<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 2000
REGISTRATION NO. 333-95905
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM N-2
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/ Pre-Effective Amendment No. 1
/ / Post-Effective Amendment No.
--------------------------
MGI2, INC.
(Exact name of registrant as specified in its charter)
9821 KATY FREEWAY, SUITE 500
HOUSTON, TEXAS 77024
(Address (Number, Street, City, State and Zip Code) of Principal Executive
Office)
(800) 315-6979
(Registrant's Telephone Number, including Area Code)
CARY M. GROSSMAN
CHIEF EXECUTIVE OFFICER
9821 KATY FREEWAY, SUITE 500
HOUSTON, TEXAS 77024
(800) 315-6979
(Name and Address (Number, Street, City, State, Zip Code) of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
ANDREWS & KURTH L.L.P. CONNER & WINTERS,
600 Travis, Suite 4200 A Professional Corporation
Houston, Texas 77002 One Leadership Square
(713) 220-4200 211 North Robinson, Suite 1700
Attn: Christopher S. Collins Oklahoma City, Oklahoma 73102
(405) 272-5750
Attn: Irwin H. Steinhorn
</TABLE>
------------------------
APPROXIMATE DATE OF THE PROPOSED PUBLIC OFFERING
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box: / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED REGISTERED SHARE(2) PRICE(1)(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Stock(1).................... 2,185,000 shares $8.00 $17,480,000 $4,615
Underwriters' warrants(3).......... 190,000 (3) (3) (3)
Common Stock underlying
underwriters' warrants........... 190,000 $9.60 $1,824,000 $482
Total Registration Fee............. $19,304,000 $5,097(4)
</TABLE>
(1) Includes common stock issuable upon exercise of the underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.
(3) Represent warrants issued to the underwriters to purchase 190,000 shares of
common stock. As the shares of common stock underlying these warrants are
being registered hereby, no registration fee for the warrants is required
according to Rule 457(g).
(4) Of which $4,129 was previously paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION DATED MARCH 15, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. MGI2 MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SEC IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
1,900,000 SHARES
[LOGO]
MGI2, INC.
COMMON STOCK
-------------------------------------------------------------------------
MGi2, Inc. is offering 1,900,000 shares of its common stock in an initial
public offering. Prior to this offering, there has been no public market for
MGi2's common stock. The U.S. underwriters are offering shares in the
U.S., and the European manager is offering shares primarily outside the
U.S.
We are an internally managed, non-diversified closed-end investment company
that has elected to be regulated as a business development company under the
Investment Company Act of 1940. Our primary business focus is to create or
identify, and then incubate and grow, businesses that intend to benefit from the
expected growth of business to business, or B2B, e-commerce. We intend to invest
capital in, and provide merchant banking and incubation services to, these
companies.
Our merchant banking and incubation services will include strategic business
and financial advisory services, and investment banking services. Our investment
objective is to achieve capital appreciation from equity investments in our
portfolio companies and from equity we receive for rendering advisory services
to our portfolio companies.
We currently anticipate that the public offering price will be between $7.00
and $9.00 per share. We intend to list our shares on the American Stock Exchange
under the symbol "MGE."
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to MGi2.......................... $ $
</TABLE>
We estimate that our total expenses of issuance and distribution will be
$355,000, in addition to the non-accountable expense allowance of 3% of the
gross proceeds to be paid to the managing underwriter. See
"Underwriting--Non-accountable Expense Allowance."
The underwriters may purchase up to 285,000 additional shares from us at the
public offering price, less underwriting discounts and commissions. The
underwriters expect to deliver and pay for the shares on or about ,
2000. See "Underwriting" for the maximum and minimum information based on the
purchase of shares subject to the underwriters' over-allotment option.
Shares of closed-end investment companies have in the past exhibited a
tendency to trade at discounts from their underlying net asset values and public
offering prices. The risk of loss associated with this tendency may be greater
for investors who expect to sell the securities offered hereby soon after the
offering concludes.
SEE "RISK FACTORS" ON PAGES 8 TO 15 FOR FACTORS THAT SHOULD BE CONSIDERED
BEFORE INVESTING IN THE SHARES OF MGI2.
This prospectus concisely provides the information that you should know
about us before investing in shares of our common stock. You should read this
prospectus carefully and retain it for future reference.
- --------------------------------------------------------------------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
This offering includes 190,000 shares of common stock issuable upon exercise
of the underwriters' warrant.
CAPITAL WEST SECURITIES, INC.
I-BANKERS SECURITIES, INC.
(EUROPEAN MANAGER)
WESTPORT RESOURCES INVESTMENT
SERVICES, INC.
APS FINANCIAL CORPORATION
The date of this prospectus is March , 2000.
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form N-2 (together
with amendments, schedules and exhibits thereto, the "registration statement")
under the Securities Act of 1933 with respect to this offering. This prospectus
sets forth concisely the information that you should know about us before
investing in our shares. This prospectus, filed as a part of the registration
statement, does not contain all the information contained in the registration
statement, certain portions of which have been omitted in accordance with the
rules and regulations of the SEC. For further information with respect to MGi2
and our offering of common stock, please refer to the registration statement
including the attached exhibits and schedules. Statements made in the prospectus
as to the contents of any contract, agreement or other document are not
necessarily complete; with respect to each such contract, agreement or other
document filed as an exhibit to the registration statement, please refer to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
The registration statement and the attached exhibits may be inspected,
without charge, at the public reference facilities maintained by the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
these materials can also be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
SEC maintains a website on the Internet (http:/www.sec.gov) that contains
reports and other information regarding users that file electronically with the
SEC through the Electronic Data Gathering, Analysis and Retrieval System or
"EDGAR."
MGi2 has filed a registration statement under the Securities Exchange Act of
1934. As a result of this offering, we will also become subject to the full
informational requirements of the Exchange Act. We will fulfill our obligations
with respect to those requirements by filing periodic reports and other
information with the SEC. We intend to furnish our stockholders with annual
reports containing audited financial statements examined by an independent
accounting firm for each fiscal year.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Where You Can Find More Information.... i
Prospectus Summary..................... 1
Risk Factors........................... 8
Forward-Looking Statements............. 16
Use of Proceeds........................ 17
Dividend Policy........................ 18
Capitalization......................... 19
Dilution............................... 20
Selected Financial Data................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 22
Senior Securities...................... 26
Business............................... 28
Portfolio Companies; Equity
Investments.......................... 38
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Investment Company Act Regulation...... 39
Management............................. 41
Certain Transactions................... 51
Control Persons and Principal
Stockholders......................... 53
Investment Advisory Services........... 54
Brokerage Allocation and Other
Practices............................ 54
Federal Income Tax Matters............. 54
Description of Capital Stock........... 55
Shares Eligible for Future Sale........ 58
Underwriting........................... 60
Legal Matters.......................... 63
Experts................................ 63
Custodian, Transfer Agent and
Registrar............................ 63
Change in Independent Accountants...... 63
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information or
additional information. We are not making an offer of these securities in any
jurisdiction where the offer or sale is not permitted. You should not assume
that the information contained in this prospectus is accurate as of any date
other than the date on the front of this prospectus.
As used in this prospectus any reference to the "Company," "MGi2," "we,"
"us," or "our" means MGi2, Inc. and its wholly owned subsidiaries, McFarland,
Grossman & Company, Inc., MGi2 Ventures, Inc., and MGi2 Capital, Inc., unless
otherwise indicated.
ii
<PAGE>
PROSPECTUS SUMMARY
UPON EFFECTIVENESS OF THE OFFERING, MCFARLAND, GROSSMAN & COMPANY, INC. WILL
BECOME A WHOLLY OWNED SUBSIDIARY OF MGI2 THROUGH A SHARE EXCHANGE OF 2 SHARES OF
MGI2 COMMON STOCK FOR EVERY 1 SHARE OF OUTSTANDING MCFARLAND, GROSSMAN COMMON
STOCK. PRIOR TO THE CLOSING OF THE OFFERING, MGI2, WHICH WAS FORMED IN
FEBRUARY 2000, WILL ALSO FORM AND ORGANIZE TWO OTHER WHOLLY OWNED SUBSIDIARIES,
MGI2 VENTURES, INC. AND MGI2 CAPITAL, INC.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL
DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT IN SHARES OF OUR COMMON
STOCK. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE MAKING AN INVESTMENT. UNLESS OTHERWISE INDICATED, THE FINANCIAL
INFORMATION, SHARE AND PER SHARE DATA IN THIS PROSPECTUS (1) HAVE BEEN ADJUSTED
FOR THE SHARE EXCHANGE AMONG THE STOCKHOLDERS OF MGI2 AND MCFARLAND, GROSSMAN
AND (2) ASSUME THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
OUR BUSINESS
Our primary business focus is to create or identify, and then incubate and
grow, businesses that aim to benefit from the expected growth of business to
business, or B2B, e-commerce, including:
- INTERNET INFRASTRUCTURE SERVICE PROVIDERS, such as companies that design
local and wide-area networks and provide telecommunications and internet
access services;
- INTERNET MARKET MAKERS who connect buyers and sellers by creating
Internet-based markets and exchanges for the marketing and sale of goods
and services via the Internet; and
- INTERNET SOLUTION PROVIDERS that develop and provide business solutions to
users of e-commerce, including:
- website design,
- web-based software enablers, such as application service providers,
- application integration software, and
- Internet services such as consulting and systems integration.
We intend to invest in and provide merchant banking and incubation services
to our clients in the B2B e-commerce market. Our merchant banking and incubation
services will include strategic business and financial advisory services, and
investment banking services. Through our funding and services, we intend to
enhance our clients' growth opportunities. As opportunities arise or market
emphasis shifts, we may invest in, and provide these services to, high growth
businesses which are not involved in the Internet or e-commerce. We will be
compensated for our services in several ways. We will receive cash fees for the
investment banking services we provide to our client and portfolio companies. We
will also earn warrants or other equity compensation in connection with
providing our other services.
Our policy is to dispose of our investments when a liquid market exists.
However, if a portfolio company becomes publicly traded, subject to the
discretion of our board of directors, we may distribute those equity securities
to our stockholders.
We have adopted a policy to use reasonable efforts to provide our
stockholders with the right to invest in the initial public offerings of
portfolio companies. These opportunities will depend on the nature of our role
with the portfolio company and whether the managing underwriter of the initial
public offering of our portfolio company does not object to offering our
stockholders the right to invest in the offering.
We are an internally managed, non-diversified closed-end investment company
that has elected to be regulated as a business development company under the
Investment Company Act of 1940. Our investment objective is to achieve capital
appreciation from equity investments in our portfolio companies and from equity
we receive for rendering advisory services to our portfolio companies. Our
management will implement our investment objective and strategies and will
determine our strategic and operational direction.
1
<PAGE>
Currently, our principal operating subsidiary is McFarland, Grossman &
Company, Inc. McFarland, Grossman, a registered broker-dealer, was formed in
1991 to provide investment banking services to rapidly expanding service
businesses or service businesses active in consolidating industries. McFarland,
Grossman has a history of forming and incubating new businesses, providing
financial advisory services to, and financing for, client and portfolio
companies. Since its inception, McFarland, Grossman has completed engagements in
10 states involving the private placement of more than $88 million in private
equity and mezzanine financing, $181 million of senior debt, and more than 20
mergers and acquisitions. Since 1997, McFarland, Grossman has focused on the
formation and incubation of new businesses and other engagements where it
receives equity, in addition to cash fees, for providing merchant banking
services. To that end, McFarland, Grossman has been instrumental in the
formation of five companies since 1997, three of which are now publicly traded
on national securities exchanges. See "Business--Our Company."
After the offering, we also intend to conduct operations through MGi2
Ventures, Inc. which will provide incubation, business consulting and other
related services and through MGi2 Capital, Inc. which will provide management
services to venture capital funds and other private equity funds that we
establish. See "Business--Our Corporate Structure."
OUR MARKET OPPORTUNITY
The Internet is rapidly becoming a critical resource for business. Companies
that successfully establish an online presence can more effectively conduct
business with partners and suppliers, communicate with customers and employees
and address the rapidly growing, global base of online customers. Forrester
Research, an independent research firm, predicts that the number of United
States online businesses will grow from 1.8 million (or 29% of all U.S.
enterprises) in 1998 to 4.3 million (or 55% of all U.S. enterprises) by 2003.
Forrester Research also projects that the U.S. B2B e-commerce market, which they
define as the intercompany trade of hard goods over the Internet, will grow from
$43 billion in 1998 to $1.3 trillion by 2003.
We believe that the emergence of this "New Economy" presents us with
significant opportunities to provide merchant banking services and incubation
services to emerging or development stage companies that have the potential to
succeed in the New Economy. In addition, we believe an opportunity exists to
provide these services to companies that are located in underserved geographic
regions. According to a recent survey published by PricewaterhouseCoopers,
approximately 69% of the venture capital invested during the first nine months
of 1999 was invested in California and New England. Our efforts will be directed
to assisting companies in underserved markets, such as Texas and other
southwestern states, as opposed to companies located in Silicon Valley, New
England and other areas near primary venture capital centers. However, we may
make investments in other geographic areas depending on the availability of
business opportunities. See "Business--Our Market Opportunity."
OUR OPERATING STRATEGY
Our operating strategy is to create value for our stockholders primarily by
creating or identifying, and then incubating and growing, businesses that are
poised to benefit from the growth of the Internet as a commercial exchange, such
as companies that will provide online B2B services. We believe our portfolio
companies will benefit from our collective experience and resources and, as a
result, be in a better position to succeed in the New Economy.
Our principal resources include the experience and industry relationships of
our management team, our directors and our advisory board. Our management team
includes experienced professionals with varied backgrounds which include
strategy consulting, investment banking and public accounting. Our directors and
advisory board members are senior level executives with experience building and
managing businesses in the technology, e-commerce and telecommunications
industries.
Our principal merchant banking and incubation services include:
- Strategic guidance and business planning;
2
<PAGE>
- Organizational development and operational support;
- Investment banking and financial advisory services; and
- Providing seed capital and later-stage growth capital.
See "Business--Our Operating Strategy."
OUR INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to achieve capital appreciation from equity
investments in our portfolio companies and from equity we receive for rendering
advisory services to our client and portfolio companies. We also expect to
receive current income from certain of our advisory activities. See
"Business--Our Merchant Banking and Incubation Services."
Our criteria for selecting target clients are:
- INDUSTRY. Businesses involved in or enabling the development of B2B
e-commerce, such as infrastructure service providers, market makers and
solution providers.
- GEOGRAPHY. Companies located outside of the primary venture capital
centers such as Silicon Valley and New England, including but not limited
to Texas and other southwestern states.
- COMPANY STAGE. Newly formed companies that need assistance in developing
their business strategies and management teams, and require "seed" level
investment capital, and companies that are developed and require
investment banking services to arrange later stage financing or mergers
and acquisitions or other financial advisory services.
- SOLID CORE MANAGEMENT TEAM. Relevant industry experience, a history of
accomplishment, and skills for managing a high growth business.
- REASONABLE VALUATION. Businesses which we believe have a reasonable
valuation in light of the value of the current business and the risks
involved in its development.
We intend to assist in the growth of our portfolio companies by providing
them with management assistance in strategy formation and development, executive
recruiting and general business operations.
The selection of portfolio investments and the day-to-day management of our
investments, including our investment practices and techniques, will be the
responsibility of certain of our officers who serve under the direction of our
board of directors. We have not adopted a fixed policy concerning the types of
business we can invest in, the types of securities we will hold or the amount of
funds which can be invested in any one portfolio company. We reserve the freedom
to invest in any kind of security or asset and to engage in business operations
to the extent considered beneficial in achieving our investment objectives. Our
investments in clients may take many forms, including preferred or common
equity, debt, debt with equity features, warrants or options, convertible
securities and other forms of ownership interests. See "Business--Our Investment
Objective and Principal Strategies." We may change our investment objective and
policies without a vote of the holders of a majority of our common stock.
OUR GROWTH STRATEGY
Our strategy to grow our business is as follows:
- Expand our financial advisory and merchant banking activities in our
client and portfolio companies and earn significant equity positions in
our portfolio companies;
- Increase our focus on the formation and development of new businesses;
- Selectively provide capital to clients in exchange for equity interests;
and
- Participate in late-stage financing of our clients' expansion by managing
a venture fund.
See "Business--Our Growth Strategy."
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock we are offering................. 1,900,000 shares
Common stock that will be outstanding after
the offering............................... 3,400,000 shares
Use of proceeds.............................. We intend to use the net proceeds from this
offering to invest in portfolio companies, to
repay indebtedness, to provide capital
reserves for regulatory capital requirements
and for general corporate purposes. See "Use
of Proceeds."
Proposed American Stock Exchange trading
symbol..................................... MGE
</TABLE>
The number of outstanding shares of common stock shown above does not
include:
- 326,500 shares issuable upon exercise of options, having a weighted
average exercise price of $4.40 per share, and consisting of 161,500
options outstanding prior to the closing of this offering and 165,000 to
be granted at the closing of this offering;
- 190,000 shares issuable upon exercise of warrants issued to the managing
underwriter; or
- 285,000 shares issuable upon exercise of the underwriters' over-allotment
option.
PRINCIPAL RISK FACTORS
You should carefully consider all of the information in this prospectus. In
particular, you should evaluate the specific factors set forth under "Risk
Factors" on pages 8 to 15 of this prospectus for risks involved with an
investment in our common stock, including but not limited to risks associated
with the following:
- our ability to attract new clients;
- our dependence on key personnel;
- the financial advisory industry;
- the competitive nature of investment banking and merchant banking;
- our ability to establish a private equity fund;
- the need to obtain SEC exemptive relief regarding various policies; and
- our investment in early stage companies.
DIVIDENDS
We intend to retain our earnings, if any, to support and finance the
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. However, if a portfolio company becomes publicly traded,
subject to the discretion of our board, we may distribute those equity
securities to our stockholders. See "Dividend Policy."
CERTAIN ANTI-TAKEOVER PROVISIONS
Our charter and bylaws, as well as certain statutory and regulatory
requirements, contain certain provisions that may have the effect of
discouraging a third party from making an acquisition proposal for MGi2 or of
otherwise initiating a change in control of MGi2. See "Description of Capital
Stock--Certificate of Incorporation and Bylaws Provisions."
4
<PAGE>
FEDERAL INCOME TAX MATTERS
We do not intend to elect pass-through treatment under subchapter M of the
Internal Revenue Code, but will expect to be taxed at regular corporate rates on
ordinary income and recognized gains on distributions of appreciated property.
See "Federal Income Tax Matters."
CORPORATE INFORMATION
MGi2 was incorporated under the laws of the State of Delaware in February
2000. Our corporate office is located at 9821 Katy Freeway, Suite 500, Houston,
Texas 77024, and our telephone number is (800) 315-6979.
5
<PAGE>
FEE TABLE AND SYNOPSIS
You can expect to bear, directly or indirectly, the following costs and
expenses in connection with an investment in shares of our common stock.
OFFERING EXPENSES
STOCKHOLDER TRANSACTION EXPENSES(1)
TRANSACTION EXPENSES (AS A PERCENTAGE OF THE OFFERING PRICE PER SHARE)
<TABLE>
<S> <C>
Sales Commission
Underwriting discounts and commissions............ 10.0%
Non-accountable expense allowance................. 3.0%
-----
Total Stockholder Transaction Expenses.......... 13.0%
=====
</TABLE>
- ------------------------
(1) Does not include offering expenses incurred in connection with our
organization, which are estimated to be $355,000 and which will be paid from
the net proceeds of this offering.
ANNUAL EXPENSES
ANNUAL EXPENSES
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON
SHARES)
<TABLE>
<S> <C>
Operating expenses(2)
Salaries and Compensation........................ 8.84%
Professional Fees................................ 0.18%
General and Administrative....................... 2.65%
Total Annual Expenses.......................... 11.67%
======
</TABLE>
- ------------------------
(2) "Operating expenses" represents the estimated operating expenses of MGi2 for
the current fiscal year, as a percentage of net assets, including estimated
net proceeds from the offering.
EXAMPLE OF COSTS AND EXPENSES CALCULATION
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assuming a 5% annual return, you can expect to
pay the following expenses on a $1,000
investment..................................... $113 $319 $500 $ 863
</TABLE>
Our actual rate of return may be greater or less than the hypothetical 5%
return used above. The 5% return is merely a hypothetical return that is
required by law to be used to demonstrate the costs and expenses of an
investment in shares of our common stock, and does not reflect our expectation
of the actual return that you may or may not realize from an investment in our
shares.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
We have derived the following summary financial information for the years
ended December 31, 1995 through 1999 from the audited financial statements and
the related notes of MGi2 and McFarland, Grossman, our subsidiary. The audited
financial statements for the years ended December 31, 1997 through 1999 are
included in this prospectus. The audited financial statements for the years
ended December 31, 1995 and 1996 are not included in this prospectus. The
consolidated financial statements of MGi2 reflect the exchange of stock of
McFarland, Grossman for the stock of MGi2 at a ratio of 2 shares of MGi2 for
every 1 share of McFarland, Grossman. You should read this summary financial
information in conjunction with our more detailed financial statements and
related notes. You should also read "Use of Proceeds," on page 17
"Capitalization," on page 19 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 22.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Revenues:
Investment banking fees............................. $1,114,455 $1,100,426 $1,813,995 $2,824,594 $1,082,946
Net gain (loss) on securities....................... (1,036) 105,425 496,845 70,373 (4,145)
Dividends and interest.............................. 3,183 3,678 6,079 87,712 54,567
Other income........................................ 144,325 123,250 148,850 66,820 6,636
---------- ---------- ---------- ---------- ----------
Total revenues.................................... $1,260,927 $1,332,779 $2,465,769 $3,049,499 $1,140,004
---------- ---------- ---------- ---------- ----------
Operating expenses:
Compensation and benefits........................... $ 921,443 $ 770,289 $1,250,207 $2,327,942 $1,192,315
Other operating expenses............................ 344,277 435,315 398,962 497,054 386,862
---------- ---------- ---------- ---------- ----------
Total expenses.................................... $1,265,720 $1,205,604 $1,649,169 $2,824,996 $1,579,177
---------- ---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income
taxes............................................... $ (4,793) $ 127,175 $ 816,600 $ 224,503 $ (439,173)
---------- ---------- ---------- ---------- ----------
Net income (loss)..................................... $ (6,670) $ 96,424 $ 522,152 $ 137,780 $ (297,397)
========== ========== ========== ========== ==========
Net income (loss) per share
Basic............................................... $ (0.00) $ 0.06 $ 0.34 $ 0.09 $ (0.20)
========== ========== ========== ========== ==========
Diluted............................................. $ (0.00) $ 0.06 $ 0.30 $ 0.08 $ (0.20)
========== ========== ========== ========== ==========
Shares used in computing net income (loss) per share
Basic(1)............................................ 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000
========== ========== ========== ========== ==========
Diluted............................................. 1,500,000 1,695,705 1,743,613 1,754,242 1,500,000
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Total assets.......................................... $ 269,675 $ 390,032 $1,236,061 $1,375,606 $1,157,243
========== ========== ========== ========== ==========
Total debt(2)......................................... $ 6,986 $ 3,881 $ 776 $ 180,000 $ 192,100
========== ========== ========== ========== ==========
Total stockholders' equity............................ $ 219,547 $ 323,704 $ 881,675 $ 918,555 $ 621,158
========== ========== ========== ========== ==========
</TABLE>
- ------------------------------
(1) Does not reflect the 1,900,000 shares offered pursuant to this prospectus.
(2) See "Senior Securities" on page 26 for more information regarding our level
of indebtedness.
Since 1997, we have assigned most of our interest in client securities which
we received as fees for our services to our employees as compensation. In
addition, we have participated in the formation of new businesses and allowed
our employees, rather than us, to purchase the founders' stock, which is
generally issued for nominal consideration. We have now adopted a policy that
any client securities to be received in connection with the services we provide,
and shares to be acquired as founders' stock in companies that we incubate or
assist in incubation, are to be paid or issued directly to us. Subject to review
and approval by the SEC, once granted or issued to us, our compensation
committee, which is comprised of independent directors, may distribute or
allocate up to 30% of these securities among our officers and employees as
additional compensation. If this policy had been in effect in prior years, we
would have retained additional securities which are now publicly traded and
which had a value of approximately $1,523,000 as of December 31, 1999. This
valuation does not include the value of privately held securities which were
previously granted to our officers and employees as compensation. See "Risk
Factors--Risks Associated with Our Operations--Our policy of granting a
percentage of the securities received as compensation to our officers and
employees could result in a conflict of interest" and "--Failure to obtain SEC
exemptive relief of various policies could negatively affect our operations."
7
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RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS BEFORE PURCHASING ANY SHARES
OF OUR COMMON STOCK. PURCHASING SHARES OF OUR COMMON STOCK CARRIES SIGNIFICANT
RISK OF LOSING SOME OR ALL OF YOUR INVESTMENT.
RISKS ASSOCIATED WITH OUR OPERATIONS
WE HAVE A LIMITED OPERATING HISTORY WORKING WITH INFORMATION TECHNOLOGY,
INTERNET AND E-COMMERCE COMPANIES.
We have limited experience advising information technology, Internet and
e-commerce companies and have no significant operating history with respect to
these types of companies upon which you may evaluate our business. We cannot
assure you that our management will be able to effectively manage, promote or
finance Internet-related companies or implement our strategies.
OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT NEW CLIENTS.
Many of our engagements are one-time representations and do not result in
follow-on business or revenues. We have a limited number of client engagements,
and our success will depend on our ability to identify, attract and maintain
clients for our services in the future. We cannot assure you that we will be
able to attract client and portfolio companies or that our services will be
required on fee terms or on equity-for-services terms satisfactory to us.
WE DEPEND ON KEY PERSONNEL, THE LOSS OF WHICH COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
For the foreseeable future, we will place substantial reliance upon the
personal efforts and abilities of Clifford E. McFarland and Cary M. Grossman,
the co-founders of MGi2, along with other members of our management team. The
loss of the services of either of Messrs. McFarland or Grossman likely would
have a material adverse effect on our business, operations, revenues and/or
prospects. Our success also depends on our ability to retain and hire additional
highly skilled personnel and upon the continued assistance of our directors and
advisory board members. Competition for experienced personnel in our business is
intense. We cannot assure you that we will be able to retain our personnel or
hire and retain additional qualified and skilled personnel. See
"Business--Competition" and "Management." We currently have key man life
insurance policies on Messrs. McFarland and Grossman in the amount of $500,000
each.
