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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 20, 2001
FUTURELINK CORP.
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(Exact name of registrant as specified in its charter)
Delaware 0-24833 95-4763404
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
2 South Pointe Drive, Lake Forest, CA 92630
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 672-3000
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Not Applicable
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(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS
On April 23, 2001, we announced (a) the amendment of our current credit
facility with Foothill Capital Corporation; (b) the execution of a secured
subordinated convertible promissory note in the principal amount of $5,000,000
with Pequot Private Equity Fund, II, L.P.; and (c) the consolidation of our
three data centers in North America and a work force reduction of approximately
5%. The April 23, 2001 press release relating to these events is attached to
this current report as Exhibit 99.1, and is incorporated herein by reference.
Amendment of Revolving Credit Facility
On April 20, 2001, we amended the loan and security agreement which we
entered into with Foothill Capital Corporation in November 2000. The amendment
reduces the maximum amount that we may borrow under this facility from $25
million to $15 million and the maximum amount that we may borrow against our
Canadian subsidiary accounts receivable from $10 million to $2 million. These
reduced levels are more in line with our current and projected borrowing
capacity which is based upon a percentage of our United States and Canadian
accounts receivable, as described in the loan and security agreement. Before we
may borrow against our Canadian subsidiary accounts receivable, however, we
first must meet certain conditions of the lender, which we are attempting to
satisfy.
The amendment shortens the maturity date of the credit facility to
November 30, 2001 and eliminates the prepayment penalty for our early
termination of the facility. We currently are seeking to replace the facility
and desire to accomplish this before the November 30, 2001 maturity date. If we
are able to terminate the facility on or before September 30, 2001, we will be
entitled to a refund of up to one-half of the $500,000 amendment fee which the
lender agreed to finance without reducing borrowing capacity under the facility.
The amendment also reduces the amount of tangible net worth we are
required to maintain at the end of each month to a level that we believe is
achievable. Also, the amendment introduces additional financial covenants,
including a requirement that we maintain, as of the end of each month beginning
in May 2001, specified levels of revenue and of earnings before interest, income
taxes, depreciation and amortization. The amendment also increases the interest
rate under the facility to prime plus 2% per annum, provided that, in accordance
with the original terms of the agreement, the interest rate may not be less than
8% per annum. Further, the amendment requires us to raise proceeds from the
issuance of subordinated debt or equity securities of at least $5 million by May
31, 2001 and another $5 million by June 30, 2001, which proceeds may include the
amount raised from the bridge financing described below.
On April 20, 2001, one of our U.K. subsidiaries amended its loan
agreement entered into with the same financial institution in December 2000.
This amendment reduces the maximum amount that can be borrowed under the
facility from $5 million to $1.7 million to be more in line with the expected
borrowing capacity under the line, which is based upon a percentage of our U.K.
accounts receivable. The amendment also shortens the maturity date of this
facility to November 30, 2001, consistent with our other credit facility. Any
amount that we borrow under the U.K. facility will reduce the available amount
we can borrow under the $15 million facility with Foothill Capital Corporation,
described above.
The applicable amendments to the credit facility are attached to this
current report as Exhibits 10.1 and 10.2, respectively, each of which is
incorporated herein by reference.
Bridge Financing
On April 20, 2001, Pequot Private Equity Fund, II, L.P. entered into a
secured subordinated convertible promissory note with us in the aggregate
principal amount of $5 million. Under the terms of this bridge note, $3.5
million (the "Initial Advance") was advanced to us by Pequot on April 23, 2001,
and, subject to certain conditions, an additional $1.5 million (the "Subsequent
Advance") will be advanced pursuant to the terms of the bridge note on the
earlier of (a) the closing of the next round of equity or convertible debt
financing in which we receive aggregate gross proceeds of at least $5 million
(the "Third-Party Financing") or (b) May 31, 2001. In addition, we granted
Pequot, its affiliates and JDS Capital Management, Inc. and its affiliates the
right to invest in a Third-Party Financing, if any, up to an additional $2.5
million. The applicable agreements relating to the bridge financing are attached
to this current report as Exhibits 10.3, 10.4, 10.5 and 10.6, respectively, each
of which is incorporated herein by reference.
