SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, For Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ADRENALIN INTERACTIVE, INC.
---------------------------
(Name of Registrant as Specified In Its Charter)
--------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange A Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|X| Fee paid previously with preliminary materials.
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|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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Adrenalin Interactive, Inc.
5301 Beethoven Street, Suite 255
Los Angeles, CA 90066-7047
(310) 821-7880
Dear Stockholder:
We will hold our 1999 Annual Meeting of Stockholders (the "Meeting")
at 10:00 a.m., local time, on November 11, 1999 at our offices, 5301 Beethoven
Street, Suite 255, Los Angeles, California 90066-7047.
As previously announced, we entered into an Agreement and Plan of
Merger dated as of April 28, 1999, as amended (the "Merger Agreement"), among
us, Adrenalin Acquisition Corporation, our wholly-owned subsidiary ("Merger
Sub"), McGlen Micro, Inc., a California corporation ("McGlen"), and the
principal stockholders of McGlen. Under the terms and subject to the conditions
of the Merger Agreement:
o Merger Sub is to merge into McGlen, and McGlen will thereby
become our wholly-owned subsidiary (the "Merger"); and
o We will issue to the McGlen securityholders shares of our
common stock and options to purchase shares of our common
stock equaling approximately 87.5% of the shares of our common
stock that will be outstanding (on a fully-diluted basis)
immediately following the merger (the "Merger Issuance").
At the Meeting, you will be asked to approve the Merger Issuance. If
the requisite approval of our stockholders is received and the other conditions
to closing are satisfied or waived, we expect the Merger to be consummated
within a few days after the Meeting.
At the Meeting, you will also be asked to consider and vote upon
proposals to:
o elect three directors to hold office until the consummation
of the Merger or, if the Merger is abandoned, until the next
annual meeting of stockholders;
o elect four directors to hold office, effective upon
consummation of the Merger, until the next annual meeting of
stockholders;
o ratify past and approve future issuances of our common stock
to an investor under the terms of an agreement we entered into
in July 1999;
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o approve an amendment to our Certificate of Incorporation
increasing the number of authorized shares of our common stock
to 50 million and increasing the number of authorized shares
of our preferred stock to 5 million (the "Authorized Shares
Amendment");
o approve our 1999 Long-Term Incentive Plan and the reservation
of 2,500,000 shares for issuance thereunder;
o approve a change of our corporate name to McGlen Internet
Group or such other name as our Board of Directors deems
appropriate, effective upon consummation of the Merger; and
o transact such other business as may properly come before the
Meeting and any adjournments thereof.
In the material accompanying this letter, you will find a Notice of
Meeting of Stockholders, a Proxy Statement relating to the actions to be taken
by our stockholders at the Meeting and a proxy card. The Proxy Statement more
fully describes the Merger and the other matters for consideration at the
Meeting.
You are cordially invited to attend the Meeting in person. Whether
or not you plan to attend the Meeting, please complete, sign, date and return
your proxy card in the enclosed envelope. You may attend the Meeting in person
even though you have previously returned your proxy card. It is important that
your shares be represented and voted at the Meeting.
THE MERGER CANNOT BE CONSUMMATED IF THE MERGER ISSUANCE AND THE
CERTIFICATE AMENDMENT ARE NOT APPROVED BY OUR STOCKHOLDERS. THE APPROVAL OF THE
AUTHORIZED SHARES AMENDMENT REQUIRES THE AFFIRMATIVE VOTE OF HOLDERS OF A
MAJORITY OF THE SHARES OF OUR COMMON STOCK OUTSTANDING. PLEASE UNDERSTAND,
THEREFORE, THAT FAILURE TO VOTE (EITHER BY VOTING "NO" OR BY NOT VOTING AT ALL)
FOR THE AUTHORIZED SHARES AMENDMENT WILL HAVE THE SAME EFFECT AS A VOTE AGAINST
THE MERGER.
The Merger is a realization of one of the primary goals of the past
two years. Even the anticipation of the Merger has brought substantially
increased value to the shareholders.
During fiscal 1999 we have started several new projects:
o Flintstones Bowling - an action game that is more like a ride
than bowling;
o Internet Toys - downloads sounds from the Web for Steve Austin
of the WWF and Barney for pre-schoolers;
o WCW Gameboy - a new product for us for Nintendo;
o Brunswick Bowling - the next generation for THQ on the Sony
PlayStation;
o PlayStation Football - a new multi-year contract for college
football.
Sincerely,
/s/ Jay Smith, III
-------------------------
Jay Smith, III, President
and Chief Executive Officer
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ADRENALIN INTERACTIVE, INC.
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held November 11, 1999
-----------
To Our Stockholders:
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders
(the "Meeting") of Adrenalin Interactive, Inc. ("Adrenalin"), will be held at
10:00 a.m., local time, on November 11, 1999 at the offices of Adrenalin, 5301
Beethoven Street, Suite 255, Los Angeles, California 90066-7047, for the
following purposes:
1. To approve the issuance of shares of Adrenalin common stock and
options to purchase shares of Adrenalin common stock pursuant to the
Agreement and Plan of Merger dated as of April 28, 1999, as amended
(the "Merger Agreement") among Adrenalin, Adrenalin Acquisition
Corporation, a wholly-owned subsidiary of Adrenalin, McGlen Micro,
Inc., a California corporation, and the principal stockholders of
McGlen;
2. To elect three directors to hold office until the consummation of
the merger contemplated by the Merger Agreement (the "Merger") or,
if the Merger is abandoned, until the next annual meeting of
stockholders;
3. To elect four directors to hold office, effective upon consummation
of the Merger, until the next annual meeting of stockholders;
4. To ratify past and approve future issuances of Adrenalin's common
stock to an investor under the terms of an agreement Adrenalin
entered into in July 1999;
5. To approve an amendment to Adrenalin's Certificate of Incorporation
increasing the number of authorized shares of Adrenalin's common
stock to 50 million and increasing the number of authorized shares
of preferred stock to 5 million;
6. To approve the Adrenalin 1999 Long-Term Incentive Plan and the
reservation of 2,500,000 shares for issuance thereunder;
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7. To approve a change of Adrenalin's corporate name to McGlen Internet
Group or such other name as Adrenalin's Board of Directors deems
appropriate, effective upon consummation of the Merger; and
8. To transact such other business as may properly come before the
Meeting and any adjournments thereof.
The foregoing items of business are more fully described in the
Proxy Statement accompanying this Notice.
Only holders of record of Adrenalin common stock at the close of
business on October 5, 1999 are entitled to notice of, and will be entitled to
vote at, the Meeting or any adjournment thereof.
The Merger cannot be consummated if the Merger Issuance and the
Authorized Shares Amendment are not approved by our stockholders. The approval
of the Authorized Shares Amendment requires the affirmative vote of holders of a
majority of the shares of our common stock outstanding. Please understand,
therefore, that failure to vote (either by voting "no" or by not voting at all)
for the Authorized Shares Amendment will have the same effect as a vote against
the Merger.
By Order of our Board of Directors
/s/ Michael Cartabiano
- ----------------------
Michael Cartabiano
Secretary
Los Angeles, California
October 4, 1999
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING YOU ARE URGED TO
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE
PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON.
YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED.
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Adrenalin Interactive, Inc.
5301 Beethoven Street, Suite 255
Los Angeles, CA 90066-7047
(310) 821-7880
-----------
PROXY STATEMENT
-----------
We are furnishing this Proxy Statement to our stockholders in
connection with our Board of Directors' solicitation of proxies for use at our
1999 Annual Meeting of stockholders (the "Meeting") to be held at 10:00 a.m.,
local time, on November 11, 1999 at our offices, 5301 Beethoven Street, Suite
255, Los Angeles, CA 90066-7047, and at any adjournments or postponements of the
Meeting.
This Proxy Statement and the accompanying proxy are first being
mailed to our stockholders on or about October 5, 1999.
WE HAVE NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT IN CONNECTION WITH THE
SOLICITATION OF PROXIES. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US.
THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
We supplied all information contained in this Proxy Statement
relating to us. McGlen Micro, Inc. ("McGlen") supplied all information contained
in this Proxy Statement relating to McGlen.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Proxy Statement constitute
"forward-looking statements." For instance, the reasons for the Merger discussed
herein, the statements herein about the expected impact of the Merger on our
business, financial performance and condition, and the discussion herein about
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the strategy of the post-merger company are forward-looking statements. Further,
any statements contained in this Proxy Statement that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "projects," "believes," "anticipates," "plans,"
"excepts," "may," "might," "will," "continue," "intends" "believes,"
"anticipates," "plans," "expects," "may," "might," "will," "continue," "intends"
or the negative thereof or other variations thereon or comparable and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause our results following the Merger to
differ materially from those indicated by such forward-looking statements (See
"Risk Factors"). We caution you not to place undue reliance on the
forward-looking statements contained in this Proxy Statement. Unless otherwise
required by applicable securities laws, we have no obligation to publicly
release the results of any revisions to these forward-looking statements to
reflect events or circumstances after the date of this filing.
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TABLE OF CONTENTS
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Page
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THE ANNUAL MEETING...........................................................1
PROPOSAL 1 - APPROVAL OF THE MERGER ISSUANCE...............................5
GENERAL................................................................5
BACKGROUND OF THE MERGER...............................................5
REASONS FOR THE MERGER.......................................................7
RISK FACTORS ...............................................................8
RISKS RELATING TO THE MERGER.................................................8
RISKS RELATING TO McGLEN'S BUSINESS.........................................10
OPINION OF THE FINANCIAL ADVISOR............................................19
REGULATORY APPROVALS REQUIRED...............................................23
INTERESTS OF CERTAIN PERSONS IN THE MERGER..................................24
ACCOUNTING TREATMENT........................................................25
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................26
NO APPRAISAL RIGHTS.........................................................26
NO PREEMPTIVE RIGHTS........................................................26
THE MERGER AGREEMENT........................................................26
ANCILLARY TRANSACTIONS......................................................33
POST-MERGER MANAGEMENT......................................................34
PROFORMA POST-MERGER SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.........................................35
POST-MERGER OPERATIONS......................................................37
McGLEN ...... ..............................................................37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR MCGLEN AND AMT COMPONENT, INC...............46
UNAUDITED PROFORMA COMBINED FINANCIAL INFORMATION...........................57
PROPOSAL 2 - ELECTION OF PRE-MERGER DIRECTORS..............................66
PROPOSAL 3 - ELECTION OF POST-MERGER DIRECTORS.............................68
PROPOSAL 4 - RATIFICATION OF PAST AND APPROVAL OF FUTURE
ISSUANCES TO ESCALADE INVESTORS, LLC..........................70
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PROPOSAL 5 - INCREASE IN THE NUMBER OF AUTHORIZED SHARES...................73
PROPOSAL 6 - APPROVAL OF 1999 LONG TERM INCENTIVE PLAN.....................76
PROPOSAL 7 - APPROVAL OF NAME CHANGE.......................................80
INFORMATION ABOUT DIRECTORS, EXECUTIVE OFFICERS
AND BENEFICIAL OWNERS.....................................................80
STOCKHOLDER PROPOSALS.......................................................91
INCORPORATION BY REFERENCE..................................................91
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THE ANNUAL MEETING
Date, Time and Place of Meeting
The Meeting will be held at 10:00 a.m., local time, on November
11, 1999 at our offices, 5301 Beethoven Street, Suite 255, Los Angeles, CA
90066-7047.
Business at the Meeting
Under the terms and subject to the conditions of an Agreement and
Plan of Merger dated as of April 28, 1999, as amended (the "Merger Agreement"),
among us, Adrenalin Acquisition Corporation, our wholly-owned subsidiary
("Merger Sub"), McGlen Micro, Inc., a California corporation ("McGlen"), and the
principal stockholders of McGlen:
o Merger Sub is to merge into McGlen, and McGlen will thereby
become our wholly-owned subsidiary (the "Merger"); and
o we will issue to the McGlen security holders shares of our
common stock and options to purchase shares of our common
stock equaling approximately 87.5% of the shares of our common
stock that will be outstanding (on a fully-diluted basis)
immediately following the Merger (the "Merger Issuance").
At the Meeting, you will be asked to approve the Merger Issuance.
If the requisite approval of our stockholders is received and the other
conditions to closing are satisfied or waived, we expect the Merger to be
consummated within a few days after the Meeting.
At the Meeting, you will also be asked to consider and vote upon
proposals to:
o elect three directors to hold office until the consummation of
the Merger or, if the Merger is abandoned, until the next
annual meeting of stockholders (the "Pre-Merger Directors");
o elect four directors to hold office, effective upon
consummation of the Merger, until the next annual meeting of
stockholders (the "Post-Merger Directors);
o ratify past and approve future issuances of our common stock
to an investor under the terms of an agreement we entered into
in July 1999;
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o approve an amendment to our Certificate of Incorporation
increasing the number of authorized shares of our common stock
to 50 million and increasing the number of authorized shares
of our preferred stock to 5 million (the "Authorized Shares
Amendment");
o approve our 1999 Long-Term Incentive Plan and the reservation
of 2,500,000 shares for issuance thereunder;
o approve a change of our corporate name to McGlen Internet
Group or such other name as our Board of Directors deems
appropriate, effective upon consummation of the Merger; and
o transact such other business as may properly come before the
Meeting and any adjournments thereof.
THE MERGER CANNOT BE CONSUMMATED IF THE MERGER ISSUANCE AND THE
CERTIFICATE AMENDMENT ARE NOT APPROVED BY OUR STOCKHOLDERS. THE APPROVAL OF THE
AUTHORIZED SHARES AMENDMENT REQUIRES THE AFFIRMATIVE VOTE OF HOLDERS OF A
MAJORITY OF THE SHARES OF OUR COMMON STOCK OUTSTANDING. PLEASE UNDERSTAND,
THEREFORE, THAT FAILURE TO VOTE (EITHER BY VOTING "NO" OR BY NOT VOTING AT ALL)
FOR THE AUTHORIZED SHARES AMENDMENT WILL HAVE THE SAME EFFECT AS A VOTE AGAINST
THE MERGER.
Record Date
Only holders of record of our common stock at the close of
business on October 5, 1999 (the "Record Date") are entitled to notice of and to
vote at the Meeting. As of the close of business on October 4, 1999, there were
3,539,343 shares of our common stock outstanding and entitled to vote and such
shares were held of record by 431 holders. Each stockholder is entitled to one
vote for each share of our common stock held as of the Record Date.
Quorum
The presence, in person or by proxy, of holders of a majority of
the shares of our common stock outstanding on the Record Date is necessary to
constitute a quorum for the transaction of business at the Meeting. Abstentions
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and broker non-votes will be considered present for purposes of determining
whether a quorum has been constituted.
Vote Required
Approval of the Authorized Shares Amendment and approval of the
name change proposal each requires the affirmative vote of holders of a majority
of the shares of our common stock outstanding on the Record Date. Accordingly,
an abstention or broker non-vote will have the same effect as a "NO" vote.
With respect to the election of directors, the nominees receiving
the highest number of votes will be elected to such positions. An abstention or
broker non-vote will have no effect upon such election.
Approval of each other proposal recommended by our Board of
Directors requires the affirmative vote of holders of the majority of shares
present, in person or by proxy, at the Meeting and entitled to vote on such
matter. On each such matter, an abstention will have the same effect as a "NO"
vote and a broker non-vote will have no effect.
As of the Record Date, our current executive officers and
directors and their affiliates held as a group 324,996 shares of our common
stock (approximately 9.2% of the shares of our common stock then outstanding).
Each such executive officer and director has advised us that he intends to vote
or direct the vote of all shares of our common stock over which he has voting
control for approval of all proposals being submitted by our Board of Directors
to the stockholders, subject to and consistent with any fiduciary obligations in
the case of shares held by a fiduciary.
Voting of Proxies
The proxy accompanying this Proxy Statement is solicited on behalf
of our Board of Directors for use at the Meeting. You are requested to complete,
date and sign the accompanying proxy and promptly return it in the accompanying
envelope or otherwise mail it to us. All proxies that are properly executed and
returned, and that are not revoked, will be voted at the Meeting in accordance
with the instructions indicated on the proxies or, if no direction is indicated,
to approve the Merger Issuance and the other proposals recommended by our Board
of Directors as indicated herein. Our Board of Directors does not presently
intend to bring any business before the Meeting other than the specific
proposals referred to in this Proxy Statement and specified in the Notice of the
Meeting. So far as is known to our Board of Directors, no other matters are to
be brought before the Meeting. As to any business that may properly come before
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the Meeting, however, it is intended that proxies will be voted in respect
thereof in accordance with the judgment of the persons voting such proxies.
Revocability of Proxies
You may revoke a proxy at any time before it is voted by filing
with our Secretary a duly executed revocation of proxy, by submitting a duly
executed proxy bearing a later date, or by attending the Meeting and voting in
person. Attendance at the Meeting will not by itself constitute revocation of a
proxy.
Solicitation of Proxies and Expenses
We will bear the entire cost of the solicitation of proxies,
including preparation, assembly, printing and mailing of this Proxy Statement,
the proxy and any additional information furnished to our stockholders. We may
engage the services of a proxy solicitation firm in the event we deem it
necessary to obtain assistance in the distribution of and solicitation of
proxies. We will furnish copies of the solicitation materials to banks,
brokerage houses, fiduciaries and custodians holding in their names shares of
our common stock beneficially owned by others to forward to such beneficial
owners. We may reimburse persons representing beneficial owners of our common
stock for their costs of forwarding solicitation materials to such beneficial
owners. Our directors, officers, or other regular employees and employees or
agents of any proxy soliciting firm that we hire may supplement by telephone,
facsimile, letter or personal solicitation original solicitation of proxies by
mail. We will not pay any additional compensation to directors, officers or
other regular employees for such services.
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COMPANY PROPOSALS
PROPOSAL 1 -
APPROVAL OF THE MERGER ISSUANCE
GENERAL
We entered into the Merger Agreement on April 28, 1999 with the
approval of our Board of Directors. If we obtain the requisite approval of our
stockholders for the Merger Issuance and the Authorized Shares Amendment, and
the other conditions to closing are met, Merger Sub will merge into McGlen, by
which McGlen will thereby become our wholly-owned subsidiary, and we will make
the Merger Issuance. This section of the Proxy Statement describes certain
aspects of the Merger, including the Merger Issuance.
BACKGROUND OF THE MERGER
Since going public in March 1996, we have experienced substantial
losses. We were originally a software and CD-ROM development startup company. In
August 1997, we discontinued our CD-ROM and software development business, the
members of our Board of Directors resigned and the control and operations of the
company shifted to the management of our subsidiary, Western Technologies, Inc.
("Western"). The principal business of Western was then and remains the
development and sale or license of toys and games delivered over a wide range of
consumer formats including electronic toys, video games, CD-ROMs, interactive
television software products and products for other mediums.
In October 1997, we engaged Mackenzie Shea, Inc. ("Mackenzie") to
advise us on corporate and business matters and on financing opportunities.
Mackenzie provided operational consultants to us and assisted in two separate
private placements of approximately $500,000 each. In early 1998, it became
apparent that our revenues were insufficient to support the overhead of a public
corporation and revenues were not expected to increase rapidly enough to absorb
these costs. In the ensuing months, Mackenzie assisted us in reviewing certain
possible business combinations with other companies, as well as the other
strategic alternatives. None of those opportunities, however, came to fruition.
In February 1999, Mackenzie identified McGlen (also a client of
Mackenzie) to us as a possible business combination candidate. After reviewing
the information on McGlen made available, we concluded that we should make
further inquiries into the possibility of such a combination. In February 1999,
Jay Smith, III, our President and Chief Executive Officer, and George Lee,
President of McGlen, met to discuss the possibility of a transaction between the
two companies. As a result of these discussions, Mr. Smith and Mr. Lee
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concluded that it would be in the best interests of their respective
stockholders to pursue further discussions regarding a possible business
combination.
During the ensuing two weeks, management of the two companies met
on a number of occasions to discuss a possible business combination between the
two companies, including the operational and strategic benefits that could be
realized as a result of such a transaction and the terms and conditions on which
such a transaction could be effected, including terms related to the ownership
interest that McGlen's stockholders would have in the combined company.
On March 5, 1999, McGlen presented a letter of intent to our Board
of Directors regarding a proposed business combination between the entities.
After reviewing the terms of the letter of intent and considering, with the
advice of management, the possible strategic and financial benefits of the
proposed business combination as well as the alternatives to the proposed
business combination likely to be available to us, our Board approved the letter
of intent by unanimous written consent dated March 5, 1999. The letter of intent
was signed on March 11, 1999. The high and low sale price for our common stock
on March 10, 1999 was $2-7/8 and $1-7/8, respectively.
In early April 1999, McGlen presented a draft Merger Agreement to
us. Over the next few weeks, representatives of the two companies and their
respective legal counsel negotiated the terms of the Merger Agreement and
related transactions.
On April 22, 1999, our Board of Directors met to consider the
proposed Merger Agreement. At the meeting, members of our senior management and
our legal and financial advisors made presentations and reviewed a number of the
matters set forth below under "Reasons for the Merger." After discussion, our
Board unanimously voted to approve the Merger Agreement, subject to reviewing
the final draft of the Merger Agreement. On April 28, 1999, our Board members
reviewed a copy of the final Merger Agreement and unanimously approved it by
written consent.
The parties signed the Merger Agreement later on April 28, 1999
and publicly announced the Merger on April 30, 1999.
In July 1999, the parties amended the Merger Agreement to extend
the termination date thereof until October 31, 1999. In July, we also entered
into a private placement with a new investor and made a loan to McGlen, as
contemplated by the Merger Agreement. (See "Ancillary Transactions") In October
1999, the parties amended the Merger Agreement to extend the termination date
thereof until November 30, 1999.
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REASONS FOR THE MERGER
Our Board of Directors believes that the Merger represents the
best opportunity available to us to strengthen our prospects and that the terms
of the Merger, including the Merger Issuance, are fair to our stockholders. In
reaching its conclusions, our Board considered, among other things (including
the matters discussed under "Risk Factors"), the following material factors:
o the financial performance, business operations and prospects of
McGlen and the projected prospects of the combined companies;
o our Board's assessment that we will not be able to sustain our
operations in the future on a stand-alone basis;
o current economic conditions and trends in the respective markets
in which McGlen and we operate;
o the possibility of achieving cost savings, operating efficiencies,
revenue enhancements and synergies as a result of the Merger;
o our Board's assessment that the access to the e-commerce market
that will result from the Merger may afford us the on-line forum
we have been seeking for our interactive technology, which would
expose our products to a wider audience;
o the lack of other strategic alternatives that are available to us;
o the terms of the Merger Agreement, including our right to
terminate the Merger Agreement if we do not obtain a fairness
opinion; and
o the opinion of Bilich Associates described below as to the
fairness of the Merger from a financial point of view to our
stockholders.
Our Board also considered the factors described herein under "Risk
Factors." In reaching its decision to approve the Merger Agreement, our Board
did not assign any relative or specific weights to the various factors
considered, and individual directors may have given differing weights to
different factors.
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RISK FACTORS
You should consider carefully the following risks before you
decide to approve the Merger Issuance. The risks and uncertainties described
below are not the only ones we face or will face. Additional risks and
uncertainties not presently known to us may also adversely impact our business
and proposed business upon completion of the Merger. If any of the following
risks actually occur, they could adversely affect our business, financial
condition or operating results, which could adversely affect the trading price
of our common stock.
RISKS RELATING TO THE MERGER
The Merger Will Require Us to Reapply for Nasdaq Listing; Possible Reverse
Stock Split
We have been advised by Nasdaq that the Merger will constitute a
"reverse merger" within the meaning of Rule 4330 of Nasdaq's Marketplace Rules
and that we will need to reapply for listing on Nasdaq's SmallCap Market upon
completion of the Merger. In order to requalify for listing on Nasdaq's SmallCap
Market:
o our common stock must continue to be registered under Section
12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act");
o we must initially either have (i) at least $4,000,000 of net
tangible assets, (ii) net income in two of the last three
years of at least $750,000 or (iii) a market capitalization of
$50,000,000; and
o we must initially have a minimum bid price of $4.00 per share,
at least 300 round lot shareholders, a public float of at
least 1,000,000 shares, and at least three active market
makers for our common stock.
If we fail to meet Nasdaq's initial listing requirements, trading
in our shares would thereafter be conducted in the over-the-counter market on
the OTC Bulletin Board established for securities that do not meet Nasdaq's
listing requirements. This may result in investors finding it more difficult to
trade our stock and would probably result in a lower market price for our common
stock.
We anticipate that we will satisfy all of Nasdaq's listing
requirements at the time of the completion of the Merger, except possibly the
$4.00 per share minimum bid price for shares of our common stock. Depending upon
the market price of our shares of common stock between now and the time that
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Nasdaq rules on our listing reapplication, we may be forced to effect a reverse
stock split to support the minimum bid price of our common stock at $4.00 or
more. Reverse stock splits usually cause drops in the price of a stock and the
market price of our common stock may drop as a result thereof, even if the
Merger is completed. While a reverse stock split does not change a stockholder's
percentage ownership in us, it may well lessen public confidence in us and our
common stock.
Our Integration of McGlen's Business
Once we complete the Merger, our future success will depend, in
large part, upon our ability to effectively integrate our and McGlen's
businesses. Integration of McGlen's business with ours may involve unseen
difficulties and may require a disproportionate amount of our attention and our
combined financial and other resources. Our failure to effectively integrate
McGlen would have an adverse affect on our future business performance,
financial condition, results of operations and the market value of our common
stock.
Our Stockholders Will Suffer Immediate and Substantial Dilution to their Voting
Power Which May Lower the Market Price of Our Common Stock
The Merger Issuance and the other issuances that we are required
to make in connection with the Merger could reduce the market price of our
common stock unless the market perceives that the combined revenues, assets and
business or potential growth, cost savings and other business synergies are
sufficient to offset the effect of such issuance. In addition, as a result of
the Merger, any given stockholder's percentage ownership of our common stock
prior to the Merger will decrease substantially. The percentage ownership of all
pre-Merger stockholders will decrease from 100% of our issued and outstanding
common stock immediately prior to the Merger to approximately 12.5% of our
issued and outstanding common stock immediately following the Merger (on a
fully-diluted basis). As a result, persons who own our stock immediately prior
to the Merger will experience an immediate reduction in their voting power and
could experience a material reduction in their economic interest in us.
Additional Financing
Following the Merger, we may require additional funds to support
our working capital requirements and for other purposes, including the continued
expansion of McGlen's business. We may seek to raise such funds through public
or private equity financings or from other sources. There can be no assurance
that additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to us or that any additional
financing will not be dilutive to our stockholders.
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RISKS RELATING TO McGLEN'S BUSINESS
McGlen Has a Limited Operating History
McGlen was founded in May 1996 and began retailing computer
components and accessories on the Internet. Accordingly, McGlen has a limited
operating history upon which to base an evaluation of its business and
prospects. McGlen's business and prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly companies in new and rapidly evolving
markets such as electronic commerce. Such risks include McGlen's dependence on
key vendors for merchandise, McGlen's evolving and unpredictable business model,
McGlen's management of its anticipated growth, McGlen's ability to anticipate
and adapt to a developing market, McGlen's competitors' possible development of
equal or superior Internet auctions and McGlen's ability to sell excess
merchandise at such auctions, and McGlen's ability to identify, attract, retain
and motivate qualified personnel. To address these risks, McGlen must, among
other things, continue to expand its vendor channels and buyer resources, manage
product obsolescence and pricing risks, maintain its customer base and attract
significant numbers of new customers, respond to competitive developments,
implement and execute successfully its business strategy and continue to develop
and upgrade its technologies and retailing services. McGlen may not be
successful in doing what is required to address these risks. A substantial
reduction in merchandise availability would have a material adverse effect on
its business, results of operations and financial condition. In addition, McGlen
has historically had relatively low operating margins and plans to continue to
increase its operating expenses significantly in order to increase the size of
its staff, expand its marketing efforts to enhance its brand image, increase its
visibility on other companies' high traffic Web sites, purchase larger volumes
of merchandise, increase its software development efforts, and support its
growing infrastructure. As a result, McGlen could experience losses in the
future. Further, in view of the rapidly evolving nature of its business, McGlen
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of its
future performance.
McGlen's Faces a Competitive Market for Technical Personnel and Retention of its
Key Employees
McGlen's success depends in part on its ability to attract, hire,
train and retain qualified managerial, technical and sales and marketing
personnel, particularly its co-founders, Mike Chen and George Lee and its Vice
President of Marketing, Alex Chen. The loss of any of these individuals could
have a material adverse effect on McGlen's business, results of operation and
financial condition. McGlen does not have long-term employment agreements with
any of its key personnel and maintains no "key person" life insurance. Although
it is a condition precedent to the consummation of the Merger that we enter into
long-term employment agreements with Mike Chen and George Lee, there can be no
assurance that those agreements will not be terminated early. Competition for
qualified managerial, technical and sales and marketing personnel is intense.
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In particular, there can be no assurance that McGlen will be successful in
attracting and retaining the technical personnel required to conduct and expand
its operations successfully. McGlen's results of operations could be materially
adversely affected if it is unable to attract, hire, train and retain qualified
personnel.
Fluctuations in McGlen's Operating Results
McGlen's operating results have fluctuated in the past, and are
expected to continue to fluctuate in the future, due to a number of factors,
many of which are outside its control. These factors include (i) its ability to
attract new customers at a steady rate, manage its inventory mix and the mix of
products offered, meet certain pricing targets, liquidate its inventory in a
timely manner, maintain gross margins and customer satisfaction, (ii) the
availability and pricing of merchandise from its vendors, (iii) product
obsolescence and pricing erosion, (iv) consumer confidence in encrypted
transactions in the Internet environment, (v) the timing, cost and availability
of advertising on other entities' Web sites, (vi) the amount and timing of costs
relating to expansion of its operations, (vii) the announcement or introduction
of new types of merchandise, service offerings or customer services by its
competitors, (viii) technical difficulties with respect to consumer use of its
Web sites, (ix) delays in revenue recognition at the end of a fiscal period as a
result of shipping or logistical problems, (x) delays in shipments as a result
of strikes or other problems with its delivery service providers or the loss of
its credit card processor, (xi) the level of merchandise returns it experiences,
and (xii) general economic conditions and economic conditions specific to the
Internet and electronic commerce. As a strategic response to changes in the
competitive environment, McGlen may from time to time make certain service,
marketing or supply decisions or acquisitions that could have a material adverse
effect on its quarterly results of operations and financial condition. McGlen
also expects that in the future, like other retailers, it may continue to
experience seasonality in its business.
McGlen's Reliance on Merchandise Vendors
McGlen is entirely dependent upon vendors to supply it with
merchandise for sale through its Internet sites and the availability and pricing
of merchandise is unpredictable. In 1998, a substantial percentage of McGlen's
gross merchandise sales were derived from merchandise acquired from a single
provider, Ingram Micro. McGlen has no long-term contracts or arrangements with
its vendors that guarantee the availability of merchandise. McGlen cannot assure
that its current vendors will continue to sell merchandise to it or otherwise
provide merchandise for sale in its auctions or that McGlen will be able to
establish new vendor relationships that ensure merchandise will be available for
sale on its Web sites. McGlen also relies on many of its vendors to process and
ship merchandise to customers. McGlen has limited control over the shipping
procedures of its vendors, and shipments by these vendors have often been
subject to delays. Although most merchandise sold by McGlen carries a warranty
supplied either by the manufacturer or the vendor, and McGlen is not
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obligated to accept merchandise returns, McGlen has, in fact, accepted returns
from customers for which McGlen did not receive reimbursements from its vendors
or manufacturers. If (i) McGlen is unable to develop and maintain satisfactory
relationships with vendors on acceptable commercial terms, (ii) McGlen is unable
to obtain sufficient quantities of merchandise, (iii) the quality of service
provided by its vendors falls below a satisfactory standard, or (iv) McGlen's
level of returns exceeds its expectations, McGlen's business, results of
operations and financial condition will be materially adversely affected.
McGlen's Reliance on Other Third Parties
In addition to its merchandise vendors, McGlen's operations depend
on a number of other third parties. McGlen has limited control over these third
parties and no long-term relationships with any of them. McGlen does not own a
gateway (connection) onto the Internet, but instead relies on an Internet
service provider to connect its Web sites to the Internet. From time to time,
McGlen has experienced temporary interruptions in its Web sites connections and
also its telecommunications access. Continuous or prolonged interruptions in its
Web sites connections or in its telecommunications access would have a material
adverse effect on its business, results of operations and financial condition.
McGlen's operating software depends on operating systems, databases and various
server software that were substantially developed and produced by and licensed
from third parties. McGlen has from time to time discovered errors and defects
in the software from these third parties and, in part, relies on these third
parties to correct these errors and defects in a timely manner.
McGlen's Risks Relating to a Purchased Inventory Model
While in most cases McGlen has limited inventory and price risk
because it acts as a sales agent for vendors that retain title to the
merchandise sold by it, McGlen has commenced purchasing an increasing percentage
of its merchandise from vendors, thereby assuming the inventory and price risks
of these products. These risks are especially significant because much of the
merchandise currently sold by McGlen (e.g., computer parts, peripherals and
consumer electronics) is characterized by rapid technological change,
obsolescence and price erosion. With McGlen increasingly relying on purchased
inventory, McGlen's success will depend on its ability to liquidate its
inventory rapidly through its sales, the ability of its buying staff to purchase
inventory at attractive prices relative to resale value, and its ability to
manage customer returns and shrinkage resulting from theft, loss and
misrecording of inventory. If McGlen is unable to liquidate its purchased
inventory rapidly, if its buying staff fails to purchase inventory at attractive
prices, or if McGlen fails to predict with accuracy the best resale prices for
its purchased merchandise, McGlen may be forced to sell its inventory at a
discount or at a loss and its business, results of operations and financial
condition will be materially adversely affected.
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McGlen's Competition
The electronic commerce market, particularly on the Internet, is
new, rapidly evolving and intensely competitive, and McGlen expects competition
to intensify in the future. McGlen currently or potentially competes with a
variety of other companies depending on the type of merchandise and sales format
offered to customers. These competitors include Buy.Com, Cyberion Outpost and
Shopping.Com/Compaq. McGlen believes that most if not all of these competitors
are currently selling products below cost in order to acquire market share.
Current and potential competitors have established or may establish cooperative
relationships among themselves or directly with vendors and suppliers to obtain
exclusive or semi-exclusive sources of merchandise. Accordingly, it is possible
that new competitors or alliances among competitors and vendors may emerge and
rapidly acquire market share. In addition, manufacturers might elect to
liquidate their products directly. Increased competition is likely to result in
reduced operating margins, loss of market share and a diminished brand
franchise, any one of which could materially adversely affect McGlen's business,
results of operations and financial condition. Many of McGlen's current and
potential competitors have significantly greater financial, technical, marketing
and other resources than it. As a result, they may be able to secure merchandise
from vendors on more favorable terms than McGlen, and they may be able to
respond more quickly to changes in customer preferences or to devote greater
resources to the development, promotion and sale of their merchandise than can
McGlen.
McGlen Has Limited Senior Management Resources
McGlen has rapidly and significantly expanded its operations and
anticipates that significant expansion of its operations will continue to be
required in order to address potential market opportunities. This rapid growth
has placed, and is expected to continue to place, a significant strain on its
management, operational and financial resources. McGlen expanded from 13
employees as of December 31, 1997, to 34 employees as of December 31, 1998, and
65 employees as of August 31, 1999. McGlen's new employees include certain key
managerial and technical employees who have not yet been fully integrated into
its management team, and McGlen expects to add additional key personnel in the
near future. Increases in the number of employees and the volume of merchandise
sales have placed significant demands on McGlen's management, which includes
only three executive officers. In order to manage the expected growth of its
operations, McGlen will be required to expand existing operations, particularly
with respect to customer service and merchandising, to improve existing and
implement new operational, financial and inventory systems, procedures and
controls, including improvement of its financial and other internal management
systems on a timely basis, and to train, manage and expand the capabilities of
its growing employee base. McGlen also will be required to expand its accounting
staff. Further, McGlen's management will be required to maintain relationships
with various merchandise vendors, freight companies, warehouse operators, other
Web sites and services, Internet service providers and other third parties and
to maintain control over its strategic direction in a rapidly changing
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environment. McGlen cannot assure that its current personnel, systems,
procedures and controls will be adequate to support its future operations, that
management will be able to identify, hire, train, retain, motivate and manage
required personnel or that management will be able to manage and exploit
existing and potential market opportunities successfully. If McGlen is unable to
manage growth effectively, its business, results of operations and financial
condition will be materially adversely affected.
McGlen's Risks Associated with Technological Change; McGlen's Dependence on the
Internet
The Internet and electronic commerce industries are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service or product introductions embodying new technologies and the emergence of
new industry standards and practices that could render McGlen's existing Web
site and proprietary technology obsolete. McGlen's performance will depend, in
part, on its ability to license leading technologies, enhance its existing
services, develop new proprietary technology that addresses the increasingly
sophisticated and varied needs of its current and prospective customers, and
respond to technological advances and emerging industry standards and practices
on a timely and cost-effective basis. The development of Web sites and other
proprietary technology entails significant technical and business risks. McGlen
cannot assure that it will be successful in using new technologies effectively
or adapting its Web sites and proprietary technology to customer requirements or
emerging industry standards. If McGlen is unable, for technical, legal,
financial or other reasons, to adapt in a timely manner in response to changing
market conditions or customer requirements, or if its Web sites and proprietary
technology do not achieve market acceptance, McGlen's business, results of
operations and financial condition will be materially adversely affected.
Government Regulation and Legal Uncertainties
McGlen is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally and
laws or regulations directly applicable to access to or commerce on the
Internet. Due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing and characteristics
and quality of products and services. Furthermore, the growth and development of
the market for Internet commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies conducting
business over the Internet. The adoption of any additional laws or regulations
may decrease the growth of the Internet, which, in turn, could decrease the
demand for McGlen's Internet sales and increase McGlen's cost of doing business
or otherwise have an adverse effect on its business, results of operations and
financial condition. Moreover, the applicability of existing laws to the
Internet in various jurisdictions governing issues such as property ownership,
auction regulation, sales tax, libel and personal privacy is uncertain and may
take years to resolve. In addition, as McGlen's services and products are
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available over the Internet in multiple states and foreign countries, and as it
sells to numerous consumers residing in such states and foreign countries, such
jurisdictions may claim that McGlen is required to qualify to do business as a
foreign corporation in each such state and foreign country. Any such new
legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to its business, could have a
material adverse effect on McGlen's business, results of operations and
financial condition.
McGlen's Risk of System Failure at its Single Site
McGlen's success is largely dependent upon its communications
hardware and computer hardware, substantially all of which are located at a
leased facility in Tustin, California. McGlen's systems are vulnerable to damage
from earthquake, fire, floods, power loss, telecommunications failures,
break-ins and similar events. McGlen does not presently have significant
redundant systems or a formal disaster recovery plan. A substantial interruption
in these systems would have a material adverse effect on McGlen's business,
results of operations and financial condition. Despite the implementation of
network security measures, McGlen's servers are also vulnerable to computer
viruses, physical or electronic break-ins, deliberate attempts by third parties
to exceed the capacity of its systems and similar disruptive problems. Computer
viruses, break-ins or other problems caused by third parties could lead to
interruptions, delays, loss of data or cessation in service to users of McGlen's
services and products. The occurrence of any of these risks could have a
material adverse effect on McGlen's business, results of operations and
financial condition.
McGlen's Internet Commerce Security Risks
A significant barrier to electronic commerce and communications is
the secure transmission of confidential information over public networks. McGlen
relies on encryption and authentication technology licensed from third parties
to provide the security and authentication necessary to effect secure
transmission of confidential information. McGlen cannot assure that advances in
computer capabilities, new discoveries in the field of cryptography or other
events or developments will not result in a compromise or breach of the
algorithms used by it to protect customer transaction data. If any such
compromise of its security were to occur, it could have a material adverse
effect on McGlen's business, results of operations and financial condition. A
party who is able to circumvent McGlen's security measures could misappropriate
proprietary information, credit card information of customers or cause
interruptions in its operations. McGlen may be required to expend significant
capital and other resources to protect against the threat of such security
breaches or to alleviate problems caused by such breaches. Concerns over the
security of Internet transactions and the privacy of users may also inhibit the
growth of the Internet generally, and the Web in particular, especially as a
means of conducting commercial transactions. To the extent that McGlen's
activities or third party contractors involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches
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could expose McGlen to a risk of loss or litigation and possible liability.
McGlen cannot assure that its security measures will prevent security breaches
or that failure to prevent such security breaches will not have a material
adverse effect on its business, results of operations and financial condition.
McGlen's Risk of Capacity Constraints; System-Development Risks
A key element of McGlen's strategy is to generate a high volume of
traffic on, and use of, its Web sites. Accordingly, the satisfactory
performance, reliability and availability of McGlen's Web sites,
transaction-processing systems and network infrastructure are critical to its
reputation and its ability to attract and retain customers, as well as maintain
adequate customer service levels. McGlen's revenues depend on the number of
visitors who shop on its Web sites and the volume of orders it fulfills. Any
systems interruptions that result in the unavailability of its Web sites or
reduced order fulfillment process would reduce the volume of goods sold and the
attractiveness of McGlen's product and service offerings. McGlen may experience
periodic systems interruptions from time to time. Currently, McGlen is
experiencing a significant increase in customer telephone inquiries regarding
pending orders resulting in an overload of its telephone system. McGlen's
telephone system requires major enhancements immediately to handle the current
telephone volume. Any substantial increase in the volume of traffic on its Web
sites or the number of orders placed by customers will require McGlen to expand
and further upgrade its technology, transaction-processing systems and network
infrastructure. McGlen cannot assure that it will be able to accurately project
the rate or timing of increases, if any, in the use of its Web sites or timely
expand and upgrade its systems and infrastructure to accommodate such increases.
