
NET ASSETS ACQUIRED
Non cash working capital deficiency......................... $ (179,251)
Equipment and leasehold improvements........................ 135,291
Goodwill.................................................... 3,275,687
Employee and consultants base............................... 3,200,000
Deferred tax liability...................................... (1,427,840)
-----------
NET ASSETS ACQUIRED......................................... $ 5,003,887
===========
During 1999, the notes were paid in full and the 4,250,000 exchangeable
shares were exchanged for 850,000 common shares of the Company.
The results of operations for SysGold are consolidated as of August 24,
1998.
The following pro forma results of operations give effect to the
acquisition of Sysgold as if the transaction has occurred January 1, 1998, and
includes the amortization of goodwill and employee and consultants base
calculated on a straight-line basis over a period of 5 years:
YEAR ENDED
DECEMBER 31, 1998
-----------------
Revenue..................................................... $ 8,587,094
===========
Net loss.................................................... $(6,692,201)
===========
Loss per share.............................................. $ 2.11
===========
F-17
105
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are comprised of the following at:
DECEMBER 31,
--------------------- SEPTEMBER 30,
1997 1998 1999
-------- ---------- -------------
Computers and equipment........................... $ -- $ 605,830 $1,846,940
Software.......................................... -- 185,406 561,135
Office equipment.................................. -- 181,384 503,952
Equipment under capital lease..................... -- 135,740 137,735
Leasehold improvements............................ -- 218,018 299,103
-------- ---------- ----------
-- 1,326,378 $3,348,865
Less accumulated depreciation and amortization.... -- (203,455) (751,643)
-------- ---------- ----------
$ -- $1,122,923 $2,597,222
======== ========== ==========
8. INTANGIBLE ASSETS
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
Goodwill......................................... $ -- $5,313,334 $ 5,340,271
Employee and consultants lease................... -- 3,200,000 3,200,000
---------- ---------- -----------
-- 8,513,334 8,540,271
Less accumulated amortization.................. -- (667,617) (2,088,652)
---------- ---------- -----------
$ $7,845,717 $ 6,451,619
========== ========== ===========
The $3,200,000 relating to employee and consultants base represents the
valuation placed on the knowledge, expertise, and contacts of employees and
consultants of SysGold.
F-18
106
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL AND OPERATING LEASE OBLIGATIONS PAYABLE
The Company has various leases for office premises which expire on January
31, 2000 and January 31, 2002. The future minimum lease payments at September
30, 1999 under capital and operating leases are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- ----------
1999........................................................ $ 12,484 $ 147,309
2000........................................................ 40,382 554,352
2001........................................................ 20,624 495,190
2002........................................................ 2,251 46,099
2003........................................................ -- 192
-------- ----------
Total future minimum lease payments......................... 75,741 $1,243,142
==========
Less: imputed interest...................................... (10,167)
--------
Balance of obligations under capital lease.................. 65,574
Less: current portion included in accounts payable and
accrued liabilities....................................... (37,962)
--------
Long-term obligations under capital lease................... $ 27,612
========
Rent expense was $0, $118,471, $19,999, and $508,649 for the years ended
December 31, 1997 and 1998 and the nine months ended September 30, 1998 and
1999, respectively.
10. LINE OF CREDIT
As of September 30, 1999, FutureLink Alberta has a line of credit with a
Canadian chartered bank for approximately $1.4 million ($2,100,000 Canadian)
which the Company has guaranteed. Interest on the line of credit is based on a
range of the bank's prime rate plus 1% to 3% depending on FutureLink Alberta's
debt to equity ratio. Substantially all the assets of FutureLink Alberta have
been pledged as collateral. The amount outstanding on the line of credit at
September 30, 1999 is approximately $1.4 million.
11. CONVERTIBLE DEBENTURES
DECEMBER 31,
------------------------ SEPTEMBER 30,
1997 1998 1999
----------- ---------- -------------
LONG-TERM
10% TK convertible debentures........................... $ -- $2,153,457 $ 1,678,344
8% Senior subordinated convertible promissory notes..... -- -- 15,000,000
8% Senior subordinated convertible promissory notes..... -- -- 5,259,043
10% Convertible debentures.............................. -- -- 232,979
----------- ---------- -----------
$ -- $2,153,457 $22,170,366
=========== ========== ===========
F-19
107
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10% TK convertible debentures
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
Principal............................................ $2,050,000 $2,220,000 $2,500,000
Discount on debt..................................... -- -- (977,830)
Deferred financing fee............................... -- (222,073) --
Accrued interest..................................... 20,602 155,530 156,174
---------- ---------- ----------
Net balance.......................................... $2,070,602 $2,153,457 $1,678,344
========== ========== ==========
During 1998 the Company entered into a 10% convertible debenture agreement
with Thomson Kernaghan & Co. Ltd. ("TK") as agent, to provide up to $5,000,000
of financing. The financing included the issuance of 208,333 share purchase
warrants. During the nine month period to September 30, 1998, the Company
received $2,250,000 under the financing arrangement. On September 21, 1998,
$200,000 of the convertible debentures, together with accrued interest were
converted into 133,752 common shares. During the fourth quarter of 1998, an
additional $470,000 of funding was received and $300,000 plus $5,042 of accrued
interest was converted into 241,203 common shares.
During the first quarter of 1999, the Company received the final $2,280,000
under the $5,000,000 facility. In addition, the Company amended the terms of the
10% TK convertible debentures which increased the total available financing from
$5,000,000 to $6,000,000 following which the Company received an additional
$970,000. In addition, an additional 129,534 warrants were issued which were
recorded to contributed surplus at a value of $129,500 based on the fair value
of the warrants with an offsetting entry to discount on debt.
Of the total principal amount of the debentures of $6,000,000, a total of
$1,689,133 has been attributed to the intrinsic value of the conversion option.
Of this amount, $911,990 relates to debentures received during the nine months
ended September 30, 1999. The amount attributed to the conversion option has
been included in interest expense as the conversion option was exercisable upon
issuance.
During 1999, $1,500,000 of the convertible debentures, together with
$61,486 of accrued interest, were converted into 1,197,054 common shares.
On April 26, 1999, the Company amended the terms of the 10% TK convertible
debenture agreement. Previously the debenture holders had the right to convert
the debentures at a price equal to the lower of $3.75 per share and 78% of the
average closing bid price of the Company's common stock for the three trading
days immediately preceding the conversion. Following the amendment, the
debenture conversion price was fixed at $1.00 per common share. In addition, the
common share purchase warrants of 208,334 and 129,534 issued under prior
agreements were repriced such that their exercise price of $4.80 became $1.25
per common share. The Company also issued an additional 862,132 share purchase
warrants at an exercise price of $1.25 per common share such that a total of
1,200,000 share purchase warrants are outstanding relating to this convertible
debenture agreement. In addition, the Company paid $1,881,600 as consideration
for the cancellation of $1,470,000 of the principal balance such that $2,500,000
of the convertible debentures remain outstanding.
During the nine month period ended September 30, 1999, an amount of
$844,552 has been recorded as an extraordinary item relating to the loss on
extinguishment of debt and includes $259,318 unamortized finance fees and
$173,634 unamortized debt discount associated with the $3,470,000 of debt
existing at the time, as well as $411,600 relating to the cost of settling
$1,470,000 of debt. In addition, an amount of $1,015,000 attributable to the
intrinsic value of the conversion feature of the amended debt has been
F-20
108
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
included as interest expense with a corresponding credit to contributed surplus
as the conversion option was exercisable upon issuance.
An amount of $1,200,000 has been included in contributed surplus as the
estimated value attributed to the 1,200,000 warrants as they were exercisable
upon issuance. The amount is being amortized over the remaining life of the
debentures of which $222,170 has been amortized to September 30, 1999. The
warrants expire August 20, 2001.
The Company may prepay any or all of the outstanding principal amounts at
any time, upon thirty days' notice, subject to the holders' right to convert
into common shares. At the debenture holders' election, interest can be settled
in common stock of the Company based on market prices. During the nine month
period ended September 30, 1999, the Company issued 36,706 shares as payment for
$76,365 of accrued interest.
During the three month period ended September 30, 1999, 52,083 common
shares were issued on the exercise of 52,083 warrants.
$15,000,000 aggregate principal amount of 8% senior subordinated convertible
promissory notes
SEPTEMBER 30,
1999
-------------
Principal................................................... $15,000,000
-----------
Net balance at September 30, 1999........................... $15,000,000
===========
On July 27, 1999, the Company completed a closing of 8% senior subordinated
convertible promissory notes (the "Notes") and warrants for gross proceeds of
$15,000,000. The Notes are due on the earlier of (i) July 19, 2001; (ii) the
consummation of a public offering of the Company's securities; (iii) the
completion of a private placement resulting in gross proceeds of at least
$15,000,000; and (iv) the consummation of a merger, combination or the sale of
substantially all of the Company's assets, or the purchase by a single entity or
person of more than 50% of the Company's voting stock. The Notes are convertible
into common stock at an exercise price of $8.50 per common share. However, if
prior to maturity, the Company completes a private placement of debt or equity
securities resulting in gross proceeds of at least $15,000,000, and the terms of
this subsequent placement are acceptable to the agent and the noteholders, the
Notes will automatically convert as payment for an investment into the
securities sold in the subsequent conversion, and will be converted at the same
price and terms as that private placement.
Interest on the Notes is payable semi-annually commencing January 31, 2000.
In addition, 2,250,000 warrants were issued to note holders to purchase
common stock at an exercise price of $8.50 per common share. The warrants are
exercisable until July 27, 2001; however, they are callable at the option of the
Company on 30 days' notice if (i) the average closing bid price of the Company's
common stock for 20 consecutive trading days exceeds $17 and (ii) a registration
statement covering the warrant shares has been declared effective by the
Securities and Exchange Commission.
The Company paid $1,350,000 cash and issued 225,000 warrants to the
placement agent as a finance fee. These warrants are exercisable at $8.50 per
share and expire July 27, 2001. Additional issue costs of $42,592 were incurred.
F-21
109
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 2,475,000 warrants issued under this offering were recorded as a
component of equity since it was known that the notes would convert into the
securities of a subsequent offering. Accordingly, no amount has been recorded to
capital in excess of par.
F-22
110
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Subsequent to September 30, 1999 and following a private placement (see
note 21c), the $15,000,000 promissory notes converted into 2,727,273 common
shares at $5.50 per share and 711,818 warrants at an exercise price of $8.50 per
share.
$8,038,500 aggregate principal amount of 8% senior subordinated convertible
promissory notes
SEPTEMBER 30,
1999
-------------
Principal................................................... $5,736,000
Discount on debt............................................ (383,164)
Deferred financing fee...................................... (93,793)
----------
Net balance at September 30, 1999........................... $5,259,043
==========
On May 7, 1999, the Company completed a $8,038,500 financing of 8% senior
subordinated convertible promissory notes. The notes are due April 30, 2000;
however, maturity may be extended by up to one year at the option of the
placement agent. Interest is payable quarterly from April 30, 1999. The notes
are convertible at the option of the note holders at a conversion price of $1.00
per share (except those issued to management and directors, see below). The
notes will automatically convert in the event the Company raises gross proceeds
from a subsequent offering of at least $10,000,000, at a valuation in excess of
the greater of (i) double the average closing bid price of the Company's common
stock for the 10 trading days immediately preceding the initial closing date of
the subsequent offering; or (ii) $1.00 per common share. Such conversion is
conditional upon the common stock underlying the notes being registered at the
time of conversion.
Of the total $8,038,500 notes issued, management and directors of the
Company purchased $433,000. The notes are convertible at a conversion price of
$1.50 per share, subject to a 12 month lock up provision.
An amount of $4,911,880 has been attributed to the intrinsic value of the
conversion option and has been included in contributed surplus with an
offsetting entry to interest expense.
An amount of $3,195,848 has been included as a discount on debt and is
being amortized to expenses over the estimated life of the debt of six months.
Upon entering into the agreement, the Company issued warrants to purchase
3,802,750 of common stock to the external holders of the debentures and 216,500
of common stock to directors and management of the Company. Common stock can be
purchased at $1.25 per share by external holders and at $1.50 per share by
directors and management. The warrants expire on April 29, 2006 but may be
redeemed at the option of the Company on 30 days' notice at a redemption price
of $1.25 per warrant provided (i) a registration statement is declared effective
by the Securities and Exchange Commission; and (ii) the average closing bid
price of the Company's common stock for 15 consecutive trading days exceeds
$7.50. An amount of $3,126,620 has been included in contributed surplus as the
estimated value of the warrants.
Issue costs of $780,173 were paid relating to the issuance of the
debentures and were recorded as a discount on debt. The amount is being
amortized over the estimated life of the debentures. In addition, 2,000,000
warrants at an exercise price of $1.25 per common share were provided to the
agent as a placement fee. An amount of $1,800,000 has been attributed to the
value of the warrants and has been recorded to contributed surplus. The
placement fee is attributable to the equity portion of the debt and therefore
this issue cost has also been recorded as a charge against contributed surplus.
The warrants expire on April 29, 2006.
F-23
111
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On August 20, 1999, $2,302,500 of the convertible promissory notes were
converted into 2,291,221 common shares.
Subsequent to September 30, 1999, $5,090,500 notes were converted into
5,988,824 common shares. Also subsequent to September 30, 1999, a further
269,556 common shares were issued to those noteholders which had converted on
August 20, 1999 due to the notes having anti-dilution provisions. The subsequent
issuance of securities at terms and conditions preferential to that of the
promissory notes resulted in the additional common shares. These anti-dilution
privileges also resulted in the remaining $645,500 unconverted notes having a
conversion price of $0.89 for noteholders and $1.34 for management.
10% Convertible debentures
SEPTEMBER 30,
1999
-------------
Principal................................................... $278,164
Discount on debt............................................ (36,180)
Deferred financing fee...................................... (20,209)
Accrued interest............................................ 11,204
--------
Net balance at September 30, 1999........................... $232,979
========
During the first quarter of 1999, the Company issued a $275,000 promissory
note. Effective May 7, 1999, the Company entered into an agreement which
converted the promissory note and $3,160 accrued interest into a 10% convertible
debenture. The holder of the convertible debenture has the right to convert the
debenture at $1.15 per common share. The Company may prepay upon 30 days advance
notice. The note matures on April 20, 2002. At the noteholders' option, interest
can be paid in stock at $1.15 per share. Interest is otherwise due at maturity.
An amount of $79,821 has been attributed to the intrinsic value of the
conversion options and has been included in contributed surplus.
Upon entering into the 10% convertible debenture agreement, the Company
issued warrants to purchase 44,505 of common stock of the Company to the holder
of the debenture. Common stock can be purchased at $1.25 per share. The warrants
expire April 30, 2001. An amount of $41,800 has been included in contributed
surplus as the estimated value of the warrants.
The Company also paid a 10% financing fee on the original $275,000. The
value of the fees associated with the equity component of the 10% convertible
debentures in the amount of $4,180 has been charged to contributed surplus. The
remaining amount is being amortized to expenses over the life of the debentures.
12. STOCKHOLDERS' EQUITY
On June 1, 1999, the Company completed a reverse stock split of 5 to 1. 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. All amounts disclosed in these financial statements have been
restated to give effect to these transactions.
F-24
112
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMON STOCK
During the first quarter of 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 $289,264 ($440,000 Canadian) including
interest existing at December 31, 1998.
Upon entering into the convertible debenture agreement, the Company issued
150,621 common share purchase warrants to the holders of the debentures. Each
warrant gives the holder the right to purchase one common share of the Company
for $2.00 per share on or before February 22, 2000, for $3.00 per share between
February 23, 2000 and February 22, 2001 and $4.00 per share between February 23,
2001 and February 22, 2002. An amount of $20,000 has been included in
contributed surplus as the estimated value attributed to the 150,621 warrants.
During the second quarter of 1999, the Company repaid $218,725 of the
principal amount. In addition, $3,867 of accrued interest was forgiven by a
debenture holder. During the third quarter, $34,055 of principal and interest
was repaid and $55,125 of principal and interest was converted into 27,431
common shares such that the full principal and interest relating to the note has
been settled.
During the first quarter of 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 has been attributed to the
intrinsic value of the conversion option and has been included in contributed
surplus.
Upon entering into the 8% convertible debenture agreement, the Company
issued warrants to purchase 26,553 of common stock of the Company to the holder
of the 8% convertible debentures. Common stock can be purchased at $1.88 per
share. The warrants expire on February 28, 2001. An amount of $35,847 has been
included in contributed surplus as the estimated value of the warrants.
The Company paid a finance fee of $10,000 which was recorded as a discount
on debt and was being amortized to expenses over the life of the convertible
debentures.
On August 21, 1999, $500,000 of principal and $37,314 of accrued interest
and other fees were converted into 355,836 common shares.
During the nine month period ended September 30, 1998, the Company issued
51,163 common shares and 51,163 warrants for $846,800 cash. Of the warrants,
16,667 are exercisable at $15.00 on or before January 29, 1999 and at $15.50 on
or before January 29, 2000; 21,163 are exercisable at $18.75 on or before April
3, 1999 and at $20.00 on or before April 3, 2000; and 13,333 are exercisable at
$16.25 on or before April 22, 2000. As at September 30, 1999 none of the
warrants have been exercised.
On July 27, 1998, the Company issued 700,000 shares to employees, officers
and directors of the Company for $3,500. The fair value of these shares at that
time was $2,117,500. The difference between the fair value and the cash
consideration received has been included with capital in excess of par and with
expenses under contracts, payroll and benefits.
During 1998, a stockholder advanced the Company $729,802. Interest incurred
on the loan to July 2, 1998 in the amount of $2,849 was added to the principal
amount owing. $350,000 of the loan was assigned to another stockholder on July
2, 1998. On the same date, both portions of the loan were converted into 225,448
common shares with an ascribed value of $732,651, and an equal number of
warrants. Each warrant entitles the holders to purchase one common share at
$5.00 on or before June 30, 1999 and $6.25 on or before June 30, 2000. As at
September 30, 1999 none of the warrants have been exercised.
F-25
113
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LOAN RECEIVABLE FROM EMPLOYEE
On August 1, 1999, the Company loaned $2,000,000 to an executive which was
then used by the executive to purchase 232,829 common shares of the Company. The
loan receivable has been recorded as a reduction of stockholders' equity. The
common shares are escrowed. On October 1, 1999, 29,129 shares were released from
escrow. An additional 29,100 shares will be released from escrow on a quarterly
basis commencing January 1, 2000. So long as the executive remains employed by
the Company, $250,000 of the principal amount of the loan shall be forgiven on a
quarterly basis.
The loan bears interest at 5.625% per year. Interest is payable annually;
however, should the executive be employed at the end of each annual period, the
interest will be forgiven at such time. Interest earned by the Company for the
nine months ended September 30, 1999 was $18,750.
During the nine months ended September 30, 1999, the Company recognized
$250,000 as salary expense relating to the services received from the employee
in relation to the loan agreement.
UNEARNED COMPENSATION
During 1998, the Company entered into an agreement for consulting services
which provided for the settlement of fees by way of shares in the Company's
stock. The number of shares issued was based on 95% of the average closing price
of the Company's stock during the trading days for the month in question as
quoted on the Nasdaq Over the Counter Bulletin Board. As at December 31, 1998,
$50,000 was owing for consulting services in relation to this agreement,
equating to 23,051 shares. During 1999, the 23,051 shares were issued along with
an additional 41,652 shares relating to services performed in 1999.
OPTIONS
As of September 30, 1999, the Company has issued 5,385,500 options to
purchase common stock to the Company's directors, officers and employees. Of the
total issued, 27,500 have been exercised and 107,600 had expired or been
cancelled. The maximum number of shares that may be issued pursuant to options
is 11,000,000 and cannot exceed 20% of the common stock issued and outstanding
on a fully diluted basis. Details of the stock options outstanding at September
30, 1999 are as follows:
NUMBER OF OPTIONS EXERCISE PRICE EXPIRATION DATE
----------------- -------------- ----------------
543,500................................ 3.80 June 29, 2001
160,000................................ 5.85 August 5, 2001
5,000................................ 2.25 December 1, 2001
5,000................................ 2.25 December 1, 2002
44,900................................ 2.25 April 1, 2004
265,000................................ 1.40 April 1, 2004
2,147,000................................ 3.15 June 1, 2004
600,000................................ 5.00 June 1, 2004
880,000................................ 6.08 June 1, 2004
600,000................................ 7.56 August 30, 2004
- ---------
5,250,400
=========
The fair value of each option granted during 1999 is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: expected volatility of 146% - 205%; risk-free interest rate of
4.0%; no payment of common share dividends; and expected life of 1 to 5 years.
F-26
114
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Had compensation cost for these plans been determined based upon the fair value
at grant date, consistent with the methodology prescribed in Statement of
Financial Accounting Standards No. 123, "Accounting
F-27
115
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for Stock-Based compensation" (FAS 123), the Company's net loss and net loss per
common share for the year ended December 31, 1998 would have been $9,406,724 and
$2.96 and for the nine month period ended September 30, 1999 would have been
$27,124,287 and $4.15. The net loss and net loss per common share for the year
ended December 31, 1997 is not significant.