The maturity date for the bridge note is June 30, 2001. The bridge note,
which bears interest at 10% per annum, is secured by substantially all of our
assets and by guarantees and a pledge of the shares of certain of our
subsidiaries. The bridge note is subordinated to our revolving credit facility
pursuant to the terms of the bridge note and a subordination agreement entered
into between Foothill Capital Corporation and Pequot. The Bridge Note is
generally not assignable without our consent, except that Pequot may assign the
bridge note, or a portion thereof, to its affiliates and JDS Capital Management,
Inc. and its affiliates. The bridge note contains certain customary
representations, warranties and covenants by us. In addition, the bridge note
contains a provision which provides that any acceleration of indebtedness under
our senior credit facility will constitute a default under the bridge note.
The bridge note is convertible at the option of the holder into units
consisting of senior subordinated convertible promissory notes and warrants to
purchase shares of our common stock. The bridge note outlines the general terms
of the units and the securities underlying the units, the final terms of which
are subject to the completion of the definitive documentation relating to such
securities. The general terms of such securities as outlined in the bridge note
are set forth below.
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Each unit will consist of (a) a $100,000 senior subordinated convertible
note (the "Conversion Notes") and (b) warrants to purchase 15% of the shares of
our common stock issuable upon conversion of the Conversion Notes (the
"Conversion Warrants"). Each $100,000 of principal and interest due and owing on
the bridge note will convert into one unit. The units issued on conversion of
the Initial Advance are referred to herein as the "First Tranche Units" and the
units issued on conversion of the Subsequent Advance are referred to herein as
the "Second Tranche Units."
The Conversion Notes will bear interest at 8% per annum, payable
quarterly in cash, or, at the holder's option, in kind. The maturity date of the
Conversion Notes will be the earlier of (a) 36 months from the date of issuance
or (b) upon a liquidation event (as hereinafter referenced).
At any time on or prior to the maturity date of the Conversion Notes, at
the option of the holder, all or any portion of the principal amount of the
Conversion Notes and all accrued and unpaid interest due on such Conversion
Notes, may be converted into (a) the number of shares of one or more series of
our preferred stock (the "New Preferred Stock"), each senior to our outstanding
Series A Preferred Stock and, if a Third-Party Financing occurs, with the
exception of the common stock conversion price, on substantially the same terms
and conditions as the preferred stock to be issued in the Third-Party Financing,
equal to the portion of the principal and accrued and unpaid interest due on
such Conversion Notes which the holder decides to convert, divided by the
preferred stock conversion price or (b) the number of shares of our common stock
equal to the portion of the principal and accrued and unpaid interest due on
such Conversion Notes which the holder decides to convert, divided by the common
stock conversion price.
The preferred stock conversion price will be $10.00. The common stock
conversion price of the First Tranche Units will be the average closing bid
price of our common stock for the five trading days preceding the date of the
Initial Advance (the "Initial Funding Date"). The common stock conversion price
of the Second Tranche Units will be determined as follows: (a) if the
Third-Party Financing closes within 15 days of the Initial Funding Date, the
common stock conversion price will be the lower of the average closing bid price
of our common stock for the five trading days preceding the Initial Funding Date
and the five trading days preceding the closing date of the Third-Party
Financing (the "Third-Party Financing Common Stock Conversion Price"); (b) if
the Third-Party Financing closes more than 15 days after the Initial Funding
Date but on or before May 30, 2001, the common stock conversion price will be
the lower of $0.60 and the Third-Party Financing Common Stock Conversion Price
and (c) if the Third-Party Financing closes after May 30, 2001, the common stock
conversion price will be the same as the common stock conversion price of the
First Tranche Units.
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Notwithstanding the preceding paragraph, if the Third-Party Financing
closes on or before May 30, 2001 and the Third-Party Financing Common Stock
Conversion Price is less than the common stock conversion price for the First
Tranche Units, then the common stock conversion price for the First Tranche
Units will be reduced to the Third-Party Financing Common Stock Conversion Price
and the number of shares of our common stock into which the units are
convertible (the "Conversion Shares") will be adjusted accordingly.