McGlen uses a combination of industry supplied software and
internally developed software and systems for its Web sites, search engine, and
substantially all aspects of transaction processing, including order management,
cash and credit card processing, shipping and accounting and financial systems.
Any substantial disruptions or delays in any of its systems would have a
material adverse effect on McGlen's business, prospects, financial condition and
results of operations.
McGlen's Dependence of Continued Growth of Online Commerce
McGlen's future revenues and future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of commerce by consumers. Rapid growth in
the use of and interest in the Web, the Internet and other online services is a
recent phenomenon, and McGlen cannot assure that acceptance and use will
continue to develop or that a sufficiently broad base of consumers will adopt,
and continue to use, the Internet and other online services as a medium of
commerce. Demand and market acceptance for recently introduced products and
services over the Internet are subject to a high level of uncertainty. McGlen
relies, and will continue to rely, on consumers who have historically used
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traditional means of commerce to purchase merchandise. For McGlen to be
successful, these consumers must accept and utilize novel ways of conducting
business and exchanging information. In addition, the Internet and other online
services may not be accepted as a viable 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. To the extent that the Internet and other online services continue
to experience significant growth in the number of users, their frequency of use
or an increase in their bandwidth requirements, McGlen cannot assure that the
infrastructure for the Internet and other online services will be able to
support the demands placed on them. In addition, the Internet or other online
services could lose their viability due to delays in the development or adoption
of new standards and protocols required to handle increased levels of Internet
or other online service activity, or due to increased governmental regulation.
Changes in or insufficient availability of telecommunications services to
support the Internet or other online services could also result in slower
response times and adversely affect usage of the Internet and other online
services generally. If use of the Internet and other online services does not
continue to grow or grows more slowly than expected, if the infrastructure for
the Internet and other online services does not effectively support growth that
may occur, or if the Internet and other online services do not become a viable
commercial marketplace, McGlen's business, prospects, financial condition and
results of operations will be materially adversely affected.
McGlen's Year 2000 Risks
McGlen interacts with certain computer programs in connection with
credit card transactions and programs used by its vendors and other suppliers.
These programs may refer to annual dates only by the last two digits, e.g., "99"
for "1999." Problems are anticipated to arise for many of these programs in the
year 2000 ("Year 2000 Problems") when "00" is mistaken for "1900." McGlen has
taken this problem into account with respect to its own internal programs and
believes that its own internal software is not susceptible to Year 2000
Problems. McGlen will not, however, be certain that its own systems are free
from Year 2000 Problems until after January 1, 2000, when it may be too late to
correct undiscovered problems before they potentially adversely effect its
operations. McGlen has not made a formal assessment of programs used by service
providers or other third parties, including the financial institutions
processing credit card transactions, with which it may have to interact, nor its
vulnerability which may result from any such party's failure to remediate its
own Year 2000 problems. The systems of other companies on which McGlen relies
may not be converted timely and this may have an adverse effect on McGlen's
systems and its business, prospects, financial condition and results of
operations.
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McGlen's Availability of Merchandise and Vendor Credit
Although McGlen's merchandising division maintains relationships
with vendors which it believes will offer competitive sources of supply, and
believes that other sources are available for most of the merchandise it sells
or may sell in the future, McGlen may not be able to obtain the quantity of
brand or quality of items that it believes are optimum. The unavailability of
certain product lines could adversely impact McGlen's operating results. Most of
McGlen's vendors are not prepared to advance normal levels of credit to it.
McGlen's current sales volumes are also limited by the gross account limitations
placed upon credit card sales by its Visa/Mastercard and other credit card
service providers. An unwillingness to extend credit along with a substantial
increase in product volume will cause McGlen to exceed its current credit limit,
thus requiring additional amounts of capital to finance its operations, and
reduce returns, if any, on its invested capital.
McGlen Does Not Collect Sales and Other Taxes
McGlen does not currently collect sales taxes or other similar
taxes with respect to shipments of goods to consumers into states other than
California. One or more states may seek to impose sales tax collection
obligations on out-of-state companies such as McGlen, which engage in online
commerce. In addition, any new operation in states outside California could
subject shipments into such states to state sales taxes under current or future
laws. A successful assertion by one or more states or any foreign country that
McGlen should collect sales or other taxes on the sale of merchandise could have
a material adverse effect on McGlen's business, prospects, financial condition
and results of operations.
McGlen's Risks of Business Combinations and Strategic Alliances
McGlen may choose to expand its operations or market presence by
entering into business combinations, investments, joint ventures or other
strategic alliances with third parties. Any such transactions will be
accompanied by the risks commonly encountered in such transactions. These
include, among others, the difficulty of assimilating operations, technology and
personnel of the combined companies, the potential disruption of its ongoing
business, the inability to retain key technical and managerial personnel, the
inability of management to maximize its financial and strategic position through
the successful integration of acquired businesses, additional expenses
associated with amortization of acquired intangible assets, the maintenance of
uniform standards, controls and policies and the impairment of relationships
with existing employees and customers. McGlen may be unsuccessful in overcoming
these risks or any other problems encountered in connection with such business
combinations, investments, joint ventures or other strategic alliances, or such
transactions may otherwise have a material adverse effect on its business,
prospects, financial condition and results of operations.
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McGlen Has Recently Installed a New Server and Software
McGlen has recently purchased and adopted a new server and related
software for accounting and purchasing control. None of its employees is
experienced in the operation of the new server and software. Since McGlen is
dependent upon its server to support many aspects of its business, if it is
unable to quickly adapt to the new system, it could have a material adverse
effect upon its results of operations.
OPINION OF THE FINANCIAL ADVISOR
On July 22, 1999, we retained Bilich Associates ("Bilich") to
render an opinion as to the fairness of the Merger from a financial point of
view to our stockholders. At a meeting of our Board held on August 9, 1999,
Bilich made a presentation on financial aspects of the Merger and delivered its
oral opinion (which opinion was subsequently delivered to our Board in written
form dated August 9, 1999) to the effect that, as of the date of such opinion,
based on the matters set forth in such opinion, the terms of the Merger
Agreement are fair from a financial point of view to our stockholders. Bilich
subsequently confirmed its August 9, 1999 opinion by delivery of its written
opinion to our Board, dated the date of this Proxy Statement (the "Fairness
Opinion"), stating that, as of the date hereof and based on the matters set
forth in such opinion, the terms of the Merger Agreement are fair from a
financial point of view to our stockholders. Bilich has consented to the
inclusion of the Fairness Opinion in this Proxy Statement.
THE FULL TEXT OF THE AUGUST 9, 1999 FAIRNESS OPINION, WHICH SETS
FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS
ON THE VIEW UNDERTAKEN, IS ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. THE FAIRNESS OPINION, WHICH IS ADDRESSED TO
OUR BOARD, IS DIRECTED ONLY TO THE FAIRNESS OF THE MERGER FROM A FINANCIAL POINT
OF VIEW TO OUR STOCKHOLDERS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER
ISSUANCE. THE DESCRIPTION OF THE FAIRNESS OPINION SET FORTH HEREIN IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO APPENDIX A AND TO THE REPORT ISSUED BY BILICH TO
OUR BOARD, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AND COPYING AT OUR
PRINCIPAL EXECUTIVE OFFICES DURING REGULAR BUSINESS HOURS BY ANY SHAREHOLDER.
THE FAIRNESS OPINION DATED AS OF THE DATE HEREOF IS SUBSTANTIALLY IDENTICAL TO
THE OPINION DELIVERED TO OUR BOARD DATED AUGUST 9, 1999 AND ATTACHED AS APPENDIX
A. WE URGE YOU TO READ THE FAIRNESS OPINION IN ITS ENTIRETY.
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Bilich is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, secondary
distributions of listed and unlisted securities, private placements, estate and
gift tax valuations and for corporate and other purposes. We selected Bilich
because of such experience and its reputation.
In connection with rendering its opinions dated August 9, 1999 and
the date hereof, Bilich, among other things:
o reviewed the Merger Agreement;
o reviewed our Annual Reports on Form 10-KSB for the years ended
June 30, 1997 and June 30, 1998;
o reviewed our Quarterly Reports on Form 10-QSB for the quarters
ended September 30, 1998, December 31, 1998 and March 31, 1999;
o reviewed McGlen's audited balance sheet and income statement for
the fiscal years ended December 31, 1997 and December 31, 1998;
o reviewed McGlen's unaudited balance sheet and income statement
for the fiscal quarter ended March 31, 1999;
o reviewed certain internal financial analyses and forecasts for
the two companies prepared by their respective managements;
o held discussions with members of the senior managements of the two
companies regarding the strategic rationale for, and the potential
benefits of, the transactions contemplated by the Merger Agreement
and the past and current business operations, financial condition
and future prospects of their respective companies and of the
companies as combined pursuant to the Merger Agreement;
o considered the view of our senior management that the Merger
represents a significant business opportunity for us and that
certain strategic and operational benefits will be derived from
the Merger;
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o reviewed the reported price and trading activity for our common
stock during the period from our initial public offering to the
present, with an emphasis on June 6, 1998 through August 5, 1999;
o compared certain financial information for the two companies and
stock market information for us with similar information for
certain other companies the securities of which are publicly
traded;
o reviewed the financial terms of certain recent business
combinations in the Internet e-commerce industry specifically and
in other industries generally; and
o performed such other studies and analyses as Bilich deemed
appropriate.
In connection with rendering the Fairness Opinion, as set forth
therein, Bilich relied upon the accuracy and completeness of all the financial
and other information reviewed by it and assumed such accuracy and completeness
for purposes of such opinion. Bilich did not determine the amount of
consideration to be paid in the Merger. With our consent, Bilich assumed that
the financial forecasts of the two companies were reasonably prepared on a basis
reflecting the best currently available judgments and estimates of the two
companies, and that such forecasts would be realized in the amounts and at the
times contemplated thereby. In connection with the Fairness Opinion, Bilich
reviewed the analyses used to render its August 9, 1999 opinion to our Board by
performing procedures to update certain of such analyses and by reviewing the
assumptions upon which such analyses were based and the factors considered in
connection therewith. In addition, in connection with rendering the Fairness
Opinion, Bilich reviewed this Proxy Statement.
The following is a summary of the material financial analyses
presented by Bilich to our Board in connection with providing its opinion to our
Board on August 9, 1999, and does not purport to be a complete description of
the analyses performed by Bilich. Bilich used substantially the same types of
financial analyses in preparing its written opinion dated as of the date of this
Proxy Statement as it used in providing its opinion dated as of August 9, 1999.
In determining our value, Bilich considered the fact that the
value of our stock rose significantly as rumors of a possible transaction
involving us began to circulate in the marketplace in early February, 1999,
increasing our market cap dramatically and obscuring our value based on our
operations. To eliminate this effect, Bilich averaged the trading prices in the
10-day period in February before the first jump in stock price, assuming that
these prices were representative of the market value of our operations exclusive
of the effects of the Merger. These prices ranged from $.5625 to $1.00 per
share, and averaged $.75 per share, giving us a market cap of $2.2 million prior
to the early news of the potential merger.
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Bilich also considered the market valuations of similar small
software companies with negative earnings. Applying the median price/sale
multiplier from this group (.83) to our projected sales for fiscal 1999 gave a
value of $2.5 million, which supported the market valuation prior to any
influence of the Merger. This analysis established a $2.2 million figure as the
basis for our value.
In determining McGlen's value, Bilich searched its public company
databases and located approximately 50 potential guideline companies for McGlen.
From this universe, Bilich selected three primary guideline companies for McGlen
- - Cyberian Outpost Inc (cool), Audio Book Club Inc. (klb), Onsale Inc. (onsl),
which were the only pure internet distributor/retailers with similar or related
product lines. Bilich obtained financial data for these companies going back 5
quarters, and their current market valuation and stock price trading histories.
From this, Bilich calculated their latest 12 months revenue and income/loss.
Bilch also projected their next 12 months revenue and income/loss based on their
recent quarterly sales growth rates. From this data, Bilich calculated the
revenue multipliers which currently prevail in the industry and applied them to
McGlen.
Bilch obtained financial data for approximately 50 other computer
and electronic equipment distributor/retailers which operate on a more
traditional basis or which sell both through traditional channels and over the
internet, and calculated their market price multipliers. Bilich then prepared
discounted future earnings and cash flow analyses based on McGlen projections.
Discount rates were taken from the traditional computer and electronic equipment
distributor/retailers, on the assumption that in three years, e-commerce and
internet equipment superstores will be valued on roughly the same basis as
traditional distributors are today. Terminal values for the DCF and DFE analysis
were based on price/sales ratios for traditional distributors rather than
current internet commerce industry price multipliers, which resulted in a
conservative valuation for McGlen.
From these numbers Bilich determined eight value estimates for
McGlen as of August 6, 1999. These values implied a market value for McGlen in
the range of $30 million to $140 million.
Bilich also located several recent acquisitions in the e-commerce
industry, and selected Compaq's acquisition of Shopping.com as directly
comparable. For all of the acquisitions located, Bilch obtained the available
financial information and the acquisition prices paid, drawing on news releases
and SEC filings. Bilich then calculated the price/sales multipliers which these
transactions implied. All of these resulted in astronomical valuations when
applied to McGlen. Bilich did not use these valuations in its analysis other
than as illustrations of current market conditions. Bilich then calculated the
ratio of the low, average, and high values for McGlen as compared to our high
value. These ratios ranged from 13.6 TO 63.4, with an average of 16.
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Based on the foregoing, Bilich determined that the Merger is fair
to our stockholders.
The summary set forth above describes the material analyses that
Bilich performed and presented to our Board on August 9, 1999, and does not
purport to be a complete description of such analyses. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or a summary description. Bilich believes that its analyses
must be considered as a whole and that selecting portions of its analyses
without considering all factors and analyses would create an incomplete view of
the analyses and processes underlying its opinion. In its analyses, Bilich
relied upon numerous assumptions made by the two companies with respect to
industry performance, general business and economic conditions, and other
matters, many of which are beyond the control of the two companies. Analyses
based upon forecasts of future results are not necessarily indicative of actual
values, which may be significantly more or less favorable than suggested by such
analyses. No company or transaction used as a comparison in the analyses is
identical to the two companies or to the Merger. Additionally, estimates of the
value of businesses do not purport to be appraisals or necessarily reflective of
the prices at which businesses actually may be sold. Because such estimates are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of the two companies, neither of the companies, Bilich or any
other person assumes responsibility if future results or actual values are
materially different from these forecasts or assumptions. Bilich's analyses were
prepared solely for purposes of its opinions rendered on August 9, 1999 and the
date of this Proxy Statement provided to our Board, and do not purport to be
appraisals or necessarily reflect the prices at which we or our securities
actually may be sold.
For the services of Bilich in rendering its opinion regarding the
Merger, we have agreed to pay Bilich a fee of $35,000. We have also agreed to
indemnify Bilich against losses, claims and liabilities to which it becomes
subject under any federal or state law or otherwise relating to or in connection
with the Fairness Opinion.
REGULATORY APPROVALS REQUIRED
Our common stock is listed on the Nasdaq SmallCap Market. Nasdaq
has advised us that the consummation of the Merger will constitute a "reverse
merger" within the meaning of Rule 4330 of Nasdaq's Market Place Rules and that,
pursuant to such Rules, we will need to reapply for listing on the Nasdaq
SmallCap Market upon consummation of the Merger. In order for such application
to be accepted, we will need to meet the initial listing requirements set forth
in Nasdaq's Market Place Rules. We anticipate that we will satisfy the initial
listing requirements. (See "Risk Factors")
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We are not aware of any other governmental or regulatory approvals
required for consummation of the Merger, other than compliance with the federal
securities laws and applicable securities and "blue sky" laws of the various
states.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Under the terms of the Merger Agreement, it is a condition
precedent to the consummation of the Merger that at the closing of the Merger,
Jay Smith, III enter into a new employment agreement to serve as our Co-Chief
Executive Officer on terms agreeable to McGlen, Mr. Smith and us. Mr. Smith is
our President and Chief Executive Officer, is a member of our Board of Directors
and is being nominated as a Pre-Merger Director. The new employment agreement
would supersede Mr. Smith's current employment agreement. McGlen, Mr. Smith and
we are negotiating the terms of the new employment agreement. If mutually
agreeable terms are not reached and McGlen waives this condition precedent, the
termination without "cause" provisions of Mr. Smith's current employment
agreement will govern. (See "Executive Officer Employment Contracts"); should
McGlen not waive this condition precedent, McGlen might not be obligated to
consummate the Merger.
Pursuant to the terms of the Merger Agreement, at the closing of
the Merger, George Lee and Mike Chen each will enter into an employment
agreement with us. Messrs. Lee and Chen are being nominated as Post-Merger
Directors. Messrs. Lee and Chen are also directors, executive officers and
principal stockholders of McGlen. Under the term of Mr. Lee's employment
agreement, he is to serve as our Chief Executive Officer and, if requested or
elected, to serve on our Board of Directors. Under the terms of Mr. Chen's
employment agreement, he is to serve as our President and, if requested or
elected, is to serve on our Board of Directors. The terms of Mr. Lee's and Mr.
Chen's respective employment agreement are otherwise identical, as follows.
He is to use his reasonable efforts to manage our business. We are
to pay to him salary at the rate of $80,000 per year. He will be entitled to
four weeks of vacation. We will provide him with, or reimburse him for the cost
of, medical insurance. In addition, he will be entitled to reimbursement for
out-of-pocket expenses incurred in the performance of our business. We will
provide him with the use of a company automobile and we will pay the costs of
operating and maintaining the automobile. The term of his employment is five
years, but we may terminate him earlier if:
o he is convicted of, or pleads guilty or nolo contendere to, a
misdemeanor involving moral turpitude or to a felony;
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o he commits fraud or dishonesty with respect to our business and
embezzles or misappropriates any of our funds or assets;
o he materially breaches the employment agreement;
o he is substantially unable by reason of drug or alcohol abuse or
addiction to reasonably and effectively carry out his duties;
o he directly causes us to default in performing our obligations
under contracts intentionally or without authorization; or
o he is grossly negligent with respect to his duties.
In addition, the employment agreement automatically terminates if he becomes
permanently disabled or dies.
ACCOUNTING TREATMENT
Because McGlen's securityholders will, as a result of the Merger,
hold approximately 87.5% of the securities of the combined enterprise, the
Merger will be treated for accounting purposes as a reverse acquisition. This
means that for accounting purposes McGlen will be treated as the "acquiring
company" and we will be treated as the "acquired company." In a reverse
acquisition, the combined enterprise:
o presents the historical financial statements of the "acquiring
company" (McGlen) as the combined enterprise's historical
financial statements;
o does not record goodwill for the acquisition where, as here, the
issuer (Adrenalin) is treated as if it was a shell company and the
operating enterprise (McGlen) is the "acquiring company";
o treats the acquisition as a recapitalization of the "acquiring
company" (McGlen"); and
o includes the results of operations of the "acquired corporation"
(us) only from the acquisition date.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following describes the principal federal income tax
consequences of the Merger to us under the Internal Revenue Code of 1986, as
amended (the "Code"), assuming that the Merger is consummated as contemplated
herein. This discussion is based on current laws and interpretations thereof,
which are subject to change.
The Merger will be treated for federal income tax purposes as a
"reorganization" within the meaning of Section 368(a) of the Code, and McGlen
and we will each be a party to the reorganization within the meaning of Section
368(b) of the Code. Neither McGlen nor we expect to recognize gain or loss as a
result of the Merger.
NO APPRAISAL RIGHTS
Stockholders will not have any appraisal rights under Delaware law
in connection with the Merger or the consummation of the transactions
contemplated thereby.
NO PREEMPTIVE RIGHTS
Our common stock does not have preemptive rights.
THE MERGER AGREEMENT
This section of the Proxy Statement describes the principal terms
of the Merger Agreement. A copy of the Merger Agreement is attached to this
Proxy Statement as Appendix B and is incorporated in this Proxy Statement by
this reference. The description set forth below of the terms of the Merger
Agreement is qualified in its entirety by reference to the Merger Agreement. We
urge you to read the Merger Agreement in its entirety.
Structure of the Merger; Closing; Effective Time
The Merger Agreement contemplates the merger of Merger Sub with
and into McGlen. McGlen will be the surviving corporation in the Merger and will
continue its corporate existence under California law. The closing of the Merger
(the "Closing") will take place at 10:00 a.m., on the second business day
following the satisfaction or waiver (subject to applicable law) of the
conditions (excluding conditions that, by their terms, cannot be satisfied until
the Closing) set forth in the Merger Agreement, unless another time or date is
agreed to by McGlen and us (the time of the Closing is referred to as the
"Closing Date"). The Merger will become effective at the time of the
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filing with the California Secretary of State of an agreement of merger or at
such later time as is specified in such Merger Agreement (the "Effective Time").
Conversion of McGlen Stock; The Merger Issuance
At the Effective Time, the shares of McGlen common stock (the
"McGlen Stock") issued and outstanding immediately prior to the Effective Time
will automatically be converted into the right to receive the number of shares
of our common stock (the "Share Exchange Ratio") calculated such that (i) all
outstanding shares of McGlen Stock on a Fully Diluted Basis (as defined below)
immediately prior to Effective Time, plus (ii) the Loan Shares (as defined
below) will equal, in the aggregate, 87.5% of the outstanding shares of our
common stock on a Fully Diluted Basis outstanding immediately following the
Effective Time. "Fully Diluted Basis" means all outstanding shares and all
shares issuable pursuant to Convertible Securities (as defined below) to the
extent "in the money" as of the Closing Date, but does not include any shares
issuable pursuant to the Synnex Agreement (as defined in Section 1.8 of the
Merger Agreement). "Convertible Securities" means options, warrants, convertible
securities or other rights to acquire common stock. "Loan Shares" means the
shares of our common stock sold in our private placement, the net proceeds of
which were used to fund the McGlen Loans. (See "Ancillary Transactions" and
"Proforma Post-Merger Security Ownership of Certain Beneficial Owners and
Management")
Conversion of McGlen Options
All options to purchase McGlen Stock outstanding at the Effective
Time under any McGlen stock option plan or agreement or any other type of
option, warrant or right to purchase shares of McGlen (the "McGlen Stock
Options") will, at the Effective Time, automatically be converted into options
or similar rights to purchase our common stock (a "Converted Stock Option").
Each Converted Stock Option will be exercisable upon the same terms and
conditions as under the applicable Converted Stock Option in compliance with the
requirements of Section 424(a) of the Internal Revenue Code of 1986, as amended
and the applicable agreement issued thereunder, except that:
o each such McGlen Stock Option will be exercisable for that whole
number of shares of our common stock (to the nearest whole share)
determined by multiplying the number of shares of McGlen Stock
that were, immediately prior to the Effective Time, subject to the
McGlen Stock Option by the Share Exchange Ratio immediately prior
to the Effective Time (the "Option Exchange Ratio");
o the total option price of the shares of our common stock issuable
upon exercise of such Converted Stock Option will be an amount
equal to the total option price of the shares of
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McGlen Stock that were, immediately prior to the Effective Time,
subject to the McGlen Stock Option; and
o the exercise price per share will be calculated by dividing the
aggregate option value of the shares of McGlen Stock that were,
immediately prior to the Effective Time, subject to the McGlen
Stock Option by the number of shares of our common stock
underlying such Converted Stock Option. No payments will be made
for fractional interests.
Representations and Warranties
The Merger Agreement contains customary mutual representations and
warranties by us, Merger Sub and McGlen relating to, among other things:
o corporate organization and existence;
o capitalization;
o corporate power and authority to enter into, and due
authorization, execution, delivery, performance and enforceability
of, the Merger Agreement;
o required governmental and third party consents and approvals;
o financial statements;
o litigation;
o filing of tax returns, payment of taxes and related matters;
o certain material contracts;
o employee benefit plans;
o the absence of undisclosed liabilities;
o intellectual property; and
o absence of material misstatements or omissions.
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We also made representations and warranties concerning documents
and reports we filed with the Securities and Exchange Commission and the
accuracy and completeness of the information contained therein.
The representations and warranties are to survive for a period of
eighteen months following the Closing.
Conduct of Business Pending the Merger
Prior to the Effective Time, except as expressly contemplated or
permitted by the Merger Agreement or to the extent that the other party
otherwise consents in writing, each of the companies will, among other things,
carry on its business in the usual, regular and ordinary course in substantially
the same manner as conducted prior to the execution of the Merger Agreement and
use its best efforts to preserve intact its present business organizations,
retain its present employees and preserve the relationships with its customers,
suppliers and others having business dealings with it.
Prior to the Effective Time, except as expressly contemplated or
permitted by the Merger Agreement or to the extent that the other party
otherwise consents in writing, neither McGlen nor we will, among other things:
o declare or pay any dividends on its capital stock;
o issue or sell any shares of its capital stock (except for
issuances in connection with the exercise of stock options or
other stock purchase rights) or any stock options or stock
purchase rights;
o redeem or otherwise acquire any shares of its capital stock;
o amend its organizational documents;
o sell, lease, encumber or otherwise dispose of, any property,
except in the ordinary course of business;
o enter into any transaction outside of the ordinary course;
o subject to certain exceptions, increase the compensation of any
employee; or
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o amend or terminate material contracts.
In addition, prior to the Effective Time, except as expressly
contemplated or permitted by the Merger Agreement or to the extent that McGlen
otherwise consents in writing, we will not, among other things, enter into any
contract or commitment or incur or agree to incur any liability other than in
the ordinary course of business or make any single capital expenditure in excess
of $10,000 or in excess of $100,000 in the aggregate during any consecutive
thirty day period without regard to whether such capital expenditure is in the
ordinary course of business. Prior to the Effective Time, except as expressly
contemplated or permitted by the Merger Agreement or to the extent that we
otherwise consent in writing, McGlen will not, among other things, make any
capital expenditures or commitments therefor in excess of $1,000,000 in the
aggregate.
Other Covenants
Acquisition Proposals. The companies each will not (and will use
its best efforts to cause its directors, officers, agents, representatives, and
affiliates, and any other person acting on its behalf not to) enter into any
contract or agreement that has as a purpose a business combination or merger, an
issuance or sale of debt or equity of such company, a sale of a substantial
portion of the assets of such company, or a transaction comparable to or similar
to the Merger.
Filings and Consents. Each company is to use all reasonable
efforts to cooperate with the other in determining which filings are required to
be made prior to the Effective Time with, and which consents, approvals,
permits, or authorizations are required to be obtained prior to the Effective
Time from, governmental or regulatory authorities of the United States, the
several states and foreign jurisdictions in connection with the execution and
delivery of the Merger Agreement and the consummation of the transactions
contemplated thereby and to timely making all such filings and timely seek all
such consents, approvals, permits, or authorizations, and to do all things
necessary, proper, or appropriate to consummate and make effective the
transactions contemplated by the Merger Agreement.
Restricted Shares
All shares of our common stock issued in the Merger, as well as
all shares issuable upon exercise of Converted Stock Options, will be
"restricted securities" as that term is defined in Rule 144 under the Securities
Act of 1933, as amended. Accordingly, such shares must be held indefinitely
unless such shares are subsequently registered under such Act or an exemption
from registration is available.
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Conditions to the Consummation of the Merger
Each party's obligation to effect the Merger is subject to various
conditions, which include, in addition to other customary closing conditions,
the following:
o all necessary consents and approvals of third parties shall have
been obtained;
o the stock to be issued in the Merger Issuance shall have been
approved for listing on the Nasdaq SmallCap Market, subject only
to official notice of issuance;
o our common stock shall continue to be listed on the Nasdaq
SmallCap Market;
o there shall not be any litigation, injunction or restraining
order preventing the consummation of the Merger;
o Jay Smith, III shall have repudiated his current employment
agreement with us and shall have entered into a new employment
agreement to serve as President of Western on mutually agreeable
terms; and
o we shall have received a written opinion from our financial
advisors to the effect that the consideration to be paid in
respect of the McGlen common stock is fair from a financial point
of view to our stockholders, and such opinion shall have not been
withdrawn.
Our obligation to effect the Merger is subject to various
additional conditions, which include, in addition to other customary closing
conditions, the following:
o McGlen shall not be in default on any obligation, where such
default cannot be cured by the Closing Date, under any of the
Material Contracts (as defined in Section 4.9(q) of the Merger
Agreement), unless such defaults, individually or in the
aggregate, would not reasonably be expected to have a Company
Material Adverse Effect (as defined in Section 4.1(c) of the
Merger Agreement);
o McGlen's stockholders shall have unanimously approved the Merger;
and
o our stockholders shall have approved the Merger Issuance.
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McGlen's obligation to effect the Merger is subject to various
additional conditions, which include, in addition to other customary closing
conditions, that there shall not have been any material adverse change in our
condition (financial or otherwise), business, properties or assets.
Termination
McGlen and we may mutually terminate the Merger Agreement at any
time prior to the Effective Time. In addition, any party may terminate the
Merger Agreement if:
o the Closing has not occurred by November 30, 1999; provided that
the terminating party is not responsible for a breach of the
Merger Agreement that results in the failure of the Merger to be
consummated by that time;
o there is any law or regulation that makes consummation of the
Merger illegal or otherwise prohibited; or
o if any judgment, injunction, order or decree enjoining any party
from consummating the Merger is entered and such judgment,
injunction, order or decree shall have become final and
non-appealable; provided, that the party seeking to terminate the
Merger Agreement pursuant to this clause shall have used its best
efforts to remove such injunction, order or decree.
If the Merger Agreement is terminated for any of the foregoing
reasons, the Merger Agreement will become void and there will be no liability or
obligation by any party other than under certain specified sections of the
Merger Agreement. In addition, if the Merger is not consummated, all costs and
expenses incurred in connection with the Merger Agreement and the transactions
contemplated thereby are to be paid by the party incurring such expenses.
Brokers and Finders
Each party is to pay and be responsible for any broker's, finder's
or financial advisory fee incurred by such party in connection with the
transactions contemplated by the Merger Agreement. We will be responsible for
our obligations to Mackenzie calculated as issued prior to the determination of
the Share Exchange Ratio. McGlen will be responsible for its obligations to
Mackenzie calculated prior to the determination of the Share Exchange Ratio and
the Option Exchange Ratio. (See "Ancillary Transactions"). Mackenzie is the
mutual financial advisor for McGlen and us and introduced the parties.
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ANCILLARY TRANSACTIONS
Mackenzie Shea
Under the terms of an Engagement Agreement dated March 26, 1999
between McGlen and Mackenzie (which will become our obligation upon the
Closing), we will be required to issue to Mackenzie upon consummation of the
Merger shares equaling 4% of the outstanding common stock of the post-merger
combined entity on a fully diluted basis (excluding options and warrants that
are not "in-the-money") and, if Mackenzie assists McGlen in raising prior to the
Merger at least $2,500,000, we will be required to issue to Mackenzie upon
consummation of the Merger shares equaling an additional 1.5% of the outstanding
common stock of the post-merger combined entity. The Merger Agreement, in turn,
provides that the shares to be issued to Mackenzie will reduce, on a one-for-one
basis, the shares to be issued to the McGlen Shareholders in the Merger.
Under the terms of an Engagement Agreement dated October 3, 1997
between Mackenzie and us, as amended, we will be required to issue to Mackenzie
upon consummation of the Merger shares equaling 5% of our common stock
outstanding on a fully diluted basis (excluding options and warrants that are
not "in-the-money") immediately prior to the Merger.
Private Placement
On July 12, 1999, we entered into a Common Stock Purchase Agreement with
Escalade Investors, LLC. Please refer to Proposal 4 for the terms of the
agreement.
The McGlen Loan
On July 23, 1999, we entered into a loan transaction with McGlen, under
which we loaned $500,000 to McGlen. McGlen's obligation to repay the loan is
evidenced by a secured subordinated promissory note.
Under the terms of the note:
o The loan is to be repaid on the first anniversary of the date
thereof, but may be prepaid without penalty or premium;
o the outstanding principal amount of the loan accrues interest at
an annual rate of 8%;
o in the event of a default, the total amount outstanding will
become immediately due and payable in full at our option; and
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o McGlen may use the proceeds of the loan only for the purpose of
working capital or for other corporate purposes.
McGlen granted to us a junior security interest in its assets to
secure its obligation to repay the loan. McGlen's obligation to repay the loan
is subordinate and subject in right of payment to the prior payment in full in
cash of the principal amount of any currently existing secured obligation of
McGlen or its subsidiaries, and any future vendor/supplier accounts (similar to
Synnex, Ingram Micro, IBM, etc.) which from time to time require a security
interest in McGlen's assets, and all related interest, fees, expenses,
refinancing thereof, and other amounts payable with respect thereto.
The foregoing description of the loan is qualified in its entirety
by reference to the loan documents, which we have previously filed with the
Securities and Exchange Commission.
POST-MERGER MANAGEMENT
Our Board of Directors
Our Board of Directors has amended our Bylaws to provide that
immediately following the Merger our Board will be expanded to seven members. It
is a condition precedent to the closing of the Merger that the four persons
nominated as Post-Merger Directors be elected. (See Proposal 3 - "Election of
Post-Merger Directors"). The Post-Merger Directors will take office immediately
following the Merger and will hold office until the next annual meeting of our
stockholders or until their successors are duly elected. Because our Board has
nominated only four persons to be Post-Merger Directors, there will be three
vacancies on our Board unless and until those vacancies are filled by action of
our Board or the stockholders.
Executive Officers
Under the terms of the Merger Agreement, the following persons are
to be appointed as our executive officers following the Closing: George Lee,
Chief Executive Officer; Mike Chen, President, Secretary and Chief Technology
Officer; Alex Chen, Vice President of Business Development; and David Yao, Chief
Financial Officer. (See "McGlen - Management").
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PROFORMA POST-MERGER SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, on a proforma basis, the estimated
number of shares of our common stock that will be held of record upon the
effectiveness of the Merger by: (i) each person who will then own 5% or more of
our common stock; (ii) each then executive officer of the Company; (iii) each
then director of the Company; (iv) all then executive officers and directors as
a group:
Number of Percent of Outstanding
Names Shares Owned(1) Shares of Common Stock(2)
----- ------------- -----------------------
George Lee 10,178,780(3) 32.44%
Mike Chen 10,198,936(4) 32.48%
Alex Chen 4,605,646(5) 14.69%
David Yao 15,000(6) *
Calbert Lai 20,156(7) *
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(1) Except as otherwise indicated and subject to applicable community property
and similar statutes, the persons listed as beneficial owners of the shares
of common stock have sole voting and dispositive power with respect to such
shares.
(2) Based upon an estimated 31,274,813 shares outstanding upon the
effectiveness of the Merger which assumes, for purposes of calculating the
number of shares to be issued pursuant to the Merger, a closing bid price
for shares of the Company's Common Stock on the closing date of the Merger
of at least $4.00 per share. Does not include shares to be issued to
Escalade Investors LLC following the closing of the Merger. Based upon an
assumed closing price of $4.00 per share, Escalade will receive 170,454
shares for a total investment of $750,000. Does not include any warrants or
shares that may be issuable by the Company following the Merger to Redstone
Securities, Inc. pursuant to an existing advisory agreement or pursuant to
the Synnex Agreement. For purposes of computing the percentages for each
individual listed below, the number of shares of Common Stock outstanding
includes shares purchasable within 60 days upon exercise of outstanding
stock options, as follows: Mr. Lee (100,780), Mr. Mike Chen (120,936), Mr.
Alex Chen (70,546), Mr. Yao (15,000), Mr. Lai (20,156) and Mr. Janssen
(20,156).
(3) Includes 100,780 shares purchasable within 60 days of this Proxy Statement
pursuant to outstanding stock options.
(4) Includes 120,936 shares purchasable within 60 days of this Proxy Statement
pursuant to outstanding stock options.
(5) Includes 4,535,100 shares owned of record by ACST Computers, Inc. Mr. Chen
owns 50% of the outstanding shares of ACST Computers, Inc. and has sold
voting power over the shares owned by such company. Such amount also
includes 70,546 shares purchasable within 60 days of the date of this Proxy
Statement pursuant to outstanding stock options granted to Mr. Chen.
(6) Includes 15,000 shares purchasable within 60 days of the date of this
Proxy Statement pursuant to outstanding stock options.
(7) Includes 20,156 shares purchasable within 60 days of the date of this
Proxy Statement pursuant to outstanding stock options.
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<PAGE>
Paul Janssen 20,156(8) *
MacKenzie Shea, Inc. 2,101,976(9) 6.72%
All then executive officers and 25,038,674(10) 79.18%
directors as a group (6 persons)
- ------------------
* Less than 1%
- --------
(8) Includes 20,156 shares purchasable within 60 days of the date of this
Proxy Statement pursuant to outstanding stock options.
(9) Assumes that MacKenzie Shea, Inc. has earned its full fee in connection
with the Merger and in connection with obtaining financing for McGlen prior
thereto. The share numbers indicated do not assume that any additional
shares have been issued pursuant to such financing prior to the closing of
the Merger. Any shares so issued prior to the closing of the Merger would
not increase the estimated number of shares outstanding upon effectiveness
of the Merger but would lower the number of shares beneficially owned by
the persons listed above (other than MacKenzie).
(10) Includes 347,574 shares purchasable within 60 days of the date of this
Proxy Statement pursuant to outstanding stock options. Also includes
4,535,100 shares held of record by ACST Computers, Inc. with respect to
which Mr. Alex Chen has sole voting power.
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<PAGE>
POST-MERGER OPERATIONS
Upon completion of the Merger, we expect to operate Western and
McGlen as independent business subsidiaries. Our senior management will act as
senior management of the subsidiaries as well. We anticipate that Western will
continue with its business operations as presently conducted and as outlined
early in this Proxy Statement. We anticipate that McGlen will generate the
majority of the revenue of our combined revenue through continued operation of
online retailing of computer parts and peripherals. We expect that McGlen will
continue to focus on creating a simple, objective, highly interactive,
personalized shopping experience by leveraging its strengths in marketing,
branding, e-commerce, value chain management and global product sourcing, and
that it will also focus on increasing customer loyalty by leveraging the
interactive experience mated with exceptional customer service resources.
McGLEN
General
McGlen was formed in May 1996 to sell computer products over the
Internet. McGlen has since grown into a global Internet retailer of computer
hardware and peripheral products servicing individuals, small offices/home
offices, and the corporate market. As a leading aggregator of hi-tech products,
McGlen offers over 40,000 stockkeeping units (SKUs) at its virtual superstore,
www.mcglen.com. McGlen recently purchased a competitor, AMT Component, Inc., and
now also operates AccessMicro.com, which sells similar products at typically
lower price parts. The McGlen.com superstore has been in operation for more than
three years and already has brand recognition across 120,000 current customers.
McGlen has a marketing and promotion program in place that includes web
advertising, hyperlink allegiances, portal alliances, and direct one-to-one
marketing. For website development, McGlen plans to enhance its virtual
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superstore to provide a community-like experience while shopping online. The
objectives behind the website enhancement will be to increase customer
interaction and to offer a more comprehensive array of value-added services.
Business Strategy
McGlen's objective is to operate a leading online superstore
selling high-technology products to the worldwide consumer, small office/ home
office, and corporate markets. McGlen's strategy emphasizes the following key
elements:
Provide High-Margin Niche Products Via a Network of Specialty Stores
By providing specialized niche products, McGlen.com is able to
offer to its customers a greater variety of products and prices than that
associated with the common brand name selections only. Each specialty store will
appeal to a certain market segment, providing customers in-depth selection of
name brand, unbranded, private label, surplus and refurbished products. The
extensive product line of each niche store serves to differentiate McGlen as the
specialty store that offers more than the "plain vanilla" selection most
competitors offer.
In addition, since the majority of brand name products come from
major distributors such as Ingram Micro and Tech Data, McGlen's portfolio of
unbranded and refurbished goods decreases its dependence on those suppliers and
creates an opportunity for higher gross margins. Currently, unbranded and
refurbished items account for 23% of net sales at average gross margins of 20%.
With the recent acquisition of Access Micro
(http://www.accessmicro.com), a specialty online retailer, McGlen has begun the
process of defining niche markets and building specialty stores to cater to
those markets. Currently planned niche markets include: portable systems and
upgrades, memory upgrade solutions, supplies for printers/copiers/fax machines
and unbranded systems. Each of the specialty stores will feature online
configuration wizards.
Build Recognition of Consolidated Brand Mcglen.com Network
McGlen believes that McGlen.com is well positioned to become a
leading brand name in Internet commerce due to management's experience in
marketing, sales, distribution and development and application of proprietary
information technology. McGlen operates in a market in which its brand name is
critical to attracting high quality vendors and a high level of customer
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traffic. Accordingly, McGlen's strategy is to promote, advertise and increase
its visibility through a variety of marketing and promotional techniques.
McGlen has experienced substantial growth in its online sales and
its customer base since May 1996. Faced with fierce competition in the online
retail industry, McGlen continues to attract a great number of new customers to
its already impressive 120,000 current customer base. A 150% increase in
customers was realized in the past year. Purchases by repeating customers
amounted to 35% of net sales during the first quarter of 1999, with the average
order size from repeating customer reaching approximately $310 versus $240 per
overall average sale.
Provide Enhanced Online Experience for Customers
McGlen believes buyers are attracted by bargain prices and quality
merchandise in a friendly and community-enhanced environment. Accordingly,
McGlen intends to continue offering its customers a wide array of opportunities
to buy desired merchandise at low prices through a visually stimulating and
user-friendly interface which is rich in both product SKUs and product
description content.
McGlen believes that by building a virtual community on its
website, it can attract more customers and maintain higher levels of loyalty
from these customers. McGlen is developing a highly interactive community
featuring value added services that are aimed at attracting traffic, retaining
customers, and generating new revenue sources.