During the year ended December 31, 1998, the Company issued 255,813 shares
for $846,800 cash. An additional 3,500,000 shares were issued to employees,
officers and directors of the Company on July 7, 1998 for $3,500, as had been
previously approved by stockholders in January, 1998. The fair value of these
shares at the time of the share issuance was $2,117,500. The difference between
the fair value and the cash consideration received has been included in capital
in excess of par and in contracts, payroll and benefits expense.
13. INCOME TAXES
The income tax benefit differs from the amount computed by applying the
U.S. federal statutory tax rates to the loss before income taxes for the
following reasons:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ --------------------------
1997 1998 1998 1999
--------- ----------- ----------- -----------
Tax benefit at U.S. statutory rate
(34%)................................ $(250,597) $(2,068,868) $(1,489,968) $(7,590,793)
Increase (decrease) in taxes resulting
from:
Deferred tax asset valuation
allowance......................... 294,820 1,690,192 1,496,047 4,178,596
Equity loss on affiliate............. -- -- 360,208 --
U.S. state taxes..................... (44,223) (120,665) -- (505,127)
Non deductible expenses.............. -- 541,030 83,605 4,305,780
Foreign tax rate differences......... -- (257,895) (465,396) (745,416)
Other................................ -- 11,597 -- --
--------- ----------- ----------- -----------
Deferred tax benefit................... $ -- $ (204,609) $ (15,504) $ (356,960)
========= =========== =========== ===========
F-28
116
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net taxes of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The components
of the companies deferred tax liabilities and assets are as follows:
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
Deferred tax assets (liabilities):
Employee and consultants base........... $ -- $(1,211,634) $ (854,673)
--------- ----------- -----------
Deferred tax assets
Net operating loss carryforwards.......... 40,000 1,904,583 4,863,601
Start-up costs............................ 48,820 39,715 29,591
Write-off of mining related assets........ 206,000 206,000 206,000
Depreciation.............................. -- 77,017 324,484
Debt issue costs.......................... -- 23,327 --
Debenture receivable...................... -- 22,564 22,564
--------- ----------- -----------
Total deferred tax assets....... 294,820 2,273,206 5,446,240
Valuation allowance....................... (294,820) (2,273,206) (5,446,240)
--------- ----------- -----------
Net deferred tax assets................... -- -- --
--------- ----------- -----------
Net deferred tax liabilities.............. $ -- $(1,211,634) $ (854,673)
========= =========== ===========
F-29
117
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has provided a valuation allowance for the full amount of
deferred tax assets in light of its history of operating losses since its
inception. When recognized, $288,194 of the valuation allowance will reduce
goodwill. The remaining balance may be available to offset future tax expense.
The Company has U.S. net operating losses carried forward of $7,201,000
which expire from 2012 to 2019.
The availability of these loss carryforwards to reduce future taxable
income could be subject to limitations under Section 382 of the Internal Revenue
Code of 1986, as amended. Certain ownership changes can significantly limit the
utilization of net operating loss carryforwards in the period following the
ownership change. The Company has not determined whether such changes have
occurred and the effect such changes could have on its ability to carry forward
all or some of the U.S. net operating losses.
The Company has non-capital losses carried forward for Canadian income tax
purposes of $6,849,000. These losses expire as follows:
2002..................................................... $ 123,000
2003..................................................... 563,000
2004..................................................... 1,868,000
2005..................................................... 906,000
2006..................................................... 3,389,000
14. RELATED PARTY TRANSACTIONS
(a) On August 1, 1999, the Company loaned $2,000,000 to an executive of the
Company which was used to purchase 232,829 common shares from Treasury (see note
12).
(b) During the nine months ended September 30, 1999, management of the
Company participated in the 8% senior subordinated convertible promissory note
offering by way of purchasing notes totaling $433,000 (see note 11).
(c) During the nine months ended September 30, 1999, the Company provided
services and products of $30,292 ($45,117 Canadian) to Jaws Technologies Inc.,
an entity of which a Director was also a Director of the Company. An amount of
$43,571 ($63,927 Canadian) is owing from Jaws Technologies Inc. as at September
30, 1999.
In addition, the Company obtained services from Jaws Technologies Inc. in
the amount of $2,031 ($3,025 Canadian). As at September 30, 1999 $2,206 ($3,237
Canadian) remains owing by the Company.
During the year end December 31, 1998, the Company provided services and
products of $40,277 ($59,735 Canadian) to Jaws Technologies Inc. An amount of
$37,002 ($56,735 Canadian) was owing from Jaws Technologies Inc. at December 31,
1998.
(d) During the nine months ended September 30, 1999, the Company provided
services and products of $267,439 ($398,323 Canadian) to Willson Stationers Ltd.
and e-Supplies Inc., related entities of which a previous Director was also a
Director of these companies. As at September 30, 1999, $488,135 ($716,192
Canadian) remains owing from these entities. An allowance for doubtful accounts
of $473,922 ($695,339 Canadian) has been recorded due to the uncertainty of
collection.
During the year ended December 31, 1998, the Company provided services and
products of $63,561 ($94,267 Canadian) to Willson Stationers Ltd. As at December
31, 1998 an amount of $58,909 ($90,325 Canadian) was owing from Willson
Stationers Ltd.
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FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, the Company obtained $20,857 ($31,077 Canadian) of products
from Willson Stationers Ltd. during the period. As at September 30, 1999,
$26,382 ($38,707 Canadian) remains owing by the Company. As at December 31, 1999
an amount of $4,976 ($7,630 Canadian) was owing.
DECEMBER 31, SEPTEMBER 30,
--------------------- -------------
1997 1998 1999
--------- -------- -------------
Due from related party......................... $ -- $131,294 $ 531,706
Allowance for doubtful accounts................ -- (57,513) (473,922)
--------- -------- ---------
$ -- $ 73,781 $ 57,784
========= ======== =========
(e) During 1998, two of the Company's stockholders advanced the Company
$289,264 ($440,000 Canadian). Simple interest at a rate of prime plus 1%,
totaling $2,854 and $10,145 to September 30, 1998 and December 31, 1998,
respectively, was added to the principal amount owing. In addition, one of the
Company's stockholders advanced the Company $17,609 ($27,000 Canadian) of which
$19,662 ($30,147) including interest was outstanding at year end. These amounts
were repaid during 1999.
(f) During the third quarter of 1999, the Company obtained services from
Micro Visions relating to consulting work performed in connection with the
Company's overall expansion of application service provider and server based
computing services. The services provided by Micro Visions were charged on
normal commercial terms and conditions. The total value of these services was
$107,188, all of which remained outstanding at September 30, 1999.
15. NET CHANGE IN NON-CASH WORKING CAPITAL
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------- ------------------------
1997 1998 1998 1999
------- ----------- ----------- ---------
(Increase) decrease in non-cash working
capital:
Accounts receivable.......................... $ -- $(1,532,095) $(1,100,475) $(278,991)
Inventory.................................... -- (22,206) (25,880) (46,639)
Prepaid expenses and deposits................ -- (116,219) (74,167) (77,004)
Interest receivable.......................... -- -- -- (18,750)
Accounts payable and accrued liabilities..... 17,059 2,874,183 809,194 (170,507)
Deferred revenue............................. -- -- -- 50,000
Interest payable............................. -- -- (180,511) 340,703
------- ----------- ----------- ---------
17,059 1,203,663 (571,839) (201,188)
Attributable to investing and financing
activities................................... -- (15,916) 7,839
------- ----------- ----------- ---------
Attributable to operating activities........... $17,059 $ 1,187,747 $ (571,839) $(193,349)
======= =========== =========== =========
16. COMMITMENTS
On May 1, 1999, the Company entered into an agreement in which the Company
retained an advisor for a period of one year. Compensation for the services
received under the agreement include payment of $5,000 per month and issuance of
2,000,001 warrants. An amount of $1,800,000 has been included in additional
paid-in capital as the estimated value of the warrants with an offset to
shareholders' equity as warrants for services. As the amount relates to services
for a one year period, $150,000 per month is being amortized as consulting
expense.
F-31
119
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On April 1, 1999, the Company issued 45,600 warrants relating to an
agreement which provides for advisory services to the Company for a period of
one year commencing December 1, 1998. An amount of $40,320 has been included in
additional paid-in capital as the estimated value of the warrants. The warrants
are exercisable at $2.35 per common share and expire on December 31, 2001. In
addition, 95,000 warrants were issued to the advisor as compensation for
services rendered relating to certain financing transactions. An amount of
$228,950 has been included in additional paid-in capital as the estimated value
of the warrants. Of this amount, $159,722 has been charged to additional paid-in
capital as the amount attributable to the equity component of the related
financing. The balance has been recorded as a deferred financing fee against the
related debt. These warrants are exercisable at $4.00 per common share and
expire on April 29, 2002.
17. CONTINGENCIES
A statement of claim has been filed against the Company in the amount of
approximately $340,000 ($500,000 Canadian) plus costs. The statement of claim
alleges that the Company made certain misrepresentations and interfered with
contractual relations in respect of a sale transaction between two third parties
involving the Company's common shares. The Company has entered into an indemnity
agreement with a former principal of the Company whereby such former principal
directs the action on behalf of the Company, bears the costs of legal counsel
and agrees to indemnify the Company for any losses arising. Management believes
the claim is without merit; consequently, no liability in respect of the claim
has been recorded in the financial statements.
A statement of claim has been filed against the Company's subsidiary,
FutureLink Alberta in the amount of $194,000 ($285,000 Canadian) plus costs
seeking damages and loss of rent related to a purported lease agreement with
respect to a building in Calgary, Alberta, Canada. The Company is counter
claiming an amount of approximately $266,000 ($390,000 Canadian) against the
claimant. The plaintiff has now leased the premises in question to a third
party, thereby mitigating its alleged losses. However, it is impossible at this
time for the Company to predict with any certainty the outcome of such
litigation. Management believes the claim is without merit and will defend the
Company's position vigorously. However, should the matter proceed to trial,
costs may be in excess of $68,000 ($100,000 Canadian). These financial
statements contain no provision for losses related to the claims.
A statement of claim was filed against the Company's subsidiary, SysGold
(now merged into FutureLink Alberta) by TAP Consulting Ltd. in the amount of
$102,000 ($150,000 Canadian). The claim seeks damages and loss of compensation
relating to services provided to the Company. It is management's position that
the claim is without merit. An indemnity agreement has been obtained from the
previous stockholders of SysGold.
The Company is currently in discussion with certain shareholders and
ex-employees with respect to various issues, including employment related
matters and other claims. These parties seek additional compensation in the form
of cash and options. Formal statements of claim have not been filed against the
Company with respect to these matters. At this time, management is unable to
determine the amount, if any, it will be required to pay to settle these issues.
In November, 1999 the Company received correspondence from a party making
claims under a letter agreement seeking further compensation for financing
transactions completed by the Company. The Company is not aware of formal
litigation having been filed with respect to these matters, however, the party
claims an entitlement to cash fees totaling $5,129,733 as well as warrants to
purchase an aggregate of 3,289,689 common shares of the Company at exercise
prices ranging from $1.00 to $8.50 per share. The
F-32
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FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company believes the claim is without merit, but continues to discuss this
matter with the party in question. At this early juncture, an evaluation of the
dollar amount to be paid, if any, cannot be made. See Note 21 (h).
Under certain California State regulatory requirements, it appears the
Company may be obliged to offer a rescission of certain options granted to
California employees subsequent to September 30, 1999. The Company has applied
for an order from the State of California approving the proposed terms of the
rescission offer. The rescission offer, if approved, would be made with respect
to 1,240,500 options at an exercise price of $8.50, and 40,000 shares issued in
relation to other options exercised to date. In light of market prices for the
Company's common stock recently being significantly in excess of the exercise
price, the Company expects few holders would accept the rescission offer.
However, should all offers be accepted, the maximum dollar amount the Company
would be required to pay under this offer is estimated to be $2,377,800 for
option holders and $152,000 for shareholders plus 7% interest per annum.
The Company is also involved in other legal proceedings, claims and
litigation arising in the ordinary course of business.
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, and such outcome
is at least reasonably possible. The Company is unable to make an estimate of
the range of possible loss from outstanding litigation, and no amounts have been
provided for such matters in the accompanying consolidated financial statements.
18. IMPAIRMENTS AND OTHER LOSSES
During 1997, the previous management entered into an agreement which
included payment of a $100,000 non-refundable deposit to purchase Printscan
International Inc. The Company did not raise sufficient funds to complete the
purchase, and the deposit was forfeited.
During 1997 the company wrote off its mining asset with a book value of
$515,000.
19. SEGMENT INFORMATION
The Company's activities are conducted in one operating segment with all
activities relating to the sales and support of information technology. These
activities are carried out in two geographic segments, being Canada and the
United States.
As at December 31, 1997 and during the year ended December 31, 1997 all of
the Company's activities were carried out in the United States.
DECEMBER 31, 1998
-----------------------------------
CANADA U.S. TOTAL
---------- ------- ----------
Revenue.................................................. $2,436,658 $ -- $2,436,658
---------- ------- ----------
Equipment and leasehold improvements, goodwill and
employee and consultants base.......................... $9,046,685 $ 3,187 $9,049,872
========== ======= ==========
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FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
-----------------------------------
CANADA U.S. TOTAL
---------- ------- ----------
Revenue.................................................. $ 622,854 $ -- $ 622,854
---------- ------- ----------
Equipment and leasehold improvements, goodwill and
employee and consultants base.......................... $5,308,178 $ -- $5,308,178
========== ======= ==========
SEPTEMBER 30, 1999
-----------------------------------
CANADA U.S. TOTAL
---------- ------- ----------
Revenue.................................................. $5,036,715 $ -- $5,036,715
---------- ------- ----------
Equipment and leasehold improvements, goodwill and
employee and consultants base.......................... $8,964,840 $84,001 $9,048,841
========== ======= ==========
20. FINANCIAL INSTRUMENTS
Financial instruments comprising cash, accounts receivable, due from
related parties, bank indebtedness, accounts payable, accrued liabilities, due
to related parties, notes payable, stockholder advances, interest payable and
capital lease obligations payable approximate their fair value. It is
management's opinion that the Company is not exposed to significant currency or
credit risks arising from these financial instruments.
The Company's sales have been primarily derived from customers in Calgary,
Alberta, Canada. In addition, approximately 18% of revenues for the nine month
period ended September 30, 1999 were derived from one customer, as compared to
22% for the year ended December 31, 1998.
The estimated fair value of the Company's convertible debentures are as
follows:
DECEMBER 31, 1998
--------------------------------------
CARRYING VALUE ESTIMATED FAIR VALUE
-------------- --------------------
TK convertible debentures.......................... $2,375,530 $2,150,000
SEPTEMBER 30, 1999
--------------------------------------
CARRYING VALUE ESTIMATED FAIR VALUE
-------------- --------------------
TK convertible debentures.......................... $1,678,344 $2,703,286
Senior subordinated convertible promissory notes,
not subsequently converted....................... 591,826 1,123,420
Convertible debentures............................. 232,979 235,937
The above fair values have been calculated based on the estimated present
value of the principle and interest under the debenture plus the estimated fair
value of the conversion option (exclusive of the intrinsic value of the
conversion option and the detachable warrants at the issue date of the
debenture). Fair values have not been determined for debt that has been
converted to equity subsequent to September 30, 1999.
The fair value of the loan receivable from employee is nil given $250,000
of the loan is forgiven on a quarterly basis and the Company does not expect to
collect the loan balance by way of cash.
F-34
122
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is subject to interest rate risk to the extent of the interest
rate being charged on the various convertible debentures. The effective interest
rates realized by the Company, inclusive of the amounts relating to the non cash
value of conversion features and warrants associated with the debt are as
follows:
DECEMBER 31, 1998
--------------------------------------
STATED INTEREST RATE EFFECTIVE RATE
-------------------- --------------
TK convertible debentures............................ 10% 38%
SEPTEMBER 30, 1998
--------------------------------------
STATED INTEREST RATE EFFECTIVE RATE
-------------------- --------------
TK convertible debentures............................ 10% 38%
SEPTEMBER 30, 1999
--------------------------------------
STATED INTEREST RATE EFFECTIVE RATE
-------------------- --------------
TK convertible debentures............................ 10% 92%
Senior subordinated convertible promissory notes..... 8% 8%
Senior subordinated convertible promissory notes..... 8% 149%
Convertible debentures............................... 10% 44%
Convertible debentures (converted during the
period)............................................ 10% 30%
Convertible debentures (converted during the
period)............................................ 8% 35%
21. SUBSEQUENT EVENTS
(a) On October 15, 1999, the Company completed the acquisition of Micro
Visions. The remaining cash of $10,000,000 was paid and 7,200,000 common shares
were issued, including 1,200,000 common shares of contingent consideration which
had been achieved. The remaining 1,200,000 common share contingent consideration
will be paid if and when the remaining contingent criterion has been achieved.
(b) On November 5, 1999, the Company completed the acquisition of CNI. The
remaining cash of $3,510,000 was paid and 1,181,816 common shares were issued.
(c) During October and November, 1999, the Company completed a private
placement of $50,000,000 gross proceeds through the issuance of 9,090,909 common
shares and 2,372,727 common share purchase warrants. The warrants are
exercisable for up to five years at an exercise price of $8.50 per share. The
company received $30,000,000 upon initial closing. $13,000,000 was received on
November 5, 1999 after the satisfaction of conditions relating to the conversion
of certain existing debt (see notes 11 and 21). The remaining $7,000,000 was
received on November 12, 1999.
A finance fee of 6% or $3,000,000 was paid to the placement agent. The
Company also issued 909,091 common share purchase warrants to the placement
agent. The warrants are exercisable for up to five years at an exercise price of
$8.50 per share. Additional costs of the issue are expected to be $1,000,000.
(d) During the fourth quarter, the $15,000,000 of 8% senior subordinated
convertible promissory notes (see note 11) converted into 2,727,273 common
shares. An additional 711,811 common share purchase warrants were also issued.
The warrants are exercisable for up to five years at an exercise price of $8.50
per common share.
(e) Subsequent to September 30, 1999, 5,988,824 common shares were issued
in relation to the conversion of $5,090,500 of 8% senior subordinated
convertible promissory notes (see note 11). In
F-35
123
FUTURELINK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
addition, 3,517,933 common shares were issued on the exercise of 3,696,500
warrants primarily on a non cash basis. These warrants were issued in connection
with the original issuance of the promissory notes.
(f) Subsequent to September 30, 1999, 3,799,974 shares were issued on a non
cash basis relating to the exercise of 4,000,001 warrants. These warrants
included 2,000,000 previously issued as a placement fee in relation to the
issuance of 8% senior subordinated convertible promissory notes (see note 11),
as well as 2,000,001 previously issued for advisory services (see note 16).
(g) On November 29, 1999, the Company completed the acquisition of Async.
The remaining cash of $5,400,000 was paid and 1,298,705 common share were
issued.
On February 11, 2000 the Company entered into an agreement with SmallCaps
Online Group LLC to settle litigation commenced against it by SmallCaps.
SmallCaps had brought this action claiming fees for financial advisory services.
The settlement agreement obligates the Company to pay SmallCaps $5.0 million by
March 14, 2000. The Company is also obligated to issue to Small Caps warrants to
purchase 2,000,000 shares of common stock at $20.50 per share, 500,000 shares of
common stock at $8.50 per share and 500,000 shares of common stock at $22.50 per
share. The warrants are exercisable at any time prior to March 14, 2005 and are
subject to adjustment for stock splits, stock dividends, reorganizations, below
market issuances and similar transactions. The Company may be obligated to
register the shares underlying Small Caps' warrants.
(i) On January 20, 2000, the Company commenced a lawsuit against Cameron
Chell, its former chief executive officer, other former employees of the
Company, C Me Run Corp., a company organized by these former employees and
certain other defendants. The suit alleges that the defendants, while many were
employed by the Company, misappropriated plans to develop certain ASP services
in breach of fiduciary and contractual obligations. The Company seeks, among
other things, damages in the amount of approximately $54 million. On January 27,
2000, Mr. Chell filed a counterclaim for $28.7 million, alleging interference of
ongoing economic interests, defamation of character and damages concerning his
ability to exercise options he claims to hold in the Company. On January 31,
2000, C Me Run filed a counterclaim for approximately $84 million, alleging
conspiracy to cause economic harm, unlawful interference with its economic
interests, interference with contractual relations and abuse of process. On
January 26, 2000, Michael Chan commenced a lawsuit against the Company seeking
options to purchase 50,000 shares of common stock that he alleges Mr. Chell
promised him for services he allegedly provided to the Company or in the
alternative approximately $1,500,000. Mr. Chan also seeks punitive damages of
$300,000. On February 7, 2000, Mr. David Bollink, a former director of business
development, filed a counterclaim against us seeking 50,000 options that he
alleges was promised to him by the Company.