WE COULD EXPERIENCE LOSSES IN THE FUTURE.
We had a net loss of $297,397 for the twelve months ended December 31, 1999
resulting largely from reduced revenues, increased expenses and unrealized
losses on investments. We cannot assure you that we will be able to generate
profits in the future, and we could continue to incur losses.
IF WE HAVE LIMITED ACCESS TO ADDITIONAL FUNDS, OUR GROWTH COULD BE LIMITED.
We cannot assure you that our business will generate sufficient cash flow
from operations to fund our liquidity needs in the future. If we do not have
sufficient cash or borrowing capacity, our growth could be limited, our capital
impaired and/or our ability to carry out our operating and growth strategy could
be severely limited unless we are able to obtain additional cash from the sale
of equity or the incurrence of debt.
WE ARE SUBJECT TO GOVERNMENT REGULATION BECAUSE OF OUR STATUS AS A BUSINESS
DEVELOPMENT COMPANY.
We have elected to be regulated as a business development company under the
Investment Company Act. Although the business development provisions relieve
business development companies from compliance with many of the provisions of
the Investment Company Act, business development companies are subject to
certain restrictions on permitted types of investments. Moreover, the applicable
provisions of the
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Investment Company Act impose numerous restrictions on our activities, including
restrictions on the nature of our investments and transactions with affiliates.
We cannot assure you that these business development company provisions will be
interpreted or administratively implemented in a manner consistent with our
objectives and manner of operations. If our election to operate as a business
development company is rejected, or if we otherwise fail to qualify as a
business development company, we would be subject to the substantially greater
regulation applicable to a registered investment company under the Investment
Company Act, unless we can establish an exemption. Compliance with these
regulations would significantly increase our costs of doing business and would
limit our ability to comply with our operating and growth strategy.
If we lose our status as a business development company and are unable to
obtain a ruling from the SEC that we are not an investment company, we may have
to take actions which are not in our best interests or which could be contrary
to our operating and growth strategy in order to avoid being a registered
investment company and having to register under the Investment Company Act. See
"Investment Company Act Regulation."
If we lose our status as a business development company and are unable to
obtain a ruling from the SEC that we will not be an investment company, we may
further be required, in order to avoid being an investment company, to sell
assets which we could otherwise want to retain and may be unable to sell assets
which we would otherwise want to sell. Further, we may be forced to acquire
additional income generating or loss generating assets that we would not
otherwise acquire, in order to avoid being an investment company. If we are
required to do the above, we believe that it could have a material adverse
effect on our ability to carry out and perform our business and operating
strategy. See "Business--Government Regulation" and "Investment Company Act
Regulation."
WE ARE SUBJECT TO RISKS INHERENT IN THE FINANCIAL ADVISORY BUSINESS.
The financial advisory business is, by its nature, subject to various risks,
particularly in volatile or illiquid markets, including the risk of losses
resulting from the ownership of securities. Our activities and their
profitability are affected by many factors, including:
- the volatility and price level of the securities markets;
- the demand for financial advisory and merchant banking services;
- the level and volatility of interest rates;
- legislation affecting the business and financial communities; and
- the economy in general.
These conditions may lead to periods of reduced activities. Sudden declines
in market values of securities and the failure of issuers to meet their
obligations can result in substantial losses. Down markets, if prolonged, may
also lower our revenues. Further, under applicable securities laws and court
decisions with respect to financial advisor liability and limitations on
indemnification by issuers, we may be exposed to substantial securities
liability arising out of our involvement in private offerings of equity and debt
instruments. See "Business--Our Merchant Banking and Incubation Services."
OUR EQUITY POSITIONS IN PORTFOLIO COMPANIES WILL HAVE VOLATILE VALUES.
As a result of our merchant banking activities and receipt of equity for
services, we expect to hold equity interests in various portfolio companies.
These securities may take on any of a number of forms but would likely consist
principally of stock and warrants, most of which will be restricted and
non-marketable for varying periods of time. Each accounting period, as required
by generally accepted accounting principles for broker-dealers and investment
companies, these securities will be marked-to-market, i.e., valued at market
value or a percentage thereof, with resulting unrealized gains and losses being
reported in earnings. Our investments in the securities of non-public companies
are valued, under the supervision and
9
<PAGE>
authority of our board of directors, by management based upon valuation models
commonly used in the venture capital industry, which include various factors
such as multiples of revenues, earnings, cash flow and other factors. Values of
securities are volatile and fluctuations may have a material adverse effect on
our earnings. See "Business--Our Merchant Banking and Incubation Services,"
"--Our Prior Incubation and Merchant Banking Experience" and "--Determination of
Net Asset Value."
WE MAY LOSE ALL OF OUR INVESTMENT IN A CLIENT COMPANY IF IT IS NOT SUCCESSFUL.
We cannot assure you that any of our investments in our portfolio companies
will be successful. We may realize substantially less value than anticipated
from the equity positions we hold in portfolio companies and we may lose our
entire investment in any or all of our portfolio companies.
THE SECURITIES IN WHICH WE INVEST ARE GENERALLY ILLIQUID AND WE MAY NOT BE ABLE
TO SELL OUR INVESTMENTS.
A venture capital investment typically takes at least several years before
the portfolio company is in a position to sell its shares in a public offering
or engage in a sale or merger. The securities of our portfolio companies will
generally be "restricted" under Rule 144 of the Securities Act and thus cannot
be sold unless we satisfy the requirements of Rule 144. In addition, it is
conceivable that certain of our equity positions could be subject to lock-up
agreements and other restrictions on transfer, which impact liquidity.
Accordingly, it could be several years before we are able to sell our
investments.
OUR BROKER-DEALER ACTIVITIES WILL SUBJECT US TO EXTENSIVE REGULATION.
Our business is subject to extensive regulation at both the federal and
state levels. In addition, self-regulatory organizations, such as the NASD,
require strict compliance with their rules and regulations. The extensive
regulatory framework applicable to broker-dealers and investment advisors, the
purpose of which is to protect customers and the integrity of the securities
markets, imposes significant compliance burdens on us. Failure to comply with
any of the laws, rules or regulations of any independent, state or federal
regulatory authority could result in fines, injunction, suspension or expulsion
from the industry, which could have a material adverse impact upon us. The SEC
and the NASD also have provisions with respect to net capital requirements
applicable to the operation of securities firms. Furthermore, amendments to
existing statutes and regulations or the adoption of new statutes and
regulations could require us to alter our methods of operation at costs which
could be substantial. See "Business--Government Regulation."
INVESTMENT BANKING AND MERCHANT BANKING IS HIGHLY COMPETITIVE.
We expect to encounter competition in all aspects of our business and to
compete directly with other investment banking and merchant banking firms, a
significant number of which have greater capital and other resources than us. In
addition to competition from firms currently in the investment banking, merchant
banking and private equity businesses, recently there has been increasing
competition from other sources, such as commercial banks, insurance companies
and other businesses offering financial services. See "Business--Competition."
GOVERNMENT REGULATION OF THE INTERNET AND DATA TRANSMISSION OVER THE INTERNET
COULD AFFECT OUR BUSINESS.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The law
of the Internet, however, remains largely unsettled, even in areas where there
has been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply to the Internet. In addition, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws, both in the
10
<PAGE>
United States and abroad, that may impose additional burdens on companies
conducting business on the Internet. The adoption or modification of laws or
regulations relating to the Internet could adversely affect our business.
OUR SHARES MAY TRADE AT A DISCOUNT TO NET ASSET VALUE.
Shares of many closed-end investment companies tend to trade at discounts
from their underlying net asset values and their initial public offering prices.
The shares offered hereby may follow that pattern. The risk of loss associated
with this tendency of closed-end investment companies may be greater for
investors expecting to sell the shares offered hereby soon after the offering is
completed.
THE MARKET PRICE OF OUR SHARES MAY BE VOLATILE.
After completion of the offering, the market price of our common stock could
be subject to significant fluctuations due to variations in response to numerous
factors, including:
- variations in our annual or quarterly financial results or those of our
competitors;
- changes by financial research analysts in their estimates of our future
earnings, conditions in the economy in general or in our industry in
particular;
- unfavorable publicity or changes in applicable laws or regulations (or
judicial or administrative interpretations thereof) affecting us or the
investment banking industry; and
- fluctuations in the market price of the companies in which we hold, or
have the right to acquire, equity or other interests.
WE MAY NOT BE ABLE TO ESTABLISH A PRIVATE EQUITY FUND.
A part of our operating strategy is to attempt to establish a venture
capital fund which we would manage. There is substantial competition for fund
capital and we may not be able to establish a fund in the next 12 to 18 months
or at all. If we are unable to develop a venture capital fund, our future
revenues could be negatively impacted and we could be required to change our
operating strategy. Additionally, the time required to establish a fund could
distract our management from its other duties.
OUR TRANSACTIONS WITH AFFILIATES MAY BE LIMITED.
The Investment Company Act restricts joint transactions with, and
transactions between, us and any of our affiliates, including our officers,
directors or employees and principal stockholders. In many cases, the Investment
Company Act prohibits joint transactions with, and transactions between, such
persons and ourselves unless we first apply for and obtain an exemptive order
from the SEC. Delays and costs in obtaining necessary approvals may decrease or
even eliminate any profitability of such transactions or make it impracticable
or impossible to consummate such transactions. These affiliations could cause
circumstances which would require the SEC's approval in advance of proposed
transactions by us in portfolio companies.
OUR POLICY OF GRANTING A PERCENTAGE OF THE SECURITIES RECEIVED AS COMPENSATION
TO OUR OFFICERS AND EMPLOYEES COULD RESULT IN A CONFLICT OF INTEREST.
We have adopted a policy stating that up to 30% of the client securities
received by us as compensation or acquired by us as founding stockholders will
be distributed by our compensation committee among our officers and employees as
additional compensation. This policy could result in a conflict of interest
between us and our officers and employees in structuring our compensation
arrangements with our portfolio companies. See "Certain Transactions."
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FAILURE TO OBTAIN SEC EXEMPTIVE RELIEF OF VARIOUS POLICIES COULD NEGATIVELY
AFFECT OUR OPERATIONS.
Due to certain restrictions contained in the Investment Company Act, our
proposed compensation program requires that we obtain the approval of the SEC to
implement certain facets of our proposed compensation program. We intend to seek
exemptive relief in order to issue options to directors, advisory board members
and employees, to make stock grants to directors and advisory board members and
to periodically distribute 30% of the equities in portfolio companies received
by us to our officers and employees. If exemptive relief is not granted, we may
have to restructure our compensation program to make cash payments and other
permitted incentives to directors, advisory board members, officers and
employees. Any failure to obtain the required SEC approval or successfully
restructure the compensation program could result in us being unable to attract
or maintain our management team, directors, advisory directors and employees.
FLUCTUATIONS IN OUR QUARTERLY FINANCIAL RESULTS, AND IN THE QUARTERLY FINANCIAL
RESULTS OF OUR PORTFOLIO COMPANIES, MAY ADVERSELY AFFECT OUR STOCK PRICE.
We expect that our quarterly results and the quarterly results of our
portfolio companies may fluctuate significantly due to many factors, including:
- the rate of growth in e-commerce markets;
- the level of competition from other firms providing financial advisory
services and merchant banking services to e-commerce companies;
- the operating results of our portfolio companies in which we have an
equity interest; and
- the non-recurring nature of our client relationships.
RISKS ASSOCIATED WITH OUR PORTFOLIO COMPANIES
MOST OF OUR CLIENTS WILL HAVE LIMITED OPERATING HISTORIES.
Most of the clients to whom we will provide services will be start-up or
emerging growth companies with little or no operating history. Our business and
prospects must be viewed in light of the risks inherent in early development
companies, particularly companies in new or rapidly evolving markets such as
e-commerce. These risks include the risk that this e-commerce market will not
develop into a widely accepted vehicle for commercial exchange.
IF WE ARE UNABLE OR UNWILLING TO PROVIDE PORTFOLIO COMPANIES WITH THE
SIGNIFICANT ADDITIONAL FINANCING THEY MAY NEED, OUR INTEREST IN THEM MAY BE
DILUTED OR THEY MAY FAIL.
We anticipate that most of the companies we advise or receive equity in will
be in the early stages of their development. Our portfolio companies will likely
be competing with larger, established companies, with greater access to, and
resources for, capital and further development. As a result, these companies may
require significant amounts of additional capital to compete successfully, meet
their business objectives and produce revenues and profits. We may not be able
to accurately predict these capital needs, and we may be unable or unwilling to
provide the additional capital they require. If these companies receive capital
from other sources, our ownership interest may be diluted. If these companies
are unable to obtain additional capital, they may fail.
OUR PORTFOLIO CLIENTS CONSIST PRIMARILY OF SMALL AND MEDIUM SIZED
PRIVATELY-OWNED BUSINESSES. BY LIMITING OUR INVESTMENTS TO THESE TYPES OF
BUSINESSES, THE RISK TO OUR COMPANY, AND THEREBY YOUR INVESTMENT, IS
INCREASED.
Our portfolio clients consist primarily of small and medium sized,
privately-owned businesses. There is generally no publicly available information
about such companies, and we must rely on our own employees and agents to obtain
information to make our investment decisions. Typically, small and medium sized
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businesses depend on the talents and efforts of one or two persons or a small
group of persons, and the death, disability or resignation of one or more of
these persons could have a material adverse impact on the related business. In
addition, such businesses frequently have smaller product lines and market
shares than their competition, may be more vulnerable to economic downturns and
often need substantial additional capital to expand or compete. Such businesses
may also experience substantial variations in operating results. Accordingly,
investments in small and medium sized businesses should be considered
speculative. To the extent we do not diversify our portfolio with investments in
larger, more stable companies, your investment in our company should also be
considered speculative.
MANY OF OUR PORTFOLIO COMPANIES WILL BE EARLY STAGE COMPANIES WHICH WILL
ENCOUNTER RISKS AND DIFFICULTIES FREQUENTLY FACED BY EARLY STAGE COMPANIES IN
NEW AND RAPIDLY EVOLVING MARKETS.
An investor in our common stock must consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets. These challenges include their:
- Need to be the first to market or an early entrant in their market;
- Need to increase brand name awareness;
- Need to attract and retain customers at a reasonable cost;
- Dependence on website and transaction processing performance and
reliability;
- Need to manage changing and expanding operations;
- Need to compete effectively; and
- Need to establish themselves as an important participant in the evolving
market for products and services on the Internet.
In addition, because of their limited operating history, these portfolio
companies may have limited insight into trends that may emerge and affect their
businesses. We cannot be certain that their business strategies will be
successful or that they will successfully address these risks. Any failure to do
so would seriously harm our business and operating results.
RISKS ASSOCIATED WITH OUR INDUSTRY
WE AND MANY OF OUR PORTFOLIO COMPANIES DEPEND ON CONTINUED USE OF THE INTERNET
AND THE GROWTH OF ITS USE AS A COMMERCIAL TOOL.
Our future revenues and profits, if any, substantially depend upon the
widespread acceptance and use of the Internet as an effective medium for
business and communication between businesses and their customers. Rapid growth
in the use of and interest in the Internet has occurred only recently. As a
result, acceptance and use may not continue to develop at historical rates, and
a sufficiently broad base of businesses and consumers may not adopt, and
continue to use, the Internet and other online services as a medium of commerce.
Demand and market acceptance for recently introduced services and products over
the Internet are subject to a high level of uncertainty, and few proven services
and products exist.
The Internet may not be accepted as a viable long-term commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. Our success and the success
of our portfolio companies will depend, in large part, upon third parties
maintaining the Internet infrastructure to provide a reliable network platform
with the speed, data capacity, security and hardware necessary for reliable
Internet access and services.
COMPETITION AMONG INTERNET PRODUCTS AND SERVICES IS INTENSE.
As the market for e-commerce grows, we expect that competition will
intensify. Barriers to entry are minimal, and competitors can offer products and
services at a relatively low cost. If the client or portfolio
13
<PAGE>
companies we advise or receive equity in fail to adapt to changes in technology
and customer and supplier demands, they may not be competitive. We cannot assure
you that the products and services of these companies will achieve market
acceptance or commercial success, nor can we assure you that the businesses of
these companies will be successful.
WE AND OUR PORTFOLIO COMPANIES MAY NOT BE ABLE TO ADAPT TO RAPID CHANGES IN THE
E-COMMERCE INDUSTRY.
The success of many of the companies for which we will provide advisory
services and in which we may acquire an equity interest will depend on their
ability to adapt to the rapidly changing e-commerce marketplace. The e-commerce
market is characterized by:
- rapidly changing technology;
- evolving industry standards;
- frequent new product and service introductions;
- shifting distribution channels; and
- changing customer demands.
Our business will suffer if the companies we advise or receive equity in as
compensation for services are unable to adapt to this rapidly evolving
marketplace. They may not be able to adequately or economically adapt their
products and services, develop new products and services or establish and
maintain effective distribution channels for their products and services. In
addition, we and these companies may be unable or unwilling to respond to the
technology changes occurring in Internet products and services in an
economically efficient manner, and our businesses may become or remain
unprofitable.
RISKS ASSOCIATED WITH THIS OFFERING
YOU WILL EXPERIENCE IMMEDIATE, SUBSTANTIAL DILUTION IN THE NET ASSET VALUE OF
THE SHARES YOU PURCHASE.
The common stock offered by this prospectus will experience immediate
dilution in net asset value per share. To the extent outstanding options or
warrants are exercised, you may experience further dilution. We may issue
additional shares of common stock in the future to raise capital to carry out
our business strategy, fund acquisitions or to incentivize management. These
issuances may cause further dilution to our stockholders. See "Dilution."
WE HAVE NO PRIOR PUBLIC MARKET FOR OUR SHARES.
Prior to the offering, no public market for our common stock has existed.
The initial public offering price for the common stock was determined by
negotiation between us and the underwriters and may bear no relationship to the
price at which the common stock will trade after the offering. See
"Underwriting" for the factors considered in determining the initial public
offering price. We have applied to list our common stock on the American Stock
Exchange. However, we cannot assure you that an active trading market will
develop subsequent to the offering or, if developed, that it will continue to
exist.
OUR EXECUTIVE OFFICERS AND DIRECTORS WILL INITIALLY HAVE SIGNIFICANT VOTING
RIGHTS.
Following the consummation of this offering, our executive officers and
directors and entities affiliated with them will own approximately 49% of the
outstanding shares of our common stock. This group, if acting in concert, will
be able to influence decisions affecting our affairs including the election of
directors and other matters submitted to the stockholders for a vote. This could
discourage, inhibit or delay any takeover attempt. See "Description of Capital
Stock" and "Control Persons and Principal Stockholders."
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OUR CHARTER HAS PROVISIONS THAT DISCOURAGE CORPORATE TAKEOVERS AND COULD PREVENT
STOCKHOLDERS FROM REALIZING A PREMIUM ON THEIR INVESTMENT.
Our charter authorizes our board to issue, without stockholder approval, one
or more series of preferred stock having rights as our board may determine.
Subject to the requirement that MGi2 have an asset coverage of at least 200%
after the issuance of senior securities, including preferred stock and debt, the
issuance of this "blank-check" preferred stock could render more difficult or
discourage an attempt to obtain control of MGi2. Our charter and bylaws also
include other provisions, such as extraordinary voting percentages for
stockholder action, which could inhibit or delay a takeover attempt. See
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE MAY AFFECT THE PRICE OF COMMON STOCK.
Upon consummation of the offering, 3,400,000 shares of common stock will be
outstanding. The 1,900,000 shares sold in the offering, other than shares which
may be purchased by affiliates of MGi2, will be freely tradable. The remaining
outstanding shares may be resold publicly only following their registration
under the Securities Act, or under an available exemption from registration. One
exemption provided by Rule 144 allows stockholders to sell unregistered shares
following a one year holding period. The officers and directors, representing
1,500,000 shares of these remaining unregistered shares, have agreed with the
underwriters that they will not sell, transfer or otherwise dispose of any of
their shares for periods varying from one to two years following the
consummation of the offering. Sales, or the availability for sale, of
substantial amounts of common stock in the public market could adversely affect
prevailing market prices and our future ability to raise equity capital. See
"Shares Eligible for Future Sale" and "Underwriting."
WE HAVE A RESTRICTIVE DIVIDEND POLICY.
We do not anticipate paying dividends in the foreseeable future. If you need
current income from your investments, you should not buy our common stock.
Further, our ability to pay dividends in the future could be limited or
prohibited by regulatory requirements. See "Dividend Policy."
OUR MANAGEMENT HAS BROAD DISCRETION IN INVESTING THE PROCEEDS OF THIS OFFERING.
Except as set forth in "Use of Proceeds," our management has broad
discretion in the application of the proceeds of this offering. We have not
identified any particular use for the net proceeds of this offering, other than
the repayment of certain debt to affiliates. Accordingly, purchasers of our
securities must rely on the ability of our management in making portfolio
investments consistent with our objectives. Investors will not have the
opportunity to evaluate personally the relevant economic, financial and other
information that will be utilized by management in deciding whether or not to
make a particular investment.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All statements other
than statements of historical facts contained in this prospectus are
forward-looking statements including statements regarding:
- our clients benefitting from our experience and resources;
- our future financial position;
- our operating and growth strategy;
- our investment objectives and principal strategies;
- opportunities to provide our services to companies that have a potential
to succeed in the New Economy;
- objectives of management for future operations; and
- our ability to raise or manage private equity.
Although we believe our expectations reflected in these forward-looking
statements are based on reasonable assumptions, we cannot assure you that these
expectations will prove to be correct.
Important factors that could cause actual results to differ materially from
the expectations reflected in the forward-looking statements include, among
other things:
- the risk factors discussed in this prospectus;
- the volatility of prices and activity in the e-commerce industry;
- acceptance of the Internet by businesses and consumers as a medium for
commercial transactions;
- demand for Internet and e-commerce services;
- general economic, market or business conditions;
- the nature or lack of business opportunities that may be presented to and
pursued by us;
- the risks of required registration under the Investment Company Act;
- obtaining or retaining qualified employees;
- changes in laws or regulations; and
- other factors, most of which are beyond our control.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "would," "expect," "plan,"
"anticipate," "believe," "continue," or the derivative of these terms or other
similar expressions. All forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified by the cautionary
statements included in this prospectus. We undertake no obligation to update or
revise our forward-looking statements, whether as a result of new information,
future events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this prospectus might not
occur.
This prospectus also contains statistical data regarding, among other
things, venture capital investing in the United States and the past and
projected growth of e-commerce. We have taken this data from information
published by sources specializing in research of the relevant subject matter.
However, this data is by its nature imprecise, and we caution you not to unduly
rely on it.
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USE OF PROCEEDS
Based on an initial public offering price of $8.00, we estimate our net
proceeds from the sale of the shares of common stock offered by this prospectus,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, to be approximately $12,869,000 (approximately
$14,853,000 if the underwriters exercise their over-allotment option in full).
Assuming the NASD approves, we plan to use approximately $210,000 of the net
proceeds to repay indebtedness and accrued interest to Messrs. McFarland and
Grossman in the principal amount of $180,000. This indebtedness was incurred in
December 1998, bears interest at 13.5% per annum and matures on April 30, 2002.
We also plan to use $12,100 of the net proceeds to repay notes payable to former
employees. These notes were issued during 1999, bear interest at 8.0%, with
installments of principal and interest due monthly and final payment due in June
2002. Approximately $100,000 of the net proceeds will be used to provide capital
reserves for broker-dealer capital requirements. We also intend to use
approximately $750,000 for general working capital purposes. We expect to use
the remainder to invest in portfolio companies and provide capital to support
our merchant banking activities as follows: approximately 20% to 25% at or about
six months from the offering date, approximately 50% at or about one year from
the offering date, and full investment at or about two years from the offering
date. We cannot assure you that we will be able to achieve our targeted
investment pace. Until we have identified appropriate investments in accordance
with our investment objective, we may invest all of our excess cash in short-
term, interest-bearing investment-grade securities or guaranteed obligations of
the U.S. government.
We expect that the proceeds from this offering, combined with our cash and
our ability to generate cash from the sale of marketable securities, will be
adequate to meet our capital and liquidity requirements for the next eighteen
months.
17
<PAGE>
DIVIDEND POLICY
We intend to retain all our earnings, if any, to support and finance the
expansion of our business and do not anticipate paying any cash dividends on our
common stock in the foreseeable future. In the future, subject to the board's
discretion, we may distribute to our stockholders equity interests we receive
from our portfolio companies if the portfolio company becomes publicly traded.
Any future dividends will be at the discretion of our board after taking into
account various factors, including, among others:
- our financial condition;
- results of operations;
- cash flows from operations;
- current and anticipated cash needs and expansion plans;
- the income tax laws then in effect;
- the performance of securities we hold in our portfolio companies;
- regulatory prohibitions and limitations; and
- the requirements of Delaware law.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" and "Federal Income Tax
Matters."
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999 on
an actual and as adjusted basis. The "Actual" column reflects the capitalization
of MGi2 as of December 31, 1999 restated to reflect the exchange of the stock of
McFarland, Grossman for stock of MGi2 at a ratio of 2 shares of MGi2 for every 1
share of McFarland, Grossman. The "As Adjusted" column reflects our restated
capitalization as of December 31, 1999 assuming the receipt of the estimated net
proceeds from this offering of common stock of $8.00 per share, proceeds of
$5,000 from issuance of warrants to the managing underwriter, and the
application of net proceeds to repay outstanding debt.