Notwithstanding the determination of the First Tranche common stock
conversion price as set forth above, if and solely to the extent necessary to
comply with the Nasdaq Stock Market Marketplace Rules, (a) the common stock
conversion price for the First Tranche Units will be fixed at the average
closing bid price of our common stock for the five trading days preceding the
Initial Funding Date (as an alternative to the price as set forth above) and (b)
if the Third Party Financing Common Stock Conversion Price is less than the
common stock conversion price for the First Tranche Units, we will issue to the
investor special warrants to purchase additional shares of our common stock in
an amount equal to (a) the common stock conversion price for the First Tranche
Units less the Third Party Financing Common Stock Conversion Price (b)
multiplied by the number of shares of our common stock into which the First
Tranche Units are convertible. The exercise price of the these special warrants
will be equal to the average closing bid price of our common stock for the five
trading days preceding the closing date of the Third Party Financing.
Notwithstanding the determination of the common stock conversion price for the
Second Tranche Units as set forth above, if and solely to the extent necessary
to comply with the Nasdaq Marketplace Rules, (a) the common stock conversion
price for the Second Tranche Units will be fixed at the average closing bid
price of our common stock for the five trading days preceding the date of the
Subsequent Advance (as an alternative to the price as set forth above) and (b)
if such common stock conversion price for the Second Tranche Units is less than
the common stock conversion price for the First Tranche Units, we will issue to
the holder of the Second Tranche Units special warrants to purchase additional
shares of our common stock in an amount equal to (a) the difference between the
common stock conversion price for the First Tranche Units less the common stock
conversion price for the Second Tranche Units (b) multiplied by the number of
shares of our common stock into which the Second Tranche Units are convertible.
The exercise price of these additional special warrants will be equal to the
common stock conversion price of the Second Tranche Units.
In the event that after the Initial Funding Date we issue any other
shares of our common stock, preferred stock, options, warrants or convertible
securities (other than as contemplated in connection with or relating to this
transaction) at a purchase price, conversion price or exercise price per share
(including any adjustments thereof) less than the fair market value (the
"Purchase Price"), then the applicable conversion price and the number of
Conversion Shares will be adjusted on a weighted-average basis (subject to
certain customary exceptions to be agreed to by the parties), unless any such
issuance occurs within one year after the initial closing of the First Tranche
Units and the Purchase Price is below the conversion price, in which event the
conversion price will be automatically reduced to such lower price, and the
number of Conversion Shares will be adjusted accordingly. Notwithstanding the
foregoing, no anti-dilution adjustment will be applicable in the event that (a)
the Purchase Price of any securities issued equals twice the conversion price
and (b) the Conversion Shares are fully registered for resale pursuant to an
effective registration statement and are not subject to any lock-up provisions.
In order to be in compliance with the Nasdaq Marketplace Rules relating
to stockholder approval of a transaction by an issuer other than a public
offering, the holders of the units will agree not to convert the securities
which comprise the units into a number of shares of our common stock which,
together with any securities issued in connection with a Third-Party Financing,
in the aggregate, would result in the issuance of more than 19.9% of the
outstanding shares of our common stock before the issuance of the units (the
"Conversion Limitation"), until we receive stockholder approval of the
transaction or a waiver of the stockholder approval from Nasdaq. We have agreed
to seek such stockholder approval or waiver as soon as
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reasonably practicable, but in no event later than June 30, 2001.
The Conversion Notes will be callable by us at such time as the closing
bid price for our common stock has equaled or exceeded, in each case for the 30
consecutive trading days prior to our notice to holders to call such Conversion
Notes, (a) twice the common stock conversion price during year one, (b) two and
a half times the common stock conversion price during year two, and (c) three
times the common stock conversion price during year three or beyond, provided
that our common stock is trading on a national securities exchange or the Nasdaq
SmallCap or National Market System, and the shares underlying the Conversion
Notes are fully registered for resale and not subject to any lock-up provisions.
The holder of the Conversion Notes will have the right to convert all of the
Conversion Notes before the call date and we may not call the Conversion Notes
if the investor's right to convert the Conversion Notes is restricted in any
way.