F-36
124
EXECUTIVE LAN MANAGEMENT, INC.,
DBA MICRO VISIONS
FINANCIAL STATEMENTS
F-37
125
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.
Orange County, California
November 17, 1999
F-38
126
EXECUTIVE LAN MANAGEMENT, INC.,
DBA MICRO VISIONS
BALANCE SHEETS
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
(UNAUDITED)
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
========== ========== ========== ==========
See accompanying notes.
F-39
127
EXECUTIVE LAN MANAGEMENT, INC.,
DBA MICRO VISIONS
STATEMENTS OF OPERATIONS
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
(UNAUDITED)
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 (loss) income........................ $ 538,000 $ 677,000 $ 576,000 $ (907,000)
========== =========== ========== ===========
See accompanying notes.
F-40
128
EXECUTIVE LAN MANAGEMENT, INC.,
DBA MICRO VISIONS
STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- ---------- ----------
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
=== ======= ========== ==========
See accompanying notes.
F-41
129
EXECUTIVE LAN MANAGEMENT, INC.,
DBA MICRO VISIONS
STATEMENTS OF CASH FLOWS
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
(UNAUDITED)
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
See accompanying notes.
F-42
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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 revenues are recognized upon delivery.
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.
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
F-43
131
EXECUTIVE LAN MANAGEMENT, INC.
DBA MICRO VISIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
improvements are amortized using the straight-line method over seven years.
Property and equipment were comprised of the following:
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
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
======== ========= ======== ==========
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash,
receivables, payables, and borrowings. The Company believes all the financial
instruments' recorded values approximate current values.
CONCENTRATION OF CREDIT RISK
The Company sells the majority of its products and provides services to
various customers, which include a variety of large companies and distributors
throughout the United States. In 1997, sales to the Company's two largest
customers accounted for 47% and 19% of total sales. Accounts receivable from
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
F-44
132
EXECUTIVE LAN MANAGEMENT, INC.
DBA MICRO VISIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
on all new customers. During 1998, the Company did not perform credit
evaluations on its customers, however, the Company required a twenty-five
percent deposit for its first time customers. The Company generally does not
require collateral on its accounts receivable.
ADVERTISING
The Company expenses advertising costs as incurred. These costs include
promotional literature, direct mailing brochures, telemarketing and trade shows.
Advertising expense for the years ended December 31, 1997 and 1998 was $11,000
and $106,000, respectively, and $71,000 and $80,000 for the nine months ended
September 30, 1998 and 1999, respectively.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. The Company
did not have any components of comprehensive income as defined by SFAS No. 130
for any period presented.
SEGMENTS OF A BUSINESS ENTERPRISE
Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS 131 superseded
SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the results of operations or
financial position of the Company. The Company views its business as a single
segment, a network service solution company, and therefore has no reportable
segments under FAS 131. All segment disclosures are included in or can be
derived from the Company's financial statements.
CERTAIN RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform to the current period presentation.
INTERIM FINANCIAL INFORMATION
The unaudited financial statements for the nine month period ended
September 30, 1998 included herein are unaudited; however, they contain all
normal recurring accruals and adjustments which, in the opinion of management,
are necessary to present fairly the consolidated financial position of the
Company at September 30, 1998 and the results of its operations and cash flows
for the nine months ended September 30, 1998.
F-45
133
EXECUTIVE LAN MANAGEMENT, INC.
DBA MICRO VISIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INCOME TAXES
Provision (benefit) for income taxes is comprised of the following:
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
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 $--
======== ======== ======== ==
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:
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
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)
========= ========= ========= =========
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-46
134
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:
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
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 $ --
======== ========= ========= =========
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:
1999..................................................... $ 117,000
2000..................................................... 382,000
2001..................................................... 267,000
2002..................................................... 182,000
2003..................................................... 91,000
----------
$1,039,000
==========
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-47
135
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-48
136
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
FINANCIAL STATEMENTS
F-49
137
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, 1998 and 1997 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, 1998 and 1997, 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-50
138
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---------- ----------
Current Assets
Cash..................................................... $ 37,628 $ 13,913
Accounts Receivable...................................... 1,060,736 1,077,401
Prepaid Federal Taxes.................................... 6,805 0
Inventory, at cost....................................... 206,672 229,783
---------- ----------
Total Current Assets............................. 1,311,840 1,321,096
---------- ----------
Property, Plant & Equipment
Property, Plant & Equipment, at cost..................... 226,832 209,409
Accumulated Depreciation................................. (182,534) (99,642)
---------- ----------
Total Property, Plant & Equipment................ 44,297 109,767
---------- ----------
Other assets
Lease Security Deposits.................................. 11,440 10,383
Deferred Tax Asset....................................... 14,635 7,923
---------- ----------
Total Other Assets............................... 26,075 18,306
---------- ----------
Total Assets..................................... $1,382,213 $1,449,169
========== ==========
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable......................................... $ 381,923 $ 605,072
Notes Payable, Current Portion (See Note 3).............. 509,381 402,564
Sales Tax Payable........................................ 34,224 23,389
Federal Income Taxes Payable............................. 0 13,900
State Franchise Taxes Payable............................ 584 3,031
Deferred Tax Liability................................... 0 1,055
---------- ----------
Total Current Liabilities........................ 926,112 1,049,011
---------- ----------
Notes Payable, Long Term (See Note 3).................... 17,119 41,899
---------- ----------
Total Liabilities................................ 943,231 1,090,910
---------- ----------
Stockholders' Equity
Common Stock, no par, 1,000,000 Shares Authorized, 10,000
Shares Issued and Outstanding......................... 10,000 10,000
Retained Earnings........................................ 428,981 348,258
---------- ----------
Total Stockholders' Equity....................... 438,981 358,258
---------- ----------
Total Liabilities and Equity..................... $1,382,213 $1,449,169
---------- ----------
F-51
139
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---------- ----------
Revenue
Net Sales................................................. $5,540,938 $6,439,637
Sales Discounts........................................... (2,703) (3,802)
Freight................................................... 30,003 40,645
---------- ----------
Total Revenue.......................................... 5,568,238 6,476,480
---------- ----------
Cost of Sales............................................... 3,179,433 4,308,540
Purchase Returns............................................ 0 (147)
---------- ----------
Gross Profit........................................... 2,388,805 2,168,087
General and Administrative Expenses......................... 2,229,931 1,964,094
---------- ----------
Net Income from Operations............................. 158,874 203,993
---------- ----------
Other Income and (Expense)
Miscellaneous Income...................................... 187 1,570
Interest Expense.......................................... (41,176) (44,092)
---------- ----------
Total Other Income and (Expense)....................... (40,989) (42,521)
---------- ----------
Earnings Before Income Taxes........................... 117,885 161,471
Provision for Income Taxes
Federal Income Taxes...................................... 24,885 43,337
State Franchise Taxes..................................... 12,277 14,863
---------- ----------
Net Income............................................. $ 80,723 $ 103,271
========== ==========
F-52
140
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ------- -------- --------
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
========= ======= ======== ========
See Independent Auditor's Report and Accompanying Notes
F-53
141
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
--------- ---------
Cash Flows from Operating Activities
Net Income................................................ $ 80,723 $ 103,271
Adjustments to Reconcile Net Income to Net Cash (Used)
Provided by Operating Activities
Depreciation........................................... 82,892 58,339
Deferred Income Tax.................................... (7,767) (9,931)
(Increase) Decrease In:
Accounts Receivable.................................... 16,664 (332,659)
Inventory.............................................. 23,111 (153,611)
Other Assets........................................... (1,057) 15
Prepaid Income Taxes................................... (6,805) 0
Increase (Decrease) In:
Accounts Payable....................................... (223,149) 169,757
Sales Tax Payable...................................... 10,835 16,855
Income Taxes Payable................................... (16,347) 3,992
--------- ---------
Net Cash (Used) by Operating Activities................ (40,899) (143,971)
--------- ---------
Cash Flows from Investing Activities
Acquisition of Property and Equipment..................... (17,423) (126,554)
--------- ---------
Net Cash (Used) by Investing Activities................ (17,423) (126,554)
--------- ---------
Cash Flows from Financing Activities Acquisition of Debt.... 410,000 618,707
Repayment of Debt......................................... (327,962) (364,387)
--------- ---------
Net Cash Provided by Financing Activities.............. 82,038 254,320
--------- ---------
Net Increase (Decrease) in Cash............................. 23,716 (16,205)
Cash at January 1, 1998 and 1997............................ 13,913 30,118
--------- ---------
Cash at December 31, 1998 and 1997.......................... $ 37,628 $ 13,913
========= =========
Cash paid for income taxes for the years ended December 31, 1998 and 1997 was
$68,081 and $51,210, respectively. Cash paid for interest for the years ended
December 31, 1998 and 1997 was $41,176 and $44,092, respectively.
F-54
142
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 is recognized when products are shipped, 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.
See Independent Auditor's Report
F-55
143
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
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, 1998 and 1997 consist of:
Hardware.................. 75,347
Software.................. 131,325
--------
Total................ $206,672
========
Hardware.................. 87,318
Software.................. 142,465
--------
Total................ $229,783
========
NOTE 4 -- LONG-TERM DEBT
Following is a summary of long-term debt at December 31, 1998 and 1997:
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............................................ $ 31,494 $ 47,934
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................................. 10,405 18,745
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................................. 0 2,808
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%.............. 484,601 374,976
--------- ---------
526,500 444,463
Less: Current maturities included in current liabilities.... (509,381) (402,564)
--------- ---------
$ 17,119 $ 41,899
========= =========
Following are maturities of long-term debt for each of the next two years:
Year ended December 31,
1999.................................................... $509,381
2000.................................................... 17,119
--------
$526,500
========
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
See Independent Auditor's Report
F-56
144
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
expiring 2004. Total rental expense recorded in the financial statements for the
years under these leases was $113,893 for 1998 and $96,514 for 1997. 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 $19,551 for 1998 and $24,775 for 1997. Future minimum
rental payments under these operating leases are as follows:
Year ended December 31,
1999................................................... $ 209,133
2000................................................... 245,329
2001................................................... 254,259
2002................................................... 211,691
2003................................................... 210,062
----------
$1,130,474
==========
NOTE 6 -- INCOME TAXES
Income tax expense for the year ended December 31, 1998 and 1997 is
comprised of the following:
1998 1997
--------------------------- ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------ ------- -------- ------
Federal.................................... 31,505 6,620 24,885 48,538 5,201 43,337
State...................................... 14,485 2,208 12,277 16,010 1,147 14,863
------ ----- ------ ------ ----- ------
45,990 8,828 37,162 64,548 6,348 58,200
====== ===== ====== ====== ===== ======
Deferred tax (liabilities) assets comprise the following at December 31,
1998 and 1997:
Depreciation................................................ 0 (1,055)
Gross deferred tax liabilities............................ 0 (1,055)
State taxes, net of federal benefit......................... 4,564 5,808
Depreciation................................................ 10,071 2,115
Gross deferred tax assets................................. 14,635 7,923
------- -------
Net deferred tax assets................................... $14,635 $ 6,868
======= =======
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, 1998 and 1997:
Federal statutory rate...................................... 25% 30%
State income taxes, net of federal tax benefit and
credits................................................... 7% 6%
--- ---
32% 36%
=== ===
See Independent Auditor's Report
F-57
145
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
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 1997, 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.
See Independent Auditor's Report
F-58
146
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, 1999 and 1998 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
/s/ JANIS M. PALERMO
--------------------------------------
Janis M. Palermo
Certified Public Accountant
Livermore, California
November 3, 1999
F-59
147
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
1999 1998
---------- ----------
ASSETS
Current Assets
Cash...................................................... $ 272,314 $ 146,665
Accounts Receivable....................................... 1,759,730 916,227
Inventory, at cost........................................ 201,807 263,537
---------- ----------
Total Current Assets................................. 2,233,850 1,326,428
---------- ----------
Property, Plant & Equipment
Property, Plant & Equipment, at cost...................... 242,570 209,409
Accumulated Depreciation.................................. (205,273) (166,729)
---------- ----------
Total Property, Plant & Equipment.................... 37,297 42,680
---------- ----------
Other Assets
Lease Security Deposits................................... 28,389 10,383
Deferred Tax Asset........................................ 18,188 10,976
---------- ----------
Total Other Assets................................... 46,577 21,359
---------- ----------
Total Assets......................................... $2,317,724 $1,390,468
========== ==========
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable.......................................... $1,143,632 $ 444,091
Notes Payable, Current Portion (See Note 3)............... 549,186 454,670
Sales Tax Payable......................................... 51,983 30,237
Payroll Taxes Payable..................................... 36,456 19,676
Federal Income Taxes Payable.............................. 11,970 354
State Franchise Taxes Payable............................. 2,516 2,329
---------- ----------
Total Current Liabilities............................ 1,795,743 951,358
---------- ----------
Notes Payable, Long Term (See Note 3)..................... 2,724 23,314
---------- ----------
Total Liabilities.................................... 1,798,467 974,672
---------- ----------
Stockholders' Equity
Common Stock, no par, 1,000,000 Shares Authorized, 10,000
Shares Issued and Outstanding.......................... 10,000 10,000
Retained Earnings......................................... 509,257 405,796
---------- ----------
Total Stockholders' Equity........................... 519,257 415,796
---------- ----------
Total Liabilities and Equity......................... $2,317,724 $1,390,468
========== ==========
See Accountant's Review Report and Accompanying Notes.
F-60
148
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
---------- ----------
Revenue
Net Sales................................................. $5,862,391 $3,962,871
Sales Discounts........................................... (1,012) (2,101)
Freight................................................... 38,068 17,055
---------- ----------
Total Revenue.......................................... 5,899,447 3,977,825
---------- ----------
Cost of Sales............................................... 3,850,358 2,229,366
---------- ----------
Gross Profit........................................... 2,049,089 1,748,459
General and Administrative Expenses......................... 1,899,508 1,630,072
---------- ----------
Net Income from Operations........................... 149,581 118,387
---------- ----------
Other Income and (Expense)
Miscellaneous Income...................................... -- 187
Interest Expense.......................................... (34,527) (28,362)
---------- ----------
Total Other Income and (Expense)....................... (34,527) (28,175)
---------- ----------
Earnings Before Income Taxes........................... 115,054 90,212
Provision for Income Taxes
Federal Income Taxes...................................... 20,663 22,117
State Franchise Taxes..................................... 14,116 10,558
---------- ----------
34,779 32,675
---------- ----------
Net Income............................................. 80,275 57,537
Retained Earnings at Beginning of Year...................... 428,982 348,259
---------- ----------
Retained Earnings at End of Year............................ $ 509,257 $ 405,796
========== ==========
F-61
149
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
STATEMENTS OF CASH FLOWS
SEPTEMBER 30, 1999 AND 1998
1999 1998
--------- ---------
Cash Flows from Operating Activities
Net Income................................................ $ 80,275 $ 57,537
Adjustments to Reconcile Net Income to Net
Cash (Used) Provided by Operating Activities
Depreciation......................................... 22,739 67,087
Deferred Income Tax.................................. (3,553) (3,053)
(Increase) Decrease In:
Accounts Receivable.................................. (698,995) 161,174
Inventory............................................ 4,865 (33,754)
Other Assets......................................... (16,949) --
Prepaid Income Taxes................................. 6,805 --
Increase (Decrease) In:
Accounts Payable..................................... 761,709 (160,981)
Sales Tax Payable.................................... 17,759 6,848
Payroll Taxes Payable................................ 36,456 19,676
Income Taxes Payable................................. 13,902 (15,303)
--------- ---------
Net Cash (Used) by Operating Activities........... 225,014 99,231
--------- ---------
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....................................... 42,819 54,914
Repayment of Debt......................................... (17,409) (21,393)
--------- ---------
Net Cash Provided by Financing Activities......... 25,410 33,521
--------- ---------
Net Increase (Decrease) in Cash............................. 234,686 132,752
Cash at January 1, 1999 and 1998............................ 37,628 13,913
--------- ---------
Cash at September 30, 1999 and 1998......................... $ 272,314 $ 146,665
========= =========
Cash paid for income taxes for the nine months ended September 30, 1999 and 1998
was $23,216 and $34,100, respectively. Cash paid for interest for the nine
months ended September 30, 1999 and 1998 was $34,527 and $28,362, respectively.
F-62
150
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 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 is recognized when products are shipped, 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.
See Accountant's Review Report
F-63
151
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 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 -- LONG-TERM DEBT
Following is a summary of long-term debt at September 30, 1999 and 1998:
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........................ $ 20,369 $ 35,604
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................................... 4,120 12,490
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.............. 527,420 429,890
--------- ---------
551,909 477,984
Less: Current maturities included in current liabilities.... (549,185) (454,670)
--------- ---------
$ 2,724 $ 23,314
========= =========
Following are maturities of long-term debt for each of the next two years:
Year ended September 30,
2000.................................................... $549,215
2001.................................................... 2,724
--------
$551,939
========
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 September
30, under these leases was $123,585 for 1999 and $87,835 for 1998. In addition,
on February 3, 1999 the Company signed a lease for additional space to
accommodate an expansion of the training facility. Occupancy is scheduled for
April, 1999. The Company also pays lease payments on an automobile effective
February, 1997 for 60 months. The automobile lease expense recorded in the
financial statements
See Accountant's Review Report
F-64
152
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
was $19,551 for 1999 and $24,775 for 1998. Future minimum rental payments under
these operating leases are as follows:
Year ended December 31,
1999................................................... $ 209,133
2000................................................... 245,329
2001................................................... 254,259
2002................................................... 211,691
2003................................................... 210,062
----------
$1,130,474
==========
NOTE 5 -- INCOME TAXES
Income tax expense for the period ended September 30, 1999 and 1998 is
comprised of the following:
1999 1998
----------------------------- -----------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------ ------- -------- ------
Federal.......................... 26,966 6,303 20,663 25,894 3,777 22,117
State............................ 11,366 (2,750) 14,116 10,889 331 10,558
------ ------ ------ ------ ----- ------
38,332 3,553 34,779 36,783 4,108 32,675
====== ====== ====== ====== ===== ======
Deferred tax (liabilities) assets comprise the following at September 30,
1999 and 1998:
Depreciation................................................ 0 0
Gross deferred tax liabilities............................ 0 0
State taxes, net of federal benefit......................... 3,650 3,423
Depreciation................................................ 14,538 7,553
------- -------
Gross deferred tax assets................................. 18,188 10,976
------- -------
Net deferred tax assets................................... $18,188 $10,976
======= =======
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, 1999 and 1998:
Federal statutory rate...................................... 28% 27%
State income taxes, net of federal tax benefit and
credits................................................... 3% 10%
--- ---
31% 37%
=== ===
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
See Accountant's Review Report
F-65
153
CN NETWORKS, INC.
DBA COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
insured financial institutions and as of September 30, 1999 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 periods ended
September 30, 1999 and 1998 the Company had one customer that individually had
an accounts receivable balance exceeding 10% of the total accounts receivable
balance.
F-66
154
ASYNC TECHNOLOGIES, INC. AND ASYNC TECHNICAL INSTITUTE, INC.
COMBINED FINANCIAL STATEMENTS
F-67
155
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
- ---------------------------------------------------------
Detroit, Michigan
February 9, 2000
F-68
156
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
1997 1998
-------- ----------
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
======== ==========
See accompanying notes.
(The accompanying notes are an integral part of these combined financial
statements.)
(See independent auditors' report.)
F-69
157
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
COMBINED STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
1997 1998
---------- ----------
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)
========== ==========
See accompanying notes.
(The accompanying notes are an integral part of these combined financial
statements.)
(See independent auditors' report.)
F-70
158
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
1997 1998
-------- --------
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
======== ========
See accompanying notes.
(The accompanying notes are an integral part of these combined financial
statements.)
(See independent auditors' report.)
F-71
159
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 10 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
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
See Independent Auditors' Report
F-72
160
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
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.
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
1997 1998
-------- --------
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
======== ========
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.
See Independent Auditors' Report
F-73
161
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:
1999...................................................... $ 31,212
2000...................................................... 105,834
2001...................................................... 110,283
2002...................................................... 61,610
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. SUBSEQUENT EVENTS
Effective August 30, 1999, Async Technologies, Inc. authorized 60,000
additional shares of common stock. The total authorized shares (120,000) are
divided into two equal classes of voting and non-voting shares. ATI also
authorized the issuance of 54,000 shares during September and October, 1999.
Effective October 7, 1999, ATI entered into a Plan of Merger with ATII.
Under the terms of the merger, all of the outstanding shares of ATII will be
converted into voting shares of ATI. Upon consummation of the merger, the
separate corporate existence of ATII shall terminate.