Increase Direct Supply from Domestic and International Manufacturers
Acquiring products directly from manufacturers is an essential
component to McGlen's model for profitability and growth. The benefits of
eliminating the distributor from the supply chain are improved gross margins and
better terms of sale. Having direct relationships with the manufacturer also
serves as a competitive advantage given that the universe of component
manufacturers is large and fragmented. In choosing manufacturers with whom to do
business, McGlen selects only those with a proven reputation of offering
high-quality products. McGlen currently acquires some of its battery, memory,
media, and printer accessory products directly from manufacturers.
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Strategic Alliances with Manufacturers and Distributors
Given that many of McGlen's online competitors are supplied by the
same few distributors such as Ingram Micro and Tech Data, McGlen believes that
developing strategic alliances with other distributors will prove to be an
operational and competitive advantage. In pursuit of this strategy, McGlen
entered into a strategic alliance with Synnex Information Technologies Inc.
("Synnex"), the largest distributor of computer-related products in Taiwan. The
benefits of this alliance include higher margins, better terms of sale, and the
leveraging of the Synnex relationship to negotiate direct contracts with other
select manufacturers.
Cross-Merchandising and One-to-One Marketing
McGlen will utilize data mining techniques to analyze storefront
traffic and purchase history. This should allow McGlen to develop products and
services based upon customer needs. By promoting purchases from repeat buyers,
McGlen simultaneously develops brand loyalty, one of the most powerful and
cost-effective marketing assets. In addition, average order sizes have been
historically higher for repeat purchases than for first-time purchases.
Currently, over 35% of McGlen's net sales are from repeat buyers. To increase
this number, McGlen will increase the frequency and appeal of its direct
marketing efforts to existing customers. Furthermore, McGlen will increase the
interactivity of its website to provide a community-like experience which will
encourage customers to return repeatedly.
Increase International Sales
Historically, average order sizes for international sales have
been higher than for domestic orders. In addition to higher profitability,
McGlen believes that the international market for computer-related products
faces less competition than the domestic market. McGlen intends to expand its
international appeal by developing multilingual versions of its website and by
advertising on international websites.
Leverage Low Cost Structure
McGlen is not required to pay the expenses necessary to support a
traditional retail operation which requires inventory, warehouse facilities,
retail store space and attendant personnel. McGlen establishes its vendor
relationships where it acts as a principal and arranges the order fulfillment,
payment verification, shipping functions and customer support, which enables it
to take advantage of the savings from eliminating those traditional retail
expenses.
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Develop Broad Appeal Merchandising
McGlen's merchandising strategy is designed to appeal to all
classes of consumer and trade customers. McGlen intends to become a one-stop,
high-technology shopping service by virtue of its broad merchandise mix. McGlen
expects to provide the Internet shopper with merchandise selection and pricing
unmatched by any other current category leader.
Marketing Strategy
McGlen's primary marketing objectives are to:
1. Increase viewer traffic to McGlen.com by promoting the McGlen
brand name;
2. Promote repeat purchases through strong customer loyalty; and
3. Increase international sales for incremental revenue
opportunities.
McGlen intends to build strong customer loyalty through the use of
customer preference and behavioral data obtained as a result of monitoring its
customers' activities online. In contrast to traditional direct marketing
efforts, McGlen's personalized notification services send customers information
on updated prices, new product availability and new service enhancements. By
offering customers a compelling and personalized value proposition, McGlen seeks
to increase the number of visitors who make a purchase, encourage repeat visits
and purchases and extend customer retention. Loyal, satisfied customers also
generate word-of-mouth advertising and are able to reach thousands of other
users through online methods.
McGlen's advertising philosophy is based on measurable
effectiveness. As a profitable company over the past three years, McGlen
believes that growth of revenue through marketing should not come at the expense
of the bottom line. Therefore, to increase customer awareness and the customer
base, McGlen plans to focus its marketing approach to one that encompasses
multiple elements:
Build a virtual community. McGlen believes that by building a
virtual community on its website, it can attract more customers and maintain
higher levels of loyalty from these customers. McGlen intends to create an
interactive, community-like feel to the online shopping experience. For example,
customers/members will be able to set up profiles, provide product feedback,
play interactive online games with each other, and communicate in real-time chat
rooms. The virtual community "feel" will create an online shopping experience
that attracts and retains customers.
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Web-based advertising. McGlen will advertise online with other
computer-related sites and offer product promotions through these sites. Each
advertising project will be evaluated with respect to cost, exclusivity, and
exposure based on click-through ratios and conversion ratios.
Alliances with major portals. McGlen believes that although
niche-based advertising will attract desired customers who are more likely to
purchase, the growth of the Internet population will include general populations
that have more diverse interests. The intent of advertising and alliances with
major portals is to target this forthcoming general population, who can help
build brand recognition for McGlen through informal channels.
Linking programs. According to WordOfNet, an online service that
measures the number of links to a particular site, McGlen is reported to have
approximately 10,500 links from other sites on the Web as of September 1998.
These links, most of which are free to McGlen, allow potential customers to
simply click on the link and become connected to McGlen's site from search
engines, manufacturers' sites, general interest sites, and community sites.
McGlen intends to seek out link affiliates as a cost-effective means of
advertising.
Direct marketing to current customers. McGlen currently sends
promotional offers via E-mail to current customers. With the enhancement of the
McGlen website to accommodate customer profiles, McGlen will include one-to-one
marketing efforts to the overall program.
Competition and Positioning
In the market for computer-related products, McGlen faces
competition from a spectrum of category competitors. A consumer who wishes to
purchase hi-tech goods has a variety of options:
CATEGORY SAMPLE COMPETITORS
========================================= ===================================
Traditional "bricks and mortar" retailers CompUSA and MicroCenter
Mail-order cataloguers CDW, MicroWarehouse and Insight
Online retailers Buy.com, Cyberian Outpost, NECX and
Onsale.com
Manufacturers who sell directly online Dell and Gateway
Online service providers OL and the Microsoft Network
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McGlen believes that traditional retailers and mail-order
cataloguers cannot effectively compete with the convenience, affordability and
selection offered by an online superstore like McGlen.com. With the number of
online purchasers growing at a compound annual rate of roughly 40%, offline
sales is sure to decrease as a percentage of the total market.
McGlen encounters the tightest competition from the flurry of
other online sites that offer computer products over the Internet, including
Buy.com, Cyberion Outpost, Onsale.com and NECX.
Competition
The online commerce market is new, rapidly evolving and intensely
competitive. Current and new competitors can launch new sites at a relatively
low cost. In addition, the computer products retail industry is intensely
competitive. McGlen currently or potentially competes with a variety of other
companies. These competitors include (i) various traditional computer retailers
including CompUSA and MicroCenter, (ii) various mail-order retailers including
CDW, MicroWarehouse, Insight, PC Connection and Creative Computers, (iii)
various Internet-focused computer retailers including Egghead.com, software.net
Corporation and NECX Direct, (iv) various manufacturers that sell directly over
the Internet including Dell, Gateway, Apple and many software companies, (v) a
number of online service providers including America Online and the Microsoft
Network that offer computer products directly or in partnership with other
retailers, (vi) some non-computer retailers such as Wal-Mart that sell a limited
selection of computer products in their stores and (vii) computer products
distributors which may develop direct channels to the consumer market. Increased
competition from these and other sources could require McGlen to respond to
competitive pressures by establishing pricing, marketing and other programs or
seeking out additional strategic alliances or acquisitions, any of which could
have a material adverse effect on the business, prospects, financial condition
and results of operations of McGlen. McGlen believes that the principal
competitive factors in its market are brand recognition, selection, price,
variety of value-added services, ease of use, site content, fulfillment,
reliability, quality of search tools, customer service and technical expertise.
Many of McGlen's current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition, and significantly
greater financial, marketing and other resources than McGlen. In addition,
online retailers may be acquired by, receive investments from or enter into
other commercial relationships with larger, well-established and well-financed
companies as use of the Internet and other online services increases. McGlen is
aware that certain of its competitors have and may continue to adopt aggressive
pricing or inventory availability policies and devote substantially more
resources to Web site and systems development than McGlen. Increased competition
may result in reduced operating margins, loss of market share and a diminished
brand franchise, any of which would have a material adverse effect on McGlen.
Moreover, companies that control access to transactions through network access
or Web browsers currently promote, and will likely continue to promote
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competitors of McGlen. There can be no assurance that McGlen will be able to
respond effectively to increasing competitive pressures or to compete
successfully with current and future competitors.
"Pure-Play" Online Retailers
Out of the "pure-play" E-commerce companies, the early market
share leaders are Beyond.com, Buy.com, Cyberian Outpost, NECX and Onsale. These
companies often sell their products at near wholesale prices, and while they do
offer a competitive selection of items, they (with the exception of NECX)
typically purchase their products from the same group of major distributors such
as Ingram Micro and Tech Data. Thus, they are subject to a risky dependence on
common suppliers. Furthermore, these online superstores rely heavily on
advertising revenue to supplement their less profitable trade operations, and
none of them have demonstrated positive profits in any period in their financial
history.
Recent New Entrants
The addition of direct manufacturers and Web content providers to
the online superstore scene adds even more competition to an already crowded
market. Dell Computer, with the help of IBM, has launched Gigabuys.com, a
superstore that will offer roughly 30,000 SKUs. Gateway, with the help of NECX,
has developed SpotShop.com, an online outlet that will offer Gateway and
third-party offerings. Other new entrants include Compaq and Microsoft.
The threat of direct online selling from the major computer
distributors such as Ingram Micro and Tech Data also presents a challenge. While
these distributors are currently operating only in the indirect channel, the
threat of eroding margins and increased competition could force them to enter
the direct channel. This would create an opportunity for online retailers that
are able to forge direct relationships with manufacturers, eliminating the
distributor.
Competitive Positioning
McGlen realizes the challenges faced by the dynamic competitive
landscape and believes that it can establish a significant portion of the online
retailing market by following its core strategy of operating a network of
high-margin, niche market specialty stores. Unlike other "pure-play" E-commerce
companies, McGlen will offer online product expertise and assistance through its
segmented specialty stores and virtual community experience, ultimately
providing the customer a higher level of service, a greater selection and added
convenience. On the operational front, McGlen will seek to continue to establish
more lucrative contracts and alliances with manufacturers and distributors.
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Additionally, McGlen has the advantage of having a profitable operating history,
unlike most of the large online retailers who have yet to turn a profit in any
given period.
In response to the threat posed by the large manufacturers and
distributors who are eager to establish a superstore presence online, McGlen
intends to continue to offer a broad selection of higher-margin unbranded
products to supplement its brand-name items with the aim that this will
differentiate its product portfolio from the brand name manufacturers and
distributors. Furthermore, McGlen intends to continue to expand on the number of
direct relationships with other manufacturers and distributors (e.g. Synnex, the
largest distributor in Taiwan).
Offices
McGlen operates McGlen.com from its principal executive offices,
located at 3002 Dow Avenue, Suite 212, Tustin, CA 92780, Tel: (949) 851-8078.
These offices consist of approximately 4,058 square feet of office. McGlen has
four years remaining on a five year lease. The monthly rent is $3,490. McGlen
also leases approximately 2,000 square feet of office space in Irvine,
California, from which McGlen operates AMT Component, Inc. under a three year
lease which expires in July 13, 2001. McGlen pays $2,200 per month. McGlen
believes its current facilities are adequate for the next 12 months.
Proprietary Rights
McGlen regards its copyrights, trademarks, trade dress, trade
secrets, and similar intellectual property as critical to its success. McGlen
intends to rely on trademark and copyright law, trade secret protection and
confidentiality or license agreements with its employees, customers, partners
and others to protect its proprietary rights. McGlen has filed an application
for the registration of its tradename "mcglen.com" with the United States Patent
and Trademark Office. Effective trademark, copyright, and trade secret
protection may not be available in every country in which McGlen's products are
made available through the Internet. McGlen is aware that third parties,
particularly competitors, have, from time to time, copied significant portions
of McGlen's web-site design and directory listings for use in competitive
Internet services. The distinctive elements of McGlen's web-sites may not be
protectible under copyright law. McGlen cannot guarantee the steps McGlen has
taken to protect its proprietary rights will be adequate.
Many parties are actively developing search, indexing, e-commerce
and other Web-related technologies. McGlen believes that such parties will
continue to take steps to protect these technologies, including seeking patent
protection. Disputes regarding the ownership of such technologies are likely to
arise in the future. For example, McGlen is aware that a number of patents have
been issued in the areas of electronic commerce, online auctions, Web-based
information indexing and retrieval, online direct marketing, common Web
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graphics formats and mapping technologies. McGlen anticipates that additional
third party patents will be issued in the future. McGlen has not received any
infringement claims against McGlen in the form of letters, lawsuits and other
forms of communication. In the event that there is a determination that McGlen
has infringed such third-party patent rights, McGlen could incur substantial
monetary liability and be prevented form using the rights in the future.
Management
Our Board of Directors of McGlen currently consists of George Lee,
Mike Chen, Calbert Lai and Peter Janssen. The following table sets forth
information about the present directors and the senior officers of McGlen.
Name Age Office
---- --- ------
George Lee 28 Chief Executive Officer, Director
Mike Chen 26 Secretary, Director
Calbert Lai 43 Director
Peter Janssen 57 Director
For additional information about Messrs. Lee, Chen, Lai and Janssen,
refer to Proposal 3 - Election of Post-Merger Directors.
Legal Proceedings
McGlen is not presently a party to any litigation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR MCGLEN AND AMT COMPONENT, INC.
The following discussion of the financial condition and results of
operations of McGlen and AMT Component, Inc ("AMT"), which McGlen recently
acquired, should be read in conjunction with the Financial Statements, including
the Notes thereto, for each of McGlen and AMT and the Risk Factors included
elsewhere in this Proxy Statement.
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Overview
McGlen is a global Internet retailer of computer hardware, software and
peripheral products to the consumer and small office/home office marketplace.
With more than 40,000 SKUs, McGlen offers an online "superstore" at
www.mcglen.com and through its subsidiary AMT with AccessMicro.com, that provide
one-stop shopping for domestic and international customers, 24 hours a day,
seven days a week. McGlen's online stores feature a fun, easy to navigate
interface, competitive pricing, extensive product information and powerful
search capabilities.
McGlen has grown rapidly since its inception in 1996. McGlen had net
income of $59,719 and $151,507 for the years ended December 31, 1998, and 1997,
respectively. Costs associated with the acquisition of AMT and the merger with
Adrenalin Interactive, Inc., caused McGlen to suffer a small loss in the first
two quarters of 1999. AMT had net income of $131,410 for the period ended
December 31, 1998 and lost $21,500 in the first year of its operations which
ended December 31, 1997.
Since computer retailers typically have low product gross margins,
McGlen's ability to regain profitability is dependent upon its ability to
increase net sales. To the extent that McGlen's marketing efforts do not result
in significantly higher net sales, McGlen will be materially adversely affected.
There can be no assurance that sufficient revenues will be generated from the
sale of its products to enable McGlen to regain profitability on a quarterly or
annual basis. In view of the rapidly evolving nature of McGlen's business and
its limited operating history, McGlen believes that period-to-period comparisons
of its operating results, including gross profit and operating expenses as
percentage of net sales, or similar results concerning AMT, are not necessarily
meaningful and should not be relied upon as an indication of future performance.
McGlen believes that the key factor affecting its long-term financial
success is its ability to attract and retain customers in a cost effective
manner. Currently, McGlen seeks to expand its customer base and encourage repeat
buying through internal and other sales and marketing programs. Such programs
include: (i) brand development, (ii) online and offline marketing and
promotional campaigns, (iii) linking programs with targeted McGlen sites, (iv)
personalized direct marketing programs designed to generate repeat sales from
existing customers, (v) strategic alliances with Internet content providers and
portal sites, and (vi) the development of a one-stop online marketplace.
McGlen expects to experience significant fluctuations in its future
operating results due to a variety of factors, many of which are outside its
control. Factors that may affect its operating results include the frequency of
new product releases, success of strategic alliances, mix of product sales and
seasonality of sales typically experienced by retailers. Sales in the computer
retail industry are significantly affected by the release of new products.
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Infrequent or delayed new product releases can negatively impact the overall
growth in retail sales. Gross profit margins for hardware, software and
peripheral products vary widely, with computer hardware generally having the
lowest gross profit margins. While McGlen has some ability to affect its product
mix through effective upselling of high margin products, its sales mix will vary
from period to period and McGlen's gross margins will fluctuate accordingly.
McGlen's Results of Operations: For The Fiscal Years Ended December 31, 1998,
and 1997.
The following sets forth selected items from McGlen's statements of
operations and the percentages that such items bear to net sales for the fiscal
years ended December 31, 1998 ("FY98") and December 31, 1997 ("FY97").
Analysis of significant difference
<TABLE>
<CAPTION>
1998 % of Sales 1997 % of Sales Difference % Difference
------ ---------- ------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales 11,525,307 100% 3,660,899 100% 7,864,408 215%
Cost of Sales 9,707,247 84% 2,991,119 82% 6,716,128 225%
Gross Profit 1,818,060 16% 669,780 18% 1,148,280 171%
Operating Expenses 1,778,646 15% 520,324 14% 1,258,322 242%
Income from operations 39,414 0% 149,456 4% (110,042) (74%)
Interest income (expenses) 5,105 .04% 752 .02% 4,353 579%
Other income 15,200 0% 1,299 .0% 13,901 1170%
Net income 59,719 1% 151,507 4% (91,788) (61%)
</TABLE>
FY98 compared with FY97
Net Sales: Net sales for the year ended December 31, 1998, increased
by $7,864,408 or 215% to $11,525,307 compared to $3,660,899 for the year ended
December 31, 1997. During the last quarter of 1997, McGlen completed and
introduced the McGlen.com Website, which featured and promoted products from
Ingram Micro. The Ingram Micro name is more widely recognized and thus McGlen
turned towards a mass market concept. Prior to this, McGlen had focused on more
"niche" selling to specialty markets, primarily memory related. With the change
towards the end of 1997, McGlen experienced a large spike in volume during 1998.
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Cost of Sales: Cost of sales for the year ended December 31, 1998,
increased by $6,716,128 or 225% to $9,707,247 compared to $2,991,119 for the
year ended December 31, 1997. McGlen was able to control costs due to the
ability to jump from one vendor to another based on pricing. McGlen had
established negotiated rates with some vendors, such as Battery Biz, however,
for the most part, McGlen relied on the bargaining power of its purchasing
department which was headed by George Lee. The incremental increase corresponds
to the increase in sales volume.
Operating Expenses: Operating expenses for the year ended December
31, 1998, increased by $1,258,322 or 242% to $1,778,646 compared to $520,324 for
the year ended December 31, 1997. The major components of McGlen's operating
expenses are analyzed as follows:
Advertising expenses for the year ended December 31, 1998, increased
by $131,584 or 148% to $220,524 compared to $88,940 for the year ended December
31, 1997. McGlen conducted most of its advertising on the Internet, primarily
through price comparison Websites. McGlen increased advertising to increase its
brand name awareness. Many Websites were acquired by larger companies, which
consolidated ownership and increased McGlen's advertising costs during 1998.
Credit charge expenses for the year ended December 31, 1998,
increased by $247,970 or 21 times to $259,608 compared to $11,638 for the year
ended December 31, 1997.
Shipping charges for the year ended December 31, 1998, increased by
$187,712 or 114% to $352,559 compared to $164,847 for the year ended December
31, 1997. This was primarily the result of increases in the volume of
purchases/sales of Ingram's products. Ingram dropships to McGlen's customers and
charges McGlen for the shipping.
Payroll for the year ended December 31, 1998, increased by $339,814
or 285% to $458,863 compared to $119,049 for the year ended December 31, 1997.
This was due to increases in staffing required to meet McGlen's growth.
AMT Results of Operations For The Year Ended December 31, 1998, and 1997
The following sets forth items from AMT's statements of operations
and the percentages that such items bear to net sales for the fiscal years ended
December 31, 1998 ("FY98") and December 31, 1997 ("FY97").
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Analysis of significant difference
<TABLE>
<CAPTION>
1998 % of Sales 1997 % of Sales Difference % Difference
------ ---------- ------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales 4,634,744 100% 1,503,040 100% 3,131,704 208%
Cost of Sales 3,818,691 82% 1,150,663 77% 2,668,028 232%
Gross Profit 816,053 18% 352,377 23% 463,676 132%
Operating Expenses 684,793 15% 373,877 25% 310,916 83%
Income from operations 131,260 2.8% (21,500) (1%) 152,760 710%
Interest income (expenses) 150 - - - 150 100%
Other income - - - - - 0.0%
Net income 131,410 2.8% (21,500) (1%) 152,910 710%
</TABLE>
FY98 compared with FY97
Net Sales: Net sales for the year ended December 31, 1998, increased
by $3,131,704 or 208% to $4,634,744 compared to $1,503,040 for the year ended
December 31, 1997. The increase was mainly attributed to the fact that fiscal
year 1998 was the first full year that AMT had on-line purchasing ability for
its customers. The Internet rendered AccessMicro.com much more visible to
potential customers.
Cost of Sales: Cost of sales for the year ended December 31, 1998,
increased by $2,668,028 or 231% to $3,818,691 compared to $1,150,663 for the
year ended December 31, 1997. AMT experienced an increase in the amount of
laptop memory sales and sales of other products.
Gross Profit: Gross profit ratio for the year ended December 31,
1998, decreased by 5% to 18% as compared to 23% for the first quarter of 1998.
This was mainly due to the change in sales mix.
AMT sold more items lower profit margin than in 1997.
Operating Expenses: Operating expenses for the year ended December
31, 1998 increased by $310,916 or 83% to $684,793 compared to $373,877 for the
year ended December 31, 1997. The major components of AMT's operating expenses
are analyzed as follows.
Advertising expenses increased by $78,613 or 65% from $120,613 for
the year ended December 31, 1997, to $199,226 for the year ended December 31,
1998, primarily due to advertising and promotional activity by AMT through
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<PAGE>
the Internet. The costs of Internet advertising are typically higher than
traditional print advertising previously utilized by AMT.
Credit services increased by $31,547 or 36% from $88,354 for the
year ended December 31, 1997, to $119,901 for the year ended December 31, 1998.
The increase was primarily due to increases in sales volume, despite the fact
that AMT was able to obtain a lower interest rate due to the increase in sales
volume.
Shipping charges increased by $137,225 or 216% from $63,359 for the
year ended December 31, 1997, to $200,584 for the year ended December 31, 1998.
AMT believes that this increase was in line with the increase in sales.
Salaries and wages increased by $106,866 or 258% from $41,421 for
the year ended December 31, 1997, to $148,287 for the year ended December 31,
1998. Additional staffing was required to meet AMT's milestones for continued
growth and there was general wage increases at the end of 1998.
Web development charges increased by $51,049 or 100% from nil for
the year ended December 31, 1997. This was attributed to the increase in
expenditures for the improvements to AMT's Website.
Consolidated McGlen and AMT Results of Operations: For the Six Months Ended June
30, 1999 and 1998
The following sets forth selected items from the consolidated McGlen
and AMT statements of operations and the percentages that such items bear to net
sales for the six months ended June 30, 1999, and June 30, 1998.
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<PAGE>
Period ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 % of Sales 1998 % of Sales Difference % Difference
------ ---------- ------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales 11,854,893 100% 5,996,738 100% 5,858,155 98%
Cost of Sales 9,978,868 84% 4,786,659 80% 5,192,210 108%
Gross Profit 1,876,025 16% 1,210,080 20% 665,945 55%
Operating Expenses 1,897,998 16% 849,886 14% 1,048,112 123%
Gain/Loss from operations (21,973) (.19%) 360,194 6.01 (382,167) (106%)
Interest income (expenses) 2,793 .05% (2,793) (100%)
Net income (21,973) (.19%) 362,987 6.05 (384,960) (106%)
</TABLE>
Net Sales: Net sales are comprised of product sales, net of returns
and allowances. Product sales are comprised of computer hardware, software and
accessories. Net sales increased by $5,858,155 or 98% from $5,996,738 for the
six months ended June 30, 1998 to $11,854,893 for the Six months ended June 30,
1999. McGlen believes that this increase was primarily a result of the
successful launch of its new Website that featured Ingram Micro's products, an
increased drive towards a mass marketing concept and an increase customer base
and repeat purchases from existing customers.
Cost of Sales: Cost of sales consists of the cost of the merchandise
McGlen sells. Cost of sales increased $5,192,210 or 108% from $4,786,659 for the
six months ended June 30, 1998, to $9,978,868 for the six months ended June 30,
1999. This increase was the result of an increase in product sales volume.
Gross Profit: Gross profit ratio for the six months ended June 30,
1999, decreased by 4% to 16% as compared to 20% for the same period in 1998.
During 1998, McGlen made an attempt to expand the market share of its products
by lowering its selling price. Additionally, the decrease was attributable to
sales mix of products.
Operating Expenses: Operating expenses for the six months ending
June 30, 1999, increased by $1,048,112 or 123% to $1,897,998 compared to
$849,886 for the same six month period in 1998. Major components of operating
expenses are analyzed as follows.
Credit services increased by $128,100 or 90% from $141,847 for the
six months ending June 30, 1998, to $269,947 for the six months ending June 30,
1999. Credit services charges are traditionally approximately two percent of
sales. McGlen considers the increase reasonable.
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<PAGE>
Shipping charges increased by $357,131 or 229% from $155,675 for the
six months ending June 30, 1998, to $512,806 for the six months ending June 30,
1999. McGlen believes that the increase was in line with the increase in sales.
Payroll increased by $260,302 or 131% from $198,515 in the first six
months of 1998, to $458,816 in the first six months of 1999. Additional staffing
was required to meet the goal for continued growth and there was a general wage
raise at the end of the year.
Professional services increased by $21,597 or 153% from $14,123 in
first six months of 1998, to $35,720 in first six months of 1999. Telephone
expenses as a percentage of sales are consistent with the prior period.
Advertising, Sales and Marketing: Advertising, sales and marketing
expenses consist primarily of fees paid to strategic partners, advertising and
promotion costs, sales, marketing and customer service personnel and related
expenditures, as direct selling expenses. For the six months ending June 30,
1999, advertising, sales and marketing expenses increased by $145,851 or 93%
from $157,631 for the six months ended June 30, 1998, to $303,482. As a
percentage of net sales, advertising, sales and marketing expense decreased from
2.63% for the six months ended June 30, 1998, to 2.56% for the six months ended
June 30, 1999. The dollar increases from quarter to quarter are primarily a
result of costs associated with increasing sales. McGlen intends to pursue more
branding and advertising campaigns and may enter into other marketing alliances
and, as a result, may experience increases in its sales and marketing expenses
in future periods.
Net Loss: As a result of the foregoing factors, McGlen incurred a
net loss of $21,973 for the six months ended June 30, 1999 and a net profit of
$362,987 for the six months ended June 30, 1998, respectively.
Liquidity and Capital Resources
As of June 30, 1999, McGlen had $330,738 in cash and cash
equivalents compared to $159,096 as of March 31, 1999. As of June 30, 1999,
McGlen had material capital commitments consisted of $137,254 in obligations
outstanding under capital leases.
McGlen has a $1.0 million "ceiling" credit agreement with Synnex
Information Systems, Inc.("Synnex"), pursuant to which Synnex may, at its
option, extend credit to us from time to time to purchase from Synnex. McGlen
has net terms of 30 days to pay Synnex for the products purchased. To date,
McGlen has paid all obligations within 30 days and has incurred no extra
expenses under this facility.
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<PAGE>
All of McGlen's assets are pledged as security interest to secure this facility.
As of August 9, 1999, McGlen has an outstanding balance of approximately
$300,000 under this facility.
McGlen also has a $400,000 credit agreement with Reseller Credit
Corporation ("Reseller"), the asset financing company of Ingram Micro, Inc.
McGlen has net terms of 30 days to pay Reseller for the products purchased. To
date, McGlen has paid all notes within 30 days and has incurred no extra
expenses under this facility. All of McGlen's assets are pledged as security
interest to secure this facility. As of August 9, 1999, McGlen has an
outstanding balance of approximately $400,000 under this facility.
McGlen does not believe that its current cash and cash equivalents
and short term investments will be sufficient to meet its anticipated cash needs
for working capital and capital expenditures for the next 12 months. If
available cash and cash generated from operations is insufficient to satisfy our
liquidity requirements, McGlen may seek to sell additional equity or debt
securities or obtain a credit facility. The sale of additional equity or
convertible debt securities could result in additional dilution to McGlen's and
our stockholders. There can be no assurance that financing will be available in
amounts or on terms acceptable to us or McGlen, if at all.
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<PAGE>
Year 2000 Compliance
The "Year 2000 Problem" arose because many existing computer
programs use only the last two digits to refer to a year. These computer
programs may recognize a year that ends in "00" as the Year 1900 rather than the
Year 2000. This could result in a significant disruption of operations and an
inability to process certain transactions.
McGlen's State of Readiness: McGlen (and its subsidiary) uses a
significant number of computer software programs and operating systems in its
internal operations, including applications used in order processing, inventory
management, distribution, financial business systems and various administrative
functions. To determine the effect, if any, of the Year 2000 Problem on its
operations, it recently began an audit of its internal information systems in
August 1999. Upon completion of this process, McGlen hopes to determine that its
systems are able to correctly interpret the upcoming Year 2000 and whether
principal information systems correctly define the Year 2000 and thus, determine
if the Year 2000 Problem will have material impact on its systems. McGlen also
intends to contact third parties in an effort to determine the extent to which
the failure of these parties to timely identify and correct their own problems
associated with the Year 2000 Problem may affect McGlen. The third parties
include suppliers, strategic partners and key service providers (including
contract warehouse and McGlen hosting service providers). This review is ongoing
and will continue through the end of 1999.
Costs Associated with the Year 2000 Problem: To date the costs
incurred to conduct the review of McGlen's internal information systems and to
identify the impact of the Year 2000 Problem on third parties have been
immaterial and McGlen expects that the additional costs incurred to complete
this review will also be immaterial. The costs McGlen will incur to address the
Year 2000 Problem could increase materially if in completing the review of its
internal information systems, McGlen identifies non-compliant systems which must
be replaced or modified or if it identifies any other problem related to the
Year 2000 Problem which must be addressed.
Risks Associated with the Year 2000 Problem: To the extent that
McGlen assessment fails to identify any non-compliant systems operated by McGlen
or by third parties, the Year 2000 Problem could have a material adverse effect
on McGlen's operations. Such failure could result in systems interruptions or
failures including the inability to process and ship orders, to collect credit
card payments and to provide effective customer service, which could cause the
loss of business and customers and could subject McGlen to claims for damages.
The severity of these possible problems would depend on the nature of the
problem and how quickly it could be corrected or an alternate implemented, which
is unknown at this time.
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<PAGE>
Contingency Plan: McGlen believes that its efforts towards Year 2000
compliance are behind schedule. McGlen will continue to monitor the need for a
contingency plan based on the results of its Year 2000 compliance review once
the review is completed.
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<PAGE>
Material Changes in Operations for the Six Months Ended June 30, 1999
On March 31, 1999, McGlen completed the acquisition of AMT
Component, Inc., which resulted in nearly a 100% increase in combined sale
revenue. McGlen issued approximately 17.5% of its outstanding shares to the
shareholders of AMT Component, Inc. McGlen also entered into an agreement to
merge with us in the same period. Both the acquisition and the merger caused
McGlen to expend an inordinate amount of resources on legal fees, accounting
fees and consulting fees.
Forward-Looking Statements
This report may contain forward-looking statements. Such statements
are based on McGlen's and AMT's management's current expectations and are
subject to a number of factors and uncertainties that could cause actual results
or outcomes to differ materially from those described in such forward-looking
statements. These statements address or may address the following subjects: Year
2000 readiness, results of operations, customer growth and retention; expansion
of systems capacity and development of technology; losses or earnings; operating
expenses, including, without limitation, marketing expense and technology and
development expense; revenue growth; and international sales. We caution
investors that there can be no assurance that actual results, outcomes or
business conditions will not differ materially from those projected or suggested
in such forward-looking statements as a result of various factors, including,
among others, its limited operating history, unpredictability of future revenues
and operating results, the continued growth of online commerce, risks associated
with international sales, system failure and capacity constraints and
competitive pressures. For further information, refer to the more specific Risk
Factors and uncertainties discussed throughout this report.
UNAUDITED PROFORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information
presents the pro forma consolidated balance sheet as of June 30, 1999 of McGlen
and its subsidiaries giving effect to the acquisition of AMT Components, Inc.
("AMT") and the acquisition of McGlen by us and the pro forma effect of our sale
of $1,250,000 of common stock to Escalada Investors, LLC. Also presented are the
pro forma consolidated statements of operations for the year ended December 31,
1998 and the three months ended March 31, 1999.
As a result of the Merger, McGlen's shareholders will own
approximately 87.5% of the common stock of the combined entity. Accordingly, in
accordance with Accounting Principles Board's Opinion No. 16 (APB 16),
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<PAGE>
McGlen is deemed to be the accounting acquirer. The Pro Forma financial
information reflects the reverse acquisition of us by McGlen and no goodwill has
been recorded.
In a reverse acquisition, the company whose stockholders receive the
larger portion of the voting rights in the combined enterprise is deemed to be
the acquiring enterprise for financial reporting purposes. Accordingly, the
historical financial statements of the acquiring enterprise (McGlen) are
presented as the historical financial statements of the combined enterprise and
the assets and liabilities of the acquired enterprise (us) are accounted for as
required by the purchase method of accounting without regard to which enterprise
is the surviving enterprise. For accounting purposes, the transaction has been
treated as a recapitalization of McGlen as the accounting acquirer (reverse
acquisition).
Our fiscal year ends June 30, and McGlen's year ends December 31.
The pro forma financial information has been prepared based on McGlen's year
end. The pro forma consolidated balance sheet combines our and McGlen's balance
sheets as of June 30, 1999. The pro forma consolidated statements of operations
combines the results of operations of us, McGlen and AMT for the year ended
December 31, 1998 and for the six months ended June 30, 1999.
The pro forma data is based on historical combined statements of us
and McGlen and has been accounted for as a reverse acquisition of us by McGlen
giving effect to the purchase method of accounting and to the assumptions and
adjustments (which are believed to be reasonable) described in the accompanying
notes to the unaudited pro forma consolidated financial information. In
addition, the pro forma adjustments set forth in the following unaudited pro
forma combined financial information are estimated and may differ from actual
adjustments when they become known.
The following unaudited pro forma consolidated financial information
does not reflect certain cost savings that we believe may be realized following
the Merger. Such cost savings are expected to be realized primarily through the
elimination of certain overhead expenses.
The pro forma data is provided for comparative purposes only. It
does not purport to be indicative of the results that actually would have
occurred if such acquisitions had been consummated on the dates indicated or
that may be obtained in the future. The unaudited pro forma combined financial
information should be read in conjunction with the notes thereto, the audited
financial statements of McGlen and AMT for the year ended December 31, 1998 and
our historical financial statements.
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<PAGE>
<TABLE>
Unaudited Pro Forma Combined Balance Sheet
As of June 30, 1999
<CAPTION>
Proforma
McGlen & Sub Adrenalin Proforma Proforma Combined
Hist Hist Adj Adj Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash & cash equivalents 196,130 134,608 (b) 1,100,000 675,000 2,105,738
Accounts receivables 479,061 89,595 - 568,656
Inventory 307,047 - - 307,047
Costs in excess of billing 103,146 103,146
Prepaid expenses and other current assets 372,693 35,804 - 408,497
--------- ------- --------- ------- ---------
Total current assets 1,354,931 363,153 1,100,000 675,000 3,493,084
INVESTMENT IN AMT - - - -
PROPERTY & EQUIPMENT 221,054 258,827 - 479,881
OTHER ASSETS
Deposits - 25,465 - 25,465
Patents & licenses - 2,196,711 - 2,196,711
Goodwill - - - -
Others 12,751 187,188 - 199,939
--------- ------- --------- ------- ---------
Total other assets 12,751 2,409,364 - 2,422,115
TOTAL ASSETS 1,588,736 3,031,344 1,100,000 675,000 6,395,080
========= ========= ========= ======= =========
</TABLE>
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<PAGE>
<TABLE>
McGlen Micro & Adrenalin Merger
As of June 30, 1999
<CAPTION>
Proforma
McGlen & Sub Adrenalin Proforma Proforma Combined
Hist Hist Adj Adj Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable & accrued expenses 809,147 540,075 - 1,349,222
Billings in excess of costs & estimated earnings - 158,874 - 158,874
Notes and loans payable-current portion - 12,360 - 12,360
Due to stockholders - - - -
--------- ---------- ----------- ------- ---------
Total current liabilities 809,147 711,309 - 1,520,456
Equipment Lease 137,254 137,254
Notes payable 310,000 424,253 - 734,253
--------- ---------- ----------- ------- ---------
TOTAL LIABILITIES 1,256,401 1,135,562 - 2,391,963
COMMITMENTS
STOCKHOLDER'S EQUITY
Common stock 76,350 96,883 (a) 678,178
(b) 8,798
(c) 5,728 187,759
Additional paid in capital 199,423 13,695,684 (a) (12,574,963)
(b) 1,091,202
(d) 56,562
(c) 669,272 3,815,358
Retained earnings 56,562 (11,896,785) (a) 11,896,785
(d) (56,562) -
--------- ---------- ---------- ------- ---------
Total stockholders' equity 332,335 1,895,782 1,100,000 675,000 4,003,117
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 1,588,736 3,031,344 1,100,000 675,000 6,395,080
========= ========== ========== ======= =========
</TABLE>
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1999
Note 1:
The unaudited pro-forma combined balance sheet is based on the individual
consolidated balance sheets of McGlen Micro, Inc. and its wholly owned
subsidiary, AMT Components, Inc(collectivley McGlen), and Adrenalin
Interactive, Inc (Adrenalin) to reflect the acquisition of McGlen by
Adrenalin, accounted for as a reverse acqusition of Adrenalin by McGlen;
and the private placement of $2,000,000 by Adrenalin as if the transactions
had taken place on June 30, 1999.
(a) To reflect the recapitalization of McGlen as a result of the
acquisition of McGlen by Adrenalin accounted for as a reverse
acquisition of Adrenalin by McGlen.
(b) Issuance of 293,255 shares of Adrenalin's $0.03 par value common stock
for a proceeds of $ 1,100,000, net of estimated expenses of the
offering of $ 150,000, pursuant to a common stock purchase agreement
between Adrenalin and Escalade Investors, Inc. dated July 12, 1999 for
$2,000,000. The investor has also received a warrant to purchase 29,325
shares at $4.843 per share, which is not included in the pro forma
adjustments.
(c) Assumed sale of 175,953 shares of common stock for proceeds of
$675,000, net of estimated expenses of $75,000. In addition, the
investor will receive a warrant tp purchase additional common stock at
an exercise price equal to 125% of the closing bid price on the trading
day prior to such funding, which has not been included in the pro forma
adjustments. This assumed sale is persuant to the common stock purcahse
agreement discussed in (b) above.
(d) S. Corporations retained earnings reclassified to additional
paid-in-capital
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<PAGE>
<TABLE>
Unaudited Pro Forma Consolidated Condensed Statement of Operation
For The Six Months Ended June 30, 1999
<CAPTION>
McGlen Access Adrenalin
Hist Micro Proforma Sub Hist Proforma Combined
Jun-99 Mar-99 Adj Total Jun-99 Adj Total
--------- --------- -------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Net sales 9,969,423 1,885,468 -- 11,854,891 -- -- 11,854,891
Development Contracts 1,237,696 1,237,696
Royalties 532,666 532,666
--------- --------- ---------- --------- ----------
9,969,423 1,885,468 11,854,891 1,770,362 13,625,253
Cost of sales 8,390,241 1,588,627 -- 9,978,868 1,665,177 -- 11,644,045
Gross profit 1,579,182 296,841 -- 1,876,023 105,185 -- 1,981,208
Operating expenses 1,571,489 326,507 -- 1,897,996 443,566 -- 2,341,562
--------- --------- ---------- --------- ----------
Loss before other income/ (expenses) 7,693 (29,666) -- (21,973) (338,381) -- (360,354)
Total other income/(expenses) -- -- -- -- (1,610,071) -- (1,610,071)
Loss before provision for income taxes 7,693 (29,666) (21,973) (1,948,452) -- (1,970,425)
Provision for income taxes -- -- -- -- -- -- -
--------- --------- ---------- --------- ----------
Net income 7,693 (29,666) (21,973) (1,948,452) (1,970,425)
========= ========= ========== ========= ==========
Earnings per share :
Basic (0.64) (0.06)
========= ==========
Fully diluted (0.64) (0.06)
========= ==========
Weighted Average Shares Outstanding :
Basic 3,043,823 (a) 32,274,384
========= ==========
Fully diluted 3,151,172 32,476,568
========= ==========
</TABLE>
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Note 2:
The Unaudited pro forma combined condensed statement of operations is
based on the individual statements of McGlen Micro, Inc and its wholly
owned subsidiary, AMT Components, Inc and Adrenalin Interactive, Inc. for
the six months ended June 30, 1999 after giving effect to the pro forma
adjustments necessary to reflect the acquisition described in Note 1 and
the acquisition of AMT components, Inc by McGlen Micro, Inc on March 31,
1999, as if the acquisitions had taken place on January 1, 1999.
(a) Includes estimated number of shares to be issued to McGlen's
stockholders and number of shares issued and to be issued in connection
with Adrenalin's $2,000,000 private placement.
