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EXHIBIT 10.5
FUTURELINK DISTRIBUTION CORP.
LETTER AGREEMENT WITH
THOMSON XXXXXXXXX & CO. LIMITED
Xxxx X.X. Xxxxx
General Counsel & Secretary
Direct Line: [REMOVED]
E-Mail: xxxxxx@xxxxxxxxxx.xxx
VIA FACSIMILE: [REMOVED] CONFIDENTIAL
April 26, 1999
Thomson Kernaghan & Co. Limited
000 Xxx Xxxxxx
Xxxxxxx, Xxxxxxx X0X 0X0
Attention: Xxxx Xxxxxxxxx
Executive Vice-President
Dear Sir:
RE: MODIFICATION OF EXISTING AGREEMENTS WITH THOMSON KERNAGHAN ("TK")
Further to the most recent discussions between FutureLink's senior management
and members of your firm, including yourself, concerning modifications to the
existing arrangements between TK and FutureLink to be made in conjunction with
our proposed financing led by Commonwealth Associates, we now believe that
modifications acceptable to all parties can be agreed upon.
Again, our Company's chief goal in these negotiations has been to clean up our
capital structure to focus on creating shareholder value. Given the terms of the
convertible debentures held by TK's clients, there is no way to accurately
determine full dilution of our common stock, leading to a large amount of
uncertainty. While XX expressed some misgivings with regard to the Commonwealth
transaction, that financing does allow for accurate calculation of a fully
diluted share total. The transaction itself is somewhat dilutive to TK's
investors, but we believe the structure we propose below will address this
matter.
TK's Current Position
Before confirming the terms of the modifications, it is helpful to review TK's
current position in FutureLink securities. Under the Debenture Acquisition
Agreement, TK funded $5,000,000 for which it received floating conversion
debentures ($2,000,000 of which, plus accrued interest, having been converted to
7,860,046 shares of common stock) plus 1,041,667 warrants exercisable at $0.96
per share. Our Registration Statement accepted January 6, 1999 registered
9,615,384 shares underlying the convertible debenture and 1,000,000 shares
underlying the warrants. Effective February 26, 1999, TK and FutureLink executed
a Letter Agreement modifying the Debenture Acquisition Agreement to allow for
the issuance of $1,000,000 of additional convertible debenture(s) plus warrants,
of which $970,000 has been funded to date. The common stock to be issued in
trust to support the $1,000,000 additional debenture(s) under the terms of the
Letter Agreement, based on the closing price of FutureLink stock for the three
days prior to February 26th, is 3,306,878 shares ($1,000,000 divided by 125% of
the average closing prices, February 23 to 25, of $0.378 per share). The warrant
pricing formula was tied to the proposed
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financing which did not go forward. Instead, we have proceeded with the offering
led by Commonwealth Associates. As such, I propose that we use April 14, 1999,
being the date the Commonwealth financing proceeded (which is the date it became
absolutely certain that we would not proceed with a TK private placement) to set
the warrant numbers and pricing. The 20 day closing price average to and
including April 14th is $0.3089 per share and 125% of this average price is
$0.386 per share. The $250,000 of warrant coverage using these figures becomes
warrants to acquire 647,668 shares of common stock.
Modifying Debenture Terms; Additional Warrants
We are willing to modify the number of warrants granted to TK and lower their
exercise price. Specifically, we would modify or cancel existing warrants and
issue additional warrants to TK investors such that TK investors would hold a
total of 6,000,000 warrants exercisable at $0.25 per share, These changes to the
warrant coverage and pricing are being made in exchange for modifications to the
terms of the outstanding convertible debentures issued to TK investors (the "TK
debentures"). These TK debentures, which are currently convertible on a floating
conversion price formula, would have their conversion terms altered to provide
for a fixed conversion rate of $0.20 per share for principal and accrued
interest, bringing the conversion price of the TK debentures in line with the
convertible notes offered by Commonwealth (the "Commonwealth notes"). The
Commonwealth notes also have anti-dilution protection, such that in certain
circumstances they can be converted at less than $0.20, and we would add these
same anti-dilution provisions to the TK debentures. Please refer to the courtesy
copy of the Confidential Term Sheet provided to you previously for details of
the anti-dilution protection attached to the Commonwealth notes.
Prepayment of Certain TK Debentures
As discussed, the fixed conversion price, subject to anti-dilution provisions,
would be added to $2.5 million of outstanding TK debentures, as the Company
would give notice to prepay $1.47 million of outstanding TK debentures. Over and
above the terms contained within Section 3 of each of the relevant debentures
covering $1.47 million of principal amount, the choice of such TK debentures to
be prepaid to be at the discretion of TK, the Company hereby gives thirty days
notice of intention to prepay such TK debentures on the basis of payment in full
of the principal amount together with a 28% premium (a total of $1,881,600),
with such TK debenture holders thereby obligated to accept common stock for
accrued interest based on the "market price formula" contained in the TK
debentures. FutureLink will be modifying the terms of its Confidential Term
Sheet regarding the Commonwealth notes by way of a Supplement which will show
the repayment of these $1.47 million principal amount of TK debentures, together
with prepayment premium, as a revised "Use of Proceeds".