Effective September 7, 1999, and subject to the consummation of the above
described events, the Company entered into an Agreement and Plan of
Reorganization and Merger with Futurelink Michigan Acquisition Corp., a wholly
owned subsidiary of Futurelink Distribution Corp. (the "Parent"). Under the
terms of the agreement, all outstanding shares of the Company will be exchanged
for cash and common stock of the Parent. Upon consummation of the merger, the
separate corporate existence of the Company shall terminate.
See Independent Auditors' Report
F-74
162
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
February 3, 2000
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.
F-75
163
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1999
1998 1999
---------- ----------
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
========== ==========
See accompanying notes.
(The accompanying notes are an integral part of these combined financial
statements.)
(See independent public accountants review report.)
F-76
164
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
1998 1999
----------- -----------
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
=========== ===========
See accompanying notes.
(The accompanying notes are an integral part of these combined financial
statements.)
(See independent public accountants review report.)
F-77
165
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
1998 1999
--------- ---------
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
========= =========
See accompanying notes.
(The accompanying notes are an integral part of these combined financial
statements.)
(See independent public accountants review report.)
F-78
166
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
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
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
(See accountants' review report.)
F-79
167
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
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.
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
1998 1999
-------- --------
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
======== ========
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
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.
(See accountants' review report.)
F-80
168
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
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:
2003...................................................... $ 95,565
2004...................................................... 117,342
2005...................................................... 102,278
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.
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:
SHARES
----------------
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 limited voting rights........ 3,000
------
35,900
------
Ending balance of common stock.............................. 36,900
======
(See accountants' review report.)
F-81
169
ASYNC TECHNOLOGIES, INC.
ASYNC TECHNICAL INSTITUTE, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1999
An additional 16,200 shares of Class B Common Stock and 1,900 of Class C
Common Stock (with no voting rights) were issued to employees of the Company
during October, 1999.
11. 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-82
170
KNS HOLDINGS LIMITED
FINANCIAL STATEMENTS
F-83
171
REPORT OF THE INDEPENDENT AUDITORS
To the directors of KNS Holdings Limited
We have audited the combined balance sheets of KNS Holdings Limited as at
February 28, 1998 and February 28, 1999, and the related combined 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 combined financial position of KNS Holdings
Limited at February 28, 1998 and February 28, 1999 and the combined results of
its operations and its combined 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
December 17, 1999
F-84
172
KNS HOLDING LIMITED
COMBINED BALANCE SHEETS
AT FEBRUARY 28, 1999
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
NOTE 1998 1999 1999
---- ----------- ----------- ------------
(UNAUDITED)
CURRENT ASSETS
Cash......................................... $1,221,645 $ 539,999 $ 199,613
Marketable securities........................ 10 1,998,377 2,093,636 1,947,775
Accounts receivable and other................ 11 3,537,736 3,592,460 6,588,845
---------- ---------- ----------
6,757,758 6,226,095 8,736,233
Capital assets............................... 8 410,109 694,643 716,253
Investments.................................. 9 344,935 522,882 537,537
---------- ---------- ----------
755,044 1,217,525 1,253,790
---------- ---------- ----------
7,512,802 7,443,620 9,990,023
CURRENT LIABILITIES
Accounts payable and other................... 12 6,271,137 5,902,080 8,291,911
Accruals and deferred income................. 14 297,644 379,163 172,579
---------- ---------- ----------
6,568,781 6,281,243 8,464,490
Deferred taxes............................... 13 -- 12,959 16,469
Minority interest............................ -- 291,739 345,691
---------- ---------- ----------
6,568,781 6,585,941 8,826,650
STOCKHOLDERS EQUITY
Called up share capital...................... 237,096 237,096 237,096
Other reserves............................... 703,056 421,022 421,022
Retained earnings............................ 3,858 224,428 505,799
Cumulative translation adjustment............ 11 (24,867) (544)
---------- ---------- ----------
Total shareholders equity.................. 944,021 857,679 1,163,373
---------- ---------- ----------
$7,512,802 $7,443,620 $9,990,023
========== ========== ==========
- -------------------------
(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-85
173
KNS HOLDINGS LIMITED
COMBINED PROFIT AND LOSS ACCOUNTS
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
NOTE 1998 1999 1999
----- ------------ ----------- --------------
(UNAUDITED)
REVENUE................................. 2 & 5 $948,725 $18,381,901 $15,854,697
Expenses
Cost of service delivery................ 789,953 15,079,421 11,177,631
Selling general and administrative
expenses.............................. 130,177 2,611,009 4,172,883
-------- ----------- -----------
Income before interest and taxes........ 28,595 691,471 504,183
Interest expense........................ 6 (17,290) (336,892) (197,741)
Loss on disposal of fixed asset
investments........................... -- (283,387) --
Equity loss in investee................. -- (17,884) (62,903)
-------- ----------- -----------
Income before taxes..................... 3 11,305 53,308 243,539
Taxation on profit on ordinary
activities............................ 7 (7,447) (116,127) (96,765)
-------- ----------- -----------
Net income (loss) for the period........ $ 3,858 $ (62,819) $ 146,774
======== =========== ===========
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-86
174
KNS HOLDING LIMITED
COMBINED STATEMENT OF MOVEMENTS IN SHAREHOLDERS' FUNDS
AT FEBRUARY 28, 1999
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
Recognized profit/(loss).............................. $ 3,858 $(62,819) $ 146,774
Other movements:
New shares issued................................... 940,152 -- --
Exchange movements.................................. 11 (23,523) (119,415)
-------- -------- ----------
Total movements in the periods........................ 944,021 (86,342) 27,359
Shareholders' funds at March 1/January 1.............. -- 944,021 1,136,011
-------- -------- ----------
Shareholders' funds at February 28/September 30....... $944,021 $857,679 $1,163,370
======== ======== ==========
F-87
175
KNS HOLDING LIMITED
COMBINED CASH FLOW STATEMENTS
AT FEBRUARY 28, 1999
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
NOTES 1998 1999 1999
----- ------------ ----------- --------------
(UNAUDITED)
CASH FLOWS USED IN OPERATING ACTIVITIES......... 17 $ (62,432) $1,133,929 $(2,083,116)
--------- ---------- -----------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received............................... -- 57,528 18,047
Interest paid................................... -- (336,892) (197,742)
--------- ---------- -----------
Net Cash Outflow From Returns on Investments and
Servicing of Finance.......................... -- (279,364) (179,695)
--------- ---------- -----------
TAXATION
Corporation tax paid............................ -- (142,101) --
--------- ---------- -----------
Tax Paid........................................ -- (142,101) --
--------- ---------- -----------
INVESTING ACTIVITIES
Payments to acquire tangible fixed assets....... (87,190) (554,350) (625,435)
Receipts from sales of tangible fixed assets.... -- 47,499 10,008
Loan to fixed asset investment.................. (259,404) (193,394) --
--------- ---------- -----------
Net Cash Outflow From Investing Activities...... (346,594) (700,245) (615,427)
--------- ---------- -----------
Net Cash (Outflow)/Inflow Before Financing...... (409,026) 12,219 (2,878,238)
--------- ---------- -----------
FINANCING
Other loan advances............................. 959,246 -- 2,326,210
Loan repayments................................. -- (682,064) --
--------- ---------- -----------
Net Cash Inflow From Financing.................. 959,246 (682,064) 2,326,210
--------- ---------- -----------
Increase/(Decrease) in Cash and Cash
Equivalents................................... 17 $ 550,220 $ (669,845) $ (552,028)
========= ========== ===========
F-88
176
KNS HOLDING LIMITED
COMBINED CASH FLOW STATEMENTS
AT FEBRUARY 28, 1999
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
NOTES 1998 1999 1999
----- ------------ ----------- --------------
(UNAUDITED)
Increase/(decrease) in cash.............. $ 550,220 $ (669,845) $ (552,028)
Cash inflow from increase in loans....... (959,246) -- (2,326,210)
Repayment of loans....................... -- 682,064 --
----------- ----------- -----------
Change in net debt resulting from cash
flows.................................. (409,026) 12,219 (2,878,238)
Exchange differences..................... (7,888) 75,923 (8,673)
Other movements.......................... (2,406,528) -- --
----------- ----------- -----------
Movement in Net Debt..................... (2,823,442) 88,142 (2,886,911)
Net Debt at March 1...................... -- (2,823,442) (2,189,424)
----------- ----------- -----------
Net Debt at February 28.................. $(2,823,442) $(2,735,300) $(5,076,335)
=========== =========== ===========
F-89
177
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. The combined
financial statements include the accounts of the company and its subsidiary, KNS
Limited, from January 15, 1998, the date of acquisition. 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.
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:
Computers and other equipment............................... 25%
Motor vehicles.............................................. 25%
Office equipment............................................ 25%
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.
Research and development
Expenditure on research and development is written off in the year in which
it is incurred.
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-90
178
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
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. REVENUE
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:
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
United Kingdom................................... $937,320 $18,075,874 $15,617,657
Europe........................................... 3,845 109,738 94,814
Rest of world.................................... 6,707 138,761 124,179
-------- ----------- -----------
$947,872 $18,324,373 $15,836,650
======== =========== ===========
F-91
179
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
3. INCOME BEFORE TAXES
Pretax income is stated after charging:
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
Depreciation of tangible fixed assets............. $22,489 $213,227 $106,181
Rent on buildings held under operating lease...... 7,427 184,843 144,171
Hire on other assets.............................. 2,510 8,395 8,509
Exchange loss..................................... 1,934 54,822 25,331
Auditors' remuneration:
-- audit services............................... $ 2,736 $ 13,135 $ 15,422
4. DIRECTORS AND EMPLOYEES
Staff costs during the period were as follows:
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
Wages and salaries................................ $286,351 $2,724,882 $2,253,952
Value of benefits in kind......................... 21,936 211,746 35,176
Social security costs............................. 29,834 277,627 229,646
Other pension costs............................... 12,586 121,923 117,890
-------- ---------- ----------
$350,707 $3,336,178 $2,636,664
======== ========== ==========
The average weekly number of employees of the company, included above, was
as follows:
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
NO NO NO
------------ ----------- --------------
(UNAUDITED)
Office and management............................. 5 5 5
Production and sales.............................. 19 34 35
-- -- --
24 39 40
== == ==
F-92
180
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
Remuneration in respect of directors of the company, included above, was
payable by the company as follows:
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
Emoluments........................................ $63,051 $754,571 $248,723
Pension contributions............................. 2,579 26,394 48,883
------- -------- --------
$65,630 $780,965 $297,606
======= ======== ========
Pension contributions are payable under defined contributions schemes on
behalf of three directors.
PERIOD ENDED YEAR ENDED
FEBRUARY 28 FEBRUARY 28
1998 1999
------------ -----------
Highest paid director..................................... $ $
Emoluments................................................ 21,466 256,199
Pension contributions..................................... 789 8,303
------- --------
$22,255 $264,502
======= ========
5. OTHER INCOME
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
Loan interest receivable.................. $853 $33,311 $18,047
Bank interest receivable.................. -- 24,217 --
---- ------- -------
$853 $57,528 $18,047
==== ======= =======
6. INTEREST PAYABLE AND SIMILAR CHARGES
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
Loan interest payable............................. $17,290 $334,347 $197,741
======= ======== ========
F-93
181
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
7. TAXATION ON PROFIT ON ORDINARY ACTIVITIES
The tax charge on the profit on ordinary activities for the year was as
follows:
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
UK Corporation tax................................ $7,447 $103,168 $93,255
Deferred tax...................................... -- 12,959 3,510
------ -------- -------
$7,447 $116,127 $96,765
====== ======== =======
8. TANGIBLE FIXED ASSETS
OFFICE
COMPUTERS EQUIPMENT,
AND OTHER MOTOR FIXTURES &
EQUIPMENT VEHICLES FITTINGS TOTAL
--------- -------- ---------- ----------
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 September 30, 1999 (unaudited)......... $218,433 $371,793 $126,027 $ 716,253
======== ======== ======== ==========
F-94
182
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
9. INVESTMENTS
LOAN TO
INVESTMENT FIXED ASSET
IN SHARES INVESTMENT TOTAL
---------- ----------- --------
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 September 30, 1999 (unaudited)....................... $99 $537,438 $537,537
=== ======== ========
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.
10. MARKETABLE SECURITIES
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
----------- ----------- ------------
(UNAUDITED)
Goods for resale..................................... $1,998,377 $2,093,636 $1,947,775
========== ========== ==========
11. ACCOUNTS RECEIVABLE
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
----------- ----------- ------------
(UNAUDITED)
Trade debtors........................................ $3,457,846 $3,281,822 $5,423,395
Prepayments.......................................... 79,890 221,624 226,844
Other debtors........................................ -- 89,014 938,606
---------- ---------- ----------
$3,537,736 $3,592,460 $6,588,845
========== ========== ==========
12. ACCOUNTS PAYABLE AND OTHER: AMOUNTS FALLING DUE WITHIN ONE YEAR
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
----------- ----------- ------------
(UNAUDITED)
Trade creditors...................................... $2,136,434 $2,490,899 $2,041,133
Other creditors...................................... 4,045,087 3,275,299 5,937,766
Social security & other taxes........................ -- 86,801 103,628
Corporation tax...................................... 89,616 49,082 209,384
---------- ---------- ----------
$6,271,137 $5,902,081 $8,291,911
========== ========== ==========
F-95
183
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
13. PROVISIONS FOR LIABILITIES AND CHARGES
Deferred taxation provided in the accounts and amounts not provided are as
follows:
Provided
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
----------- ----------- ------------
(UNAUDITED)
Capital allowances in advance of depreciation........ $ -- $12,959 $16,469
======= ======= =======
Not provided
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
----------- ----------- ------------
(UNAUDITED)
Capital allowances in advance of depreciation........ $(14,069) $ -- $ --
======== ========== ==========
14. ACCRUALS AND DEFERRED INCOME
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
----------- ----------- ------------
(UNAUDITED)
Accruals............................................. $161,047 $310,053 $ 76,202
Deferred income...................................... 136,597 69,110 96,377
-------- -------- --------
$297,644 $379,163 $172,579
======== ======== ========
15. SHARE CAPITAL
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
----------- ----------- ------------
(UNAUDITED)
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
======== ======== ========
F-96
184
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
16. MOVEMENTS IN RESERVES
CUMULATIVE TOTAL
SHARE OTHER PROFIT & TRANSLATION SHAREHOLDERS'
CAPITAL RESERVES LOSS ACCOUNT ADJUSTMENT FUNDS
-------- --------- ------------ ----------- -------------
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 September 30, 1999
(unaudited)............... $237,096 $ 421,022 $505,799 $ (544) $1,163,373
======== ========= ======== ======== ==========
17. NOTES TO THE STATEMENT OF CASH FLOWS
(a) Reconciliation of operating profit to net cash inflow from operating
activities
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
Operating profit.................................. $ 22,743 $ 633,945 $ 486,138
Depreciation...................................... 22,489 213,227 106,181
Profit on sale of fixed assets.................... -- (11,667) (10,008)
(Increase)/decrease in debtors.................... 507,848 (154,152) (2,226,103)
(Increase)/decrease in stocks..................... (560,965) (155,256) 48,895
Increase/(decrease) in creditors.................. (54,547) 607,832 (488,219)
--------- ---------- -----------
Net cash inflow from operating activities......... $ (62,432) $1,133,929 $(2,083,116)
========= ========== ===========
(b) Analysis of net debt
AT AT
MARCH 1 CASH EXCHANGE FEBRUARY 28
1998 FLOW DIFFERENCES 1999
----------- --------- ----------- -----------
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)
=========== ========= ======== ===========
F-97
185
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
AT AT
JANUARY 1 CASH EXCHANGE SEPTEMBER 30
1999 FLOW DIFFERENCES 1999
----------- ----------- ----------- ------------
Cash at bank and in hand............... $ 765,343 $ (552,028) $(13,702) $ 199,613
Loans.................................. (2,954,767) (2,326,210) 5,029 (5,275,948)
----------- ----------- -------- -----------
$(2,189,424) $(2,878,238) $ (8,673) $(5,076,335)
=========== =========== ======== ===========
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.
- 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:
1998 1999
------------------- --------------------
LAND & LAND &
BUILDINGS OTHER BUILDINGS OTHER
--------- ------ --------- -------
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
======== ====== ======== =======
F-98
186
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
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.
PROFIT FOR THE PERIOD
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
Profit/(loss) for the period as reported in the
consolidated profit and loss account under UK
GAAP............................................ $3,858 $(62,819) $146,774
------ -------- --------
ADJUSTMENTS:
Deferred taxation
Methodology..................................... 1,169 -- --
------ -------- --------
Net income as adjusted to accord with US GAAP..... $5,027 $(62,819) $146,774
====== ======== ========
F-99
187
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
INVESTED CAPITAL
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
Invested capital as reported in the consolidated
balance sheet under UK GAAP..................... $944,021 $857,679 $1,163,373
-------- -------- ----------
ADJUSTMENTS:
Deferred taxation
Methodology..................................... 14,069 -- --
-------- -------- ----------
Invested capital as adjusted to accord with US
GAAP............................................ $958,090 $857,679 $1,163,373
======== ======== ==========
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, 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:
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
Cash (outflow)/inflow from operating activities... $ (62,432) $ 712,464 $(2,262,812)
Cash outflow on investing activities.............. (346,594) (700,245) (615,426)
Cash inflow/(outflow) from financing activities... 959,246 (682,064) 2,326,210
--------- --------- -----------
Increase/(Decrease) in cash and cash
equivalents..................................... $ 550,220 $(669,845) $ (552,028)
========= ========= ===========
F-100
188
KNS HOLDING LIMITED
NOTES TO THE ACCOUNTS (CONTINUED)
AT FEBRUARY 28, 1999
COMBINED 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.
DEFERRED TAXATION
The analysis of the deferred taxation balance under US GAAP is as follows:
PERIOD ENDED YEAR ENDED 9 MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 SEPTEMBER 30
1998 1999 1999
------------ ----------- --------------
(UNAUDITED)
Deferred taxation liabilities
Excess of book value over taxation value of fixed
assets........................................... $ -- $(12,959) $(16,469)
------- -------- --------
-- (12,959) (16,469)
------- -------- --------
Deferred taxation assets
Excess of taxation value over book value of fixed
assets........................................... 14,069 -- --
------- -------- --------
14,069 -- --
------- -------- --------
Net deferred taxation asset/(liability)............... $14,069 $(12,959) $(16,469)
======= ======== ========
F-101
189
VERTICAL SOFTWARE, INC.
FINANCIAL STATEMENTS
F-102
190
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, 1996, 1997 and 1998, and the related statements of
operations, 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 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, 1996, 1997 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
McLean, Virginia
January 7, 2000
F-103
191
VERTICAL SOFTWARE, INC.
BALANCE SHEETS
DECEMBER 31,
------------------------------------ SEPTEMBER 30,
1996 1997 1998 1999
---------- ---------- ---------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash..................................... $ 244,541 $ 397,400 $ 206,178 $ 260,080
Accounts receivable:
Trade................................. 573,180 603,912 1,693,700 2,038,350
Related party......................... -- -- 51,056 6,286
Inventory................................ 185,818 76,285 270,424 230,896
Employee advances and prepaid expenses... 13,130 13,552 12,092 20,552
---------- ---------- ---------- ----------
Total current assets....................... 1,016,669 1,091,149 2,233,450 2,556,164
Property and equipment, net................ 105,184 105,481 157,193 154,403
Other asset................................ 5,547 5,547 5,547 5,547
---------- ---------- ---------- ----------
Total assets..................... $1,127,400 $1,202,177 $2,396,190 $2,716,114
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand note payable...................... $ 245,000 $ -- $ -- $ --
Accounts payable:
Trade................................. 407,187 139,882 526,443 623,274
Related party......................... -- -- 17,395 12,111
Accrued expenses......................... 67,215 109,407 241,675 289,487
Customer deposits........................ 28,123 110,916 148,026 143,944
Deferred revenue......................... 101,906 204,132 381,710 262,380
Demand notes payable -- related
parties............................... 94,359 92,957 201,623 116,622
---------- ---------- ---------- ----------
Total current liabilities........... 943,790 657,294 1,516,872 1,447,818
STOCKHOLDERS' EQUITY:
Common stock -- $1 par value, 100,000
shares authorized, 102 shares issued
and outstanding....................... 102 102 102 102
Additional paid-in capital............... 898 898 898 898
Retained earnings........................ 182,610 543,883 878,318 1,267,296
---------- ---------- ---------- ----------
Total stockholders' equity.......... 183,610 544,883 879,318 1,268,296
---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity........................... $1,127,400 $1,202,177 $2,396,190 $2,716,114
========== ========== ========== ==========
See accompanying notes.
F-104
192
VERTICAL SOFTWARE, INC.
