1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
TO THE 1934 ACT REPORTING REQUIREMENTS
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ____________
Commission File No. 0-24833
FUTURELINK DISTRIBUTION CORP.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Colorado 95-3895211
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
300, 250 - 6th Avenue S.W., Calgary, Alberta CANADA T2P 3H7
- --------------------------------------------------------------------------------
(Address of principal executive offices) (ZIP Code)
(403) 216-6000
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The total number of shares of the Registrant's Common Stock outstanding as of
June 30, 1999 was 6,207,784.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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FUTURELINK DISTRIBUTION CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1999 and 1998 and
December 31, 1998......................................................... 3
Consolidated Statements of Loss and Deficit and Comprehensive Loss
for the six month and three month periods ended June 30, 1999 and 1998.... 5
Consolidated Statements of Change in Stockholders' Equity to
June 30, 1999 and 1998.................................................... 6
Consolidated Statements of Cash Flows for the six month period ended
June 30, 1999 and 1998.................................................... 8
Notes to Consolidated Financial Statements................................ 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................. 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................................... 31
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................. 32
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................................... 34
ITEM 4. SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS..................... 34
ITEM 5. OTHER INFORMATION......................................................... 34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................... 35
SIGNATURES................................................................ 36
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FUTURELINK DISTRIBUTION CORP.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED BALANCE SHEETS
(See basis of presentation - Note 1)
(All amounts stated in $U.S.)
JUNE 30 DECEMBER 31
----------------------- -----------
1999 1998 1998
$ $ $
------------------------------------
(unaudited)
ASSETS
CURRENT
Cash 257,551 -- 6,651
Accounts receivable, net of
$195,338 allowance for doubtful
account 2,068,305 -- 1,458,314
Due from related parties, net of
$29,350 allowance for doubtful
accounts 48,626 -- 73,781
Prepaid expenses and other 1,701,676 -- 116,220
Inventory and work in progress 126,907 -- 22,205
---------- --------- ----------
4,203,065 -- 1,677,171
---------- --------- ----------
CAPITAL ASSETS, NET OF $572,372
ACCUMULATED DEPRECIATION 2,297,782 -- 1,122,923
INVESTMENTS [NOTE 2] 1,220,189 1,269,259 --
GOODWILL, NET OF $712,581
ACCUMULATED AMORTIZATION 4,627,690 -- 5,027,939
EMPLOYEE AND CONSULTANTS BASE,
NET OF $915,556 ACCUMULATED
AMORTIZATION 2,284,444 -- 2,817,778
---------- --------- ----------
10,430,105 1,269,259 8,968,640
---------- --------- ----------
14,633,170 1,269,259 10,645,811
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Bank indebtedness [note 4] 638,945 -- 819,217
Accounts payable 937,108 24,981 2,190,098
Accrued Liabilities 678,725 -- 663,201
Deferred Revenues 50,000 -- --
Notes payable 151,756 -- 387,795
Convertible debentures [note 3] 88,161 -- --
Due to related party -- -- 363,887
Interest payable 112,515 -- --
---------- --------- ----------
2,657,210 24,981 4,424,198
---------- --------- ----------
CAPITAL LEASE OBLIGATIONS PAYABLE 35,018 -- 30,262
CONVERTIBLE DEBENTURES [NOTE 3] 7,555,930 -- 2,153,457
DUE TO STOCKHOLDER -- 504,802 --
DEFERRED TAXES 973,660 -- 1,211,634
---------- --------- ----------
11,221,818 529,783 7,819,551
========== ========= ==========
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FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED BALANCE SHEETS
(See basis of presentation - Note 1)
(All amounts stated in $U.S.)
JUNE 30 DECEMBER 31
-------------------- -------------
1999 1998 1998
$ $ $
--------------------------------------
(unaudited)
MINORITY INTEREST -- -- (11,141)
STOCKHOLDERS' EQUITY
Authorized
5,000,000 preferred shares without par value
100,000,000 common shares with par value of $0.0005
Issued and paid-up 3,102 1,200 2,018
6,207,784 and 2,399,863 common
shares issued and outstanding at
June 30, 1999 and June 30, 1998,
respectively
To be issued 1,800 -- 50,000
Exchangeable shares -- -- 2,550,000
Capital in excess of par value 10,662,863 2,670,831 6,437,640
Contributed surplus 14,636,300 -- 1,224,668
Cumulative translation adjustment (210,250) -- (96,468)
Deficit (21,682,463) (1,932,555) (7,330,457)
----------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY 3,411,352 739,476 2,837,401
----------- ---------- ----------
14,633,170 1,269,259 10,645,811
=========== ========== ==========
See accompanying notes:
On behalf of the Board: /s/ Robert Kubbernus /s/ F. Bryson Farrill
---------------------- -------------------------
Robert J. Kubbernus F. Bryson Farrill
Director Director
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FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT AND
COMPREHENSIVE LOSS
(All amounts stated in $U.S.)
3 MONTH PERIOD ENDED 6 MONTH PERIOD ENDED
JUNE 30 JUNE 30
------------------------- ------------------------
1999 1998 1999 1998
$ $ $ $
------------------------- ------------------------
(unaudited) (unaudited)
REVENUE
Consulting services 1,148,682 -- 2,345,530 --
Hardware and software sales 501,189 -- 883,890 --
Other 61,577 -- 225,653 --
----------- ----------- ----------- ----------
1,711,448 -- 3,455,073 --
----------- ----------- ----------- ----------
EXPENSES
Hardware and software purchases 469,600 -- 822,130 --
Contracts, payroll and benefits 1,738,920 -- 3,223,962 --
Accounting and legal 97,382 10,000 146,846 40,158
Consulting expenses 425,416 -- 891,238 --
General and administrative 1,060,819 5,351 1,830,891 30,918
Other 9,500 -- 9,500 --
Interest expense 6,408,353 -- 7,406,143 --
Amortization of deferred financing
fees and debt discount [note 3] 1,437,668 -- 1,466,517 --
Bad debt expense/(recovery) (91,023) -- 92,504 --
Depreciation 218,416 -- 350,250 --
Amortization of intangible assets 460,515 -- 960,520 --
----------- ----------- ----------- ----------
12,235,566 15,351 17,200,501 71,076
----------- ----------- ----------- ----------
Loss from operations (10,524,118) (15,351) (13,745,428) (71,076)
----------- ----------- ----------- ----------
Extinguishment of debt [note 3a] (844,552) -- (844,552) --
Equity in loss of affiliate [note 2b] -- (270,089) -- (411,316)
----------- ----------- ----------- ----------
(844,552) (270,089) (844,552) (411,316)
----------- ----------- ----------- ----------
LOSS BEFORE INCOME TAXES (11,368,670) (285,440) (14,589,980)
Deferred tax benefit 118,987 -- 237,974 --
----------- ----------- ----------- ----------
NET LOSS FOR THE PERIOD (11,249,683) (285,440) (14,352,006) 482,392
OTHER COMPREHENSIVE LOSS
Foreign currency translation
adjustment (72,063) -- (113,782) --
----------- ----------- ----------- ----------
COMPREHENSIVE LOSS (11,321,746) (285,440) (14,465,787) 482,392
=========== =========== =========== ==========
DEFICIT, BEGINNING OF PERIOD (10,432,780) (1,647,115) (7,330,457) (1,450,163)
DEFICIT, END OF PERIOD (21,682,463) (1,932,555) (21,682,463) (1,932,555)
=========== =========== =========== ==========
LOSS PER COMMON SHARE $(1.82) $(0.12) $(2.39) $(0.20)
=========== =========== =========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 6,175,671 2,395,709 5,995,831 2,392,824
=========== =========== =========== ==========
The above statement gives retroactive effect to share consolidations of 5 to 1
on June 1, 1999.
See accompanying notes
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FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(All amounts stated in $U.S.)
CAPITAL IN
TO BE EXCESS OF CONTRIBUTED
(UNAUDITED) COMMON STOCK ISSUED PAR SURPLUS
------------------- ------ ---------- -----------
SHARES $ $ $ $
----------------------------------------------------------
BALANCE, DECEMBER 31, 1997 2,040,700 1,020 -- 1,425,211 --
Issuance of shares on acquisition
of 46% of FutureLink Alberta 308,000 154 -- 338,646 --
Forgiveness of stockholder debt -- -- -- 60,200 --
Issuance of share capital for cash 51,163 26 -- 846,774 --
--------- ----- ------ --------- ---------
BALANCE, JUNE 30, 1998 2,399,863 1,200 -- 2,670,831 --
Forgiveness of stockholder debt -- -- -- 10,125 --
Issuance of share capital to
employees, officers and directors
of the company 700,000 350 -- 2,117,150 --
Warrants issued with issuance of
convertible debentures -- -- -- -- 562,500
Equity component of convertible
debentures [note 3a] -- -- -- -- 777,143
Equity component of financing fees -- -- -- -- (75,600)
Equity component of financing fees -- -- -- -- (39,375)
Shares issued upon conversion of
convertible debt 374,955 188 -- 506,553 --
Shares issued on conversion of loan 225,448 113 -- 732,538 --
Issuance of shares on acquisition
of 50.4% of FutureLink Alberta 334,755 167 -- 663,960 --
Share issue costs -- -- -- (218,992) --
Financing fees associated
with converted debentures -- -- (44,525) --
---------
TOTAL OUTSTANDING SHARES 4,035,021
---------
Issuance of exchangeable shares on
acquisition of FL/SysGold 850,000 -- -- -- --
Shares to be issued for services 23,051 -- 50,000 -- --
--------- ----- ------ --------- ---------
BALANCE, DECEMBER 31, 1998 4,908,072 2,018 50,000 6,437,640 1,224,668
========= ===== ====== ========= =========
The above statement gives retroactive effect to share consolidations of 5 to 1
on June 1, 1999.
See accompanying notes
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FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(All amounts stated in $U.S.)