Ranking of Remaining TK Debentures
As to ranking of debt, Commonwealth agreed in the letter of intent between that
firm and FutureLink to have the Commonwealth notes issuable in the planned
offering rank pari passu with the Company's existing convertible debt, including
the TK debentures. If we are changing the terms of our securities issued to TK
to be relatively equal to the securities offered in the Commonwealth offering,
the debt should rank equally. As well, the Commonwealth offering is now US$2.5
to US$5 million, subject to over-allotment, with at least the maximum offering
likely to be closed upon, making the amount of debt likely to be owed to
Commonwealth and its investors double the $2.5 million to remain owing to TK
debenture holders.
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Registration and Lock-Up
With regard to registration of the common stock underlying the remaining TK
debentures and the 6,000,000 TK warrants, FutureLink will issue additional
"coverage shares", in trust, and register same. For the TK debentures,
13,750,000 shares of common stock should be available to cover the $2.5 million
of TK debentures to be outstanding following prepayment, to be convertible at
$0.20 per share, which includes an additional 10% to cover common stock issuable
for accrued interest should TK debenture holders elect to receive their interest
in common stock. The Company must also make available 6,000,000 coverage shares
underlying the new TK warrants.
At present, there are 1,755,338 registered coverage shares and 8,000,000
unregistered coverage shares underlying TK debentures and 1,000,000 registered
coverage shares underlying TK warrants. As such, an additional 8,994,662
coverage shares must be issued by FutureLink, in trust, to bring the total
coverage shares up to the 19,750,000 to cover TK debentures and TK warrants, as
provided above.
The Company will take immediate steps, following the closing of the Commonwealth
offering, to register the 8,000,000 outstanding unregistered coverage shares and
the 8,994,662 additional (unregistered) coverage shares to be issued as per the
preceding paragraph. FutureLink will also be registering the common stock
underlying the Commonwealth notes and warrants in the same Registration
Statement. TK (and TK investors) and Commonwealth (and Commonwealth investors)
will enter into a lock-up agreement agreeing not to dispose of any common stock
being registered in FutureLink's May 1999 Registration Statement (to be
initially filed in May 1999, with an effective date likely to be somewhat later)
until 180 days following the closing of the Company's current private placement
offering being conducted through Commonwealth.
Summary
o TK convertible debt to rank pari passu with Commonwealth notes;
o TK debentures, now convertible on a floating basis, 22% below market,
modified to convert at a fixed conversion price of $0.20 per share, with
the addition of anti-dilution provisions similar to the Commonwealth
notes;
o Prepayment by the Company of $1.47 million of outstanding TK debentures
on the basis of 128% of principal amount ($1,881,600 in total) plus the
issuance of common stock "at market price" to cover accrued interest;
o Repricing of all TK warrants and/or issuance of additional warrants to
TK, such that TK holds 6,000,000 warrants exercisable at $0.25 per
share, with anti-dilution protection identical to Commonwealth warrants;
o Issuance of an additional 8,994,662 "coverage shares", in trust,
underlying the TK debentures and TK warrants and registration of all
16,994,662 unregistered coverage shares ASAP in a Registration Statement
to be filed following the closing of the Commonwealth offering. (Please
note, TK has 2,755,338 registered coverage shares outstanding from
FutureLink's last Registration Statement);
o All common stock underlying the Commonwealth notes and warrants to be
registered concurrently with the TK warrants and additional "coverage
shares" in FutureLink's next Registration Statement; and
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o All common stock to be registered on behalf of TK and Commonwealth in
FutureLink's next Registration Statement is to be locked-up FOR 180 DAYS
following the closing of the Commonwealth offering by agreement among
the parties.
Retraction of Objections
In addition to the above, should XX accept these arrangements, we would ask that
TK formally retract the letter of March 23, 1999 signed by Xxxxxx Xxxxxx and
addressed to Xxxxxxx Xxxxx, FutureLink's Chairman and CEO, regarding the
proposed transaction with Commonwealth.
Acknowledgment and Acceptance
We trust that TK will agree to modify the terms of our current agreements in the
above manner to the benefit of TK and its investors, and to the long-term
benefit of the Company on a go-forward basis. Please signify your acceptance of
the above terms by executing (or by having another officer of TK execute) the
"Acknowledgment" area below.
Please feel free to contact me at either my direct line given above or on my
cell at [removed] should you have any additional comments regarding these
matters. Please also feel free to contact Xxxxx Xxxxxxx, FutureLink's Chief
Financial Officer, at his direct line of [removed] or on his cell at [removed].
Yours truly,
FUTURELINK DISTRIBUTION CORP.
[signed: K.B. Xxxxx]
Xxxx Xxxxx
General Counsel & Secretary
ACKNOWLEDGMENT
Thomson Kernaghan & Co. Limited ("TK") hereby acknowledges and agrees to the
above-noted modifications to the terms of the outstanding debentures and
warrants issued or issuable by FutureLink Distribution Corp. ("FutureLink") in
accordance with the Debenture Acquisition Agreement dated August 14, 1998, as
amended by the Letter Agreement dated February 26, 1999, between TK and
FutureLink; the modification of outstanding warrants and/or issuance of
additional warrants by FutureLink to TK on the terms given above; and TK
formally retracts the letter of March 23, 1999 sent by Mr. Xxxxxx Xxxxxx of TK
to Xx. Xxxxxxx Xxxxx of FutureLink, all as evidenced by the signature of an
officer of TK duly authorized in that regard.
Dated: April [26th] , 1999 Per: [signed: X. Xxxxxxxxx]
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Name: [Xxxx Xxxxxxxxx]
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Position: [EVP / Director]
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