STATEMENTS OF OPERATIONS
NINE MONTHS
DECEMBER 31, ENDED
-------------------------------------- SEPTEMBER 30,
1996 1997 1998 1999
---------- ---------- ---------- -------------
(UNAUDITED)
Net revenues:
Equipment sales....................... $2,445,747 $3,220,679 $6,774,585 $5,833,290
Installation, services, and other
fees............................... 925,199 1,897,846 3,014,287 3,624,332
---------- ---------- ---------- ----------
Total net revenues................. 3,370,946 5,118,525 9,788,872 9,457,622
Costs and expenses:
Costs of equipment sales.............. 1,966,537 2,501,350 5,382,931 4,695,712
Costs of services and other fees...... 72,609 167,753 246,964 243,216
Sales and marketing................... 177,666 192,573 360,156 516,672
General and administrative............ 933,170 1,406,058 2,499,222 2,720,098
Depreciation.......................... 27,582 31,323 37,737 30,052
---------- ---------- ---------- ----------
Total costs and expenses........... 3,177,564 4,299,057 8,527,010 8,205,750
---------- ---------- ---------- ----------
Income from operations.................. 193,382 819,468 1,261,862 1,251,872
Other expense:
Loss on disposal of equipment......... (3,348) (5,073) (11,115) (242)
Interest income (expense), net........ (28,975) (3,818) 15,888 (5,152)
---------- ---------- ---------- ----------
(32,323) (8,891) 4,773 (5,394)
---------- ---------- ---------- ----------
Net income.............................. $ 161,059 $ 810,577 $1,266,635 $1,246,478
========== ========== ========== ==========
Unaudited pro forma information:
Pro forma income tax expense.......... $ 62,274 $ 313,353 $ 482,601 $ 479,844
========== ========== ========== ==========
Pro forma net income.................. $ 98,785 $ 497,224 $ 784,034 $ 766,634
========== ========== ========== ==========
See accompanying notes.
F-105
193
VERTICAL SOFTWARE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY
------ ---------- ---------- -------------
Balance, December 31, 1995................. $102 $898 $ 79,551 $ 80,551
Net income............................... -- -- 161,059 161,059
Distributions............................ -- -- (58,000) (58,000)
---- ---- ---------- ----------
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 (Unaudited)................... -- -- 1,246,478 1,246,478
Distributions (Unaudited)................ -- -- (857,500) (857,500)
---- ---- ---------- ----------
Balance, September 30, 1999
(Unaudited).............................. $102 $898 $1,267,296 $1,268,296
==== ==== ========== ==========
See accompanying notes.
F-106
194
VERTICAL SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------- SEPTEMBER 30,
1996 1997 1998 1999
--------- --------- ----------- -------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income.................................... $ 161,059 $ 810,577 $ 1,266,635 $1,246,478
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................ 27,582 31,323 37,737 30,052
Loss on disposal of equipment............... 3,348 5,073 11,115 242
Changes in operating assets and liabilities:
Accounts receivable -- trade............. (254,132) (30,732) (1,089,788) (344,650)
Accounts receivable -- related party..... -- -- (51,056) 44,770
Inventory................................ (149,181) 109,533 (194,139) 39,528
Employee advances and prepaid expenses... (2,165) (422) 1,460 (8,460)
Accounts payable -- trade................ 347,870 (267,305) 386,561 96,831
Accounts payable -- related party........ -- -- 17,395 (5,284)
Accrued expenses......................... 32,949 42,192 132,268 47,812
Customer deposits........................ 24,750 82,793 37,110 (4,082)
Deferred revenue......................... 69,583 102,226 177,578 (119,330)
--------- --------- ----------- ----------
Net cash provided by operating
activities.......................... 261,663 885,258 732,876 1,023,907
INVESTING ACTIVITIES
Proceeds from sale of equipment............... -- -- 818 --
Purchases of property and equipment........... (35,994) (36,693) (101,382) (27,504)
--------- --------- ----------- ----------
Net cash used in investing activities......... (35,994) (36,693) (100,564) (27,504)
FINANCING ACTIVITIES
Net borrowings (repayments) on credit line.... 40,000 (245,000) -- --
Proceeds from issuance of demand notes
payable -- related parties.................. 24,254 42,863 184,045 --
Payments on demand notes payable -- related
parties..................................... -- (44,265) (75,379) (85,001)
Distributions to stockholders'................ (58,000) (449,304) (932,200) (857,500)
--------- --------- ----------- ----------
Net cash provided by (used in) financing
activities.................................. 6,254 (695,706) (823,534) (942,501)
--------- --------- ----------- ----------
Net increase (decrease) in cash............... 231,923 152,859 (191,222) 53,902
Cash at beginning of period................... 12,618 244,541 397,400 206,178
--------- --------- ----------- ----------
Cash at end of period......................... $ 244,541 $ 397,400 $ 206,178 $ 260,080
========= ========= =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest........................ $ 5,000 $ 13,000 $ 8,000 $ 13,000
========= ========= =========== ==========
See accompanying notes.
F-107
195
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.
UNAUDITED FINANCIAL INFORMATION
All disclosures and balances pertaining to the nine months ended September
30, 1999 in the accompanying footnotes are unaudited.
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 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. The Company also offers
maintenance contracts for technical support services that are generally paid for
in
F-108
196
VERTICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
advance by customers. The Company defers recognition of revenue on these advance
payments and amortizes 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, 1996, 1997, and 1998 advertising and promotion costs were
$1,016, $12,788, and $56,845, respectively. For the nine months ended September
30, 1999, advertising and promotion costs were $65,910.
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, 1996, 1997 and 1998, and the nine months ended
September 30, 1999, four of the Company's clients comprised approximately 35%,
34%, 39%, and 30%, 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.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("Statement No. 130"), Comprehensive
Income, which was required to be adopted in the year ended December 31, 1998.
Statement No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in the financial statements, and (b)
display the accumulated
F-109
197
VERTICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the Statement of Stockholders' Equity. The
adoption of Statement No. 130 did not have any effect on the Company's financial
statements as the Company does not have any elements of comprehensive income.
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
financial reports to stockholders. The Company has only one reportable segment,
system integration and information technology services.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
-------------------------------- SEPTEMBER 30,
1996 1997 1998 1999
-------- -------- -------- -------------
Furniture, fixtures, and office equipment... $131,784 $152,017 $204,804 $229,336
Vehicles.................................... 23,339 23,339 50,308 50,308
Other....................................... 6,173 5,165 4,874 6,928
-------- -------- -------- --------
161,296 180,521 259,986 286,572
Less accumulated depreciation............... 56,112 75,040 102,793 132,169
-------- -------- -------- --------
$105,184 $105,481 $157,193 $154,403
======== ======== ======== ========
4. ACCRUED EXPENSES
Accrued expenses consist of the following
DECEMBER 31,
------------------------------- SEPTEMBER 30,
1996 1997 1998 1999
------- -------- -------- -------------
Payroll and related costs.................... $40,665 $ 89,225 $176,505 $225,912
Sales tax payable............................ 21,273 -- 38,072 34,032
Employee benefits payable.................... 5,277 20,182 27,098 29,543
------- -------- -------- --------
Total accrued expenses..................... $67,215 $109,407 $241,675 $289,487
======= ======== ======== ========
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 $167,777
for the year ended December 31, 1998 and for the nine months ended September 30,
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
with a party related by common ownership, for travel services. The agreement
terms require monthly reimbursements of $1,000 for the Company's portion of
expenses.
F-110
198
VERTICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company also has $94,359, $92,957, $201,623, and $116,622 of unsecured
demand notes payable to related parties at December 31, 1996, 1997, 1998, and at
September 30, 1999, respectively. These notes bear interest in a range of 7 1/2%
to 8%, per annum. Interest expense related to the notes was $7,850, $9,834,
$8,344, and $19,583 for the years ended December 31, 1996, 1997, and 1998, and
for the nine months ended September 30, 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. At December 31, 1996
$245,000 was outstanding against the line of credit. No borrowings related to
this line of credit were outstanding as of December 31, 1997, 1998, and
September 30, 1999.
During 1998, the Company also 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, 1997, 1998,
and September 30, 1999.
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, 1996, 1997
and 1998 were $5,277, $15,945 and $28,051, respectively. No contributions were
made to this plan during the nine months ended September 30, 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 nine months
ended September 30, 1999, were $37,778.
The Company intends to make all future contributions to the 401K 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 $68,266, $70,280 and $96,919
for the years ended December 31, 1996, 1997 and 1998, 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
F-111
199
VERTICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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:
1999..................................................... $ 107,118
2000..................................................... 181,056
2001..................................................... 190,476
2002..................................................... 186,472
2003..................................................... 192,072
Thereafter............................................... 1,515,890
----------
Total.................................................. $2,373,084
==========
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"), 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, 1995, the Company would have had pro
forma federal and state income tax expense of $62,274, $313,353, $482,601, and
$479,844 for the years ended 1996, 1997 and 1998, and for the nine months ended
September 30, 1999, respectively. The Company would have had pro forma net
deferred tax liabilities of approximately $10,000, $46,000, $91,000, and
$141,000 at December 31, 1996, 1997, 1998, and September 30, 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-112
200
MICROLAN SYSTEMS, INC.
DBA MADISON TECHNOLOGY GROUP
FINANCIAL STATEMENTS
F-113
201
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 1997 and the related
statement 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 audited
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 Microlan Systems Inc. "DBA"
Madison Technology Group as of December 31, 1998 and 1997, and the results of
its operations and cash flows for the years then ended in conformity with
generally accepted accounting principles.
JOEL E. SAMMET & CO.
Certified Public Accountants
New York, New York
January 18, 2000
F-114
202
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
---------- ----------
ASSETS
Current Assets
Cash and cash equivalents (Note 3)........................ $ 53,572 $ 29,159
Accounts receivable, less allowance for doubtful accounts
of $40,149 in 1998 (Note 2)............................ 1,964,688 2,373,507
Inventory -- at cost (Note 2)............................. 278,747 59,415
Due from related parties.................................. 16,204 4,116
Other current assets...................................... 6,789 487
---------- ----------
Total Current Assets................................... 2,320,000 2,466,684
---------- ----------
Property and Other Assets
Property and equipment (net of accumulated depreciation of
$177,647 and $108,510)................................. 238,509 241,653
Other assets.............................................. 30,000 40,000
---------- ----------
Total Property, Equipment and Other Assets............. 268,509 281,653
---------- ----------
Total Assets...................................... $2,588,509 $2,748,337
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash overdraft............................................ $ 0 $ 42,832
Line of credit (Note 4)................................... 950,000 750,000
Loans payable -- due to related parties (Note 5).......... 150,000 240,539
Accounts payable.......................................... 742,755 1,037,712
Accrued purchases and expenses............................ 390,000 184,744
Other current liabilities................................. 0 86,506
---------- ----------
Total Current Liabilities.............................. 2,232,755 2,342,333
---------- ----------
Shareholders' Equity
Capital stock, 500 shares authorized, 50 shares issued and
outstanding............................................ 20,863 20,863
Retained earnings......................................... 334,891 385,141
---------- ----------
Total Shareholders' Equity............................. 355,754 406,004
---------- ----------
Total Liabilities and Shareholders' Equity........ $2,588,509 $2,748,337
========== ==========
See the Accompanying Independent Auditor's Report and Notes to Financial
Statements.
F-115
203
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---------- ----------
Revenue..................................................... $5,798,124 $6,204,711
Cost of sales............................................... 2,619,991 3,254,848
Cost of service and delivery................................ 1,290,483 1,060,304
Selling, general and administrative expenses................ 1,779,576 1,663,296
---------- ----------
Income from operations...................................... 108,074 226,263
Interest income............................................. 1,947 1,383
Interest expense............................................ 99,521 52,922
---------- ----------
Income before income taxes.................................. 10,500 174,724
Provision for State and City taxes.......................... 7,581 14,088
---------- ----------
Net Income.................................................. $ 2,919 $ 160,636
========== ==========
See the Accompanying Independent Auditor's Report and Notes to Financial
Statements.
F-116
204
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
Balances as of December 31, 1996................... 50 $20,863 $283,725 $304,588
Net income......................................... 160,636 160,636
Distribution to shareholders....................... (59,220) (59,220)
-- ------- -------- --------
Balances as of December 31, 1997................... 50 20,863 385,141 406,004
Net income......................................... 2,919 2,919
Distribution to shareholders....................... (53,169) (53,169)
-- ------- -------- --------
Balances as of December 31, 1998................... 50 $20,863 $334,891 $355,754
== ======= ======== ========
See the Accompanying Independent Auditor's Report and Notes to Financial
Statements.
F-117
205
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
--------- -----------
Cash Flows From Operating Activities:
Net income................................................ $ 2,919 $ 160,636
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for losses on accounts receivable............ 40,149 0
Depreciation........................................... 69,137 51,546
(Increase) decrease in operating assets:
Inventory............................................ (219,332) 315,207
Accounts receivable.................................. 368,670 (1,051,114)
Due from related parties............................. (12,088) 0
Other current assets................................. 3,698 7,425
Increase (decrease) in operating liabilities:
Accounts payable..................................... (294,957) (19,204)
Accrued purchases and expenses......................... 205,256 120,368
Other current liabilities............................ (86,506) (75,350)
--------- -----------
Net Cash Provided (Used) by Operating
Activities...................................... 76,946 (490,486)
--------- -----------
Cash Flows (Used by) Investing Activities:
Purchase of computers, office equipment and leasehold
improvements........................................... (65,993) (256,798)
--------- -----------
Cash Flows From (Used in) Financing Activities:
Proceeds from line of credit.............................. $ 200,000 $ 500,000
Proceeds (payments) of loans from shareholders and related
party.................................................. (90,539) 240,539
Distributions to shareholders............................. (53,169) (59,220)
--------- -----------
Net Cash Provided by Financing Activities......... 56,292 681,319
--------- -----------
Net increase (decrease) in cash............................. 67,245 (65,965)
Cash at January 1, 1998 and 1997............................ (13,673) 52,292
--------- -----------
Cash at December 31, 1998 and 1997.......................... $ 53,572 $ (13,673)
========= ===========
Cash paid for income taxes for the years ended December 31, 1998 and 1997 was
$14,325 and $9,932, respectively. Cash paid for interest for the years ended
December 31, 1998 and 1997 was $96,978 and $41,149, respectively.
See the Accompanying Independent Auditor's Report and Notes to Financial
Statements.
F-118
206
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 is recognized when products are shipped and training revenue is
recognized when performed. Income from service contracts is recognized over the
life of the contract on a pro rata basis. Losses on returns and contract costs
are recorded when they occur.
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 at December 31, 1998 of $40,149. There is no
allowance for doubtful accounts at December 31, 1997.
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
See the Accompanying Independent Auditor's Report.
F-119
207
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
and city taxes calculated at the greater of minimum, regular or alternative tax
methods have been provided for in the financial statements.
Deferred Service Contract Income
The Company sells service contracts which may cover a period of time of one
year or more. At December 31, 1997 several service contracts were prepaid.
Management determines deferred service contract income based upon the contract
period.
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 1997, the Company held a
certificate of deposit of $30,538 and $29,159, 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 18, 1999. 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 $750,000 at December 31, 1998
and 1997, respectively. Interest is payable monthly at 1.50% over the bank's
prime rate which amounted to 10.00% and 9.25% at December 31, 1998 and 1997,
respectively. As of December 31, 1998 and 1997, outstanding borrowings under the
line of credit are $950,000 and $750,000, respectively. Loans payable to
shareholders are subordinated to this time secured loan.
NOTE 5 -- LOANS PAYABLE -- RELATED PARTIES
Loans payable to shareholders and related party consists of borrowings for
working capital purposes and are summarized as follows:
DECEMBER 31,
--------------------
1998 1997
-------- --------
Shareholders........................................... $150,000 $132,703
Related Party.......................................... 0 107,836
-------- --------
$150,000 $240,539
======== ========
Loans payable to shareholders are unsecured and bear interest at a rate of
8.5%. A loan payable to the father of the shareholders of the Company was also
unsecured and bore interest at a rate of 10%. This loan was paid back in 1998.
Loans payable to shareholders are subordinated to the bank line of credit.
See the Accompanying Independent Auditor's Report.
F-120
208
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 6 -- RELATED PARTY TRANSACTIONS
During 1998 and 1997, 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, the Company shared office space with these affiliated
companies, and charged overhead, primarily for rent and shared administrative
salaries.
Following is a summary of transactions and balances with these affiliated
companies for 1998 and 1997:
1998 1997
-------- -------
Sales....................................................... $435,558 $80,732
======== =======
Accounts receivable (included in the accompanying balance
sheets)................................................... $ 72,102 $80,732
======== =======
Due from affiliated company (included in the accompanying
balance sheets)........................................... $ 16,204 $ 4,116
======== =======
Overhead charged (included as a reduction to general and
administrative expenses)
Madison Consulting Resources, Inc........................... $202,912
Madison Consulting Resources NJ, Inc........................ 15,291
-------- -------
$218,203 $ 0
======== =======
NOTE 7 -- 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 $ 41,067 for 1998 and 1997, respectively.
Future minimum rental payments at December 31, 1998, under this operating
lease is as follows:
Year ended December 31,
1999................................................... $ 148,800
2000................................................... 148,800
2001................................................... 148,800
2002................................................... 148,800
2003................................................... 148,800
Thereafter............................................. 499,100
----------
$1,243,100
==========
See the Accompanying Independent Auditor's Report.
F-121
209
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 8 -- INCOME TAXES
Income tax expense for the years ended December 31, 1998 and 1997 is
comprised of the following:
1998 1997
------ -------
New York State Franchise tax.............................. $ 325 $ 325
New York City corporation tax............................. 7,256 13,763
------ -------
$7,581 $14,088
====== =======
NOTE 9 -- 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 1997, respectively.
NOTE 10 -- 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 1997, 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, 1997, the
Company had one customer which had an accounts receivable balance of
approximately 30% 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
1997, respectively.
F-122
210
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
To the Board of Directors
Microlan Systems, Inc.
"DBA" Madison Technology Group
New York, New York
We have reviewed the accompanying balance sheet of Microlan Systems, Inc.
"DBA" Madison Technology Group as of September 30, 1999 and 1998 and the related
statement of income, 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 Microlan Systems, Inc. "DBA" Madison Technology Group.
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.
Our review was made for the purpose of expressing limited assurance that
there are no material modifications that should be made to the financial
statements in order for them to be in conformity with generally accepted
accounting principles.
JOEL E. SAMMET & CO.
Certified Public Accountants
New York, New York
January 27, 2000
F-123
211
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
1999 1998
---------- ----------
ASSETS
Current Assets
Cash and cash equivalents (Note 3)........................ $ 67,090 $ 46,159
Accounts receivable (Net of allowance for doubtful
accounts of $105,149 at September 30, 1999)............ 4,158,944 1,799,683
Inventory (Note 2)........................................ 433,976 288,402
Other current assets...................................... 3,000 24,070
---------- ----------
Total Current Assets................................... 4,663,010 2,158,314
---------- ----------
Fixed and Other Assets (Note 2)
Property and equipment (net of accumulated depreciation of
$228,597 and $176,999)................................. 292,267 223,421
Other assets.............................................. 51,263 40,000
---------- ----------
Total Fixed and Other Assets........................... 343,530 263,421
---------- ----------
Total Assets........................................... $5,006,540 $2,421,735
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable -- Merchants Bank (Note 4).................. $1,450,000 $ 880,000
Loans payable -- due to related parties (Note 5).......... 150,000 150,000
Accounts payable.......................................... 1,673,203 704,469
Accrued purchases and expenses............................ 951,449 300,330
Other current liabilities (Note 2)........................ 128,683 40,391
---------- ----------
Total Current Liabilities.............................. 4,353,335 2,075,190
Shareholders' Equity
Capital stock, 500 shares authorized 50 shares issued and
outstanding............................................ 20,863 20,863
Retained earnings......................................... 632,342 325,682
---------- ----------
Total Shareholders' Equity............................. 653,205 346,545
---------- ----------
Total Liabilities and Shareholders' Equity............. $5,006,540 $2,421,735
========== ==========
See Accompanying Accountant's Review Report and Notes to Financial Statements.
F-124
212
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
---------- ----------
Revenue..................................................... $9,179,522 $4,003,267
Cost of hardware and software............................... 5,533,680 1,660,417
Cost of service and delivery................................ 1,189,435 980,045
Selling, general and administrative expenses................ 2,054,383 1,288,714
Operating income before interest income (expenses) and
taxes..................................................... 402,024 74,091
Interest income............................................. 910 1,082
Interest expense............................................ (82,001) (74,255)
---------- ----------
Net income before taxes..................................... 320,933 918
Provision for State and City taxes (Note 7)................. 23,484 0
---------- ----------
Net Income.................................................. $ 297,449 $ 918
========== ==========
See Accompanying Accountant's Review Report and Notes to Financial Statements.
F-125
213
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
STATEMENTS OF RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
-------- --------
Retained earnings -- beginning January 1.................... $334,893 $377,933
Distributions to shareholders............................... 0 (53,169)
Net income.................................................. 297,449 918
-------- --------
Retained Earnings -- Ending September 30.................... $632,342 $325,682
======== ========
See Accompanying Accountant's Review Report and Notes to Financial Statements.