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<PAGE>
<TABLE>
Unaudited Pro Forma Condensed Statement of Operations
For The Year Ended December 31, 1998
<CAPTION>
McGlen Access Adrenalin
Hist Micro Proforma Sub Hist Proforma Combined
Dec-98 Dec-98 Adj Total Dec-98 Adj Total
--------- --------- -------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Net sales 11,525,307 4,634,744 - 16,160,051 - - 16,160,051
Development contracts - - - - 1,461,288 - 1,461,288
Royalties - - - - 1,063,632 - 1,063,632
--------- --------- ---------- --------- ----------
Total sales 11,525,307 4,634,744 16,160,051 2,524,920 18,684,971
Cost of sales 9,707,247 3,818,691 - 13,525,938 2,336,026 - 15,861,964
--------- --------- ---------- --------- ----------
Gross profit 1,818,060 816,053 2,634,113 188,894 2,823,007
Operating expenses 1,778,646 684,793 - 2,463,439 2,236,155 - 4,699,594
Research & Development - - - - 35,373 - 35,373
--------- --------- ---------- --------- ----------
1,778,646 684,793 2,463,439 2,271,528 4,734,957
Income before other income/ (expenses) 39,414 131,260 - 170,674 (2,082,634) (1,911,960)
Total other income/(expenses) 20,305 150 - 20,455 52,669 - 73,124
Income before provision for income taxes 59,719 131,410 - 191,129 (2,135,303) (1,985,084)
Provision for income taxes 1,300 1,463 (a) 82,000 84,763 18,836 103,599
--------- --------- ---------- --------- ----------
Net income 58,419 129,947 106,366 (2,154,139) (2,088,683)
========= ========= ========== ========== ==========
Earnings per share :
Basic (0.81) (0.07)
========== ==========
Fully diluted (0.81) (0.07)
========== ==========
Weighted Average Shares Outstanding :
Basic 2,656,035 (b) 31,760,875
========== ==========
Fully diluted 2,843,299 32,476,588
========== ==========
</TABLE>
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
Note 3:
The Unaudited pro forma combined condensed statement of operations is
based on the individual statements of McGlen Micro, Inc and its wholly
owned subsidiary, AMT Components, Inc and Adrenalin Interactive, Inc.
for the tear ended December 31, 1998 after giving effect to the pro
forma adjustments necessary to reflect the acquisition described in Note
1 and the acquisition of AMT components, Inc by McGlen Micro, Inc on
March 31, 1999, as if the acquisitions had taken place on January 1,
1999.
(a)adjustment to S Corporation tax provision based on an assumed
effective rate of 40% to reflect tax provision for McGlen and its
subsidiary as if they were a C Corporation.
(b)Includes estimated number of shares to be issued to McGlen's
stockholders and number of shares issued and to be issued in
connection with Adrenalin's $2,000,000 private placement.
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<PAGE>
BOARD RECOMMENDATION
OUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF THE
MERGER ISSUANCE.
PROPOSAL 2 -
ELECTION OF PRE-MERGER DIRECTORS
Three directors are to be elected at the Meeting, each to hold
office until the consummation of the Merger and until his respective successor
is elected and qualified or, if the Merger is abandoned, until the next annual
meeting of stockholders and until his respective successor is elected and
qualified. (See "Proposal 3 - Election of Post-Merger Directors"). The persons
named in the accompanying proxy have advised management that it is their
intention to vote for the election of the following nominees as Pre-Merger
Directors unless authority is withheld:
Jay Smith, III
Edward H. MacKay
Robert A. D. Wilson
Management has no reason to believe that any nominee will be unable
to serve. In the event that any nominee becomes unavailable, the proxies may be
voted for the election of such other person or persons who may be designated by
our Board of Directors.
The following table sets forth certain information as to the persons
nominated for election as Pre-Merger Directors, all of whom are presently
members of our Board of Directors:
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<PAGE>
Name Business Experience Age
- ---- ------------------- ---
Jay Smith, III Mr. Smith has been a director since February 1997. 59
In June 1997, Mr. Smith was appointed as our
President and Chief Executive Officer. From 1980
until 1997, Mr. Smith was the owner and President of
Western Technologies Inc. and Smith Engineering.
Edward H. MacKay Mr. MacKay became a director in February 1999. 65
Since October 1998, Mr. MacKay has been CEO of
Cyberdat. From 1995 to 1997, he was Executive Vice
President, Chief Operating Officer and Chief
Financial Officer of Visicom Laboratories, a
developer of software and hardware for C41
applications for the U.S. Navy. From 1981 to 1995, he
was Chief Executive Officer and Chairman of our Board
of ATM Service Corporation, an automated teller
machine service business.
Robert A.D. Wilson Mr. Wilson became a director in November 1997. 48
Mr. Wilson has been Chairman and majority owner of
Sound Technology PLC, an electronics distribution
company in the United Kingdom, since 1978. In
addition, Mr. Wilson serves as Vice Chairman of
Alesis Studio Electronics, Inc., an international
manufacturing and marketing company for studio
electronics located in California. Currently, Mr.
Wilson is a director of Business Link, a U.K.
Government sponsored initiative to new and emerging
industries, and is Chairman of the British Music
Fairs Ltd., as well as past President of the Music
Industries Association.
BOARD RECOMMENDATION
OUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
THE NOMINEES.
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PROPOSAL 3 -
ELECTION OF POST-MERGER DIRECTORS
Four directors are to be elected at the Meeting, each to hold
office, effective upon the consummation of the Merger, until the next annual
meeting of stockholders and until his respective successor is elected and
qualified. (See "Proposal 2 - Election of Pre-Merger Directors"). The persons
named in the accompanying proxy have advised management that it is their
intention to vote for the election of the following nominees as Post-Merger
Directors unless authority is withheld:
George Lee
Mike Chen
Calbert Lai
Peter Janssen
Management has no reason to believe that any nominee will be unable
to serve. In the event that a nominee becomes unavailable, the proxies may be
voted for the election of such other persons who may be designated by our Board
of Directors.
The election of these persons as the Post-Merger Directors is a
condition precedent to McGlen's obligation to consummate the Merger.
The following table sets forth certain information as to the person
nominated for election as Post-Merger Directors:
Name Five Year Business Experience Age
- ---- ----------------------------- ---
George Lee Mr. Lee is Co-Founder and Chief Executive Officer of McGlen. 28
Mr. Lee is responsible for capital growth, organizational
growth, development of sales and marketing, and internal
operations and finances at McGlen. Prior to founding McGlen,
he held positions in sales at Eva Airways, and in freight
forwarding at Immortal Service. Mr. Lee graduated from the
University of California at Irvine in 1993 and was conferred
a Bachelor of Arts in Economics.
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Name Five Year Business Experience Age
- ---- ----------------------------- ---
Mike Chen Mr. Chen is Co-Founder and Chief Technology Officer of McGlen. 26
Mr. Chen is responsible for the development and coordination
of proprietary information technology applications including
the website storefront, internal logistics applications, and
financial reporting tools. Prior to founding McGlen, he was
an independent software programmer. Mr. Chen graduated from
the University of California at Berkeley in 1995 with a
degree in Electrical Engineering and Computer Science.
Calbert Lai Mr. Lai, a 15-year veteran of Silicon Valley, is the 43
President, Co-Founder and senior business strategist at
I-Storm, an E-commerce consulting firm. In 1986, Mr. Lai
became a founding partner and the Chief Executive Officer of
Lai, Venuti and Lai Advertising ("LVL"), where he provided
strategic marketing and consulting services for technology
clients such as IBM, HP, Sun, Cisco and NEC, and helped
launch many successful hi-tech products such as the Palm
Pilot. He served in such positions until joining I-Storm. In
1998, while serving as CEO of LVL, LVL was reorganized
pursuant to Chapter 11 of the United States Bankruptcy Code.
Peter Janssen Mr. Janssen founded Peter Janssen & Associates ("PJA") in 57
September 1995. PJA is a technology consulting firm
specializing in sales marketing and channel marketing
strategies. From September 1993 until September 1995, Mr
Janssen was head of Merchandising and Marketing at Egghead
Software, where he helped implement one of the first Internet
retail sites, Egghead.com.
If elected as Post-Merger Directors, Messrs. Lai and Janssen will
serve as the members of our Audit Committee. BOARD RECOMMENDATION
OUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
NOMINEES.
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PROPOSAL - 4
RATIFICATION OF PAST AND APPROVAL OF FUTURE
ISSUANCES TO ESCALADE INVESTORS, LLC
In early 1999, it became apparent that we needed an infusion of
capital to fund our operational obligations and payables. We undertook an
extensive effort to locate sources of capital on terms and conditions favorable
to us. Our need for capital increased in April, as we needed to cover the costs
that we had incurred and would continue to incur in connection with the Merger.
Our efforts were unsuccessful, until July 1999. On July 12, 1999, we entered
into a Common Stock Purchase Agreement and certain related agreements
(collectively, the "Purchase Agreement") with Escalade Investors, LLC, a
Delaware limited liability company ("Escalade").
Under the terms of the Purchase Agreement:
o we sold 293,255 shares of our common stock to Escalade for gross
proceeds of $1,2500,000 ($4.2625 per share, which was 110% of the
closing price on Friday, July 9, 1999);
o we issued to Escalade, at no additional cost, a three year warrant
to purchase 29,325 shares of our common stock at an exercise price
of $4.843 per share (which was 125% of the closing price on Friday,
July 9, 1999);
o Escalade agreed to purchase an additional $750,000 of our common
stock upon the consummation of the Merger, at a price per share
equal to 110% of the closing bid price of a share of common stock on
the trading day prior to such purchase; and
o we agreed to issue at no additional cost to Escalade upon its
purchase of such $750,000 of shares an additional three year warrant
covering a number of shares of our common stock equal to 10% of our
common stock Escalade receives in consideration for such $750,000.
This warrant will have an exercise price equal to 125% of the
closing bid price of a share of our common stock on the trading day
prior to such funding.
The Purchase Agreement provides other material rights and
obligations of the parties, including the following:
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o until October 10, 1999, we may redeem any of the shares we sold to
Escalade, at a redemption price equal to the greater of (i) $4.901
or (ii) the closing bid price of our common stock on the trading day
prior to redemption;
o if the average closing bid price for our common stock for the two
next successive 90 day periods (subject to certain adjustments) do
not equal 115% and 118%, respectively, of the price paid by
Escalade, we will issue additional shares ("Repricing Shares") to
Escalade so that the value of the purchased shares plus the
additional shares equals 115% or 118%, as applicable, of the
applicable purchase price;
o we will cause a registration statement with respect to the common
stock issued to Escalade to become effective by October 10, 1999 and
to stay effective for at least two years. After the registration
statement becomes effective, Escalade may not sell more than 33% of
the common stock it holds in any 30 day period;
o we may not offer or sell our common stock or securities convertible
into our common stock without Escalade's prior written consent until
the date which is 180 days after the latter of the effective date of
the above-referenced registration statement or the funding of the
$750,000 (the "Restrictive Period"). Such consent is not required in
connection with securities sold pursuant to the Merger, securities
sold in an underwritten public offering with gross proceeds of at
least $10,00,000, securities sold for an effective price per share
of common stock equal to or greater than the weighted average of the
price per share paid by Escalade for shares that are "restricted
securities" throughout the Restrictive Period, and under certain
other circumstances; and
o we are not obligated to issue additional shares to Escalade to the
extent the issuance would violate the Nasdaq rules relating to
limitations on the amount of shares that can be issued without
stockholder approval. However, we are required to seek such approval
and if we do not obtain it, we will be obligated to redeem, at a
redemption price equal to 120% of the price paid by Escalade, such
number of shares of our common stock held by Escalade so that we can
issue the additional shares without violating the limitations
imposed by Nasdaq.
The proceeds from the Purchase Agreement have and will continue to
enable us to fund our immediate operational obligations, payables, expenses
arising from the Merger, including legal and accounting fees, and other Merger
related expenses. In addition, as required by the Merger Agreement, we loaned a
portion of the proceeds to McGlen, as described above.
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The foregoing description of the terms of the private placement is
qualified in its entirety by the terms of the Purchase Agreement, which we
previously filed with the Securities and Exchange Commission.
Under the terms of the Purchase Agreement, we are required to seek
stockholder ratification of the terms of the Purchase Agreement. Failure to
obtain this approval, however, will not nullify the terms of the Purchase
Agreement.
As described above, the Purchase Agreement provides for the issuance
to Escalade of Repricing Shares under certain circumstances and to the issuance
of additional shares upon exercise of the warrants ("Warrant Shares"). Unless
our stockholders approve the issuances of Repricing Shares and Warrant Shares,
however, we may be required to redeem shares of our common stock held by
Escalade at a substantial premium. Specifically, Nasdaq's Marketplace Rules
prohibit a Nasdaq company from issuing shares at below market prices in a
private transaction to the extent that the number of shares issued equals or
exceeds 20% of the number of the company's shares outstanding prior to the
issuance, unless the issuances are approved by the company's stockholders. If
the price of our common stock falls substantially during the repricing periods,
we may be required to issue a substantial number of Repricing Shares to
Escalade. These shares, together with any Warrant Shares held by Escalade, may
exceed the 20% threshold. As noted above, the Purchase Agreement provides that
under those circumstances and in the absence of stockholder approval, Escalade
may require us to redeem from it a number of shares that it holds so that we can
issue the Repricing Shares. The redemption price is to equal 120% of the price
paid by Escalade for the shares being repurchased. Such redemption could
substantially deplete our cash resources at a time when those resources are
scarce. Stockholder approval of these issuances, on the other hand, will
eliminate our need to redeem the shares.
BOARD RECOMMENDATION
OUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
RATIFICATION OF PAST AND APPROVAL OF FUTURE ISSUANCES TO ESCALADE
INVESTORS, LLC UNDER THE PURCHASE AGREEMENT
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PROPOSAL 5 -
INCREASE IN THE NUMBER OF AUTHORIZED SHARES
General
On October 4, 1999, our Board of Directors adopted resolutions
recommending that the stockholders approve an amendment to our Certificate of
Incorporation to increase the authorized common stock from 20 million to 50
million shares and the authorized shares of our preferred stock from 100,000 to
5 million shares (the "Authorized Shares Amendment"). The text of the Authorized
Shares Amendment is attached hereto as Appendix C and is incorporated herein by
this reference. The relative rights and limitations of the common and preferred
stock would remain unchanged after the Authorized Shares Amendment.
Reasons for the Authorized Shares Amendment
Our Board recommends the Authorized Shares Amendment for several
reasons. We do not have sufficient authorized but unissued shares to enable us
to affect the Merger Issuance. Under the terms of the Merger Agreement, we will
need to issue approximately 28,000,000 shares of our common stock to the McGlen
stockholders and reserve for issuance under options issued in the Merger
approximately 875,000 additional shares of our common stock. At the Effective
Time, there may be approximately only 16,000,000 shares of authorized but
unissued shares available. Also, we will need approximately 550,000 additional
shares to satisfy obligations under existing option plans and warrants and to
reserve an additional 2,500,000 shares under the Long-Term Incentive Plan being
proposed.
Our Board of Directors further believes that is in our best
interests to have additional authorized but unissued common and preferred shares
available for issuance to meet business needs as they arise. Our Board of
Directors believes that the availability of such additional shares will provide
us with the flexibility to issue common and/or preferred stock for possible
future financings, stock dividends or distributions, acquisitions, stock option
plans or other proper corporate purposes which may be identified in the future
by our Board of Directors, without the possible expense and delay of a special
stockholders' meeting.
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Effect of Authorized Shares Amendment
The additional shares of common stock authorized by the Authorized
Shares Amendment will be available for issuance at such times and for such
corporate purposes as our Board of Directors may deem advisable, without further
action by our stockholders, except as may be required by applicable law or by
the rules of Nasdaq or any other stock exchange or national securities
association trading system on which the securities may be listed or traded. Upon
issuance, such shares will have the same rights as the outstanding shares of
common stock. Holders of common stock have no preemptive rights. Our Board of
Directors does not intend to issue any common stock except on terms which our
Board deems to be in the best interests of us and our stockholders. Any future
issuance of common stock will be subject to the rights of holders of outstanding
shares of any preferred stock which we may issue in the future. No preferred
stock is currently outstanding.
Although our Board has no present intention to issue shares of
common stock in the future in order to make acquisition of control of us more
difficult, future issuances of common stock could have that effect. For example,
the acquisition of shares of our common stock by an entity in order to acquire
control of us might be discouraged through the public or private issuance of
additional shares of common stock, since such issuance would dilute the stock
ownership of the acquiring entity. Common stock could also be issued to existing
stockholders as a dividend or privately placed with purchasers who might side
with our Board in opposing a takeover bid, thus discouraging such a bid.
The additional authorized shares of preferred stock will have such
designations, preferences, conversion rights, cumulative, relative,
participating, optional or other rights, including voting rights,
qualifications, limitations or restrictions thereof as are determined by our
Board of Directors. Thus, if the Authorized Shares Amendment is approved, our
Board of Directors would be entitled to authorize the creation and issuance of
up to 5,000,000 shares of preferred stock in one or more series with such
limitations and restrictions as may be determined in our Board's sole
discretion, without further authorization by the stockholders. Stockholders will
not have preemptive rights to subscribe for shares of preferred stock.
It is not possible to determine the actual effect of the preferred
stock on the rights of our stockholders until our Board of Directors determines
the rights of the holders of a series of the preferred stock. However, such
effects might include:
o restrictions on the payment of dividends to holders of the common
stock;
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o dilution of voting power to the extent that the holders of shares
of preferred stock are given voting rights;
o dilution of the equity interests and voting power if the preferred
stock is convertible into common stock; and
o restrictions upon any distribution of assets to the holders of the
common stock upon liquidation or dissolution and until the
satisfaction of any liquidation preference granted to the holders of
preferred stock.
Although our Board has no present intention of doing so, it could
issue shares of preferred stock (within the limits imposed by applicable law)
that could, depending on the terms of such series, make more difficult or
discourage an attempt to obtain control of us by means of a merger, tender
offer, proxy contest or other means. When in the judgment of our Board of
Directors such action would be in the best interests of the stockholders and us,
the issuance of shares of preferred stock could be used to create voting or
other impediments or to discourage persons seeking to gain control of us, for
example, by the sale of preferred stock to purchasers favorable to our Board of
Directors. In addition, our Board of Directors could authorize holders of a
series of preferred stock to vote either separately as a class or with the
holders of common stock, on any merger, sale or exchange of assets by us or any
other extraordinary corporate transaction. The existence of the additional
authorized shares could have the effect of discouraging unsolicited takeover
attempts. The issuance of new shares could also be used to dilute the stock
ownership of a person or entity seeking to obtain control of us should our Board
of Directors consider the action of such entity or person not to be in the best
interests of the stockholders and us. Such issuance of preferred stock could
also have the effect of diluting the earnings per share and book value per share
of the common stock held by the holders of common stock.
While we may consider effecting an equity offering of common and/or
preferred stock in the future for the purposes of raising additional working
capital or otherwise, we have no agreements or understandings with any third
party to effect any such offering and no assurances are given that any offering
will in fact be effected.
Stockholders will not have any appraisal rights under Delaware law
in connection with the Authorized Shares Amendment.
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BOARD RECOMMENDATION
OUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF THE
AUTHORIZED SHARES AMENDMENT.
PROPOSAL 6 -
APPROVAL OF 1999 LONG TERM INCENTIVE PLAN
On October 4, 1999, our Board of Directors adopted, subject to
stockholder approval, the Adrenalin Interactive, Inc. 1999 Long-Term Stock
Incentive Plan (the "1999 Incentive Plan"). Our Board believes that attracting,
motivating and retaining highly qualified employees and consultants contributes
to our growth and success and that our long-term success is enhanced by a
compensation program which includes long-term incentives relating to stock
ownership because such incentives encourage recipients to more closely align
their interests with those of our stockholders by relating compensation to
increases in stockholder value.
The 1999 Incentive Plan provides for grants of stock options, stock
appreciation rights, stock awards and cash awards to employees and consultants.
The 1999 Incentive Plan is intended to replace our existing stock option plans
(the "Existing Plans"). If the 1999 Incentive Plan is approved by our
stockholders, authority to make further grants under the Existing Plans will
terminate, although previously granted awards under the Existing Plans will
remain outstanding in accordance with their terms.
The full text of the 1999 Incentive Plan is attached to this Proxy
Statement as Appendix D and is incorporated herein by reference. Principal
features are described below, but such description is qualified in its entirety
by reference to the text.
General. The purpose of the 1999 Incentive Plan is to promote our
long-term financial success by providing a means to attract, retain and award
individuals who can and do contribute to such success. Grants of stock-based
compensation under the 1999 Incentive Plan will encourage the recipients of such
awards to further identify their interests with those of our stockholders.
Eligibility. The 1999 Incentive Plan provides for the grant of
awards to employees of and consultants to us and our subsidiaries selected by a
committee responsible for administering the plan, subject to limitations
contained in the 1999 Incentive Plan. Awards which may be granted under the 1999
Incentive Plan include stock options, including incentive stock options ("ISOs")
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and non-qualified stock options ("NQSOs"), stock appreciation rights ("SARs"),
stock awards ("Stock Awards") and cash awards ("Cash Awards").
No award may be granted under the 1999 Incentive Plan subsequent to
the tenth anniversary of the date on which the plan is approved by our
stockholders. The number of shares of our common stock ("Shares") available for
issuance under the 1999 Incentive Plan may not exceed the sum of 2,500,000.
Administration. The 1999 Incentive Plan will be administered by a
committee composed of two or more non-employee directors; provided, however,
that our Board of Directors may assume, at its sole discretion, administration
of the plan. Among other things, the committee may authorize awards to eligible
participants, specify the types, terms and conditions of such awards, permit
transferability of awards to third parties, interpret the plan's provisions and
administer the plan in a manner consistent with its purpose.
Types of Awards Under the Plan
Stock Options. Stock options, including ISOs and NQSOs, may be
granted by the committee on such terms, including vesting and payment terms, as
it deems appropriate in its discretion; provided that the exercise price shall
be not less than 100% of the fair market value of a Share on the applicable date
as determined by the committee. Additional limitations are applicable to ISOs
granted to holders of 10% or more of our outstanding shares. As is the case with
the other types of awards available under the 1999 Incentive Plan, stock options
may be granted singularly, in combination with another award(s) or in tandem
whereby exercise or vesting of one award held by the participant cancels another
of the participant's awards. Payment for Shares received on exercise of an
option may be made in cash or by such other means as the committee may permit.
SARs. Participants may receive, at the discretion of the committee,
awards of a right to receive payment in cash, Shares or a combination equal to
the excess of the aggregate market price at the time of exercise of a specified
number of Shares over the aggregate exercise price of the SAR being exercised,
such aggregate exercise price being based on the fair market value of a Share on
the applicable date as determined by the committee.
Stock Awards. The committee, in its discretion, may make a grant of
Shares or of a right to receive Shares (or their cash equivalent or a
combination of both) in the future to a participant on such terms as the
committee shall determine.
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Cash Awards. The committee, in its discretion, may make a grant of a
right denominated in cash or cash units to receive a payment (in cash, Shares or
a combination of both) based on the attainment of pre-established performance
goals and such other terms as the committee shall determine.
Performance Goals. The committee may grant Stock Awards and Cash
Awards under such terms and conditions as it deems appropriate, which may
include the achievement of certain performance goals. The performance goals the
committee may use in determining awards consist of cash generation targets,
profits, revenue and market share targets, profitability targets as measured by
return ratios, and stockholder returns. The committee may measure performance
using a single goal criterion or multiple goal criteria, and such measurement
may be based on our performance, business unit performance and/or performance as
compared to that of other publicly-traded companies.
Amendment and Termination. Our Board of Directors may amend, suspend
or terminate the 1999 Incentive Plan at any time; provided, however, that (i)
the Share limitations set forth in Sections 3(a) and 3(b) of the 1999 Incentive
Plan cannot be increased and (ii) the minimum stock option and stock
appreciation right exercise prices set forth in Section 2(c) of the 1999
Incentive Plan cannot be changed, unless approved by our stockholders.
Actual Award Benefits. Actual awards under the 1999 Incentive Plan
cannot be determined at this time. Such awards will depend on the criteria
established from time to time by the committee.
Federal Income Tax Consequences
The following description of Federal income tax consequences is
based upon the Internal Revenue Code of 1986, as amended, the applicable
Treasury Regulations promulgated thereunder, judicial authority and current
administrative rulings and practices as in effect on the date of this Proxy
Statement. This discussion is for general information only and does not discuss
consequences which may apply to special classes of taxpayers (e.g., nonresident
aliens, broker dealers, or insurance companies). Stockholders are urged to
consult their own tax advisors to determine the particular consequences to them.
The grant of a stock option or SAR will create no tax consequences
for the participant or us. The participant will have no taxable income upon
exercising an ISO (except that the alternative minimum tax provisions of the
Internal Revenue Regulations may apply), and we will not receive a deduction
when the ISO is exercised. If the participant does not dispose of the shares
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acquired on exercise of an ISO within the two-year period beginning on the day
after the grant of the ISO and within one year after the transfer of the shares
to the participant, the gain or loss on a subsequent sale will be a capital gain
or loss to the participant. If the participant disposes of the shares within the
two-year or one-year periods described above, the participant generally will
realize ordinary income and we will be entitled to a corresponding deduction.
Upon exercise of an SAR or an NQSO, the participant must recognize ordinary
income in an amount equal to the difference between the exercise price and the
fair market value of the stock on the exercise date. We will receive a
corresponding deduction for the same amount.
With respect to Stock Awards granted under the 1999 Incentive Plan,
the participant must recognize ordinary income in an amount equal to the fair
market value of the shares received at such time that the shares become
transferable or not subject to a substantial risk of forfeiture, whichever
occurs earlier.
The tax treatment upon disposition of shares acquired under the 1999
Incentive Plan depends on how long the shares have been held. In the case of
shares acquired through exercise of an option, the tax treatment will also
depend on whether or not the shares were acquired by exercising an ISO. There
will be no tax consequences to us upon the disposition of shares acquired under
the 1999 Incentive Plan except that we may receive a deduction in the case of
disposition of shares acquired under an ISO before the applicable ISO holding
period has been satisfied.
We believe that upon stockholder approval, compensation received
upon the exercise of stock options thereafter granted under the 1999 Incentive
Plan will qualify as "performance-based compensation," and that the compensation
element related to such exercise will, therefore, be deductible under Section
162(m) of the Code.
BOARD RECOMMENDATION
OUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE 1999 LONG TERM INCENTIVE PLAN
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PROPOSAL 7 -
APPROVAL OF NAME CHANGE
On October 4, 1999, our Board of Directors adopted resolutions
recommending that the stockholders approve an amendment to our Certificate of
Incorporation changing our corporate name to McGlen Internet Group or such other
name as our Board of Directors deems appropriate, effective upon consummation of
the Merger. Because the principal focus of our business following the Merger
will be McGlen's internet business, our Board believes that the name McGlen
Internet Group will better reflect the corporate image that we will wish to
publicly convey than would our current corporate name, Adrenalin Interactive,
Inc. Should our Board, prior to the consummation of the Merger, conceive of
another corporate name that, it the Board's view, is even more reflective of the
post-Merger company, the Board wishes to have the flexibility to adopt that
name.
BOARD RECOMMENDATION
OUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE NAME CHANGE PROPOSAL
INFORMATION ABOUT DIRECTORS,
EXECUTIVE OFFICERS AND BENEFICIAL OWNERS
Meetings of our Board of Directors
Our Board of Directors held five meetings during fiscal 1999. None
of the incumbent directors attended fewer than 75% of our Board meetings and
committee meetings of which he was a member. Our Board of Directors acted twelve
times by unanimous written consent during fiscal 1999.
Committees of our Board of Directors
The Audit Committee is currently comprised of Messrs. MacKay and
Wilson. It is responsible for advising our Board of Directors in connection with
our annual audit and meeting with our independent accountants to review our
internal controls and financial management practices. The Audit Committee held
one meeting in fiscal 1999.
The Compensation Committee is currently comprised of Messrs. MacKay
and Wilson. It is responsible for advising our Board of Directors in connection
with determining compensation
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payable to officers and senior employees. The Compensation Committee held one
meeting in fiscal 1999.
Our Board of Directors does not have a Nominating Committee.
Information Relating to Executive Officers and Directors
The following table sets forth certain information relating to our
current executive officers and directors:
POSITION(S) WITH
NAME AGE ADRENALIN
-------- --- ---------------------------
Jay Smith III 59 President, Chief Executive Officer,
Treasurer and Director
Michael Cartabiano 48 Vice President and Secretary
Edward H. MacKay 65 Director
Robert A.D. Wilson 48 Director
Information regarding Messrs. Smith, MacKay and Wilson is provided
under Proposal 2 - Election of Pre-Merger Directors.
Mr. Cartabiano served as a consultant of our subsidiary Western
Technologies, Inc., from 1994 to 1997. In February 1997, Mr. Cartabiano was
appointed to manage our toy and game group. Mr. Cartabiano was appointed as our
Vice President in February 1998 and as our Secretary in May 1998.
There are no family relationships among any of our directors,
nominees for directors or executive officers.
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Section 16(a) Reporting Delinquencies.
No beneficial owners of more than 10% of our issued and outstanding
common stock failed to file on a timely basis any reports required to be filed
by them under Section 16(a) of the Securities Exchange Act of 1934 during or
with respect to fiscal 1999. The following executive officers and directors
failed to file on a timely basis one or more reports required to be filed by
them under Section 16(a) of the Securities Exchange Act of 1934 during or with
respect to fiscal 1999:
Number of
Name of Executive Transactions not
Officer, Director or Number of Reported on
10% Beneficial Capacity or Capacities Reports Filed a Timely Basis
-------------- ---------------------- ------------- --------------
Owner Late
----- ----
Michael Cartabiano Vice President and 1 1
Secretary
Edward MacKay Director 2 1
Thomas A. Schultz Former Director 2 2
Robert A.D. Wilson Director 2 1
As of the date hereof, we are not aware of the continued failure of
any of these persons to file such required reports.
Executive Officer Compensation
The following Summary Compensation Table sets forth the names,
positions and annual compensation we paid for each of our fiscal years ended
June 30, 1999, 1998 and 1997 to Jay Smith III, our President, Chief Executive
Officer and Treasurer, and Michael Cartabiano, our only other executive officer
or key employee whose aggregate annual compensation exceeded $100,000 during
fiscal 1999:
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Summary Compensation Table
Annual Compensation Long-Term Compensation
---------------------- -------------------------------
Securities All
Fiscal Underlying Other
Name and Position(s) Year Salary ($) Options (#) Compensation
- ------------------------ ------- ------------ ------------ ($)
--------------
Jay Smith III, President 1999 $149,300 --0-- $21,294 (1)
Chief Executive Officer,
Treasurer and Director
1998 150,000 233,333 $23,461(2)
1997 57,775 (3) -0- -0-(4)
Michael Cartabiano, 1999 130,000 333 --0--
Vice President and
Secretary
1998 118,240 58,333 -0-(5)
1997 n/a 6,333 n/a
* Figures through December 31, 1998 have been adjusted to reflect a 3-for-1
reverse stock split effected on December 29, 1998.
(1) Reflects legal fees and costs we paid in respect of the defense of a
lawsuit against Mr. Smith d/b/a Smith Engineering and the reimbursement of
automobile costs for Mr. Smith, but excludes $25,407 received by Mr. Smith
pursuant to his license agreement with Western Technologies, Inc.
("Western") (See "Certain Relationships and Related Transactions").
(2) Reflects legal fees and costs we paid in respect of the lawsuit referred
to in Note (1) above and the reimbursement of automobile costs for Mr.
Smith, but excludes 143,303 received by Mr. Smith pursuant to the license
agreement referred to in Note (1) above.
(3) Reflects Mr. Smith's salary from February 1997 through June 30, 1997 after
our acquisition of Western.
(4) Excludes $69,928 received by Mr. Smith pursuant to the license agreement
referred to in Note 1 above.
-83-
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<PAGE>
(5) Excludes $55,200 received by Mr. Cartabiano pursuant to the
royalty-sharing arrangement referred to below under Certain Relationships
and Related Transactions.
The following table sets forth certain information with respect to
all stock options we granted during fiscal 1999 to Messrs. Smith and Cartabiano:
(Individual Grants)
-------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise
Granted In Fiscal Price Expiration
Name (#) Year ($/sh) Date
- ---- --- ---- ------ ----
Jay Smith, III --0-- --0-- n/a n/a
Michael Cartabiano 333 1.56% $1.00 1/31/04
The following table sets forth certain information with respect to
the exercise of stock options during fiscal 1999 and the value of unexercised
stock options held by Messrs. Smith and Cartabiano at the end of fiscal 1999:
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<PAGE>
Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year-End (Fye) Option Values
--------------------------------------------
Value of
Shares Number of Unexercised
Acquired Securities In-the-money
On Value Underlying Options at Fye
Name Exercise Realized Unexercised Option Exercisable/
Unexercisable ($)
- ---- -------- -------- -------------------
(#) At Fye
Exercisable /
-------------
Unexercisable
-------------
Jay Smith III n/a n/a 145,068 / 99,098 290,136/198,196
Michael n/a n/a 43,721 / 21,278 105,739/51,850
Cartabiano
Director Compensation.
We do not compensate our directors for their services to us or for
attendance at meetings with cash compensation. Instead, from time to time we
grant our directors shares of our common stock or options to purchase such
shares. In fiscal 1999, we granted 16,666 shares to each of Thomas Schultz and
Robert A.D. Wilson and we issued an option to Edward H. MacKay to purchase
25,000 shares at an exercise price of $1.50 per share.
Executive Officer Employment Contracts
On November 1, 1997, we entered into a three-year employment
agreement with Mr. Smith (the "Smith Employment Agreement"). The Smith
Employment Agreement provides that he will serve as our President and Chief
Executive officer and receive a base salary of $150,000 per year for his
services. Mr. Smith is also entitled to receive bonuses based upon our
achievement of our goals as determined by our Board of Directors. The Smith
Employment Agreement also provides that Mr. Smith will devote all of his
business time, attention and energy to us and will be subject to a one-year
covenant not to directly compete with us after his relationship with us ends.
Mr. Smith is also entitled to participate in all group health and insurance
programs and other fringe benefits or retirement plans available to our other
employees.
-85-
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<PAGE>
The Smith Employment Agreement automatically terminates upon Mr.
Smith's death, permanent disability or involuntary termination for cause. If Mr.
Smith is terminated without cause (which is deemed to include Mr. Smith's
resignation after we: (a) reduce his monthly base compensation by more than 25%
other than as a result of a decrease in the compensation of all of our executive
officers based upon our financial performance; (b) significantly change Mr.
Smith's duties, responsibilities, authority, powers or functions; (c) require
Mr. Smith to relocate to an office more than 25 miles from our current executive
offices in Los Angeles; or (d) fail to perform any of our material obligations
to Mr. Smith), we will be obligated to: (i) pay Mr. Smith a lump-sum payment
equal to $150,000; (ii) continue to provide Mr. Smith's other employment
benefits at our expense for 12 months; (iii) enter into a post-termination
consulting agreement with Mr. Smith pursuant to which Mr. Smith will be required
to provide no more than 10 hours of consulting services per week to us and will
be entitled to receive the sum of $150 for each hour actually worked; and (iv)
grant Mr. Smith a 120-day exclusive option to repurchase all of the stock of
Western for Western's then net book value as reflected on our books and records.
The Smith Employment Agreement also provided that Mr. Smith was to
be awarded stock options to purchase up to 233,333 shares of our common stock at
an exercise price equal to $1.875 per share. Such options have a 10-year term
and become exercisable at the rate of 19,444 shares at the end of each calendar
quarter of Mr. Smith's employment under the Smith Employment Agreement from and
after November 1, 1997.
It is a condition precedent to the Merger that the Smith Employment
Agreement be superseded by a new employment agreement upon consummation of the
Merger. See "Interests of Certain Persons in the Merger".
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of September 20, 1999, the number
of shares of our common stock held of record or beneficially: (i) by each person
who held of record, or was known by us to own beneficially, more than 5% of the
outstanding shares of our common stock; (ii) by each of the named executive
officers (as such term is defined in the proxy rules); (iii) by each director;
(iv) by each nominee for director; and (v) by all of our current executive
officers and directors as a group:
-86-
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<PAGE>
Names and Address Number of Percent of Outstanding
Of Beneficial Owner Shares Owned (1) Shares
------------------- ----------------
Of Common Stock (2)
-------------------
Jay Smith III 406,095(3) 11.0%
5301 Beethoven St.
Los Angeles, CA 90066
Michael Cartabiano 43,721(4) 1.2%
5301 Beethoven St.
Los Angeles, CA 90066
Robert A.D. Wilson 80,843 2.3%
Letchworth Point
Dunhams Lane
Letchworth, Hertfordshire
SG6 I ND England
Edward H. MacKay 25,000 0.7 %
George Lee -0- -0- %
3002 Dow Avenue
Suite 212
Tustin, CA 92780
Mike Chen -0- -0- %
3002 Dow Avenue
Suite 212
Tustin, CA 92780
Calbert Lai -0- -0- %
3002 Dow Avenue
Suite 212
Tustin, CA 92780
Paul Janssen -0- -0- %
3002 Dow Avenue
Suite 212
Tustin, CA 92780
-87-
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<PAGE>
Names and Address Number of Percent of Outstanding
Of Beneficial Owner Shares Owned (1) Shares
------------------- ---------------- Of Common Stock (2)
-------------------
Escalade Investors, LLC 322,580(5) 9.0 %
One World Trade Center
Suite 4563
New York, NY 10046
All current executive officers and 558,229(6) 14.8%
directors as a group (four persons)
* Figures through December 31, 1998 have been adjusted to reflect a 3-for-1
reverse stock split effected on December 29, 1998.
(1) Except as otherwise indicated and subject to applicable community property
and similar statutes, the persons listed as beneficial owners of the
shares of common stock have sole voting and dispositive power with respect
of such shares.
(2) For purposes of computing the percentages, the number of shares of common
stock outstanding includes shares purchasable within 60 days upon exercise
of outstanding stock options, as follows: Mr. Smith (164,512), Mr.
Cartabiano (43,721 shares), Mr. Wilson (16,666 shares), Mr. MacKay (25,000
shares), Escalade Investors, LLC (29,325 shares) and all executive
officers and directors as a group (233,233 shares).
(3) Includes 241,583 shares of common stock owned of record by a family trust
established for the benefit of Mr. Smith and his spouse and 164,512 shares
purchasable within 60 days upon exercise of outstanding stock options.
(4) All of the shares of common stock beneficially owned by Mr. Cartabiano are
shares purchasable within 60 days upon exercise of outstanding stock
options.
(5) Includes 29,325 shares purchasable within 60 days upon exercise of an
outstanding warrant.
(6) Includes 233,233 shares of common stock purchasable within 60 days upon
exercise of outstanding stock options.
-88-
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<PAGE>
Certain Relationships and Related Transactions
In February 1997, we acquired all of the issued and outstanding
capital stock of Western and certain of the assets and liabilities of Smith
Engineering from Jay Smith III, our President, Chief Executive officer and
Treasurer, in exchange of 267,667 shares of our common stock. As a part of such
acquisition, Western entered into a license agreement with Mr. Smith (the "Smith
License Agreement") pursuant to which Mr. Smith granted to Western the exclusive
right to use and market patents and license agreements owned by Mr. Smith and
Smith Engineering. The Smith License Agreement provides that 75% of the revenues
of such patents and licenses are to be retained by Western and 25% are to be
retained by Mr. Smith until Mr. Smith receives the aggregate sum of $2,000,000
from such patents and licenses, after which time no further revenue is to inure
to Mr. Smith and the patents and licenses will be assigned to Western. During
fiscal 1999, Mr. Smith received an aggregate of $25,407 in revenues pursuant to
the Smith License Agreement. During fiscal 1998, Mr. Smith received an aggregate
of $143,303 in revenues pursuant to the Smith License Agreement. During fiscal
1997, Mr. Smith received an aggregate of $69,928 in revenues pursuant to the
Smith License Agreement for the approximately five-month period subsequent to
the date of our acquisition of Western.
Michael Cartabiano, our Vice President and Secretary, is entitled to
share in certain royalties generated by us in respect of certain products
created by him pursuant to an arrangement entered into between Mr. Cartabiano
and Western prior to our acquisition of Western, which arrangement has been
modified and supplemented subsequent to our acquisition of Western. During
fiscal 1998, Mr. Cartabiano received an aggregate of $55,200, in revenues
pursuant to such arrangement. During fiscal 1999, Mr. Cartabiano did not receive
any revenue pursuant to such arrangement.
On November 18, 1997, we entered into a consulting agreement with
Kayne International, Inc., a business consulting firm with which Thomas A.
Schultz, a former director, is affiliated (the "Kayne Consulting Agreement").
The Kayne Consulting Agreement, which expired on December 31, 1998, provided
that Adrenalin was to pay Kayne the sum of $1,500 per day plus expenses for the
business consulting services rendered to Adrenalin by Mr. Schultz on behalf of
Kayne. During the fiscal 1998, Adrenalin paid Kayne the sum of $163,600 in fees
for the consulting services performed by Mr. Schultz under the Kayne Consulting
Agreement (which sum includes the issuance date value of an aggregate of 73,333
shares of our common stock issued to Kayne on May 12, 1998 at a price equal to
$1.88 per share in lieu of previously accrued but unpaid consulting fees due
Kayne thereunder).
-89-
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<PAGE>
On April 10, 1998, we entered into a consulting agreement with
Robert A.D. Wilson, a director, pursuant to which Mr. Wilson agreed to provide
certain consulting services to us in exchange for 8,333 shares of our Common
Stock issued to Mr. Wilson at a deemed price of $1,875 per share.
George Lee and Mike Chen, who are nominees for Post-Merger
Directors, are principal stockholders of McGlen. McGlen has entered into the
Agreement the Merger and certain loan transactions with Adrenalin. (See
"Proposal 1-The Merger Issuance").
-90-
Page 100 of 303
<PAGE>
STOCKHOLDER PROPOSALS
Any stockholder intending to submit to us a proposal for inclusion
in our Proxy Statement and proxy for the 2000 Annual Meeting must submit such
proposal so that it is received by us no later than July 14, 2000. Stockholder
proposals should be submitted to our Secretary. No stockholder proposals were
received for inclusion in this proxy statement.