In the event that at the two-year anniversary of the closing of the First
Tranche Units (the "Anniversary Date"), the average closing bid price of our
common stock for the 30 consecutive trading days immediately preceding such
two-year anniversary (the "Average Trading Price") is less than the common stock
conversion price, the holder of the Conversion Notes will have the right to
accelerate the maturity date of the Conversion Notes to a date twenty days after
the Anniversary Date (the "Put"). In the event of such Put, the Company will
have the option to pay such redemption price in cash or in shares of our common
stock valued at the Average Trading Price provided the shares to be issued are
fully registered for resale pursuant to an effective registration statement and
are not subject to any lock-up provisions.
The Conversion Notes will be secured by substantially all of our assets
and will rank senior to any existing or future indebtedness but will be
subordinate to senior indebtedness (to be defined in the definitive
documentation). The Conversion Notes will contain standard affirmative and
negative covenants including restrictions on incurrence of debt, payment of
dividends, mergers, increases in compensation and related party transactions.
We will file a registration statement covering the shares of our common
stock underlying the units (without giving effect to the potential anti-dilution
calculations) within three months after the initial issuance of the First
Tranche Units, and will use its best efforts to cause such registration
statement to become effective within two months after such filing, subject to
the lock-up provision set forth below. In the event that such registration
statement is not effective within six months or the effectiveness and use
thereof is suspended beyond certain mutually agreed periods, then the applicable
conversion price will be reduced by 5% for each month, or portion thereof, until
such time as the registration statement is effective or the suspension ceases
and the prospectus may be used. The holder of the units will also have unlimited
piggyback registration rights.
The New Preferred Stock will have the same covenants and anti-dilution
rights as the Conversion Notes. The New Preferred Stock will have customary
terms, including, but not limited to, customary conversion rights and voting
rights. In addition, the New Preferred Stock will have the terms set forth
below.
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The original issue price for each share of New Preferred Stock will be
$10.00. Each share of New Preferred Stock will be entitled to receive, in
preference to holders of our common stock and the holders of any shares of our
Series A Preferred Stock, an amount such that holders of each share of New
Preferred Stock will receive a compound annual return on the original issue
price up to 33%. This return is referred to as the liquidation preference. In no
event will the holders of New Preferred Stock receive a return on the original
issue price of less than 15%, irrespective of the date of a liquidation event,
described below. After payment in full of the liquidation preference, the
holders of shares of New Preferred Stock will be entitled to participation in
our remaining assets, and any assets available for distribution will be
distributed to the holders of our common stock and the holders of New Preferred
Stock in proportion to the number of shares of our common stock then held by
them and the number of shares of our common stock which they then have the right
to acquire upon conversion of the shares of New Preferred Stock then held by
them. A merger or consolidation, where existing stockholders do not retain more
than 50% of the voting power or interest, a sale of all or substantially all of
our assets or an acquisition of 50% or more of the voting power or interest in
the company by a single person or Section 13D group (except in a transaction as
contemplated in connection with or relating to the bridge note transaction) will
be deemed to be a liquidation for purposes hereof except to the extent that such
acquisition, merger or consolidation transaction involves the formation of a
holding company or is an internal reorganization or reclassification, the effect
of which is that more than 50% of the voting power remain constant. Each of the
aforementioned transactions, with the noted exceptions, are referred to as a
liquidation event.
Holders of New Preferred Stock will be entitled to receive, prior to any
payments of dividends to holders of our common stock or other series of our
preferred stock, cumulative dividends payable quarterly in the amount of 8% per
annum per share. To the extent that the dividend is not declared and paid
quarterly, it will accumulate. At the option of the holder, dividends may be
paid in-kind or paid in cash.
We will issue seven-year Conversion Warrants to purchase a number of
shares of common stock equal to 15% of the number of shares of our common stock
initially issuable upon conversion of the Conversion Notes, at an exercise price
equal to 100% of the applicable Common Stock Conversion Price. We also may issue
seven-year special warrants if the common stock conversion price is changed as a
result of the application of the Nasdaq Marketplace Rules. The Conversion
Warrants and the special warrants will contain the same anti-dilution rights as
provided in the Conversion Notes.
Pequot is an affiliate of Pequot Capital Management, Inc. which manages
other related investment funds that, as a group, constitute our largest
shareholder. In addition, James P. McNiel, one of our directors, is a Senior
Vice President at Pequot Capital Management, Inc., and Gerald A. Poch, also one
of our directors, is a Manager Director/Portfolio Manager at Pequot Capital
Management, Inc. In addition, before joining FutureLink, Howard E. Taylor, our
President and Chief Executive Officer was a venture operating partner at Pequot
Capital Management, Inc. from September 2000 to November 2000.