The table below should be read in conjunction with MGi2's consolidated
statement of financial condition as of December 31, 1999 and the related notes,
which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Liabilities subordinated to the claim of creditors.......... $180,000 $ --
Notes payable to former employees........................... 12,100 --
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 1,500,000 shares issued and outstanding;
3,400,000 shares issued and outstanding as adjusted..... 15,000 34,000
Additional paid-in-capital.................................. 88,275 12,943,275
Retained earnings........................................... 517,883 517,883
-------- -----------
Total stockholders' equity................................ 621,158 13,495,158
======== ===========
Total capitalization...................................... $813,258 $13,495,158
======== ===========
</TABLE>
The as adjusted numbers of shares of issued and outstanding common stock
exclude:
- 326,500 shares issuable upon exercise of options, having a weighted
average exercise price of $4.40 per share, and consisting of 161,500
options outstanding prior to the closing of this offering and 165,000 to
be granted at the closing of this offering;
- 190,000 shares issuable upon exercise of warrants issued for cash to the
managing underwriter; and
- 285,000 shares issuable upon exercise of the underwriters' over-allotment
option.
19
<PAGE>
DILUTION
Net asset value per share is our adjusted net assets (total tangible assets
less total liabilities) divided by the number of shares of common stock
outstanding. Net asset value dilution per share represents the difference
between the amount per share paid by purchasers of shares of common stock in the
offering and the pro forma net asset value per share after the offering. After
giving effect to the sale of the shares of common stock in this offering (at a
price of $8.00 per share and after deducting underwriting discounts and
commissions and estimated offering expenses), our pro forma net tangible book
value at December 31, 1999 would have been $13,490,158 or $3.97 per share,
representing an immediate increase in net tangible book value of $3.56 per share
to existing stockholders and an immediate dilution of $4.03 per share to new
investors purchasing the shares in this offering. The following table
illustrates the dilution to new investors:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share..................... $8.00
Net asset value per share before this offering............ $ .41
Increase attributable to new investors.................... 3.56
-----
Pro forma net asset value per share after this offering..... 3.97
-----
Dilution per share to new investors......................... $4.03
=====
</TABLE>
The following table sets forth as of the date of this prospectus the number
of shares of common stock purchased from us, the total consideration to us and
the average price per share paid by existing stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 1,500,000 44.1% $ 103,275 0.7% $0.07
New investors................... 1,900,000 55.9% 15,200,000 99.3% 8.00
--------- ----- ----------- -----
Total......................... 3,400,000 100.0% $15,303,275 100.0% $4.50
========= ===== =========== =====
</TABLE>
The number of shares does not include:
- 326,500 shares of common stock issuable upon exercise of options, having a
weighted average exercise price of $4.40 per share, and consisting of
161,500 options outstanding prior to the closing of this offering and
165,000 to be granted at the closing of this offering;
- 190,000 shares of common stock issuable upon exercise of the warrants
issued for cash to the managing underwriter; and
- 285,000 shares of common stock issuable upon exercise of the underwriters'
over-allotment option.
20
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial information should be read in conjunction
with the financial statements and the notes to the financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," which are included elsewhere in this prospectus.
We have derived the selected financial information for the years ended
December 31, 1995 through 1999 from the audited financial statements and the
related notes of MGi2 and McFarland, Grossman, our subsidiary. The audited
financial statements for the years ended December 31, 1997 through 1999 are
included in this prospectus. The audited financial statements for the years
ended December 31, 1995 and 1996 are not included in this prospectus. Our
financial statements for the year ended December 31, 1999, were audited by
Arthur Andersen LLP. Our financial statements for the years ended December 31,
1995 through 1998 were audited by Weinstein Spira & Company, P.C.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Revenues:
Investment banking fees.......................... $1,114,455 $1,100,426 $1,813,995 $2,824,594 $1,082,946
Net gain (loss) on securities.................... (1,036) 105,425 496,845 70,373 (4,145)
Dividends and interest........................... 3,183 3,678 6,079 87,712 54,567
Other income..................................... 144,325 123,250 148,850 66,820 6,636
---------- ---------- ---------- ---------- ----------
Total revenues............................... $1,260,927 $1,332,779 $2,465,769 $3,049,499 $1,140,004
---------- ---------- ---------- ---------- ----------
Operating expenses:
Compensation and benefits........................ $ 921,443 $ 770,289 $1,250,207 $2,327,942 $1,192,315
Other operating expenses......................... 344,277 435,315 398,962 497,054 386,862
---------- ---------- ---------- ---------- ----------
Total expenses............................... $1,265,720 $1,205,604 $1,649,169 $2,824,996 $1,579,177
---------- ---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income
taxes............................................ $ (4,793) $ 127,175 $ 816,600 $ 224,503 $ (439,173)
---------- ---------- ---------- ---------- ----------
Net income (loss).................................. $ (6,670) $ 96,424 $ 522,152 $ 137,780 $ (297,397)
========== ========== ========== ========== ==========
Net income (loss) per share
Basic............................................ $ (0.00) $ 0.06 $ 0.34 $ 0.09 $ (0.20)
========== ========== ========== ========== ==========
Diluted.......................................... $ (0.00) $ 0.06 $ 0.30 $ 0.08 $ (0.20)
========== ========== ========== ========== ==========
Shares used in computing net income (loss) per
share
Basic(1)......................................... 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000
========== ========== ========== ========== ==========
Diluted.......................................... 1,500,000 1,695,705 1,743,613 1,754,242 1,500,000
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Total assets....................................... $ 269,675 $ 390,032 $1,236,061 $1,375,606 $1,157,243
========== ========== ========== ========== ==========
Total debt(2)...................................... $ 6,986 $ 3,881 $ 776 $ 180,000 $ 192,100
========== ========== ========== ========== ==========
Total stockholders' equity......................... $ 219,547 $ 323,704 $ 881,675 $ 918,555 $ 621,158
========== ========== ========== ========== ==========
</TABLE>
- ------------------------------
(1) Does not reflect the 1,900,000 shares offered pursuant to this prospectus.
(2) See "Senior Securities" for more information regarding our level of
indebtedness.
Since 1997, we have assigned most of our interest in client securities we
received as fees for our services to our employees as compensation. In addition,
we have participated in the formation of new businesses and allowed our
employees, rather than us, to purchase the founders' stock, which is generally
issued for nominal consideration. We have now adopted a policy that any client
securities to be received in connection with the services we provide, and shares
to be acquired as founders' stock in companies that we incubate or assist in
incubation, are to be paid or issued directly to us. Subject to review and
approval by the SEC, once granted or issued to us, our compensation committee,
which is comprised of independent directors, may distribute or allocate up to
30% of these securities among our officers and employees as additional
compensation. If this policy had been in effect in prior years, we would have
retained additional securities, which are now publicly traded, and which had a
value of approximately $1,523,000 as of December 31, 1999. This valuation does
not include the value of privately held securities which were previously granted
to our officers and employees as compensation. See "Risk Factors--Risks
Associated with Our Operations--Our policy of granting a percentage of the
securities received as compensation to our officers and employees could result
in a conflict of interest" and "--Failure to obtain SEC exemptive relief of
various policies could negatively affect our operations."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW AND BACKGROUND
Currently, we derive a substantial part of our revenues from investment
banking and financial advisory fees, and from realized and unrealized gains on
our investments, including securities received from clients. We generally
receive our fees in cash, in securities of our client companies or in
combinations of cash and client securities. We are also involved in the
formation and incubation of new businesses in which we acquire common stock as
founding stockholders for nominal consideration. Most of our client engagements
are non-recurring in nature. McFarland, Grossman, our subsidiary and a
registered broker-dealer, carries its equity positions, which are primarily
client securities, at market value in accordance with generally accepted
accounting principles. Because these equity interests are often securities of
early-stage enterprises or are illiquid, and because of the uncertain nature of
variations in the value of publicly traded securities, the market value of our
equity interests may fluctuate by material amounts between accounting periods.
Our securities in non-public companies are valued by management based upon
valuation models commonly used in the venture capital industry, which include
various factors such as multiples of revenues, earnings, cash flow and other
factors. Due to the inherent uncertainty of the valuation process, estimated
values at the end of an accounting period may differ significantly from the
values that would have been realized in a sale at that date had a ready market
for the securities existed, and the differences may be material. Because of the
combination of the non-recurring nature of our revenues and the fluctuation in
the market value of our investments, our revenues may vary materially between
accounting periods.
We have elected to be regulated as a business development company under the
Investment Company Act. Our investment objective is to achieve capital
appreciation from equity investments in our portfolio companies and from equity
we receive for rendering advisory services to our portfolio companies.
Since 1997, we have assigned most of our interest in the client securities
we received as fees for our services to our employees as compensation. In
addition, we have participated in the formation of new businesses and allowed
our employees, rather than us, to purchase the founders' stock, which is
generally issued for nominal consideration. We have now, subject to review and
approval by the SEC, adopted a policy that any client securities to be received
in connection with the services we provide, and shares to be acquired as
founders' stock in companies that we incubate or assist in incubation, are to be
paid or issued directly to us. Once granted or issued to us, our compensation
committee, which is comprised of independent directors, may distribute or
allocate up to 30% of these securities among our officers and employees as
additional compensation. If this policy had been in effect in prior years, we
would have retained additional securities which are now publicly traded and
which had a value of approximately $1,523,000 as of December 31, 1999. This
valuation does not include the value of privately held securities which were
previously granted to our officers and employees as compensation. See "Risk
Factors--Risks Associated with Our Operations--Our policy of granting a
percentage of the securities received as compensation to our officers and
employees could result in a conflict of interest" and "--Failure to obtain SEC
exemptive relief of various policies could negatively affect our operations."
Our operating expenses consist primarily of salaries and related employee
benefits, office occupancy and operating expenses, travel expenses, research
related expenses and professional fees.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1998
Revenues for the year ended December 31, 1999 totaled $1,140,004 compared to
$3,049,499 for the year ended December 31, 1998, representing a decrease of
62.6%.
Investment banking fees decreased from $2,824,594 in 1998 to $1,082,946 in
1999, a decrease of 61.7%. The decrease was primarily due to a reduction in the
number and size of completed investment banking transactions in 1999 compared to
1998.
22
<PAGE>
We incurred a net loss on securities of $4,145 in 1999 compared to a net
gain of $70,373 in 1998. The net loss in 1999 was primarily the result of
unrealized losses of approximately $44,000 on our equity position in
Pentacon, Inc., partially offset by gains on our equity positions in
Transcoastal Marine Services, Inc., TALX Corporation, Brightstar Information
Technologies Group, Inc., and other small investments. In 1998, the gain was
primarily the result of the additional increase in the market value of our
equity position in Pentacon and Brightstar following their initial public
offerings, offset by a decline in the value of our equity position in
Transcoastal.
Dividend and interest income decreased from $87,712 in 1998 to $54,567 in
1999. The decrease was primarily due to a default on the payment of
approximately $25,000 of accrued interest on certain notes receivable from our
former employees, secured by marketable securities that we hold, and the
modification of the principal amount and interest rate of certain notes
receivable from our principal officers, Messrs. Grossman and McFarland, secured
by marketable securities that we hold, which resulted in a decrease of
approximately $30,000 from the interest which would have been received had the
notes not been modified, partially offset by the fact that these notes were
outstanding for all of 1999 and approximately seven months in 1998. See "Certain
Transactions." The balance of the decrease was primarily the result of lower
interest bearing cash balances in 1999 compared to 1998.
Other income decreased from $66,820 in 1998 to $6,636 in 1999, a decrease of
$60,184. The decrease is primarily due to a decline in fees received from mutual
funds of $54,411 as customer accounts from our discontinued retail brokerage and
retail investment advisory businesses were moved to other brokerage and
investment management firms.
Total expenses for the fiscal year 1999 were $1,579,177 compared to
$2,824,996 for fiscal year 1998, a decrease of $1,245,819 or 44.1%.
Compensation and benefits decreased from $2,327,942 in 1998 to $1,192,315 in
1999, a decrease of $1,135,627 or 48.8%. The decrease was primarily due to a
decrease of $1,063,652 in cash compensation to two of our principal executive
officers and reduced cash compensation to other professionals, partially offset
by an increase in non-cash compensation to officers and employees in the form of
distributions of warrants in portfolio companies.
Other expenses decreased from $497,054 in 1998 to $386,862 in 1999, a
decrease of $110,192. The decrease was primarily due to decreases in expenses
for referral fees, clearing costs from our discontinued brokerage and investment
management business, telecommunications expenses, professional fees, travel
expenses, and promotional expenses, and changes in the levels of other expenses,
partially offset by interest expense of $23,315 in 1999.
Our fiscal 1999 income tax benefit was $141,776 and represented an effective
tax rate of 32.3%. In fiscal 1998, the income tax provision was $86,723 and
represented an effective tax rate of 38.6%. The 1999 benefit reflects the amount
of an expected income tax refund resulting from a net operating loss carry-back
in the approximate amount of $112,000 combined with a reduction in deferred
income taxes resulting primarily from a decrease in the carrying value of
marketable securities held as collateral for notes receivable from related
parties and investments, partially offset by a reduction in deferred taxes due
to the realization of gains from the sale of certain investments.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
Revenues for the year ended December 31, 1998 totaled $3,049,499 compared to
$2,465,769 for the year ended December 31, 1997, representing an increase of
23.7%.
Investment banking fees increased from $1,813,995 in 1997 to $2,824,594 in
1998 or 55.7%. The increase was primarily because two of our engagements in 1998
generated aggregate fees of approximately $2.2 million. The fees earned from
these engagements are more than our historical average. In 1997, one of our
engagements generated fees of $1.2 million.
23
<PAGE>
Our net gain on securities decreased from $496,845 in 1997 to $70,373 in
1998. The gain in 1997 was primarily due to the increase in market value of our
equity position in Pentacon and Brightstar, both of which were about to complete
initial public offerings at the end of 1997. In 1998, the gain was primarily the
result of the additional increase in the market value of our equity position in
the same two companies, offset by a decline in the value of our equity position
in Transcoastal.
Dividend and interest income increased from $6,079 in 1997 to $87,712 in
1998. The increase was primarily due to interest earned on notes receivable
secured by marketable securities that we hold. These notes generated interest
income of approximately $58,000 in 1998. The balance of the increase is
primarily due to interest earned on cash balances which were generally greater
in 1998 than in 1997.
Other income decreased from $148,850 in 1997 to $66,820 in 1998. The
decrease is primarily due to the decline in commissions and investment advisory
fees of $73,935 following our discontinuance of our retail brokerage and retail
investment advisory businesses in 1998, and a non-recurring management fee of
$19,700 received in 1997 from an affiliate.
Total expenses for the fiscal year 1998 were $2,824,996 compared to
$1,649,169 for fiscal year 1997, an increase of $1,175,827 or 71.3%.
Compensation and benefits increased from $1,250,207 in 1997 to $2,327,942 in
1998. The increase was primarily due to an increase in compensation to two
executive officers of $1,005,152 and increased bonuses to other key employees.
The increase was partially offset by a reduction in payroll associated with
discontinuing our retail brokerage and investment advisory businesses.
Other expenses increased from $398,962 in 1997 to $497,054 in 1998, an
increase of $98,092. The increase was primarily due to the payment of referral
fees of $53,268 in 1998, and increases in the amount paid for rent, travel and
professional fees.
Our fiscal 1998 income tax provision was $86,723 and represented an
effective tax rate of 38.6%. In fiscal 1997, the income tax provision was
$294,448 and represented an effective tax rate of 36.1%. The greater effective
tax rate in 1998 was the result of a greater percentage of taxable income being
subject to the phase out of the surtax exemption, and subject to a 39% tax rate
rather than the statutory rate of 34%.
LIQUIDITY AND CAPITAL RESOURCES
We had liquid assets consisting of cash, cash equivalents and marketable
securities of $297,173 at December 31, 1999, compared to $593,596 at
December 31, 1998 and $530,097 at December 31, 1997.
Net cash used in operations was $130,000 for the year ended December 31,
1999, primarily due to the loss incurred in 1999. Cash used in investing
activities for the purchase of property and equipment was $32,000 for the year
ended December 31, 1999.
Included in liquid assets at December 31, 1999, is the value of our
investment in Pentacon of approximately $56,000 and other marketable securities
of $26,000. In December 1999, we held certain notes receivable from several
former employees, secured by additional shares in Pentacon that were in default.
In January 2000, we exercised our right to foreclose on the marketable
securities held as collateral securing the notes and obtained possession of an
additional 45,000 shares of Pentacon, which were added to our marketable
securities. The value of these securities was $146,250 as of December 31, 1999.
During 1999, three clients accounted for approximately $724,000, or 67%, of
our total investment banking fees. During 1998, three clients accounted for
approximately $2.6 million, or 91%, of our total investment banking fees. During
1997, two clients accounted for approximately $1.6 million, or 86%, of our total
investment banking fees.
On December 18, 1998, we received the proceeds of two loans from our
principal stockholders and executive officers in the amount of $90,000 each. In
March of 1999, these loans were converted to
24
<PAGE>
"satisfactory subordination agreements", as defined by the National Association
of Securities Dealers. The loans bear interest at the rate of 13.5% per annum.
The principal and accrued interest are due on April 30, 2002 and repayment is
subordinated to the claims of other creditors and subject to certain net capital
requirements as set forth by the NASD. On June 7, 1999, we redeemed the interest
of certain former employees in our Class B non-voting common stock with a cash
payment of $4,858, and the delivery of promissory notes in the principal amount
of $14,520. The notes are payable in monthly principal installments over three
years and bear interest at 8% per annum.
As of December 31, 1999, we had a federal income tax refund due of
approximately $112,000 as the result of a carry-back of our 1999 net operating
loss.
We believe that our cash and our ability to generate cash from the sale of
marketable securities combined with the proceeds from the offering will be
adequate to meet our capital and liquidity requirements for the next eighteen
months.
FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
Our future operating results could fluctuate as a result of a number of
factors. These include, among others, the timing and non-recurring nature of our
investment banking revenues, the degree to which we encounter competition in our
markets, general economic conditions, and variations in and the timing of
recognition of realized and unrealized gains or losses. As a result of these
factors, our results for any one quarter should not be relied upon as being
indicative of our performance in future quarters.
MARKET RISK
We do not hold derivative financial instruments which could expose us to
significant market risk, other than investments in warrants which expose us to
market value risk. We do not have exposure to market risk for changes in
interest rates on our borrowings, which have fixed interest rates. We intend to
repay our borrowings with a portion of the proceeds of this offering.
EFFECTS OF INFLATION
Inflationary conditions in the United States have been moderate and have not
had a material impact on our results of operations or financial condition.
25
<PAGE>
SENIOR SECURITIES
Certain information about the various classes of senior securities issued by
us is set forth in the following table.
<TABLE>
<CAPTION>
TOTAL
AMOUNT
OUTSTANDING INVOLUNTARY
EXCLUSIVE OF LIQUIDATING AVERAGE MARKET
TREASURY ASSET COVERAGE PREFERENCE PER VALUE PER
CLASS AND YEAR SECURITIES(1) PER UNIT(2) UNIT(3) UNIT(4)
- -------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INSTALLMENT NOTES
1991................................... $ -- $ -- N/A N/A
1992................................... 27,925 (.06) N/A N/A
1993................................... 14,297 1.30 N/A N/A
1994................................... 10,091 2.04 N/A N/A
1995................................... 6,986 32.43 N/A N/A
1996................................... 3,881 84.41 N/A N/A
1997................................... 776 1,137.18 N/A N/A
1998................................... -- N/A N/A
1999................................... 12,100 4.23 N/A N/A
LIABILITIES SUBORDINATED TO CLAIMS OF
GENERAL CREDITORS
1991................................... $ -- $ -- N/A N/A
1992................................... -- -- N/A N/A
1993................................... 65,000 1.30 N/A N/A
1994................................... 90,275 2.04 N/A N/A
1995................................... -- -- N/A N/A
1996................................... -- -- N/A N/A
1997................................... -- -- N/A N/A
*1998................................... 180,000 6.10 N/A N/A
1999................................... 180,000 4.23 N/A N/A
- ------------------------
* Converted on March 31, 1999 from an unsecured note.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
TOTAL
AMOUNT
OUTSTANDING INVOLUNTARY
EXCLUSIVE OF LIQUIDATING AVERAGE MARKET
TREASURY ASSET COVERAGE PREFERENCE PER VALUE PER
CLASS AND YEAR SECURITIES(1) PER UNIT(2) UNIT(3) UNIT(4)
- -------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SERIES A PREFERRED STOCK
1991................................... $ -- $ -- $-- N/A
1992................................... -- -- -- N/A
1993................................... -- -- -- N/A
1994................................... -- -- -- N/A
1995................................... 20,000 12.33 1.00 N/A
1996................................... 35,006 12.09 1.17 N/A
1997................................... -- -- -- N/A
1998................................... -- -- -- N/A
1999................................... -- -- -- N/A
SERIES B PREFERRED STOCK
1991................................... $ -- $ -- $-- N/A
1992................................... -- -- -- N/A
1993................................... -- -- -- N/A
1994................................... -- -- -- N/A
1995................................... -- -- -- N/A
1996................................... -- -- -- N/A
1997................................... 97,500 10.05 1.00 N/A
1998................................... -- -- -- N/A
1999................................... -- -- -- N/A
</TABLE>
- ------------------------
(1) Total amount of each class of senior securities outstanding at the end of
the year presented.
(2) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as our consolidated total assets less all
liabilities and indebtedness not represented by senior securities, divided
by senior securities representing indebtedness. This asset coverage ratio is
multiplied by $1,000 to determine the Asset Coverage Per Unit. The asset
coverage ratio for a class of senior securities that is preferred stock is
calculated as our consolidated total assets less all liabilities and
indebtedness not represented by senior securities, divided by senior
securities representing indebtedness, plus the involuntary liquidation
preference of the preferred stock (see footnote 3). The Asset Coverage Per
Unit is expressed in terms of dollar amounts per share.
(3) The amount to which such class of senior security would be entitled upon the
voluntary liquidation of the issuer in preference to any security junior to
it.
(4) Not applicable, as senior securities are not registered for public trading.
27
<PAGE>
BUSINESS
OUR COMPANY
We were incorporated in the State of Delaware in February 2000. Our primary
business focus is to create or identify, and then incubate and grow, businesses
that aim to benefit from the expected growth of business to business, or B2B,
e-commerce, including:
- INTERNET INFRASTRUCTURE SERVICE PROVIDERS, such as companies that design
local and wide-area networks and provide telecommunications and internet
access services;
- INTERNET MARKET MAKERS who connect buyers and sellers by creating
Internet-based markets and exchanges for the marketing and sale of goods
and services via the Internet; and
- INTERNET SOLUTION PROVIDERS that develop and provide business solutions to
users of e-commerce, including website design, web-based software
enablers, such as application service providers; application integration
software; and Internet services such as consulting and systems
integration.
We intend to invest in and provide merchant banking and incubation services
to our clients in the B2B e-commerce market. Our merchant banking and incubation
services will include strategic business and financial advisory services and
investment banking services. Through our funding and services, we intend to
enhance our clients' growth opportunities. As opportunities arise or market
emphasis shifts, we may invest in and provide these services to, high growth
businesses which are not involved in the Internet or e-commerce. We will be
compensated for our services in several ways. We will receive cash fees for the
advisory services we provide to our client and portfolio companies. We will also
earn warrants or other equity compensation in connection with providing our
other services.
Our policy is to dispose of our investments when a liquid market exists.
However, if a portfolio company becomes publicly traded, subject to the
discretion of our board of directors, we may distribute those equity securities
to our stockholders.
We have adopted a policy to use reasonable efforts to provide our
stockholders with the right to invest in the initial public offerings of our
portfolio companies. These opportunities will depend on the nature of our role
with the portfolio company and whether the managing underwriter of the initial
public offering of our portfolio company does not object to offering our
stockholders the right to invest in the offering.
We are an internally managed, non-diversified closed-end investment company
that has elected to be regulated as a business development company under the
Investment Company Act. Our investment objective is to achieve capital
appreciation from equity investments in our portfolio companies and from equity
we receive for rendering advisory services to our portfolio companies. Our
management will implement our investment objective and strategies, and will
determine our strategic and operational direction.
Currently, our principal operating subsidiary is McFarland, Grossman &
Company, Inc. McFarland, Grossman, a registered broker-dealer, was formed in
1991 to provide investment banking services to rapidly expanding service
businesses or service businesses active in consolidating industries. McFarland,
Grossman has a history of forming and incubating new businesses, providing
financial advisory services to, and financing for, client companies. Since its
inception, McFarland, Grossman has completed engagements in 10 states involving
the private placement of more than $88 million in private equity and mezzanine
financing, $181 million of senior debt, and more than 20 mergers and
acquisitions. Since 1997, McFarland, Grossman has focused on the formation and
incubation of new businesses and other engagements where it receives equity, in
addition to cash fees, for the provision of merchant banking services. To that
end, McFarland, Grossman has been instrumental in the formation of five
companies since 1997, three of which are now publicly traded on national
securities exchanges.
After the offering, we also intend to conduct operations through MGi2
Ventures, Inc. which will provide incubation, business consulting and other
related services and through MGi2 Capital, Inc. which
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<PAGE>
will provide management services to venture capital funds and other private
equity funds that we establish. See "--Our Corporate Structure."
OUR CURRENT INCUBATION AND MERCHANT BANKING ACTIVITIES
We are engaged in a number of investment banking relationships which include
merger and acquisition advisory services and other financial advisory services.
Following is a summary of our current, active incubation and merchant banking
engagements:
INCUBATION CLIENTS
RE-EXG.COM, INC.
Re is a development stage Internet-based, reinsurance exchange and financial
clearinghouse where direct insurers and reinsurers will meet to buy and sell
risk coverage. Re's objective is to fundamentally reshape the insurance
industry's costly, manual risk transfer business process so that insurers and
reinsurers will migrate from the current broker-driven reinsurance process to
electronic risk exchange. Re has initially targeted the $100 billion property
and casualty reinsurance market. Subsequently, it plans to include the
$20+ billion life and health reinsurance market.
We have entered into an agreement with Re to provide a combination of
incubation and investment banking services. As a part of our incubation
services, we are arranging $1 million of seed financing for Re. We and our
employees have acquired 18.7% of Re's initial ownership, with MGi2's ownership
interest being approximately 11.11%. We have the right to earn investment
banking fees and a warrant for additional equity upon the successful completion
of additional equity financing.
ZMAIL MEDIA, INC.
Zmail intends to provide public Internet access terminals in high traffic
public facilities such as airports. Revenues are to be derived from access fees,
advertising and other Internet commerce transactions. Zmail is in its
development stage and is currently negotiating various site access agreements
and is negotiating with various equipment suppliers and technology service
providers.