INCORPORATION BY REFERENCE
This Proxy Statement incorporates by reference the following
sections of our Annual Report to Stockholders for the fiscal year ended June 30,
1999 (a copy of which is attached hereto as Appendix E): "Item 1. Description of
Business"; "Item 2. Description of Property"; "Item 3. Legal Proceedings"; "Item
5. Market for Registrant's Common Equity and Related Stockholder Matters"; "Item
6. Management's Discussion and Analysis of Financial Condition and Results of
Operations"; "Item 7. Financial Statements"; and "Item 8. Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure".
STOCKHOLDERS ARE URGED TO IMMEDIATELY MARK, DATE, SIGN AND RETURN
THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED, TO WHICH NO POSTAGE NEED BE AFFIXED
IF MAILED IN THE UNITED STATES.
By Order of our Board of Directors
/s/ Michael Cartabiano
- --------------------------
Michael Cartabiano
Secretary
-91-
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<PAGE>
PROXY
SOLICITED BY OUR BOARD OF DIRECTORS OF
ADRENALIN INTERACTIVE, INC.
FOR ANNUAL MEETING OF STOCKHOLDERS ON NOVEMBER 11, 1999
The undersigned, revoking any previous proxies respecting the subject
matter hereof, hereby appoints Jay Smith, III and Michael Cartabiano attorneys
and proxies (each with power to act alone and with power of substitution) to
vote all of the shares which the undersigned is entitled to vote, with all
powers which the undersigned would possess if personally present at the 1999
Annual Meeting of Stockholders of Adrenalin Interactive, Inc. ("Adrenalin") to
be held on November 11, 1999, at 10:00 am at the offices of Adrenalin, 5301
Beethoven Street, Los Angeles, California, and any adjournments or postponements
thereof, as follows.
1. APPROVAL OF THE MERGER ISSUANCE PURSUANT TO THE MERGER BETWEEN
ADRENALIN AND McGLEN MICRO, INC.:
FOR ________AGAINST _________ WITHHOLD __________
2. ELECTION OF PRE-MERGER DIRECTORS:
FOR all nominees listed below (except as authority to vote for all marked
to the contrary below)________.
WITHHOLD nominees listed below ___________.
(INSTRUCTION: To withhold authority to vote for an individual nominee,
strike a line through such nominee's name in the list below.)
JAY SMITH, III, EDWARD H. MACKAY and ROBERT A.D. WILSON
-1-
Page 102 of 303
<PAGE>
3. ELECTION OF POST-MERGER DIRECTORS:
FOR all nominees listed below (except as authority to vote for all marked
to the contrary below)___________.
WITHHOLD nominees listed below_________.
(INSTRUCTION: To withhold authority to vote for an individual nominee, a
line through such nominee's name in the list below.)
GEORGE LEE, MIKE CHEN, CALBERT LAI, and PETE JANSSEN
4. RATIFICATION OF PAST AND APPROVAL FUTURE ISSUANCES OF ADRENALIN'S COMMON
STOCK TO ESCALADE INVESTORS, LLC UNDER THE TERMS OF THE COMMON STOCK
PURCHASE AGREEMENT ENTERED INTO IN JULY 1999:
FOR ________AGAINST _________ WITHHOLD __________
5. APPROVAL OF INCREASE IN NUMBER OF AUTHORIZED SHARES OF ADRENALIN'S COMMON
STOCK FROM 20 MILLION TO 50 MILLION AND INCREASE IN NUMBER OF AUTHORIZED
SHARES OF ADRENALIN'S PREFERRED STOCK FROM 100,000 TO 5 MILLION:
FOR ________AGAINST _________ WITHHOLD __________
6. RATIFICATION AND APPROVAL OF THE ADRENALIN 1999 LONG-TERM INCENTIVE PLAN
AND THE RESERVATION OF 2,500,000 SHARES OF ADRENALIN COMMON STOCK FOR
ISSUANCE THEREUNDER:
FOR ________AGAINST _________ WITHHOLD __________
-2-
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<PAGE>
7. APPROVAL OF A CHANGE OF ADRENALIN'S CORPORATE NAME TO MCGLEN INTERNET
GROUP OR SUCH OTHER NAME AS ADRENALIN'S BOARD OF DIRECTORS DEEMS
APPROPRIATE, EFFECTIVE UPON CONSUMMATION OF THE MERGER:
FOR ________AGAINST _________ WITHHOLD __________
8. IN THEIR DISCRETION, UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE
THE MEETING.
PLEASE SIGN BELOW AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED
ENVELOPE.
The undersigned acknowledges receipt of the Notice of 1999 Annual Meeting
and the accompanying Proxy Statement.
THIS PROXY IS SOLICITED ON BEHALF OF OUR BOARD OF DIRECTORS OF ADRENALIN
and when properly executed will be voted as directed herein. If no direction is
given, this Proxy will be voted FOR the proposals identified above.
----------------------------- ------------------------------
(Signature) (Signature, if held jointly)
Dated:_________, 1999
Where stock is registered in the names of two or more persons ALL
should sign. Signature(s) should correspond exactly with the name(s) as shown
above. Please sign, date and return promptly in the enclosed envelope. No
postage need be affixed if mailed in the United States.
-3-
Page 104 of 303
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
AUDITED FINANCIAL STATEMENTS - Adrenalin Interactive, Inc.*
Independent Auditors' Report............................................F-1
Consolidated Balance Sheet as of June 30, 1998..........................F-2
Consolidated Statements of Operations
For the Years Ended June 30, 1998 and 1997...........................F-3
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended June 30, 1998 and 1997...........................F-4
Consolidated Statements of Cash Flows...................................F-6
Notes to Consolidated Financial Statements
For the Years Ended June 30, 1998 and 1997...........................F-8
AUDITED FINANCIAL STATEMENTS - McGlen Micro, Inc.
Independent Auditors' Report............................................F-23
Balance Sheets as of December 31, 1998 and 1997.........................F-24
Statements of Income For the Years Ended December 31, 1998 and 1997.....F-26
Statements of Stockholders' Equity For the Years Ended December 31,
1996, 1997 and 1998..................................................F-27
Statements of Cash Flows For the Years Ended December 31, 1998 and 1997.F-28
Notes to Financial Statements For the Years Ended
December 31, 1998 and 1997...........................................F-30
AUDITED FINANCIAL STATEMENTS - AMT Component, Inc.
Independent Auditors' Report............................................F-37
Balance Sheet as of December 31, 1998...................................F-38
Statement of Income and Retained Earnings For the Year Ended
December 31, 1998....................................................F-41
Statement of Cash Flows For the Year Ended December 31, 1998............F-42
Notes to Financial Statements For the Year Ended December 31, 1998......F-44
UNAUDITED FINANCIAL STATEMENTS - McGlen Micro, Inc.
Balance Sheet as of June 30, 1999.......................................F-48
Income Statement For the Six Month Period Ended June 30, 1999...........F-50
- --------------------------
* For our audited financial statements as of and for the fiscal year ended
June 30, 1999 and for the notes thereon, refer to our Annual Report on Form
10-KSB for the fiscal year ended June 30, 1999, "Item 7. Financial
Statements," which is incorporated by reference herein and is included as
an appendix to this Proxy Statement.
-94-
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<PAGE>
ADRENALIN INTERACTIVE, INC.
AND SUBSIDIARY
FOR THE YEARS ENDED JUNE 30, 1998
AND JUNE 30, 1997
Page 106 of 303
<PAGE>
Independent Auditors' Report
----------------------------
Board of Directors
Adrenalin Interactive, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of
Adrenalin Interactive, Inc. (formerly Wanderlust Interactive, Inc.) and
subsidiary ("Company") as of June 30, 1998, and the related
consolidated statements of operations, changes in shareholders' equity
and cash flows for the years ended June 30, 1998 and 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Adrenalin Interactive, Inc. and subsidiary as of June 30,
1998, and the consolidated results of its operations and its
consolidated cash flows for the years ended June 30, 1998 and 1997, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the
Company has suffered recurring losses from operations, which raises
substantial doubt as to the Company's ability to continue as a going
concern. Management's plans in regard to this is discussed in Note 2.
The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Drucker Math & Whitman, P.C.
- --------------------------------
DRUCKER MATH & WHITMAN, P.C.
North Brunswick, New Jersey
Sept 22, 1998 F-1
Page 107 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Balance Sheet
June 30, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 166,363
Common stock subscription receivable 435,000
Accounts receivable, net of allowance for
doubtful accounts of $45,750 180,704
Costs and estimated earnings in excess
of billings on uncompleted contracts 15,086
Prepaid expenses 74,774
----------
Total current assets 871,927
----------
Fixed assets, net 329,450
----------
Other assets:
Patents and licenses, net of accumulated
amortization of $779,479 2,621,880
Goodwill, net of accumulated amortization
of $59,523 1,621,149
License rights, advance royalty, net of
write-off of $200,000 100,000
Capitalized software 24,254
Security deposits and other 19,229
----------
4,386,512
----------
$5,587,889
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes and loans payable, current portion $ 88,000
Accounts payable and accrued liabilities 605,468
Billings in excess of costs and estimated
earnings on uncompleted contracts 36,055
----------
Total current liabilities 729,523
----------
Notes and loans payable, non-current portion 397,130
----------
Due to officer/shareholder 55,935
----------
Total liabilities 1,182,588
----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value;
authorized, 100,000 shares;
issued and outstanding, none -
Common stock, $.01 par value;
authorized, 20,000,000 shares;
issued and outstanding, 8,691,061 86,911
Additional paid-in capital 13,469,441
Accumulated deficit ( 9,151,051)
----------
Total shareholders' equity 4,405,301
----------
$5,587,889
==========
See notes to consolidated financial statements. F-2
Page 108 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Operations
For the year ended June 30,
---------------------------
1998 1997
---- ----
Revenues:
Product sales $ - $ 288,820
Development contracts 1,886,497 613,887
Royalties 870,201 601,713
---------- ----------
2,756,698 1,504,420
---------- ----------
Expenses:
Cost of product sales - 143,264
Cost of development contracts 1,533,917 716,280
Research and development 152,126 2,062,739
Selling, general and administrative 2,367,973 2,413,834
Depreciation and amortization 931,014 691,785
Interest expense (income), net 60,663 ( 37,086)
---------- ----------
5,045,693 5,990,816
---------- ----------
Loss before income taxes ( 2,288,995) ( 4,486,396)
Income taxes 18,836 -
---------- ----------
Net loss ($2,307,831) ($4,486,396)
========== ==========
Per share information:
Basic:
Net loss per share ($ 0.37) ($ 1.07)
========== ==========
Weighted average shares outstanding 6,317,411 4,175,058
========== ==========
Diluted:
Net loss per share ($ 0.37) ($ 1.07)
========== ==========
Weighted average shares outstanding 6,317,411 4,175,058
========== ==========
See notes to consolidated financial statements. F-3
Page 109 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For the years ended June 30, 1998 and 1997
Additional Total
Common stock paid-in Accumulated shareholders'
Shares Amount capital deficit equity
------ ------ ------- ------- ------
Balances,
June 30, 1996 3,763,719 $37,637 $ 7,216,348 ($2,356,824) $4,897,161
February 1997,
issued for
acquisition
of Western 800,000 8,000 3,992,000 4,000,000
February 1997,
issued in settlement
of accounts payable 2,350 23 4,677 4,700
February 1997,
issued for services 8,000 80 15,920 16,000
May 1997, issued
in exchange for
convertible
debentures 404,159 4,042 238,458 242,500
May 1997, issued
for extension
of due date of
debentures 13,000 130 7,670 7,800
June 1997, issued
in connection with
contract settlement 50,000 500 29,500 30,000
Net loss for the
year ended
June 30, 1997 ( 4,486,396) ( 4,486,396)
--------- ------- ----------- ---------- ----------
Balances,
June 30, 1997 5,041,228 $50,412 $11,504,573 ($6,843,220) $4,711,765
========= ======= =========== ========== ==========
(Continued) F-4
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<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
Additional Total
Common stock paid-in Accumulated shareholders'
Shares Amount capital deficit equity
------ ------ ------- ------- ------
Balances,
June 30, 1997 5,041,228 $50,412 $11,504,573 ($6,843,220) $4,711,765
Sept 1997, issued
in exchange for
convertible
debentures 135,415 1,354 79,896 81,250
October 1997, 285,000 2,850 168,150 171,000
issued for capital
raising services (171,000) (171,000)
November 1997, issued
in exchange for
convertible
debentures 135,414 1,354 79,896 81,250
November 1997,
issued in settlement
of accounts payable 50,000 500 29,500 30,000
March 1998,
issued in settlement
of note payable 117,532 1,175 59,372 60,547
March 1998, issued
for services 150,000 1,500 75,751 77,251
May 1998, issued
for services 319,000 3,190 196,185 199,375
May 1998, issued
in exchange for
convertible
debentures 199,620 1,997 100,503 102,500
May 1998, issued
in settlement of
accounts payable 332,852 3,329 206,794 210,123
June 1998, issued
for services 100,000 1,000 99,000 100,000
Issued for cash,
common stock and
300,000 warrants 1,200,000 12,000 588,000 600,000
Costs related to
issuance of common
stock and warrants ( 202,075) ( 202,075)
Common stock
subscription
receivable 625,000 6,250 493,750 500,000
Costs related to
common stock
subscription
receivable ( 65,000) ( 65,000)
Issued 180,000 options
for services 226,146 226,146
Issued 900,000 warrants 396,808 396,808
for capital
raising services ( 396,808) ( 396,808)
Net loss for the year
ended June 30, 1998 ( 2,307,831) (2,307,831)
--------- ------- ----------- ---------- ----------
Balances,
June 30, 1998 8,691,061 $86,911 $13,469,441 ($9,151,051) $4,405,301
========= ======= =========== ========== ==========
F-5
Page 111 of 303
<PAGE>
See notes to consolidated financial statements.
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the year ended June 30,
---------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net loss ($2,307,831) ($4,486,396)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Write-off of fixed assets - 100,000
Write-off of license rights 100,000 100,000
Amortization 542,871 371,815
Depreciation 288,143 319,970
Loss on disposal of fixed assets 250,669 29,718
Allowance for doubtful accounts 22,250 -
Common stock issued for services 376,625 16,000
Common stock issued in connection
with contract settlement - 30,000
Options issued for services 226,146 -
Change in:
Accounts receivable 34,027 ( 68,641)
Costs and estimated earnings in
excess of billings on uncompleted
contracts 5,514 49,202
Prepaid expenses ( 50,274) 7,300
Other assets 36,722 52,937
Accounts payable and accrued
liabilities 101,363 ( 70,126)
Billings in excess of costs and
estimated earnings on uncompleted
contracts ( 94,230) ( 13,664)
---------- ----------
Net cash used in operating activities ( 468,005) ( 3,561,885)
---------- ----------
Cash flows from investing activities:
Purchase of fixed assets ( 22,463) ( 536,234)
Advances to subsidiary,
prior to acquisition - ( 387,500)
Capitalized software - ( 99,938)
Cash acquired from subsidiary - 13,908
---------- ----------
Net cash used in investing activities ( 22,463) ( 1,009,764)
---------- ----------
(Continued) F-6
Page 112 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
For the year ended June 30,
---------------------------
1998 1997
---- ----
Cash flows from financing
activities:
Issuance of common stock and
warrants, net of costs of
issuance $ 397,927 $ -
Payments on notes and loans
payable ( 1,234,004) ( 56,548)
Proceeds from notes and loans 1,291,512 -
Payments on due to officer,
net of interest accrued ( 27,365) ( 36,700)
---------- ----------
Net cash provided by (used in)
financing activities 428,070 ( 93,248)
---------- ----------
Decrease in cash and cash equivalents ( 62,398) ( 4,664,897)
Cash and cash equivalents,
beginning 228,761 4,893,658
---------- ----------
Cash and cash equivalents, ending $ 166,363 $ 228,761
========== ==========
Cash paid during the year for:
Interest $ 61,073 $ 61,075
========== ===========
Income taxes $ 32,633 $ 800
========== ===========
Noncash investing and financing activities: See Note 21.
See notes to consolidated financial statements. F-7
Page 113 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
1. Summary of significant accounting policies and business activity:
Business activity and basis of presentation:
The consolidated financial statements of Adrenalin Interactive,
Inc.(formerly Wanderlust Interactive, Inc.) and subsidiary ("Company")
include the accounts of Adrenalin Interactive, Inc.(formerly Wanderlust
Interactive, Inc.) ("Adrenalin"), its wholly-owned subsidiary, Western
Technologies, Inc. ("Western"), and certain assets and certain
liabilities of Smith Engineering ("SE"), which was a sole proprietorship
prior to the acquisition discussed in Note 3. Intercompany transactions
and balances have been eliminated. The Company is located in Los
Angeles, California.
Adrenalin is engaged in the creation, development, publishing, marketing
and selling of interactive multimedia software entertainment titles on
CD-ROM for personal computers.
Western is engaged in the invention and development (including
engineering and software development) of electronic designs, technology,
and software, principally for toys and electronic games. Western
licenses or sells inventions, designs, and software to independent
manufacturers and publishers. Such manufacturers and publishers
generally pay advance royalties or development fees and may pay
additional royalties based on products sold. Western also provides
product development services to manufacturers. SE is inactive at June
30, 1998.
The Company's customers are concentrated in the toy and electronic
entertainment industries. These industries are characterized by rapid
changes in technology and customer preferences.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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 from those
estimates.
Cash and cash equivalents:
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
F-8
Page 114 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
1. Summary of significant accounting policies and business activity
(continued):
Concentration of credit risk:
Financial instruments which subject the Company to concentrations of
credit risk consist of temporary cash investments and accounts
receivable. The Company places its temporary cash investments with high
quality financial institutions. At times, the Company's cash balances
with these institutions exceed the current insured amount under the
Federal Deposit Insurance Corporation. Accounts receivable are primarily
from development contracts. The Company reviews its accounts receivable
monthly and provides allowances for potential uncollectible accounts.
Fixed assets:
Fixed assets consist primarily of computers, leasehold improvements and
furniture, and are stated at cost. Amortization of leasehold
improvements is provided on a straight-line basis over the shorter of the
estimated useful lives of the improvements or the life of the lease.
Depreciation is provided on a straight-line basis over the estimated
useful lives of the related assets.
Patents and licenses:
The Company amortizes patents and licenses over their estimated useful
lives. The Company revised its estimate of the useful lives during the
fiscal year ended June 30, 1998 from four years to eight years. For the
year ended June 30, 1998 the effect of applying the new estimated life
was to reduce amortization expense by $425,170, and to decrease net loss
by $425,170, and net loss per share by $0.07.
Goodwill:
Goodwill represents the excess of cost over the fair value of assets
acquired and is amortized using the straight-line method over 40 years.
The Company assesses the recoverability of its goodwill, and whenever
continued adverse events or changes in circumstances indicate impairment,
a write-off will be recorded. Based on the relatively short interval
since the Company's business combination with Western, the Company
believes no material impairment of goodwill exists at June 30, 1998.
Capitalized software:
Capitalized software consists of salaries and other costs incurred to
develop software from the time technical feasibility is established thru
the date the product is ready for sale. Amortization begins when the
software is available for general release and is calculated on a product-
by-product basis using the faster of the straight-line method over the
estimated useful life or based on expected units of sale. Amortization
expense was $75,684 for the year ended June 30, 1998 and nil for the year
ended June 30, 1997.
F-9
Page 115 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
1. Summary of significant accounting policies and business activity
(continued):
Development contract revenue and cost recognition:
Revenues from fixed-price and modified fixed-price development contracts
are recognized on the percentage-of-completion method measured by the
percentage that costs incurred to date bear to total estimated costs.
A contract is considered complete when all costs, except insignificant
items, have been incurred.
Contract costs include all direct labor, subcontractor and other costs
and those indirect costs related to contract performance, such as
indirect salaries, employee benefits, insurance, and payroll taxes.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance,
customer acceptance of work done, technological developments and
estimated profitability may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of
amounts billed. The liability, "Billings in excess of costs and
estimated earnings on uncompleted contracts", represents billings in
excess of revenues recognized.
Royalty revenue:
Royalties earned by the Company as a result of development contracts are
generally reported by the licensees on a calendar quarter basis. The
Company recognizes such royalty revenue when received. Royalties earned
by the Company as a result of its publishing segment are recognized as
earned.
Income (loss) per share:
Basic income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted income (loss) per share
is computed as above while giving effect to all potential common shares
(but not giving effect to securities that would have an antidilutive
effect, as would occur in loss years) that were outstanding during the
period.
F-10
Page 116 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
2. Going concern:
The accompanying consolidated financial statements have been prepared on
a going concern basis which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The
Company has suffered recurring losses from operations which raises
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amount of liabilities that might be necessary should the
Company be unable to continue in existence. Continuation of the Company
as a going concern is dependent on achieving profitable operations.
Management's plans to achieve profitability include developing new
products, obtaining new customers, and continuation of a cost cutting
program started during fiscal year 1997. Management also plans to obtain
additional investment capital .
3. Acquisition:
On February 4, 1997, Adrenalin closed on an acquisition agreement between
Adrenalin, Western, SE and Mr. Jay Smith, III ("Mr. Smith"). The
agreement provided for the sale of 100% of the outstanding shares of
stock of Western and certain assets and certain liabilities of SE in
exchange for 800,000 shares of the Company's common stock. As part of
the acquisition, a license agreement was entered into between Western and
Mr. Smith in which Mr. Smith granted to Western the exclusive right to
use and market patents and license agreements owned by Mr. Smith. The
license agreement provides that 75% of the revenues from such patents and
licenses will be retained by Western and 25% will be retained by Mr.
Smith until Mr. Smith receives an aggregate revenue from such patents and
licenses of $2,000,000, at which time no further revenue will inure to
Mr. Smith.
The business combination has been accounted for using the purchase
method. The results of operations of Western for the period from
February 4, 1997 thru June 30, 1997 are included in the Company's
statements of operations and cash flows for the year ended June 30, 1997.
The cost of the acquired enterprise was $5,082,000. 800,000 shares of
common stock with an assigned value of $5 each were issued.
Acquired goodwill is being amortized over forty years using the straight-
line method.
F-11
Page 117 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
4. Accounts receivable:
June 30, 1998
-------------
Completed contracts $ 25,000
Contracts in progress 95,000
Other 106,454
-----------
226,454
Less allowance for doubtful accounts 45,750
-----------
$ 180,704
===========
5. Billings in excess of costs and estimated earnings on uncompleted
contracts:
June 30, 1998
-------------
Costs incurred $ 980,632
Estimated earnings 560,399
----------
1,541,031
Less billings to date ( 1,562,000)
----------
($ 20,969)
==========
Included in the accompanying consolidated balance sheet under the
following:
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 15,086
Billings in excess of costs
and estimated earnings on
uncompleted contracts ( 36,055)
----------
($ 20,969)
6. Fixed assets, net:
June 30, 1998
-------------
Computers $1,208,053
Furniture 102,046
Leasehold improvements 15,994
----------
1,326,093
Less accumulated depreciation
and amortization 996,643
----------
$ 329,450
==========
F-12
Page 118 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
7. Notes and loans payable:
June 30, 1998
-------------
Unsecured note payable, due July, 1999.
Paid in monthly installments of $1,000
plus accrued interest at 12%. $ 13,130
Unsecured note payable, due January 30, 2000.
Interest only (at prime plus 3.5%)
is payable monthly. Prime was 8.5%
at June 30, 1998. Personally guaranteed
by an officer/shareholder and his wife and
secured by a Second Trust Deed on the
officer/shareholder's residence. 396,000
Loan payable to financial institution, due
on demand. Interest accrues at 24%.
Secured by a blanket lien on all assets
of the Company. 76,000
----------
485,130
Current portion 88,000
----------
$397,130
==========
8. Convertible debentures:
In May, 1995, the Company issued units consisting of convertible
debentures and common stock. An aggregate of $507,500 of debentures
payable and 465,374 shares of common stock were issued to various
investors in exchange for $1,015,000. The debentures bear interest at
the rate of 8% (payable annually), and were due in May, 1997. The
Company initially offered the debenture holders two options in lieu of
payment: 1) Conversion into shares of common stock at the rate of $0.60
per share or, 2) extend the due date for one year in exchange for 200
shares of common stock for each $1,000 so extended. As of June 30,
1997, 404,159 shares of common stock were issued in exchange for $242,500
of convertible debentures, and 13,000 shares were issued to extend the
due date of $65,000 of convertible debentures. During the year ended
June 30, 1998, 470,451 shares of common stock were issued in exchange for
$265,000 of convertible debentures, and accrued interest thereon. At
June 30, 1998, no convertible debentures were outstanding.
9. Due to officer/shareholder:
This loan is payable to Mr. Smith in the face amount of $53,347 plus
accumulated interest of $2,588. Interest accrues at 10% and is payable
annually. The principal is due in February, 2002.
F-13
Page 119 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
10. Stock options:
In the fiscal year ended June 30, 1995, the Company adopted the 1995
Stock Option Plan ("95 Plan"). In September, 1995, the Company amended
the 95 Plan. The 95 Plan provides for the granting of options to
purchase up to 360,000 shares of common stock at an exercise price equal
to the fair market value of the common stock (110% of fair market value
for a holder of in excess of 10%) on the date of the grant. No options
have been exercised to date.
95 Plan activity during the year ended June 30, 1997 follows:
Average
Shares Price
------ -----
Outstanding at beginning of year 360,000 $3.03
Granted 164,509 2.22
Exercised - -
Forfeited 204,988 2.88
------- -----
Outstanding at end of year 319,521 $2.06
======= =====
Options exercisable at June 30, 1997 67,605 $1.99
======= =====
Weighted average remaining
contractual life, years 3.9
=======
95 Plan activity during the year ended June 30, 1998 follows:
Average
Shares Price
------ -----
Outstanding at beginning of year 319,521 $2.06
Granted 240,500 0.53
Exercised - -
Forfeited 315,021 2.08
------- -----
Outstanding at end of year 245,000 0.53
======= =====
Options exercisable at June 30, 1998 81,025 $0.53
======= =====
Weighted average remaining
contractual life, years 4.6
=======
Options outstanding at June 30, 1998:
Shares Price
------ -----
175,000 $0.47
60,000 0.63
10,000 1.09
-------
245,000
=======
F-14
Page 120 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
10. Stock options (continued):
In July, 1996, the Company adopted the 1996 Stock Option Plan ("96
Plan"). The 96 Plan provides for the granting of options to purchase up
to 360,000 shares of common stock at an exercise price equal to the fair
market value of the common stock (110% of fair market value for a holder
of in excess of 10%) on the date of the grant. No options have been
exercised to date.
96 Plan activity during the year ended June 30, 1997 follows:
Average
Shares Price
------ -----
Outstanding at beginning of year - -
Granted 209,000 $ 2.72
Exercised - -
Forfeited 90,750 4.48
-------- ------
Outstanding at end of year 118,250 $ 1.36
======== ======
Options exercisable at June 30, 1997 15,312 $0.625
======== ======
Weighted average remaining
contractual life, years 4.4
========
96 Plan activity during the year ended June 30, 1998 follows:
Average
Shares Price
------ -----
Outstanding at beginning of year 118,250 $ 1.36
Granted - -
Exercised - -
Forfeited 77,750 1.75
-------- ------
Outstanding at end of year 40,500 $ 0.63
======== ======
Options exercisable at June 30, 1998 13,500 $ 0.63
======== ======
Weighted average remaining
contractual life, years 3.6
========
Options outstanding at June 30, 1998: Shares Price
------ -----
40,500 $ 0.63
======= ======
During the fiscal year ended June 30, 1997, the Company granted non-plan
options as follows: 40,000 at exercise price of $5.00 plus 55,000 at
exercise price of $.625. During the fiscal year ended June 30, 1998, the
Company granted non-plan options as follows: 835,000 at exercise price
of $0.63 plus 25,000 at exercise price of $0.40. No options have been
exercised to date.
11. Accounting for stock based compensation:
During the year ending June 30, 1997, the Company adopted the disclosure-
only provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly,
no compensation cost has been recognized in the consolidated financial
statements for the employee stock options issued.
Page 121 of 303 F-15
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
11. Accounting for stock based compensation (continued):
Had compensation cost for the Company's employee stock option plans been
recognized based on the fair value at the grant date for awards
consistent with the provisions of SFAS 123, the Company's net loss and
loss per share would have been as indicated below:
Year ended Year ended
June 30, 1998 June 30, 1997
------------- -------------
Net loss - as reported $2,307,831 $4,486,396
Net loss - pro forma $2,445,099 $4,755,851
Loss per share - as reported $0.37 $1.07
Loss per share - pro forma $0.39 $1.13
For the years ended June 30, 1998 and 1997, respectively, the fair value
of each option grant is estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted-average
assumptions used for grants: expected volatility of 209% and 120%; risk-
free interest rate of 6.0% and 6.0%; and expected lives of 6.4 and 4.5
years.
12. Commitments and contingencies:
Commitments:
On June 30, 1997, the Company entered into a settlement agreement with
a former officer. The agreement provides for the cancellation of an
employment agreement and cancellation of options to purchase 200,000
shares of common stock. The former officer was issued 50,000 shares of
common stock which were valued at $30,000 and recorded as a charge in the
consolidated statement of operations. The Company also entered into a
one year consulting agreement with the former officer, providing for
compensation of $60,000.
In February, 1997, the Company entered into a three year employment
agreement with an officer providing for base salary of $150,000 per year.
In May, 1995, the Company entered into a four year nonexclusive license
agreement with Metro-Goldwyn-Mayer Inc., ("MGM") which provides for use
of the "Pink Panther" character. The agreement was amended in May of
1996, and the Company paid $300,000 as a nonrefundable advance royalty,
to be applied to future royalties. The agreement provides for payment
of the greater of a percentage royalty on wholesale prices or an absolute
minimum per unit sold. The agreement also provides for the shipment of
minimum copies by certain due dates. Failure to ship such minimum copies
may cause termination of the agreement. The agreement grants MGM a right
of first negotiation and last refusal in regards to distribution of the
licensed products. MGM also has the right to approve, at its sole
discretion, the Company's software titles that contain the "Pink Panther"
character.
F-16
Page 122 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
12. Commitments and contingencies (continued):
Commitments (continued):
The Company wrote off $100,000 of the advance royalty in each of the
years ended June 30, 1998 and 1997, as a result of weaker than expected
sales of the licensed product.
The Company is obligated under a lease agreement for office space in Los
Angeles, California. Minimum monthly payments of $14,600 are due through
January 31, 1999. The lease provides for two one-year renewal options.
Future minimum rental commitments under the lease is $102,200 for the
year ended June 30, 1999. Rent expense for the fiscal years ended June
30, 1998 and 1997 was $208,566 and $151,813, respectively.
The Company leases computer equipment under several operating leases that
are substantially similar. These leases have expiration dates from
fiscal years ending 1999 to 2002. Future minimum lease payments are:
1999, $52,711; 2000, $11,012; 2001, $6,691; 2002,$3,387.
In October 1997, the Company entered into an agreement with a business
consulting firm. The agreement provides for a monthly fee of $10,000.
The Company may terminate the agreement upon 30 days written notice.
Contingencies:
In connection with the acquisition discussed in Note 3, the Company
acquired Western, certain assets and liabilities of SE, and certain
rights from Mr. Smith. Prior to the acquisition, SE entered into a
contract with GT Interactive Software Corp. ("GT") to produce a software
title named "Vampire". A dispute has arisen between GT and SE whereby
SE, having spent over $700,000 of its own funds on changing requirements
to meet GT demands, seeks reimbursement of those funds and GT, having
failed to receive a complete project, is seeking the return of $645,000,
funds which GT advanced to SE. The acquisition agreement specifically
provides that the Company has no obligation with respect to GT. During
the fiscal year ended June 30, 1998, the Company (as the alleged
successor of SE) received a letter from GT requesting payment for the
Vampire project. The Company responded to GT stating it is not
responsible for any payment because the acquisition agreement does not
provide for the Company to acquire any of the rights to the Vampire
project, nor is the Company the successor to SE. In December, 1997 GT
filed and served a lawsuit against Mr. Smith and SE. No lawsuit has been
brought by GT against the Company to date. The Company believes it has
meritorious defenses against any claims, if a lawsuit against the Company
is commenced, and intends to vigorously defend itself. The Company has
agreed to pay the legal fees related to the lawsuit against Mr. Smith and
SE.
F-17
Page 123 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
12. Commitments and contingencies(continued):
Contingencies (continued):
The Company had entered into an agreement with BMG Music, d/b/a/ BMG
Entertainment ("BMG") to distribute certain of its software titles in the
United States ("BMG Agreement"). BMG and the Company reached a
settlement of this agreement on June 11, 1997 ("BMG Settlement") which
provided in pertinent part, that: (a) BMG agreed to pay the Company
$175,000 and (b) for the BMG Releasees (as such term is defined in the
BMG Settlement) to release the Company from any obligations to BMG. In
connection with the BMG Agreement, the Company acquired services from
Sonopress in the amount of $62,500. The Company believes Sonopress is
affiliated with BMG and the Company obtained a release against this
obligation pursuant to the BMG Settlement. On September 17, 1997, the
Company received a letter from Sonopress' counsel requesting payment of
$62,500. The Company believes, pursuant to the terms of the BMG
Settlement, that it is released from this obligation. To date, no
lawsuit has been brought by Sonopress against the Company. There is no
assurance that Sonopress may not have a valid claim against the Company.
The Company believes it has meritorious defenses, and if a lawsuit is
commenced, intends to vigorously defend itself.
In October 1995, Western entered into an agreement to develop software
for certain games ("Games") for Banpresto Co. Ltd. ("Banpresto"). This
agreement was related to an agreement Banpresto entered into with Sony
Interactive Entertainment, Inc. ("Sony") related to the Games. Computer
hardware and software ("Tools") were delivered by Sony to Western, for
use in developing the Games. Banpresto alleges it paid Sony for the
Tools. Western developed the Games, and Sony disapproved them. In
December 1996, Banpresto and Western agreed to terminate their prior
agreement. The terms of the settlement included a $200,000 payment to
Western from Banpresto, and the return of the Tools to Banpresto upon
written authorization from Sony. Since December of 1997, Banpresto has
threatened to sue Western for failure to return the Tools, and demanded
either the Tools, or $322,000, representing the cost of such Tools, per
Banpresto. Western responded to Banpresto stating that it is willing to
return the Tools, but may only do so with Sony's written authorization.
To date, no lawsuit has been brought against the Company. The Company
believes it has meritorious defenses, and if a lawsuit is commenced,
intends to vigorously defend itself.
On October 6, 1997, the Company entered into an agreement with an
investment banking firm. The agreement provided for the Company to pay
a retainer fee of 36,000 shares of common stock for the first quarter and
30,000 shares for each subsequent quarter. In November 1997, the Company
terminated the agreement. In June 1998, the investment banking firm sent
a letter demanding 30,000 shares of common stock pursuant to their
agreement. The Company responded stating that the investment banking
firm was not entitled to the common stock, and that the investment
banking firm misrepresented themselves to the Company.
F-18
Page 124 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
12. Commitments and contingencies(continued):
Contingencies (continued):
To date, no lawsuit has been brought against the Company. The Company
believes it has meritorious defenses, and if a lawsuit is commenced,
intends to vigorously defend itself.
13. Initial public offering:
In March and April, 1996, the Company closed an initial public offering
of common stock and redeemable warrants. A total of 1,395,000 shares
of common stock and 2,415,000 redeemable warrants were issued. The
redeemable warrants are exercisable at any time during a three year
period ending March 20, 1999 at an exercise price of $7.00 per share.
The redeemable warrants include an option whereby, under certain
conditions, the Company can redeem the warrants.
In connection with the initial public offering, the investment banker
received, for nominal consideration, five year warrants to purchase
130,000 shares of common stock and 210,000 redeemable warrants. These
warrants are exercisable at any time during a four year period ending
March 20, 2001 for $6.00 per share of common stock and $.30 per
redeemable warrant.
14. Bridge financing:
On December 29, 1995 the Company completed a private offering of 343,746
shares of common stock and 515,624 redeemable warrants for an aggregate
consideration of $378,750. Persuant to their terms, the redeemable
warrants were automatically converted into an equal number of warrants
bearing the same rights as those discussed in Note 13, "Initial public
offering".
15. Related party transactions:
During the year ended June 30, 1998, the Company incurred $45,830 of
legal fees and disbursements to a law firm. For the year ended June 30,
1997, legal fees and disbursements of $175,888 were incurred to the same
law firm. A partner in that firm was an officer/shareholder/director,
and is currently a shareholder.
In May, 1998, the Company issued 220,000 shares of common stock at a
deemed price of $.625 to a business consulting firm with which a director
of the Company is affiliated and 25,000 shares of common stock to another
director in consideration of consulting services.
F-19
Page 125 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
16. Income taxes:
For income tax purposes, as of June 30, 1998 the Company has deferred
start-up costs and a net operating loss carryforward approximating the
financial accounting net loss since inception. The start-up costs are
being amortized over five years commencing during the third quarter of
fiscal 1997. The net operating loss carryforward will expire in 2012.
These items result in a deferred tax asset of approximately $3,000,000.
However, a valuation reserve has been recorded for the full amount due
to the uncertainty of realization of the deferred tax asset.
17. Business segment information and foreign revenue:
The Company's operations have been classified into two business segments:
publishing and development contracts. Prior to the Company's acquisition
of Western, it operated as a publisher. For the fiscal year ended June
30, 1997 information regarding development contracts is for the five
months ended June 30, 1997.
For the fiscal year ended June 30, 1997:
Development
Publishing contracts Total
---------- --------- -----
Revenues $ 747,000 $ 757,000 $ 1,504,000
Operating loss 3,557,000 929,000 4,486,000
Total assets 1,063,000 5,360,000 6,423,000
Depreciation and
amortization 235,000 457,000 692,000
Capital expenditures 524,000 12,000 536,000
For the fiscal year ended June 30, 1998:
Development
Publishing contracts Total
---------- --------- -----
Revenues $ 460,000 $ 2,300,000 $ 2,760,000
Operating loss 1,620,000 670,000 2,290,000
Total assets 820,000 4,765,000 5,585,000
Depreciation and
amortization 305,000 625,000 930,000
Capital expenditures - 20,000 20,000
Foreign royalties for the fiscal year ended June 30, 1998 and 1997 were
$518,000 and $458,000, respectively.
18. Emergence from development stage:
During the third quarter of fiscal year end June 30, 1997, the Company
no longer considered itself to be in the development stage. Prior
thereto, the Company was considered to be in the development stage as
either planned principal operations had not commenced, or such operations
had commenced, but no significant revenue was derived therefrom.
F-20
Page 126 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
19. Concentration of credit risk and major customers:
The Company deals with a relatively small number of customers which
account for the majority of revenues and receivables.
% of Revenues % of Receivables
Year ended June 30, As of June 30,
------------------- --------------
1998 1997 1998
---- ---- ----
Customer "A" 27% 10% 11%
Customer "B" 25% - 41%
Customer "C" - 35% -
Customer "D" - 11% -
20. Private offering and warrants issued:
During the fiscal year ended June 30, 1998, the Company effected a
private offering of 1,200,000 shares of stock and 300,000 warrants for
aggregate consideration, (net of expenses) of $397,927. The warrants are
exercisable at $1.25 per share, and expire one year from the date of
issuance.
During the fiscal year ended June 30, 1998, the following warrants,
exercisable upon issuance, were issued for capital raising services:
50,000 exercisable at $1.25 per share, expiring January 14, 2001
500,000 exercisable at $0.25 per share, expiring December 31, 2004
350,000 exercisable at $0.625 per share, expiring December 31, 2004
These warrants were valued using the Black Scholes pricing model (see
Note 11 for assumptions) which resulted in a valuation of $396,808.
21. Supplemental disclosure of noncash investing and financing activities:
During fiscal year ended June 30, 1997:
See Note 3 regarding acquisition.
See Note 8 regarding convertible debentures converted.
2,350 shares issued in settlement of $4,700 of accounts payable.
13,000 shares issued for extension of due date of debentures.
During fiscal year ended June 30, 1998:
See Note 8 regarding convertible debentures converted.
470,451 shares issued in exchange for $265,000 of convertible debentures.
382,852 shares issued in settlement of $240,123 of accounts payable.
117,532 shares issued in settlement of $60,547 of notes payable.
569,000 shares issued for consulting services.
On June 30, 1998, subscription agreements for an aggregate of 625,000
shares of common stock were executed. Net proceeds were received in
July, 1998 in the amount of $435,000.
F-21
Page 127 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
22. Pro forma information (unaudited):
Supplemental pro forma information for the year ended June 30, 1997, as
if the acquisition had occurred at the beginning of the fiscal year:
Proforma revenue $3,092,000
Proforma net (loss) ($5,780,000)
Proforma (loss) per share ($1.24)
F-22
Page 128 of 303
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of McGlen Micro, Inc.
Tustin, California
We have audited the accompanying balance sheets of McGlen Micro, Inc. (a
California corporation) as of December 31, 1998 and 1997, and the related
statements of income, stockholders' equity and cash flows for the 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 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 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 McGlen Micro, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Singer Lewak Greenbaum & Goldstein LLP
- ------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Santa Ana, California
April 14, 1999 (except for Notes 9 and 10, for which the dates are April 30 and
April 28, 1999, respectively)
F-23
Page 129 of 303
<PAGE>
================================================================================
ASSETS
1998 1997
---------- ----------
Current assets
Cash and cash equivalents $ 436,692 $ 213,108
Accounts receivable 350,048 257,473
Inventory, net of reserves of $7,608 in 1998
and $0 in 1997 115,184 66,138
Prepaid expenses and other current assets 8,112 -
----- -
Total current assets 910,036 536,719
------- -------
Property and equipment
Machinery and equipment 35,186 3,992
Office furniture 20,347 11,592
------ ------
55,533 15,584
Less accumulated depreciation 13,783 7,469
------ -----
Total property and equipment 41,750 8,115
------ -----
Other assets
Deposits 148,189 2,565
Organization costs, net of amortization of $800 in
1998 and $500 in 1997 700 1,000
--- -----
Total other assets 148,889 3,565
------- -----
Total assets $ 1,100,675 $ 548,399
=========== ===========
F-24
Page 130 of 303
<PAGE>
McGLEN MICRO, INC.