CAPITAL IN
(UNAUDITED) TO BE EXCESS OF CONTRIBUTED
COMMON STOCK ISSUED PAR SURPLUS
------------------ ------ ---------- ----------
SHARES $ $ $ $
-----------------------------------------------------
BALANCE, DECEMBER 31, 1998 4,035,021 2,018 -- 6,437,640 1,224,668
Equity components of
10% convertible debentures [note 3a] -- -- -- -- 911,990
Warrants issued with issuance of
convertible debentures -- -- -- -- 129,500
Equity component of financing fees -- -- -- -- (91,194)
Shares issued on conversion of
convertible debt [note 3a] 1,197,054 599 -- 1,560,887 --
Financing fees associated with
converted debentures -- -- -- (96,834) --
Discount associated with converted
debentures -- -- -- (26,747) --
Warrants issued with issuance of 10%
convertible debentures [note 3b] -- -- -- -- 20,000
Equity component of 8% convertible
debentures [note 3e] -- -- -- -- 125,000
Warrants issued with issuance of 8%
convertible debentures [note 3e] -- -- -- -- 35,847
Issuance of shares on 3.6%
acquisition of FutureLink Alberta
[note 2] 23,500 12 -- 42,288 --
Issuance of common stock for services 64,703 32 -- 124,968 --
Issuance of common stock relating to
exchange of exchangeable shares on
acquisition of FL/SysGold in 1998 850,000 424 -- 2,549,576 --
Issuance of common stock for
interest [note 3a] 36,706 18 -- 76,347 --
Warrants issued with issuance of
convertible debentures under amended
agreement [note 3a] -- -- -- -- 1,200,000
Equity component of convertible
debentures under amended agreement
[note 3a] -- -- -- -- 1,015,000
Warrants issued with issuance of
senior subordinated convertible
promissory notes [note 3c] -- -- -- -- 3,126,620
Equity component of senior
subordinated convertible promissory
notes [note 3c] -- -- -- -- 4,911,880
Warrants issued as placement fee on
issuance of senior subordinated
convertible promissory note [note 3c] -- -- -- -- 1,800,000
Placement fee attributable to equity
component of senior subordinated
convertible promissory notes [note 5] -- -- -- -- (1,800,000)
Warrants issued for advisory
services [note 5] -- -- -- -- 1,800,000
Warrants issued for advisory
services [note 5] -- -- -- -- 40,320
Warrants issued for advisory
services [note 5] -- -- -- -- 228,950
Finance fees attributable to equity
component of senior subordinated
convertible promissory notes -- -- -- -- (159,722)
Equity component of 10% convertible
debentures [note 3d] -- -- -- -- 79,821
Warrants issued with issuance of 10%
convertible debentures [note 3d] -- -- -- -- 41,800
Financing fees associated with 10%
convertible debentures [note 3d] -- -- -- -- (4,180)
Exercise of employee stock options 800 -- 1,800 -- --
Stock issue costs -- -- -- (5,262) --
--------- ----- ----- ---------- ----------
BALANCE, JUNE 30, 1999 6,207,784 3,102 1,800 10,662,863 14,636,300
========= ===== ===== ========== ==========
The above statement gives retroactive effect to share consolidations 5 to 1 on
June 1, 1999.
See accompanying notes
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FUTURELINK DISTRIBUTION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts stated in $U.S.)
6 MONTH PERIOD ENDED
(UNAUDITED) JUNE 30
------------------------
1999 1998
$ $
------------------------
(unaudited)
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss for the period (14,352,006) (482,392)
Adjustments to reconcile net loss to net cash provided by
operating activities
Equity in loss of affiliate [note 2b] -- 411,316
Non cash interest expense 7,235,169 --
Non cash consulting expense 125,000 --
Depreciation 350,250 --
Amortization of deferred financing fees and debt discount 1,466,517 --
Amortization of intangible assets 960,520 --
Bad debt expense 92,504 --
Extinguishment of debt 432,952 --
Other (50,000) --
Deferred tax recovery (237,974) --
----------- ----------
(3,977,068) (71,076)
Changes in non-cash working capital (1,264,698) 1,049
Effect of foreign currency on operating activities (67,424) --
----------- ----------
(5,309,190) (70,027)
----------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital assets purchased (1,543,777) --
Cash advances to equity investee -- (1,341,775)
Investment [note 2a] (1,220,189) --
Other investments (40,016) --
Changes in non-cash working capital (289,451) --
Other (125,193) --
----------- ----------
(3,218,626) (1,341,775)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received under demand credit facility (180,272) --
Issuance of common stock -- 846,800
Share issue costs (5,262) --
Shares to be issued 1,800
Repayment of capital lease obligations (17,704) --
Forgiveness of stockholder debt -- 60,200
Issuance of 8% convertible debentures net of issue costs [note 3a] 2,925,000 --
Repayment of 8% convertible debentures [note 3a] (1,470,000) --
Repayment of 10% convertible debentures [note 3b] (218,725) --
Issuance of 8% senior subordinated convertible debentures net of
issue costs [note 3c] 7,258,327 --
Issuance of 10% convertible debentures net of issue costs [note 3d] 247,500 --
Issuance of 8% convertible debentures net of issue costs [note 3e) 490,000 --
Issuance of note payable net of issue costs 125,000 --
Issuance of promissory note 150,000 --
Repayment of promissory note (150,000) --
Repayment of note payable (381,033) --
Other financing fees (89,000) --
Advances from stockholders -- 504,802
Changes in non-cash working capital 93,085 --
----------- ----------
8,778,716 1,411,802
----------- ----------
INCREASE IN CASH 250,900 --
Cash, beginning of period 6,651 --
----------- ----------
CASH, END OF PERIOD 257,551 --
=========== ==========
See accompanying notes
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FUTURELINK DISTRIBUTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998 (unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company has an accumulated deficit amounting to $21,682,463 and
total net operating cash outflows of $3,977,068. Although it has a positive
working capital balance of $1,545,855, the Company's continuation as a going
concern is in substantial doubt and dependent on its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing as may be required, and ultimately to attain successful
operations. However, no assurance can be given at this time as to whether the
Company will achieve any of these conditions. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern
for a reasonable period of time.
During the period from June 30, 1999 to August 16, 1999, management has raised
$15,000,000 of capital in the form of convertible debt which will primarily be
used to finance operations. These funds have further improved the Company's
working capital position of $1,545,855 as at June 30, 1999.
The accompanying financial statements reflect all adjustments which are, in the
opinion of management, necessary to reflect a fair presentation for the periods
being presented.
2. INVESTMENTS
A) PROPOSED ACQUISITION OF EXECUTIVE LAN MANAGEMENT, INC.
On June 2, 1999, the Company signed an Agreement and Plan of Reorganization and
Merger with Executive LAN Management, Inc., operating as Micro Visions ("Micro
Visions"). The agreement provides for a merger of the Company with Micro
Visions such that all of Micro Visions' outstanding stock shall be sold to the
Company in exchange for $12,000,000 cash and 6,000,000 common shares, as well as
contingent consideration of 2,400,000 common shares subject to the achievement
of certain targets. The merger is to take place as soon as practicable after
the satisfaction or waiver of the conditions set forth in the Agreement and is
anticipated to be completed by October 1, 1999.
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:
i) 1,200,000 common shares to be issued if Micro Visions achieves sales in
excess of $18,000,000;
ii) 720,000 common shares to be issued if Micro Visions enlists 100 new
customers; and
iii) 480,000 common shares to be issued if Micro Visions installs and integrates
at least 200 new servers.
Upon signing the agreement, a deposit of $1,000,000 was paid by the Company for
the purchase of Micro Visions. As per the agreement, a further $500,000
deposit was paid July 31, 1999, and an additional $500,000 is due August 31,
1999.
The Company has incurred costs relating to this proposed acquisition of
$220,189 to June 30, 1999.
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The acquisition, upon completion will be accounted for by the purchase method.
The purchase price will be allocated to the net assets acquired based on their
estimated fair values. As at June 30, 1999, the purchase allocation would be
as follows:
$
----------
NET ASSETS ACQUIRED
Working capital 904,826
Capital and other assets 708,512
Goodwill 44,085,005
----------
NET ASSETS ACQUIRED 45,698,343
==========
CONSIDERATION:
Cash 12,000,000
Common shares of FutureLink 33,375,000
Acquisition costs 323,343
----------
45,698,343
==========
Additional consideration payable to the former shareholders of Micro Visions
has not been reflected in the purchase allocation or the proforma results of
operations 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.
The following proforma results of operations give effect to the acquisition of
Micro Visions as if the transaction had occurred January 1, 1999 and 1998,
respectively, and includes the amortization of goodwill calculated on a straight
line basis over a period of 5 years.
June 30
1999 1998
------------ -----------
Revenue 12,776,661 5,461,238
Expenses
Contracts, payroll and benefits 6,300,981 1,753,780
General, administration, and other 4,147,463 810,637
Hardware and software purchases 5,527,345 2,606,371
Interest expense 7,413,483 -
Depreciation 391,068 3,342
Goodwill and other amortization 6,835,538 4,413,905
----------- ----------
30,615,878 9,588,035
=========== ==========
Loss from operations (17,839,217) (4,126,797)
Extinguishment of debt (844,552) -
Equity in loss of affiliate - (411,316)
Net profit/(loss) before tax (18,683,769) (4,538,113)
Deferred tax benefit/(expense) 133,707 (143,274)
----------- ----------
Net profit/(loss) after tax (18,550,062) (4,681,387)
=========== ==========
Loss per common share $ (1.55) $ (0.56)
=========== ==========
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B) FUTURELINK DISTRIBUTION CORP. (ALBERTA)
On February 26, 1999, FutureLink Alberta became a wholly owned subsidiary when
the Company purchased the remaining 23,500 shares (3.6%) of FutureLink Alberta
in exchange for 23,500 common shares of the Company at an ascribed value of
$42,300. Net assets acquired are as follows:
$
-------
NET ASSETS ACQUIRED
Non cash working capital deficiency (49,208)
Capital assets 66,657
Goodwill 26,937
Other obligations (2,086)
-------
NET ASSETS ACQUIRED 42,300
=======
As at June 30, 1998, the Company held a 46% interest in FutureLink Alberta
which had been accounted for on an equity basis since the period of ownership
commencing January 20, 1998. The Company acquired the interest in FutureLink
Alberta by issuing 308,000 common shares in exchange for 308,000 common share
of FutureLink Alberta. The value ascribed to the investment was $338,800 and
was based on an independent valuation report. The Company's investment in
FutureLink Alberta at June 30, 1998 was as follows:
$
---------
308,000 common shares 338,800
Advances to equity investee 1,341,775
Equity loss in investee (411,316)
---------
1,269,259
=========
The advances to FutureLink Alberta were non-interest bearing and had no
repayment terms.
3. CONVERTIBLE DEBENTURES
June 30, December 31,
1999 1998
$ $
--------- ------------
CURRENT
Stockholder 10% convertible debentures (b) 88,161 --
-------- ------------
88,161 --
======== ============
LONG TERM
10% TK convertible debentures (a) 1,477,084 2,153,457
8% Senior subordinated convertible
promissory notes (c) 5,386,406 --
10% convertible debentures (d) 220,439 --
8% convertible debentures (e) 472,001 --
--------- ------------
7,555,930 2,153,457
========= ============
A) 10% TK CONVERTIBLE DEBENTURES
June 30, December 31,
1999 1998
$ $
---------- ------------
Principal 2,500,000 2,220,000
Discount on debt (1,108,109) --
Deferred financing fee -- (222,073)
Accrued interest 85,103 155,530
---------- ------------
NET BALANCE AT JUNE 30, 1999 1,477,084 2,153,457
========== ============
11
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During 1998 the Company entered into a 10% convertible debenture agreement with
Thomson Kernaghan & Co. Ltd. as agent, to provide up to $5,000,000 of
financing. In February, 1999 the company amended the terms of the 10% TK
convertible debentures which increased the total financing from $5,000,000 to
$6,000,0000.
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
at the issue date and included with contributed surplus. Of this amount,
$911,990 relates to debentures received during the six months to June 30, 1999.
The amount attributed to the conversion option has been included in interest
on long term debt as the conversion option was exercisable upon issuance.
On April 26, 1999, the Company amended the terms of the 10% TK convertible
debenture agreement. The amendment supersedes all prior amendments.
Previously the debenture holders had the right to convert the debentures at a
price equal to the lower of $3.75 per share and 78% of the average closing bid
price of the Company's common stock for the three trading days immediately
preceding the conversion. Under the terms of the amendment, the debenture
conversion price was fixed at $1.00 per common share. In addition, the common
share purchase warrants of 208,334 and 129,534 issued under prior agreements
were repriced such that their exercise price became $1.25 per common share.
