FutureLink Prospectus Aims to Remit Any Sins: Christopher Byron
Weston, Connecticut, July 6 (Bloomberg) -- A prospectus worthy of comment crossed my desk the other day. It described a stock offering by an Irvine, California, company bearing the name FutureLink Corp., and representing itself to be in the ``application service provider'' business.
The prospectus described FutureLink's plan to raise $42 million in a sale of stock to the public with the help of Bear, Stearns & Co. The sale, of six million additional shares at $7 each, went through last Thursday.
It's an interesting prospectus because it contains something that I, for one, have never seen before in a such a document. If you bring a copy of the prospectus to your computer screen and search for the word ``unlawful,'' you will encounter, under the section titled ``Risk Factors,'' the following statement, which I think is something of a first when it comes to preemptive full disclosure: ``Persons formerly associated with our business may have engaged in unlawful activities designed to manipulate our stock. We may be subject to criminal and civil sanctions, fines and penalties because of their actions.''
There are two things I like about that statement. I like the way it refers to persons ``formerly'' associated with the company as being only possibly guilty of stock fraud. And I like the subtextual inference that, by putting investors on notice regarding these facts, the company -- and its underwriter -- are, in effect, absolved of any responsibility if people want to go ahead and buy the shares anyway.
Goal: Stay Afloat
We'll get more deeply into the implications of all that in a minute, but first some thoughts on what FutureLink actually is, and why it is conducting this stock sale: basically, to stave off bankruptcy.
Not so long ago, FutureLink was one of the hottest stocks on the Nasdaq National Market, rising from barely $8 last October to a mid-November high of almost $36. How that run-up occurred is also something we'll get to in a minute. But for now, it's enough to know that this recently high-flying stock began life not as a so-called ``application service provider'' at all but as a uranium mining company in Colorado back in the mid-1950s.
Several name changes and 40 years later, the company -- known originally as Cortez Uranium & Mining Co. -- emerged bearing the name Core Ventures Inc., an OTC Bulletin Board penny stock outfit with ambitions to get into high tech.
Young Man's Interest
It was at that point, in early 1998, that Core Ventures turned up on the radar screen of an over-achieving young Canadian stock promoter named Cameron Chell, who was then not yet 30. Beginning adult life as a computer salesman, Chell had switched to finance at the age of 25 and become a stock broker, setting himself up in business with a stock promoter buddy as self- proclaimed ``investment bankers.''
By the start of 1998, Chell had founded and was heading up a Calgary outfit named FutureLink Distribution Corp., which he foresaw as a big player in the computer networking business. In Core Ventures, Chell saw a way to further that goal -- namely, through a merger that would enable FutureLink to gain access to the U.S. capital market without all the annoying folderol of having to register shares with securities regulators for an IPO.
So Chell thereupon worked out a deal by which FutureLink would merge itself into, and take over, Core Ventures, with Chell as the top man in the combined business.
In February 1998, the merger was consummated, and in that year, FutureLink's revenue jumped from zero to $2.4 million. But payroll costs alone exceeded $3.6 million, with the company racking up a total of $7.6 million in costs.
Cash Flow Losses
In 1999, revenue jumped 467 percent to $13.6 million, mainly through acquisitions, but costs rose even more, with the result that losses leaped 481 percent to $34.9 million. Meanwhile, cash flow losses from operations soared more than 16-fold, to $16.4 million.
In the first quarter of 2000, another $13.1 million of cash was devoured by operations, as the company's quarterly revenue topped $22.6 million while expenses ballooned to $45.4 million. Result: FutureLink's day-to-day working capital evaporated, and the company's tangible net worth on the balance sheet plunged from $16 million to $1.2 million.
Given the foregoing, it is hardly surprising that FutureLink's stock price would have fallen from its March 10 high of $38.50 a share, to its current price of less than $7. But what possible appeal could Bear Stearns have hoped its clients would see in this deal, other than perhaps the possibility that this collapsed and bleeding stock would somehow recover and climb back into the 30s again?