F-126
214
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
----------- ---------
Cash Flows From Operating Activities:
Net income................................................ $ 297,449 $ 918
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation........................................... 50,949 61,281
(Increase) decrease in operating assets:
Inventory............................................ (155,229) (228,987)
Accounts receivable.................................. (2,194,256) 573,824
Due from related parties............................. 16,204 4,116
Other current assets................................. 3,789 (23,583)
Other assets......................................... (21,263) 0
Increase (decrease) in operating liabilities:
Accounts payable..................................... 930,448 (333,243)
Accrued purchases and expenses......................... 561,452 115,586
Other current liabilities.............................. 128,683 (46,115)
----------- ---------
Total Adjustments................................. (679,223) 122,879
----------- ---------
Net Cash Flows From (Used by) Operating
Activities...................................... (381,774) 123,797
----------- ---------
Cash Flows From (Used by) Investing Activities:
Purchase of property and equipment........................ (104,708) (50,257)
----------- ---------
Cash Flows From (Used by) Financing Activities:
Proceeds from note payable -- Merchants Bank.............. 500,000 130,000
Net payments on loans from related party.................. 0 (90,539)
Distributions to shareholders............................. 0 (53,169)
----------- ---------
Net Cash Flows From (Used by) Financing
Activities...................................... 500,000 (13,708)
----------- ---------
Net increase in cash and cash equivalents................... 13,518 59,832
Cash and cash equivalents -- beginning of period............ 53,572 (13,673)
----------- ---------
Cash and Cash Equivalents -- End of Period.................. $ 67,090 $ 46,159
=========== =========
See Accompanying Accountant's Review Report and Notes to Financial Statements.
F-127
215
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
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 is recognized when products are shipped and training revenue is
recognized when performed. Income from service contracts is recognized over the
life of the contract on a pro rata basis. Losses on returns and contract costs
are recorded when they occur.
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.
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.
See the Accompanying Independent Accountant's Review Report.
F-128
216
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
Deferred Service Contract Income
The Company sells service contracts which may cover a period of time of one
year or more. At September 30, 1999 service contracts were prepaid. Management
determines deferred service contract income based upon the contract period.
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 September 30, 1999 and 1998, the Company held a
certificate of deposit of $31,455 and $30,196, 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 every three months subject to bank renewal. 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 $1,500,000 and
$1,000,000 at September 30, 1999 and 1998, respectively. Interest is payable
monthly at 1.50% over the bank's prime rate which amounted to 10.00% and 9.25%
at September 30, 1999 and 1998, respectively. As of September 30, 1999 and 1998,
outstanding borrowings under the line of credit are $1,450,000 and $880,000,
respectively. Loans payable to shareholders are subordinated to this time
secured loan.
NOTE 5 -- LOANS PAYABLE -- DUE TO RELATED PARTIES
Loans payable to shareholders and related party consists of borrowings for
working capital purposes and amounted to $150,000 at September 30, 1999 and
1998.
Loans payable to shareholders are unsecured and bear interest at a rate of
8.5%.
NOTE 6 -- RELATED PARTY TRANSACTIONS
During 1999 and 1998, 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 1999 and 1998, the Company shared office space with these affiliated
companies, and charged overhead, primarily for rent and shared administrative
salaries.
See the Accompanying Independent Accountant's Review Report.
F-129
217
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
Following is a summary of transactions and balances with these affiliated
companies for the nine months ended September 30, 1999 and 1998:
1999 1998
------- --------
Sales....................................................... $28,439 $336,903
======= ========
Accounts receivable (included in the accompanying balance
sheets)................................................... $ 322 $ 36,336
======= ========
Due to affiliated company (included in the accompanying
balance sheets)........................................... $ -- $ 24,354
======= ========
Overhead charged (included as a reduction to general and
administrative expenses).................................. $42,000 $118,200
======= ========
NOTE 7 -- LEASES
The Company leases office space under an operating lease expiring in 2007.
Future minimum rental payments at September 30, 1999, under this operating
lease is as follows:
Year ended December 31,
1999................. $ 37,200
2000................. 37,200
2001................. 37,200
2002................. 37,200
2003................. 37,200
Thereafter........... 499,100
--------
$685,100
========
NOTE 8 -- INCOME TAXES
Income tax expense for the nine months then ended September 30, 1999 and
1998 is comprised of the following:
1999 1998
------- ----
New York State Franchise tax................................ $ 2,657 $0
New York City corporation tax............................... 20,827 0
------- --
$23,484 $0
======= ==
NOTE 9 -- 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 nine months then ended September 30, 1999 and 1998, respectively.
See the Accompanying Independent Accountant's Review Report.
F-130
218
MICROLAN SYSTEMS, INC.
"DBA" MADISON TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
NOTE 10 -- 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, 1999 and 1998, 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.
NOTE 11 -- SUBSEQUENT EVENTS
In January, 2000 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.
See the Accompanying Independent Accountant's Review Report.
F-131
219
MADISON CONSULTING RESOURCES, INC.
FINANCIAL STATEMENTS
F-132
220
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 1997, its initial years of
operation, 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 1997, and the results of its
operations and cash flows for the years then ended in conformity with generally
accepted accounting principles.
JOEL E. SAMMET & CO.
Certified Public Accountants
New York, New York
January 18, 2000
F-133
221
MADISON CONSULTING RESOURCES, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
---------- --------
ASSETS
Current Assets
Cash...................................................... $ 51,186 $ 52,101
Accounts receivable (Note 2).............................. 620,914 250,852
Due from related party (Note 5)........................... 672,238 0
---------- --------
Total Current Assets................................... 1,344,338 302,953
Other Assets................................................ 7,000 0
---------- --------
Total Assets........................................... $1,351,338 $302,953
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit (Note 3)................................... $ 785,000 $ 0
Accounts payable.......................................... 154,556 119,467
Accrued expenses payable.................................. 1,028 0
Due to related party (Note 6)............................. 16,204 4,116
---------- --------
Total Current Liabilities.............................. 956,788 123,583
Long-Term Liabilities
Loan payable -- related party (Note 4).................... 437,400 250,000
---------- --------
Total Liabilities...................................... 1,394,188 373,583
---------- --------
Shareholders' Equity
Capital stock -- 150 shares issued and outstanding........ 20,000 20,000
Retained earnings (deficit)............................... (62,850) (90,630)
---------- --------
Total Shareholders' Equity............................. (42,850) (70,630)
---------- --------
Total Liabilities and Shareholders' Equity............. $1,351,338 $302,953
========== ========
See the Accompanying Independent Auditor's Report and Notes to Financial
Statements.
F-134
222
MADISON CONSULTING RESOURCES, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---------- --------
Revenue..................................................... $2,577,819 $503,446
Cost of sales............................................... 1,980,654 376,712
Selling, general and administrative expenses................ 568,357 216,739
---------- --------
Operating income (loss) before income taxes................. 28,808 (90,005)
Provision for state and city taxes.......................... 1,028 625
---------- --------
Net Income (Loss)........................................... $ 27,780 $(90,630)
========== ========
See the Accompanying Independent Auditor's Report and Notes to Financial
Statements.
F-135
223
MADISON CONSULTING RESOURCES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
COMMON STOCK RETAINED
----------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
------ ------- --------- --------
Common stock issued................................ 0 $20,000 $ 0 $ 20,000
Net loss........................................... 0 0 (90,630) (90,630)
-- ------- -------- --------
Balances as of December 31, 1997................... 0 20,000 (90,630) (70,630)
Net income......................................... 0 0 27,780 27,780
-- ------- -------- --------
Balances as of December 31, 1998................... 0 $20,000 $(62,850) $(42,850)
== ======= ======== ========
See the Accompanying Independent Auditor's Report and Notes to Financial
Statements.
F-136
224
MADISON CONSULTING RESOURCES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
--------- ---------
Cash Flow from Operating Activities
Net income (loss)......................................... $ 27,780 $ (90,630)
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Increase in accounts receivable........................ (370,062) (250,852)
Increase in other assets............................... (7,000) 0
Increase in accounts payable........................... 35,089 119,467
Increase in due related parties........................ 12,088 4,116
Increase in accrued expenses payable................... 1,028 0
--------- ---------
Net Cash Used by Operating Activities.................. (301,077) (217,899)
Cash Flows from Financing Activities
Increase in loan payable -- related party................. 187,400 250,000
Increase in line of credit................................ 785,000 0
Increase in receivable from related party................. (672,238) 0
Increase in common stock.................................. 0 20,000
--------- ---------
Cash Flows Provided by Financing Activities.......... 300,162 270,000
--------- ---------
Net increase (decrease) in cash............................. (915) 52,101
Cash at January 1, 1998 and 1997............................ 52,101 0
--------- ---------
Cash and Cash Equivalents at End of Year.................... $ 51,186 $ 52,101
========= =========
Cash paid for income taxes for the years ended December 31, 1998 and 1997 was
$625 and $-0-, respectively. Cash paid for interest for the years ended December
31, 1998 and 1997 was $17,865 and $-0-, respectively.
See the Accompanying Independent Auditor's Report and Notes to Financial
Statements.
F-137
225
MADISON CONSULTING RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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. Losses on allowances and permanent placement
revenues are recorded when they occur.
Allowance for Doubtful Accounts
The Company reflects accounts receivable at net realizable value. The
Company considers accounts receivable to be fully collectible. Accordingly,
there is no allowance for doubtful accounts at December 31, 1998 and 1997,
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.
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 February 19, 1999. The loan is secured by eligible
accounts receivable. The Company can borrow up to 80% of eligible accounts
receivable (outstanding 90 days or less) up to $1,000,000 at December 31, 1998.
Interest is payable monthly at 1.50% over the bank's prime rate which amounted
to 10.00% at December 31, 1998. As of December 31, 1998, outstanding borrowings
under the line of credit is $785,000. Loan payable to shareholder is
subordinated to this time secured loan.
See the Accompanying Independent Auditor's Report.
F-138
226
MADISON CONSULTING RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 4 -- LOAN PAYABLE -- RELATED PARTY
Loan payable to shareholder consists of borrowings for working capital
purposes and amounted to $437,400 and $250,000 at December 31, 1998 and 1997,
respectively.
At the shareholders discretion, interest on this loan was deferred. No
accrual has been made for interest expense on this loan for December 31, 1998
and 1997, respectively.
Loan payable to shareholder is unsecured and is subordinated to the bank
line of credit.
NOTE 5 -- DUE FROM RELATED PARTY
During 1998, 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, 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.
The Company also loaned MCR NJ amounts for working capital purposes. At
December 31, 1998, the Company had a balance due from MCR NJ in the amount of
$672,238.
NOTE 6 -- RELATED PARTY TRANSACTIONS
During 1998 and 1997, 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, the
Company shared office space with this affiliated company, and was charged for
overhead, primarily for rent and shared administrative salaries.
Following is a summary of transactions and balances with this affiliated
company for 1998 and 1997:
1998 1997
-------- -------
Purchase of computer consultants labor (included in cost of
sales).................................................... $435,558 $80,732
======== =======
Accounts payable (included in the accompanying balance
sheets)................................................... $ 72,102 $80,732
======== =======
Due to affiliated company (included in the accompanying
balance sheets)........................................... $ 16,204 $ 4,116
======== =======
Overhead charged, reduced by $15,291 for amount allocated to
MCR NJ
(included in general and administrative expenses)......... $202,912 $ 0
======== =======
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 1997, the Company's
balances do not exceed federally insured limits. Fair value of these financial
instruments approximates their carrying values.
See the Accompanying Independent Auditor's Report.
F-139
227
MADISON CONSULTING RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
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, 1997, substantially all of the
Company's customers had individual accounts receivable balances exceeding 10% 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.
F-140
228
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
To the Board of Directors
Madison Consulting Resources, Inc.
New York, New York
We have reviewed the accompanying balance sheet of Madison Consulting
Resources, Inc. as of September 30, 1999 and 1998 and the related statement of
income, 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 Madison Consulting Resources, 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.
Our review was made for the purpose of expressing limited assurance that
there are no material modifications that should be made to the financial
statements in order for them to be in conformity with generally accepted
accounting principles.
JOEL E. SAMMET & CO.
Certified Public Accountants
New York, New York
January 27, 2000
F-141
229
MADISON CONSULTING RESOURCES, INC.
BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
1999 1998
---------- ----------
ASSETS
Current Assets
Cash...................................................... $ 22,462 $ (46,920)
Accounts receivable (less allowance for doubtful accounts
of $75,000 at September 30, 1999)...................... 994,103 458,253
Due from related party (Note 5)........................... 803,579 599,801
Other current assets...................................... 46,541 18,194
---------- ----------
Total Current Assets................................... 1,866,685 1,029,328
Other assets................................................ 8,539 7,000
---------- ----------
Total Assets........................................... $1,875,224 $1,036,328
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Loan payable -- Merchants Bank............................ $1,150,000 $ 490,000
Accounts and accrued expenses payable..................... 187,334 155,924
---------- ----------
Total Current Liabilities.............................. 1,337,334 645,924
Long-Term Liabilities
Loans payable -- related party (Note 4)................... 437,400 437,400
---------- ----------
Total Liabilities...................................... 1,774,734 1,083,324
---------- ----------
Shareholders' Equity
Common stock.............................................. 20,000 20,000
Retained earnings......................................... 80,490 (66,996)
---------- ----------
Total Shareholders' Equity............................. 100,490 (46,996)
---------- ----------
Total Liabilities and Shareholders' Equity............. $1,875,224 $1,036,328
========== ==========
See the Accompanying Independent Accountant's Review Report and Notes to
Financial Statements.
F-142
230
MADISON CONSULTING RESOURCES, INC.
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
---------- ----------
Revenue..................................................... $2,977,266 $1,810,741
Cost of Sales............................................... 1,983,446 1,327,474
Selling, general and administrative expenses................ 791,701 457,133
---------- ----------
Operating income before interest expense.................... 202,119 26,134
Interest expense............................................ 44,779 0
---------- ----------
Net income before provision for income tax.................. 157,340 26,134
Provision for income taxes.................................. 14,000 2,500
---------- ----------
Net Income................................................ $ 143,340 $ 23,634
========== ==========
See the Accompanying Independent Accountant's Review Report and Notes to
Financial Statements.
F-143
231
MADISON CONSULTING RESOURCES, INC.
STATEMENTS OF RETAINED EARNINGS (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
-------- --------
Beginning retained earnings (deficit)....................... $(62,850) $(90,630)
Net income.................................................. 143,340 23,634
-------- --------
Ending Retained Earnings (Deficit)........................ $ 80,490 $(66,996)
======== ========
See the Accompanying Independent Accountant's Review Report and Notes to
Financial Statements.
F-144
232
MADISON CONSULTING RESOURCES, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
--------- ---------
Cash Flows From Operating Activities:
Net income................................................ $ 143,340 $ 23,634
Adjustment to reconcile net net income to net cash used in
operating activities:
(Increase) decrease in operating assets:
Accounts receivable.................................. (373,189) (207,401)
Due from related party............................... (131,341) (599,801)
Other current assets................................. (46,541) (18,194)
Other assets......................................... (1,539) (7,000)
Increase (decrease) in operating liabilities:
Accounts payable..................................... 18,778 36,457
Due to related party................................. (16,204) (4,116)
Accrued expenses payable............................. 12,972 0
--------- ---------
Total Adjustments................................. (537,064) (800,055)
--------- ---------
Net Cash Flows (Used by) Operating Activities..... (393,724) (776,421)
Cash Flows Provided by Financing Activities:
Proceeds of note payable -- Merchants Bank................ 365,000 490,000
Loans from related party.................................. 0 187,400
--------- ---------
Net Cash Flows Provided by Financing Activities... 365,000 677,400
Net decrease to cash........................................ (28,724) (99,021)
Beginning cash balance...................................... 51,186 52,101
--------- ---------
Ending Cash Balance............................... $ 22,462 $ (46,920)
========= =========
See the Accompanying Independent Accountant's Review Report and Notes to
Financial Statements.
F-145
233
MADISON CONSULTING RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
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. Losses on allowances and permanent placement
revenues are recorded when they occur.
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.
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 every 3 months subject to bank's renewal. The loan is
secured by eligible accounts receivable. The Company can borrow up to 80% of
eligible accounts receivable (outstanding 90 days or less) up to $2,000,000 at
September 30, 1999 and $1,000,000 at September 30, 1998. Interest is payable
monthly at 1.50% over the bank's prime rate which amounted to 10.00% and 9.25%
at September 30, 1999 and 1998, respectively. As of September 30, 1999 and 1998,
outstanding borrowings under the line of credit was $1,150,000 and $490,000,
respectively. Loan payable to shareholder is subordinated to this time secured
loan.
NOTE 4 -- LOAN PAYABLE -- RELATED PARTY
Loan payable to shareholder consists of borrowings for working capital
purposes and amounted to $437,400 at September 30, 1999 and 1998, respectively.
See the Accompanying Independent Accountant's Review Report.
F-146
234
MADISON CONSULTING RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
At the shareholders discretion, interest on this loan was deferred. No
accrual has been made for interest expense on this loan for the nine months
ended September 30, 1999 and 1998, respectively.
Loan payable to shareholder is unsecured and is subordinated to the bank
line of credit.
NOTE 5 -- DUE FROM RELATED PARTY
During 1999 and 1998, 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 1999 and 1998, 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.
The Company also loaned MCR NJ amounts for working capital purposes. At
September 30, 1999 and 1998, the Company had a balance due from MCR NJ in the
amounts of $803,579 and $599,801, respectively.
NOTE 6 -- RELATED PARTY TRANSACTIONS
During 1999 and 1998, 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 1999 and 1998,
the Company shared office space with this affiliated company, and was charged
for overhead, primarily for rent and shared administrative salaries.
Following is a summary of transactions and balances with this affiliated
company for the nine months ended September 30, 1999 and 1998:
1999 1998
-------- --------
Sales to affiliates......................................... $253,985 $ 1,954
======== ========
Purchase of computer consultants labor (included in cost of
sales).................................................... $ 28,439 $336,903
======== ========
Accounts receivable (included in accompanying balance
sheets.................................................... $253,985 $ 1,954
======== ========
Accounts payable (included in the accompanying balance
sheets)................................................... $ 322 $ 36,336
======== ========
Due from affiliated company (included in the accompanying
balance sheets)........................................... $ 0 $ 24,354
======== ========
Overhead charged, reduced by $16,375 for amount allocated to
MCR NJ
(included in general and administrative expenses)........... $ 25,625 $100,000
======== ========
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 September 30, 1999 and 1998, the Company's
balances do not exceed federally insured limits. Fair value of these financial
instruments approximates their carrying values.
See the Accompanying Independent Accountant's Review Report.
F-147
235
MADISON CONSULTING RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
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 September 30, 1999,
approximately 60% of the Company's trade receivables were represented by three
customers, with one customer representing approximately 25% of the outstanding
trade receivable balance. At September 30, 1998, substantially all of the
Company's customers accounts receivable balances will represented by three
customers. There were no other customers that individually had accounts
receivable balances exceeding 10% of the total accounts receivable balance at
September 30, 1999.
See the Accompanying Independent Accountant's Review Report.
F-148
236
MADISON CONSULTING RESOURCES NJ, INC.
FINANCIAL STATEMENTS
F-149
237
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Madison Consulting Resources NJ, Inc.
New York, New York
We have audited the accompanying balance sheet of Madison Consulting
Resources NJ, Inc. as of December 31, 1998, its initial year of operation, and
the related statement of income, shareholders' equity and cash flow for the year
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 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 the results of its operations and cash
flows for the year then ended in conformity with generally accepted accounting
principles.
JOEL E. SAMMET & CO.
Certified Public Accountants
New York, New York
January 18, 2000
F-150
238
MADISON CONSULTING RESOURCES NJ, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
Current Assets
Cash...................................................... $ 43,320
Accounts receivable -- Trade.............................. 670,738
Loan receivable -- related party.......................... 8,000
--------
Total Assets........................................... $722,058
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 7,920
Accrued expenses payable.................................. 200
Due to related party (Note 3 & 4)......................... 672,238
--------
Total Current Liabilities.............................. 680,358
--------
Shareholders' Equity
Capital stock -- 200 shares issued and outstanding........ 20,000
Retained earnings......................................... 21,700
--------
Total Shareholders' Equity............................. 41,700
--------
Total Liabilities and Shareholders' Equity............. $722,058
========
See the Accompanying Independent Auditor's Report and Notes to Financial
Statements.
F-151
239
MADISON CONSULTING RESOURCES NJ, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
Net sales................................................... $2,512,757
Cost of sales............................................... 1,850,451
Selling, general and administrative expenses................ 640,406
----------
Income before income taxes................................ 21,900
Provision for state taxes................................... 200
----------
Net Income.................................................. $ 21,700
==========
See the Accompanying Independent Auditor's Report and Notes to Financial
Statements.