The Company also issued an additional 862,132 share purchase warrants at an
exercise price of $1.25 per common share such that a total of 1,200,000 share
purchase warrants are outstanding relating to this convertible debenture
agreement. In addition, the Company paid $1,881,600 as consideration for the
cancellation of $1,470,000 of the principal balance such that $2,500,000 of the
convertible debentures remain outstanding.
An amount of $844,552 has been recorded as a loss on the extinguishment of
debt and includes $259,318 unamortized finance fees and $173,634 unamortized
debt discount associated with the prior debt, as well as $411,600 relating to
the cost of settling $1,470,000 of debt. In addition, an amount of $1,015,000
attributable to the intrinsic value of the conversion feature of the amended
debt has been included as interest expense with a corresponding credit to
contributed surplus as the conversion option was exercisable upon issuance.
An amount of $1,200,000 has been included in contributed surplus as the
estimated value attributed to the 1,200,000 warrants as they were exercisable
upon issuance. The amount is being amortized over the remaining life of the
debentures of which $91,981 has been amortized to June 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 period, the
Company issued 36,700 shares as payment for $76,347 of accrued interest.
B) STOCKHOLDER 10% CONVERTIBLE DEBENTURES
$
------
Principal 82,517
Accrued interest 5,644
------
NET BALANCE AT JUNE 30, 1999 88,161
======
During the first quarter of 1999 the Company issued $301,241 10% convertible
debentures, due on June 30, 1999 in exchange for stockholders advances of
$289,264 ($440,000 Canadian) including interest existing at December 31, 1998.
The holders have the right to convert the debentures in increments of at least
$10,000, at a price per share equal to $2.00. The Company may prepay any and
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 holders'
election, interest can be settled in common stock of the Company based on
market prices.
12
13
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 note holder.
C) 8% SENIOR SUBORDINATED CONVERTIBLE PROMISSORY NOTES
$
----------
Principal 8,038,500
Discount on debt (2,130,565)
Deferred financing fee (521,529)
----------
NET BALANCE AT JUNE 30, 1999 5,386,406
==========
On May 7, 1999, the Company completed $8,038,500 financing of 8% senior
subordinated convertible promissory notes. The notes are due April 30, 2000,
however maturity may be extended by up to one year at the option of the
placement agent. Interest is payable quarterly from April 30, 1999. The
notes are convertible at the option of the note holders at a conversion price
of $1.00 per share (except those issued to management and directors, see
below). The notes will automatically convert in the event the Company raises
gross proceeds from a subsequent offering of at least $10,000,000, at a
valuation in excess of the greater of (i) double the average closing bid price
of the Company's common stock for the 10 trading days immediately preceding the
initial closing date; or (ii) $1.00 per common share. Such conversion is
conditioned upon the common stock underlying the notes being registered at the
time of conversion.
Of the total $8,038,500 notes issued, management and directors of the Company
purchased $433,000. The notes are convertible at a conversion price of $1.50
per share, subject to a 12 month lock up provision.
An amount of $4,911,880 has been attributed to the intrinsic value of the
conversion option and has been included in contributed surplus.
An amount of $3,195,848 has been included as a discount on debt and is being
amortized over the estimated life of the debt of six months.
Upon entering into the agreement, the Company issued warrants to purchase
3,802,750 of common stock to the external holders of the debentures and 216,500
of common stock to directors and management of the Company. Common stock can
be purchased at $1.25 per share by external holders and at $1.50 per share by
directors and management. The warrants expire on April 29, 2006 but may be
redeemed at the option of the Company on 30 days' notice at a redemption price
of $1.25 per warrant provided either (i) a registration statement is declared
effective by the Securities and Exchange Commission; (ii) or 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.
In addition, 2,000,000 warrants at an exercise price of $1.25 per common share
were provided to the agent as a placement fee. An amount of $1,800,000 has
been attributed to the value of the warrants and has been recorded to
contributed surplus. The placement fee is attributable to the equity portion
of the debt and therefore this issue cost has also been recorded as a charge
against contributed surplus. The warrants are exercisable at $1.25 per share
and expire on April 29, 2006.
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14
D) 10% CONVERTIBLE DEBENTURES
$
-------
Principal 278,160
Discount on debt (39,727)
Deferred financing fee (22,164)
Accrued interest 4,170
-------
NET BALANCE AT JUNE 30, 1999 220,439
=======
During the first quarter of 1999, the Company issued a $275,000 promissory
note. Effective May 7, 1999, the Company entered into an agreement which
converted the promissory note and $3,160 accrued interest into a 10%
convertible debenture. The holder of the convertible debenture has the right to
convert the debenture at $1.15 per common share. The Company may prepay upon
30 days advance notice. The note matures on April 20, 2002. At the
noteholders' option, interest can be paid in stock at $1.15 per share.
Interest is otherwise due at maturity.
An amount of $79,821 has been attributed to the intrinsic value of the
conversion options and has been included in contributed surplus.
Upon entering into the 10% convertible debenture agreement, the Company issued
warrants to purchase 44,505 of common stock of the Company to the holder of the
debenture. Common stock can be purchased at $1.25 per share. The warrants
expire April 30, 2001. An amount of $41,800 has been included in contributed
surplus as the estimated value of the warrants.
The Company also paid a 10% financing fee on the original $275,000. The value
of the fees associated with the equity component of the 10% convertible
debentures in the amount of $4,180 has been charged to contributed surplus.
The remaining amount is being amortized over the life of the debentures.
E) 8% CONVERTIBLE DEBENTURES
$
-------
Principal 500,000
Discount on debt (32,003)
Deferred financing fee (8,928)
Accrued interest 12,932
-------
NET BALANCE AT JUNE 30, 1999 472,001
=======
During the first quarter of 1999, the Company issued an aggregate of $500,000
8% convertible debentures, due February 28, 2002. The holders have the right
to convert the debentures at a price per share equal to the lower of $0.38 per
share or 80% of the closing prices for the three days prior to the date of
conversion. The Company may prepay any and 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 holders' election, interest can be settled
in common stock of the Company based on market prices.
An amount of $125,000 has been attributed to the intrinsic value of the
conversion option and has been included in contributed surplus.
Upon entering into the 8% convertible debenture agreement, the Company issued
warrants to purchase 26,553 of common stock of the Company to the holder of the
debentures. Common stock can be purchased at $1.50 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 is being amortized over the life of the
convertible debentures.
14
15
4. BANK INDEBTEDNESS
A subsidiary of the Company has a demand credit facility with a Canadian
chartered bank for $1,000,000 Canadian for which the Company has provided a
guarantee and postponement of claim. The facility provides for a first
floating charge over all assets of the subsidiary as well as an assignment of
the shares of the subsidiary. Interest on the facility is based on a range of
the bank's prime rate plus 1% to the bank's prime rate plus 3% depending on the
subsidiary`s debt to equity ratio.
5. 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 2,000,000 warrants. An amount of $1,800,000 has been included in
contributed surplus as the estimated value of the warrants. The issuance of
the warrants has been recorded as a prepaid expense and is being amortized over
the life of the agreement.
On April 1, 1999 the Company issued 45,600 warrants relating to an agreement
which provides for advisory services to the Company for a period of one year
commencing December 1, 1998. An amount of $40,320 has been included in
contributed surplus as the estimated value of the warrants. The warrants are
exercisable at $2.35 per common share and expire on December 31, 2001. In
addition, 95,000 warrants were issued to the advisor as compensation for
services rendered relating to certain financing transactions. An amount of
$228,950 has been included in contributed surplus as the estimated value of the
warrants. Of this amount, $159,722 has been charged to contributed surplus as
the amount attributable to the equity component of the related financing. The
balance has been recorded as a deferred financing fee against the related debt.
These warrants are exercisable at $4 per common share and expire on April 29,
2002.
6. CONTINGENCIES
A statement of claim has been filed against the Company in the amount of
approximately $326,000 ($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 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 $185,571 ($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 $254,000 ($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 $65,000 ($100,000 Canadian). These financial
statements contain no provision for loss related to the claims.
15
16
A statement of claim was filed against the Company's subsidiary, FL/SysGold by
TAP Consulting Ltd. in the amount of $97,828 ($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
FL/SysGold.
7. LOSS PER SHARE
Loss per common share is loss for the period divided by the weighted average
number of common shares outstanding after retroactive effect of the share
consolidation. The effect on earnings per share of the exercise of options and
warrants, and the conversion of the convertible securities is anti-dilutive.
8. SUBSEQUENT EVENTS
On July 27, 1999, the Company completed a closing of 8% senior subordinated
convertible promissory notes and warrants for gross proceeds of $15,000,000.
The notes are due on the earlier of (i) July 19, 2001; (ii) the consummation of
a public offering of the Company's securities; (iii) the completion of a
private placement resulting in gross proceeds of at least $15,000,000; and (iv)
the consummation of a merger, combination or the sale of substantially all of
the Company's assets, or the purchase by a single entity or person of more than
50% of the Company's voting stock. The notes are convertible into common stock
at an exercise price of $8.50 per common share. However, if prior to maturity,
the Company completes a private placement of debt or equity securities
resulting in gross proceeds of $15,000,000, and the terms of this subsequent
placement are acceptable to the agent and the noteholders, the notes will
automatically convert as payment for an investment into the securities sold in
the subsequent conversion.
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 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 a finance fee of $1,350,000 and issued 225,000 warrants to the
placement agent. The warrants are exercisable at $8.50 per share and expire
July 27, 2001.
On August 1, 1999, the Company entered into an agreement with an executive of
the Company. In accordance with the terms of the agreement, the Company loaned
$2,000,000 to the executive which was then used by the executive to purchase
232,829 common shares of the Company. The common stock are escrowed. On
October 1, 1999, 29,129 shares will be released from escrow. An additional
29,100 shares will be released from escrow on a quarterly basis commencing
January 1, 2000. So long as the executive remains employed by the Company,
$250,000 of the principal amount of the loan shall be forgiven on a quarterly
basis, commencing October 1, 1999.
16
17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates" and other similar expressions or variations of such words
are intended to identify these forward-looking statements. Additionally,
statements concerning future matters such as the development of new products,
enhancements or technologies, possible changes in legislation and other
statements regarding matters that are not historical fact are forward-looking
statements. Forward-looking statements involve risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, availability of financial
resources adequate for short-, medium- and long-term needs, demand for our
products and services and market acceptance, as well as those factors discussed
in this "ITEM 2. Management's Discussion and Analysis of Financial Condition
and Operating Results" and elsewhere in this Report.
OVERVIEW
FutureLink Distribution Corp., a Colorado corporation ("FutureLink" or the
"Company") is a founder of the Application Services Provider (ASP) industry.
FutureLink provides computer utility services (as "the Computer Utility
Company(TM)") that include ASP (Application Service Provision), computer
infrastructure management and IT business consulting. FutureLink strives to
understand its clients' organizational processes and information requirements
and provides a full suite of information management solutions.
FutureLink and its subsidiaries provide computing solutions for mid-sized
businesses. The Company has expanded its services, which now include the
provision of off-site network management solutions to clients, in the growing
ASP industry. The Company's ASP services make it possible for clients to access
and use leading software packages without the costs of owning and managing the
IT infrastructure typically required.