BALANCE SHEETS
As of December 31,
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
---------- ----------
Current liabilities
Accounts payable $ 610,429 $ 333,400
Accrued expenses 78,873 28,083
Income taxes payable 863 1,764
Due to stockholders - 24,061
------- -------
Total current liabilities 690,165 387,308
Notes payable 200,000 -
------- -------
Total liabilities 890,165 387,308
------- -------
Commitments
Stockholders' equity
Common stock, $0.003 par value; 50,000,000
shares authorized, 20,000,000 shares
issued and outstanding 60,000 60,000
Common stock to be issued 75,000 -
Retained earnings 75,510 101,091
------ -------
Total stockholders' equity 210,510 161,091
------- -------
Total liabilities and stockholders' equity $ 1,100,675 $ 548,399
=========== ===========
F-25
Page 131 of 303
<PAGE>
McGLEN MICRO, INC.
STATEMENTS OF INCOME
For the Years Ended December 31,
================================================================================
1998 1997
-------------------- --------------------
% of % of
Net Net
Amount Sales Amount Sales
------ ----- ------ -----
Net sales $11,525,307 100.0 $ 3,660,899 100.0
Cost of sales 9,707,247 84.2 2,991,119 81.7
--------- ---- --------- ----
Gross profit 1,818,060 15.8 669,780 18.3
Operating expenses 1,778,646 15.4 520,324 14.2
--------- ---- ------- ----
Income before other income (expense) 39,414 0.4 149,456 4.1
------ --- ------- ---
Other income (expense)
Miscellaneous income 15,200 0.1 1,299 -
Interest income 5,390 - 769 -
Interest expense (285) - (17) -
------ --- ------- ---
Total other income (expense) 20,305 0.2 2,051 -
------ --- ------- ---
Income before provision for income taxes 59,719 0.5 151,507 4.1
Provision for income taxes 1,300 - 2,460 -
------ --- ------- ---
Net income $ 58,419 0.5 $ 149,047 4.1
=========== === =========== ===
Earnings Per Share:
Basic $ .003 $ .007
=========== ===========
Fully diluted $ .003 $ .007
=========== ===========
Weighted Average Shares Outstanding:
Basic 20,000,000 20,000,000
=========== ===========
Fully diluted 20,010,274 20,000,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-26
Page 132 of 303
<PAGE>
McGLEN MICRO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
================================================================================
Common Stock
------------------------------- Total
Number Of To Be Retained Stockholders'
Shares Amount Issued Earnings Equity
------ ------ ------ -------- ------
BALANCE - December 31, 1996 20,000,000 $60,000 $ - $ 5,544 $ 65,544
Distributions to stockholders - - - (53,500) (53,500)
Net income for the year ended
December 31, 1997 - - - 149,047 149,047
- - - ------- -------
BALANCE - December 31, 1997 20,000,000 60,000 - 101,091 161,091
Distributions to stockholders - - - (84,000) (84,000)
Common stock to be issued - - 75,000 - 75,000
Net income for the year ended
December 31, 1998 - - - 58,419 58,419
- - - ------ ------
BALANCE - December 31, 1998 20,000,000 $60,000 $75,000 $ 75,510 $210,510
========== ======== ======= ======== ========
The accompanying notes are an integral part of these financial statements.
F-27
Page 133 of 303
<PAGE>
McGLEN MICRO, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
================================================================================
1998 1997
---------- ----------
Cash flows from operating activities
Cash received from customers $11,432,732 $ 3,440,143
Cash paid to suppliers and employees (11,279,242) (3,237,884)
Miscellaneous income 15,200 1,299
Interest income 5,390 769
Interest paid (285) (17)
Income taxes paid (2,201) (696)
----------- -----------
Net cash provided by operating activities 171,594 203,614
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (39,949) (3,992)
----------- -----------
Cash flows from financing activities
Net (payments) borrowings on due to stockholders (24,061) 6,737
Distributions to stockholders (84,000) (53,500)
Principal borrowings on notes payable 200,000 -
----------- -----------
Net cash provided by (used in) financing
activities 91,939 (46,763)
----------- -----------
Net increase in cash and cash equivalents 223,584 152,859
Cash and cash equivalents - beginning of year 213,108 60,249
----------- -----------
Cash and cash equivalents - end of year $ 436,692 $ 213,108
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-28
Page 134 of 303
<PAGE>
McGLEN MICRO, INC.
STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
================================================================================
1998 1997
-------- --------
Reconciliation of net income to net cash provided
by operating activities
Net income $ 58,419 $ 149,047
Non-cash items included in net income
Reserves for inventory 7,608 -
Amortization 300 300
Depreciation 6,314 6,310
Legal expenses 75,000 -
(Increase) decrease in
Accounts receivable (92,575) (220,756)
Inventory (56,654) (66,138)
Prepaid expenses and other current assets (8,112) -
Deposits (145,624) 1,222
Increase (decrease) in
Accounts payable 277,029 308,693
Accrued expenses 50,790 23,172
Income taxes payable (901) 1,764
--------- ---------
Net cash provided by operating activities $ 171,594 $ 203,614
========= ========
Supplemental schedule of non-cash financing activities
Common stock to be issued in lieu of fees
for professional services $ 75,000 $ -
========= ========
The accompanying notes are an integral part of these financial statements.
F-29
Page 135 of 303
<PAGE>
McGLEN MICRO, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 1 - BUSINESS ACTIVITY
McGlen Micro, Inc., a California S-corporation was organized September
20, 1996. The Company is engaged in providing an on-line internet web
site selling computer components and peripherals to customers
worldwide. They extend credit only to government and educational
institutions.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, 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
from those estimates.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash and cash equivalents,
accounts receivable, and accounts payable and accrued expenses, the
carrying amounts approximate fair value due to their short maturities.
The amounts shown for long-term debt also approximate fair value due to
current interest rates offered to the Company for long-term debt and
capital lease obligations of similar maturities are substantially the
same.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid debt instruments that
consist of time deposits with financial institutions. Cash equivalents
are stated at cost plus accrued interest, which approximates market
value.
Inventory
Inventory consists primarily of finished goods and is valued at the
lower of cost or market. Cost is determined principally by a first-in,
first-out method assumption.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line and accelerated methods over the
estimated useful lives of the various classes of property, as follows:
Machinery and equipment 5 years
Office furniture 5 to 7 years
F-30
Page 136 of 303
<PAGE>
McGLEN MICRO, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment (Continued)
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred.
Organization Costs
Organization costs are being amortized using the straight-line method
over the estimated useful life of 60 months.
Revenue Recognition
The Company recognizes revenue upon shipment of goods.
Accounting for the Impairment of Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards 121,
"Accounting for the Impairment of Long-Lived Assets for Long-Lived
Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. Management has determined that there is no impairment
of long-lived or intangible assets as of December 31, 1998.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter
S of the Internal Revenue Code. Accordingly, results of operations of
the Company for the year ended December 31, 1998 are reported, as
allowable, on the stockholders' federal income tax returns. Therefore,
no federal income tax expense or benefit has been recorded in the
accompanying Statement of Income. Similarly, the Company elected to be
treated as an S Corporation for California franchise tax purposes. The
provision for income taxes in the accompanying Statement of Income
represents the state franchise tax applied to S Corporations at a tax
rate of 1.5% for the year ended December 31, 1998.
Advertising Expense
Advertising expenses are charged to expense as incurred. Advertising
expense for the year ended December 31, 1998 and 1997 were $220,524 and
$88,940, respectively.
F-31
Page 137 of 303
<PAGE>
McGLEN MICRO, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Income per Share
The Company calculates earnings per share in accordance with Statement
of Financial Accounting Standards No. 128 - "Earnings Per Share" ("SFAS
128"). SFAS 128 replaced the presentation of primary and fully diluted
earnings per share with the presentation of basic and diluted earnings
per share. Basic earnings per share excludes dilution and is calculated
by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share includes the potential dilutive effects that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock that would then share in the
earnings of the Company.
Recently Issued Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for financial statements with fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The Company does not expect adoption of SFAS No. 133 to
have a material effect, if any, on its financial position or results of
operations.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," is effective for financial statements with the
first fiscal quarter beginning after December 15, 1998. The Company
does not expect adoption of SFAS No. 134 to have a material effect, if
any, on its financial position or results of operations.
SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections," is effective for financial statements with fiscal years
beginning February 1999. This statement is not applicable to the
Company.
NOTE 3 - CONCENTRATIONS OF RISK
Cash
As of December 31, 1998 and 1997, the Company maintained deposits
totaling $307,195 and $186,681, respectively, with certain financial
institutions in excess of federally insured amounts.
F-32
Page 138 of 303
<PAGE>
McGLEN MICRO, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 3 - CONCENTRATIONS OF RISK (Continued)
Customers
The Company extends credit to its customers. Collateral generally is
not required. Credit losses are provided for in the financial
statements based on management's evaluation of historical and current
industry trends. Although the Company expects to collect amounts due,
actual collections may differ from estimated amounts.
No one customer accounted for 10% of net sales or accounts receivable
as of December 31, 1998.
Suppliers
For the year ended December 31, 1998, one vendor represented 75% of
total purchases.
For the year ended December 31, 1997, one vendor represented 31% of
total purchases.
NOTE 4 - DUE TO STOCKHOLDERS
During the year ended December 31, 1997, the stockholders made
non-interest bearing advances to the Company. As of December 31, 1997,
the balance was $24,061. This balance was paid in full in January 1998.
NOTE 5 - NOTES PAYABLE
As of December 31, 1998, the Company had notes payable to two
individuals totaling $200,000. The notes bear interest at 5% and mature
January 2000. The notes each contain an option to convert $10,000 of
the note into 10,000 shares of common stock.
NOTE 6 - LINE OF CREDIT
In November 1998, the Company entered into an agreement with a bank for
a revolving line of credit in the amount of $50,000, with interest at
the bank's reference rate (7.75% as of December 31, 1998) plus 2.625%.
As of December 31, 1998, the Company had not utilized the line. The
line of credit matures November 1999 and is renewed annually based upon
bank review.
F-33
Page 139 of 303
<PAGE>
McGLEN MICRO, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 7 - COMMITMENTS
The Company leases office and warehouse facilities and autos under
operating leases requiring minimum monthly payments of $4,365. The auto
leases expire through September 2001 and the office and warehouse lease
expires April 2003. Rent expense for office and warehouse facilities
was $39,748 and $20,766 for the years ended December 31, 1998 and 1997,
respectively.
The following is a schedule by years of future minimum rental payments
under those operating leases that have an initial or remaining
non-cancelable lease term in excess of one year as of December 31,
1998:
Year ending December 31,
1999 $ 50,205
2000 52,005
2001 48,635
2002 47,781
2003 14,060
------
Total $ 212,686
=========
NOTE 8 - YEAR 2000
The Company is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000
Issue and is developing a remediation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company is dependent on computer
processing in the conduct of its business activities.
Because the Company has not completed its review of the computer
systems, management is unable to estimate the cost of making the
systems Year 2000 compliant.
NOTE 9 - STOCKHOLDERS' EQUITY
Legal Expenses
The Company agreed to issued 75,000 shares (pre 10 for 1 split) of its
common stock for legal services rendered through December 31, 1998.
F-34
Page 140 of 303
<PAGE>
McGLEN MICRO, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
Stock Split
On May 1, 1998, the Board of Directors approved a 33.33 for 1 stock
split followed by a 10 for 1 split on April 30, 1999. All per share
data has been retroactively restated.
NOTE 10 - SUBSEQUENT EVENTS
Purchase of Business
The Company acquired all assets and assumed all liabilities of Access
Micro, Inc., on March 15, 1999. The Company agreed to issue 450,000
(pre-split) of its shares of common stock. The agreement also provides
for the issuance of an additional 255,000 shares if the Company's
common stock is not publicly traded by May 31, 2000.
Merger
On April 28, 1999, the Company entered into an agreement to merge with
Adrenalin Interactive, Inc., a publicly held company, in a transaction
to be accounted for as a reverse acquisition of Adrenalin by the
Company. As a result of the merger, the Company's stockholders will own
approximately 87.5% of the combined company.
In addition, in connection with the merger agreement, the Company may
conduct a private placement of equity or debt securities prior to the
closing.
Conversion of Notes Payable into Common Stock
On February 19, 1999, notes payable amounting to $20,000 were converted
into 20,000 shares (pre-split) of the Company's common stock.
Stock Option Plan
On February 23, 1999, the stockholders of the Company adopted its 1999
stock option plan, which provides for the granting to officers, key
employees and consultants an option to acquire stock. In connection
with the plan, the Company has reserved 200,000 shares (pre-split) of
its common stock for issuance upon the exercise of stock options.
The Company issued an aggregate of 174,500 shares (pre-split) of its
common stock in connection with the exercise of options for cash of
$1,745 or for a per share price of $0.10 per share.
F-35
Page 141 of 303
<PAGE>
McGLEN MICRO, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 10 - SUBSEQUENT EVENTS (Continued)
Employment Contract
On January 13, 1999, the Company entered into an employment contract
with one of its officers which expires January 13, 2000. The agreement
calls for a minimum base salary and provides for certain expense
allowances. In addition, the agreement provides for a bonus based on
the "net profits" of the Company as defined.
F-36
Page 142 of 303
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
AMT Component, Inc. (dba Access Micro Technology and RAM Warehouse)
Irvine, California
We have audited the accompanying balance sheet of AMT Component, Inc. (dba
Access Micro Technology and RAM Warehouse) as of December 31, 1998, and the
related statements of income and retained earnings 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 financial statements referred to above present fairly, in
all material respects, the financial position of AMT Component, Inc. (dba Access
Micro Technology and RAM Warehouse) as of December 31, 1998, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Singer Lewak Greenbaum & Goldstein LLP
- ------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Santa Ana, California
June 22, 1999
F-37
Page 143 of 303
<PAGE>
================================================================================
ASSETS
Current assets
Cash and cash equivalents $ 83,071
Accounts receivable, net of allowance for
doubtful accounts of $7,000 83,170
Inventory 89,614
-----------
Total current assets $ 255,855
Property and equipment
Machinery and equipment 29,101
Auto 7,300
Furniture and fixtures 5,758
-----------
42,159
Less accumulated depreciation 10,057
-----------
Total property and equipment 32,102
Other assets
Deposits 9,490
-----------
Total assets $ 297,447
===========
F-38
Page 144 of 303
<PAGE>
AMT COMPONENT, INC.
BALANCE SHEET
As of December 31, 1998
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 127,178
Accrued expenses 27,808
Income tax payable 663
-----------
Total current liabilities $ 155,649
Note payable 17,000
-----------
Total liabilities 172,649
Commitments
Stockholders' equity
Common stock, $1 par value;
1,000,000 shares authorized,
10,000 shares issued and outstanding 10,000
Additional paid-in capital 45,784
Retained earnings 69,014
-----------
Total stockholders' equity 124,798
-----------
Total liabilities and stockholders' equity $ 297,447
===========
The accompanying notes are an integral part of these financial statements.
F-39
Page 145 of 303
<PAGE>
AMT COMPONENT, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
For the Year Ended December 31, 1998
================================================================================
% of
Amount Net Sales
------ ---------
Net sales $4,634,744 100.0
Cost of sales 3,818,691 82.4
---------- --------
Gross profit 816,053 17.6
Operating expenses 684,793 14.8
---------- --------
Income before other income 131,260 2.8
Interest income 150 -
---------- --------
Income before provision for income taxes 131,410 2.8
Provision for income taxes 1,463 -
---------- --------
Net income 129,947 2.8
========
Accumulated deficit - beginning of year (51,933)
Distributions to stockholders 9,000
----------
Retained earnings - end of year $ 69,014
==========
Earnings Per Share:
Basic $ 9.95
==========
Fully diluted $ 9.95
==========
Weighted Average Shares Outstanding:
Basic 10,000
==========
Fully diluted 10,000
==========
The accompanying notes are an integral part of these financial statements.
F-40
Page 146 of 303
<PAGE>
AMT COMPONENT, INC.
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
================================================================================
Cash flows from operating activities
Cash received from customers $ 4,571,574
Cash paid to suppliers and employees (4,536,351)
Interest received 150
Income taxes paid (800)
-----------
Net cash provided by operating activities 34,573
-----------
Cash flows from investing activity
Purchase of property and equipment (3,109)
-----------
Cash flows from financing activities
Principal borrowings on note payable 17,000
Contribution of capital 34,500
Distributions to stockholders (9,000)
-----------
Net cash provided by financing activities 42,500
-----------
Net increase in cash and cash equivalents 73,964
Cash and cash equivalents - beginning of year 9,107
-----------
Cash and cash equivalents - end of year $ 83,071
===========
The accompanying notes are an integral part of these financial statements.
F-41
Page 147 of 303
<PAGE>
AMT COMPONENT, INC.
STATEMENT OF CASH FLOWS (Continued)
For the Year Ended December 31, 1998
================================================================================
Reconciliation of net income to net cash provided by operating activities
Net income $ 129,947
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for doubtful accounts 7,000
Depreciation 8,962
(Increase) in
Accounts receivable (63,170)
Inventory (69,614)
Deposits (9,490)
Increase in
Accounts payable 7,178
Accrued expenses 23,097
Income tax payable 663
-----------
Net cash provided by operating activities $ 34,573
===========
Supplemental schedule of non-cash investing and financing activities During the
year ended December 31, 1998, the majority stockholder
contributed $750 of property and equipment to the Company to be included
with additional paid-in capital.
During the year ended December 31, 1998, the majority stockholder contributed
$31,000 of property and equipment to the Company representing repayment of
the note receivable-stockholder.
The accompanying notes are an integral part of these financial statements.
F-42
Page 148 of 303
<PAGE>
AMT COMPONENT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 1 - BUSINESS ACTIVITY
AMT Component, Inc. (dba Access Micro Technology and RAM Warehouse), a
California S-corporation, was organized April 23, 1997. The Company is
engaged in providing an on-line internet web site selling computer
components and peripherals to customers worldwide. They extend credit
to corporations, government and educational institutions.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, 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
from those estimates.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash and cash equivalents,
accounts receivable, and accounts payable and accrued expenses, the
carrying amounts approximate fair value due to their short maturities.
The amounts shown for long-term debt also approximate fair value due to
current interest rates offered to the Company for long-term debt of
similar maturities are substantially the same.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid debt instruments that
consist of time deposits with financial institutions. Cash equivalents
are stated at cost plus accrued interest, which approximates market
value.
Inventory
Inventory consists primarily of finished goods and is valued at the
lower of cost or market. Cost is determined principally by a first-in,
first-out method assumption.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line and accelerated methods over the
estimated useful lives of the various classes of property, as follows:
F-43
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<PAGE>
AMT COMPONENT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment (Continued)
Machinery and equipment 5 years
Auto 5 years
Furniture and fixtures 5 to 7 years
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred.
Revenue Recognition
The Company recognizes revenue upon shipment of goods.
Accounting for the Impairment of Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards 121,
"Accounting for the Impairment of Long-Lived Assets for Long-Lived
Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. Management has determined that there is no impairment
of long-lived assets as of December 31, 1998.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter
S of the Internal Revenue Code. Accordingly, results of operations of
the Company for the year ended December 31, 1998 are reported, as
allowable, on the stockholders' federal income tax returns. Therefore,
no federal income tax expense or benefit has been recorded in the
accompanying Statement of Income. Similarly, the Company elected to be
treated as an S Corporation for California franchise tax purposes. The
provision for income taxes in the accompanying Statement of Income
represents the state franchise tax applied to S Corporations at a tax
rate of 1.5% for the year ended December 31, 1998.
Advertising Expense
Advertising expenses are charged to expense as incurred. Advertising
expense for the year ended December 31, 1998 was $194,553.
F-44
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<PAGE>
AMT COMPONENT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Income per Share
The Company calculates earnings per share in accordance with Statement
of Financial Accounting Standards No. 128 - "Earnings Per Share" ("SFAS
128"). SFAS 128 replaced the presentation of primary and fully diluted
earnings per share with the presentation of basic and diluted earnings
per share. Basic earnings per share excludes dilution and is calculated
by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share includes the potential dilutive effects that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock that would then share in the
earnings of the Company.
Recently Issued Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for financial statements with fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The Company does not expect adoption of SFAS No. 133 to
have a material effect, if any, on its financial position or results of
operations.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," is effective for financial statements with the
first fiscal quarter beginning after December 15, 1998. The Company
does not expect adoption of SFAS No. 134 to have a material effect, if
any, on its financial position or results of operations.
SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections," is effective for financial statements with fiscal years
beginning February 1999. This statement is not applicable to the
Company.
NOTE 3 - CONCENTRATIONS OF RISK
Cash
As of December 31, 1998, the Company maintained deposits totaling
$29,162, with certain financial institutions in excess of federally
insured amounts.
F-45
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<PAGE>
AMT COMPONENT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 3 - CONCENTRATIONS OF RISK (Continued)
Customers
The Company extends credit to its customers. Collateral generally is
not required. Credit losses are provided for in the financial
statements based on management's evaluation of historical and current
industry trends. Although the Company expects to collect amounts due,
actual collections may differ from estimated amounts.
For the year ended December 31, 1998, no one customer accounted for 10%
or greater of net sales.
As of December 31, 1998, one customer accounted for 32% of accounts
receivable.
Suppliers
For the year ended December 31, 1998, one vendor represented 27% of
total purchases.
NOTE 4 - NOTE PAYABLE
As of December 31, 1998, the Company has a note payable totaling
$17,000. The note bears interest at 8% and is due March 2000. In
accordance with its terms, the note has been assumed by a stockholder
as a result of the sale of the Company (see Note 7).
NOTE 5 - COMMITMENTS
The Company leases office and warehouse facilities and office equipment
under operating leases requiring minimum monthly payments of $2,375.
The office equipment lease expires September 2000 and the office and
warehouse lease expires July 2001. Rent expense for office and
warehouse facilities was $20,333 for the year ended December 31, 1998.
The following is a schedule by years of future minimum rental payments
under those operating leases that have an initial or remaining
non-cancelable lease term in excess of one year as of December 31,
1998:
Year ending December 31,
1999 $ 28,496
2000 29,696
2001 17,472
-----------
Total $ 75,664
===========
F-46
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<PAGE>
AMT COMPONENT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 6 - YEAR 2000
The Company is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000
Issue and is developing a remediation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company is dependent on computer
processing in the conduct of its business activities.
Because the Company has not completed its review of the computer
systems, management is unable to estimate the cost of making the
systems Year 2000 compliant.
NOTE 7 - SUBSEQUENT EVENT
On March 31, 1999, McGlen Micro, Inc. acquired all assets and assumed
all liabilities of the Company for 450,000 shares of common stock of
McGlen Micro, Inc. The agreement also provides for the issuance of an
additional 255,000 shares if McGlen Micro, Inc.'s common stock is not
publicly traded by May 31, 2000.
F-47
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<PAGE>
McGLEN MICRO, INC.
------------------
BALANCE SHEET
JUNE 30, 1999
A S S E T S
CURRENT ASSETS
- --------------
CASH $ 196,130.21
ACCOUNTS RECEIVABLE $ 479,060.97
INVENTORY $ 307,047.00
DEPOSITS $ 372,693.00
------------
TOTAL CURRENT ASSETS $1,354,931.18
FIXED ASSETS
- ------------
VEHICLES $ 7,300.00
ACCUM. DEP. - VEHICLES $ (3,500.00)
FURNITURE & COMPUTERS $ 30,000.00
ACCUM. DEP. - FURN & COMP $ (5,000.00)
EQUIPMENT $ 202,254.09
ACCUM. DEP. - EQUIPMENT $ (10,000.00)
------------
TOTAL FIXED ASSETS $ 221,054.09
OTHER ASSETS
- ------------
PREPAID TAXES - FTB $ 5,451.00
ORGANIZATION COST $ 1,500.00
ACCUM. AMORT. ORGANIZATION $ (500.00)
AUTO LEASE ACQUIRED COST $ 8,000.00
ACCUM. AMORT. AUTO LEASE $ (1,700.00)
------------
TOTAL OTHER ASSETS $ 12,751.00
-------------
TOTAL ASSETS $1,588,736.27
=============
F-48
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<PAGE>
McGLEN MICRO, INC.
------------------
BALANCE SHEET
JUNE 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
- -------------------
ACCOUNTS PAYABLE $ 697,938.03
SALES TAX PAYABLE $ 59,252.00
OTHER LIABILITIES $ 51,956.73
------------
TOTAL CURRENT LIABILITIES $ 809,146.76
LONG-TERM DEBT
- --------------
EQUIPMENT LEASE $ 137,254.09
LOAN FROM SHAREHOLDERS $ 110,000.00
CONVERTIBLE NOTES PAYABLE $ 200,000.00
------------
TOTAL LONG-TERM DEBT $ 447,254.09
-------------
TOTAL LIABILITIES $1,256,400.85
STOCKHOLDERS' EQUITY
- --------------------
COMMON STOCK $ 80,000.00
COMMON STOCK TO BE ISSUD $ 75,000.00
ADDITONAL PAID IN CAPITAL $ 62,784.00
DISTRIBUTIONS $ (8,000.00)
RETAINED EARNINGS - PRIOR $144,524.00
RETAINED EARNINGS - CURRENT $(21,972.58)
-----------
$ 332,335.42
-------------
TOTAL LIABILITIES & EQUITY $1,588,736.27
=============
F-49
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<PAGE>
McGLEN MICRO McGLEN MICRO AMT COMP INC SIX MONTHS
1st QTR99 2nd QTR99 1st QTR99 ENDING 6/30/99
--------- --------- --------- --------------
Revenues
Sales 3,769,456.84 6,314,197.00 $1,903,075.04 11,986,728.88
Sales Return 386,753.70 384,232.00 $ 20,588.72 791,574.42
Freight Income 187,844.92 466,279.00 $ 2,982.67 657,106.59
Interest Income 1,346.37 1,285.23 2,631.60
Total Revenues 3,571,894.43 6,397,529.23 1,885,468.99 11,854,892.65
Cost of Sales
Beginning Inventory 122,792.25 189,207.50 122,792.25
Purchase 3,392,301.35 5,767,694.20 $1,588,627.36 10,748,622.91
Purchase Return (304,521.53) (280,979.00) (585,500.53)
Freight Out 155,713.33 282,347.10 $ 74,745.65 512,806.08
Ending Inventory (189,207.50) (307,047.00) (304,047.00)
Total Cost of Sales 3,177,077.90 5,651,222.80 1,663,373.01 10,491,673.71
Gross Profit 394,816.53 746,306.43 $ 222,095.98 1,363,218.94
Expenses
Advertising $ 70,265.18 $ 166,391.74 $ 66,825.45 303,482.37
Auto Expense $ 1,309.53 $ 2,896.80 $ 2,060.00 6,266.33
Auto Lease $ 1,824.51 $ 1,824.51 3,649.02
Bank Charge $ 489.26 $ 325.98 $ 96.00 911.24
Commission $ $ 2,296.00 2,296.00
Credit Service $ 76,612.92 $ 140,710.67 $ 52,623.48 269,947.07
Dues & Subscription $ 11,270.48 $ 15,549.22 26,819.70
Entertainment $ 3,767.45 $ 1,968.55 5,736.00
Insurance $ 7,533.25 $ $ 1,749.44 9,282.69
Interest $ 416.67 $ 11,169.38 11,586.05
MACS Support $ 5,543.73 5,543.73
Insurance $ 9,704.49 9,704.49
Misc. expense $ 325.92 325.92
Office Expense $ 3,933.11 $ 10,353.69 $ 6,420.92 20,707.72
Payroll $ 170,885.11 $ 226,789.76 $ 61,141.50 458,816.37
Payroll Taxes $ 13,834.03 $ 24,000.53 $ 7,306.40 45,140.96
Postage $ 6,049.00 $ 9,003.13 $ 1,522.67 16,574.80
Printing $ 2,177.53 $ 3,260.41 5,437.94
Professional $ 19,370.00 $ 16,350.38 35,720.38
Rental $ 12,758.29 $ 13,172.00 $ 6,780.00 32,710.29
Repair $ 822.57 $ 900.00 1,722.57
Taxes & licenses $ 300.00 $ 725.00 1,025.00
Telephone $ 21,488.02 $ 46,642.08 $ 23,672.03 91,802.13
Temporary Help $ 1,310.30 $ 135.50 1,445.80
Travel $ 531.50 531.50
Warehouse supply $ 2,092.99 $ 8,387.12 $ 1,723.25 12,203.36
Utility $ 1,456.86 $ 2,343.15 $ 1,182.46 4,982.47
Misc. expense $ 807.88 $ 11.74 819.62
Total Expenses $ 430,824.48 702,605.32 251,761.72 1,385,191.52
Net Income $ (36,007.95) 43,701.11 (29,665.74) (21,972.58)
F-50
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<PAGE>
APPENDIX INDEX
Appendix A: Fairness Opinion
Appendix B: Agreement and Plan of Merger
Appendix C: Certificate of Amendment to Certificate of Incorporation
Appendix D: Adrenalin Interactive, Inc. 1999 Long-Term Stock Incentive
Appendix E: Annual Report on Form 10-KSB of Adrenalin Interactive, Inc.
for the period ended 6/30/99
Page 157 of 303
<PAGE>
APPENDIX A
----------
SEE ATTACHED
Page 158 of 303
<PAGE>
August 9, 1999
Board of Directors
Adrenalin Interactive, Inc.
5301 Beethoven Street, Suite 255
Los Angeles, CA 90066
Members of the Board:
We understand that the stockholders of Adrenalin Interactive, Inc. will be asked
to consider and vote upon a proposal to approve the issuance of common stock of
Adrenalin Interactive, Inc. pursuant to the terms of the Agreement and Plan of
Merger dated as of April 28, 1999, as amended, among Adrenalin Interactive,
Inc., Adrenalin Acquisition Corporation, a wholly-owned subsidiary of Adrenalin
Interactive, Inc. (the "Merger Sub"), McGlen Micro, Inc., a California
corporation, and George Lee, Mike Chen, and ACST Computers, Inc., a California
corporation. Pursuant to the terms and subject to the conditions of the Merger
Agreement, Merger Sub will merge with and into McGlen Micro, Inc., which will
thereby become a wholly-owned subsidiary of Adrenalin Interactive, Inc., and
common stock of Adrenalin Interactive, Inc. will be issued to the stockholders
of McGlen Micro, Inc. such that, upon consummation of the Merger, they will
collectively own up to 87.5% of the outstanding shares of Adrenalin Interactive,
Inc.'s common stock on a Fully-Diluted Basis (as such term is defined in the
Merger Agreement). The terms and conditions of the proposed Merger are set forth
in more detail in the Merger Agreement.
Bilich Associates has been requested by the Board of Directors of Adrenalin
Interactive, Inc. to render our opinion with respect to the fairness of the
proposed Merger to the stockholders of Adrenalin Interactive, Inc., from a
financial point of view, assuming the Merger is consummated as proposed. More
specifically, the opinion addresses the fairness of the Merger to the outside
minority shareholders of Adrenalin Interactive, Inc. We have not been requested
to opine as to, and our opinion does not in any manner address, Adrenalin's
underlying business decision to proceed with or effect the proposed Merger.
In arriving at our opinion, we reviewed and analyzed: (1) the Merger Agreement
and the specific terms of the proposed Merger, (2) such publicly available
information concerning Adrenalin Interactive, Inc. which we believe to be
relevant to our analysis, (3) financial and operating information with respect
to the business, operations and prospects of Adrenalin Interactive, Inc.
Page 159 of 303
<PAGE>
Board of Directors
Adrenalin Interactive, Inc. Page 2
furnished to us by Adrenalin Interactive, Inc., (4) financial and operating
information with respect to the business, operations and prospects of McGlen
Micro, Inc. furnished to us by McGlen Micro, Inc., (5) a trading history of
Adrenalin Interactive, Inc.'s common stock from its initial public offering date
to the present and a comparison of its recent trading history with those of
other companies that we deemed relevant, (6) a comparison of the historical
financial results and present financial condition of Adrenalin Interactive, Inc.
with those of other companies that we deemed relevant, (7) a comparison of the
historical financial results, present financial condition and prospects of
McGlen Micro, Inc. with those of other companies that we deemed relevant, (8)
the potential pro forma financial effects of the proposed Merger, including the
cost savings and operating synergies expected by management of Adrenalin
Interactive, Inc. to result from a combination of the businesses of Adrenalin
Interactive, Inc. and McGlen Micro, Inc., (9) a comparison of the financial
terms of the proposed Merger with the financial terms of certain other
transactions that we deemed relevant, and (10) a summary of the Private
Placement dated July 12, 1999, whereby Adrenalin consummated a financing
pursuant to which it sold shares of its common stock to Escalade Investors, LLC,
an accredited investor. In addition, we have had discussions with the management
of Adrenalin Interactive, Inc. and of McGlen Micro, Inc. concerning their
respective businesses, operations, assets, financial conditions and prospects
and the potential strategic benefits of the proposed Merger and have undertaken
such other studies, analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without assuming
any responsibility for independent verification of such information and have
further relied upon the assurances of management of Adrenalin Interactive, Inc.
that they are not aware of any facts that would make such information inaccurate
or misleading. With respect to the financial projections of Adrenalin
Interactive, Inc. and McGlen Micro, Inc. following the consummation of the
proposed Merger, upon advice of Adrenalin Interactive, Inc. we have assumed that
such projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgements of the management of Adrenalin
Interactive, Inc. or McGlen Micro, Inc., as the case may be, as to the future
financial performance of Adrenalin Interactive, Inc. and McGlen Micro, Inc., and
that Adrenalin Interactive, Inc. and McGlen Micro, Inc. would, and following the
consummation of the proposed Merger will, perform substantially in accordance
with such projections. In arriving at our opinion, we have conducted a limited
physical inspection of the properties and facilities of Adrenalin Interactive,
Inc. and McGlen Micro, Inc. and have not made or obtained any evaluations or
appraisals of the assets or liabilities of Adrenalin Interactive, Inc. or McGlen
Micro, Inc. Upon advice of Adrenalin Interactive, Inc., we have assumed that the
proposed Merger will qualify as a tax-free transaction to the stockholders of
Adrenalin Interactive, Inc. Our opinion necessarily is based upon market,
economic and other conditions as they exist on, and can be evaluated as of, the
date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the date
hereof that, from a financial point of view, the proposed Merger is fair to the
stockholders of Adrenalin Interactive, Inc.
Page 160 of 303
<PAGE>
Board of Directors
Adrenalin Interactive, Inc. Page 3
We have acted as a financial advisor to Adrenalin Interactive, Inc., in
connection with the proposed Merger and will receive a fee for our services
which is fixed and is not contingent upon the consummation of the proposed
Merger. Adrenalin Interactive, Inc. has agreed to indemnify us for certain
liabilities that may arise out of the rendering of this opinion.
The opinion is for the use and benefit of the Board of Directors of Adrenalin
Interactive, Inc. and is rendered to the Board of Directors in connection with
its consideration of the proposed Merger. This opinion is not intended to be and
does not constitute a recommendation to any stockholder of Adrenalin
Interactive, Inc. as to how such stockholder should vote with respect to the
proposed Merger.
Very truly yours,
BILICH ASSOCIATES
/s/ Michael E. Bilich
- ----------------------
Michael E. Bilich, ASA
Page 161 of 303
<PAGE>
APPENDIX B
----------
SEE ATTACHED
Page 162 of 303
<PAGE>
AGREEMENT AND PLAN OF MERGER
Dated as of April 28, 1999, by and among
Adrenalin Interactive, Inc.
Adrenalin Acquisition Corporation
McGlen Micro Inc.
and
The Shareholders of McGlen Micro Inc.
Page 163 of 303
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I THE MERGER......................................................2
1.1 The Merger..........................................................2
1.2 The Closing.........................................................2
1.3 Effective Time......................................................2
1.4 Effects of the Merger...............................................2
1.5 Articles of Incorporation and Bylaws of the Surviving
Corporation.........................................................3
1.6 The Parent Private Placement........................................3
1.7 The Company Private Placement.......................................3
(a) Sale of Shares.................................................3
(b) Parent Approval................................................4
(c) Compliance with Law............................................4
1.8 Synnex Agreement....................................................4
1.9 Merger Proxy........................................................4
ARTICLE II DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION.............4
2.1 Directors...........................................................4
2.2 Director's Agreement................................................5
2.3 Parent Officers.....................................................5
2.4 Executive Employment Agreements.....................................5
2.5 Termination of Existing Agreements..................................5
(a) Repudiation ..................................................5
(b) Repudiation by the Company's Officers..........................5
ARTICLE III EFFECT OF THE MERGER ON SECURITIES OF MERGER SUB AND
THE COMPANY.....................................................5
3.1 Merger Sub Stock....................................................5
3.2 The Company Securities..............................................6
3.3 Exchange of Certificates Representing the Company
Stock...............................................................7
3.4 Amendment of Certificate............................................7
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................7
4.1 Existence; Good Standing; Corporate Authority;
Compliance with Law.................................................8
4.2 Authorization, Validity and Effect of Agreements....................9
4.3 Capitalization......................................................9
4.4 Other Interests....................................................10
4.5 No Violation.......................................................10
4.6 Financial Statements..............................................11
4.7 Absence of Undisclosed Liabilities.................................11
4.8 Absence of Certain Changes or Events...............................12
4.9 List of Properties, Contracts, Etc.................................14
i
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<PAGE>
4.10 Title to Assets....................................................17
4.11 Adequacy of Assets.................................................18
4.12 Condition of Inventory, Property and Equipment.....................18
4.13 Litigation.........................................................18
4.14 Taxes ..........................................................19
4.15 Proprietary Rights.................................................20
4.16 Royalties..........................................................23
4.17 Year 2000 Compliance...............................................23
4.18 Labor Relations....................................................23
4.19 Certain Employee Matters...........................................24
4.20 Transactions With Affiliates.......................................24
4.21 Permits; Compliance with Laws......................................25
4.22 Environmental Matters..............................................25
4.23 Adverse Agreements.................................................26
4.24 Fees ..........................................................26
4.25 Books and Records..................................................26
4.26 ERISA ..........................................................26
4.27 Insurance..........................................................28
4.28 Disclosure.........................................................28
4.29 Investment Representations of Principal Shareholders ..............29
4.30 Subsidiary.........................................................30
4.31 Authorization......................................................30
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER
SUB............................................................30
5.1 Existence; Good Standing; Corporate Authority;
Compliance with Law................................................30
5.2 Authorization, Validity and Effect of Agreements...................31
5.3 Capitalization.....................................................32
5.4 Other Interests....................................................33
5.5 No Violation.......................................................33
5.6 SEC Documents......................................................34
5.7 Financial Statements...............................................34
5.8 Absence of Undisclosed Liabilities.................................35
5.9 Absence of Certain Changes or Events...............................35
5.11 Title to Assets....................................................41
5.12 Adequacy of Assets.................................................42
5.13 Condition of Inventory, Property and Equipment.....................42
5.15 Accounts Receivable and Accounts Payable...........................43
5.16 Litigation.........................................................43
5.17 Taxes ..........................................................44
5.18 Proprietary Rights.................................................45
5.19 Royalties..........................................................48
5.20 Year 2000 Compliance...............................................48
5.21 Labor Relations....................................................49
5.22 Certain Employee Matters...........................................50
5.23 Environmental Matters..............................................50
5.24 ERISA ..........................................................51
ii
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<PAGE>
5.25 Fees...............................................................52
5.26 Books and Records..................................................52
5.27 Insurance..........................................................52
5.28 Disclosure.........................................................52
5.29 Purchase Accounting Treatment......................................53
5.30 Subsidiaries.......................................................53
ARTICLE VI INTERIM OPERATING COVENANTS OF THE PARENT AND
SUBSIDIARIES...................................................53
6.1 Operations.........................................................53
6.2 No Change..........................................................54
6.3 Access; Confidential Information...................................55
6.4 Obtain Consents....................................................56
6.5 Exclusivity........................................................56
6.6 Listing Application................................................56
ARTICE VII INTERIM COVENANTS OF THE COMPANY................................56
7.1 Interim Operations.................................................56
7.2 Meeting of Stockholders............................................58
7.3 Notices to Holders of Company Stock Options........................58
7.4 Exclusivity........................................................58
ARTICLE VIII ADDITIONAL COVENANTS OF THE PARTIES.............................59
8.1 Filings; Other Action..............................................59
8.2 Publicity..........................................................59
8.3 Further Action.....................................................59
8.4 Expenses ..........................................................60
8.5 Tax Matters........................................................60
8.6 Brokers and Finders Fees...........................................60
8.7 Company's Directors and Officers Liability.........................60
8.8 Notices of Certain Events..........................................60
8.9 Completion of Due Diligence........................................61
8.10 Preparation of Schedules and Exhibits..............................61
ARTICLE IX CONDITIONS TO CLOSING..........................................61
9.1 Conditions to Each Party's Obligations to Effect the
Merger.............................................................61
9.2 Conditions to Obligation of the Company to Effect the
Merger.............................................................63
9.3 Conditions to Obligation of the Parent and Merger Sub
to Effect the Merger...............................................64
ARTICLE X TERMINATION....................................................66
10.1 Termination by Mutual Consent......................................66
10.2 Termination by Either Party........................................66
10.3 Effect of Termination and Abandonment..............................66
10.4 Extension; Waiver..................................................67
iii
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<PAGE>
ARTICLE XI GENERAL PROVISIONS.............................................67
11.1 Notices ..........................................................67
11.2 Assignment, Binding Effect.........................................68
11.3 Entire Agreement...................................................68
11.4 Amendment..........................................................69
11.5 Subsequent Actions.................................................69
11.6 Governing Law......................................................69
11.7 Counterparts.......................................................69
11.8 Headings ..........................................................69
11.9 Interpretation.....................................................70
11.10 Waivers ..........................................................70
11.11 Attorneys' Fees....................................................70
11.12 Survival ..........................................................70
11.13 Incorporation of Exhibits..........................................70
11.14 Severability.......................................................71
11.15 Enforcement of Agreement...........................................71
11.16 Consent ..........................................................71
iv
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<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is
entered into as of April 28, 1999, among Adrenalin Interactive,
Inc., a Delaware corporation (the "Parent"), Adrenalin Acquisition
Corporation, a California corporation and a wholly owned subsidiary
of the Parent (the "Merger Sub"), McGlen Micro Inc., a California
corporation (the "Company"), George Lee, Mike Chen, and ACST
Computers, Inc., a California corporation (collectively, the
"Principal Shareholders"), with reference to the following.