We conceived Zmail and formed it with a partner who has taken responsibility
for managing the day-to-day business activities during the development stage. We
and our employees have acquired 75% of Zmail's initial ownership, with MGi2's
ownership interest being approximately 25.05%. Our agreement with Zmail provides
us the right to earn investment banking fees and a warrant for additional equity
upon the successful completion of additional equity financing. The initial seed
capital was provided by one of our officers and our partner. If Zmail proceeds
with its development, we will have the opportunity to invest in its next round
of financing.
MERCHANT BANKING CLIENTS
INWAREHOUSE.COM, INC.
inwarehouse is creating a global Internet exchange and information resource
for the public and contract warehouse industry. inwarehouse believes it is the
first company to create an online exchange for the $1 billion U.S. warehousing
industry. It has contracted with four warehousing companies to develop and
install its beta-solution, and has entered into a design relationship with a
nationally recognized Internet software company.
We have entered into an agreement with inwarehouse to arrange $1.5 million
in seed financing. Our compensation includes an investment banking fee and a
warrant in inwarehouse for successful completion of the proposed financing.
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<PAGE>
ST2EP, LLC
St2ep is an international specialty engineering and consulting company that
provides technologies, services, personnel, and training to engineering and
construction companies, process industry companies, and financial institutions.
St2ep's revenues have grown from approximately $5.3 million in 1998, its first
year in business, to approximately $10.3 million in 1999.
St2ep has engaged us to raise approximately $10 million of capital to
support rapid growth in international sales and provide working capital for new
joint ventures. Our compensation includes an investment banking fee and a
warrant in St2ep for successful completion of the proposed financing.
OPENCON SYSTEMS, INC.
OpenCon is a leading supplier of solutions for the telecommunications
industry. OpenCon's products include embedded network management system
solutions for transmission equipment, such as Synchronous Optical NETwork and
Synchronous Digital Hierarchy fiber loop multiplexers. OpenCon also provides
network management solutions for other Network Elements ranging from access
codes to mediation devices, and GR-303 Integrated Access implementation for Next
Generation Digital Loop Carrier solutions and applications.
OpenCon has engaged us to raise approximately $15 million of capital to
support rapid growth. Our compensation includes an investment banking fee and a
warrant in OpenCon for successful completion of the proposed financing.
DIRECT INVESTMENTS
SUPPLIERONE.COM, INC.
SupplierOne intends to become a leading e-marketplace for outsourced
manufacturing of components for original equipment manufacturers. The management
team includes the former chief executive officer and executive vice president of
a publicly traded $2 billion industrial distribution company, as well as several
noted technologists. SupplierOne's seed capital was provided by members of its
management team. It is currently seeking approximately $12 million in venture
financing.
We have secured the right to co-invest not less than $250,000 or more than
$1 million in SupplierOne's venture financing.
OUR MARKET OPPORTUNITY
The Internet has experienced significant growth due in large part to the
development of faster and more reliable networks, the emergence of innovative
commercial trading applications and a more widespread acceptance of the Internet
as a means of conducting various e-commerce transactions. Companies that
successfully establish an online presence can more effectively conduct business
with partners and suppliers, communicate with customers and employees and
address the rapidly growing, global base of online customers. Forrester
Research, an independent research firm, predicts that the number of United
States online businesses will grow from 1.8 million (or 29% of all U.S.
enterprises) in 1998 to 4.3 million (or 55% of all U.S. enterprises) by 2003.
Forrester Research also projects that the U.S. B2B e-commerce market, which they
define as the intercompany trade of hard goods over the Internet, will grow from
$43 billion in 1998 to $1.3 trillion by 2003.
We believe that the Internet's substantial growth and the willingness of
businesses to shift their marketing efforts from conventional marketing
platforms to the Internet will create significant opportunities to provide
merchant banking services and incubation services to emerging or development
stage companies that have the potential to succeed in the New Economy. In
addition, we believe that opportunities exist to provide these services to
companies that are located in underserved geographic regions. According to a
recent survey published by PricewaterhouseCoopers, approximately 69% of the
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<PAGE>
venture capital invested during the first nine months of 1999 was invested in
California and New England. Our efforts will be directed to assisting companies
in underserved markets, such as Texas and other southwestern states, as opposed
to companies located in Silicon Valley, New England and other areas near primary
venture capital centers. However, we may make investments in other geographic
areas depending on the availability of business opportunities.
OUR OPERATING STRATEGY
Our operating strategy is to create value for our stockholders primarily by
creating or identifying, and then incubating and growing, businesses that are
poised to benefit from growth of the Internet as a commercial exchange, such as
companies that will provide online B2B services. We believe our portfolio
companies will benefit from our collective experience and resources and, as a
result, be in a better position to succeed in the New Economy.
Our principal resources include the experience and industry relationships of
our management team, our directors and our advisory board. Our management team
includes experienced professionals with varied backgrounds which include
strategy consulting, investment banking and public accounting. Our directors and
advisory board members are senior level executives with experience building and
managing businesses in the technology, e-commerce and telecommunications
industries.
OUR MERCHANT BANKING AND INCUBATION SERVICES
Our merchant banking and incubation services include:
STRATEGIC GUIDANCE AND BUSINESS PLANNING
We assist our clients in developing and refining business strategies to
maximize potential to be successful, reduce risk of failure, and accelerate time
to market. We provide assistance with business strategy, marketing strategy and
competitive positioning.
ORGANIZATIONAL DEVELOPMENT AND OPERATIONAL SUPPORT
Once the business plan is complete, we assist our clients in organizational
development and executive recruiting. We can provide temporary office facilities
if needed; we assist in selecting and engaging technical and professional
service providers through the resources of our directors, advisory board members
and management team; and we provide technical consulting through the experience
and resources of our directors and advisory board members.
INVESTMENT BANKING AND FINANCIAL ADVISORY SERVICES
We assist in the planning and development of capital structures, assist in
arranging financing and when appropriate, provide merger and acquisition
advisory services. Our investment banking services have primarily consisted of
arranging private equity placements between $5 and $25 million, arranging debt
financing between $5 and $50 million, providing merger and acquisition and
advisory services, and providing valuations and fairness opinions. We expect to
provide these services primarily to businesses which intend to use the Internet
as a primary vehicle for delivery of a product or service, i.e., B2B e-commerce;
however we reserve the right to service other businesses.
PROVIDING SEED CAPITAL AND LATER-STAGE GROWTH CAPITAL
As part of our merchant banking activities, we expect, from time to time and
as opportunities arise, to provide seed capital, later stage investment capital
and other types of capital infusions and financing to certain of our portfolio
companies. These activities will typically generate significant equity positions
in portfolio companies for us.
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<PAGE>
OUR INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to achieve capital appreciation from equity
investments in our portfolio companies and from equity we receive for rendering
advisory services to our portfolio companies. We intend to focus on investments
in early development stage companies that have the greatest potential for
growth.
We apply several screening criteria when selecting target clients,
including:
INDUSTRY-- Businesses involved in or enabling the development of B2B
e-commerce such as infrastructure service providers, market makers and solution
providers. We intend to select clients that have the following characteristics:
(1) the opportunity to be at the forefront of new or developing markets,
(2) the potential to participate in large markets opportunities, (3) unique
ideas, and (4) dynamic, intellectually strong founders with experience within
their industry.
GEOGRAPHY-- Companies located outside of the primary venture capital centers
such as Silicon Valley and New England, including but not limited to Texas and
other southwestern states. We believe that many good business opportunities
exist in secondary markets which do not have access to financial advisory
services and capital.
COMPANY STAGE-- Newly formed companies that (1) need assistance developing
their business strategies and management teams and require "seed" or early stage
capital investments, and (2) companies that are developed and require investment
banking services such as arranging expansion financing or require merger and
acquisition or other financial advisory services.
SOLID CORE MANAGEMENT TEAM-- Relevant industry experience, a history of
accomplishment, and skills for managing a high growth business.
REASONABLE VALUATION-- Businesses which we believe have a reasonable
valuation in light of the current stage of the business and the risks involved
in its development.
We intend to assist in the growth of our portfolio companies by providing
them with management assistance in strategy formation and development, executive
recruiting and general business operations.
The selection of portfolio investments and the day-to-day management of our
investments, including our investment practices and techniques, will be the
responsibility of certain of our officers who serve under the direction of our
board of directors. We have not adopted a fixed policy concerning the types of
business we can invest in, the types of securities we will hold or the amount of
funds which can be invested in any one portfolio company. We reserve the freedom
to invest in any kind of security or asset and to engage in business operations
to the extent considered beneficial in achieving our investment objectives. For
example, even though we have no current intention to do so, we could devote any
portion of and up to all of our assets to any of the following activities: the
issuance of senior securities; short sales, purchases on margin, and the writing
of put and call options; the borrowing of money; the underwriting of securities
of other issuers; the purchase or sale of real estate and real estate mortgage
loans; and the making of loans.
Our investments in clients may take many forms, including preferred or
common equity, debt, debt with equity features, warrants or options, convertible
securities and other forms of ownership interests. We may change our investment
objective and policies without a vote of the holders of a majority of our common
stock. See "Risk Factors--Risks Associated With Our Operations" and "Risks
Associated With Our Industry."
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OUR CORPORATE STRUCTURE
We are internally managed through the efforts of our officers under the
supervision of our board of directors. After the offering, we intend to operate
through three subsidiaries:
MCFARLAND, GROSSMAN & COMPANY, INC.--a registered broker-dealer, will
provide financial advisory and investment banking services; and private
placement services.
MGI2 VENTURES, INC.--will provide business consulting services; enterprise
and organizational consulting services; merchant banking services; and
incubation services.
MGI2 CAPITAL, INC.--will provide management services to venture capital
funds and other private equity funds that we establish.
Our revenues and profits will be derived from:
- financial advisory and consulting fees;
- investment banking fees, including equity interests we earn in portfolio
companies;
- capital appreciation and income derived from ownership interests in our
portfolio companies; and
- management fees and earned carried interests in managed venture capital
and other private equity funds that we establish.
OUR GROWTH STRATEGY
Our strategy to grow our business is as follows:
EXPAND OUR FINANCIAL ADVISORY AND MERCHANT BANKING ACTIVITIES
We plan to expand our financial advisory and merchant banking activities by
increasing our exposure to the public, adding to our professional staff,
utilizing our increased capital resources, and through the collective contacts
of our directors and advisory board members.
INCREASE OUR FOCUS ON THE FORMATION AND DEVELOPMENT OF NEW BUSINESSES
We intend to focus on development stage businesses where our experience,
resources and capital can assist our clients and provide us with the opportunity
to generate fees and equity interests.
SELECTIVELY PROVIDE CAPITAL TO CLIENTS
As part of our merchant banking activities, we expect, from time to time and
as opportunities arise, to provide seed capital, early stage investment capital
and other types of financing in exchange for significant equity interests in
certain of our portfolio companies.
ENGAGE IN VENTURE CAPITAL MANAGEMENT
We plan to establish a venture capital fund. We believe that the ability to
selectively provide expansion capital to our clients will further benefit the
client and provide us with the opportunity to profit from venture management
fees and earned carried interests.
OUR PRIOR INCUBATION AND MERCHANT BANKING EXPERIENCE
The following table presents the merchant banking transactions that
McFarland, Grossman, our subsidiary, has completed over the past five years and
in which it has received equity. We have transferred most of the equity to our
officers and employees as compensation.
<TABLE>
<CAPTION>
BUSINESS STATUS
- -------- -----------------------------------------
<S> <C>
Telecommunications(1).................... Completed financing and IPO
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
BUSINESS STATUS
- -------- -----------------------------------------
<S> <C>
Consumer Products(2)..................... Completed financing
Software(3).............................. Completed financing and IPO
Transportation(4)........................ Abandoned
Energy services(5)....................... Completed IPO
Inventory management/distribution(6)..... Completed IPO
IT Services(7)........................... Completed IPO
Telecommunications(8).................... Arranging next financing
Specialty retail and Internet Completed financing
auction(9).............................
Internet-financial information(10)....... Seeking strategic buyer
Plastics manufacturing(11)............... Completed financing
Public Internet access terminals(12)..... Development stage
</TABLE>
- ------------------------
1. We arranged two rounds of senior debt financing and provided merger and
acquisition advisory services for Teletouch Communications, Inc., a wireless
telecommunications company. We received cash and common stock in Teletouch.
2. We were the principal adviser to Loadhandler Industries, Inc., a
manufacturer of accessories for sport utility vehicles. We received a cash
fee and a warrant to purchase shares of common stock in Loadhandler. We
believe that the warrant currently has no value because Loadhandler is in
bankruptcy proceedings.
3. We were the principal advisor to TALX Corporation in a $4 million financing
of subordinated notes with warrants. TALX is engaged in the development of
software and provides related services. We received a cash fee and warrants
to purchase common stock in TALX. The warrants were exercised following an
initial public offering by TALX.
4. We incubated Consolidated Coach, Inc., arranged seed financing, and later
abandoned the project at a loss after determining continued development
unwarranted.
5. We were the principal advisor and participated in the incubation of
Transcoastal Marine Services, Inc., a marine construction company. We
received a cash fee and a warrant to purchase shares of common stock of
Transcoastal.
6. We originated and incubated Pentacon, Inc. which distributes fasteners and
small components and provides inventory management solutions. We received a
cash fee and, along with our employees and consultants, were founding
stockholders of Pentacon.
7. We were the principal advisor and participated in the incubation of
BrightStar Information Technology Group, an information technology services
company. We were involved in conceiving the concept for the business,
introducing the management team and assembling some of the acquired
companies. We received a cash fee and a warrant to purchase shares of common
stock of BrightStar.
8. We arranged a private placement for Omniplex Communications Group, LLC, a
telecommunications company. We earned a cash fee and warrants to purchase
interests in Omniplex.
9. We arranged a private placement of subordinated notes for Antiqueland
USA, Inc., a consolidator of antique malls. We earned a cash fee and
warrants to purchase preferred stock of Antiqueland.
10. We assisted in the formation of Altair Corp. which provides financial
information via the Internet. We recruited part of its management team, and
arranged its seed financing. Our employees were founding stockholders in
Altair.
11. We arranged a private placement of subordinated notes for Cass
Polymers, Inc., a manufacturer of polymer coatings. We received a cash fee
and a warrant to purchase common stock in Cass.
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<PAGE>
12. We conceived the concept for Zmail Media, which is in the development
stage. Zmail intends to provide courtesy internet access in airports and
other high traffic venues. We and our employees were founding stockholders.
GOVERNMENT REGULATION
The securities and investment businesses are subject to extensive and
frequently changing federal and state laws and substantial regulation under such
laws by the SEC and various state agencies and self-regulatory organizations,
such as the NASD. Regulation by the SEC, state agencies and self-regulatory
organizations does not mean that these entities have approved or passed upon the
propriety of an investment in MGi2.
BROKER-DEALER REGULATION
McFarland, Grossman is registered as a broker-dealer with the SEC and is a
member firm of the NASD. Much of the regulation of broker-dealers has been
delegated to self-regulatory organizations, principally the NASD, which has been
designated by the SEC as McFarland, Grossman's primary regulator. The NASD
adopts rules, which are subject to approval by the SEC, that govern its members
and conducts periodic examinations of member firms' operations. Securities firms
are also subject to regulation by state securities administrators in those
states in which they conduct business. McFarland, Grossman is registered as a
broker-dealer in 10 states. Broker-dealers are subject to regulations which
cover all aspects of the securities business, including:
- sales methods and supervision;
- trading practices among broker-dealers;
- use and safekeeping of customer's funds and securities;
- capital structure of securities firms; and
- recordkeeping and the conduct of directors, officers and employees.
Additional legislation, changes in rules promulgated by the SEC and
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules, may directly affect the mode of operation and
profitability of broker-dealers. The SEC, self-regulatory organizations and
state securities commissions may conduct administrative proceedings which can
result in censure, fine, the issuance of cease and desist orders or the
suspension or expulsion of a broker-dealer, its officers or employees. The
principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the integrity of the securities markets.
As a registered broker-dealer and member firm of the NASD, McFarland,
Grossman is subject to the SEC's net capital rule. The net capital rule, which
specifies minimum net capital requirements for registered brokers and dealers,
is designed to measure the general financial integrity and liquidity of a
broker-dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form. Net capital is essentially defined as net worth or
assets minus liabilities, plus qualifying subordinated borrowings and less
certain mandatory deductions that result from excluding assets not readily
convertible into cash and from valuing certain other assets, such as a firm's
positions in securities, conservatively. Among these deductions are adjustments
in the market value of securities to reflect the possibility of a market decline
prior to disposition.
Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NASD, the SEC and other regulatory bodies and
ultimately may require its liquidation. The net capital rule also prohibits
payments of dividends, redemption of stock and the prepayment or payment in
respect of principal of subordinated indebtedness if net capital, after giving
effect to the payment, redemption or repayment, would be less than 120% of the
minimum net capital requirement. Compliance with the net capital rule could
limit the operations of McFarland, Grossman.
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<PAGE>
INVESTMENT ADVISERS ACT
MGi2 Capital, Inc. may be required to register as an investment adviser,
which would subject it to regulation under the Investment Advisers Act of 1940
and regulations promulgated thereunder.
INVESTMENT COMPANY ACT
We have elected to be regulated as a business development company under the
Investment Company Act. As a business development company, we will be subject to
various restrictions on our activities as provided in the Investment Company
Act. See "Risk Factors" and "Investment Company Act Regulation."
COMPETITION
The business in which we are engaged is highly competitive. Competition is
based primarily on the quality of service and performance history. We will be
competing with a large number of investment banking and merchant banking firms,
as well as private equity funds, on a regional and local basis, many of which
may have greater financial resources than we do. In addition, recently there has
been increasing competition from other sources, such as commercial banks,
insurance companies and consulting firms offering financial services.
PERSONNEL
At March 13, 2000, we had 7 full-time employees. None of our personnel is
covered by a collective bargaining agreement. We consider our relationships with
our employees to be good.
McFarland, Grossman is party to a client services agreement, or CSA, with
Administaff Companies, Inc. The CSA establishes a three party relationship where
Administaff and McFarland, Grossman act as co-employers of McFarland, Grossman's
employees. Under the CSA, Administaff assumes responsibility for personnel
administration and compliance with most employment-related governmental
regulations while McFarland, Grossman retains the employees' services in its
business and remains the employer for various other purposes. Administaff
charges a comprehensive service fee which is invoiced along with each periodic
payroll of McFarland, Grossman. The fee is based upon the gross payroll of
McFarland, Grossman and Administaff's estimated cost of providing the services.
Concurrently with the close of the offering, McFarland Grossman will assign its
rights and obligations under the CSA to MGi2 or McFarland Grossman and
Administaff will terminate the CSA and MGi2 and Administaff will enter into a
new client services agreement with substantially the same term as the current
CSA.
PROPERTIES
The principal executive offices of MGi2 and its subsidiaries are located at
9821 Katy Freeway, Suite 500, Houston, Texas 77024 where MGi2 leases
approximately 4,669 square feet of office space. The lease expires on March 31,
2001.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings, other than ordinary
litigation incidental to our business. Management believes that none of these
proceedings would have a material adverse effect on our business, financial
condition or results of operations.
DETERMINATION OF NET ASSET VALUE
We will determine the net asset value per share of our common stock
quarterly. The net asset value per common share is equal to the value of our
total assets minus total liabilities and preferred stock, if any, divided by the
total number of common shares outstanding.
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Both public and private securities that we receive from companies are valued
at their appraised values as determined by certain of our officers under our
valuation policies. With respect to private securities, each investment is
valued using industry valuation benchmarks. When an external event such as a
purchase transaction, public offering, or subsequent sale occurs, the pricing
indicated by the external event is used to corroborate our private valuation.
Securities in public companies that carry certain restrictions on sale are
generally valued at a discount from the public market value of the securities.
Restricted and unrestricted publicly traded securities may also be valued at
discounts due to the size of our investment or market liquidity concerns.
Determination of fair value involves subjective judgments. Due to the
inherent uncertainty of the valuation process, estimated values at the end of an
accounting period may differ significantly from the values that would have been
realized in a sale at that date had a ready market for the securities existed.
PORTFOLIO TRANSACTIONS
The capital stock we receive from portfolio companies is expected to be
acquired primarily in private transactions negotiated directly with the
portfolio company or with an affiliate thereof. Our management will continue to
be principally responsible for conducting negotiations with respect to our
investments. We make available significant managerial assistance to our
portfolio companies.
We may invest a portion of our other assets in the publicly traded
securities of public companies. Such investments and other investments which are
not "qualifying assets" may not exceed 30% of the value of our total assets at
the time of any such investment.
Based on the amount of existing available funds together with the proceeds
from this offering, it is not likely that we will be able to acquire securities
in a large number of companies. As a result, we do not anticipate that our
investments will be diversified.
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<PAGE>
PORTFOLIO COMPANIES; EQUITY INVESTMENTS
The following is a listing of portfolio companies in which we had an equity
investment at February 29, 2000.
<TABLE>
<CAPTION>
RELATIONSHIP OF
TYPE OF % OF CLASS VALUE OF PORTFOLIO COMPANIES
NAME/ADDRESS NATURE OF ITS BUSINESS SECURITIES HELD(1) SECURITIES HELD TO MGI2
- ------------ ------------------------- -------------- ---------- --------------- --------------------
<S> <C> <C> <C> <C> <C>
Pentacon, Inc. .............. Wholesale Distribution of Common Stock 0.1% $149,625 Cary Grossman is a
10375 Richmond Ave. Fasteners director.
Suite 700
Houston, TX 77042
ACR Group, Inc. ............. Wholesale Distribution of Common Stock 0.02% 2,938 None.
3200 Wilcrest Drive Heating and Air
Suite 440 Conditioning Equipment
Houston, TX 77042
Antiqueland USA, Inc. ....... Operate Antique Malls Warrant 3.5% 100 Cary Grossman is a
5000 Bee Cave Road, director.
Suite 200
Austin, TX 78746
Altair Corp. ................ Financial Information Common Stock .7% -0- Cary Grossman is a
5757 Memorial Drive Services director.
Houston, TX 77007
McFarland, Grossman ......... Investments(3) Series B Units 2.0% 50 McFarland, Grossman
Capital III, L.C. is manager;
9821 Katy Freeway, Suite Cary Grossman is
500 president;
Houston, TX 77024 Clifford McFarland
is vice president
and secretary.
Zmail Media, Inc. ........... Provider of public Common Stock 25.05% 251 Cary Grossman is a
24 Greenway Plaza, Suite Internet access director.
1826 terminals in public
Houston, TX 77046 facilities(2)
Re-Exg.com, Inc. ............ Internet-based, Common Stock 11.11% 249,900 Clifford McFarland
9821 Katy Freeway, Suite reinsurance exchange is a director.
500 and financial
Houston, TX 77024 clearinghouse(2)
McFarland, Grossman ......... Investments(3) Series B Units 100% 2,500 McFarland, Grossman
Capital Ventures IV, L.C. is manager;
9821 Katy Freeway, Suite Cary Grossman is
500 president;
Houston, TX 77024 Clifford McFarland
is vice president
and secretary.
</TABLE>
- ------------------------------
(1) Percentages shown for warrants and options held represent the percentage of
class of security we may own, on a fully diluted basis, assuming we exercise
our warrants or options.
(2) See "Business--Our Current Incubation and Merchant Banking Activities" for
further description regarding the nature of the business in this portfolio
company.
(3) This company was formed to hold investments in portfolio companies.
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<PAGE>
INVESTMENT COMPANY ACT REGULATION
We have elected to be regulated as a business development company under the
Investment Company Act. We are a unique kind of investment company that focuses
on investing in or lending to small private companies and making managerial
assistance available to them. A business development company may use capital
provided by public shareholders and from other sources to invest in long-term,
private investments in emerging and development stage business. A business
development company provides its shareholders the ability to retain the
liquidity of a publicly traded stock, while sharing in the possible benefits, if
any, of investing in privately owned growth companies.
As a business development company, we must:
- have at least 70% of our investments in qualifying assets before investing
in non-eligible assets;
- provide or make available significant managerial assistance to client
companies;
- have a class of equity securities registered under the Securities Act
of 1934 or have filed a registration statement with the SEC; and
- have a majority of directors who are not "interested persons," as such
term is used under the Investment Company Act.
Eligible assets for investment include:
- securities of an eligible portfolio company which are purchased from that
company in a private transaction. An eligible portfolio company is a U.S.
company that:
-- subject to certain narrowly defined exceptions, is not itself a
registered investment company;
-- has no class of securities listed on a national securities exchange
or on a dealers' margin list;
-- is actively controlled by a business development company, either
alone or acting as part of a controlling group, and an affiliate of
the business development company serves on the company's board of
directors; or
-- meets certain other criteria as may be established from time to time
by the SEC pursuant to its rule-making authority.
- securities received by the business development company in connection with
its ownership of securities of an eligible portfolio company; and
- cash, cash items, government securities, or high quality debt securities
maturing in one year or less from the time of investment.
Significant managerial assistance includes:
- any arrangement in which a business development company offers to provide,
and, if accepted, provides, significant guidance and counsel concerning
the management, operations, or business objectives and policies of a
portfolio company; or
- the exercise by a business development company of a controlling influence
over the management or policies of a portfolio company by the business
development company acting individually or as part of a group acting
together which controls the portfolio companies.
The Investment Company Act prohibits us from investing in certain types of
companies such as brokerage firms, insurance companies, investment banking firms
and investment companies.
We may also be prohibited under the Investment Company Act from conducting
certain transactions with our affiliates without the prior approval of our
disinterested directors and, in some cases, the SEC.
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<PAGE>
As a business development company, we may not change the nature of our
business so as to cease being a business development company, or withdraw from
our election as a business development company, without first obtaining the
approval of a majority of our "outstanding voting securities" as defined in the
Investment Company Act. We may, in the future, seek to become exempt from
registration under the Investment Company Act.