FutureLink transacts business through the following subsidiaries: (i) a 100%
interest in FutureLink Distribution Corp. (an Alberta corporation) ("FutureLink
Alberta") located in Calgary, Alberta, Canada; (ii) a 100% interest in
FutureLink Acquisition Corp. (an Alberta corporation) which in turn owns 100% of
the voting shares of FutureLink/SysGold Ltd. ("FutureLink/SysGold"). Effective
August 1, 1999, the Company completed a series of amalgamations of these
subsidiaries such that the three former wholly-owned subsidiaries now continue
as a single wholly-owned corporation named FutureLink Distribution Corp., an
Alberta corporation (also referred to herein as "FutureLink Alberta"). The
Company also owns a 100% interest in FutureLink California Acquisition Corp., a
Delaware corporation, which was created by the Company in order to effect the
proposed acquisition of Micro Visions (please see "Recent Developments -
Acquisition Agreement with Micro Visions", below).
FutureLink provides small and mid-sized businesses (10-1,000 employees) with
off-site, Internet-based computing, allowing subscribers to escape
hardware/software upgrade cycles, precisely control total cost of technology
ownership and focus on their core businesses. FutureLink's expertise in
application hosting on a monthly subscription basis, outsourcing and facility
management, and business practices consulting enables the company to offer an
all-inclusive, trouble-free service at a predictable price. FutureLink markets
itself as "The Computer Utility Company," and offers computer and information
services as transparently and reliably as today's utilities deliver electricity,
water and telephone services.
17
18
In the first quarter of 1999, FutureLink was funded with $775,000 of additional
gross convertible debt and debt financing to fund operations and capital
investments as well as amending an existing $5,000,000 facility to a $6,000,000
package. Funding received during 1999 under this amended facility totaled
$3,250,000. In the second quarter of 1999, the Company secured an additional
$8,038,500 (gross) of convertible debt financing, again for operations and
capital investments. In late July, 1999 FutureLink closed on an additional
$15,000,000 gross proceeds of convertible debt financing. The raising of
capital has been a key focus of the Company during the first six months of 1999.
FINANCIAL POSITION
JUNE 30, 1999 VS. DECEMBER 31, 1998
June 30, 1999 December 31, 1998
Current assets 4,203,065 1,677,171
Long term assets 10,430,105 8,968,640
---------- ----------
Total assets 14,633,170 10,645,811
Current liabilities 2,657,210 4,424,198
Long term liabilities 8,564,608 3,395,353
----------- ----------
Total Liabilities 11,221,818 7,819,551
Total Equity 3,411,352 2,826,260
ASSETS
Current assets increased to $4,203,065 at June 30, 1999 from $1,677,171 at
December 31, 1998. This increase is primarily due to an increase of $1,585,456
in prepaids of which $1,500,000 relates to an agreement for advisory services
for a period of one year. The agreement provided for payment by way of
warrants. An amount of $1,800,000 was the estimated value of the warrants
which is being taken to income over a period of 12 months. As at June 30,
1999, $300,000 had been recognized as an expense.
Long term assets increased by approximately $1,450,000 since December 31, 1999.
The increase includes a deposit of $1,000,000 towards the acquisition of Micro
Visions, $220,189 relating to acquisition costs, and fixed asset additions of
$1,543,777. These are offset by depreciation of $350,250 and amortization of
intangible assets of $960,520 for the period.
LIABILITIES
Current liabilities deceased by approximately $1,767,000 This decrease is
largely due to the company obtaining additional financing during the period and
thereby enabling the Company to pay a significant number of its suppliers.
Accounts payable decreased by $1,253,000 since December 31, 1998. In addition,
the Company has reduced its line of credit with its bank by $180,000, and
repaid $360,000 owing to a related party.
Long term liabilities increased approximately $5,200,000. The increase relates
to the issuance of approximately $12,000,000 debt during the six months, net of
issue costs and debt discounts associated with the estimated value of warrants
issued with the debt. In addition, the Company repaid approximately $1,700,000
of debt during the period.
18
19
STOCKHOLDERS' EQUITY
Equity increased by approximately $575,000 over that at December 31, 1998.
Capital in excess of par increased $4,200,000 relating to the conversion of
debt ($1,560,000) and the issuance of shares for exchangeable shares previously
issued in conjunction with the acquisition of a subsidiary in 1998
($2,550,000).
Contributed surplus increased by $13,400,000 primarily relating to the value of
conversion features and warrants associated with new debt.
These increases are offset by a loss of approximately $14,350,000 for the six
month period ended June 30, 1999.
RESULTS OF OPERATIONS
EBITDA
FutureLink incurred a loss for the six months ended June 30, 1999 of
$14,352,006, largely related to non-cash interest expenses. The Company's
EBITDA (loss before interest, taxes, depreciation and amortization) for the
three month periods ending March 31, 1999, June 30, 1999 and the six month
period ending June 30, 1999 were as follows:
3 months to March 31 3 months to June 30 6 months to June 30
Loss for the Period ($3,102,323) ($11,249,683) ($14,352,006)
Interest Expense $ 997,790 $ 6,408,353 7,406,143
Deferred Tax Benefit ($118,987) ($118,987) ($237,974)
Depreciation and
Amortization of
Intangible Assets $ 631,839 $ 678,931 $ 1,310,770
Amortization of
deferred finance
fees
and debt discount $ 28,849 $ 1,437,668 $ 1,466,517
Debt extinguishment - 432,952 432,952
---------- ------------ -----------
EBITDA ($1,562,832) ($2,410,766) ($3,973,598)
----------- ------------ -----------
Interest expense for the three months to June 30, 1999 of $5,393,353 relates
primarily to a non-cash amount relating to the intrinsic value of conversion
features associated with convertible debt securities issued during the period.
Of this amount, $4,911,880 of interest expense relates to $8,038,500 of
convertible notes issued during the period.
Depreciation and amortization of intangible assets includes the amortization of
the employee and consultants base and goodwill.
The amortization of deferred finance fees and debt discount of $1,437,668
includes a non-cash amount of $1,323,927 relating to this same issuance of
$8,038,500 debt. This debt issuance resulted in $3,976,021 being deferred which
relates to actual cash debt issue costs of $780,173, as well as $3,195,848
relating to warrants issued in association with the debt. The amounts are being
amortized over a period of six months, being the expected life of the debt.
A debt extinguishment of $844,552 was recognized in relation to the amendment
of 10% convertible debentures. Of this amount, $411,600 related to the cash
required to settle $1,470,000 of debt. The remaining amount related to debt
discounts, finance fees and the values of conversion features and warrants.
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20
JUNE 30, 1999 VS. JUNE 30, 1998
The following is an analysis and comparison of the six month results ending
June 30, 1999 to that of June 30, 1998 (where applicable).
REVENUES
During the six months ended June 30, 1999, the Company recorded total
revenues of $3,455,073. Revenues for the same period in 1998 were nil as
FutureLink had not yet acquired Riverview Management Corporation ("SysGold"),
the Company's Consulting and IT Outsourcing subsidiary (now part of the
amalgamated FutureLink Alberta) and it did not have a controlling interest in
FutureLink Alberta. SysGold was acquired in late August, 1998 and FutureLink
Alberta became a controlled subsidiary on November 23, 1998. The Company's
total recognized revenues from these subsidiaries was approximately $2.4
million in 1998.
The major source of FutureLink's revenue for the six months was information
technology consulting services, including Application Service Provision
("ASP") related services, which generated total revenues of $2,345,530. These
revenues relate to information technology outsourcing services, IT business
practices consulting and server-based (including ASP) computer consulting.
FutureLink's 1999 revenues also include hardware and software sales relating
to items procured by the Company for its clients. FutureLink purchases and
resells hardware and software to many of its IT consulting clients as an
additional service to these clients. These sales are not considered a
primary line of business, but part of the Company's overall consulting
services. During the first six months of 1999, FutureLink generated $883,890
of hardware and software sales, earning a gross margin of approximately 7%.
Direct Application Service Provider ("ASP") services also contributed to
FutureLink's revenue stream, with $181,601 generated from direct sales of
hosted applications from the Company's Server Farm for the six months ended
June 30, 1999. Total ASP sales and related services were approximately
$370,000 for the six months ended June 30, 1999.
EXPENSES
Hardware and Software Purchases
Hardware and software purchases of $822,130 for the six months to June 30,
1999 relates to equipment procured on behalf of customers as part of the
Company's overall IT consulting services.
Contracts, Payroll and Benefits
FutureLink's contracts, payroll and benefits expense comprise amounts
relating to salaries to information technology services staff and
consultants, directors, management, sales, marketing, and administrative
employees, as well as the related revenue sharing and benefits. The amount
totaled $3,223,962 for the six months ended June 30, 1999.
In 1998, the Company did not have such expenses, other than the 46% share of
FutureLink Alberta's contracts, payroll and benefits expense of $245,515
which was included in the equity in loss of affiliate.
20
21
Accounting and Legal Costs
FutureLink incurred $146,846 in accounting and legal expenses through to June
30, 1999. These costs include amounts related to fees for accounting, audit
and taxation services in the amount of $74,928, as well as $71,918 incurred
for legal advice and services associated with corporate governance,
compliance and commercial transactions.
For the sixth month comparable period in 1998, FutureLink incurred accounting
and legal expenses of $40,158. In addition, FutureLink Alberta incurred
accounting and legal expenses of $26,632 of which 46% of the expenses are
included in FutureLink's $411,316 equity in loss of affiliate.
General and Administrative Expenses
FutureLink's consolidated general and administrative expenses for the six
months ending June 30, 1999 were $1,830,891.
The consolidated general and administrative expenses are comprised of the
following:
Travel Expenses $ 335,397
Meals and Entertainment Expenses $ 52,878
Office Expenses $ 283,342
Advertising, Promotion and Investor Relations Expenses $ 388,821
Staff Development Expenses $ 96,689
Rent $ 314,612
Compliance $ 80,947
Other Expenses $ 278,205
TOTAL ----------
$1,830,891
The Company's travel expenses were significant and relate to sales, securing
business partnerships and vendor alliances, as well as meeting and
developing relationships with industry analysts and financiers.
Office expenses relate primarily to telephone, insurance, and office
supplies. These costs totaled $283,342 for the six months ending June 30,
1999, and have remained relatively stable in spite of the significant growth
of the Company over the past six months.
The Company incurred a significant amount during the second quarter relating
to promoting the Company and the ASP Industry. A total of $263,911 for the
three months ending June 30, 1999 was incurred in efforts to increase the
company profile and the ASP Industry, some of which related to the
organization and participation in the ASP Consortium, as well as
participation in trade shows and other computer industry related events.
Rent costs relate primarily to amounts incurred relating to operations in
Calgary, Canada.
Compliance costs relate to fees incurred in preparing and filing
documentation as required by the Securities and Exchange Commission.
Other expenses include internet and connectivity charges, life insurance,
equipment rentals and other expenses.
21
22
Consulting Expenses
Consulting expenses of $891,238 were incurred to engage consultants to
assist the Company in several areas including business development,
marketing, market research, market analysis, investor relations and delivery
of IT services to customers. In addition, non-cash charges of $300,000 and
$13,200 were incurred in relation to the recognition of the estimated value
of warrants associated with agreements relating to advisory services
obtained for assessing financing strategies and business acquisitions,
amongst other items.