We issued the bridge note under an exemption provided by Section 4(2) of
the Securities Act, as a transaction not involving any public offering. No
underwriters were
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involved in connection with the issuance of the bridge note. Pequot represented
its intention to acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof, and agreed that it
would not resell the bridge note or the underlying securities unless they became
registered or another exemption from registration was available. The bridge
note is appropriately legended to reflect these restrictions.
Consolidation of Data Centers and Workforce Reduction
We are in the process of consolidating our three North American data
centers at our Lake Forest, California facility. In addition, in April 2001, we
completed a 5% reduction of our workforce.
Nasdaq Update
As previously disclosed, we received a notice from Nasdaq that our common
stock had not maintained a minimum bid price of $1.00 over a period of 30
consecutive trading days as required by the Nasdaq Marketplace Rules. As a
result, Nasdaq, in accordance with such Marketplace Rules, has provided us with
90 calendar days, until June 25, 2001, to regain compliance with this
requirement. If we are unable to demonstrate compliance with the requirement on
or before June 25, 2001, Nasdaq will provide us with written notification that
our securities will be delisted, a determination which we may appeal at that
time.
Since filing our annual report on Form 10-KSB with the Securities and
Exchange Commission, which included our independent auditors' report that
contained a "going concern" qualification, Nasdaq requested that we present it
with information relating to our ability to sustain compliance with Nasdaq's
continued listing requirements. We plan to submit such information to Nasdaq in
accordance with Nasdaq's request. Although we intend to take steps to maintain
our Nasdaq listing, we cannot give any assurance that Nasdaq will not take steps
to delist our common stock.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired. Not Applicable.
(b) Pro Forma Financial Information. Not Applicable.
(c) Exhibits
10.1 Amendment Number Two to Loan and Security Agreement and
Waiver and Consent, dated April 20, 2001, by and among
Foothill Capital Corporation, FutureLink Corp. and certain
of its Subsidiaries.
10.2 Amendment Number One to Loan Agreement, dated April 20,
2001 between Foothill Capital Corporation and FutureLink
Corp. and FutureLink Europe Limited.
10.3 Secured Subordinated Convertible Promissory Note issued to
Pequot Private Equity Fund II, L.P. on April 20, 2001
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10.4 Security Agreement dated April 20, 2001 by and among
FutureLink Corp., certain of its Subsidiaries and Pequot
Private Equity Fund II, L.P.
10.5 Subsidiary Guaranty dated April 20, 2001 by certain
Subsidiaries of FutureLink Corp. in favor of Pequot Private
Equity Fund II, L.P.
10.6 Pequot Subordination Agreement dated April 20, 2001 by and
between Pequot Equity Fund II, L.P. and Foothill Capital
Corporation.
99.1 Press Release dated April 23, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FUTURELINK CORP.
By:/s/ HOWARD E. TAYLOR
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Howard E. Taylor, President
and Chief Executive Officer
Dated: April 23, 2001
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INDEX TO EXHIBITS
10.1 Amendment Number Two to Loan and Security Agreement and
Waiver and Consent, dated April 20, 2001, by and among
Foothill Capital Corporation, FutureLink Corp. and certain
of its Subsidiaries.
10.2 Amendment Number One to Loan Agreement, dated April 20,
2001 between Foothill Capital Corporation and FutureLink
Corp. and FutureLink Europe Limited.
10.3 Secured Subordinated Convertible Promissory Note issued to
Pequot Private Equity Fund II, L.P. on April 20, 2001
10.4 Security Agreement dated April 20, 2001 by and among
FutureLink Corp., certain of its Subsidiaries and Pequot
Private Equity Fund II, L.P.
10.5 Subsidiary Guaranty dated April 20, 2001 by certain
Subsidiaries of FutureLink Corp. in favor of Pequot Private
Equity Fund II, L.P.
10.6 Pequot Subordination Agreement dated April 20, 2001 by and
between Pequot Equity Fund II, L.P. and Foothill Capital
Corporation.
99.1 Press Release dated April 23, 2001