F-152
240
MADISON CONSULTING RESOURCES NJ, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- -------
Common stock issued.......................... 0 $20,000 $ 0 $20,000
Net income................................... 0 0 21,700 21,700
-- ------- ------- -------
Balances as of December 31, 1998............. 0 $20,000 $21,700 $41,700
== ======= ======= =======
See the Accompanying Independent Auditor's Report and Notes to Financial
Statements.
F-153
241
MADISON CONSULTING RESOURCES NJ, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
Cash Flows from Operating Activities
Net income................................................ $ 21,700
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in accounts receivable........................ (670,738)
Increase in receivable from related party.............. (8,000)
Increase in accounts payable........................... 7,920
Increase in current liability due to related party..... 672,238
Increase in accrued expenses payable................... 200
---------
Total Adjustments.................................... 1,620
---------
Net Cash Provided by Operating Activities............ 23,320
Cash Flows from Financing Activities
Proceeds from issuance of common stock.................... 20,000
---------
Net increase in cash and cash equivalents................... 43,320
Cash and cash equivalents at beginning of year.............. 0
---------
Cash and Cash Equivalents At End of Year.................... $ 43,320
=========
Taxes Paid.................................................. $ 0
=========
Interest Paid............................................... $ 0
=========
See the Accompanying Independent Auditor's Report and Notes to Financial
Statements.
F-154
242
MADISON CONSULTING RESOURCES NJ, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. Losses on allowances and permanent placement
revenues are recorded when they occur.
Allowance for Doubtful Accounts
The Company considers accounts receivable to be fully collectible.
Accordingly, there is no allowance for doubtful accounts at December 31, 1998.
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.
NOTE 3 -- DUE TO RELATED PARTY
During 1998, 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, the Company shared office
expenses with MCR, and was charged for common office and administrative expenses
paid or incurred by MCR primarily based on an allocation of monthly sales or
outstanding accounts receivable balances. In addition, MCR charged the Company
$120,000 for management services for the year ended December 31, 1998.
The Company also had borrowings from MCR for working capital purposes. At
December 31, 1998, the Company had a balance due to MCR in the amount of
$672,238.
See the Accompanying Independent Auditor's Report.
F-155
243
MADISON CONSULTING RESOURCES NJ, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 4 -- RELATED PARTY TRANSACTIONS
During 1998, the Company was allocated with an overhead charge 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, overhead allocated by MCR from this
affiliate in the amount of $15,291 is included in general and administrative
expenses.
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, 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. 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.
F-156
244
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
To the Board of Directors
Madison Consulting Resources NJ, Inc.
New York, New York
We have reviewed the accompanying balance sheet of Madison Consulting
Resources NJ, Inc. as of September 30, 1999 and 1998 and the related statement
of income, 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 Madison Consulting Resources NJ, 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.
Our review was made for the purpose of expressing limited assurance that
there are no material modifications that should be made to the financial
statements in order for them to be in conformity with generally accepted
accounting principles.
JOEL E. SAMMET & CO.
Certified Public Accountants
New York, New York
January 27, 2000
F-157
245
MADISON CONSULTING RESOURCES NJ, INC.
BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
1999 1998
---------- --------
ASSETS
Current Assets
Cash...................................................... $ 45,214 $ 22,351
Accounts receivable (less allowance for doubtful accounts
of $14,184 at September 30, 1999)...................... 1,074,308 567,386
Loan receivable -- related party.......................... 20,500 6,000
Other current assets...................................... 20,718 20,006
---------- --------
Total Current Assets................................... 1,160,740 615,743
Other Assets
Property and equipment.................................... 59,161 0
Stock subscription receivable............................. 0 10,000
Other assets.............................................. 442 0
---------- --------
Total Other Assets..................................... 59,603 10,000
---------- --------
Total Assets........................................... $1,220,343 $625,743
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts and accrued expenses payable..................... $ 143,050 $ 1,106
Due to related party (Note 3)............................. 803,579 599,801
---------- --------
Total Current Liabilities.............................. 946,629 600,907
Shareholders' Equity
Capital stock............................................. 20,000 10,000
Retained earnings......................................... 253,714 14,836
---------- --------
Total Shareholders' Equity............................. 273,714 24,836
---------- --------
Total Liabilities and Shareholders' Equity............. $1,220,343 $625,743
========== ========
See the Accompanying Independent Accountant's Review Report and Notes to
Financial Statements.
F-158
246
MADISON CONSULTING RESOURCES NJ, INC.
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
---------- ----------
Revenue..................................................... $4,491,842 $1,428,523
Cost of Sales............................................... 3,303,253 1,079,747
Selling, general and administrative expenses................ 907,798 333,940
---------- ----------
Operating income before interest expense and provision for
taxes..................................................... 280,791 14,836
Interest income............................................. 357 0
Interest expense............................................ 48,934 0
---------- ----------
Operating income before provision for taxes................. 232,214 14,836
Provision for income taxes.................................. 200 0
---------- ----------
Net Income.................................................. $ 232,014 $ 14,836
========== ==========
See the Accompanying Independent Accountant's Review Report and Notes to
Financial Statements.
F-159
247
MADISON CONSULTING RESOURCES NJ, INC.
STATEMENTS OF RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
-------- -------
Beginning retained earnings............................. $ 21,700 $ 0
Net income.............................................. 232,014 14,836
-------- -------
Ending Retained Earnings................................ $253,714 $14,836
======== =======
See the Accompanying Independent Accountant's Review Report and Notes to
Financial Statements.
F-160
248
MADISON CONSULTING RESOURCES NJ, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
-------- ---------
Cash Flows From Operating Activities:
Net income................................................ $232,014 $ 14,836
Adjustments to reconcile net income to net cash used in
operating activities:
(Increase) decrease in operating assets:
Accounts receivable.................................. (403,570) (567,386)
Loan receivable -- related party..................... (12,500) (6,000)
Other current assets................................. (21,160) (20,006)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses................ 134,930 1,106
Due to related party................................. 131,341 599,801
Stock subscription................................... 0 (10,000)
-------- ---------
Total Adjustments................................. (170,959) (2,485)
Net Cash Flows Provided by Operating Activities... 61,055 12,351
Cash Flows from Financing Activities:
Issuance of capital stock................................. 0 10,000
Cash Flows (Used by) Investing Activities:
Purchases of property and equipment....................... (59,161) 0
-------- ---------
Net increase in cash........................................ 1,894 22,351
Beginning cash balance...................................... 43,320 0
-------- ---------
Ending Cash Balance......................................... $ 45,214 $ 22,351
======== =========
See the Accompanying Independent Accountant's Review Report and Notes to
Financial Statements.
F-161
249
MADISON CONSULTING RESOURCES NJ, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
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. Losses on allowances and permanent placement
revenues are recorded when they occur.
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.
NOTE 3 -- DUE TO RELATED PARTY
During 1999 and 1998, 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 1999 and 1998, the Company
shared office expenses with MCR, and was charged for common office and
administrative expenses paid or incurred by MCR primarily based on an allocation
of monthly sales or outstanding accounts receivable balances.
The Company also had borrowings from MCR for working capital purposes. At
September 30, 1999 and 1998, the Company had balances due to MCR in the amount
of $803,579 and $599,801, respectively.
NOTE 4 -- RELATED PARTY TRANSACTIONS
During 1999 and 1998, the Company was allocated with an overhead charge 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 nine months ended September 30, 1999
and 1998, overhead allocated by MCR from this affiliate in the amount of
$16,375 and $-0-, respectively is included in general and administrative
expenses.
F-162
250
MADISON CONSULTING RESOURCES NJ, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
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 September 30, 1999 and 1998, 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 September 30, 1999,
approximately 65% of the Company's trade receivables were represented by three
customers, with one customer representing approximately 40% 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 nine months ended September 30, 1999.
F-163
251
CHARON SYSTEMS, INC.
FINANCIAL STATEMENTS
F-164
252
AUDITORS' REPORT
To the Directors of
Charon Systems Inc.
We have audited the balance sheets of Charon Systems Inc. as at July 31,
1998 and 1999 and the statements of operations and retained earnings 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 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 July 31, 1998 and 1999 and
the results of its operations and its cash flows for the years then ended in
accordance with generally accepted accounting principles in Canada.
/s/ BDO Dunwoody LLP
Chartered Accountants
Markham, Ontario
January 31, 2000
F-165
253
CHARON SYSTEMS INC.
BALANCE SHEETS
(CANADIAN $)
JULY 31 JULY 31 SEPTEMBER 30
1998 1999 1999
---------- ---------- ------------
(UNAUDITED)
ASSETS
Current
Cash and short term investments........................ $ 270,850 $ 976,007 $ 331,439
Accounts receivable.................................... 3,671,058 2,512,058 2,449,542
Inventory.............................................. 42,633 158,135 620,562
Prepaid expenses and deposits.......................... 8,485 186,796 151,796
---------- ---------- ----------
3,993,026 3,832,996 3,553,339
Equipment (Note 1)....................................... 140,904 263,502 282,651
---------- ---------- ----------
$4,133,930 $4,096,498 $3,835,990
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities............... $3,729,034 $3,194,839 $2,872,687
Income taxes payable................................... 74,377 92,327 80,527
Deferred income taxes.................................. -- 74,000 60,800
---------- ---------- ----------
3,803,411 3,361,166 3,014,014
Due to shareholder (Note 2).............................. 75,000 -- --
Deferred income taxes.................................... -- 36,000 36,000
---------- ---------- ----------
3,878,411 3,397,166 3,050,014
---------- ---------- ----------
SHAREHOLDERS' EQUITY
Share capital (Note 3)................................. 900 63,450 66,350
Retained earnings...................................... 254,619 635,882 719,626
---------- ---------- ----------
255,519 699,332 785,976
---------- ---------- ----------
$4,133,930 $4,096,498 $3,835,990
========== ========== ==========
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements
F-166
254
CHARON SYSTEMS INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CANADIAN $)
FOR THE PERIODS ENDED
--------------------------------------------------------
TWO MONTHS
YEARS ENDED JULY 31 ENDED SEPTEMBER 30
-------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
SALES
Sales -- computer hardware and
software........................... $12,183,387 $14,864,429 $1,901,190 $2,054,560
Sales -- services..................... 2,290,127 4,324,660 456,799 750,732
Other................................. 134,139 260,061 9,139 50,912
----------- ----------- ---------- ----------
14,607,653 19,449,150 2,367,128 2,856,204
----------- ----------- ---------- ----------
EXPENSES
Cost of Hardware and Software......... 10,633,028 12,949,963 1,654,951 1,630,737
Cost of Service Delivery.............. 1,404,875 2,418,975 255,079 449,754
Selling, general and administrative... 2,212,503 3,338,025 393,404 652,256
Depreciation.......................... 38,272 61,445 7,282 12,984
Interest and bank charges............. 3,025 5,611 618 1,729
----------- ----------- ---------- ----------
14,291,703 18,774,019 2,311,334 2,747,460
----------- ----------- ---------- ----------
Income before income taxes.............. 315,950 675,131 55,794 108,744
----------- ----------- ---------- ----------
INCOME TAXES
Current............................... 115,820 183,868 12,275 38,200
Deferred (reduction).................. -- 110,000 -- (13,200)
----------- ----------- ---------- ----------
115,820 293,868 12,275 25,000
----------- ----------- ---------- ----------
Net income for the period............... 200,130 381,263 43,519 83,744
Retained earnings, beginning of
period................................ 304,389 254,619 254,619 635,882
Dividends............................... (100,000) -- -- --
Premium paid on cancellation of shares
previously issued and outstanding..... (149,900) -- -- --
----------- ----------- ---------- ----------
Retained earnings, end of period........ $ 254,619 $ 635,882 $ 298,138 $ 719,626
=========== =========== ========== ==========
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements
F-167
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CHARON SYSTEMS INC.
STATEMENTS OF CASH FLOWS
(CANADIAN $)
FOR THE PERIODS ENDED
-------------------------------------------------------
TWO MONTHS
YEARS ENDED JULY 31 ENDED SEPTEMBER 30
------------------------- --------------------------
1998 1999 1998 1999
----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
CASH PROVIDED BY (USED IN)
Cash flows from operating activities
Net income for the period............... $ 200,130 $ 381,263 $ 43,519 $ 83,744
Adjustments to reconcile net income to
net cash provided by operating
activities
Deferred income taxes................ -- 110,000 -- (13,200)
Depreciation......................... 38,272 61,445 7,282 12,984
Changes in non-cash working capital
balances
Accounts receivable................ (2,755,697) 1,159,000 995,166 62,516
Inventory.......................... 79,502 (115,502) (351,507) (462,427)
Prepaid expenses and deposits...... 2,345 (178,311) -- 35,000
Accounts payable and accrued
liabilities..................... 2,463,411 (534,195) (619,946) (322,152)
Income taxes....................... (30,830) 17,950 (42,225) 11,800
----------- ---------- --------- ---------
(2,867) 901,650 32,289 (615,335)
----------- ---------- --------- ---------
Cash flows from investing activities
Purchase of equipment................... (74,031) (184,043) (18,474) (32,133)
----------- ---------- --------- ---------
Cash flows from financing activities
Payment on cancellation of common
shares............................... (75,000) -- -- --
Issuance of common shares............... -- 12,550 -- --
Dividends............................... (100,000) -- -- --
Due to/from shareholder (net)........... -- (25,000) -- 2,900
----------- ---------- --------- ---------
(175,000) (12,450) -- 2,900
----------- ---------- --------- ---------
Increase (decrease) in cash and short term
investments during the period........... (251,898) 705,157 13,815 (644,568)
Cash and short term investments, beginning
of period............................... 522,748 270,850 270,850 976,007
----------- ---------- --------- ---------
Cash and short term investments, end of
period.................................. $ 270,850 $ 976,007 $ 284,665 $ 331,439
=========== ========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................. $ 3,025 $ 5,611 $ 618 $ 1,729
Cash paid for income taxes.............. $ 146,650 $ 165,918 $ -- $ 50,000
NON-CASH TRANSACTIONS
Issuance of common shares............... 50,000 137,450 -- --
Cancellation of common shares........... (75,000) -- -- --
Due from/to shareholder................. 25,000 (137,450) -- --
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements
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256
CHARON SYSTEMS INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), AND JULY 31, 1999 AND 1998
(CANADIAN $)
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:
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
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-169
257
CHARON SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), AND JULY 31, 1999 AND 1998
(CANADIAN $)
1. EQUIPMENT
JULY 31, 1998 JULY 31, 1999 SEPTEMBER 30, 1999
------------------------ ------------------------ ------------------------
ACCUMULATED ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION COST DEPRECIATION
-------- ------------- -------- ------------- -------- -------------
(UNAUDITED)
Computer equipment............................ $108,633 $ 57,742 $229,219 $ 91,060 $229,219 $ 97,968
Computer software............................. 7,363 5,217 -- -- -- --
Leasehold improvements........................ 64,851 19,966 87,093 35,161 122,046 30,919
Office furniture and fixtures................. 58,177 15,195 101,539 28,128 98,012 39,349
-------- -------- -------- -------- -------- --------
$239,024 98,120 $417,851 154,349 $449,277 168,236
-------- -------- -------- -------- -------- --------
Cost less accumulated amortization............ $140,904 $263,502 $281,041
======== ======== ========
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
JULY 31, 1998 JULY 31, 1999 SEPTEMBER 30, 1999
------------------ --------------------- -----------------------
# $ # $ # $
------- -------- --------- --------- --------- -----------
(UNAUDITED)
ISSUED
Voting common shares.................................. 950,000 $ 50,900 1,055,000 $ 155,900 1,055,000 $ 155,900
Non-voting common shares.............................. -- -- 45,000 45,000 45,000 45,000
------- -------- --------- --------- --------- ---------
950,000 50,900 1,100,000 200,900 1,100,000 200,900
Less: Share purchase loan............................. (50,000) (137,450) (134,550)
-------- --------- ---------
$ 900 $ 63,450 $ 66,350
======== ========= =========
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 fiscal 1999, 150,000 (1998 - 50,000) common shares were issued for cash
of $12,550 (1998 - nil) and share purchase loans of $137,450 (1998 - $50,000).
In fiscal 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-170
258
CHARON SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), AND JULY 31, 1999 AND 1998
(CANADIAN $)
4. RELATED PARTY TRANSACTIONS
The following table summarizes the company's related party transactions for
the periods:
JULY 31 SEPTEMBER 30
-------------------- ------------------
1998 1999 1998 1999
-------- -------- ------- -------
(UNAUDITED)
Management fees paid to company owned by a
shareholder included in consulting fees......... $527,489 $332,326 $54,072 $81,443
-------- -------- ------- -------
The transactions were measured at the exchange amount.
JULY 31 SEPTEMBER 30
----------------- --------------
1998 1999 1998 1999
------- ------- ---- -------
(UNAUDITED)
Accounts payable
Shareholders.............................................. $28,916 $18,344 $-- $18,344
Company 100% owned by shareholder......................... $14,160 $35,003 $-- $35,003
5. COMMITMENTS
The Company has leased realty to December 2003 and equipment to January
2003.
Future minimum lease payments for the next five years are approximately as
follows:
2000...................................................... $214,000
2001...................................................... 212,000
2002...................................................... 178,000
2003...................................................... 102,000
2004...................................................... 12,000
--------
$718,000
========
6. SUBSEQUENT EVENT
On January 31, 2000 the company issued 24,000 options to acquire common
shares at an exercise price of $1.00 per share.
7. STOCK OPTIONS
The Company has a fixed stock option plan. The status of the stock option
plans as of September 30, 1999 and July 31, 1999, and changes during the periods
ending on those dates is presented below:
JULY 31 SEPTEMBER 30 EXERCISE PRICE
1999 1999 PER SHARE
-------- ------------ --------------
(UNAUDITED)
Outstanding at beginning of period........... -- --
Granted during period........................ 150,000 --
Exercised during the period.................. (150,000) -- $1
-------- --
Outstanding at end of period................. -- --
======== ==
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259
CHARON SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), AND JULY 31, 1999 AND 1998
(CANADIAN $)
100,000 options were granted and exercised in January 2000 at prices
ranging from $1 to $2.50 per share.
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. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000.
If the Year 2000 Issue is not addressed by the Company and its major
customers, suppliers and other third party business associates, the impact on
the Company's operations and financial reporting may range from minor errors to
significant systems failure which could affect the Company's ability to conduct
normal business operations. It is not possible to be certain that all aspects of
the Year 2000 Issue affecting the Company, including those related to the
efforts of customers, suppliers, or other third parties, will be 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:
JULY 31 SEPTEMBER 30
-------------------- ------------------
1998 1999 1998 1999
-------- -------- ------- -------
(UNAUDITED)
Net income per Canadian GAAP...................... $200,130 $381,263 $43,519 $58,887
Stock compensation expense........................ -- (75,000) -- --
-------- -------- ------- -------
200,130 306,263 43,519 58,887
Income tax effect -- Stock compensation expense... -- 33,000 -- --
-------- -------- ------- -------
Net income per U.S. GAAP.......................... $200,130 $339,263 $43,519 $58,887
======== ======== ======= =======
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 was to increase share capital by $75,000,
decrease income taxes payable by $33,000 and decrease retained earnings by
$42,000.
F-172
260
- ------------------------------------------------------
- ------------------------------------------------------
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
-------------------------
PAGE
----
Prospectus Summary.................... 1
Risk Factors.......................... 6
Use of Proceeds....................... 17
Dividend Policy....................... 17
Price Range of Our Common Stock....... 18
Capitalization........................ 19
Dilution.............................. 20
Acquisitions.......................... 21
Pro Forma Condensed Consolidated
Financial Information............... 24
Selected Consolidated Financial
Data................................ 36
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 37
Business.............................. 44
Management............................ 53
Principal Stockholders................ 62
Certain Relationships and Related
Transactions........................ 64
Description of Capital Stock.......... 66
Shares Eligible for Future Sale....... 69
Underwriting.......................... 71
Legal Matters......................... 73
Experts............................... 73
Where You Can Find More Information... 74
Index to Consolidated Financial
Statements.......................... F-1
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
[FUTURELINK LOGO]
5,000,000 SHARES
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
BEAR, STEARNS & CO. INC.
ROBERTSON STEPHENS
CIBC WORLD MARKETS
C.E. UNTERBERG, TOWBIN
, 2000
- ------------------------------------------------------
- ------------------------------------------------------
261
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC registration fee........................................ $34,535
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............................................. $
=======
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
262
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 pursuant to an exemption provided by
Rule 903 of Regulation S under the Securities Act Rules.
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 pursuant to an
exemption provided by Rule 903 of Regulation S under the Securities Act
Rules.
3. On December 18, 1997, we issued 10,000 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 pursuant to an
exemption provided by Rule 903 of Regulation S under the Securities Act
Rules.