FutureLink Alberta incurred consulting expenses of $148,927 in the first
half of 1998, of which 46% of these expenses are included as part of
FutureLink's equity in loss of affiliate.
Interest Expense
FutureLink's interest expense for the six months ended June 30, 1999 of
$7,406,143 is comprised of the following:
Non-Cash Interest Charge Related to Convertible
Debt Financings (intrinsic value of conversion features) $7,043,691
Accrued interest on Convertible Debt $ 323,185
Other Interest $ 39,267
TOTAL ----------
$7,406,143
The intrinsic value of the conversion features of debt issued during the
period relates primarily to the $8,038,500 of convertible notes issued by
the Company in the second quarter. This financing resulted in $4,911,880
being recorded as interest expense. An amount of $895,964 was similarly
recorded in the first quarter and was primarily associated with financing
received under the terms of a $5 million facility, later extended to $6
million.
The accrued interest on convertible debt includes $112,515 relating to the
$8,038,500 gross proceeds of a financing completed in the second quarter.
This interest is payable on a quarterly basis. The remaining accrued
interest amount relates to various other convertible debt instruments which
provide an option to the debt holders for the interest to be settled in
stock.
Bad Debt Expense
FutureLink's bad debt expense of $92,504 for the six months to June 30, 1999
includes actual bad debts and a provision for doubtful accounts relating to
amounts for which management believes collection to be unlikely. During the
three month period ending June 30, 1999, the Company recorded a net recovery
of $91,023 for amounts subsequently determined to be collectible.
Depreciation
FutureLink's consolidated depreciation of $350,520 is related to its two
subsidiaries, FutureLink/SysGold and FutureLink Alberta (these two companies
now amalgamated with FutureLink Acquisition Corp. as FutureLink Alberta) and
includes depreciation of computer equipment, software, leasehold
improvements and office equipment.
Amortization of Intangible Assets
FutureLink's amortization expense of $960,520 for the six months ended June
30, 1999 includes the following:
22
23
Goodwill amortization related to the acquisitions
of FutureLink Alberta and FutureLink/SysGold
Amortization of employee and consultant base $427,186
Intangible asset related to the acquisition of FutureLink/SysGold $533,334
TOTAL --------
$960,520
Goodwill is being amortized over a period of five years whereas the employee
and consultant base is being amortized over a period of three years.
Debt Extinguishment
During the second quarter of 1999, FutureLink renegotiated the terms of its
10% convertible debenture which had been previously issued in relation to $6
million of financing. Under the amendment, the conversion price of the
debentures was fixed at $1.00 (after giving effect to the June 1, 1999 1 for
5 reverse stock split). The Company also issued additional warrants, and
repriced prior warrants such that 1,200,000 warrants at a price of $1.25 per
share (after giving effect to the June 1, 1999 1 for 5 reverse stock split)
became outstanding. Lastly, FutureLink paid $1,881,600 to settle $1,470,000
of principle. For accounting purposes, all amounts relating to the "old"
debt were treated as extinguished and new debt issued. As a result of the
transaction, FutureLink recognized a loss of $844,552.
JUNE 30, 1999 VS. MARCH 31, 1999
The following is a discussion of the three months ended June 30, 1999 as
compared to the three months ended March 31, 1999.
REVENUES
FutureLink recognized revenues of $1,711,448 during the second quarter as
compared to $1,743,625 during the first quarter. Although, in terms of US
dollars, sales were lower in the second quarter, the decrease is related to
the Canadian to US exchange rate. To date, FutureLink's sales have been
primarily in Canadian dollars. Sales in the second quarter in terms of
Canadian dollars were Cdn$2,895,035 as compared to Cdn$2,843,486 in the
first quarter of 1999, reflecting an increase of Cdn$51,549.
In both US and Canadian dollar terms, hardware and software sales increased
over the prior quarter. The increase of US $118,488 was largely the result
of a backlog of orders as at March 31, 1999.
Other revenue includes miscellaneous income and ASP sales. Direct ASP sales
during the second quarter were $35,335. This is a decrease of $168,635 over
the first quarter and is due to a contract which terminated during the
period. This contract included sales of approximately $50,000 during the
first quarter to a customer for which all amounts have been written off as a
bad debt. The Company no longer provides services to this customer. In
addition, the Company renegotiated the terms of an ASP contract with a
related party resulting in a credit to this customer of approximately $72,000
which directly reduced second quarter ASP revenues, although the credit
includes services provided in prior periods. This party was an early adopter
of server-based computing.
During the second quarter, the Company signed four new customers for ASP
services. Of these contracts, however, billing of revenues for three
contracts does not commence until July or August of 1999.
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EXPENSES
Hardware and Software Purchases
Hardware and software purchases increased in the second quarter over that in
the first quarter due to the increase in sales of these items. The Company
maintains budgets for margins of approximately 8 to 9% on such items. The
margin was 8% and 6.3% in Q1 and Q2 respectively.
Contracts, Payroll and Benefits
Contracts, payroll and benefits were $1,738,920 in the second quarter as
compared to $1,485,042 in the first quarter. The increase is partially due
to the hiring of additional staff, including the company's new Executive
Chairman in June, 1999, and is also due to the reclassification of
approximately $110,000 from consulting expenses to payroll relating to
contractors who work for the Company in the capacity of serving our clients.
Accounting and Legal Costs
Accounting and legal fees were $146,846 for the six months to June 30, 1999,
including $49,464 and $97,382 in the first and second quarter respectively.
The increase in the second quarter relates largely to an increase of
approximately $37,000 in legal fees. This relates to an overall increase in
the activities of the Company and the number of agreements being negotiated
and signed.
General and Administrative Expenses
FutureLink's consolidated general and administrative expenses for the three
months ending June 30, 1999 were $1,060,819 as compared to $770,072 in Q1
1999. The increase, again, relates to the overall increase in Company
activities. General and administrative expenses for each of the two
quarters were as follows:
3 months to June 30, 3 months to March
1999 31, 1999
Travel Expenses $ 214,901 $120,496
Meals and Entertainment Expenses $ 26,510 $ 26,368
Office Expenses $ 137,383 $145,959
Advertising, Promotion and $ 263,911 $124,910
Investor Relations Expenses $ 47,581 $ 49,108
Staff Development Expenses $ 161,703 $152,909
Rent $ 80,541 $ 406
Compliance $ 128,289 $149,916
Other Expenses ---------- --------
TOTAL $1,060,819 $770,072
Travel expenses increased significantly over the prior quarter and relate to
assessing and developing integration and business plans on both the
acquisition of Micro Visions (please see Recent Developments - Acquisitions
of Micro Visions, below) and the growth of the Company, attendance at trade
shows and other industry functions, and travel associated with the promotion
of FutureLink and the ASP industry.
Advertising, promotion and investor relations costs increased almost
two-fold over the first quarter of 1999. Given the newness of the ASP
industry, FutureLink has incurred significant amounts during the second
quarter to promote both itself and the industry. It is expected that the
Company will continue to incur such costs to enhance its profile throughout
the communications and technology sectors.
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Compliance costs relate largely to the Company's filings with the Securities
and Exchange Commission. During the second quarter of 1999, the Company was
obligated to file several documents relating to periodic reports, material
changes and other such filings. These costs are not expected to increase
significantly.
Consulting Expenses
Consulting expenses were $465,822 and $425,416 in the first and second
quarter respectively. These expenses were incurred to engage consultants to
assist the Company in business development, marketing, market research and
analysis, and delivery of IT services to customers. The decrease in the
amount in the second quarter is offset by the reclassification of certain
consulting expenses to payroll of approximately $110,000. In addition, the
first quarter amount includes a non-cash expense of $125,000 relating to
advisory services received under an agreement which has since been
terminated.
During 1999, the Company entered into an agreement for advisory services for
a 12 month period. The agreement provides for the settlement of these
services via the issuance of warrants. An amount of $1,800,000 was recorded
as a prepaid non-cash expense relating to the estimated value of the
warrants. This amount is being recognized in income over 12 months. To
June 30, 1999, $300,000 has been recorded as a consulting expense.
Interest Expense
Interest expense during the second quarter totaled $6,408,353 as compared to
$997,790 in the first quarter. Both amounts relate primarily to non-cash
expenses associated with the intrinsic value of the conversion features on
convertible debt issued. The second quarter includes $4,911,880 relating to
a debt offering which raised gross proceeds of $8,038,500.
Bad Debt Expense
Bad debt expense of $183,527 during the first quarter related to amounts
which management believed to be uncollectible, including $112,486 related to
accounts receivable from companies which were early customers of
server-based computing information technology service. These companies
supported FutureLink as it built its server-based computing expertise.
During the second quarter, negotiations with one such customer resulted in
the recovery of $94,883, which is included in the $91,023 net bad debt
recovery recorded during the second quarter.
Depreciation
Depreciation during the second quarter was $218,416 as compared to $131,834
in the first quarter. This increase relates to the capital additions for
the Company's server farm.
Amortization of Intangible Assets
The amortization of intangible assets relates to the amortization of
goodwill and the employee and consultants base. Approximately $460,515 is
recognized on a quarterly basis associated with these amounts.
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LIQUIDITY AND CAPITAL RESOURCES
FINANCING
During the second quarter of 1999, FutureLink issued $8,038,500 8% senior
subordinated convertible promissory notes. The net cash proceeds of this
issuance of securities was $7,258,327, after placement fees of 9% and expenses
of the offering, of which $1,000,000 was used for the initial deposit on the
acquisition of Micro Visions.
On April 26, 1999, the Company renegotiated the terms of certain 10% convertible
debentures. The amendment to the debentures enabled the Company to fix the
conversion price at $1.00 per share (on a post reverse split basis). In
addition, FutureLink repaid $1,470,000 of principle such that $2,500,000 remains
outstanding. The cost of the repayment was $1,881,600, with the difference of
$411,600 being the equivalent value of the conversion option had the debentures
actually been converted. The Company also renegotiated the pricing of warrants
previously issued to $1.25 per common share, as well as having issued additional
warrants such that 1,200,000 warrants remain outstanding associated with this
debt (on a post reverse split basis). As a result of this transaction,
FutureLink recognized a loss on the extinguishment of debt of $844,552.
Subsequent to June 30, 1999, the Company completed a further financing of
$15,000,000 of 8% senior subordinated convertible promissory notes. The
Company received proceeds of $13,650,000 after placement fees of 9% (exclusive
of other costs associated with the financing). Of these proceeds, $1,000,000
will be used for the second and third deposit due under the terms of the Micro
Visions Acquisition Agreement ($500,000 to be paid on each of July 31, 1999 and
August 31, 1999). The remaining funds will be used for general working capital
and additional IT infrastructure.
WORKING CAPITAL
As at March 31, 1999, FutureLink had a working capital deficit of $1,534,882,
and was in technical breach of its working capital ratio covenant with its
bank. The closing of $8,038,500 of gross proceeds in financing during the
second quarter enabled the Company to remedy the covenant breach. As at June
30, 1999, the Company's working capital was $1,545,855; a ratio of 1.6:1 and
well in excess of the required 1:1 ratio. The larger $15,000,000 gross
proceeds financing completed in July, 1999 has further strengthened the
Company's working capital position.