That is why the prospectus is so memorable, since it seems to indicate pretty clearly that the only reason the stock price took off in the first place was because of that aforementioned unlawful activity that might have occurred by unnamed persons ``formerly associated'' with the company.
Full Disclosure
There are, in fact, so many slippery, slimy and close-to-the- edge transactions enumerated in the prospectus -- all in the spirit of full disclosure, mind you -- that it is hard to tell exactly which one the document is referring to as being possibly unlawful.
The prospectus describes, for example, a transaction involving a stock promoter named Jeffrey Bruss. He was charged by the Securities and Exchange Commission in 1998 with taking secret payments from 25 different microcap stocks in return for recommending them as good investments in a newsletter he published. Accepting such payments is not illegal, but failing to disclose them is. Bruss has proclaimed his innocence, and the case is pending.
An SEC litigation release in the case stated that most of the stocks recommended by Bruss quickly soared following publication of the recommendation, then abruptly collapsed -- the classic signs of a so-called pump-and-dump operation.
The prospectus quotes Bruss as claiming, at around the time of his arrest, that he had received $300,000 from FutureLink to tout it in his newsletter. But the company says, oddly, that it had no record of having made such a payment.
Stock Promoter's Suit
Elsewhere in the prospectus, the company notes that it was recently sued by an Internet stock promotion firm called SmallCaps OnLine LLC. According to the document, SmallCaps OnLine claimed FutureLink owed it $5.1 million in cash and about $60 million in FutureLink stock and warrants, in return for ``advisory and investor relations services.'' Exactly what those services were is not detailed in the document, though an examination of the SmallCaps Online Web site reveals the company to be mainly in the business of issuing upbeat investment recommendations to the public, in return for compensation from the client company. The prospectus reveals that FutureLink has negotiated a settlement with SmallCaps Online, giving the firm $5 million in cash and what are now three million out-of-the-money warrants.
Chell's Exit
In yet another section of the prospectus, readers can learn why the founder of FutureLink -- fast-tracking young Cameron Chell -- is no longer with the company. Basically, he looks to have been fired. It turns out that Chell had been the subject of an Alberta Stock Exchange investigation into various of his antics from his time as a stockbroker. Seems that he had breached certain rules involving securities sales, and in November 1998 was punished with a C$25,000 fine and a five-year ban from the Alberta exchange.
Was that why he departed FutureLink? Not necessarily, since it wasn't until August 1999 -- nine months later -- when he finally emptied out his desk and left. Five months later still, in January, FutureLink filed suit against him, claiming that he and other former employees had misappropriated a corporate opportunity for themselves, in breach of their fiduciary obligations.
Chell counterclaimed, the suits were settled in what amounted to a standstill agreement by which time he was long gone, anyway. Exactly what he did -- or more specifically, what the company says he did in the alleged misappropriation -- isn't spelled out in the prospectus.
So, to sum up, in FutureLink we have the following: A company that began life as a Colorado uranium mine, was transformed into a Canadian penny stock, then soared from $1.25 a share in 1998 to almost $39 in March, creating in the process a momentary market value of close to $2.3 billion when the business itself was literally drowning in red ink.
Back to Earth
Now, with evidence growing that the stock price may have been manipulated higher illegally to begin with, and that certain of the company's own people may have been involved, the stock has crashed back to earth ... even as a leading Wall Street underwriter has dumped yet another boatload of its shares onto the market.
All I can say is: that's some chutzpah. In a world of bull market opportunism, this is one Bear Stearns ``tombstone'' advertisement that will deserve pride of place right there alongside theglobe.com Inc. and drkoop.com Inc. And just think, all it took was that single little cautionary disclaimer (Warning: This deal can ruin your whole day ...) to be cleansed of any sin, even as that $2.9 million in underwriting commissions and fees tumbles into the underwriter's out-stretched hands.
Ain't life grand in a bull market?
Jul/06/2000 0:01 ET
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