As a business development company, we are entitled to issue senior
securities in the form of stock or senior securities representing indebtedness,
as long as each class of senior security has an asset coverage of at least 200%
immediately after each such issuance. We may sell our securities at a price that
is below the net asset value per share after approval of the disinterested
directors and upon approval of a majority of our outstanding voting securities,
provided the Investment Company Act generally requires that such price closely
approach market value less applicable discounts and commissions. As defined in
the 1940 Act, the term "majority of the outstanding voting securities" means the
vote of (i) 67 percent or more of the Company's common stock present at the
meeting, if the holders of more than 50 percent of the outstanding common stock
are present or represented by proxy or (ii) more than 50 percent of the
Company's common stock, whichever is less.
Should we lose our status as a business development company, we would become
subject to the more stringent regulations under the Investment Company Act as
applicable to investment companies unless we could obtain an exemption from
Investment Company Act regulation. See "Risk Factors."
We are also prohibited by the Investment Company Act from knowingly
participating in a joint transaction, including co-investment in a portfolio
company with an affiliated person, including any of our directors, advisory
directors or any entity managed by any of them. To allow co-investments with
directors and officers, we intend to apply to the SEC for exemptive relief from
this provision of the Investment Company Act. See "Risk Factors--Risks
Associated With Our Operations--Failure to obtain SEC exemptive relief of
various policies could negatively affect our operations."
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<PAGE>
MANAGEMENT
Our board of directors manages, or directs the management of, the property,
affairs and business of MGi2. Under Delaware law, our board may exercise all
powers of MGi2. Our board maintains an audit committee and a compensation
committee, and may establish additional committees in the future.
Our executive officers, under the direction of our board, among other
things, are responsible for the day-to-day management and investment decisions
involving of our portfolio. We have no executive or investment committee. The
company is responsible for the payment of expenses incurred by it and its
subsidiaries.
The following table contains certain biographical information with respect
to our executive officers and directors as of the date of this prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Cary M. Grossman.......................... 46 Chairman of the Board, Chief Executive
Officer and Chief Financial Officer(1)
Clifford E. McFarland..................... 45 President and Director(1)
Evans S. Attwell.......................... 39 Senior Vice President(2)
David W. Chamblee......................... 33 Senior Vice President(2)
Robert M. Chiste.......................... 52 Director(3)
Glyn J. Meek.............................. 49 Director(4)
Robert G. Solomon......................... 37 Director(5)
</TABLE>
- ------------------------
(1) Interested person as defined in Section 2(a)(19) of the Investment Company
Act. Messrs. Grossman and McFarland are interested persons because they are
officers and employees of MGi2 and each own more than five percent of the
outstanding securities of MGi2. The address for each of these persons is c/o
MGi2, Inc., 9821 Katy Freeway, Suite 500, Houston, Texas 77024.
(2) The address for each of these persons is c/o MGi2, 9821 Katy Freeway, Suite
500, Houston, Texas 77024.
(3) The address for Mr. Chiste is c/o FuelONE, Inc./FuelQUEST.com, 700
Louisiana, Suite 3900, Houston, Texas 77002.
(4) The address for Mr. Meek is c/o TriActive, Inc., 4301 Westbank Drive,
Building B, Suite 200, Austin, Texas 78731.
(5) The address for Mr. Solomon is c/o USOL Holdings, Inc., 10300 Metric Blvd.,
Austin, TX 78758.
CARY M. GROSSMAN--CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER AND
DIRECTOR. Mr. Grossman co-founded McFarland, Grossman in 1991. Since
co-founding McFarland, Grossman, he has had overall responsibility for managing
numerous public and private debt and equity financings with aggregate proceeds
of more than $125 million, as well as numerous mergers and acquisitions.
Mr. Grossman was a co-founder of Pentacon, Inc. (a distributor of fasteners and
other small components), its President from December 1997 until March 1998, and
President of McFarland, Grossman Capital Ventures II, L.C., the founding
shareholder of Pentacon. In those capacities, he was principally responsible for
arranging the acquisition of five companies with approximately $150 million in
revenues, negotiating and managing a $52 million initial public offering, and
arranging a $50 million credit facility. Mr. Grossman was engaged in the
practice of public accounting from 1977 through 1991. He is a director of
several public and private companies including Pentacon, Inc. (NYSE: JIT) and
Omniplex Communications Corp., a telecommunications services company.
Mr. Grossman is a Certified Public Accountant and earned a Bachelor of Business
Administration in Accounting from The University of Texas in 1976.
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<PAGE>
CLIFFORD E. MCFARLAND--PRESIDENT AND DIRECTOR. Mr. McFarland co-founded
McFarland, Grossman in 1991. Mr. McFarland co-founded The Watkins Group, a
merchant banking firm in Little Rock, Arkansas, where he served as a Managing
Director from 1986 until 1991. Prior to that, he was a co-founder of
McFarland & Jones, a management consulting firm in the franchise industry.
Mr. McFarland is a director of Teletouch Communications Group, Inc. (AMEX: TLL).
He earned a Bachelor of Science in Business/ Public Affairs from the University
of Houston/Clear Lake.
EVANS S. ATTWELL--SENIOR VICE PRESIDENT. Mr. Attwell will become a Senior
Vice President upon consummation of the offering. Mr. Attwell joined McFarland,
Grossman in April 1999 and heads its merger & acquisition practice. From 1988
through 1998, he was employed by Chase Bank of Texas in the Merger & Acquisition
Group. Prior to that, he was a Financial Analyst from 1983 through 1986 at
Rauscher Pierce Refsnes (investment banking firm). Mr. Attwell earned his
undergraduate degree at Washington & Lee University and his Masters Degree in
Business Administration from the University of Texas.
DAVID W. CHAMBLEE--SENIOR VICE PRESIDENT. Mr. Chamblee will become a Senior
Vice President upon consummation of the offering. Prior to joining McFarland,
Grossman in September 1998, Mr. Chamblee was a management consultant in the
Dallas office of Booz-Allen & Hamilton, a global strategy consulting firm, where
he had been employed since 1994. Prior to attending graduate school,
Mr. Chamblee was an associate in the commercial office building division of
Coldwell Banker Commercial. He earned his undergraduate degree from Vanderbilt
University in 1984, and a Masters of Business Administration from the University
of Texas in 1994.
ROBERT M. CHISTE--DIRECTOR. Mr. Chiste will become a director of MGi2 upon
consummation of the offering. Mr. Chiste is currently involved with several
Internet related businesses. Since September 1999, he has served as Chairman of
FuelQUEST, Inc., a development stage B2B e-commerce enterprise focusing on
commerce, content and community within the $200 billion industry of fuels,
lubricants, propane and solvents. Since September 1999, Mr. Chiste has also
served as the Vice-Chairman, President and Chief Executive Officer of
FuelONE, Inc., an ongoing consolidation of fuel and lubricant wholesale
distribution companies with annual projected revenues in excess of $1 billion.
FuelONE is a minority owner of FuelQUEST. Since July 1998, Mr. Chiste has served
as Chairman of the Board of Directors of TriActive Technologies, Inc., a venture
funded Application Service Provider providing systems management services over
the Internet to mid-sized companies. Mr. Chiste is a co-founder of FuelQUEST,
FuelONE and TriActive as well as a founding investor in iMark.com, a leading
auction site for industrial equipment. Mr. Chiste was the President, Industrial
Services Group, of Philip Services Corp. (provider of industrial and
environmental services) from August 1997 to June 1998. In June 1999,
approximately one year after Mr. Chiste had left the company, Philip Services
filed a voluntary petition to reorganize under Chapter 11 of the United States
Bankruptcy Code. He served as Vice Chairman of Allwaste, Inc., a provider of
industrial and environmental services, from May 1997 through July 1997,
President and Chief Executive Officer of Allwaste from November 1994 through
July 1997 and a director of Allwaste from January 1995 through August 1997.
Philip Services Corp. acquired Allwaste effective July 31, 1997. Mr. Chiste
served as Chief Executive Officer and President of American National
Power, Inc., a successor company of Transco Energy Ventures Company, from its
creation in 1986 until August 1994. During the same period, he served as Senior
Vice President of Transco Energy Company. Mr. Chiste also serves as a director
of Franklin Credit Management Corp., a New York-based financial services
company, Pentacon, Inc., and Innovative Valve Technology, Inc. (distributor of
industrial values). Mr. Chiste received a B.A. in mathematics from the College
of New Jersey, as well as a J.D. and an M.B.A. from Rutgers University.
GLYN J. MEEK--DIRECTOR. Mr. Meek will become a director of MGi2 upon
consummation of the offering. Mr. Meek has served as President and Chief
Executive Officer of TriActive Technologies, Inc. since August 1999. From
January 1997 to July 1999, Mr. Meek was the Chief Operating Officer of
Collective Technologies Inc., a consulting company providing systems management
services in the UNIX
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<PAGE>
and Windows NT marketplaces to Fortune 1000 clients. From January 1995 to
January 1997, Mr. Meek served as Vice President--Technical Services at Tivoli
Systems Inc., a subsidiary of IBM providing Enterprise Systems Management
Software. From January 1994 to January 1995, Mr. Meek was a Senior
Manager--Strategy Consulting at Andersen Consulting, responsible for the sale
and delivery of information technology consulting to Fortune 500 corporations.
From January 1991 to May 1993, Mr. Meek served as Vice President Information
Systems of Dell Computer Corporation, where he was responsible for all of Dell's
information systems in the sales, technical support, networking and
telecommunications areas. Mr. Meek received a B.S. in chemistry from The
University of Hull, England and two M.S. degrees in computer science from
Imperial College, London, England.
ROBERT G. SOLOMON--DIRECTOR. Mr. Solomon will become a director of MGi2
upon consummation of the offering. Mr. Solomon currently serves as Chairman and
Chief Executive Officer of USOL Holdings, Inc. (NASDAQ: USOL) and
TheResidentClub.com, a subsidiary company. USOL is an integrated provider of
telecommunications and entertainment services to the multi-family housing
industry. From March 1998 through July 1999 Mr. Solomon served as Founder and
Chief Executive Officer of U.S. Online Communications, Inc. and from May 1994
through March 1998 as Founder and Chief Executive Officer of predecessor
companies. From 1987 to 1995 Mr. Solomon served as Director, officer and
principal stockholder of CS Management, Inc., a real estate firm headquartered
in Austin, Texas with a core concentration in multi-family housing investment
and management. Mr. Solomon serves on the Executive Board of the Independent
Cable and Telephone Association, the leading industry trade group for the
Residential Multi-Tenant Service Industry. He is a graduate of the University of
Texas, where he received the degree of Bachelor of Business Administration.
OTHER KEY EMPLOYEES
CHRISTOPHER A. REINECKER--ASSOCIATE. Mr. Reinecker joined McFarland,
Grossman in August 1999. He was employed by Ernst & Young, LLP from 1991 to
1994, and from 1997 until joining McFarland, Grossman. Between his employment
periods at Ernst & Young, Mr. Reinecker was the Chief Financial Officer of
Hermann Eye Center, a physician practice management company. He is a Certified
Public Accountant and received his undergraduate and graduate degrees in
business at the University of Texas.
QUYEN DU--ANALYST. Ms. Du joined McFarland, Grossman in October 1999 after
being employed at Lehman Brothers, Inc. as in Investment Banking Analyst in the
Global Media and Telecom Group. She graduated from the University of California,
Berkeley in 1997 with a Bachelor of Science in Business Administration and a
Bachelor of Arts in Economics.
ADVISORY BOARD
Our advisory board members do not have policy-making authority but consult
with management and provide strategic guidance in methods for developing and
expanding our business and analyzing client opportunities. Members of the
advisory board are appointed, and may be removed with or without cause, by our
board of directors.
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<PAGE>
The following table contains certain biographical information with respect
to our advisory directors:
<TABLE>
<CAPTION>
NAME AGE POSITION ADDRESS
- ---- -------- -------- ------------------------------
<S> <C> <C> <C>
Mary D. Bass.............. 43 Advisory Board Member Spencer Stuart
1111 Bagby, Suite 1616
Houston, TX 77002
Richard C. Cilento, Jr.... 37 Advisory Board Member The Bollard Group
700 Louisiana, Suite 3900
Houston, TX 77002
Ralph H. Freeman, Ph.D.... 52 Advisory Board Member Splitrock
9012 New Trails Drive
The Woodlands, TX 77381
James A. Nolen, Jr........ 47 Advisory Board Member CFO Services, Inc.
P.O. Box 27162
Austin, TX 78731
Brett Perlman............. 40 Advisory Board Member McKinsey & Company, Inc.
2 Houston Center, Suite 3500
Houston, TX 77010
Claude J. Pumilia......... 32 Advisory Board Member emerging.com
3355 W. Alabama, Suite 1100
Houston, TX 77098
Louis A. Waters, Jr....... 33 Advisory Board Member The Waters Group
520 Post Oak Blvd., Suite 850
Houston, TX 77027
</TABLE>
MARY D. BASS. Ms. Bass has served as a Principal of Spencer Stuart, an
executive search firm, since October 1997. In this position, Ms. Bass works
extensively with emerging growth companies and prominent private equity groups
helping them recruit executive officers for their portfolio companies, and
experienced investment professionals for their firms. Since October 1987,
Ms. Bass has been a general partner in Triad Ventures LTD, a $40 million venture
capital fund specializing in investing in Texas-based emerging growth companies.
Since January 1993, Ms. Bass has been general partner in The AM Fund, a venture
fund specializing in investing in technology businesses. From June 1983 to
October 1987, Ms. Bass was employed by Allied Bancshares & Capital Corp., now
part of Wells Fargo Bank, first as a credit analyst and then an investment
officer in its venture capital fund. From January 1981 to May 1983, Ms. Bass was
employed by Mississippi Chemical Corp., a $250 million fertilizer manufacturer.
Ms. Bass is a former President of the Houston Venture Capital Association and is
on the steering committee of the Dallas Private Equity Forum. She attended
Mississippi State University, and received a B.S. with "distinction" and a
M.B.A. in corporate finance.
RICHARD C. CILENTO, JR. Mr. Cilento co-founded and is President and Chief
Executive Officer of FuelQUEST, Inc., a development stage B2B e-commerce
enterprise focusing on commerce, content and community within the $200 billion
industry of fuels, lubricants, propane and solvents. Mr. Cilento also co-founded
FuelONE. Mr. Cilento is a board member for the investment services company
Bollard Group, LLC, formed to provide investment-banking services and to develop
and pursue attractive, high-growth business ventures specializing in technology
and industry consolidations. Mr. Cilento is also a member of the Board of
Advisors to TriActive Technologies Inc. From June 1998 to January 1999,
Mr. Cilento was Vice President of Strategic Services for Xerox Connect Solutions
and was responsible for computer outsourcing services and end user support
services. From October 1996 to June 1998, Mr. Cilento was Vice President
Corporate Services for XLConnect Solutions prior to its acquisition by Xerox.
From April 1995 to October 1996, Mr. Cilento was National Director--Remote
Network Management Center for The
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<PAGE>
Future Now. From February 1988 to April 1995, Mr. Cilento was Program Manager
and Lead Engineer for Space Shuttle Flight Planning for NASA Johnson Space
Center. Mr. Cilento received his B.S. in Aerospace Engineering from the
University of Illinois and an M.B.A. from the University of Houston.
RALPH H. FREEMAN, PH.D. Dr. Freeman has served as the Vice
President--Information Systems of Splitrock Services, Inc. (telecommunications
services company) since February 1999. In this position, Dr. Freeman is
responsible for the software design of a nation-wide dial access, enhanced
services, Internet company. From December 1996 to February 1999, Dr. Freeman
served as Vice President, Information Technology/Chief Information Officer of
Logix Communication Enterprise/American Telco, Inc. (telecommunications services
company), where he was responsible for the development or acquisition of all
computer services, hardware and software. From April 1996 to November 1996,
Dr. Freeman was Director of Information Services for GDS Engineers, Inc., where
he was responsible for direction of software development and information
technology projects including LAN architecture and the company's first Internet
access portal. Dr. Freeman served twenty years in the United States Air Force,
retiring with the rank of Lieutenant Colonel. Dr. Freemen received his B.S.
degree in Engineering Management from the United States Air Force Academy, his
M.S. degree in Business Administration, Computer Methods from U.C.L.A. and his
Ph.D. in Information Technology from George Mason University.
JAMES A. NOLEN, JR. Mr. Nolen has served as a senior lecturer at the
University of Texas, Department of Finance since 1980. In this capacity,
Mr. Nolen teaches multiple undergraduate and graduate courses related to the
financial management of small businesses. Mr. Nolen is the Associate Director of
The University of Texas' Center for Small & Middle Sized Enterprises and the
Associate Director of The University of Texas' Community MBA Program. Since
1989, Mr. Nolen has also served as the President of CFO Services, Inc., which
offers capital, financial and operational consulting services to small and
middle-sized business owners. From 1995 to 1996, he served as interim Chief
Financial Officer of MetalOptics, Inc., a manufacturer of energy efficient light
fixtures and specular reflectors. Mr. Nolen received his Bachelor of Business
Administration and Masters of Business Administration in finance from the
University of Texas.
BRETT PERLMAN. Mr. Perlman has served as Commissioner of the Public Utility
Commission of Texas since his appointment by Governor George W. Bush on
January 11, 1999. From September 1993 to January 1999 Mr. Perlman was a
management consultant with McKinsey & Company, a global management consulting
firm. At McKinsey, Mr. Perlman specialized in strategic planning for Fortune 500
technology companies in identifying new market opportunities and developing
corporate strategies. From September 1985 to September 1990, Mr. Perlman
practiced law with the Washington D.C. office of Akin, Gump, Strauss, Hauer &
Feld, and from September 1990 to August 1991 with the Houston office of
Jenkins & Gilcrest. Mr. Perlman has provided strategic planning for Texas'
Telecommunications Infrastructure Fund Board, which is responsible for Texas'
$1.5 billion fund for wiring schools for the Internet. In 1998, Mr. Perlman
helped found the Houston Technology Center, where he serves on the Finance
Committee, and the Houston Area Technology Advisory Council. He is a Board
member of the MIT Enterprise Forum of Houston and an Advisory Board member of
the Houston International Theatre School. Mr. Perlman graduated Phi Beta Kappa
in economics from Northwestern University in Evanston, Ill. He received a law
degree from the University of Texas Law School where he was associate editor of
the Texas Law Review. He also holds a Master's degree in Public Administration
from the John F. Kennedy School of Government at Harvard University where his
studies focused on business and policy issues involving information technology,
the telecommunications industry and the Internet.
CLAUDE J. PUMILIA. Mr. Pumilia serves as Chief Financial Officer and Vice
President of Business Development of emerging.com, an e-services company
dedicated to the rapid creation and deployment of digital businesses.
emerging.com specializes in building strategic e-business solutions for
start-ups which intend to revolutionize their market segments. The company
offers strategic advice, creative design, and technology development and
deployment. emerging.com recently received venture funding from Austin
45
<PAGE>
Ventures and Benchmark Capital. From September 1996 to December 1999,
Mr. Pumilia led several strategy and business development teams at Compaq
Computer Corporation. As Director of Strategic Planning at Compaq, Mr. Pumilia
led the strategy and planning function for Compaq North America. During the
course of his three year tenure, he participated in the formation and growth of
Compaq's e-Commerce Solutions Group by building the strategy and business
development team responsible for partnerships with leading e-commerce and
security firms. From 1994 through September 1996, Mr. Pumilia worked as a
consultant with McKinsey & Co., serving the technology, energy, and health care
industries. Mr. Pumilia received a Bachelor of Arts degree in Economics and
Managerial Studies magna cum laude from Rice University and a J.D. from the
University of Virginia Law School.
LOUIS A. WATERS, JR. Mr. Waters currently manages ESI Partners Ltd., a
private investment partnership which focuses on investing in early-stage
companies in a variety of fields. From 1990 to 1996, Mr. Waters owned and
operated a contract engineering and technology development firm. This company
completed development projects with aggregate budgets of over $30 million, and
provided turnkey services and program management for clients ranging from
start-ups to international corporations in the fields of biotechnology
software-based automation, advanced manufacturing, and consumer electronics. In
September 1996, Mr. Waters sold his engineering company to K*Tec Electronics,
the contract manufacturing subsidiary of Kent Electronics (NYSE: KNT).
Mr. Waters joined K*Tec as director of engineering, reorganizing the company's
engineering program. In January 1997, Mr. Waters assumed the additional
responsibility of general manager of K*Tec's advanced manufacturing group in the
Silicon Valley where he completed a fast-track turnaround program to restore the
branch to profitability. He left K*Tec in September 1997 to attend graduate
school. Additionally, Mr. Waters is a founding partner and director of Hardy
Construction Technologies LC, which develops and manufactures technology
products for the construction industry, and serves on an advisory basis to
Tracey Technologies, which develops laser-based instruments for ophthalmic care.
While a student at Rice University, Mr. Waters assisted in the startup of the
Rice Robotics Laboratory and led development of surface exploration vehicle
technology and telepresence systems for NASA. Mr. Waters holds a B.S. in
Mechanical Engineering from Rice University and an M.B.A. from Insead, located
in Fontainbleau, France.
BOARD COMMITTEES
Our board of directors has established a compensation committee and an audit
committee.
Our compensation committee reviews and makes recommendations to the board
regarding compensation to be provided to our Chief Executive Officer and our
directors. In addition, our compensation committee reviews compensation
arrangements for our other executive officers. Our compensation committee also
administers our equity compensation plans and determines the allocation among
our officers and employees of the client securities we receive as compensation.
Upon the consummation of the offering, the members of our compensation
committee, all of whom are independent directors, will be Messrs. Chiste, Meek
and Solomon, with Mr. Solomon serving as Chairman.
Our audit committee reviews and monitors our corporate financial reporting,
external audits, internal control functions and compliance with laws and
regulations that could have a significant effect on our financial condition or
results of operations. In addition, our audit committee has the responsibility
to consider and recommend the appointment of, and to review fee arrangements
with, our independent auditors. Upon the consummation of the offering, the
members of our audit committee, all of whom are independent directors, will be
Messrs. Chiste, Meek and Solomon, with Mr. Chiste serving as Chairman.
EXECUTIVE COMPENSATION
The following table reflects the cash compensation paid by us as well as
certain other compensation paid or accrued, during the fiscal years ended
December 31, 1999, 1998 and 1997 to the Chief Executive Officer of MGi2 and the
other executive officers whose compensation is $60,000 or greater during the
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<PAGE>
fiscal year ended December 31, 1999. Our directors did not receive any separate
or additional compensation for serving as directors during the fiscal year ended
December 31, 1999.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------------
SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION
- --------------------------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cary M. Grossman(1)...................... 1999 $ 94,500 $150,000 -- $37,427(2)
Chairman of the Board, Chief 1998 $103,152 $677,500 -- $14,864(2)
Executive Officer and Chief 1997 $102,000 $181,500 -- $12,814(2)
Financial Officer
Clifford E. McFarland(1)................. 1999 $114,000 $150,000 -- $37,427(2)
President and Director 1998 $114,000 $677,500 -- $14,864(2)
1997 $102,000 $181,500 -- $12,814(2)
Evans S. Attwell......................... 1999 $ 57,590 $ 40,000 (3) $10,055(2)
Senior Vice President
David W. Chamblee........................ 1999 $ 72,000 $ 78,000 (3) $ 8,423(2)
Senior Vice President 1998 $ 20,216 $ 17,000 (3) $ 2,994(2)
</TABLE>
- ------------------------
(1) The employment agreements of Messrs. McFarland and Grossman provide,
respectively, that in no event shall the annual total cash compensation of
salary and bonus of such person exceed $500,000 in any one year.
(2) In the fiscal years ended 1999, 1998 and 1997, Messrs. Grossman, McFarland,
Attwell and Chamblee each received additional compensation in the form of
warrants and equity interests in portfolio companies.
(3) Each of Messrs. Attwell and Chamblee received 75,000 options to purchase
shares in McFarland, Grossman at a purchase price equal to the fair market
value of the underlying common stock as of the date of grant. See
"--Officers' Compensation." Each option will be exchanged for two options in
MGi2 upon effectiveness of the share exchange whereby McFarland, Grossman
becomes a wholly owned subsidiary of MGi2. See "--2000 Stock Plan."
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SH) DATE
- ---- ------------ ---------------- ---------- --------------
<S> <C> <C> <C> <C>
David W. Chamblee........................ 60,000 36.4% $0.67 April 12, 2004
Evans S. Attwell......................... 75,000 45.5% $0.67 April 12, 2004
</TABLE>
Since 1997, we have assigned most of our interest in client securities we
received as fees for our services to our employees as compensation. In addition,
we have participated in the formation of new businesses and allowed our
employees, rather than us, to purchase the founders' stock, which is generally
issued for nominal consideration. We have now adopted a policy that any client
securities to be received in connection with the services we provide, and shares
to be acquired as founders' stock in companies that we incubate or assist in
incubation, are to be paid or issued directly to us. Once granted or issued to
us, our compensation committee, which is comprised of independent directors, may
distribute or allocate up to
47
<PAGE>
30% of these securities among certain officers and employees as additional
compensation. Our compensation committee will also determine the proportionate
allocation of such equity interests among our officers and employees. This
policy of distributing portfolio securities to officers and employees is subject
to review and approval by the SEC. See "Risk Factors Associated with the
Offering--Risks Associated With Our Operations--Failure to obtain SEC Approval
of various policies could negatively affect our operations" and "--Our policy
granting a percentage of the securities received as compensation to our officers
and employees could result in a conflict of interest."
DIRECTORS' AND ADVISORY BOARD MEMBERS' COMPENSATION
Directors who are employees of MGi2 will not receive additional compensation
for serving as directors. Directors of MGi2 will be reimbursed for out-of-pocket
expenses incurred in attending meetings of the board of directors or committees
of the board, and for other expenses incurred in their capacity as directors of
MGi2. Each non-employee director will receive $1,000 per board meeting and $500
per committee meeting (or $1,000 if the chairman of such committee). Each
initial non-employee director has received a restricted stock grant of 25,000
shares of MGi2 common stock from Messrs. McFarland and Grossman which vests
equally over three years. If the non-employee director ceases to serve as a
director prior to the full vesting of the restricted stock, the portion of the
non-vested restricted stock grant will revert to Messrs. Grossman and McFarland.