CASHFLOW
FutureLink's operating cash outflows for the six month period ending June 30,
1999 were $3,977,068. These outflows are largely due to the hiring of
personnel and other resources to build an infrastructure which will accommodate
the significant growth in business anticipated over the next year. The Company
does not expect to be profitable or to have positive operating cashflows within
the next year as it continues to grow, develop the ASP industry, its presence
within the industry, its services, and a customer base. As such, the Company
will require additional financing to fund operations.
FutureLink's investing activities during the six months ending June 30, 1999
included payment of a deposit of $1,000,000 towards the acquisition of Micro
Visions, and $220,189 in legal, accounting and other fees associated with this
transaction. In addition, the Company incurred capital additions of $1,543,777
for building the server farm. The Company anticipates building a second server
farm during the third and fourth quarters of 1999. Funding for this second
server farm is expected to come from leasing arrangements.
The Company's financing cashflow for the six month period January 1 through June
30, 1999 included net proceeds of $11,195,827 relating to the issuance of
convertible debentures, convertible
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notes, and promissory notes. During this period, the Company also repaid
$2,219,258 of such instruments. In addition to entering a lease agreement for
the second server farm, the Company anticipates a sale and lease-back
arrangement of its first server farm.
As the Company continues to grow via internal expansion and acquisitions,
additional funding will be required. The Company is currently seeking various
other sources of financing to accommodate this growth, including financing to
fund the remaining $10,000,000 cash required upon closing of the Micro Visions
acquisition, which is expected to occur at the end of September, 1999.
RECENT DEVELOPMENTS
FINANCINGS
FutureLink has completed additional financing transactions, raising the Company
gross proceeds of $8,038,500 during the second quarter of 1999 and gross
proceeds of $15,000,000 during the period July 1 to August 10, 1999. For
further details regarding these financings, please refer to the financial
statements included in Part I, Item 1 of this Report, Management's Discussion
and Analysis of Financial Condition and Results of Operation which forms Item 2
of Part I hereof, and Changes in Securities and Use of Proceeds in Part II,
Item 2, below.
REVERSE STOCK SPLIT
On June 1, 1999, the Company effected a 1 for 5 reverse stock split of its
Common Stock. FutureLink's shareholders authorized the directors to effect up
to a 1 for 30 reverse stock split, to be executed on or before June 1, 1999, at
the annual meeting of shareholders held November 30, 1998. FutureLink has
authorized capital of 100,000,000 shares of Common Stock, $0.0001 par value, as
well as preferred stock. Prior to June 1, 1999, the Company's outstanding share
acquisition rights (warrants, options, conversion rights), if exercised, would
result in a fully diluted common stock amount in excess of 150,000,000 shares,
exceeding FutureLink's authorized capital. The reverse stock split resulted in
the Company having 6,207,784 shares of common stock issued and outstanding and
30,746,522 shares on a fully diluted basis as at June 1, 1999, well within the
continuing 100,000,000 share authorized common stock limit.
ACQUISITION AGREEMENT WITH MICRO VISIONS
On June 2, 1999, FutureLink entered into an agreement to acquire all of the
issued and outstanding shares of Executive LAN Management, Inc. of Irvine,
California, doing business as Micro Visions ("Micro Visions").
Founded in 1987, Micro Visions is one of North America's leading server-based
computing systems integrators. In 1998, Micro Visions was the number 1 (up from
number 2 in 1997) reseller and integrator of products from Citrix Systems Inc.
in North America. Citrix products provide the foundation for the Company's main
ASP business. As well as the Irvine main office, Micro Visions has branch
offices in Atlanta, Las Vegas, Los Angeles, Phoenix and Raleigh/Durham. Micro
Visions has over 80 employees and had revenues of $13.67 million in 1998. It
is intended that the merged company will be headquartered in Irvine.
Micro Visions' revenues for the six months ended June 30, 1999 were $9,322,000,
of which $4,032,000 had been earned during the first quarter of 1999 and
$5,290,000 during the second quarter. This compares to earnings for the twelve
months ended December 31, 1998 and 1997 of $13,669,000 and $9,565,000,
respectively. Revenues consist of consulting services relating to server-based
computing and the associated hardware and software sales.
On a pro forma basis, revenues for FutureLink and Micro Visions for the six
month period ending June 30, 1999 are $12,777,000. Pro Forma results to June
30, 1999 for Micro Visions and FutureLink
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are disclosed in Note 2a of the financial statements found in Part I, Item 1 of
this Report and reflect the results of operations of the two companies together
as though the acquisition had occurred at January 1, 1999.
It is anticipated that upon closing of the Micro Visions acquisition, Mr. Chell
will remain CEO of the combined companies. Glen Holmes, 42, the founder and
CEO of Micro Visions, will become President of the Company and will be
nominated to the Company's board of directors. Roger Gallego, 30, the Executive
Vice-President and Chief Operating Officer of Micro Visions, will become the
Company's Executive Vice-President, ASP, following the merger.
Consummation of the acquisition is subject to several conditions, including
approval by FutureLink's shareholders. Under the agreement, Micro Vision'
shareholders (the family of Glen Holmes) will receive $12,000,000 in cash and
6,000,000 shares of the Company's Common Stock (post-Reverse Split) upon
closing. In addition, Micro Visions' shareholders could earn an additional
2,400,000 shares based on achievement of certain performance criteria in 1999
(the "Performance Shares"). The Company advanced $1,000,000 of the cash
portion of the acquisition price in conjunction with the signing of the
acquisition agreement and an additional $500,000 deposit was paid at the end of
July, 1999. A further $500,000 deposit is payable in the event the acquisition
is not completed by August 31, 1999. Except where the Micro Visions
Acquisition Agreement is terminated by Micro Visions (without cause), by Micro
Visions' shareholders failing to deliver all Micro Visions stock "free and
clear" at closing, or by the Company as a result of a fraudulent
misrepresentation made by Micro Visions or its shareholders, $500,000 of the
deposit shall not be repaid if this agreement terminates prior to October 15,
1999 and $1,500,000 shall not be repaid to the Company if the Micro Visions
Acquisition Agreement is terminated after October 15, 1999. The Company can
terminate this agreement and demand prompt repayment of the (balance of the)
deposit funds if Micro Visions finds the financing arrangements regarding the
balance of the cash portion of the purchase price to be unacceptable, in the
event of any material misrepresentation by Micro Visions in the agreement, in
the event of a material adverse change in Micro Visions' condition, etc.
If the Micro Visions acquisition does not close by October 15, 1999, the Company
may extend the closing date to no later than December 15, 1999 by paying to
Micro Visions' shareholders an additional $1,000,000 at closing by way of
$500,000 cash and $500,000 of common stock issued "at market" (based on a ten
day average of closing prices). If the closing is extended and the Company fails
to secure sufficient financing to enable it to pay the full cash portion of the
purchase consideration prior to December 15, 1999, or fails to secure the
approval of this acquisition by its shareholders prior to that date, Micro
Visions shall be entitled to terminate the agreement and retain all deposit
funds paid to date. The parties are free to extend the time for performance of
any obligations or actions set forth in the agreement.
The Company currently plans to complete the acquisition of Micro Visions on or
about October 1, 1999.
MANAGEMENT CHANGES
Since April 1, 1999, the Company has undergone a number of management changes,
including changes to the board of directors.
The Company's board accepted the resignation of Robert Kohn on May 10, 1999 and
appointed Michael S. Falk of New York, NY to fill the vacancy created by Mr.
Kohn's departure. On May 17, 1999, the board appointed Timothy P. Flynn of Las
Vegas, NV as an additional director.
Effective June 1, 1999, Mr. Philip Ladouceur, already a director of the
Company, accepted a management position as Executive Chairman of FutureLink,
with primary responsibility for public company compliance and corporate
finance.
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On July 16, 1999, the Company's board accepted the resignation of Donald Bialik
as a director and officer of the Company and all of its subsidiaries and has
not appointed a replacement director. The Company now has a total of 7
directors, as follows:
NAME AGE POSITION HELD
- ------------------------- --- ------------------------------------------------
Philip R. Ladouceur (3) 58 Executive Chairman
Cameron B. Chell (3) 30 Director, Chief Executive Officer and President
Raghu Kilambi 33 Director, VP Finance and Chief Financial Officer
Robert Kubbernus (1) (2) 39 Director
F. Bryson Farrill (1) (2) 71 Director
Michael S. Falk (2) (3) 37 Director
Timothy P. Flynn (1) (3) 49 Director
Note (1): Members of the Audit Committee
Note (2): Members of the Compensation Committee
Note (3): Members of the Executive Committee
Detailed information on Mr. Falk and Mr. Flynn was included in the Form 10-QSB
for the quarterly period ended March 31, 1999 previously filed by the Company.
Information regarding the other directors was included in the Form 10-KSB for
the year ended December 31, 1998 previously filed by FutureLink.
RISK FACTORS
FutureLink continues to face numerous risk factors as set forth in the Annual
Report on Form 10-KSB for the year ended December 31, 1998 previously filed.
In addition, the following risk factors should be taken into account, which
include risk factors relating to the proposed acquisition of Micro Visions.
NO ASSURANCE OF COMPLETION OF MICRO VISIONS ACQUISITION. The Agreement to
acquire Micro Visions provides a number of conditions precedent to closing the
transaction, including, but not limited to, the approval of the Company's
shareholders; regulatory approval from each governmental entity necessary for
consummation of the proposed transaction, including the Securities and Exchange
Commission; the Company securing financing necessary to pay the full cash
portion of the purchase consideration on terms satisfactory to Micro Visions;
no material adverse changes in the condition (financial or otherwise) of either
the Company or Micro Visions; and the receipt of all other necessary third
party consents. There can be no assurance that the Company will be able to
meet all of the conditions precedent which are its responsibility, or even if
the Company meets such obligations, that the proposed transaction will close
due to a failure by Micro Visions to meet its obligations, due to a material
adverse change in the condition of either Micro Visions or the Company or for
any other unforeseen circumstance. If the transaction fails to close, there is
a risk that all or a portion of the deposit paid by the Company ($1,500,000 to
date, $2,000,000 by August 31, 1999) will be forfeited by the Company.
RISKS ASSOCIATED WITH MICRO VISIONS ACQUISITION. If the Micro Visions
acquisition is successfully concluded, there can be no assurance that the
Company will be able to profitably manage or successfully integrate Micro
Visions' assets and personnel without substantial expenses, delays or other
operational or financial problems. The Micro Visions acquisition will involve
the recognition of substantial goodwill which will be amortized as a charge to
operations over the next 5 years. Furthermore, this acquisition may involve
additional risks or effects, including diversion of management's attention,
failure to retain key acquired personnel, unanticipated events or
circumstances, legal liabilities and other one-time or ongoing acquisition
related expenses, some or all of which could have a material adverse effect on
the Company's business, operating results and financial condition. Client
satisfaction or performance problems of Micro Visions, if any, could have a
material adverse impact on the reputation of the Company as a whole. This
proposed acquisition
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involves the Company adding offices in other geographical locations which will
add further responsibilities to the Company's existing management structure.
There is no assurance that even if successful, the Company's acquisition of
Micro Visions will result in the generation of anticipated revenues and
earnings.