RECITALS
A. The Parent is in the business of development and
licensing of interactive programming and toy design.
B. The Company is in the business of retail sales of
computer hardware and software via the Internet.
C. The Merger Sub is or will be upon formation, a wholly
owned subsidiary of the Parent formed for the purpose of merging
with the Company.
D. The Board of Directors of the Parent and the Company each
have determined that a business combination between the Parent and
the Company is fair to and in the best interest of their respective
companies and stockholders and, accordingly, have agreed to effect
the merger provided for herein upon the terms and subject to the
conditions set forth herein.
E. The Principal Shareholders own an aggregate of 2,450,000
shares of common stock, of the Company's current 2,545,000 shares
outstanding, which constitute all of the issued and outstanding
shares of common stock of the Company.
F. In connection with the merger provided for herein, shares
of the Parent's common stock will be issued in exchange for all of
the issued and outstanding shares of the Company's Stock.
G. This merger is intended for tax purposes to qualify as a
non-taxable reorganization under Section 368(a)(2)(E) of the
Internal Revenue Code of 1986, as amended (the "Code").
H. The parties desire that the Merger Sub, upon the terms
and subject to the conditions of this Agreement and in accordance
with the California General Corporation Law (the "Corporate Law"),
merge with and into the Company (the "Merger"), and pursuant
thereto the Company's Stock shall be converted into the right to
receive shares of the Parent, as set forth herein.
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AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and
of the provisions, representations, warranties, covenants and
agreements contained herein and other good and valuable
consideration, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to the provisions of this Agreement,
in accordance with the Corporate Law, at the Effective Time (as
defined in Section 1.3 below), the Merger Sub shall be merged with
and into the Company in a transaction intended to qualify as a tax-
free reorganization under Section 368(a) of the Code. Immediately
following the Merger, the separate corporate existence of the
Merger Sub shall cease and the Company, under the name "McGlen
Micro Inc.," as the surviving corporation (the "Surviving
Corporation"), shall continue to exist under and be governed by the
Corporate Law as a direct, wholly-owned subsidiary of the Parent.
1.2 THE CLOSING. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take
place at the offices of the Company at 3002 Dow Avenue, Suite 212,
Tustin, California 92780 at 10:00 a.m., on (i) the second business
day following the satisfaction of the conditions set forth in
Article X (other than those conditions that by their nature are to
be satisfied at the Closing, but subject to the satisfaction or,
where permitted, waiver of those conditions) or (ii) or at such
other time, date, or place as the Parent and the Company may agree.
The date on which the Closing occurs is hereinafter referred to as
the "Closing Date."
1.3 EFFECTIVE TIME. As soon as practicable after the
satisfaction or waiver of all of the conditions to the Merger, the
parties shall cause the Merger to be consummated by causing an
Agreement of Merger (the "Filed Agreement") substantially in the
form of EXHIBIT 1.3 attached hereto, together with officers'
certificates in the forms included with such Exhibit, to be
executed and filed in accordance with the relevant provisions of
the Corporate Law. The Merger shall become effective at the time
of the filing with the California Secretary of State of the Filed
Agreement relating thereto or at such later time as is specified in
the Filed Agreement (the "Effective Time").
1.4 EFFECTS OF THE MERGER. The Merger shall have the effect
set forth in Section 1107 of the Corporate Law. Without limiting
the generality of the foregoing, at the Effective Time, all the
properties, rights, privileges, powers and franchises of the
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Company and Merger Sub shall vest in the Surviving Corporation, and
all debts, liabilities and duties of the Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving
Corporation in the same manner as if the Surviving Corporation had
itself incurred them. All rights of creditors and all liens upon
the property of the Company and Merger Sub shall thereafter be
preserved unimpaired.
1.5 ARTICLES OF INCORPORATION AND BYLAWS OF THE SURVIVING
CORPORATION. The Articles of Incorporation and Bylaws of the
Company, respectively, as in effect immediately prior to the
Effective Time, shall be the Articles of Incorporation and Bylaws
of the Surviving Corporation, until thereafter amended in
accordance with the provisions thereof and applicable law.
1.6 THE PARENT PRIVATE PLACEMENT. Prior to the Closing, the
Parent shall complete a private placement of the Parent's common
stock ("Parent Stock") in a minimum subscription amount of
$500,000, and not to exceed $2,000,000, in accordance with the
terms set forth in Schedule 1.6 (the "Parent Placement"). The
Parent Placement shall comply with the provision of Rule 506
promulgated under Regulation D of the Securities Act of 1933, as
amended (the "Act"). The Parent shall comply with all applicable
federal securities laws, the rules and regulations of Nasdaq and
the Securities and Exchange Commission (the "SEC") and applicable
blue sky laws, in the offer and sale of Parent Stock through the
Parent Placement and shall complete all necessary filings prior to
the Closing, including without limitation:
(i) The filing of a Form D with the SEC, if
applicable;
(ii) State blue sky filings; and
(iii) Notices and applications with Nasdaq.
The Parent will make a loan to the Company from the proceeds
of the Private Placement in such amounts requested by the Company
and in accordance with such terms as set forth in Schedule 1.6 (the
"Loan").
1.7 THE COMPANY PRIVATE PLACEMENT.
(a) SALE OF SHARES. The Company may conduct a private
placement of equity or debt securities prior to the Closing (the
"Company Placement"). Each subscriber to the Company Placement
shall be required to agree to the exchange of any securities of the
Company that the subscriber purchases with shares of the Parent
pursuant to the terms of this Agreement as in effect at the
Closing. Subscribers to the Company Placement shall not be
required to be a party to this Agreement or to provide
representations or warranties to the Parent or the Merger Sub other
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than standard investor representations made to comply with state
and federal securities laws.
(b) PARENT APPROVAL. The Parent shall have the right to
approve the terms of any registration rights, warrants, options,
conversion terms or other material terms if the Company offers any
such rights as part of the Company Placement. Subject to the
foregoing, if the Company offers securities other than common
stock, the Parent agrees to be bound by and perform under the terms
and conditions of the Company Placement upon completion of the
Merger.
(c) COMPLIANCE WITH LAW. The Company Placement shall
comply with applicable state and federal securities laws and the
Company shall complete all necessary federal and blue sky filings
prior to the Closing.
1.8 SYNNEX AGREEMENT. The Parent and Merger Sub acknowledge
and consent to the terms of the agreement between Synnex
Information Technologies, Inc., a California corporation (the
"Synnex Agreement") and the Company (the "Synnex Agreement"),
copies of which are attached hereto as EXHIBIT "1.8". The Parent
shall be bound by the terms of the Synnex Agreement upon completion
of the Merger and hereby assumes all obligations and duties of the
Company set forth in the documents evidencing the Synnex Agreement.
1.9 MERGER PROXY. The Parent shall as soon as reasonably
practicable prepare and file with the SEC, Nasdaq and all other
necessary agencies, a proxy for approval for distribution to the
Parent's shareholders to approve the Merger, the amendment of the
Parent's certificate of incorporation to increase the authorized
number of shares and the terms of this Agreement. The Company
shall assist the Parent in the preparation of the proxy materials
and have the right to review and reasonably approve the proxy
prior to its filing with the SEC and its distribution to the
Parent's shareholders.
ARTICLE II
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
2.1 DIRECTORS. The Surviving Corporation and the Parent
shall take such action as is necessary to elect as directors of
both the Surviving Corporation and the Parent immediately following
the Effective Time: the individuals identified in Schedule 2.1 (the
"Interim Directors"). The Interim Directors shall serve, until
their successors are duly appointed or elected in accordance with
applicable law. The Parent shall take all actions necessary to
nominate the Interim Directors for election.
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2.2 DIRECTOR'S AGREEMENT. The Parent and each of the Interim
Directors shall enter into director agreements in the form attached
hereto as EXHIBIT "2.2" ("Director Agreements").
2.3 PARENT OFFICERS. The Surviving Corporation and the
Parent shall take such actions as are necessary to elect as the
officers of the Parent effective immediately following the
Effective Time: Jay Smith, III, Co-Chief Executive Officer; George
Lee, Co-Chief Executive Officer and President; Mike Chen, Secretary
and Vice President of Technology; and David Yao, Chief Financial
Officer (the "Parent Officers"). At the Closing, the Parent will
enter into a one year Employment Agreement with Jay Smith, III,
pursuant to which Mr. Smith will receive $150,000 per year plus
100,000 incentive stock options.
2.4 EXECUTIVE EMPLOYMENT AGREEMENTS. On the Closing Date,
the Parent shall enter into executive employment agreements with
the Parent Officers in the forms attached hereto as EXHIBIT "2.4"
(the "Executive Employment Agreements").
2.5 TERMINATION OF EXISTING AGREEMENTS.
(a) REPUDIATION. Prior to the Closing, Jay Smith, III,
and each other executive officer and director of the Parent shall
repudiate his or her existing employment agreements with the Parent
or the Subsidiary and all rights thereunder and cancel the existing
agreements and release the Parent from all obligations thereunder.
Each of the officers and directors of the Parent shall have
resigned as of the Closing Date. Each officer, director and
employee identified in Schedule 2.5(a) shall execute as of the
Closing Date, a release in the form attached hereto as EXHIBIT
"2.5" (the "Release").
(b) REPUDIATION BY THE COMPANY'S OFFICERS. On or prior
to the Closing Date, the executive officers of the Company shall
repudiate and cancel their existing employment agreements and
release the Company from all obligations thereunder. Each such
officer shall execute a copy of the Release.
ARTICLE III
EFFECT OF THE MERGER ON SECURITIES OF MERGER SUB AND THE COMPANY
3.1 MERGER SUB STOCK. At the Effective Time, each share of
common stock of the Merger Sub outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any
action on the part of the Parent or the Company, be converted into
and exchanged for one validly issued, fully paid and non-assessable
share of common stock of the Surviving Corporation.
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3.2 THE COMPANY SECURITIES.
(a) At the Effective Time, the shares of common stock of
the Company (the "Company Stock") issued and outstanding
immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be
converted into the right to receive the number of shares of the
Parent's Common Stock (the "Share Exchange Ratio") calculated such
that (i) all outstanding shares of Company Stock on a Fully Diluted
Basis (as defined below) immediately prior to Effective Time,
including shares issued in the Company Placement prior to the
Effective Date, plus (ii) the Loan Shares (as defined below) shall
equal, in the aggregate, 87.5% of the outstanding shares of the
Parent Common Stock on a Fully Diluted Basis outstanding
immediately following the Effective Time. For purposes hereof,
"Fully Diluted Basis" shall mean all outstanding shares and all
shares issuable pursuant to Convertible Securities (as defined
below) to the extent in the money as of the Closing Date. "Fully
Diluted Basis" shall not include any shares issuable pursuant to
the Synnex Agreement. For purposes hereof, "Convertible
Securities" means options, warrants, convertible securities or
other rights to acquire common stock. For purposes hereof, "Loan
Shares" shall mean the shares of Parent Common Stock sold in the
Parent Placement, the net proceeds of which were used to fund the
Loan. The Share Exchange Ratio shall be calculated by the Parent
and the Company prior to the Effective Time and such calculation
shall be attached hereto as Schedule 3.2(a).
(b) As a result of the Merger and without any action on
the part of the holder thereof, at the Effective Time, all shares
of the Company Stock shall cease to be outstanding and shall be
canceled and retired, and each holder of shares of the Company
Stock shall thereafter cease to have any rights with respect to
such shares of the Company Stock, except the right to receive,
without interest, the Parent Stock.
(c) All options to purchase Company Stock outstanding at
the Effective Time under any Company stock option plan or agreement
or any other type of option, warrant or right to purchase shares of
the Company (the "Company Stock Options") shall, at the Effective
Time, automatically and without further action on the part of any
holder thereof, be converted into options or similar right to
purchase Parent Stock (individually, a "Parent Stock Option" and
collectively, the "Parent Stock Options"). Each option granted by
the Parent hereunder shall be exercisable upon the same terms and
conditions as under the applicable Company Stock Option in
compliance with the requirements of Section 424(a) of the Code and
the applicable agreement issued thereunder, except that (i) each
such Company Stock Option shall be exercisable for that whole
number of shares of Parent Stock (to the nearest whole share)
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determined by multiplying the number of shares of the Company Stock
subject to such Company Stock Option by the Share Exchange Ratio
immediately prior to the Effective Time times as set forth on
Schedule 3.2(b) (the "Option Exchange Ratio"), (ii) the total
option price of the shares of Parent Stock issuable upon exercise
of a Parent Stock Option shall be an amount equal to the total
option price of the shares of Company Stock subject to such Company
Stock Option in effect immediately prior to the Effective Time,
(iii) the exercise price per share shall be calculated by dividing
the aggregate option value of the shares of Company Stock subject
to such Company Stock Options in effect immediately prior to the
Effective Time by the number of shares of Parent Stock underlying
such Parent Stock Options, (iv) all Parent Stock Options shall be
exercisable otherwise in accordance with their terms. No payment
shall be made for fractional interests.
(d) As soon as practicable after the Effective Time, the
Parent shall deliver to the holders of all Company Stock Options,
a notice stating that the agreements evidencing the grants of such
Company Stock Options shall continue in effect as Parent Stock
Options on the same terms and conditions (subject to the terms of
the relevant Company Stock Option plan and the adjustments to
outstanding Shares and exercise price).
(e) The Parent shall take all corporate action necessary
to reserve for issuance a sufficient number of shares of Parent
Stock for delivery upon exercise of Parent Stock Options.
3.3 EXCHANGE OF CERTIFICATES REPRESENTING THE COMPANY STOCK.
Within 5 days of the Effective Time, the Parent will deliver to the
Company the certificates representing shares of the Parent Stock
(together with any unpaid dividends or distributions with respect
thereto relating to record dates for such dividends or
distributions after the Effective Time) to be issued and paid in
exchange for outstanding shares of Company Stock.
3.4 AMENDMENT OF CERTIFICATE. As soon as permissible under
the Delaware corporation law, the Parent shall amend its
Certificate of Incorporation to increase its authorized number of
shares to 50,000,000. The Parent shall seek approval of a majority
of its shareholders to the Amendment of its Certificate to increase
the authorized number of shares.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Parent as of the
date of this Agreement as follows:
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4.1 EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE
WITH LAW.
(a) Each of the Company and its subsidiary is a
corporation duly incorporated, validly existing, and in good
standing (including tax good standing) under the laws of the State
of California and are not qualified to do business in any other
jurisdiction.
(b) Each of the Company and its subsidiary has all
requisite corporate power and authority to own, operate, and lease
its properties and carry on its business as presently conducted and
as proposed to be conducted.
(c) Each of the Company and its subsidiary is not in
violation of any law, ordinance, governmental rule or regulation to
which it or any of its properties or assets is subject, except as
would not, individually or in the aggregate, reasonably be expected
to have a Company Material Adverse Effect, nor is the Company or
its subsidiary in violation of any order, judgment, or decree of
any court, governmental authority, or arbitration board or
tribunal. A "Company Material Adverse Effect" means a material
adverse change in the business, properties, financial condition,
results of operations, or prospects of the Company, taken as a
whole as more particularly described in Schedule 4.1(e).
(d) The copies of the Articles of Incorporation of the
Company and its subsidiary and Bylaws of each entity, which have
been delivered to the Parent, include any and all amendments made
thereto at any time prior to the date of this Agreement and are
true, correct, and complete.
(e) The Company's and its subsidiary's corporate minute
books are accurate as to their content and include therein the
Articles of Incorporation and Bylaws with any amendments thereto.
The meetings of the directors or stockholders referred to in the
corporate minute books were duly called and held. The signatures
appearing on all documents contained in the corporate minute books
are the true signatures of the persons purporting to have executed
the same and no minutes of meetings or written consents of the
directors or stockholders of the Company or the subsidiaries are
omitted from such minute books that would contain any resolutions
or other actions that would be inconsistent with any of the
representations and warranties contained in Article IV hereof or
prevent or limit any of the transactions contemplated by this
Agreement. Schedule 4.1 sets forth a true and complete list of the
names of all directors of the Company and the names and offices
held of all officers of the Company and each subsidiary as the date
hereof.
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4.2 AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. The
Company has the requisite corporate power and authority to execute
and deliver this Agreement and all agreements and documents
contemplated hereby. Subject only to the approval of this
Agreement and the transactions contemplated hereby by the Principal
Shareholders as required by the Corporate Law, the consummation by
the Company of the transactions contemplated hereby has been duly
authorized by all requisite corporate action of the Company. This
Agreement has been duly executed and delivered by the Company and,
assuming the due authorization, execution and delivery by the
Parent and the Merger Sub, constitutes, and all agreements and
documents contemplated hereby (when executed and delivered pursuant
hereto for value received) will constitute valid and legally
binding obligations of the Company, enforceable against the Company
in accordance with their respective terms, except to the extent
that enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, or other similar laws relating to
creditors' rights and general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity
or at law), including, without limitation, possible unavailability
of specific performance, other injunctive relief or other equitable
remedies and an implied covenant of good faith and fair dealing.
4.3 CAPITALIZATION. As of the date hereof, the authorized
capital stock of the Company consists of 10,000,000 Shares of
Common Stock, of which 2,545,000 shares are issued and outstanding.
The Company is not authorized to and has not issued, preferred
stock or any other class stock. Schedule 4.3 sets forth the number
of shares of Company Stock issuable upon exercise of outstanding
Company Stock Options. All of the outstanding shares of capital
stock of the Company's subsidiary have been validly issued and are
fully paid and nonassessable and, are owned by the Company free and
clear of all liens, charges, claims or encumbrances. Schedule 4.3
sets forth the name of each record holder of shares of Company
Stock, the number of shares of Company Stock so held, and the
number of whole shares of Parent Stock to be issued in exchange for
such shares of Company Stock in connection with the Merger. Except
as set forth in Schedule 4.3, the Company has no outstanding bonds,
debentures, notes, or other obligations the holders of which have
the right to vote (or which are convertible into or exercisable for
securities having the right to vote) with the stockholders of the
Company on any matter. All issued and outstanding shares of
Company Stock are duly authorized, validly issued, fully paid,
nonassessable, free of preemptive or rescission rights, and were
issued in compliance with all applicable federal and state
securities laws. Schedule 4.3 sets forth the name of each person
who holds or has rights to receive Company Stock Options, the
number of shares of Company Stock issuable in respect of such
Company Stock Options, the exercise prices and terms of such
Company Stock Options. Except for the Company Stock Options listed
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on Schedule 4.3, there are not, at the date of this Agreement, any
authorized, issued, or outstanding options, warrants, calls,
subscriptions, convertible securities, conversion privileges,
preemptive rights, or other rights, agreements, or commitments
(whether or not presently exercisable) that obligate the Company to
issue, transfer, or sell any shares of capital stock or other
securities convertible into or evidencing the right to purchase or
otherwise acquire any capital stock of the Company. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar plans, contracts, or rights with respect
to the Company that are effective as of the date hereof or that
have been executed or agreed to as of the date hereof with an
effective date after the date hereof, except as set forth in
Schedule 4.3. There are no stockholders' agreements, voting
trusts, proxies, or other agreements or understandings with respect
to the voting of the capital stock of the Company to which the
Company is a party that are presently effective or have been
executed or agreed to as of the date hereof or, to the best
knowledge of the Company, to which any officer or director of the
Company or any stockholder owned or controlled by such officer or
director is or will be a party, except in accordance with the terms
hereof. There are no restrictions upon the sale, voting, or
transfer of any shares of Company Stock pursuant to the Company's
Articles of Incorporation, Bylaws, or other governing instruments
(other than restrictions typically applicable to unregistered stock
under the Securities Act). After the Effective Time, the Surviving
Corporation will have no obligation to issue, transfer, or sell any
shares of capital stock of the Company or the Surviving Corporation
pursuant to any Plan (as defined in Section 4.26). As used in this
Agreement, except as otherwise provided in Section 4.17(d), the
"knowledge" of a person shall mean the actual knowledge of an
officer or senior manager of such person after reasonable
investigation.
4.4 OTHER INTERESTS. Except as set forth in Schedule 4.4,
the Company does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation,
partnership, joint venture, business, trust, or entity other than
investments in short term investment securities.
4.5 NO VIOLATION. Neither the execution or delivery by the
Company of this Agreement and all agreements or documents
contemplated therein nor the consummation by the Company of the
transactions contemplated therein, will: (i) conflict with or
result in a breach of any provisions of the Articles of
Incorporation or Bylaws of the Company; (ii) except as set forth in
Schedule 4.5, violate, conflict with, result in a breach of any
provision of, constitute a default (or an event which, with notice
or lapse of time or both, would constitute a default) under, result
in the termination or in a right of termination or cancellation of,
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accelerate the performance required by, result in the triggering of
any payment or other obligations pursuant to, result in the
creation of any lien, security interest, charge or encumbrance upon
any of the properties of the Company under, or result in being
declared void, voidable, or without further binding effect, any of
the terms, conditions, or provisions of any note, bond, mortgage,
indenture, loan agreement, deed of trust, or any license,
franchise, permit, lease, contract, agreement or other instrument,
commitment or obligation to which the Company is a party, or by
which the Company or any of its properties is bound or affected;
(iii) violate any law, statute, rule, regulation, judgment, or
decree applicable to the Company; or (iv) other than the filings
provided for in Article I, filings required under the Act, or
applicable state securities and "Blue Sky" laws or filings in
connection with the maintenance of qualification to do business in
other jurisdictions (collectively, the "Regulatory Filings"),
require any consent, approval, or authorization of, or declaration,
filing, or registration with, any governmental or regulatory
authority.
4.6 FINANCIAL STATEMENTS. The audited balance sheet and
statement of operations as of and for the year ended December 31,
1998, accompanied by the audit report of the Company's independent
certified public accountants, attached to Schedule 4.6, are
prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied throughout the periods
involved except as otherwise set forth therein and present fairly
the financial condition of the Company as of such date and the
results of operations of the Company for the year then ended. The
unaudited balance sheet of the Company as of March 31, 1999 and the
related statement of operations for the three months ended on such
date, which are attached to Schedule 4.6, were prepared in
accordance with GAAP consistently applied except as otherwise set
forth therein and of such date and the results of operations of the
Company for the three months then ended, except that such interim
financial statements are subject to normal year-end adjustments
that are not and are not expected to be, individually or in the
aggregate, material in amount and do not include certain notes
which may be required by GAAP. The balance sheet of the Company as
of December 31, 1998 is referred to in this Agreement as the
"Company Balance Sheet."
4.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the
extent reflected or reserved against in the Company Balance Sheet
or set forth in Schedule 4.7, at the date of the Company Balance
Sheet, the Company did not have any obligation or liability of any
kind (whether accrued, absolute, contingent, unliquidated, civil,
criminal, or otherwise and whether due or to become due), whether
or not any such liability or obligation would have been required to
be disclosed on a balance sheet prepared in accordance with GAAP,
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that, individually or in the aggregate, could have a Company
Material Adverse Effect. The Company Balance Sheet has accurate
accruals of all employee benefit costs, including, but not limited
to, payroll, commissions, bonuses, retirement benefits and vacation
accruals.
4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Since December 31, 1998, no event or events have
occurred, which individually or in the aggregate have had a Company
Material Adverse Effect, as hereafter defined, and there exists no
condition or contingency that could reasonably be expected to
result in a Company Material Adverse Effect.
(b) Since March 31, 1999, and except as set forth in
Schedule 4.8(b):
The Company has not:
(i) declared, set aside, paid, or made any dividend
or other distribution on or in respect of any shares of its capital
stock or directly or indirectly redeemed, retired, purchased, or
otherwise acquired any such shares or any option, warrant,
conversion privilege, preemptive right, or other right or agreement
to acquire the same or any other securities convertible into or
evidencing the right to purchase or otherwise acquire the same;
(ii) made any amendments to its Articles of
Incorporation or Bylaws:
(iii) made any change in the number of shares of
its capital stock authorized, issued, or outstanding or authorized,
issued, granted, or made any option, warrant, conversion privilege,
preemptive right, or other right or agreement to acquire the same
or any other securities convertible into or evidencing the right to
acquire the same;
(iv) incurred any indebtedness for borrowed
money other than pursuant to the Company's relationship with
Synnex Information Technologies, Inc., which borrowings shall not
exceed at any one time $1,500,000 in the aggregate or such greater
amount as the Company's board determines appropriate;
(v) incurred any obligation or liability
(contingent or otherwise) except (i) normal trade or business
obligations incurred in the ordinary course of business, the
performance of which will not, individually or in the aggregate,
have a Company Material Adverse Effect and (ii) obligations under
the contracts, agreements and leases described in Schedule 4.9, the
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performance of which will not, individually or in the aggregate,
have a Company Material Adverse Effect;
(vi) discharged or satisfied any lien or
encumbrance or paid any obligations or liability (fixed or
contingent) other than current liabilities paid to unrelated
parties, wages paid to officers and employees and director's fees
paid to directors, each in the ordinary course of business;
(vii) mortgaged, pledged, or been subjected to
any lien, charge, or other encumbrance any of its respective
properties or assets (tangible or intangible) except liens for
current property taxes not yet due and payable.
(viii)sold, assigned, leased, transferred or
otherwise disposed of, or agreed to sell, assign, lease, transfer
or otherwise dispose of, any of its tangible assets other than
sales of inventory in the ordinary course of business;
(ix) sold, assigned, licensed, transferred, or
otherwise disposed of, or agreed to sell, assign, license, transfer
or otherwise dispose of, any of its patents, inventions, shop
rights, know-how, trade secrets, confidentiality agreements and
confidential information, registered and unregistered trademarks,
service marks, logos, corporate names, trade names, and other
trademark rights, trade dress, or other designations or
combinations of such designations that are distinctive of goods or
services and that are used in a manner that identifies those goods
or services and distinguishes them from the goods or services of
others, works of authorship and any registered or unregistered
copyright therein, Software or Documentation (as defined in Section
4.9(e)), or other intangible assets, and all registrations for, and
applications for registration of, any of the foregoing
(collectively, "Proprietary Rights") or disclosed any of its
confidential Proprietary Rights to any person (other than Parent);
(x) entered into any transaction, contract, or
commitment other than in the ordinary course of business;
(xi) made any capital expenditures or any
commitment therefor in excess of $1,000,000 in the aggregate;
(xii) entered into any employment or consulting
agreement or arrangement, or, except for normal bonuses pursuant to
and consistent with existing plans or programs, or wages or salary
increases consistent with past practices, granted or paid any
bonus, or made or granted any general wage or salary increase or
any specific increase in the wages or salary of any employee;
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(xiii)suffered any casualty loss or damage,
whether or not such loss or damage shall have been covered by
insurance, which would constitute a Company Material Adverse
Effect.
(xiv) canceled or compromised any debt or claim
except for adjustments made in the ordinary course of business
that, in the aggregate, are not material, or waived or released
any rights that are material;
(xv) terminated, amended, or modified any
agreement or instrument described in Schedule 4.9;
(xvi) entered into any transaction with any
stockholder, officer, director, or key employee of the Company or
any affiliate of any such person other than the payment of wages
and salaries and other benefits under employee benefit plans;
(xvii)made any loans or advances to, guaranties
for the benefit of, or investments in, any person (other than
customary travel advances in accordance with past practices);
(xviii) made cash charitable contributions in
excess of $5,000 in the aggregate or any political contributions;
(xix) lost any supplier or suppliers which loss
or losses, individually or in the aggregate, has had, or could
reasonably be expected to have, a Company Material Adverse Effect;
(xx) merged or consolidated with, or acquired
all or substantially all of the assets, capital stock, or business
of any other person;
(xxi) introduced any material change with
respect to the operation of its business, including its method of
accounting, which could amount to a Company Material Adverse
Effect;
(xxii)agreed or committed to do any of the
things described in this Section 4.8.
4.9 LIST OF PROPERTIES, CONTRACTS, ETC. Schedule 4.9 sets
forth a true and complete list of the following:
(a) all leases of real property to which the Company is
a party, identifying the parties thereto and including in each case
a brief description of the property covered thereby, the annual
rental rate, and the termination date (all real property covered by
such leases being referred to herein as the "Company Real
Property");
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(b) all leases of personal property to which the Company
is a party, that (i) provide for future annual payments in excess
of $100,000 or (ii) were entered into other than in the ordinary
course of business, identifying the parties thereto and including
in each case, a brief description of the property covered thereby,
the annual rental rate and the termination date and identifying any
such leases with respect to which the obligations thereunder, in
accordance with GAAP, would be required to be capitalized on a
balance sheet of the Company or for which the amount of the asset
and liability thereunder, as if so capitalized, would be required
to be disclosed in a note to such balance sheet;
(c) all addresses at which inventory or other property
of the Company is located;
(d) all Proprietary Rights, if any, used in the business
or operations of the Company; identifying the owner thereof and in
the case of any license, the parties thereto, the method of
compensating the licensor thereunder and the termination date;
(e) all Software and Documentation owned by the Company
or used in and material to the business or operations of the
Company, identify the owner thereof. As used herein: (i)
"Software" means all computer programs, in machine-readable object
code and any and all corresponding source code, and includes,
without limitation: any and all printed listings, file formats,
interface or operating system designs, application programs,
structure, architecture, libraries, tools, functions, subroutines,
and all components, portions or modules thereof, and (ii)
"Documentation" means all user manuals, handbooks, on-line
materials, development tools, specifications and any other written
or machine readable materials relating in any way to the Software,
and includes, without limitation: any and all Software
specifications; programmer's or developer's notes, and engineering
or system design notes; instructions for compiling or decompiling;
and all pseudo-code, algorithms, diagrams or flow charts whether or
not directly incorporated in the Software. The list on Schedule
4.9 describes the extent to which the listed Software owned by the
Company is proprietary to the Company; if any such Software
requires the use of development tools, routines, libraries or the
like ("tools") that are not proprietary to the Company, such tools
are identified in Schedule 4.9; and if any such Software, or any
portion thereof, is required by law or any agreement to be
dedicated to the public, owned or co-owned, or licensed or
otherwise authorized for use by the public or any other person,
such requirements are described in Schedule 4.9;
(f) all employment and consulting agreements covering
any employee of, or consultant to, the Company;
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(g) the names and current annual or monthly compensation
rates of all employees of the Company;
(h) all deferred compensation agreements, employee stock
option plans, group life, hospitalization or disability insurance,
severance policies and other plans and arrangements providing
benefits for employees of the Company;
(i) all standard and non-standard product warranty terms
and conditions applicable to goods and services sold by the
Company;
(j) all insurance coverage that relates to or covers the
properties, assets, business, or operations of the Company,
including all policies or binders of fire, liability, vehicular,
title, workers' compensation, and other insurance, specifying the
insurer, the type of coverage, the amount of coverage, any
applicable deductibles, the expiration date and the policy number;
(k) all documents pertaining to the environmental
conditions (actual, potential, or threatened) of any real property
owned or leased by the Company including, without limitation, all
environmental reports, assessments, and audits and all notices,
orders, permits, or any other documents from any governmental
authority that refer or relate to any environmental condition of
the Company Real Property or any personal property owned or leased
by the Company or that relate to any actual or potential
liabilities or obligations arising out of such environmental
conditions;
(l) the names and ages of all retired employees and all
employees on long-term disability of the Company who are entitled
to receive health benefits, if any;
(m) all bank accounts and safe deposit boxes of the
Company, indicating the names of the persons authorized to draw
thereon;
(n) all agreements of the Company with sales
representatives, distributors, authorized service centers or other
customers;
(o) all loan agreements, credit agreements, indentures,
and other documents or instruments relating to the borrowing of
money by the Company and all promissory notes and other evidences
of indebtedness of the Company, including without limitation, all
such documents and instruments relating to or evidencing any
stockholder loans to the Company;
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(p) all guaranties of obligations of the Company under
all loan agreements, leases, and other documents and instruments to
which the Company is a party or by which it is bound, by any
officer or director of the Company or any affiliate of any of the
foregoing; and
(q) all other contracts, agreements or commitments of
the Company that (i) provide for future annual payments by the
Company in excess of $150,000 or (i) were entered into other than
in the ordinary course of business. True and correct copies of all
documents, including all amendments thereto, referred to above have
been delivered or made available to the Parent (collectively, the
"Material Contracts"). Each Material Contract is a valid
obligation of and enforceable against the Company and, to the
Company's knowledge, the other parties thereto, in accordance with
its terms for the period stated therein. There is no existing
material breach, default, or event of default by the Company or, to
the knowledge of the Company, by any other party, under any
Material Contract. There is no event that with notice or lapse of
time would constitute a default by the Company under any Material
Contract, nor has any party thereto given notice of or made a claim
with respect to any breach or default. To the Company's knowledge,
there are no material deficiencies in the Company's performance
under any Material Contract. The Company does not have any
knowledge of any existing laws, regulations, or decrees, that
materially and adversely affect, or may materially and adversely
affect any of the Material Contracts or that would have a Company
Material Adverse Effect. Except as set forth in Schedule 4.9, no
third party consents to the execution, delivery, and consummation
of this Agreement, the documents contemplated hereby or the
transactions contemplated herein are required pursuant to the terms
of any Material Contract. Except as set forth in Schedule 4.9, each
employment agreement to which the Company is a party is in full
force and effect, and neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated
hereby shall cause or result in any default, termination, or
acceleration of any provision in any such employment agreement or
give rise to the obligation of the Company to make any severance or
change of control payment.
4.10 TITLE TO ASSETS. Except as set forth in Schedule
4.10, the Company has good title, free and clear of all liens,
charges, and encumbrances (except for (a) liens for non-delinquent
taxes and assessments, (b) liens of landlords and other lessors
arising under statute, and (c) other liens, claims and encumbrances
or charges that do not materially detract from the value of, or
impair the use, occupancy or ownership of, the assets and
properties of the Company) to, or a valid leasehold interest in,
all of the personal property (i) reflected on the Company Balance
Sheet or acquired by the Company subsequent to the date thereof
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(other than assets that have been sold or otherwise disposed of in
the ordinary course of business since the date of the Company
Balance Sheet) or (ii) used in the business or operations of the
Company. Neither the Company nor any predecessor to the Company has
owned, leased, or operated any real property other than the Company
Real Property.
4.11 ADEQUACY OF ASSETS. The Company owns or has a valid
leasehold interest in all assets, real and personal properties,
contract rights and licenses necessary for the continued operation
of the Company in substantially the same manner in which it has
been and is now operating and for the future operation of the
Company as presently contemplated. Except as set forth on Schedule
4.11: (a) the Company owns or has the right to use pursuant to
license, sublicense, agreement, or permission all Proprietary
Rights necessary for the operation of the business of the Company
as presently conducted, (b) each Proprietary Right owned or used by
Company immediately prior to the Effective Time hereunder will be
owned or available for use by Company on identical terms and
conditions immediately subsequent to the Effective Time hereunder,
and (c) Company has taken all necessary action to maintain and
protect each Proprietary Right that it owns or uses.
4.12 CONDITION OF INVENTORY, PROPERTY AND EQUIPMENT.
Schedule 4.12 sets forth a list of the fixed assets of the Company.
The inventory of the Company consists of items of quality and
quantity usable and saleable in the ordinary course of business of
the Company, except for items reserved against or written off on
the Company Balance Sheet. All property, plant, and equipment used
by the Company in the conduct of its business has been maintained
in accordance with standard industry practices and is in good
operating condition and repair, ordinary wear and tear excepted,
and there are no material defects in such property, plant, or
equipment.
4.13 LITIGATION. To the knowledge of the Company, there
are no claims, actions, suits, investigations, or proceedings
(public or private) pending against or affecting the Company or any
of its properties or assets, at law or in equity, before or by any
federal, state, municipal, or other governmental or
non-governmental department, commission, board, bureau, agency,
court, or other instrumentality, or arbitrator or by any private
person or entity. To the knowledge of the Company, there are no
claims, actions, suits, investigations, or proceedings (public or
private) threatened against or affecting the Company or any of its
properties or assets, at law or in equity, before or by any
federal, state, municipal, or other governmental or
non-governmental department, commission, board, bureau, agency,
court, or other instrumentality, or arbitrator or by any private
person or entity, except for any of the foregoing which would not,
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individually or in the aggregate, reasonably be expected to have a
Company Material Adverse Effect. To the knowledge of the Company,
there are no existing orders, judgments, settlements, injunctions,
or decrees of any court or governmental agency that apply to the
Company or any of its assets, properties, business, or operations
solely by replacement of products or adjustment or refunding of
purchase price or substantially equivalent credit on future orders)
that, in the aggregate, would not have a Company Material Adverse
Effect. The Company has not entered into any settlement agreements
relating to the compromise or dismissal of any litigation involving
the Company or any of its properties or assets. Nothing contained
in any settlement agreement to which the Company is a party
prevents the Company in any way from carrying out its business as
now conducted or as presently contemplated to be conducted, in any
market, geographical area, or application, or interferes with the
Company's utilization of its Proprietary Rights.
4.14 TAXES. All Taxes (as hereinafter defined under this
Section 4.14) required to be filed by the Company have been timely
filed and are true, correct, and complete in all material respects,
and all Taxes payable pursuant thereto have been timely paid or
appropriate extensions have been filed for such periods. No
deficiency or adjustment in respect of any Taxes that was assessed
against the Company remains unpaid and no such claim or assessment
is pending or, to the knowledge of the Company, threatened. The
Company has made all withholding of Taxes required to be made under
all applicable federal, state, and local tax regulations and such
withholdings have either been paid on a timely basis to the
respective governmental agencies or set side in accounts for such
purpose or accrued, reserved against and entered upon the books of
the Company. There are no outstanding agreements or waivers
extending the statutory period of limitations applicable to any tax
return or tax liability of the Company, and to the knowledge of the
Company, there is no proposed liability for any Taxes for which
there is not an adequate reserve reflected on the Company Balance
Sheet. The Company has not filed any consent with the Internal
Revenue Service described in Section 341(f) of the Code. The
Company does not reasonably expect any authority to assess any
additional Taxes for any period for which Tax returns have been
filed. There is no dispute or claim concerning any Tax liability
of the Company either (i) claimed or raised by any authority in
writing, or (ii) as to which the Company has knowledge. The
Company has delivered to Parent correct and complete copies of all
federal and state income Tax returns of the Company, examination
reports and statements of deficiencies assessed against or agreed
to by the Company. The Company is not a party to any Tax
allocation or sharing agreement. The Company has not been a member
of an affiliated group filing federal income Tax Returns, and does
not have any liability for the Taxes of any person (other than the
Company) under Treas. Reg. Section 1.1502-6 or any similar
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provision of state, local or foreign law, as a transferee or
successor, by contract or otherwise. No item of income
attributable to transactions occurring on or before the Effective
Time will be required to be included in taxable income by the
Company in a subsequent taxable year by reason of the Company
reporting income on the installment sales method of accounting, the
cash method of accounting, the completed contract method of
accounting or the percentage of complete-capitalized cost method of
accounting. The Company has not made, and is under no obligation
to make, payments that are or, if made, would be, "parachute
payments" under Section 280G of the Code, and no such obligation
will arise as a result of this Agreement or other agreements
entered into in connection with this Agreement. "Taxes" shall mean
all federal, state, county, local, foreign and other taxes and
governmental assessments, including but not limited to, income
taxes, estimated taxes, withholding taxes, transfer taxes, excise
taxes, sales taxes, real and personal property taxes, ad valorem
taxes, payroll-related taxes, employment taxes, franchise taxes and
import duties, together with any related liabilities penalties,
fines or additions to tax and interest.
4.15 PROPRIETARY RIGHTS.
(a) Except as set forth on Schedule 4.15(a):
(i) to the Company's knowledge, the Company has not
interfered with, infringed upon, misappropriated, or otherwise come
into conflict with any Proprietary Rights of third parties, (ii)
the Company (and its employees with responsibility for Proprietary
Rights matters) has not received any written charge, complaint,
claims, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim
that the Company must license or refrain from using any Proprietary
Rights of any third party), (iii) to the Company's knowledge (and
employees with responsibility for Proprietary Rights matters),
there is no basis for any as-yet unasserted charge, complaint,
claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim
that the Company must license or refrain from using any Proprietary
Rights of any third party), or (iv) to the Company's knowledge (and
employees with responsibility for Proprietary Rights matters), no
third party has interfered with, infringed upon, misappropriated,
or otherwise come into conflict with any Proprietary Rights of the
Company.