In addition, each non-employee director will, subject to SEC review and
approval, receive an initial option grant of 25,000 shares of common stock upon
election to the board followed by an annual option to purchase 5,000 shares of
common stock. Non-employee directors will also, subject to SEC review and
approval, receive an annual retainer paid in the form of an unregistered common
stock grant equal to $16,000 in value determined using the average closing price
of the common stock for the five Fridays prior to the grant date.
Advisory board members will be reimbursed for all out-of-pocket expenses
incurred in attending meetings of the advisory board and for other expenses
incurred in their capacity as advisory board members. Each advisory board member
will, subject to SEC review and approval, receive $1,000 for attendance at each
meeting. In addition, each advisory board member will receive an initial option
to purchase 10,000 shares of common stock upon appointment as an advisory board
member followed by an annual option to purchase 5,000 shares of common stock.
Advisory board members will, subject to SEC review and approval, also receive an
annual retainer paid in the form of an unregistered common stock grant equal to
$4,000 in value determined at a 20% discount to the preceding six week average
market price of the common stock.
The issuance of options and restricted shares to our directors and advisory
board members require the exemptive relief of the SEC. All of the issuances of
options and stock grants by our company to directors will be made contingent on
us receiving SEC approval with respect to the issuances. We intend to seek the
approval of, or exemptive relief from, the SEC with respect to the issuance of
such options and securities. There can be no assurances that such relief will be
granted. See "Risk Factors Associated with the Offering--Failure to obtain SEC
approval of various policies could negatively affect our operations."
OFFICERS' COMPENSATION
We anticipate that during calendar 2000 annualized base salaries of each of
our most highly compensated executive officers will be $175,000 for
Messrs. McFarland and Grossman and $120,000 for Messrs. Attwell and Chamblee.
Options for a total of 75,000 shares of common stock at the price of $.67 per
share have previously been granted to Mr. Attwell and options for a total of
75,000 shares of common stock at the weighted average price of $.79 per share
have previously been granted to Mr. Chamblee. All of Mr. Attwell's options and
60,000 of Mr. Chamblee's options vest equally over three years, and are
forfeited under certain circumstances if their employment with us is terminated.
The remaining 15,000 of Mr. Chamblee's options had a one-year vesting period and
have already fully vested. See "--2000 Stock Plan." In addition, subject to SEC
approval, our compensation committee may allocate to one or more of
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<PAGE>
such officers an aggregate of up to 30% of the equity securities we receive from
our portfolio companies. See "--Executive Compensation."
EMPLOYMENT AGREEMENTS
We currently have employment agreements with Messrs. McFarland and Grossman.
The employment agreements prohibit the officers from disclosing our confidential
information and trade secrets. Mr. McFarland's and Mr. Grossman's employment
agreements have an initial term of three years. The employment agreements are
terminable by us for "good cause" and without "cause" or for "good reason" by
the officer upon thirty days' written notice. All employment agreements provide
that if the officer's employment is terminated by us without "good cause," the
officer will be entitled to receive a lump-sum severance payment at the
effective time of termination in an amount equal to base compensation which
would have been payable over the remainder of the term of the employment
agreement or one year's base salary, if greater.
The employment agreements provide for a severance payment to the officer in
the event of the disability of such officer, such payment to equal the base
salary for the remaining term provided the period will not exceed one year.
The employment agreements of Messrs. McFarland and Grossman contain certain
provisions concerning a change-in-control of MGi2, including the following:
(1) in the event that the executive is not notified by the acquiring company
that it will assume our obligations under the employment agreement at least five
days in advance of the transaction giving rise to the change-in-control, the
change-in-control will be deemed a termination of the employment agreement by
MGi2 without "cause," and the provisions of the employment agreement governing
the same will apply; and (2) in any change-in-control situation, such officer
may elect to terminate his employment by giving ten days' written notice prior
to the anticipated closing of the transaction giving rise to the
change-in-control, which will be deemed a termination of the employment
agreement by us without "cause," and the provisions of the employment agreement
governing the same will apply. The change-of-control provisions in the
employment agreements may discourage bids to acquire us or reduce the amount an
acquiror is willing to pay for us.
The employment agreements of Messrs. McFarland and Grossman, respectively,
provide that in no event shall such employee's annual total cash compensation of
salary and bonus exceed $500,000 in any one year. See "--Executive
Compensation."
2000 STOCK PLAN
The board of directors has adopted, and the stockholders have approved, the
MGi2, Inc. 2000 Stock Plan. The purpose of the 2000 Stock Plan is to provide
directors, advisory board members, officers, key employees and certain other
persons who will be instrumental in our success with additional incentives by
increasing their ownership in MGi2. The aggregate amount of common stock with
respect to which awards may be granted may not exceed 650,000 shares, subject to
adjustment to reflect stock splits.
The Investment Company Act limits the aggregate amount of voting securities
that may result from the exercise of all of our outstanding warrants, options
and rights at the time of issuance to 25% of our outstanding voting securities.
If the amount of voting securities that would result from the exercise of the
outstanding warrants, options and rights issued to our officers, directors and
employees exceeds 15% of our outstanding voting securities, then the total
amount of voting securities that would result from the exercise of our
outstanding warrants, options and rights at the time of issuance are limited to
20% of our outstanding voting securities. These restrictions could restrict our
ability to issue the options we want to issue, from time to time, to incentivize
our management and employees.
The 2000 Stock Plan will be administered by our compensation committee,
which will be composed of non-employee directors. Subject to the terms of the
2000 Stock Plan, the compensation committee
49
<PAGE>
generally determines to whom awards will be granted and the terms and conditions
of the awards. The exercise price per share of all options granted under the
2000 Stock Plan shall be the fair market value of our common stock on the date
of the grant of such option. Options granted under the 2000 Stock Plan may be
either non-qualified stock options, or may qualify as incentive stock options or
"ISOs," provided that the aggregate fair market value, determined at the time
the ISO is granted, of the common stock with respect to which ISOs are
exercisable for the first time by any employee during any calendar year under
all of our plans shall not exceed $100,000. The compensation committee
determines the period over which awards vest, provided that all awards become
immediately exercisable upon death of the grantee or upon a change-in-control,
as defined in our 2000 Stock Plan.
The 2000 Stock Plan also provides for automatic option grants to directors
and advisory board members who are not otherwise employed by MGi2 or its
subsidiaries. See "--Directors' and Advisory Board Members' Compensation."
Awards that are not vested at the time of a voluntary termination of the
grantee's employment or directorship or in the case of a termination "for cause"
are immediately forfeited. In no event may an ISO granted to a control person
(as defined in the 2000 Stock Plan) be exercisable more than five years from the
date of grant. Each option granted to a non-employee director shall have a term
of ten years.
As part of the share exchange, we will issue options to purchase two shares
of MGi2 common stock in exchange for each outstanding option to purchase one
share of McFarland, Grossman common stock. The exercise price for the newly
issued options shall be 50% of the exercise price of the McFarland, Grossman
options.
401(K) PLAN
Administaff maintains a 401(k) Plan for our eligible employees. An employee
participant may contribute up to 15% of his or her total annual compensation to
the 401(k) Plan, up to a legal annual limit. The annual limit for calendar year
1999 was $10,000. Each participant is fully vested in his or her deferred salary
contributions. Previously, McFarland, Grossman had maintained such a plan, which
was terminated in May 1999.
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CERTAIN TRANSACTIONS
RELATED PARTY TRANSACTIONS
Cary M. Grossman and Clifford E. McFarland are parties to a Shareholders'
Agreement dated December 27, 1995, which, among other things, provides for
restrictions on transfer, and rights of first refusal with respect to the
Class A common stock of McFarland, Grossman & Company, Inc. On November 24,
1998, Mr. Grossman's interest was transferred to the Grossman Family Limited
Partnership which became a party to the agreement. The Shareholders' Agreement
will be terminated when this offering closes.
Since 1997, we have assigned most of our interest in client securities we
received as fees for our services to our employees as compensation. In addition,
we have participated in the formation of new businesses and allowed our
employees, rather than us, to purchase the founders' stock, which is generally
issued for nominal consideration. We have now adopted a policy that any client
securities to be received in connection with the services we provide and shares
to be acquired as founders' stock in companies that we incubate or assist in
incubation, are to be paid or issued directly to us. Subject to review and
approval by the SEC, once granted or issued to us, our compensation committee,
which is comprised of independent directors, may distribute or allocate up to
30% of these securities among our officers and employees as additional
compensation.
From time to time since January 1, 1997, McFarland, Grossman has authorized
the transfer of warrants to purchase equity in portfolio companies to
Messrs. McFarland and Grossman as follows:
<TABLE>
<CAPTION>
YEAR ASSIGNED AND VALUE
AT TIME OF ASSIGNMENT
WARRANTS ------------------------------
COMPANY ASSIGNED(1) 1997 1998 1999
- ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
Transcoastal Marine Services, Inc..................... 10,000 0
SkillMaster, Inc...................................... 19,125 $12,814
BrightStar Information Technology Group, Inc.......... 14,250 0
-------
$12,814
=======
Omniplex Communications Group, LLC.................... 37,000 $ 5,550
Omniplex Communications Group, LLC.................... 155,232 9,314
-------
$14,864
=======
Antiqueland USA, Inc.................................. 182,419 $16,418
Cass Polymers, Inc.................................... 786 21,010
-------
$37,428
=======
</TABLE>
- ------------------------
(1) The number of shares underlying warrants assigned to each of
Messrs. McFarland and Grossman.
In 1997 and 1998, we engaged McFarland, Grossman Insurance Services, Inc., a
corporation owned by Cary Grossman, to provide consulting services to us. The
services included a review of employee benefits including key man life and
disability coverage, retirement plans, and group medical insurance coverage. In
1997 and 1998, we paid consulting fees of $21,000 and $19,000, respectively, to
McFarland, Grossman Insurance Services. In 1995 and 1997, we received management
fees from McFarland, Grossman Insurance Services of approximately $68,000 and
$19,700, respectively. McFarland, Grossman Insurance Services was dissolved in
1998.
In June 1998, we sold 190,000 shares of Pentacon common stock to seven of
our then employees at a purchase price equal to approximately $9.98 per share,
including Messrs. McFarland and Grossman. Each purchaser issued a promissory
note to us in consideration of the full purchase price of the Pentacon shares.
The notes provided for payment of interest at an annual rate of 5.51%, payable
on December 31, 1998 and
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<PAGE>
1999, with the principal and accrued interest due and payable on July 14, 2000.
Each of these notes was secured by the shares in Pentacon. During 1999, two
employees defaulted on their notes, and we exercised our right to foreclose on
the collateral securing these notes. As of December 1999, three notes from three
former employees were in default and in January 2000, we exercised our right to
foreclose on the collateral securing the notes. As a result, we acquired 45,000
additional shares of Pentacon. Only the notes issued by Cary M. Grossman and
Clifford E. McFarland currently remain outstanding. In March 1999, due to a
precipitous decline in the value of the Pentacon common stock, the terms of the
original sale to Messrs. McFarland and Grossman were modified to reduce the
purchase price to $3.05 per share. At the time, we modified Messrs. Grossman and
McFarland's notes, we also increased the interest rate to 8% per annum and
extended the maturity date to December 31, 2001. The current principal balance
on each of the promissory notes from Messrs. Grossman and McFarland is $213,500.
In December 1998, Cary M. Grossman and Clifford E. McFarland, two of our
principal stockholders and executive officers each loaned $90,000 to McFarland,
Grossman. The notes originally bore interest at 10% per annum and were payable
by January 31, 2000. These notes were modified in 1999 to be subordinated to the
claims of general creditors and changed the interest rate to 13.5% with the
principal and accrued interest due on April 30, 2002. We used the proceeds of
the loans for working capital. Subject to NASD approval, when this offering
closes, we will repay the outstanding principal amount of the notes plus accrued
interest.
On June 7, 1999, we redeemed the interest of certain former employees in our
Class B non-voting common stock with a cash payment of $4,858, and the delivery
of promissory notes in the principal amount of $14,520. The notes are payable in
monthly principal installments over three years and bear interest at 8% per
annum. We intend to repay these notes in full upon consummation of the offering.
In August 1999, McFarland, Grossman sold its beneficial interest in a
warrant to purchase 20,000 shares of common stock of Transcoastal Marine
Services to Messrs. McFarland and Grossman for $14,000. Messrs. McFarland and
Grossman each issued a $7,000 promissory note to McFarland, Grossman. The notes
were due and payable in full with interest at the rate of 8% per annum on
December 31, 1999, and were paid in full.
In February 2000, we acquired 18.7% of Re-Exg's initial ownership. We have
previously agreed to assign approximately 7.59% of Re-Exg's initial ownership to
our employees, including Messrs. McFarland and Grossman; however, the exact
allocation among employees has not been determined.
Upon effectiveness of the offering, McFarland, Grossman will become our
wholly owned subsidiary pursuant to a share exchange of 2 shares of our common
stock for every 1 share of McFarland, Grossman common stock. Messrs. McFarland
and Grossman are all the stockholders of McFarland, Grossman. As part of the
share exchange, we will issue options to purchase two shares of MGi2 common
stock in exchange for each outstanding option to purchase one share of
McFarland, Grossman common stock. The exercise price for the newly issued
options shall be 50% of the exercise price of the McFarland, Grossman options.
We have entered into indemnification agreements with our directors,
executive officers and advisory board members which indemnify them to the
fullest extent permitted by law. See "Description of Capital Stock--Limitation
on Director's Liabilities and Indemnification."
COMPANY POLICY
We expect any future transactions with our directors, officers, employees or
affiliates will be minimal and will be approved in advance by a majority of
disinterested members of our board, and, if required under the Investment
Company Act, by the SEC. See "Risk Factors--Risks Associated With Our
Operations--Our transactions with affiliates may be limited."
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<PAGE>
CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock, after giving effect to the issuance of shares of
common stock in the offering, by
- each person or group of persons known to us to be the beneficial owner of
5% or more of the outstanding common stock;
- each director and nominee for director;
- each executive officer; and
- all officers and directors as a group.
Certain facets of our compensation program, such as granting stock options
and making stock grants to directors, advisory board members and employees,
require exemptive relief from the SEC. If we do not obtain SEC approval of our
compensation program, the beneficial ownership of the persons holding stock
options and stock grants as reported in the following table will likely
decrease. See "Risk Factors--Risks Associated With Our Company--Failure to
obtain SEC exemptive relief of various policies could negatively affect our
operations."
Unless otherwise indicated, the address for each such person is c/o MGi2,
9821 Katy Freeway, Suite 500, Houston, TX 77024. All persons listed have sole
voting and investment power with respect to their shares of common stock unless
otherwise indicated.
<TABLE>
<CAPTION>
BENEFICIAL AND RECORD
OWNERSHIP
AFTER OFFERING
-----------------------
SHARES PERCENT(1)
---------- ----------
<S> <C> <C>
Clifford E. McFarland(3).................................... 657,500 19.3%
Cary M. Grossman(2)(3)...................................... 657,500 19.3%
Evans S. Attwell(3)(4)...................................... 80,000 2.4%
David W. Chamblee(3)(5)..................................... 90,000 2.6%
Robert M. Chiste(6)......................................... 25,000 *
Glyn J. Meek(6)............................................. 25,000 *
Robert G. Solomon(6)........................................ 25,000 *
All executive officers and directors (7 persons)(3)(6)...... 1,560,000 45.9%
</TABLE>
- ------------------------
* Less than 1%
1. Based on a total of 3,400,000 shares of MGi2 common stock issued and
outstanding upon the consummation of this offering.
2. All of the stock attributed to Mr. Grossman is held by the Grossman Family
Limited Partnership. Mr. Grossman disclaims beneficial ownership of the
shares which are attributable to the interests in the Partnership held by
Mr. Grossman's children and spouse.
3. The shares beneficially owned by Messrs. Attwell and Chamblee include 55,000
restricted stock shares to be granted to each individual upon consummation
of this offering which vest 20% in year 1, 40% in year 2 and 100% in year 3.
Upon any failure of the vesting, including a termination of employment,
these shares would revert to Messrs. McFarland and Grossman.
4. Includes 25,000 options exercisable within 60 days of the date hereof.
5. Includes 35,000 options exercisable within 60 days of the date hereof.
6. Includes 25,000 shares of restricted stock to be granted upon consummation
of this offering which vest equally over three years. Upon any failure of
the vesting, including the cessation of service as a director, these shares
would revert to Messrs. McFarland and Grossman.
Current management of MGi2 owns 100% of the outstanding capital stock of
MGi2, and will own, directly and indirectly, approximately 45.9% of the MGi2's
common stock after the offering. Consequently, these stockholders may be in a
position to effectively control our affairs, including the election of all our
directors and the approval or prevention of certain corporate transactions which
require majority stockholder approval. This concentration of ownership may have
the effect of delaying or preventing a change in control of us.
53
<PAGE>
INVESTMENT ADVISORY SERVICES
We are internally managed by our officers under the supervision of our board
of directors. We therefore have no investment advisory, administrative or
similar agreements with any person or entity.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Since we expect generally to acquire and dispose of our investments in
portfolio companies in privately negotiated transactions, we expect to
infrequently use brokers in the normal course of business.
When we sell the securities we receive in exchange for portfolio companies,
our management will arrange for the execution of such transactions and the
allocation of brokerage services and commissions. In executing transactions in
the securities we receive for portfolio companies, our management will seek to
obtain the most favorable execution, that is, the best combination of net price
and prompt reliable execution. In management's opinion it is not possible to
determine in advance that any particular broker will actually be able to effect
the most favorable execution because, in the context of an often changing
market, order execution involves judgments as to the price, volume, trend and
breadth of the market, possibility of a block transaction, and the broker's
activity in the security as well as its general record for prompt, competent and
reliable service in all aspects of order processing, execution and settlement as
well as anticipated commission rates.
Certain of the securities which we receive in exchange for our portfolio
companies may be traded in the over-the-counter markets, and we intend to deal
directly with the dealers who make markets in the securities involved, except in
those circumstances where better prices and execution are otherwise available.
Under the Investment Company Act, persons affiliated with our company are
prohibited from dealing with us as a principal in the purchase and sale of
securities. Transactions in over-the-counter markets usually involve
transactions with dealers acting as principal for their own account. We will not
deal with affiliated persons as principal; however, affiliated persons of our
company may serve as our broker in over-the-counter markets and other
transactions conducted on an agency basis in accordance with the Investment
Company Act, except that if an affiliated person is a market maker in the
securities of a company then the affiliated person will not serve as our broker
in the purchase of such securities.
Our management has no obligation to deal with any broker or group of brokers
in the execution of transactions.
FEDERAL INCOME TAX MATTERS
For Federal and state income tax purposes, we are taxed at regular corporate
rates on ordinary income and recognized gains on distributions of appreciated
property. We are not entitled to the special tax treatment available to
regulated investment companies because, among other reasons, we do not
distribute at least 90% of "investment company taxable income" as required by
the Internal Revenue Code for such treatment. Distributions of cash or property
by us to our stockholders, if any, will be taxable as dividends only to the
extent that we have current or accumulated earnings and profits. Distributions
in excess of current or accumulated earnings and profits will be treated first
as a return of capital to the extent of the holder's tax basis and then as gain
from the sale or exchange of property.
Each investor is urged to consult with his tax advisor concerning the United
States Federal, state and local, and foreign tax consequences of his investment
in our company.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 50,000,000 shares of common stock,
par value $0.01 per share and 10,000,000 shares of preferred stock, par value
$0.01 per share. Immediately prior to the closing of this offering, there will
be 1,500,000 shares of common stock outstanding, which are held of record by
seven stockholders and no shares of preferred stock outstanding. After the
closing of the offering, 3,400,000 shares of common stock will be issued and
outstanding, 840,000 shares of common stock will be reserved for issuance upon
exercise of options and warrants and, immediately after this offering there will
be no shares of preferred stock outstanding. The following summary of the terms
and provisions of our capital stock is not complete and is qualified in its
entirety by reference to our Certificate of Incorporation and Bylaws, which have
been filed as exhibits to our registration statement, of which this prospectus
is a part, and applicable law.
COMMON STOCK
Holders of our common stock each have one vote for each share held on all
matters to which they are entitled to vote, including the election of directors.
Cumulative voting for the election of directors is not permitted. Any director,
or the entire board, may be removed at any time, by 66 2/3% of the aggregate
number of votes that may be cast by the holders of outstanding shares of common
stock entitled to vote for the election of directors.
Subject to the rights of any then outstanding shares of preferred stock, our
common stockholders are entitled to receive ratably dividends, if any, as may be
declared in the discretion of the board out of funds legally available for the
payment of dividends. See "Dividend Policy." Our common stockholders are
entitled to share ratably in our net assets upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
preferred stock then outstanding. Our common stockholders have no preemptive
rights to purchase any shares of our common stock. Our common stock is not
subject to any redemption provisions and is not convertible into any other
securities of MGi2. All outstanding shares of our common stock are fully paid
and non-assessable.
PREFERRED STOCK
Our preferred stock may be issued from time to time by the board as shares
of one or more classes or series. Subject to the provisions of our Certificate
of Incorporation and limitations prescribed by the Investment Company Act and
applicable law, the board may adopt resolutions to
- issue the shares;
- fix the number of shares;
- change the number of shares constituting any series; and
- provide for or change the rights or restrictions of each series, including
dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation preferences of the shares
constituting any class or series, in each case without any further action
or vote by the stockholders.
We have no current plans to issue any shares of preferred stock of any class or
series.
One of the effects of undesignated preferred stock may be to enable our
board to render more difficult or to discourage an attempt to obtain control of
us by means of a tender offer, proxy contest, merger or otherwise, and thereby
to protect the continuity of our management. The issuance of shares of preferred
stock may adversely affect the rights of our common stockholders. For example,
preferred stock may rank prior to the common stock as to dividend rights,
liquidation preference or both, may have full or
55
<PAGE>
limited voting rights and may be convertible into shares of common stock.
Accordingly, the issuance of shares of preferred stock may discourage bids for
the common stock at a premium or may otherwise adversely affect the market price
of the common stock. In order for MGi2 to issue any shares of preferred stock it
must, immediately after the issuance and sale, have an asset coverage of at
least 200%.
WARRANTS
Prior to this offering, we have sold to Capital West warrants covering an
aggregate of up to 190,000 shares of common stock exercisable at a price of
$9.60, subject to adjustment to be 120% of the initial offering price per share.
Capital West has paid a purchase price of $5,000 for the warrants. Capital West
may exercise these warrants as to all or any lesser number of the underlying
shares of common stock commencing on the first anniversary of the date of this
offering until the fifth anniversary of the date of this offering. The exercise
price of these warrants and the number of shares of common stock for which these
warrants are exercisable are subject to adjustment to protect the warrant
holders against dilution in certain events. Capital West was employed by
McFarland, Grossman prior to the offering to provide certain consulting services
in advising McFarland, Grossman respecting the feasibility of forming an
Internet focused investment banking firm and was paid $5,500 in connection with
those advisory services.
OUTSTANDING SECURITIES
The following chart indicates the Common Stock and Preferred Stock of MGi2
outstanding as of February 29, 2000:
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF AMOUNT
AMOUNT MGI2 OR HELD BY MGI2
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT FOR ITS ACCOUNT
- -------------- ---------- --------------- -------------------
<S> <C> <C> <C>
Common Stock.................... 50,000,000 -- 1,500,000
Preferred Stock of MGi2......... 10,000,000 -- --
</TABLE>
STATUTORY BUSINESS COMBINATION PROVISION
As a Delaware corporation we are subject to the provisions of Section 203 of
the Delaware General Corporation Law. Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or an associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless:
- the transaction resulting in a person becoming an interested stockholder,
or the business combination, is approved by the board of directors of the
corporation before the person becomes an interested stockholder;
- the interested stockholder acquired 85% or more of the outstanding voting
stock of the corporation in the same transaction that makes such person an
interested stockholder, excluding shares owned by persons who are both
officers and directors of the corporation, and shares held by certain
employee stock ownership plans; or
- on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors
and by the holders of at least 66 2/3% of the corporation's outstanding
voting stock at an annual or special meeting, excluding shares owned by
the interested stockholder.
Under Section 203, an "interested stockholder" is defined as any person who owns
15% or more of the outstanding voting stock of the corporation or an affiliate
or associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
56
<PAGE>
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by including in its certificate of incorporation or by-laws by
action of its stockholders to exempt itself from coverage. We have not adopted
such an amendment to our Certificate of Incorporation or Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
Pursuant to our Certificate of Incorporation and under Delaware law, our
directors are not liable to us or our stockholders for monetary damages for
breach of fiduciary duty, except for liability in connection with a breach of
the duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit. We have entered into
indemnification agreements with our directors, advisory board members and
executive officers which indemnify such persons to the fullest extent permitted
by our Certificate of Incorporation, our Bylaws and the Delaware General
Corporation Law. Notwithstanding the foregoing, for as long as the Company is
regulated as a business development company under the Investment Company Act,
the foregoing indemnification rights shall not include indemnification for
actions or matters for which directors cannot be indemnified under the
provisions of the Investment Company Act.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Our Certificate of Incorporation and Bylaws include provisions that may have
the effect of discouraging, delaying or preventing a change in control of MGi2
or an unsolicited acquisition proposal that a stockholder might consider
favorable, including a proposal that might result in the payment of a premium
over the market price for the shares held by stockholders. These provisions are
summarized in the following paragraphs.
SUPERMAJORITY VOTING. Except as required under the Investment Company Act,
our Certificate of Incorporation requires the approval of the holders of at
least 75% of the then outstanding shares of our capital stock entitled to vote
thereon, among other things, certain amendments to the Certificate of
Incorporation. The board may amend any bylaws without the assent or vote of the
stockholders, but any bylaws made by the board may be amended upon the
affirmative vote of at least 66 2/3% of the stock entitled to vote thereon.
AUTHORIZED BUT UNISSUED OR UNDESIGNATED CAPITAL STOCK. Our authorized
capital stock will consist of 50,000,000 shares of common stock and 10,000,000
shares of preferred stock. After the offering, MGi2 will have outstanding
3,400,000 shares of common stock (assuming the underwriters' over-allotment
options are not exercised). The authorized but unissued (and in the case of
preferred stock, undesignated) stock may be issued by our board in one or more
transactions. In this regard, our Certificate of Incorporation grants the board
broad power to establish the rights and preferences of authorized and unissued
preferred stock. The issuance of shares of preferred stock pursuant to the
board's authority described above could decrease the amount of earnings and
assets available for distribution to holders of common stock and adversely
affect the rights of such holders and may also have the effect of delaying,
deferring or preventing a change in control of MGi2. The board does not
currently intend to seek stockholder approval prior to any issuance of preferred
stock, unless otherwise required by law.