LOSSES AND ACCUMULATED DEFICIT; ABILITY TO CONTINUE AS A GOING CONCERN. For the
six months ended June 30, 1999 the Company reported a net loss of $14,352,006,
including an operating loss of $13,745,428. As of June 30, 1999, FutureLink had
an accumulated deficit of $21,682,463 as shown in the Company's unaudited
consolidated financial statements. The Company is not currently profitable and
there can be no assurance that Company will operate profitably in the future and
that the Company will not continue to sustain losses. Continued losses could
materially and adversely affect the Company's business. In addition, the Company
and its subsidiaries are parties to certain lawsuits described under "Legal
Proceedings". The company cannot conclusively predict the outcome of these
lawsuits and could be directed to pay penalties to the other parties in the
suits. Should this happen, it could put a considerable cash burden on the
Company.
RISKS ASSOCIATED WITH THE YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field to specify year and cannot
distinguish 21st century dates from 20th century dates. These date code fields
will have to be able to distinguish 21st century dates from 20th century dates
to avoid systems failures or miscalculations causing disruptions of operations
by, at or beyond the Year 2000, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar ordinary
business activities. As a result, many companies' computer systems and software
may require replacement or modification in order to address such Year 2000
issues.
FutureLink has completed Phase I of our Year 2000 project, a review of all
hardware, embedded systems and software utilized by our Company, including
software utilized internally, software supplied to clients and software hosted
for clients. The review revealed that 90% of FutureLink's internal systems are
deemed to be compliant by vendors, and the remaining 10% will be compliant with
the application of Year 2000 upgrades supplied by vendors. Two of the most
critical systems, the Finance and Timesheet applications, are being replaced
instead of upgraded. It is anticipated that the upgrades and implementation of
the new systems will be completed by October, 1999, and we believe that they are
designed to function properly through and beyond the Year 2000. We cannot
guarantee that all of our computer systems, particularly if they interface with
or incorporate third-party software, will contain all date code changes
necessary to ensure Year 2000 compliance.
A letter campaign was conducted with important business associates, suppliers
and vendors to determine the status of their Year 2000 program and the
likelihood of their continued business in the Year 2000. This letter campaign
is ongoing, however the most critical business associates have responded.
FutureLink does not appear to be dependent on any business associates,
suppliers or manufacturers whose failure to be Year 2000 compliant would have a
significant impact on our financial condition or results of operations, except
providers of utilities (telecommunications, electricity, natural gas, etc.) to
our office.
The company has adequate resources, both fiscal and personnel, to complete the
remedial actions which make up Phase II of the Year 2000 project. We do not
expect to expend any significant funds to correct Year 2000 issues. Any minor
expenses will be funded in the ordinary course from cash generated by
operations. The cost of the new internal office applications was anticipated
and budgeted for, outside of the Year 2000 project, and is included in our
annual operating budget. We expect to complete our Year 2000 remediation
actions by late fall of 1999.
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Based on available information, we are preparing contingency plans in the event
of failure of critical systems resulting from Year 2000 compliance issues
including the failure of systems of outside suppliers, for example our utility
power. We are also preparing contingency plans to deal with the possibility of
systems failures at our client sites. These contingency plans should be
finalized by late fall, 1999.
FutureLink sells computer-related services and so the Company's risk of
litigation relating to Year 2000 issues is likely to be higher than the risks
faced by companies in other industries. With computer products and IT services
often incorporating components from multiple suppliers, it may be difficult to
determine which component(s) may cause Year 2000 problems. As such, FutureLink
may be subject to lawsuits regarding Year 2000 issues whether or not our
products and services are Year 2000 compliant. We can not be certain what the
outcome or impact of any such lawsuits may be.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of its business, FutureLink continues to be involved in
a number of material legal proceedings commenced or pending against the
Company, as follows:
1. Midland Walwyn Capital Inc. (now Merrill Lynch Canada Inc.) ("MWC")
commenced an action in October 1997 in Ontario Court (General Division),
Toronto, Canada, against Core Ventures, Inc. (now FutureLink), Abecorn
Enterprises Limited ("Abecorn"), Alixe Cormick, Venture Law Corporation, and
Raymond Kompani. At the time of the alleged transactions, John A. Xinos of
Abecorn was also a director of the Company, Alixe Cormick of Venture Law
Corporation acted as legal counsel for the Company and Ray Kompani was a third
party with no relation to the Company. MWC seeks judgement of CDN$500,000
against all defendants. The action against the Company alleges fraudulent
misrepresentation, negligent misrepresentation or intentional or negligent
interference with contractual relations. The Company has filed a defense jointly
with Abecorn. This action relates to a share sale transaction in which Raymond
Kompani apparently failed to pay Abecorn for 50,000 shares of the Company's
Common Stock he purchased from Abecorn. Ms. Cormick, solicitor for the Company,
advised the Company's transfer agent to stop transfer the relevant share
certificate registered in the name of Abecorn. Mr. Kompani deposited the share
certificate with MWC and instructed MWC to sell all 50,000 shares. When MWC sent
the Abecorn/Kompani share certificate to the clearinghouse, they were advised of
the stop transfer. MWC paid the net sale proceeds to Raymond Kompani before
being advised by the clearinghouse of any problem. MWC was required to
repurchase these 50,000 shares on the market at a cost of just over $325,000.
MWC demanded repayment from Raymond Kompani but Mr. Kompani failed to pay. MWC
brought suit to recover its losses. John Xinos and the Company entered into an
indemnity agreement dated January 19, 1998, whereby Mr. Xinos agreed to bear the
costs of defending this action and to indemnify the Company for any losses
arising from the MWC lawsuit. Management believes that FutureLink has minimal
exposure in this matter due to the role played by the Company and the indemnity
agreement with John A. Xinos and does not believe that there will be a material
impact on the Company if the plaintiff is successful.
2. 554495 Alberta Ltd. commenced an action against Coffee.com Interactive
Cafe Corp. (now the Company's FutureLink Alberta subsidiary) in October 1997 in
the Court of Queen's Bench of Alberta, Calgary, Canada. The proceedings relate
to a purported lease agreement with respect to commercial space in Calgary. The
Plaintiff claims that a lease agreement exists with FutureLink Alberta and
seeks judgement in an amount in excess of CDN$285,000 plus costs. FutureLink
Alberta has filed a defense and counterclaim for up to CDN$390,000, plus legal
costs. The parties have now completed the discovery of corporate officers and
documents. The legal costs to date are not immaterial and will increase should
this matter proceed to trial, which appears likely. The plaintiff
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has now leased the premises in question to a third party, thereby mitigating its
alleged losses. Management of the Company believes that its FutureLink Alberta
subsidiary does not face material exposure in this matter.
3. A Statement of Claim was issued by TAP Consulting Ltd. ("TAP") in
August 1998 in the Court of Queen's Bench of Alberta, Calgary, Canada, naming
SysGold Ltd. (now part of the Company's FutureLink Alberta subsidiary) as a
defendant. The suit alleges that SysGold Ltd. wrongfully terminated a
management services contract dated January 19, 1991, between SysGold Ltd. and
TAP without cause or reasonable notice. TAP seeks CDN$150,000 plus court costs.
Management believes that its FutureLink Alberta subsidiary has a sustainable
defence to this claim and intends to vigorously defend it and to file a
counterclaim. At the time of acquiring SysGold Ltd., the Company and Donald
Bialik entered into an indemnity agreement dated August 21, 1998, whereby Mr.
Bialik agreed to indemnify the Company for any losses suffered by the Company
arising from the TAP lawsuit. Management believes that FutureLink has minimal
exposure in this matter due to the indemnity agreement with Don Bialik and does
not believe that there would be any material impact on the Company should TAP
prove its claim. Mr. Bialik's indemnity of the Company for this matter was
confirmed at the time of his resignation as an officer and director.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company has completed a number of material financing transactions ($500,000
or more gross proceeds being considered "material") since April 1, 1999,
primarily two private placement financings led by Commonwealth Associates, LP.
As previously reported in the Company's SB-2 Registration Statement, in the
Company's Form 10-KSB Annual Report for the year ended December 31, 1998 and in
the Company's Quarterly Report for the quarterly period ended March 31, 1999 on
Form 10-QSB, the Company entered into a Debenture Acquisition Agreement dated
August 14, 1998, as amended on August 21, 1998, February 26, 1999 and April 26,
1999, with Thomson Kernaghan & Co. Limited ("TK") pursuant to which TK, acting
as an agent for certain investors, agreed to purchase from FutureLink, in one or
more tranches, $6,000,000 10% Convertible Debenture and a series of warrants.
The Form SB-2 filed by the Company January 6, 1999 registered 10,615,384 shares
of Common Stock underlying the Debenture and Warrants. As at February 26 1999,
the Company had received from TK the original $5,000,000 contemplated by the
original Debenture Acquisition Agreement and TK had converted $2,000,000 of the
Convertible Debenture plus accrued interest into 7,860,046 shares of Common
Stock. In connection with the TK Debenture, the Company also granted to TK a
warrant to subscribe for 781,250 Common Shares at a price of $0.96 per share at
any time prior to August 20, 2001, together with a warrant to subscribe for
260,417 Common Shares at a price of $0.96 per share (these figures all
pre-reverse split) at any time prior to August 20, 2001.
On February 26, 1999 the Company issued a Letter of Intent to amend the terms
of the TK convertible debentures such that the total financing available would
increase from $5,000,000 to $6,000,000. From February 26 to April 14, 1999, TK
advanced an additional $970,000 under this facility. On April 26, 1999, the
Company and TK executed a Letter Agreement amending the terms of the
outstanding convertible debentures and warrants. As of that date, TK had
acquired a total of $5,970,000 of debentures and had converted $2,000,000 of
the principal amount and accrued interest. Of the $3,970,000 outstanding
principal balance, the Company agreed to redeem $1,470,000 of principal on or
before May 26, 1999 for $1,881,600 in cash plus common stock to cover accrued
interest thereon issuable at "market price". Of the remaining $2,500,000 of
convertible debentures, these are no longer be convertible at a floating
conversion rate, but rather at the fixed rate of $0.20 per share (now $1.00 per
post reverse split share). As at April 26, 1999, TK or its clients held
warrants to purchase 1,041,667 shares of common stock at $0.96 per share and
were to receive an additional 647,668 shares at $0.39 per share under the terms
of the February 26, 1999 Letter of Intent (all figures pre-reverse split). All
of these warrants were re-priced to an exercise price of $0.25 per share and
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warrants to purchase an additional 4,310,665 shares of common stock at an
exercise price of $0.25 per share are issuable pursuant to the April 26, 1999
Letter Agreement. These 6,000,000 warrants exercisable at $0.25 per share have
become warrants to purchase 1,200,000 post-reverse split shares of common stock
at $1.25 per share. These amendments affect the existing registration of the
TK securities, which is to be amended by the Company.