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 various employees in exchange for prior services. We issued
these securities pursuant to an exemption provided by Rule 903 of Regulation
S under the Securities Act Rules, and Rule 504 of Regulation D under the
Securities Act Rules.
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 to a non-U.S. entity. In
exchange for the issuances, we received total consideration of $250,000. We
issued these securities pursuant to an exemption provided by each of Rule
903 of Regulation S under the Securities Act Rules, and Rule 504 of
Regulation D under the Securities Act Rules.
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 pursuant to an exemption provided by each of Rule
903 of Regulation S under the Securities Act Rules, and Rule 504 of
Regulation D under the Securities Act Rules.
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 pursuant to an exemption provided by each of Rule
903 of Regulation S under the Securities Act Rules, and Rule 504 of
Regulation D under the Securities Act Rules.
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 pursuant to an exemption provided by each of Rule
903 of Regulation S under the Securities Act Rules, and Rule 504 of
Regulation D under the Securities Act Rules.
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 pursuant to an exemption provided by each of Rule
903 of Regulation S under the Securities Act Rules, and Rule 504 of
Regulation D under the Securities Act Rules.
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 the issuances, 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 non-US entity. In exchange for those
issuances, we received total consideration of $350,000. We issued these
securities pursuant to an exemption provided by each of Rule 903 of
Regulation S under the Securities Act Rules, and Rule 506 of Regulation D
under the Securities Act Rules.
II-2
263
11. On August 14, 1998, we financed, with Thomson Kernaghan & Co. Limited, 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 $6,000,0000. On April 26, 1999, we repriced the
warrants and set a new fixed conversion price for the debentures. At that
time, we also issued to Thomson Kernaghan & Co., Limited additional warrants
to purchase 1,121,201 shares of common stock. On June 1, 1999, we issued
36,706 shares of common stock to Thomson Kernaghan & Co., Limited to cover
interest accrued on $1,470,000 of outstanding convertible debentures which
had been called by us in accordance with the April 26, 1999 amendment.
Effective December 7, 1999, we entered into another agreement with Thomson
Kernaghan & Co., Limited its remaining $1.53 million of convertible
debentures and exercised its remaining warrants, pursuant to which it
converted its and received an additional 125,000 shares. A portion of the
securities were registered pursuant to Amendment No. 4 to our Registration
Statement on Form SB-2 filed December 21, 1998. The rest of the securities
were issued pursuant to an exemption provided by each of Rule 903 of
Regulation S under the Securities Act Rules, and Rule 506 of Regulation D
under the Securities Act Rules.
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 its
subsidiaries SysGold, Inc., and SysGold, Ltd. We issued these securities
pursuant to an exemption provided by each of Rule 903 of Regulation S under
the Securities Act Rules, and Rule 506 of Regulation D under the Securities
Act Rules.
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
pursuant to an exemption provided by each of Rule 903 of Regulation S under
the Securities Act Rules, and Rule 506 of Regulation D under the Securities
Act Rules.
14. On February 22, 1999, we issued a $150,620.62 convertible debenture to each
of Cameron Chell and Linda Carling, and granted Mr. Chell and Ms. Carling
warrants to purchase up to 75,311 and 75,310 shares of common stock,
respectively. The issuances were made in exchange for the satisfaction of
the principal and interest due on loans of $144,632 that each had made to us
on August 11, 1998. On August 18, 1999, we issued 27,431 shares to Linda
Carling on conversion of her remaining $54,862 of debenture principal. We
issued these securities pursuant to an exemption provided by each of Rule
903 of Regulation S under the Securities Act Rules, and Rule 506 of
Regulation D under the Securities Act Rules.
15. On February 26, 1999, we issued an aggregate of 23,500 shares of our common
stock to the remaining minority shareholders of FutureLink Alberta, all
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 pursuant to an exemption provided by
each of Rule 903 of Regulation S under the Securities Act Rules.
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 non-U.S. entity. In exchange for those issuances, we received total
consideration of $500,000. We also issued 524,332 shares of common stock in
the name of the same entity, and delivered such shares to an escrow account.
Those shares represent the common stock underlying the convertible
debentures and warrants. In August 1999, we issued 355,836 shares to such
entity upon conversion of the debenture, and in December, 1999, it exercised
its warrants to acquire 26,553 shares of common stock. We are currently
taking steps to cancel the remaining shares still held in escrow. We issued
these securities pursuant to an exemption provided by
II-3
264
each of Rule 903 of Regulation S under the Securities Act Rules, and Rule
506 of Regulation D under the Securities Act Rules.
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 our management. We also issued
3,802,750 warrants to external investors and 216,500 warrants to members of
our management. Commonwealth Associates, L.P. acted as our 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.
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 Global.
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.
20. On July 27, 1999, we issued an additional $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 placement agent 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 711,805 warrants upon the automatic conversion of the notes. We
issued these securities pursuant to an exemption provided by Rule 506 of
Regulation D under the Securities Act Rules.
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 pursuant to an exemption
provided by Rule 506 of Regulation D under the Securities Act Rules.
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 marketing and advertising services. We issued these securities
pursuant to an exemption provided by Rule 506 of Regulation D under the
Securities Act Rules.
23. On October 15, 1999, we issued 7,200,000 shares of common stock to the
Holmes Trust. In exchange for the issuance and certain other consideration,
we acquired Executive LAN Management, Inc., d.b.a. Micro Visions. We issued
these securities pursuant to an exemption provided by Rule 506 of Regulation
D under the Securities Act Rules.
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 investment
funds. In exchange for the issuances, we received total consideration of $50
million. Gerard Klauer Mattison & Co., Inc. acted as our placement agent and
received commissions and placement fees equal to $3 million (6% of the gross
proceeds of the offering) and 909,091 agent's warrants. We issued these
securities pursuant to an exemption provided by Rule 506 of Regulation D
under the Securities Act Rules.
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 in conjunction
with a lease financing arrangement with Transamerica Business Credit
Corporation. We issued these securities pursuant to an exemption provided by
Rule 506 of Regulation D under the Securities Act Rules.
II-4
265
26. On November 5, 1999, we issued 1,181,816 shares of our common stock to the
prior shareholders of CN Networks, Inc. In exchange for the issuances and
certain other consideration, we acquired CN Networks. We issued these
securities pursuant to an exemption provided by Rule 506 of Regulation D
under the Securities Act Rules.
27. On November 26, 1999, we issued 1,298,705 shares of our common stock to the
prior owners of Async Technologies, Inc. In exchange for the issuances and
certain other consideration, we acquired Async Technologies, Inc. We issued
these securities pursuant to an exemption provided by Rule 506 of Regulation
D under the Securities Act Rules.
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
$2.20 million. We issued these securities pursuant to an exemption provided
by Rule 506 of Regulation D under the Securities Act Rules.
29. On December 16, 1999, we issued a warrant to acquire up to 13,140 shares of
common stock to EMC Corporation. The issuance was made as partial
consideration for an equipment financing arrangement. We issued these
securities pursuant to an exemption provided by Rule 506 of Regulation D
under the Securities Act Rules.
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. In exchange
for the issuances and certain other consideration, we acquired KNS Holdings
Limited. We issued these securities pursuant to an exemption provided by
each of Rule 903 of Regulation S under the Securities Act Rules, and Rule
506 of Regulation D under the Securities Act Rules.
31. On January 31, 2000, we issued 1,026,316 shares of common stock to the
selling shareholders of Vertical Software, Inc. d.b.a VSI Technology
Solutions. In exchange for the issuances and certain other consideration, we
acquired VSI Technology Solutions. We issued these securities pursuant to an
exemption provided by Rule 506 of Regulation D under the Securities Act
Rules.
32. Between June 29, 1998 and January 31, 2000, we issued an aggregate of
7,447,500 stock options to directors, officers and employees at various
exercises prices of which 4,000,000 were registered by our Registration
Statement on Form S-8 filed August 6, 1999. Since, we issued 449,000 shares
of common stock upon the exercise of those stock options. We issued these
securities pursuant to Rule 701 of Regulation E under the Securities Act
Rules.
Except as otherwise set forth above, no underwriters were engaged in
connection with the foregoing sales of securities.
II-5
266
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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(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(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 Micro Visions(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, and the selling shareholders of Async
Technologies(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, and
the selling shareholders of CN Networks(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,
and the selling shareholders of Async Technologies(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(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,
and the selling shareholders of Async Technologies(10)
2.15 Supplemental Agreement dated December 20, 1999 to Agreement
for Sale and Purchase of the Entire Issued Share Capital of
KNS Holdings, between FutureLink Corp. and the selling
shareholders of KNS Holdings(11)
3.1 Certificate of Incorporation of FutureLink Corp.(8)
3.2 Bylaws of FutureLink Corp.(8)
II-7
267
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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
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
10.5 Advisory Agreement dated May 1, 1999 between FutureLink
Distribution Corp. and Commonwealth(5)
10.6 Agency Agreement dated July 1, 1999 between FutureLink
Distribution Corp. and Commonwealth(7)
10.7 Loan Agreement dated August 1, 1999 between FutureLink Corp.
and Vincent Romano(7)
10.8 Securities Purchase Agreement dated October 15, 1999 between
FutureLink Corp., Pequot Private Investment Fund II, L.P.
and certain other investors(8)
10.9 Registration Rights Agreement dated October 15, 1999 between
FutureLink Corp., Pequot Private Investment Fund, and
certain other investors(8)
10.10** Registration Rights Agreement dated December 6, 1999 between
FutureLink Corp. and CPQ Holdings, Inc.
10.11** Securities Purchase Agreement dated December 6, 1999 between
FutureLink Corp. and CPQ Holdings, Inc.
10.12** Employment Agreement dated June 1, 1999 between Philip
Ladouceur and FutureLink Distribution Corp.(12)
10.13** Employment Agreement dated September 30, 1999 between Glenn
C. Holmes and FutureLink Corp.
10.14** Employment Agreement dated August 1, 1999 between Vincent
Romano and FutureLink Corp.
10.15** Client/Agency Agreement dated August 7, 1999 between Sicola,
Martin, Koons & Frank, Inc. and FutureLink Distribution
Corp., as revised
10.16** Master Loan and Security Agreement dated November 3, 1999
between Transamerica Business Credit Corporation, FutureLink
Corp. and FutureLink Micro Visions Corp.
10.17** Security Agreement dated November 3, 1999 between
Transamerica Business Credit Corporation and FutureLink
Distribution Corp.
10.18** Master Lease and Financing Agreement dated November 15, 1999
between Compaq Financial Services and FutureLink Corp.
10.19** Master Lease Agreement dated December 16, 1999 between EMC
and FutureLink Corp.
10.20 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)
10.21** 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 thereof dated October 15, 1999
10.22* Microsoft Certified Solution Provider Agreement dated
January 28, 2000 between Microsoft and FutureLink Corp.(13)
10.23** Microsoft Application Services Agreement dated December 23,
1999 between Microsoft and FutureLink Corp.(13)
10.24 Final Invoice/Enrollment Contract (MSCP) dated April 28,
1998 between Microsoft and FutureLink Corp.(1)(13)
10.25** Direct Commercial Service License Agreement dated May 21,
1999 between Microsoft and FutureLink Distribution Corp.(13)
10.26 Service Agreement dated June 1, 1998 between Willson
Stationers and FutureLink Alberta(1)
II-8
268
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.27 Solution Provider Contract dated July 27, 1998 between IBM
Canada Ltd. and FutureLink/ SysGold Ltd.(1)
10.28** Hosting Services Distributor Agreement (version 4) dated
November 12, 1998 between Onyx Software and FutureLink
Distribution Corp.
10.29** Onyx Software License Agreement dated August 5, 1998 between
Onyx Software and FutureLink Distribution Corp.
10.30** Alliance Partner Agreement dated October 26, 1998 between
Great Plains Software and FutureLink Distribution Corp.
10.31** Citrix Solutions Network Gold Renewal Membership Agreement
dated July 16, 1999 between Citrix and FutureLink
Distribution Corp.(13)
10.32** Citrix Solutions Network Platinum Renewal Membership
Agreement dated April 20, 1999 between Citrix and Async
Technologies(13)
10.33** Information Systems Services Agreement dated January 19,
1999 between FutureLink Alberta and Numac Energy, Inc.
10.34** Information Systems Services Agreement dated July 1, 1999
between Canadian Natural Resources, Ltd. and FutureLink
Alberta
10.35 Alliance Partner Agreement dated February 12, 1999 between
FutureLink Alberta and JAWS Technologies(1)
10.36** Master Consulting Agreement dated December 1, 1998 between
Ameriquest Mortgage Company and Micro Visions
10.37** Internet Data Center Services Agreement dated May 7, 1999
between Exodus Communications, Inc. and Micro Visions
10.38** Form of EMC Corporation Software License Agreement
23.1* Consent of Paul, Hastings, Janofsky & Walker LLP (consent
included in 5.1)
23.2 ** Consent of Ernst & Young LLP, Independent Auditors, Calgary,
Canada
23.3 ** Consent of Ernst & Young LLP, Independent Auditors, Orange
County, California
23.4 ** Consent of Moreland & Davis
23.5 ** Consent of M. Jevahirian and Co., Independent Auditors
23.6 ** Consent of Ernst & Young, Independent Auditors, Reading,
England
23.7 ** Consent of Ernst & Young LLP, Independent Auditors, McLean,
Virginia
23.8 ** Consents of Joel E. Sammet & Co., Certified Public
Accountants
23.9 ** Consent of BDO Dunwoody LLP, Independent Auditors, Markham,
Ontario
24.1 Power of Attorney (included in signature page)
- -------------------------
* 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.
II-9
269
(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) 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, 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.
(13) 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 [U.S.]. Underwriting Agreement [and
the International Underwriting Agreement] certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing 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
connection with 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 pursuant to 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 therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-10
270
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this Registration Statement on Form
SB-2 to be signed on its behalf by the undersigned, thereunto duly authorized,
in Irvine, California on February 10, 2000.
FUTURELINK CORP.
By: /s/ PHILIP R. LADOUCEUR
------------------------------------
Philip R. Ladouceur
Chairman and Chief Executive Officer
II-11
271
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Philip R. Ladouceur and Kyle B.A. Scott
and either of them, as such person's true and lawful attorneys-in-fact and
agents, with full power of substitution and presubstitution, for such person and
in such person's name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission and any
other regulatory authority, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or either
of them, or their or such person's substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ PHILIP R. LADOUCEUR Chairman, Chief Executive Officer February 10, 2000
- --------------------------------------------- and Director
Philip R. Ladouceur
/s/ GLEN C. HOLMES President, Chief Operating Officer February 10, 2000
- --------------------------------------------- and Director
Glen C. Holmes
/s/ RAGHUNATH KILAMBI Executive Vice President, Chief February 10, 2000
- --------------------------------------------- Financial Officer, Principal
Raghunath Kilambi Accounting Officer and Director
/s/ F. BRYSON FARRILL Director February 10, 2000
- ---------------------------------------------
F. Bryson Farrill
/s/ TIMOTHY P. FLYNN Director February 10, 2000
- ---------------------------------------------
Timothy P. Flynn
/s/ MICHAEL S. FALK Director February 10, 2000
- ---------------------------------------------
Michael S. Falk
/s/ GERALD A. POCH Director February 10, 2000
- ---------------------------------------------
Gerald A. Poch
/s/ JAMES P. MCNIEL Director February 10, 2000
- ---------------------------------------------
James P. McNiel
/s/ KYLE B.A. SCOTT Vice President, Secretary and February 10, 2000
- --------------------------------------------- General Counsel
Kyle B.A. Scott
II-12
272
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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(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(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 Micro Visions(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, and the selling shareholders of Async
Technologies(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, and
the selling shareholders of CN Networks(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,
and the selling shareholders of Async Technologies(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(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,
and the selling shareholders of Async Technologies(10)
2.15 Supplemental Agreement dated December 20, 1999 to Agreement
for Sale and Purchase of the Entire Issued Share Capital of
KNS Holdings, between FutureLink Corp. and the selling
shareholders of KNS Holdings(11)
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
273
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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
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
10.5 Advisory Agreement dated May 1, 1999 between FutureLink
Distribution Corp. and Commonwealth(5)
10.6 Agency Agreement dated July 1, 1999 between FutureLink
Distribution Corp. and Commonwealth(7)
10.7 Loan Agreement dated August 1, 1999 between FutureLink Corp.
and Vincent Romano(7)
10.8 Securities Purchase Agreement dated October 15, 1999 between
FutureLink Corp., Pequot Private Investment Fund II, L.P.
and certain other investors(8)
10.9 Registration Rights Agreement dated October 15, 1999 between
FutureLink Corp., Pequot Private Investment Fund, and
certain other investors(8)
10.10** Registration Rights Agreement dated December 6, 1999 between
FutureLink Corp. and CPQ Holdings, Inc.
10.11** Securities Purchase Agreement dated December 6, 1999 between
FutureLink Corp. and CPQ Holdings, Inc.
10.12** Employment Agreement dated June 1, 1999 between Philip
Ladouceur and FutureLink Distribution Corp.(12)
10.13** Employment Agreement dated September 30, 1999 between Glenn
C. Holmes and FutureLink Corp.
10.14** Employment Agreement dated August 1, 1999 between Vincent
Romano and FutureLink Corp.
10.15** Client/Agency Agreement dated August 7, 1999 between Sicola,
Martin, Koons & Frank, Inc. and FutureLink Distribution
Corp., as revised
10.16** Master Loan and Security Agreement dated November 3, 1999
between Transamerica Business Credit Corporation, FutureLink
Corp. and FutureLink Micro Visions Corp.
10.17** Security Agreement dated November 3, 1999 between
Transamerica Business Credit Corporation and FutureLink
Distribution Corp.
10.18** Master Lease and Financing Agreement dated November 15, 1999
between Compaq Financial Services and FutureLink Corp.
10.19** Master Lease Agreement dated December 16, 1999 between EMC
and FutureLink Corp.
10.20 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)
10.21** 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 thereof dated October 15, 1999
10.22* Microsoft Certified Solution Provider Agreement dated
January 28, 2000 between Microsoft and FutureLink Corp.(13)
10.23** Microsoft Application Services Agreement dated December 23,
1999 between Microsoft and FutureLink Corp.(13)
10.24 Final Invoice/Enrollment Contract (MSCP) dated April 28,
1998 between Microsoft and FutureLink Corp.(1)(13)
10.25** Direct Commercial Service License Agreement dated May 21,
1999 between Microsoft and FutureLink Distribution Corp.(13)
10.26 Service Agreement dated June 1, 1998 between Willson
Stationers and FutureLink Alberta(1)
10.27 Solution Provider Contract dated July 27, 1998 between IBM
Canada Ltd. and FutureLink/ SysGold Ltd.(1)
274
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.28** Hosting Services Distributor Agreement (version 4) dated
November 12, 1998 between Onyx Software and FutureLink
Distribution Corp.
10.29** Onyx Software License Agreement dated August 5, 1998 between
Onyx Software and FutureLink Distribution Corp.
10.30** Alliance Partner Agreement dated October 26, 1998 between
Great Plains Software and FutureLink Distribution Corp.
10.31** Citrix Solutions Network Gold Renewal Membership Agreement
dated July 16, 1999 between Citrix and FutureLink
Distribution Corp.(13)
10.32** Citrix Solutions Network Platinum Renewal Membership
Agreement dated April 20, 1999 between Citrix and Async
Technologies(13)
10.33** Information Systems Services Agreement dated January 19,
1999 between FutureLink Alberta and Numac Energy, Inc.
10.34** Information Systems Services Agreement dated July 1, 1999
between Canadian Natural Resources, Ltd. and FutureLink
Alberta
10.35 Alliance Partner Agreement dated February 12, 1999 between
FutureLink Alberta and JAWS Technologies(1)
10.36** Master Consulting Agreement dated December 1, 1998 between
Ameriquest Mortgage Company and Micro Visions
10.37** Internet Data Center Services Agreement dated May 7, 1999
between Exodus Communications, Inc. and Micro Visions
10.38** Form of EMC Corporation Software License Agreement
23.1* Consent of Paul, Hastings, Janofsky & Walker LLP (consent
included in 5.1)
23.2** Consent of Ernst & Young LLP, Independent Auditors, Calgary,
Canada
23.3** Consent of Ernst & Young LLP, Independent Auditors, Orange
County, California
23.4** Consent of Moreland & Davis
23.5** Consent of M. Jevahirian and Co., Independent Auditors
23.6** Consent of Ernst & Young, Independent Auditors, Reading,
England
23.7** Consent of Ernst & Young LLP, Independent Auditors, McLean,
Virginia
23.8** Consents of Joel E. Sammet & Co., Certified Public
Accountants
23.9** Consent of BDO Dunwoody LLP, Independent Auditors, Markham,
Ontario
24.1 Power of Attorney (included in signature page)
- -------------------------
* 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.
275
(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) 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, 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.
(13) Some of our subsidiaries are parties to agreements with the same party that
are substantially identical in all material respects.