SPECIAL MEETING OF STOCKHOLDERS. Our Certificate of Incorporation and
Bylaws provide that special meetings of stockholders of MGi2 may only be called
by the Chairman of the board of directors upon the written request of the board
pursuant to a resolution approved by a majority of the whole board.
STOCKHOLDER ACTION BY WRITTEN CONSENT. Our Certificate of Incorporation and
Bylaws generally provide that any action required or permitted by the
stockholders of MGi2 must be effected at a duly
57
<PAGE>
called annual or special meeting of the stockholders and may not be effected by
any written consent of the stockholders.
NOTICE PROCEDURES. Our Bylaws establish advance notice procedures with
regard to, among other things, stockholder proposals relating to the nomination
of candidates for election as director, the removal of directors and amendments
to the Certificate of Incorporation or Bylaws to be brought before annual
meetings of our stockholders. These procedures provide that notice of such
stockholder proposals must be timely given in writing to our secretary prior to
the annual meeting. Generally, to be timely, notice must be received at our
principal executive offices not less than 80 days prior to an annual meeting (or
if fewer than 90 days' notice or prior public disclosure of the date of the
annual meeting is given or made by us, not later than the tenth day following
the date on which the notice of the date of the annual meeting was mailed or
such public disclosure was made). The notice must contain certain information
specified in the Bylaws, including a brief description of the business desired
to be brought before the annual meeting and certain information concerning the
stockholder submitting the proposal.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of our common stock could be adversely affected by the sale
of substantial amounts of common stock in the public market. Upon consummation
of the offering there will be 3,400,000 shares of common stock issued and
outstanding, assuming the underwriters' over-allotment option is not exercised.
All of the 1,900,000 shares sold in the offering, except shares acquired by our
affiliates, will be freely tradable.
None of the 1,500,000 shares of common stock outstanding at the time of the
offering were issued in a transaction registered under the Securities Act, and,
accordingly, such shares may not be sold except in transactions registered under
the Securities Act or an exemption from registration, including the exemption
contained in Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned his or her shares for at
least one year, or a person who may be deemed an "affiliate" of MGi2 who has
beneficially owned shares for at least one year, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of the common stock or the average
weekly trading volume of the common stock during the four calendar weeks
preceding the date on which notice of the proposed sale is sent to the SEC.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about
MGi2. A person who is not deemed to have been an affiliate of MGi2 at any time
for 90 days preceding a sale and who has beneficially owned his shares for at
least two years would be entitled to sell such shares under Rule 144 without
regard to the volume limitations, manner of sale provisions, notice requirements
or the availability of current public information about MGi2.
We have authorized the issuance of up to 650,000 shares of our common stock
in accordance with the terms of the 2000 Stock Plan. We anticipate that upon
closing of this offering we will grant under the 2000 Stock Plan:
- options to purchase an aggregate of 181,500 shares of common stock to
certain of our employees;
- options to purchase an aggregate of 75,000 shares of common stock to three
non-employee directors; and
- options to purchase an aggregate of 70,000 shares of common stock to seven
advisory board members.
Of the 181,500 options granted to our employees, as part of the share exchange
we will issue 161,500 options in exchange for outstanding options of McFarland,
Grossman. See "Management--2000 Stock Plan."
58
<PAGE>
We intend to file a registration statement on Form S-8 under the Securities
Act registering the issuance of shares upon exercise of options granted under
the 2000 Stock Plan. As a result, these shares will be eligible for resale in
the public market.
We have agreed not to sell or offer any shares of common stock or options,
rights or warrants to acquire any common stock for a period of 180 days after
the consummation of the offering without the prior written consent of the
managing underwriter, except for shares issued pursuant to the exercise of
options granted under the 2000 Stock Plan, the over-allotment option granted to
the underwriters and the warrants granted to the managing underwriter. Further,
certain of our executive officers and employee directors who beneficially own
approximately 1,560,000 shares in the aggregate have agreed not to directly or
indirectly sell or offer for sale or otherwise dispose of any common stock for a
period of two years after the date of this prospectus without the prior written
consent of the managing underwriter. After one year, our executive officers and
employee directors may sell or dispose of up to 20% of the shares of common
stock owned by such person. Each of our outside directors and advisory board
members have agreed not to directly or indirectly sell or offer for sale or
otherwise dispose of any common stock for a period of one year after the date of
this prospectus without the prior written consent of the managing underwriter.
Prior to this offering, there has been no established trading market for the
common stock, and no predictions can be made as to the effect that sales of
common stock under Rule 144, pursuant to a registration statement, or otherwise,
or the availability of shares of common stock for sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of common stock
in the public market, or the perception that such sales could occur, could
depress the prevailing market price. Those sales may also make it more difficult
for us to issue or sell equity securities or equity-related securities in the
future at a time and price that it deems appropriate. See "Risk Factors--Risks
Associated With This Offering--Shares eligible for future sale may affect the
price of common stock."
59
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among us and the underwriters, each of the underwriters named below, for whom
Capital West Securities, Inc. is acting as a representative, has severally
agreed to purchase from us the number of shares of common stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER PRINCIPAL BUSINESS ADDRESS SHARES
- ----------- ------------------------------ ---------
<S> <C> <C>
Capital West Securities, Inc....... 211 North Robinson
Suite 200
Oklahoma City, OK 73102
I-Bankers Securities, Inc.......... 122 W. Carpenter Freeway
Suite 465
Irving, TX 75039
APS Financial Corporation.......... 1301 Capital of Texas Highway
Suite B-220
Austin, TX 78746
---------
Total.......................... 1,900,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions. The nature of the underwriters' obligations
is that they are committed to purchase and pay for all of the above shares of
common stock if any are purchased.
PUBLIC OFFERING PRICE AND DEALERS CONCESSION
The underwriters propose initially to offer the shares of common stock
offered by this prospectus to the public at the public offering price per share
set forth on the cover page of this prospectus and to certain dealers, who are
members of the NASD, at that price less a concession not in excess of $ per
share. The underwriters may allow, and these dealers may reallow, a discount not
in excess of $ per share on sales to certain other NASD member dealers. After
commencement of this offering, the offering price, discount price and
reallowance may be changed by the underwriters. No such change will alter the
amount of proceeds to be received by us as set forth on the cover page of this
prospectus.
OVER-ALLOTMENT OPTION
We have granted the underwriters an option, which may be exercised within
45 days after the date of this prospectus, to purchase up to 285,000 additional
shares of common stock to cover over-allotments, if any, at the initial public
offering price, less the underwriting discount set forth on the cover page of
this prospectus. If the underwriters exercise their over-allotment option to
purchase any of these additional 285,000 shares of common stock, these
additional shares will be sold by the underwriters on the same terms as those on
which the shares offered by this prospectus are being sold. We will be
obligated, pursuant to the over-allotment option, to sell shares to the
underwriters if the underwriters exercise their over-allotment option. The
underwriters may exercise their over-allotment option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered by this prospectus. To the extent that the underwriters exercise this
option, each underwriter will have an obligation, subject to certain conditions,
to purchase a number of shares of common stock proportionate to each
underwriter's obligation set forth in the foregoing table.
60
<PAGE>
NON-ACCOUNTABLE EXPENSE ALLOWANCE
We have agreed to pay the managing underwriter, Capital West, a
non-accountable expense allowance of 3% of the gross proceeds derived from the
sale of the shares of common stock underwritten (including the sale of any
shares of common stock that the underwriters' may sell to cover over-allotments,
if any, pursuant to the over-allotment option), $50,000 of which has been paid
as of the date of this prospectus. We have also agreed to pay all expenses in
connection with qualifying the common stock offered hereby for sale under the
laws of such states as we and the underwriters may designate and registering the
offering with the NASD, including filing fees and expenses of counsel retained
for these purposes.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
paid by us............................ $ $ $ $
Expenses payable by us.................. $ $ $ $
</TABLE>
INDEMNIFICATION OF UNDERWRITERS
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in connection with these
liabilities.
UNDERWRITERS' WARRANTS
In connection with the formation of MGi2, we sold to Capital West warrants
covering an aggregate of up to 190,000 shares of common stock exercisable at a
price of $9.60, subject to adjustment to be 120% of the initial public offering
price per share. Capital West paid a purchase price of $5,000 for the warrants.
Capital West may exercise these warrants as to all or any lesser number of the
underlying shares of common stock commencing on the first anniversary of the
date of this offering until the fifth anniversary of the date of this offering.
The exercise price of these warrants and the number of shares of common stock
for which these warrants are exercisable are subject to adjustment to protect
the warrant holders against dilution in certain events. Capital West may assign
these warrants to the other underwriters and certain affiliates.
LOCK-UP AGREEMENTS
In connection with this offering, each of our directors, officers, certain
major stockholders and affiliates have entered into lock-up agreements with the
managing underwriter. Under the terms of the lock-up agreements, our executive
officers, employee directors and certain major stockholders (Cary M. Grossman,
the Grossman Family Limited Partnership and Clifford E. McFarland) have agreed
not (without the approval of the managing underwriter) to sell, transfer or
otherwise dispose of any shares of our common stock owned by them or issuable to
them pursuant to options, warrants or otherwise for a period of 36 months from
the date of this prospectus, except that after 12 months from the date of this
prospectus each of these parties, may sell or otherwise dispose of up to 10% of
our shares of common stock owned by such party; provided, however, if after such
12-month period, the market price per share of our common stock is at least two
times the initial public offering price per share of our common stock for a
period of 20 consecutive trading days, then such party may dispose of any or all
shares of common stock owned by such party subject to applicable securities
laws. Under the lock-up agreements with our non-employee directors and advisory
board members, our non-employee directors and advisory board members have agreed
not (without the approval of the managing underwriter) to sell, transfer or
otherwise dispose of any shares of our common stock owned by them or issuable to
them pursuant to the exercise of any options or warrants for a period of
12 months from the date of this prospectus. We have also agreed that, without
the prior consent of Capital West, we will not issue or otherwise offer or sell
any shares of common stock or any options or warrants to purchase common stock
for a period of 180 days following the
61
<PAGE>
consummation of the offering, other than pursuant to the 2000 Option Plan, the
over-allotment option or the warrants issued to the underwriters.
CONSULTING SERVICES
Capital West was employed by McFarland, Grossman prior to the offering to
provide certain consulting services to McFarland, Grossman regarding the
feasibility of forming an Internet focused investment banking firm, and was paid
$5,500 in connection with such services.
COORDINATION
The underwriters have entered into an agreement that provides for the
coordination of their activities. Pursuant to the agreement, the underwriters
are permitted to sell shares of common stock to each other for purposes of
resale at the public offering price, less an amount not greater than the selling
concession.
No action has been or will be taken in any jurisdiction (except the United
States) that would permit a public offering of the shares of our common stock,
or the possession, circulation or distribution of this prospectus or any other
material relating to us or shares of our common stock in any jurisdiction where
action for that purpose is required. Accordingly, the shares of our common stock
may not be offered or sold, directly or indirectly, and neither this prospectus
nor any other offering material or any advertisement in connection with the
shares of our common stock may be distributed or published, in or from any
country or jurisdiction except in compliance with any applicable rules and
regulations of any such country or jurisdiction.
STABILIZATION AND OTHER TRANSACTIONS
In connection with this offering, Capital West, as managing underwriter may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the common stock. These transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M under the
Exchange Act, pursuant to which Capital West may bid for, or purchase, common
stock for the purpose of stabilizing the market price. Capital West also may
create a short position by selling more common stock in connection with this
offering than it is committed to purchase from us, and in such case may purchase
common stock in the open market following completion of this offering to cover
all or a portion of such short position. In addition, Capital West may impose
"penalty bids" whereby it may reclaim from a dealer participating in this
offering, the selling concession with respect to the common stock that it
distributed in this offering, but which was subsequently purchased for the
accounts of the underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
common stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in the paragraph is required, and, if
they are undertaken, they may be discontinued at any time.
DISCRETIONARY ACCOUNTS
The underwriters have informed us that they do not intend to confirm sales
to any account over which they exercise discretionary authority.
DETERMINATION OF OFFERING PRICE
Prior to this offering, there has been no market for our common stock.
Accordingly, the initial public offering price for the common stock was
determined by negotiation between us and the underwriters. Among the factors
considered in determining the initial public offering price were our results of
operations, our current financial condition, our future prospects, the state of
the markets for our services, the experience of our management, the economics of
the e-commerce industry in general, the general condition of the equity
securities market and the demand for similar securities of companies considered
comparable to us.
62
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the common stock being offered
hereby and the validity of the shares of common stock being offered hereby will
be passed upon for MGi2 by Andrews & Kurth L.L.P., Houston, Texas. Certain legal
matters in connection with the offering will be passed upon for the Underwriters
by Conner & Winters, a Professional Corporation, Oklahoma City, Oklahoma.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement, to the extent and for the periods indicated in their
reports, have been audited by Arthur Andersen LLP and Weinstein Spira & Company,
P.C. independent public accountants, and are included herein in reliance upon
the authority of said firms as experts in giving said reports.
CUSTODIAN, TRANSFER AGENT AND REGISTRAR
Frost National Bank, 100 West Houston Street, San Antonio 78296 will act as
custodian of our portfolio securities in compliance with applicable regulations
under the Investment Company Act. Harris Trust & Savings Bank, 311 West Monroe
Street, Chicago, Illinois 60606, will act as our transfer agent and registrar.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective January 4, 2000, Arthur Andersen LLP was engaged as our
independent auditors and replaced Weinstein Spira & Company, P.C. who were
dismissed as our independent accountants on the same date. The decision to
change auditors was approved by our board of directors on December 29, 1999.
Prior to their termination, our former auditors issued a report dated
January 22, 1999 on the periods ended December 31, 1997 and December 31, 1998.
The report of our former auditors did not contain an adverse opinion or
disclaimer of opinion nor was it qualified or modified as to any uncertainty,
audit scope or accounting principle. In connection with the audit for the period
from 1997 through 1998, there were no disagreements with our former auditors on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, which, if not resolved to the satisfaction of
our former auditors, would have caused them to refer to such disagreement in
their report on the financial statements for such period. Prior to January 4,
2000, we had not consulted with Arthur Andersen LLP on items that involved our
accounting principles or the form of audit opinion to be issued on our financial
statements. We have requested that our former auditors furnish us with a letter
addressed to the SEC stating whether or not they agree with the above
statements. A copy of this letter, dated January 11, 2000, is filed as
Exhibit n(3) to the registration statement of which this prospectus is a part.
63
<PAGE>
After the exchange transaction discussed in Note 1 to MGi2, Inc.'s consolidated
financial statements is effected, we expect to be in a position to render the
following audit report.
/s/ Arthur Andersen LLP
Houston, Texas
January 14, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MGi2, Inc.:
We have audited the accompanying consolidated statement of financial
condition of MGi2, Inc., as of December 31, 1999, and the related statements of
income (loss), stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MGi2, Inc.,
as of December 1999, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Houston, Texas
January 14, 2000 (except with
respect to the matters discussed in
Notes 1 and 15, as to which the date is
, 2000).
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
McFarland, Grossman & Company, Inc.
We have audited the accompanying Statements of Financial Condition of
McFarland, Grossman & Company, Inc. as of December 31, 1998, and the related
Statements of Income, Shareholders' Equity and Cash Flows for the two years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of McFarland, Grossman &
Company, Inc. as of December 31, 1998, and the results of its operations and
cash flows for the two years then ended, in conformity with generally accepted
accounting principles.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
January 22, 1999
F-2
<PAGE>
MGI2, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS................................... $ 377 $ 215
ACCOUNTS RECEIVABLE......................................... 5 51
MARKETABLE SECURITIES HELD AS COLLATERAL FOR NOTES
RECEIVABLE FROM RELATED PARTIES........................... 615 568
SECURITIES OWNED:
Marketable................................................ 217 82
Not readily marketable.................................... 31 --
PROPERTY AND EQUIPMENT, net................................. 74 69
FEDERAL INCOME TAX RECEIVABLE............................... 47 112
OTHER ASSETS................................................ 9 60
------ ------
Total assets................................ $1,375 $1,157
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses..................... $ 36 $ 134
Notes payable to related parties.......................... 180 192
Deferred federal income tax............................... 241 210
------ ------
Total liabilities........................... 457 536
------ ------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, .01 par value, 50,000,000 shares authorized,
1,500,000 shares issued and outstanding................. 15 15
Additional paid-in capital................................ 88 88
Retained earnings......................................... 815 518
------ ------
Total stockholders' equity.................. 918 621
====== ======
Total liabilities and stockholders'
equity.................................... $1,375 $1,157
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MGI2, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Investment banking fees................................ $ 1,814 $ 2,824 $ 1,083
Dividends and interest................................. 6 88 54
Net gain (loss) on securities.......................... 497 70 (4)
Other income........................................... 149 67 7
---------- ---------- ----------
Total revenues........................... 2,466 3,049 1,140
COMPENSATION AND BENEFITS................................ 1,251 2,328 1,192
OTHER OPERATING EXPENSES................................. 399 497 387
---------- ---------- ----------
INCOME (LOSS) BEFORE TAXES............................... 816 224 (439)
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current................................................ 124 48 (111)
Deferred............................................... 170 39 (31)
---------- ---------- ----------
294 87 (142)
---------- ---------- ----------
NET INCOME (LOSS)........................................ 522 137 (297)
PREFERRED STOCK DIVIDENDS................................ 6 3 --
---------- ---------- ----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS.... $ 516 $ 134 $ (297)
========== ========== ==========
INCOME (LOSS) PER SHARE:
Basic.................................................. $ .34 $ .09 $ (.20)
---------- ---------- ----------
Diluted................................................ $ .30 $ .08 $ (.20)
========== ========== ==========
SHARES USED IN COMPUTING BASIC INCOME (LOSS) PER SHARE... 1,500,000 1,500,000 1,500,000
========== ========== ==========
SHARES USED IN COMPUTING DILUTED INCOME (LOSS) PER
SHARE.................................................. 1,743,613 1,754,242 1,500,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MGI2, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS B SERIES A SERIES B ADDITIONAL TOTAL
COMMON COMMON PREFERRED PREFERRED PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK STOCK STOCK CAPITAL EARNINGS EQUITY
-------- -------- --------- --------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996.......... $15 $ -- $ 35 $ -- $88 $ 185 $ 323
Net income........................ -- -- -- -- -- 522 522
Issuance of 97,500 shares of
preferred stock for cash........ -- -- -- 97 -- (15) 82
Accretion of preferred stock...... -- -- 5 -- -- (5) --
Dividends paid on preferred
stock........................... -- -- -- -- -- (6) (6)
Redemption of 10,000 shares of
preferred stock................. -- -- (40) -- -- -- (40)
--- ---- ---- ---- --- ----- -----
BALANCE, December 31, 1997.......... 15 -- -- 97 88 681 881
Net income........................ -- -- -- -- -- 137 137
Dividends paid on preferred
stock........................... -- -- -- -- -- (3) (3)
Redemption of 97,500 shares of
preferred stock................. -- -- -- (97) -- -- (97)
--- ---- ---- ---- --- ----- -----
BALANCE, December 31, 1998.......... 15 -- -- -- 88 815 918
Net loss.......................... -- -- -- -- -- (297) (297)
Exercise of employee stock
options......................... -- 19 -- -- -- -- 19
Repurchase of common stock and
retirement...................... -- (19) -- -- -- -- (19)
--- ---- ---- ---- --- ----- -----
BALANCE, December 31, 1999.......... $15 $ -- $ -- $ -- $88 $ 518 $ 621
=== ==== ==== ==== === ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MGI2, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 522 $ 137 $(297)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization......................... 24 32 37
Bad debt expense...................................... 1 6 9
Deferred income tax provision (benefit)............... 170 39 (31)
Changes in assets and liabilities-
Accounts receivable................................. (12) 39 (55)
Marketable securities held as collateral for notes
receivable from related parties................... -- (124) 47
Securities owned.................................... (601) 47 166
Federal income tax receivable....................... 2 (47) (65)
Other assets........................................ (1) 5 (51)
Accounts payable and accrued expenses............... 1 4 98
Federal income tax payable.......................... 120 (120) --
Notes for the repurchase of employee stock.......... -- -- 12
----- ------ -----
Net cash provided by (used in) operating
activities...................................... 226 18 (130)
----- ------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (33) (52) (32)
----- ------ -----
Net cash used in investing activities............. (33) (52) (32)
----- ------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments on) notes payable to related
parties................................................. (3) 179 --
Proceeds from sale of preferred stock, net of issuance
costs................................................... 82 -- --
Redemption of preferred stock............................. (40) (97) --
Dividends paid............................................ (6) (3) --
----- ------ -----
Net cash provided by financing activities......... 33 79 --
----- ------ -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 226 45 (162)
CASH AND CASH EQUIVALENTS, beginning of year................ 106 332 377
----- ------ -----
CASH AND CASH EQUIVALENTS, end of year...................... $ 332 $ 377 $ 215
===== ====== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 1 $ 1 $ 5
Cash paid during the year for taxes, net of refunds....... 2 215 --
NONCASH FINANCING ACTIVITY:
Accretion of preferred stock preference value............. 5 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
MGI2, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
MGi2, Inc. (the Company), is an investment banking firm specializing in
strategic financial and business advisory services, merchant banking services
and incubation services. The Company was formed in February 2000 as a Delaware
company, owned by the same individuals that own McFarland, Grossman & Company,
Inc. (McFarland, Grossman). Concurrent with the effective date of this
registration statement, MGi2, Inc., exchanged two shares of its common stock for
every one share of the outstanding common stock of McFarland, Grossman, with the
effect that McFarland, Grossman became a wholly owned subsidiary of MGi2, Inc.
The accompanying consolidated financial statements reflect the exchange of
shares between the Company and McFarland, Grossman as of December 31, 1999, and
stockholders' equity and per share amounts are restated for all periods
presented. The financial statements present the historical financial position
and operations of McFarland, Grossman. References to the Company refer to
McFarland, Grossman, individually, and MGi2, Inc., as the consolidated entity.
The Company has elected to be a business development company under the
Investment Company Act of 1940, as amended.
McFarland, Grossman, a Texas C Corporation, is a private investment banking
firm and fully disclosed securities broker-dealer. McFarland, Grossman is
registered as a broker-dealer with the Securities and Exchange Commission and is
a member of the National Association of Securities Dealers, Inc. McFarland,
Grossman was registered with the Securities and Exchange Commission as an
investment advisor until 1998, when McFarland, Grossman discontinued its retail
investment advisory business and withdrew its registration.
The success of the Company involves a high degree of risk. Those risks
include, but are not limited to, dependence on key personnel and a new operating
strategy for the Company that is focused on working with information technology,
Internet and eCommerce companies, many of which will have limited operating
histories and all of which face intense competition. Success of the Company also
depends on the Company achieving profitable operations, raising adequate
capital, operating within regulatory constraints and effectively competing with
other investment banking firms that have greater resources and access to capital
than the Company. For a more complete description of the Company's risks, see
"Risk Factors" included elsewhere in this prospectus.
STATEMENT PRESENTATION
The unclassified consolidated statements of financial condition are
presented in accordance with industry standards.
REVENUE RECOGNITION
Revenues for investment banking services are recognized when all of the
following have occurred: a contract has been entered into with a client,
services have been rendered, the fee amount has been determined and
collectibility is reasonably assured. Fees received in the form of equity
securities are recorded at the fair market value of the securities received.
Earnings are charged with a provision for doubtful accounts based on collection
experience and current review of collectibility of accounts. Accounts deemed
uncollectible are applied against the allowance for doubtful accounts.
F-7
<PAGE>
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents.
SECURITIES OWNED
Marketable securities, consisting of equity securities, are stated at market
value. Not readily marketable securities are valued by management based upon
valuation models commonly used in the venture capital industry, which include
various factors such as multiples of revenues, earnings and cash flow. Due to
the inherent uncertainty of the valuation process, estimated values at the end
of an accounting period may differ significantly from the values that would have
been realized in a sale at that date had a ready market for the securities
existed, and the differences may be material. The increase or decrease in net
unrealized appreciation or depreciation is charged to operations as part of net
gain (loss) on securities.
PROPERTY AND EQUIPMENT
The Company records its property and equipment at cost, less accumulated
depreciation and amortization. Depreciation is computed on accelerated methods
over estimated useful lives of five to seven years or, in the case of leasehold
improvements, amortized over the remaining term of the lease. Maintenance and
repairs that do not improve or extend the life of assets are expensed as
incurred.
INCOME TAXES
The Company accounts for income taxes using the liability method in which
deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. The provision for income taxes is
the income tax payable for the year and the change during the year in deferred
tax assets and liabilities.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable,
marketable securities held as collateral for notes receivable from related
parties, securities owned, accounts payable and notes payable. The Company
believes that the carrying value of these instruments on the accompanying
consolidated statements of financial condition approximates their fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk consist primarily of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions which
may at times be in excess of federally insured levels. The Company has not
incurred losses related to these balances to date. In addition, the Company
maintains an allowance account on its accounts receivable that has been adequate
to cover losses incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ
F-8
<PAGE>
from those estimates. Significant estimates are involved in determining the fair
value of equity securities received for fees and the carrying value of not
readily marketable securities owned.
NEW PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which is effective for fiscal years beginning after
June 15, 2000. Management of the Company does not anticipate that this statement
will have any significant impact on the Company's results of operations or
financial condition because the Company records its investments, including
derivative investments, at fair market value with changes in fair values
included in earnings.
2. MARKETABLE SECURITIES HELD AS COLLATERAL FOR NOTES RECEIVABLE FROM RELATED
PARTIES:
In June 1998, the Company sold 190,000 shares of its investment in Pentacon,
Inc., common stock to seven of its then stockholders and employees at a purchase
price equal to approximately $9.98 per share. Each purchaser issued a promissory
note to the Company in consideration of the full purchase price of the shares.