Pursuant to Letters of Intent dated March 19, 1999 and April 13, 1999,
effective April 14, 1999, the Company entered into a formal Agency Agreement
with Commonwealth Associates L.P. ("Commonwealth") whereby Commonwealth agreed
to act as the Company's placement agent for a private offering of units
consisting of convertible notes and warrants. The offering was for a minimum
of $2 million and a maximum of $4 million, with provisions allowing for the
issuance of an additional $4 million of securities in the case of
over-subscription. Closings took place April 29, 1999 and May 7, 1999 with the
offering being fully oversubscribed. In total, the Company sold $8,038,500
worth of units. The vast majority of the units consisted of 8% senior
subordinated convertible notes convertible to shares of common stock at $0.20
per share (now $1.00 per share) and 2,500 warrants to acquire common stock at
$0.25 per share (now 500 warrants to acquire common stock at $1.25 per share)
for each $1,000 invested. Members of FutureLink management subscribed for
$433,000 of the units on modified terms such that notes issued to management
are convertible at $0.30 per share (now $1.50 per share) and warrants received
by management subscribers are exercisable at $0.30 per share (now $1.50 per
share) which pricing is based on an average market price formula for the ten
trading days to April 14, 1999. Commonwealth's compensation for acting as
placement agent consisted of 9% of gross proceeds for sales commissions,
placement fees and structuring fees, and 2,500 agent's warrants in total for
each $1,000 of units sold in the offering, which agent's warrants which are
also exercisable at $0.25 per share (now one-fifth the number of agent's
warrants exercisable at $1.25 per share).
Effective May 7, 1999, the Company completed the issuance of a convertible
debenture and warrants issued as compensation for a prior $275,000 investment
by Global Equity Partners Limited ("Global") which had been secured by a
promissory note. The promissory note plus accrued interest was converted to
these other securities on the basis of terms which were being finalized in late
March, 1999 when funds were advanced by Global. Global's debenture has a
principal amount of $278,160 (reflecting interest accrued from March 26 to May
7, 1999), and is convertible to common stock at $1.15 per share (on a post
reverse split basis). Also, in post-reverse split terms, Global received
warrants to purchase 44,505 shares of common stock at $1.25 per share.
On June 1, 1999, the Company completed a 1 for 5 reverse stock split of its
common stock which had been previously authorized by shareholders. The reverse
split reduced the total issued and outstanding (as fully paid) common stock to
just over 6,000,000 shares and, on a fully diluted basis, to approximately
30,000,000 shares as at June 1, 1999.
On July 1, 1999, the Company entered into a formal Agency Agreement with
Commonwealth, which was further to a Letter of intent dated June 16, 1999,
whereby Commonwealth agreed to act as FutureLink's placement agent for a
private placement of units made up of convertible notes and warrants. The
offering was for a minimum of $5 million and a maximum of $10 million, which
was amended July 15, 1999 by agreement between Commonwealth and the Company
such that the maximum offering was increased to $15 million. The Company sold
the maximum $15 million of units with closings taking place between July 19 and
July 27, 1999. The units consisted of (i) 8% senior subordinated convertible
notes which mature in two years or will convert into the type and respective
amount of securities issued by the Company in its next round of financing or,
in certain circumstances, will be convertible to common stock at $8.50 per
share; and (ii) warrants to purchase 15,000 shares of common stock at $850 per
share for each 100,000 invested. Commonwealth's compensation for acting as
placement agent consisted of commissions and placement fees equal to 9% of the
gross proceeds of the offering as well as a total of 225,0000 agent's warrants
also exercisable at $8.50.
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From April 1, 1999 through August 10, 1999, the Company raised an additional
$23,038,500 gross proceeds from all new financings. Of these funds, the
Company netted approximately $21 million following payment of commissions,
finders' fees, professional fees and other expenses associated with such
financings.
The uses made or to be made of these gross financing proceeds can be broken
down as follows (all figures approximated to the nearest five hundred dollars):
Gross Proceeds $23,038,500
Less: Placement Fees $ 2,073,500
Less: Other Offering Expenses (estimated) $ 155,000
-----------
Net Proceeds $20,810,000
-----------
Capital Asset Purchases April 1 to June 30, 1999 $ 847,000
Debenture Repayment $ 1,882,000
Deposits (paid or payable) re: Micro Visions' Acquisition $ 2,000,000
Acquisition costs re: Micro Visons' Acquisition (estimated) $ 320,000
Repayment of Affiliate re: Bridge Financings $ 218,000
Provision for Annual Interest on 8% Convertible Notes $ 1,843,000
General Working Capital and Additional IT Infrastructure $13,700,000
-----------
$20,810,000
-----------
The above projected uses of proceeds are estimates only and the Company may
reallocate such projected uses of proceeds.
On August 1, 1999, the Company entered into an agreement with an executive of
the Company. In accordance with the terms of the agreement, the Company loaned
$2,000,000 to the executive which was then used by the executive to purchase
232,829 previously unissued common shares of the Company. These shares of
common stock are escrowed. On October 1, 1999, 29,129 shares will be released
from escrow. An additional 29,100 shares will be released from escrow on a
quarterly basis commencing January 1, 2000. So long as the executive remains
employed by the Company, $250,000 of the principal amount of the loan shall be
forgiven on a quarterly basis, commencing October 1, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None. The Company has announced its intention to hold an Annual and
Extraordinary Meeting of Shareholders to be held in Orange County, California
on September 23, 1999. Shareholders of record on August 23, 1999 shall be
entitled to notice of, and to vote at, the meeting.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) LIST OF EXHIBITS
3.1 Certificate of Incorporation of Registrant*
3.2 By-laws of Registrant*
10.1 Debenture Acquisition Agreement dated August 14, 1998, as amended on
August 21, 1998, between FutureLink and Thomson Kernaghan & Co. Limited
("TK").*
10.2 Letter agreement dated February 26, 1999 between FutureLink and TK
extending the terms of the original Debenture Acquisition Agreement from
$5,000,000 maximum to $6,000,000.**
10.3 Debenture and Warrant Purchase Agreement dated March 2, 1999 between
FutureLink and Augustine Fund, LP.**
10.4 Agency Agreement dated April 14, 1999 between FutureLink and Commonwealth
Associates, LP ("Commonwealth") regarding a $4,000,000 maximum plus
$4,000,000 over-allotment private placement financing.**
10.5 Letter Agreement dated April 26, 1999 between FutureLink and TK amending
certain terms of outstanding FutureLink securities and redeeming certain
convertible debentures.**
10.6 Advisory Agreement dated effective May 1, 1999 between FutureLink and
Commonwealth.**
10.7 Letter Agreement dated April 29, 1999 between FutureLink and Bridge
Technology Group LLC ("Bridge") regarding warrants issuable to Bridge as a
"success fee" under an advisory agreement between the parties.
10.8 Agreement and Plan of Reorganization and Merger by and among FutureLink,
FutureLink California Acquisition Corp., Executive LAN Management, Inc.
dba Micro Visions and Holmes Trust, Glen C. Holmes and Christine M. Holmes
dated as of June 2, 1999 (without schedules). ***
10.9 Agency Agreement dated July 1, 1999 between FutureLink and Commonwealth
regarding a $5,000,000 minimum/$10,000,000 maximum private placement
financing (amended July 15, 1999 to a maximum $15,000,000 financing).
10.10 Loan Agreement dated July 15, 1999 and effective August 1, 1999 between
FutureLink and Vincent Romano regarding a loan of $2,000,000 to Mr. Romano
to purchase Common Stock of the Company.
27.1 1999 Financial Data Schedule for the six months ended June 30, 1999
(electronic filing only).
* incorporated by reference to the Company's Registration Statement on Form
SB-2 (No. 333-62133).
** incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended March 31, 1999.
*** Incorporated by reference to the Company's Report on Form 8-K filed June
16, 1999.
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(B) REPORTS ON FORM 8-K
FutureLink filed a Form 8-K on May 7 1999 to report closings for a total of
$8,000,000 gross proceeds raised by way of private placement.
FutureLink filed a Form 8-K on May 14, 1999 to report the resignation of Robert
H. Kohn from the Board of Directors and the appointment of Michael S. Falk as a
Director to fill the vacancy on the Board.
FutureLink filed a Form 8-K on May 17, 1999 to report that the Company was
proceeding with a reverse stock split on the basis of 1 new share for each 5
current shares of common stock.
FutureLink filed a Form 8-K on May 18, 1999 to report the appointment of
Timothy P. Flynn as an additional Director of the Company.
FutureLink filed a Form 8-K on June 16, 1999 to report the proposed acquisition
of Executive LAN Management, Inc., dba Micro Visions ("Micro Visions").
FutureLink filed a Form 8-K on July 22, 1999 to report the resignation of
Donald A. Bialik as an officer and director.
FutureLink filed a Form 8-K/A on July 28, 1999 as an addendum to the report on
Form 8-K filed by the Company on June 16, 1999 regarding the proposed
acquisition of Micro Visions.
FutureLink filed a form 8-K on August 3, 1999 to report closings for a total of
$15,000,000 gross proceeds raised by way of private placement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FUTURELINK DISTRIBUTION CORP.
Date: August 16, 1999 By: /s/ C. Chell
----------------------------------------------------
Cameron Chell, President and Chief Executive Officer
Date: August 16, 1999 By: /s/ R. Kilambi
----------------------------------------------------
Raghu Kilambi, Vice-President Finance and Chief
Financial Officer
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE NO.
- -------- ----------------------------------------------- --------
3.1 Certificate of Incorporation of Registrant*
3.2 By-laws of Registrant*
10.1 Debenture Acquisition Agreement dated August 14, 1998, as
amended on August 21, 1998, between FutureLink and Thomson
Kernaghan & Co. Limited ("TK").*
10.2 Letter agreement dated February 26, 1999 between
FutureLink and TK extending the terms of the original
Debenture Acquisition Agreement from $5,000,000 maximum to
$6,000,000.**
10.3 Debenture and Warrant Purchase Agreement dated March 2,
1999 between FutureLink and Augustine Fund, LP.**
10.4 Agency Agreement dated April 14, 1999 between FutureLink
and Commonwealth Associates, LP ("Commonwealth") regarding
a $4,000,000 maximum plus $4,000,000 over-allotment
private placement financing.**
10.5 Letter Agreement dated April 26, 1999 between FutureLink
and TK amending certain terms of outstanding FutureLink
securities and redeeming certain convertible debentures.**
10.6 Advisory Agreement dated effective May 1, 1999 between
FutureLink and Commonwealth.**
10.7 Letter Agreement dated April 29, 1999 between FutureLink
and Bridge Technology Group LLC ("Bridge") regarding
warrants issuable to Bridge as a "success fee" under an
advisory agreement between the parties.
10.8 Agreement and Plan of Reorganization and Merger by and
among FutureLink, FutureLink California Acquisition Corp.,
Executive LAN Management, Inc. dba Micro Visions and
Holmes Trust, Glen C. Holmes and Christine M. Holmes dated
June 2, 1999 (without schedules). ***
10.9 Agency Agreement dated July 1, 1999 between FutureLink
and Commonwealth regarding a $5,000,000
minimum/$10,000,000 maximum private placement financing
(amended July 15, 1999 to a maximum $15,000,000
financing).
10.10 Loan Agreement dated July 15, 1999 and effective August
1, 1999 between FutureLink and Vincent Romano regarding a
loan of $2,000,000 to Mr. Romano to purchase Common Stock
of the Company.
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EXHIBIT
NO. DESCRIPTION PAGE NO.
- -------- ----------------------------------------------- --------
27.1 1999 Financial Data Schedule for the six months ended
June 30, 1999 (electronic filing only).
* incorporated by reference to the Company's Registration
Statement on Form SB-2 (No. 333-62133).
** incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended March
31, 1999.
*** incorporated by reference to the Company's Report on Form
8-K filed June 16, 1999.
38