The notes provided for payment of interest at an annual rate of 5.51 percent,
payable on December 31, 1998 and 1999, with the principal balance and accrued
interest due and payable on July 14, 2000. Each of these notes was secured by
the common shares of Pentacon, Inc. In March 1999, due to a precipitous decline
in the value of the Pentacon, Inc., common stock, the terms of the original sale
of the common stock to three of the employees were modified by reducing the
purchase price to $3.05 per share, increasing the interest rate on the note to 8
percent per annum and extending the maturity date of the note to December 31,
2001. During 1999, two employees defaulted on their notes, and the Company
exercised its right to foreclose on the collateral securing the notes. At
December 31, 1999, notes from three former employees were in default and,
subsequently, the Company exercised its right to foreclose on the collateral
securing these notes. The current principal balance on each of the two remaining
modified promissory notes is $213,500.
The following details notes receivable from the Company's stockholders and
employees as of December 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Contractual balance of promissory notes from stockholders
and employees, secured by equity securities............... $ 1,869 $ 876
Less--Valuation allowance to reduce value of notes
receivable to fair market value of securities pledged as
collateral.............................................. (1,254) (308)
------- -----
$ 615 $ 568
======= =====
</TABLE>
For accounting purposes, this sale has not been recognized and the shares of
the Pentacon, Inc., common stock are carried at the lesser of fair market value
or the contractual note balance in the accompanying consolidated statements of
financial condition. Changes in the fair value of the shares are reflected in
earnings as net gain (loss) on securities.
F-9
<PAGE>
3. PROPERTY AND EQUIPMENT:
Property and equipment as of December 31, 1998 and 1999, consist of the
following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1998 1999
------------ -------- --------
<S> <C> <C> <C>
Computers and software............................. 5 years $ 80 $ 110
Furniture and fixtures............................. 5-7 years 89 91
Leasehold improvements............................. 2 years 3 3
---- -----
Total.......................................... 172 204
Less- Accumulated depreciation..................... (98) (135)
---- -----
Property and equipment, net.................... $ 74 $ 69
==== =====
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consists of the following at
December 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Accounts payable, trade..................................... $17 $ 16
Accrued bonus............................................... -- 40
Accrued professional fees................................... 10 60
Other accrued expenses...................................... 9 18
--- ----
Total................................................... $36 $134
=== ====
</TABLE>
5. NOTES PAYABLE TO RELATED PARTIES:
Notes payable to related parties as of December 31, 1998 and 1999, consists
of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Subordinated notes payable to stockholders, interest of
13.5%, principal and interest due in April 2002........... $180 $180
Notes payable to former employees, interest of 8.0%, monthly
installments of principal and interest, with final payment
due in June 2002.......................................... -- 12
---- ----
Total................................................... $180 $192
==== ====
</TABLE>
The original notes payable to stockholders were modified effective March 8,
1999, to be subordinated agreements, whereby the principal amounts remained the
same, the interest rate increased from 10 percent to 13.5 percent and the
maturity date changed from January 31, 2000, to April 30, 2002. These notes are
subordinated to the claims of the general creditors of the Company.
The subordinated notes are available in computing net capital under the
SEC's uniform net capital rule. To the extent that such borrowings are required
for the Company's continued compliance with minimum net capital requirements,
they may not be repaid.
F-10
<PAGE>
5. NOTES PAYABLE TO RELATED PARTIES: (CONTINUED)
The aggregate maturities of notes payable to related parties as of
December 31, 1999, are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................... $ 5
2001........................................... 5
2002........................................... 182
----
$192
====
</TABLE>
6. INCOME TAXES:
The provision (benefit) for income taxes differs from an amount computed at
the statutory rate as follows for the years ended December 31, 1997, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal income tax provision (benefit) at statutory
rates.................................................. $278 $76 $(149)
Nondeductible items...................................... 3 3 3
Other.................................................... 13 8 4
---- --- -----
$294 $87 $(142)
==== === =====
</TABLE>
The significant items giving rise to the deferred tax assets and liabilities
are as follows as of December 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets--
Accrued expenses.......................................... $ -- $ 6
Allowance for doubtful accounts receivable................ 1 3
---- ----
Total deferred tax assets........................... 1 9
---- ----
Deferred tax liabilities--
Bases differences in property and equipment............... 8 17
Unrealized gains and losses............................... 234 202
---- ----
Total deferred tax liabilities...................... 242 219
---- ----
Net deferred tax liability.......................... $241 $210
==== ====
</TABLE>
F-11
<PAGE>
7. EARNINGS PER SHARE
The following reconciles the income and shares used in the basic and diluted
earnings per share calculations (in thousands, except share and per share data):
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income (loss)........................ $ 522 $ 137 $ (297)
Less--Preferred stock dividends........ (6) (3) --
---------- ---------- ----------
Net income (loss) attributable to common
stockholders $ 516 $ 134 $ (297)
========== ========== ==========
Weighted average number of shares
outstanding............................ 1,500,000 1,500,000 1,500,000
========== ========== ==========
Net earnings (loss) per basic share...... $ .34 $ .09 $ (.20)
========== ========== ==========
DILUTED EARNINGS PER SHARE
Net income (loss)........................ $ 522 $ 137 $ (297)
Less--Preferred stock dividends........ (6) (3) --
---------- ---------- ----------
Net earnings (loss) attributable to
common stockholders.................... $ 516 $ 134 $ (297)
========== ========== ==========
Weighted average number of shares
outstanding............................ 1,500,000 1,500,000 1,500,000
Dilutive effect, stock options........... 243,613 254,242 --
========== ========== ==========
1,743,613 1,754,242 1,500,000
========== ========== ==========
Net income (loss) per diluted share...... $ .30 $ .08 $ (.20)
========== ========== ==========
</TABLE>
There were 161,500 options excluded from the computation of diluted earnings
per share in 1999 as their inclusion would have had an antidilutive effect on
the computation.
8. SIGNIFICANT CLIENTS
During the year ended December 31, 1997, two clients accounted for
approximately 20 and 66 percent, respectively of total investment banking fees
earned by the Company. During the year ended December 31, 1998, three clients
accounted for approximately 33, 47 and 11 percent, respectively, of total
investment banking fees earned by the Company. Three clients accounted for
approximately 24, 29 and 14 percent, respectively, of total investment banking
fees for the year ended December 31, 1999.
9. OPERATING LEASES:
The Company leases office and off-site storage space and equipment through
lease agreements that expire between 2000 and 2001. Total expenses incurred
under these agreements for the years ended December 31, 1997, 1998 and 1999,
were approximately $88,000, $93,000 and $84,000, respectively.
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
For the year ending December 31--
2000............................................... $ 81
2001............................................... 22
----
$103
====
</TABLE>
F-12
<PAGE>
10. NET CAPITAL REQUIREMENTS:
Pursuant to the net capital provisions of Rule 15c3-1 of the Securities
Exchange Act of 1934, the Company is required to maintain a minimum net capital,
as defined under such provisions. Net capital and the related net capital ratio
may fluctuate on a daily basis.
At December 31, 1999, the Company had net capital of approximately $140,000
and a net capital requirement of $50,000. The Company's ratio of aggregate
indebtedness to net capital was .91 to 1. The Securities and Exchange Commission
permits a ratio for the Company at this time of no greater than 15 to 1.
11. PROFIT-SHARING PLAN:
Effective January 1, 1993, the Company adopted a profit-sharing plan with
401(k) provisions. This plan calls for discretionary contributions by the
Company as determined by the board of directors. Employee contributions are made
to the plan by electing to defer from 1 percent to 15 percent of an employee's
compensation. The employer is not required to make a matching contribution.
Employees are eligible to participate in the plan after they have attained 21
years of age and have completed six months of service. The Company made
contributions to the plan of approximately $1,800 and $9,200 during the years
ended December 31, 1997 and 1998, respectively. This plan was terminated in
May 1999. The Company then entered into an agreement with Administaff, the
Company's outside payroll administrator, to maintain the Company's 401(k) plan
for eligible employees under the same terms of the Company's former plan. The
Company made no contributions to the plan during the year ended December 31,
1999.
12. CAPITAL STOCK:
SERIES A NONVOTING CUMULATIVE, PREFERRED STOCK
On December 1, 1995, the Company designated 300,000 shares of its
nonconvertible preferred stock as Series A cumulative, preferred stock. The
shares were redeemable at the option of the Company at amounts and conditions as
defined by the Company's resolution that established the shares. Dividends were
payable quarterly beginning December 31, 1995, at an annual rate of $0.08 per
share. In the event of liquidation, the holders of the preferred stock were
entitled to the initial par value for each share held, plus an amount equal to
17 percent their initial investment, compounded on an annual basis, plus any
accrued but unpaid dividends. During the year ended December 31, 1995, the
Company sold 20,000 shares of Series A preferred stock for $20,000. Pursuant to
unanimous approval of the board of directors, the Company issued an additional
10,000 shares of preferred stock for $10,000 in March 1996.
On November 30, 1997, the Company elected to redeem the outstanding
Series A preferred stock at its preference amount of $40,461. Effective
January 1998, the Company revised its Articles of Incorporation to eliminate the
Series A preferred stock.
SERIES B NONVOTING CUMULATIVE, PREFERRED STOCK
On June 24, 1997, the Company designated 500,000 shares of its
nonconvertible preferred stock as Series B cumulative, preferred stock at $1.00
par value per share. The shares were redeemable at the option of the Company at
amounts and conditions as defined by the Company's resolution that established
the shares. Dividends were payable quarterly beginning September 30, 1997, at an
annual rate of $0.0825 per share. In the event of liquidation, the holders of
the preferred stock were entitled to the initial par value for each share held
plus any accrued but unpaid dividends. During the year ended December 31, 1997,
the Company sold four units, each consisting of 24,375 shares of Series B
preferred stock and a limited partnership interest in MGCO Investments, Ltd., a
related party. Each unit sold for $25,000, which was allocated $24,375 to the
preferred stock and $625 to the limited partnership interest.
On June 1, 1998, the Company elected to redeem the outstanding Series B
preferred stock at its preference amount of $97,500. Effective July 1998, the
Company revised its Articles of Incorporation to eliminate the Series B
preferred stock.
F-13
<PAGE>
13. STOCK OPTION PLAN:
On December 13, 1995, the Company adopted its 1995 stock option plan (the
1995 Plan) and authorized the issuance of 700,000 stock options. For each
option, the exercise price may not be less than the fair market value of a share
on the date the option is granted, vesting occurs ratably over periods ranging
from one to five years and expiration occurs between five and 10 years from the
date of grant. Upon termination or resignation of an employee, all options must
be exercised and the Company is required to purchase all of the stock of the
departing employee at its fair market value. Option grants may include stock
appreciation rights in order to allow for cashless option exercises. During
1999, three employees owning 100 percent vested options resigned and exercised
their rights to cashless option exercises. At the date of the cashless exercise,
the excess of the fair market value over the exercise price of the options of
approximately $19,000 has been recorded as compensation expense in the
accompanying consolidated statement of income (loss) for the year ended December
31, 1999.
The Company has adopted a new stock option plan, the MGi2, Inc. 2000 Stock
Plan (the 2000 Plan). As part of the exchange of shares discussed in Note 1, the
Company will issue options to purchase two shares of MGi2, Inc. common stock
under the 2000 Plan in exchange for each outstanding option to purchase one
share of common stock of McFarland, Grossman and will terminate the 1995 Plan.
The exercise price of the newly issued options shall be 50% of the exercise
price of the McFarland, Grossman options. The aggregate amount of common stock
with respect to which awards may be granted may not exceed 650,000 shares,
subject to adjustment to reflect stock splits. Options granted under the
2000 Plan may be either non-qualified stock options or may qualify as incentive
stock options.
Information with respect to options granted under the 1995 Plan and
subsequently exchanged for options under the 2000 Plan is as follows for the
years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER EXERCISE
OPTIONS SHARE PRICE
-------- ------------- --------
<S> <C> <C> <C>
Outstanding on December 31, 1996............ 222,500 $0.50 - $0.57 $0.56
Granted................................... 45,000 $ 0.50 $0.50
--------
Outstanding on December 31, 1997............ 267,500 $0.50 - $0.57 $0.55
Granted................................... 115,000 $0.67 - $1.28 $0.74
Forfeited................................. (84,000) $0.50 - $0.57 $0.56
--------
Outstanding on December 31, 1998............ 298,500 $0.50 - $1.28 $0.63
Granted................................... 165,000 $0.67 - $1.27 $0.78
Exercised................................. (253,600) $0.50 - $0.67 $0.59
Forfeited................................. (48,400) $0.57 - $1.27 $1.00
--------
Outstanding on December 31, 1999............ 161,500 $0.57 - $1.28 $0.72
========
</TABLE>
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Options exercisable on
December 31...................... 158,100 165,100 26,500
Weighted average contractual
life............................. 7.3 years 7.6 years 7.2 years
Exercise Price per share--
Exercisable on December 31....... $0.50 - $0.57 $0.50 - $0.57 $0.57 - $1.28
Unexercised on December 31....... $0.50 - $0.57 $0.50 - $1.28 $0.57 - $1.28
Weighted average price of
exercisable options............ $ 0.54 $ 0.55 $ 0.97
Weighted average fair value of
options granted during the
year........................... $ 0.13 $ 0.12 $ 0.30
</TABLE>
F-14
<PAGE>
The Company accounts for its employee stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for
which no compensation expense is recognized for employee stock options if there
is no intrinsic value at the date of grant.
Had the Company elected to apply Financial Accounting Standards Board SFAS
No. 123, "Accounting for Stock-Based Compensation," using the fair value-based
method, the Company's net income (loss) and net income (loss) per share amounts
would have been decreased (increased) to the following pro forma amounts (in
thousands, except for per share amounts).
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)--
As reported........................................... $522 $137 $(297)
Pro forma............................................. 513 126 (304)
Net income (loss) per share, basic--
As reported........................................... $.34 $.09 $(.20)
Pro forma............................................. .34 .08 (.20)
Net income (loss) per share, diluted--
As reported........................................... $.28 $.07 $(.18)
Pro forma............................................. .27 .07 (.19)
</TABLE>
The fair value of the options at date of grant was estimated for 1997, 1998
and 1999 using the Black-Scholes Model with the following assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate...................... 5.88% 5.25% 5.0%
Expected life................................ 5 years 2-5 years 2-5 years
Expected dividends........................... None None None
</TABLE>
The Black-Scholes option valuation model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of and are highly sensitive to subjective assumptions,
including the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
their fair value estimate.
14. ADDITIONAL TRANSACTIONS WITH RELATED PARTIES:
In connection with the Series B preferred stock offering, the Series B
stockholders also received limited partnership interests in MGCO Investments,
Ltd., a Texas limited partnership of which the Company was the sole general
partner. The Company had a securities sharing agreement, dated July 1997, with
MGCO Investments, Ltd., whereby MGCO Investments, Ltd., would receive 1 percent
of all securities that the Company earned for each $10,000 of Series B preferred
stock sold plus 1.01 percent of the above-determined percentage. During 1997,
MGCO Investments, Ltd., received warrants to purchase 5,000 shares of a client
under this arrangement. This arrangement was terminated during 1998.
From time to time, the Company receives warrants, options or shares of stock
as a portion of fees for its services. It has generally been the Company's
policy to give certain of these securities to its employees as a form of
compensation. During 1999, warrants valued by the Company at approximately
$100,000 were received as fees from customers and subsequently given to
employees. The related fees and compensation expense are recorded in investment
banking fees, and compensation and benefits in the accompanying statement of
income (loss) for the year ended December 31, 1999.
F-15
<PAGE>
In 1999, two stockholders purchased warrants with a fair value of $14,000
which were reflected as securities owned at the time of purchase. The warrants
were purchased in exchange for two promissory notes totaling $14,000. The notes
were paid off by the employees prior to December 31, 1999.
The Company received fees of approximately $20,000, $933,000 and none from
related parties during 1997, 1998 and 1999, respectively.
The Company paid insurance consulting fees of approximately $21,000 and
$19,000 during 1997 and 1998, respectively, to a company owned by the
stockholders of the Company. This company was dissolved in late 1998.
Interest income on notes receivable from related parties was approximately
$58,000 and $44,000 during 1998 and 1999, respectively.
Interest expense related to the notes payable to related parties was
approximately $900 and $23,000 during 1998 and 1999, respectively.
15. COMMITMENTS AND CONTINGENCIES:
The Company was named as a defendant in a lawsuit in which the plaintiff
claimed he was wrongfully deprived of a specific ownership percentage in
TransCoastal, a former client company that subsequently became publicly traded.
In February 2000, the Company was removed from this legal action. The Company
has instituted a legal action against TransCoastal to enforce the
indemnification provision of the financial advisory agreement between the
Company and TransCoastal. The Company believes, based on currently available
information, that the results of this action will not have a material adverse
effect on its results of operations or financial condition.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MGI2, INC.
[LOGO]
CAPITAL WEST SECURITIES, INC.
I-BANKERS SECURITIES, INC.
(EUROPEAN MANAGER)
WESTPORT RESOURCES INVESTMENT
SERVICES, INC.
APS FINANCIAL CORPORATION
UNTIL , ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Consolidated Financial Statements
The following consolidated financial statements of MGi2, Inc. (the
"Registrant" or "Company") are included in the Prospectus:
<TABLE>
<C> <S>
Report of Arthur Andersen LLP, Independent Public
Accountants
Independent Auditors' Report of Weinstein Spira & Company,
P.C.
Consolidated Statements of Financial Condition
Consolidated Statements of Income (Loss)
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
</TABLE>
2. Exhibits:
<TABLE>
<C> <S>
+ a(1) Certificate of Incorporation
* b Bylaws
c Not applicable
* d Specimen Common Stock Certificate
e Not applicable
f Not applicable
g Not applicable
* h(1) Form of Underwriting Agreement
* h(3) Form of Agreement Among Underwriters
* h(3) Form of Warrant Agreement
* i MGi2, Inc. 2000 Stock Plan
j Not applicable
* k(1) Form of Employment Agreement with Cary M. Grossman
* k(2) Form of Employment Agreement with Clifford E. McFarland
* k(3) Form of Officer and Director Indemnification Agreement
* k(4) Form of Lock Up Agreement with MGi2
* k(5) Form of Lock Up Agreement with Non-employee Directors
* k(6) Form of Lock Up Agreement with Officers and Certain
Affiliates
* k(7) Form of Lock Up Agreement with Advisory Board Members
</TABLE>
C-1
<PAGE>
<TABLE>
<C> <S>
+ k(8) Power of Attorney (included on signature page)
* l Opinion of Andrews & Kurth L.L.P.
m Not applicable
n(1) Consent of Arthur Andersen LLP
n(2) Consent of Weinstein Spira & Company, P.C.
+ n(3) Letter from Weinstein Spira & Company, P.C. regarding change
in Certifying Accountant
* n(4) Consent of Andrews & Kurth L.L.P. (included in Exhibit l)
n(5) Consent of Robert M. Chiste to be appointed director
n(6) Consent of Glyn J. Meek to be appointed director
n(7) Consent of Robert G. Solomon to be appointed director
o Not applicable
p Not applicable
q Not applicable
</TABLE>
- ------------------------
* to be filed by amendment.
+ previously filed.
ITEM 25. MARKETING ARRANGEMENTS
Not applicable. See "Underwriting"
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are the expenses (other than underwriting discounts,
commissions and non-accountable expense allowance) we expect to incur in
connection with the issuance and distribution of the securities registered
hereby. With the exception of the SEC registration fee, the NASD filing fee and
the AMEX filing fee, the amounts set forth below are estimates:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee........................................ $ 4,129
NASD filing fee............................................. 1,860
American Stock Exchange listing fee......................... 25,000
Printing and engraving expenses............................. 75,000
Legal fees and expenses..................................... 150,000
Accounting fees and expenses................................ 50,000
Transfer agent and registrar fees........................... 7,500
Miscellaneous............................................... 41,511
--------
TOTAL................................................... $355,000
========
</TABLE>
ITEM 27. PERSONS CONTROLLED OR UNDER CONTROL WITH REGISTRANT
<TABLE>
<CAPTION>
COMPANY JURISDICTION BASIS OF COMMON CONTROL
------- ------------ -----------------------
<S> <C> <C>
McFarland, Grossman & Company, Inc. Delaware 100% owned by MGi2
MGi2 Ventures, Inc. Delaware 100% owned by MGi2
MGi2 Capital, Inc. Delaware 100% owned by MGi2
</TABLE>
C-2
<PAGE>
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of January 31, 2000
<TABLE>
<CAPTION>
TITLE OF CLASS HOLDERS OF RECORD
- -------------- -----------------
<S> <C>
Common stock 2
</TABLE>
ITEM 29. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation, by reason of the fact that he
is or was a director, officer, employee or agent of the corporation), or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 145(b) provides that a corporation similarly may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
or in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled; that indemnification provided by Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators, and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
C-3
<PAGE>
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a
director (1) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (3) under Section
174 of the Delaware General Corporation Law or (4) for any transaction from
which the director derived an improper personal benefit.
MGi2's certificate of incorporation provides that indemnification shall be
to the fullest extent permitted by the DGCL for all current or former directors
or officers of MGi2. As permitted by the DGCL, the certificate of incorporation
provides that directors of MGi2 shall have no personal liability to MGi2 or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to
MGi2 or its stockholders, (2) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of the law, (3) under
Section 174 of the DGCL or (4) for any transaction from which a director derived
an improper personal benefit.
In addition, MGi2 has entered into agreements with various of its officers,
directors and advisory directors which provide for indemnification of those
individuals. MGi2 and certain other persons may be entitled under agreements
entered into with agents or underwriters to indemnification by such agents or
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribution with respect to payments which MGi2
or such persons may be required to make in respect thereof. Notwithstanding the
foregoing, for as long as the Company is regulated as a business development
company under the Investment Company Act, the foregoing indemnification rights
shall not include indemnification for actions or matters for which directors
cannot be indemnified under the provisions of the Investment Company Act.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
None.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
MGi2, Inc.
9821 Katy Freeway, Suite 500
Houston, Texas 77024
(800) 315-6979
ITEM 32. MANAGEMENT SERVICES
None.
ITEM 33. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions
described in Item 29, or otherwise, the registrant has been advised
that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any
C-4
<PAGE>
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(b) To provide to the underwriter(s) at the closing specified in the
underwriting agreements, certificates in such denominations and
registered in such names as required by the underwriter(s) to permit
prompt delivery to each purchaser.
(c) For purpose of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the registrant pursuant to Rule
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(e) To suspend the offering of shares until the prospectus is amended if
(1) subsequent to the effective date of the registrant's registration
statement, the net asset value declines more than ten percent from
the registrant's net asset value as of the effective date of the
registration statement or (2) the net asset value increases to an
amount greater than its net proceeds as stated in the prospectus.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston, in
the State of Texas, on March 15, 2000.
<TABLE>
<S> <C> <C>
MGi2, INC.
By: /s/ CARY M. GROSSMAN
-----------------------------------------
Cary M. Grossman
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
</TABLE>
C-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
<C> <S>
+ a(1) Certificate of Incorporation
* b Bylaws
c Not applicable
* d Specimen Common Stock Certificate
e Not applicable
f Not applicable
g Not applicable
* h(1) Form of Underwriting Agreement
* h(3) Form of Agreement Among Underwriters
* h(3) Form of Warrant Agreement
* i MGi2, Inc. 2000 Stock Plan
j Not applicable
* k(1) Form of Employment Agreement with Cary M. Grossman
* k(2) Form of Employment Agreement with Clifford E. McFarland
* k(3) Form of Officer and Director Indemnification Agreement
* k(4) Form of Lock Up Agreement with MGi2
* k(5) Form of Lock Up Agreement with Non-employee Directors
* k(6) Form of Lock Up Agreement with Officers and Certain
Affiliates
* k(7) Form of Lock Up Agreement with Advisory Board Members
+ k(8) Power of Attorney (included on signature page)
* l Opinion of Andrews & Kurth L.L.P.
m Not applicable
n(1) Consent of Arthur Andersen LLP
n(2) Consent of Weinstein Spira & Company, P.C.
+ n(3) Letter from Weinstein Spira & Company, P.C. regarding change
in Certifying Accountant
* n(4) Consent of Andrews & Kurth L.L.P. (included in Exhibit l)
n(5) Consent of Robert M. Chiste to be appointed director
n(6) Consent of Glyn J. Meek to be appointed director
n(7) Consent of Robert G. Solomon to be appointed director
o Not applicable
p Not applicable
q Not applicable
</TABLE>
- ------------------------
* to be filed by amendment.
+ previously filed.
L-1
<PAGE>
EXHIBIT N(1)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Houston, Texas
March 14, 2000
<PAGE>
EXHIBIT N(2)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use of our report (and to all references to our Firm)
dated January 22, 1999, on the financial statements of McFarland Grossman &
Company, Inc. in MGi2, Inc.'s Registration Statement on Form N-2.
/s/ WEINSTEIN SPIRA & COMPANY, P.C.
Weinstein Spira & Company, P.C.
Houston, Texas
March 14, 2000
<PAGE>
Exhibit 99(n)(5)
CONSENT
The undersigned hereby consents to being named in the Registration
Statement (the "Registration Statement") on Form N-2 of MGi2, Inc. ("MGi2")
as a director to be appointed after consummation of the initial public
offering of MGi2.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective
as of the 13th day of March, 2000.
/s/ Robert M. Chiste
------------------------
Robert M. Chiste
<PAGE>
Exhibit 99(n)(6)
CONSENT
The undersigned hereby consents to being named in the Registration
Statement (the "Registration Statement") on Form N-2 of MGi2, Inc. ("MGi2")
as a director to be appointed after consummation of the initial public
offering of MGi2.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective
as of the 13th day of March, 2000.
/s/ Glyn J. Meek
------------------------
Glyn J. Meek
<PAGE>
Exhibit 99(n)(7)
CONSENT
The undersigned hereby consents to being named in the Registration
Statement (the "Registration Statement") on Form N-2 of MGi2, Inc. ("MGi2")
as a director to be appointed after consummation of the initial public
offering of MGi2.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective
as of the 13th day of March, 2000.
/s/ Robert G. Solomon
-------------------------
Robert G. Solomon