(b) Schedule 4.15(b) identifies each Proprietary Right
that the Company owns. Schedule 4.15(b) also identifies each
registration that has been issued to the Company with respect to
any of its Proprietary Rights, identifies each pending application
for registration that the Company has made with respect to any of
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its Proprietary Rights, identifies each item of copyrightable
Proprietary Rights (whether or not registration has been sought),
and identifies each license, agreement, or other permission which
the Company has granted to any third party with respect to any of
its Proprietary Rights and all agreements relating to any of the
Software owned by the Company, including any service, nondisclosure
or escrow agreements (together with any exceptions). The Company
has delivered to the Parent correct and complete copies of all such
patents, registrations, applications, licenses, agreements, and
permissions (as amended to date). Schedule 4.15(b) also identifies
each trade name or unregistered trademark used by the Company in
connection with its business. Except as set forth in Schedule
4.15(b), with respect to each Proprietary Right required to be
identified in Schedule 4.15(b) and with respect to each item of
copyrightable Proprietary Rights (whether or not identified in
Schedule 4.15(b)):
(i) the Company possesses all right, title, and
interest in and to the Proprietary Right, free and clear of any
lien, license, or other restriction;
(ii) the Proprietary Right is not subject to
any outstanding injunction, judgment, order, decree, ruling, or
charge; and
(iii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or,
to the knowledge of the Company, threatened, that challenges the
legality, validity, enforceability, manufacture, use or the ability
to authorize the use (including use by way of reproduction of
copies, distribution of copies, preparation of derivative works,
public performance or display, or any other use of any kind or
nature), sale or ownership of the Proprietary Right; and
(c) Schedule 4.15(c) identifies each Proprietary Right
that any third party owns and that the Company uses pursuant to
license, sublicense, agreement, or permission. The Company has
delivered to the Parent correct and complete copies of all such
licenses, sublicenses, agreements, and permissions (as amended to
date). Except as set forth on Schedule 4.15(c), with respect to
each Proprietary Right required to be identified in Schedule
4.15(c):
(i) the license, sublicense, agreement, or
permission covering the Proprietary Right is legal, valid, binding,
enforceable against the Company and, to the Company's knowledge,
against the other parties thereto, and in full force and effect;
(ii) the license, sublicense, agreement, or
permission will continue to be legal, valid, binding, enforceable
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against the Company and, to the Company's knowledge, against the
other parties thereto, and in full force and effect on identical
terms following the Effective Time;
(iii) to the Company's knowledge, no party to
the license, sublicense, agreement, or permission is in breach or
default, and no event has occurred which with notice or lapse of
time would constitute a breach or default or permit termination,
modification, or acceleration thereunder;
(iv) no party to the license, sublicense,
agreement, or permission has repudiated in writing any provision
thereof;
(v) with respect to each sublicense, the
representations and warranties set forth in subsections (i) through
(iv) above are true and correct with respect to the underlying
license;
(vi) the underlying Proprietary Right is not
subject to any outstanding injunction, judgment, order, decree,
ruling, or charge;
(vii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or,
to the Company's knowledge, threatened, that challenges the
legality, validity, or enforceability of the underlying Proprietary
Right;
(viii)the Company has not granted any sublicense
or similar right with respect to the license, sublicense,
agreement, or permission; and
(ix) no such licenses, agreements or
permissions commit the Company to continued maintenance, support,
improvement, upgrade or similar obligation with respect to any of
the Proprietary Rights, which obligation cannot be terminated by
the Company upon notice of ninety (90) days or less.
(d) Schedules 4.15(b) and 4.15(c) identify every
Proprietary Right used by the Company in the conduct of its
business. Except as set forth in Schedule 4.15(b), all Software
owned by the Company performs substantially as described in all
Documentation for such Software insofar as such Documentation has
to do with the performance, specifications or design of such
Software.
It is understood and agreed that "Software owned by the
Company" shall include all Software owned by the Company, whether
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developed in house by the Company or purchased by the Company from
any third party.
4.16 ROYALTIES. All royalties, license fees, and other
fees relating to the Company's use of Proprietary Rights have been
or will be paid in full as and when due. Except as set forth in
Schedule 4.16, to the Company's knowledge, the method used by the
Company to calculate all royalties, license fees, and other fees
relating to the Company's use of Proprietary Rights is correct and
accurate and in accordance with the terms of any agreements the
Company has with any third party relating to the use of such
party's Proprietary Rights.
4.17 YEAR 2000 COMPLIANCE. Except as set forth on
Schedule 4.17, the Company has undertaken no independent
investigation concerning whether any system, comprised of software,
hardware, databases, or embedded control systems (microprocessor
controlled, robotic or other device), that constitutes any part of,
or is used in connection with the use, operation or enjoyment of
any material tangible or intangible asset or real property of the
Company and each product licensed, sold or otherwise distributed by
the Company, including software, hardware, databases, or embedded
control systems) (a) is designed (or has been modified) to be used
prior to and after January 1, 2000, or (b) will operate without
error arising from the creation, recognition, acceptance,
calculation, display, reporting, storage, retrieval, accessing,
comparison, sorting, manipulation, processing or other use of
dates, or date-based, date-dependent or date-related data,
including but not limited to century recognition, day-of-the-week
recognition, leap years, date values and interfaces of date
functionalities.
4.18 LABOR RELATIONS. There are no material
controversies to the knowledge of the Company, between the Company
and any of its respective employees, former employees, or
applicants for employment. The Company has complied in all
respects with all laws relating to the employment of labor,
including any provisions thereof relating to wages, hours, equal
employment opportunity, collective bargaining, federal immigration
law, and the payment of social security and similar taxes, except
as would not be reasonably expected to have a Company Material
Adverse Effect. The Company is not liable for any arrears of wages
or any taxes or penalties for failure to comply with any of the
foregoing. None of the employees of the Company are covered by any
collective bargaining agreement and, to the knowledge of the
Company, there are no organizational efforts currently being made
or threatened involving any employees of the Company. All employee
severance or change of control policies covering any employee of
the Company are described in Schedule 4.18 and no such employee is
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entitled to any severance or change of control benefits not
described therein.
4.19 CERTAIN EMPLOYEE MATTERS.
(a) Except as set forth on Schedule 4.19(a), all current
and former members of management, key (including sales and
recruiting) personnel and consultants (whether employees or
independent contractors) of the Company have executed and delivered
to the Company a confidential information agreement restricting
such person's right to disclose confidential information of the
Company. Except as set forth on Schedule 4.19(a), all such members
of management, key personnel and consultants of the Company have
been party to a "work-for-hire" arrangement or proprietary rights
agreement with the Company pursuant to which either (i) in
accordance with applicable federal and state law, the Company has
been accorded full, effective, exclusive and original ownership of
all tangible and intangible property thereby arising or (ii) there
has been conveyed to the Company by appropriately executed
instruments of assignment full, effective and exclusive ownership
of all tangible and intangible property thereby arising. No
employee, agent, consultant or contractor of the Company who has
contributed to or participated in the conception and development of
proprietary rights of the Company has asserted in writing or, to
the Company's knowledge, threatened any claim against the Company
in connection with such person's involvement in the conception and
development of the proprietary rights of the Company and, to the
knowledge of the Company, no such person has a reasonable basis
for any such claim.
(b) Schedule 4.19(b) identifies all employees,
independent contractors and other personnel of the Company, their
respective rates of pay at the date hereof, and, with respect to
all consultants (employees or independent contractors), the billing
rate of each such consultant. Unless otherwise noted on Schedule
4.19(b), each of the Company's personnel identified on Schedule
4.19(b) is working full time and none of such personnel has
expressly stated that he or she intends to resign or cease working
with the Company after the Closing. Other than increases granted
in the ordinary course of business, the Company has not committed
to increase in any manner the compensation of any of its personnel
beyond the amount identified on Schedule 4.19(b).
4.20 TRANSACTIONS WITH AFFILIATES. Except as set forth
in Schedule 4.20, the Company is not a party to any contract,
lease, agreement, or other commitment with any officer, director,
or stockholder of the Company or any affiliate of any such person,
and there are no loans outstanding from the Company to, or to the
Company from, any such person or any affiliate of any such person.
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4.21 PERMITS; COMPLIANCE WITH LAWS. Schedule 4.21
contains a true, correct, and complete list of all permits,
licenses, consents, and authorizations of any government or
governmental authority held by the Company. Except as set forth in
Schedule 4.21, the Company holds all permits, licenses, consents,
and authorizations issued by any government or governmental
authority that are necessary for the conduct of its business,
except for any failure to hold that would not, individually or in
the aggregate, reasonably be expected to have a Company Material
Adverse Effect. The Company has not received any written notice of
any violation of any law, ordinance, regulation, or order
applicable to the Company or the business conducted by it. The
conduct of the business of the Company, as presently conducted,
complies with all applicable laws, ordinances, regulations, and
orders, including, but not limited to, all laws, ordinances,
regulations or orders relating to the exportation or importation of
Products, except for any noncompliance that would not, individually
or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect.
4.22 ENVIRONMENTAL MATTERS. To the knowledge of the
Company, there has been no "release or threatened release of a
hazardous substance" (as defined in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended
("CERCLA")) or any other release, emission, disposal, or discharge
into the environment or any use, storage, transport or handling
(collectively, "activities") of Hazardous Material (as defined
below) on, under, about, or from the Company Real Property other
than those activities that have not resulted and could not
reasonably be expected to result in any material liability on the
part of the Company. To the knowledge of the Company, all
"hazardous waste" (as defined in the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA") and the regulations
thereunder) generated at the Company's Real Property have been
disposed of at sites that maintain valid permits under RCRA and any
other applicable Environmental Requirement (as defined below). To
the knowledge of the Company, there are no underground tanks, PCBs,
or asbestos containing materials on the Company Real Property. The
Company does not have any written notice of any pending formal or
informal assertion by any governmental agency or other person that
the Company or subsidiaries or any predecessor business or owner or
operator of the Company Real Property may be a responsible or
potentially responsible party in connection with any violation or
obligation arising under any Environmental Requirement at any site
or facility (including the Company Real Property itself.)
"Hazardous Material" shall mean any substance (i) the presence of
which requires reporting, investigation or remediation under any
applicable statute, regulation, ordinance or order; or (ii) which
is defined as a "hazardous waste," "hazardous substance," pollutant
or contaminant under any statute, regulation, rule, or ordinance of
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any governmental authority having jurisdiction; or (iii) which is
toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic, or otherwise hazardous and is regulated by
any governmental authority having jurisdiction. "Environmental
Requirement" shall mean all applicable statutes, laws, regulations,
rules, ordinances, codes, licenses, permits, orders, standards,
guidelines, policies, and similar items of any governmental
authority having jurisdiction and all applicable judicial,
administrative, and regulatory decrees, judgments, and orders and
common law relating to the protection of human health or the
environment including, without limitation, all requirements
pertaining to the reporting, licensing, permitting, use, handling,
generation, storage, treatment, transportation, disposal, release,
discharge, investigation, and remediation of Hazardous Material.
4.23 ADVERSE AGREEMENTS. The Company is not a party to
or subject to any contract, agreement, or commitment or subject to
any charter or other corporate restriction or any judgment, order,
writ, injunction, decree law, rule, or regulation that would have,
or could reasonably be expected to have, a Company Material Adverse
Effect.
4.24 FEES. Except as set forth in Schedule 4.24, there
are no claims for legal, accounting, financial advisory, or
investment bankers' fees, brokerage commissions, finders' fees, or
similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of the Company.
4.25 BOOKS AND RECORDS. Except as set forth in Schedule
4.25, the financial books, records, and work papers of the Company
are complete and correct in all material respects, have been
maintained in accordance with good business practice and accurately
reflect the bases for the consolidated financial condition and
results of operations of the Company set forth in the financial
statements referred to in Section 4.6 hereof.
4.26 ERISA. Neither the Company nor any trade or
business (whether or not incorporated) under common control with
such Person within the meaning of Section 414(b) or (c) of the Code
(and Sections 414(m) and (o) of the Code for purposes of provisions
relating to Section 412 of the Code) (an "ERISA Affiliate") of the
Company maintains or contributes to or is obligated to contribute
to, and has ever maintained or contributed to or been obligated to
contribute to, (i) any "multiemployer plan," within the meaning of
Section 4001 (a)(3) of the Employee Retirement Income Security Act
of 1974, as amended, and the regulations promulgated and rulings
issued thereunder ("ERISA"), to which any person or any ERISA
Affiliate of such person makes, is making, or is obligated to make
contributions or, during the preceding three calendar years, has
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made, or been obligated to make, contributions (a "Multiemployer
Plan"), (ii) any single employer plan, as defined in Section 4001
(a)(15) of ERISA, that (a) is maintained for employees of a person
or any ERISA Affiliate of such person and at least one person other
than such person and any ERISA Affiliate of such person or (b) was
so maintained and in respect of which such person or an ERISA
Affiliate of such person could have liability under Section 4064 of
ERISA in the event such plan has been or were to be terminated (a
"Multiple Employer Plan") or (iii) except as set forth in Schedule
4.26, any employee benefit plan (as defined in Section 3(3) of
ERISA) sponsored or maintained by the Company or to which the
Company makes, is making, or is obligated to make contributions (a
"Plan"), including but not limited to a Pension Plan (as defined
below). With respect to the Plan(s) disclosed in Schedule 4.26:
(a) Each such Plan is in compliance in all material
respects applicable provisions of ERISA, the Code, and other
federal or state law. Any such Plan which is intended to qualify
under Section 401(a) of the Code has received a favorable
determination letter from the IRS and to the knowledge of the
Company, nothing has occurred that would cause the loss of such
qualification. The Company and each ERISA Affiliate of the Company
has made all required contributions to any such Plan subject to
Section 412 of the Code, and no application for a funding waiver or
an extension of any amortization period pursuant to Section 412 of
the Code has been made with respect to any such Plan.
(b) There are no pending claims (other than routine
claims for benefits) or, to the knowledge of the Company,
threatened claims, actions, or lawsuits, or action by any
governmental authority, with respect to any such Plan, and there
has been no prohibited transaction or violation of the fiduciary
responsibility rules with respect to any such Plan.
(c) (1) the execution of, and the performance of the
transactions contemplated in, this Agreement will not (either alone
or upon the occurrence of any additional or subsequent events)
constitute an event under any Plan that will or is reasonably
expected to result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits
with respect to any employee;
(2) no such Plan which constitutes a Pension Plan
(as defined below) has any Unfunded Pension Liability (as defined
below); (3) neither the Company nor any ERISA Affiliate of the
Company has incurred, or reasonably expects to incur, any material
liability under Title IV of ERISA with respect to any such Plan
which constitutes a Pension Plan (other than premiums due and not
delinquent under Section 4007 of ERISA); (4) neither the Company
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nor any ERISA Affiliate of the Company has incurred, or reasonably
expects to incur, any liability (and no event has occurred which,
with the giving of notice under Section 4219 of ERISA, would result
in such liability) under Section 4201 or 4243 of ERISA with
respect to a Multiemployer Plan; and (5) neither the Company nor
any ERISA Affiliate of the Company has engaged in a transaction
that could be subject to Section 4069 or 4212(c) of ERISA.
"Pension Plan" shall mean a pension plan (as defined in Section
3(2) of ERISA) subject to Title IV of ERISA that a person sponsors,
maintains, or to which it makes, is making, or is obligated to make
contributions, or in the case of a Multiple Employer Plan has made
contributions at any time during the immediately preceding five (5)
plan years. "Unfunded Pension Liability" shall mean the excess of
a Plan's benefit liabilities under Section 4001(a)(16) of ERISA,
over the current value of that Plan's assets, determined in
accordance with the assumptions used for funding the Pension Plan
pursuant to Section 412 of the Code for the applicable plan year.
4.27 INSURANCE. The business, properties, and employees
of the Company are insured by the insurers or through the funds and
with the types and amounts of insurance (including, but not limited
to, property, product liability, automobile, workers compensation,
business interruption, and excess indemnity insurance) set forth in
Schedule 4.27 (the "Company Insurance Coverage"). To the Company's
knowledge, the Company Insurance Coverage is in such amount and on
such terms as to adequately cover the risks attendant to the
Company's business. The Company has not been denied coverage by
any insurance carrier or has failed or currently fails to maintain
any insurance coverage that may be required by the laws of the
states in which the Company sells or manufactures Products or
provides services. The premiums due on the Company Insurance
Coverage that covers calendar year 1998, if any, have been paid in
full and the premiums due for the period from January 1, 1999 to
the Effective Time have been or will be paid in full as and when
due. All such insurance complies in all material respects with the
terms of each of its leases and each of the mortgages, deeds of
trust, service agreements with third parties and/or loan agreements
to which the Company is a party.
4.28 DISCLOSURE. To the Company's knowledge, no
representation or warranty by the Company in this Agreement and no
statement contained in any document, certificate, or other writing
prepared by the Company or its representatives and furnished by the
Company to Parent pursuant to the provisions hereof, affirmatively
misstates a material fact or omits a material fact necessary for
such document, certificate, or writing to be, in good faith,
accurately and completely responsive in all material respects to
the purpose identified by the Parent to the Company for which such
information was furnished by the Company to the Parent.
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4.29 INVESTMENT REPRESENTATIONS OF PRINCIPAL SHAREHOLDERS.
(a) Each Principal Shareholder has such knowledge and
experience in financial and business matters, either alone or with
Principal Shareholders' professional advisors, that he or she is
capable of evaluating the merits and risks of the acquisition of
the Parent Stock.
(b) Each Principal Shareholder is a resident of the
State of California.
(c) Each Principal Shareholder has received copies of
the following documents of the Parent: (i) Form 10-KSB reports
filed with the SEC for 1998; (ii) Form 10-QSB reports filed with
the SEC in 1998 and 1999; and (iii) all Form 8-K reports filed with
the SEC since January 1, 1999.
(d) Each Principal Shareholder has been furnished with
a list of each exhibit to the reports described in paragraph (c)
above and each has been offered a copy of all such exhibits as
requested by each Principal Shareholder.
(e) Each Principal Shareholder is acquiring Parent Stock
pursuant to this Agreement for such Shareholder's own account, not
as a nominee or agent. No one else has any interest, beneficial or
otherwise, in any of such Parent Stock.
(f) Each Principal Shareholder is able to bear the
economic risk of such an investment in the Parent Stock, is aware
that such Principal Shareholder must be prepared to hold such
Parent Stock for an indefinite period and is aware that the Parent
Stock has not been registered under the Act, or registered or
qualified under the Corporate Law, or any other securities law, on
the grounds, among others, that no unregistered distribution or
public offering of Parent Stock is to be effected and the Parent
Stock is being issued by the Parent without any public offering
within the meaning of Section 4(2) of the Act.
(g) Without in any way limiting the representations
herein, each Principal Shareholder further agrees that such
Principal Shareholder shall not encumber, pledge, hypothecate,
sell, transfer, or assign any shares of Parent Stock or any
interest in them, unless and until prior to any proposed
transaction (i) a registration statement on Form S-3 (or any other
form appropriate for the purpose or replacing such form) under the
Act with respect to the shares proposed to be transferred or
otherwise disposed of shall be then effective; (ii) such Principal
Shareholder shall have furnished the Parent with an opinion of
counsel (obtained at such Principal Shareholder's expense) in form
and substance satisfactory to the Parent to the effect that such
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disposition will not required registration of any such shares under
the Act or qualification of any such shares under any other
securities law; or (iii) Rule 144 under the Act is available with
respect to such transaction.
(h) Each Principal Shareholder understands and agrees
that the shares of Parent Stock will be "restricted securities" as
that term is defined in Rule 144 under the Act and, accordingly,
that it must be held indefinitely unless it is subsequently
registered under the Act or an exemption from such registration is
available.
4.30 SUBSIDIARY. The Subsidiary, AMT Component, Inc., is a
wholly owned subsidiary and is the Company's only subsidiary. The
Company owns all right, title and interest in and to each issued
and outstanding shares of AMT Component, Inc.
4.31 AUTHORIZATION. The execution, delivery and performance
by the Company of this Agreement and the consummation by the
Company or the Principal Shareholders of the transactions
contemplated hereby require no consents of any party and no action
by or in respect of, or filing with, any governmental body, agency,
official or authority other than (a) the filing of the Certificate
of Merger in accordance with the Corporate Law, (b) compliance with
any applicable requirements of the Act, the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), or Blue Sky laws, and (c)
any other filings, approvals or authorizations, which, if not
obtained, would not, individually or in the aggregate, have a
material adverse effect on the Company or materially impair the
ability of the Company or the Principal Shareholders to consummate
the transactions contemplated by this Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
The Parent and the Merger Sub represent and warrant to the
Company and the Principal Shareholders as of the date of this
Agreement as follows:
5.1 EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE
WITH LAW.
(a) Each of the Parent and the Merger Sub and each and
every subsidiary of the Parent (the "Subsidiaries") is a
corporation duly incorporated, validly existing, and in good
standing (including tax good standing) under the laws of its
jurisdiction of incorporation. Each of the Parent, the Merger Sub
and the Subsidiaries is duly licensed or qualified to do business
as a foreign corporation and is in good standing under the laws of
the jurisdictions listed in Schedule 5.1, which list contains all
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jurisdictions in which the character of the properties owned or
leased by it or in which the transaction of its business makes such
qualification necessary, in each case except as would not,
individually or in the aggregate, reasonably be expected to have a
Parent Material Adverse Effect (as defined below in Section 5.9).
(b) Each of the Parent, the Merger Sub and the
Subsidiaries has all requisite corporate power and authority to
own, operate, and lease its properties and carry on its business
as presently conducted and as proposed to be conducted.
(c) Each of the Parent, the Merger Sub and the
Subsidiaries is not in violation of any law, ordinance,
governmental rule or regulation to which it or any of its
properties or assets is subject, except as would not, individually
or in the aggregate, reasonably be expected to have a Parent
Material Adverse Effect, nor is the Parent in violation of any
order, judgment, or decree of any court, governmental authority, or
arbitration board or tribunal.
(d) The copies of the Parent's Certificate of
Incorporation and the Articles of Incorporation of the Merger Sub
and the Subsidiaries and Bylaws of each entity, which have been
delivered to the Company and the Principal Shareholders, include
any and all amendments made thereto at any time prior to the date
of this Agreement and are true, correct, and complete.
(e) The Parent's and the Subsidiaries' corporate minute
books are accurate as to their content and include therein the
Certificates or Articles of Incorporation and Bylaws with any
amendments thereto. The meetings of the directors or stockholders
referred to in the corporate minute books were duly called and
held. The signatures appearing on all documents contained in the
corporate minute books are the true signatures of the persons
purporting to have executed the same and no minutes of meetings or
written consents of the directors or stockholders of the Parent or
the Subsidiaries are omitted from such minute books that would
contain any resolutions or other actions that would be inconsistent
with any of the representations and warranties contained in Article
V hereof or prevent or limit any of the transactions contemplated
by this Agreement. Schedule 5.1 sets forth a true and complete
list of the names of all directors of the Parent and the names and
offices held of all officers of the Parent and each subsidiary as
the date hereof.
5.2 AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS.
(a) Each of the Parent, the Subsidiaries and Merger Sub
has the requisite corporate power and authority to execute and
deliver this Agreement and all agreements and documents
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contemplated hereby and thereby. Subject only to the approval of
this Agreement and the transactions contemplated hereby by the
stockholders of the Parent, the consummation by the Parent and
Merger Sub of the transactions contemplated hereby has been duly
authorized by all requisite corporate action of the Parent and the
Merger Sub. This Agreement has been duly executed and delivered by
the Parent and Merger Sub and, assuming the due authorization,
execution and delivery by the Company and all agreements and
documents contemplated hereby (when executed and delivered pursuant
hereto for value received) will constitute, the valid and legally
binding obligations of the Parent and Merger Sub enforceable in
accordance with their respective terms.
(b) The affirmative vote of the holders of a majority of
the shares of the Parent Stock is necessary to approve the issuance
by the Parent of the shares of the Parent Stock pursuant to the
terms hereof. Such vote is the only vote required to approve the
Merger.
5.3 CAPITALIZATION. The authorized capital stock of the
Parent consists of 20,000,000 shares of the Common Stock, $.03 par
value, and 100,000 shares of blank check preferred stock, $.01 par
value. Schedule 5.3 sets forth the number of shares of the Parent
Stock issued and outstanding, and the number of shares of the
Parent Stock issuable upon exercise of outstanding Parent Stock
Options, each as of the Closing Date. There are no shares of
preferred stock issued or outstanding and no commitment exists to
issue any preferred stock. Schedule 5.3 correctly sets forth the
name of each person who holds of record shares of the Parent
Stock, the number of shares of Company Stock so held, and the
number of whole shares of the Parent Stock to be issued in exchange
for such shares of Parent Stock in connection with the Merger as of
the date of this Agreement. No additional shares of capital stock
of the Parent will be issued, except pursuant to the exercise of
options outstanding under and vested or vesting in accordance with
the terms of the Parent Stock Option plans or warrants set forth on
Schedule 5.3 hereof. The Parent has no outstanding bonds,
debentures, notes, or other obligations the holders of which have
the right to vote (or which are convertible into or exercisable for
securities having the right to vote) with the stockholders of the
Parent on any matter. All issued and outstanding shares of the
Parent Stock are duly authorized, validly issued, fully paid,
nonassessable, free of preemptive or rescission rights, and were
issued in compliance with all applicable federal and state
securities laws. Schedule 5.3 correctly sets forth the name of
each person who holds or has rights to receive Parent Stock
Options, the number of shares of Parent Stock issuable in respect
of such Parent Stock Options, the exercise prices and terms of such
Parent Stock Options, and whether or not such Parent Stock Options
are intended to qualify as incentive stock options or non-statutory
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stock options. Except for the Parent Stock Options listed on
Schedule 5.3, there are not, at the date of this Agreement, any
authorized, issued, or outstanding options, warrants, calls,
subscriptions, convertible securities, conversion privileges,
preemptive rights, or other rights, agreements, or commitments
(whether or not presently exercisable) that obligate the Parent to
issue, transfer, or sell any shares of capital stock or other
securities convertible into or evidencing the right to purchase or
otherwise acquire any capital stock of the Parent. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar plans, contracts, or rights with respect
to the Parent that are effective as of the date hereof or that have
been executed or agreed to as of the date hereof with an effective
date after the date hereof. There are no stockholders' agreements,
voting trusts, proxies, or other agreements or understandings with
respect to the voting of the capital stock of the Parent to which
the Parent is a party that are presently effective or have been
executed or agreed to as of the date hereof or, to the best
knowledge of the Parent, to which any officer or director of the
Parent or any stockholder owned or controlled by such officer or
director is or will be a party, except in accordance with the terms
hereof. There are no restrictions upon the sale, voting, or
transfer of any shares of Parent Stock pursuant to the Parent's
Certificate of Incorporation, Bylaws, or other governing
instruments (other than restrictions typically applicable to
unregistered stock under the Securities Act). After the Effective
Time, the Surviving Corporation will have no obligation to issue,
transfer, or sell any shares of capital stock of the Parent or the
Surviving Corporation pursuant to any Plan (as defined in Section
5.27). As used in this Agreement, the "knowledge" of a person
shall mean the actual knowledge of an officer or senior manager of
such person after reasonable investigation.
5.4 OTHER INTERESTS. Except as set forth in Schedule 5.4,
neither the Parent nor the Subsidiaries own, directly or
indirectly, any interest or investment (whether equity or debt) in
any corporation, partnership, joint venture, business, trust, or
entity other than investments in short term investment securities.
5.5 NO VIOLATION. Neither the execution and delivery by the
Parent and Merger Sub of this Agreement and all agreements and
documents contemplated hereby, nor the consummation by the Parent
and Merger Sub of the transactions contemplated hereby or thereby
in accordance with the terms hereof, will: (i) conflict with or
result in a breach of any provisions of the Certificate of
Incorporation, as amended, or Bylaws of the Parent or the Articles
of Incorporation or Bylaws of Merger Sub; (ii) violate any law,
statute, rule, regulation, judgment, or decree applicable to the
Parent or the Merger Sub; (iii) except as set forth in Schedule 5.5
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violate, conflict with, result in a breach of any provision of,
constitute a default (or an event which, with notice or lapse of
time or both, would constitute a default) under, result in the
termination or in a right of termination or cancellation of,
accelerate the performance required by, result in the triggering
of any payment or other obligations pursuant to, result in the
creation of any lien, security interest, charge or encumbrance upon
any of the properties of the Parent, the Merger Sub or the
Subsidiaries under, or result in being declared void, voidable, or
without further binding effect, any of the terms, conditions, or
provisions of any note, bond, mortgage, indenture, loan agreement,
deed of trust, or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment, or obligation to which
the Parent, the Merger Sub or the Subsidiaries is a party, or by
which the Parent, the Merger Sub or the Subsidiaries or any of its
properties is bound or affected; (iv) violate any law, statute,
rule, regulation, judgment, or decree applicable to the Parent, the
Merger Sub or the Subsidiaries; or (v) other than the Regulatory
Filings, require any consent, approval, or authorization of, or
declaration, filing, or registration with, any governmental or
regulatory authority.
5.6 SEC DOCUMENTS. Since the date on which a registration
statement with respect to the Parent Stock became effective with
the SEC, the Parent has filed all forms, reports, and other
documents (including all exhibits, schedules and annexes thereto)
required to be filed by the Parent with the SEC (collectively, the
"Parent Reports"). Except to the extent that information contained
in any Parent Report has been revised or superseded by a later
Parent Report filed and publicly available prior to the date of
this Agreement, as of their respective dates, the Parent Reports
(a) were (and any Parent Reports filed after the date hereof will
be) in all material respects in accordance with the requirements of
the Act or the Exchange Act, as the case may be, and the rules and
regulations promulgated thereunder, and (b) as of their respective
filing dates did not (and any Parent Reports filed after the date
hereof will not) contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. The
financial statements of the Parent included in such reports (or
incorporated therein by reference) were prepared in accordance with
GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto and subject to
normal year-end adjustments) and fairly present in all material
respects the financial position of the Parent and its consolidated
subsidiaries as of the dates thereof and the periods then ended.
5.7 FINANCIAL STATEMENTS. The audited consolidated balance
sheet and consolidated statement of operations as of and for the
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twelve months ended June 30, 1998, accompanied by the audit report
of Drucker Math & Whitman, P.C., independent certified public
accountants, which are attached hereto as EXHIBIT "5.7", were
prepared in accordance with GAAP, consistently applied throughout
the periods involved except as otherwise set forth therein and
present fairly the financial condition of the Parent as of such
date and the results of operations of the Parent for the year then
ended. The unaudited consolidated balance sheet of the Parent as
of March 31, 1999, and the related consolidated statement of
operations for the nine months ended on such date, which are
attached hereto as EXHIBIT "5.7", were prepared in accordance with
GAAP consistently applied except as otherwise set forth therein and
of such date and the results of operations of the Parent for the
three months then ended, except that such interim financial
statements are subject to normal year-end adjustments that are not
and are not expected to be, individually or in the aggregate,
material in amount and do not include certain notes which may be
required by GAAP. The balance sheet of the Parent as of March 31,
1999, is referred to in this Agreement as the "Parent Balance
Sheet."
5.8 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the
extent reflected or reserved against in the Parent Balance Sheet or
set forth in Schedule 5.8 at the date of the Parent Balance Sheet,
the Parent did not have any obligation or liability of any kind
whatsoever (whether accrued, absolute, contingent, unliquidated,
civil, criminal, or otherwise and whether due or to become due),
whether or not any such liability or obligation would have been
required to be disclosed on a balance sheet prepared in accordance
with GAAP, that, individually or in the aggregate, could have a
Parent Material Adverse Effect. The Parent Balance Sheet has
accurate accruals of all employee benefit costs, including, but not
limited to, payroll, commissions, bonuses, retirement benefits and
vacation accruals.
5.9 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Since March 31, 1999, no event or events have
occurred, which individually or in the aggregate have had a Parent
Material Adverse Effect, as hereafter defined, and there exists no
condition or contingency that could reasonably be expected to
result in a Parent Material Adverse Effect. A "Parent Material
Adverse Effect" means a material adverse change in the business,
properties, financial condition, results of operations, or
prospects of the Parent, taken as a whole.
(b) Since the date of the Parent Balance Sheet and
except as set forth in Schedule 5.9(b), the Parent has not:
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(i) declared, set aside, paid, or made any dividend
or other distribution on or in respect of any shares of its
capital stock or directly or indirectly redeemed, retired,
purchased, or otherwise acquired any such shares or any option,
warrant, conversion privilege, preemptive right, or other right or
agreement to acquire the same or any other securities convertible
into or evidencing the right to purchase or otherwise acquire the
same;
(ii) made any amendments to its Certificate of
Incorporation or Bylaws:
(iii) made any change in the number of shares of
its capital stock authorized, issued, or outstanding or authorized,
issued, granted, or made any option, warrant, conversion privilege,
preemptive right, or other right or agreement to acquire the same
or any other securities convertible into or evidencing the right to
acquire the same;
(iv) incurred any indebtedness or borrowed
money other than pursuant to the Parent's existing lines of credit
set forth in Schedule 5.9(b)(iv), which borrowings shall not exceed
the maximum amount thereunder in the aggregate;
(v) incurred any obligation or liability
(contingent or otherwise) except (i) normal trade or business
obligations incurred in the ordinary course of business, the
performance of which will not, individually or in the aggregate,
have a Parent Material Adverse Effect and (ii) obligations under
the contracts, agreements and leases described in Schedule 5.10,
the performance of which will not, individually or in the
aggregate, have a Parent Material Adverse Effect;
(vi) discharged or satisfied any lien or
encumbrance or paid any obligations or liability (fixed or
contingent) other than current liabilities paid to unrelated
parties, wages paid to officers and employees and director's fees
paid to directors, each in the ordinary course of business;
(vii) mortgaged, pledged, or subjected to any
lien, charge, or other encumbrance any of its respective properties
or assets (tangible or intangible) except liens for current
property taxes not yet due and payable.
(viii)sold, assigned, leased, transferred or
otherwise disposed of, or agreed to sell, assign, lease, transfer
or otherwise dispose of, any of its tangible assets other than
sales of inventory in the ordinary course of business;
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(ix) sold, assigned, licensed, transferred, or
otherwise disposed of, or agreed to sell, assign, license, transfer
or otherwise dispose of, any of its patents, inventions, shop
rights, know-how, trade secrets, confidentiality agreements and
confidential information, registered and unregistered trademarks,
service marks, logos, corporate names, trade names, and other
trademark rights, trade dress, or other designations or
combinations of such designations that are distinctive of goods or
services and that are used in a manner that identifies those goods
or services and distinguishes them from the goods or services of
others, works of authorship and any registered or unregistered
copyright therein, Software or Documentation (as defined in Section
5.10(e)), or other intangible assets, and all registrations for,
and applications for registration of, any of the foregoing
(collectively, "Proprietary Rights") or disclosed any of its
confidential Proprietary Rights to any person (other than the
Parent);
(x) entered into any transaction, contract, or
commitment other than in the ordinary course of business;
(xi) made any capital expenditures or any
commitment therefor in excess of $100,000 in the aggregate except
as consented to by the Company;
(xii) adopted or made any change in any
executive compensation plan, bonus plan, incentive compensation
plan, deferred compensation agreement, or other employee benefit
plan or arrangement;
(xiii)entered into any employment or consulting
agreement or arrangement, or, except for normal bonuses pursuant to
and consistent with existing plans or programs, or wages or salary
increases consistent with past practices, granted or paid any
bonus, or made or granted any general wage or salary increase or
any specific increase in the wages or salary of any employee;
(xiv) suffered any casualty loss or damage,
whether or not such loss or damage shall have been covered by
insurance;
(xv) canceled or compromised any debt or claim
except for adjustments made in the ordinary course of business
that, in the aggregate, are not material, or waived or released
any rights that are material;
(xvi) terminated, amended, or modified any
agreement or instrument described in Schedule 5.10;
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(xvii)entered into any transaction with any
stockholder, officer, director, or key employee of the Parent or
any affiliate of any such person other than the payment of wages
and salaries and other benefits under employee benefit plans in
existence prior to June 30, 1998;
(xviii) made any loans or advances to, guaranties
for the benefit of, or investments in, any person (other than
customary travel advances in accordance with past practices);
(xix) made cash charitable contributions in
excess of $5,000 in the aggregate or any political contributions;
(xx) lost any supplier or suppliers which loss
or losses, individually or in the aggregate, has had, or could
reasonably be expected to have, a Parent Material Adverse Effect;
(xxi) merged or consolidated with, or acquired
all or substantially all of the assets, capital stock, or business
of any other person;
(xxii)introduced any material change with
respect to the operation of its business, including its method of
accounting or accounting practice by Parent or any of the
Subsidiaries;
(xxiii) agreed or committed to do any of the
things described in this Section 5.10.
5.10 LIST OF PROPERTIES, CONTRACTS, ETC. Schedule 5.10 sets
forth a true and complete list of the following:
(a) all leases of real property to which the Parent or
the Subsidiaries is a party, identifying the parties thereto and
including in each case a brief description of the property covered
thereby, the annual rental rate, and the termination date (all real
property covered by such leases being referred to herein as the
"Parent Real Property");
(b) all leases of personal property to which the Parent
or the Subsidiaries are a party, that (i) provide for future annual
payments in excess of $5,000 or (ii) were entered into other than
in the ordinary course of business, identifying the parties thereto
and including in each case, a brief description of the property
covered thereby, the annual rental rate and the termination date
and identifying any such leases with respect to which the
obligations thereunder, in accordance with GAAP, would be required
to be capitalized on a balance sheet of the Parent or for which the
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amount of the asset and liability thereunder, as if so capitalized,
would be required to be disclosed in a note to such balance sheet;
(c) all addresses at which inventory or other property
of the Parent and the Subsidiaries is located;
(d) all Proprietary Rights, if any, used in the business
or operations of the Parent or the Subsidiaries; identifying the
owner thereof and in the case of any license, the parties thereto,
the method of compensating the licensor thereunder and the
termination date;
(e) all Software and Documentation owned by the Parent
or the Subsidiaries or used in and material to the business or
operations of the Parent or the Subsidiaries, identifying the owner
thereof. As used herein: (i) "Software" means all computer
programs, in machine-readable object code and any and all
corresponding source code, and includes, without limitation: any
and all printed listings, file formats, interface or operating
system designs, application programs, structure, architecture,
libraries, tools, functions, subroutines, and all components,
portions or modules thereof, and (ii) "Documentation" means all
user manuals, handbooks, on-line materials, development tools,
specifications and any other written or machine readable materials
relating in any way to the Software, and includes, without
limitation: any and all Software specifications; programmer's or
developer's notes, and engineering or system design notes;
instructions for compiling or decompiling; and all pseudo-code,
algorithms, diagrams or flow charts whether or not directly
incorporated in the Software. The Software and Documentation owned
by the Parent and the Subsidiaries, listed on Schedule 5.10,
includes the copyright registration number of all registered
copyrights therein. The list on Schedule 5.10 describes the extent
to which the listed Software owned by the Parent or the
Subsidiaries is proprietary to the Parent or the Subsidiaries; if
any such Software requires the use of development tools, routines,
libraries or the like ("tools") that are not proprietary to the
Parent or the Subsidiaries, such tools are identified in Schedule
5.10; and if any such Software, or any portion thereof, is required
by law or any agreement to be dedicated to the public, owned or
co-owned, or licensed or otherwise authorized for use by the public
or any other person, such requirements are described in Schedule
5.10;
(f) all employment and consulting agreements covering
any employee of, or consultant to, the Parent and the Subsidiaries;
(g) the names and current annual or monthly compensation
rates of all employees of the Parent and the Subsidiaries;
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zzz
(h) all deferred compensation agreements, employee stock
option plans, group life, hospitalization or disability insurance,
severance policies and other plans and arrangements providing
benefits for employees of the Parent and the Subsidiaries;
(i) all standard and non-standard product warranty terms
and conditions applicable to goods and services sold by the Parent
and the Subsidiaries;
(j) all insurance coverage that relates to or covers the
properties, assets, business, or operations of the Parent and the
Subsidiaries, including all policies or binders of fire, liability,
vehicular, title, workers' compensation, and other insurance,
specifying the insurer, the type of coverage, the amount of
coverage, any applicable deductibles, the expiration date and the
policy number;
(k) all documents pertaining to the environmental
conditions (actual, potential, or threatened) of any real property
owned or leased by the Parent and the Subsidiaries including,
without limitation, all environmental reports, assessments, and
audits and all notices, orders, permits, or any other documents
from any governmental authority that refer or relate to any
environmental condition of the Parent Real Property or any personal
property owned or leased by the Parent and the Subsidiaries or that
relate to any actual or potential liabilities or obligations
arising out of such environmental conditions;
(l) the names and ages of all retired employees and all
employees on long-term disability of the Parent and the
Subsidiaries who are entitled to receive health benefits;
(m) all bank accounts and safe deposit boxes of the
Parent and the Subsidiaries, indicating the names of the persons
authorized to draw thereon;
(n) all agreements of the Parent and the Subsidiaries
with sales representatives, distributors, authorized service
centers or other customers;
(o) all loan agreements, credit agreements, indentures,
and other documents or instruments relating to the borrowing of
money by the Parent and the Subsidiaries and all promissory notes
and other evidences of indebtedness of the Parent and the
Subsidiaries, including without limitation, all such documents and
instruments relating to or evidencing any stockholder loans to the
Parent and the Subsidiaries;
(p) all guaranties of obligations of the Parent and the
Subsidiaries under all loan agreements, leases, and other documents
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and instruments to which the Parent and the Subsidiaries is a party
or by which it is bound, by any officer or director of the Parent
and the Subsidiaries or any affiliate of any of the foregoing; and
(q) all other contracts, agreements or commitments of
the Parent and the Subsidiaries that (i) provide for future annual
payments by the Parent and the Subsidiaries in excess of $5,000 or
(ii) were entered into other than in the ordinary course of
business. True and correct copies of all documents, including all
amendments thereto, referred to above have been delivered or made
available to the Parent and the Subsidiaries (collectively, the
"Material Contracts"). Each Material Contract is a valid
obligation of and enforceable against the Parent or the
Subsidiaries and, to the Parent's knowledge, the other parties
thereto, in accordance with its terms for the period stated
therein. There is no existing material breach, default, or event
of default by the Parent or, to the knowledge of the Parent, by any
other party, under any Material Contract. There is no event that
with notice or lapse of time would constitute a default by the
Parent or the Subsidiaries under any Material Contract, nor has any
party thereto given notice of or made a claim with respect to any
breach or default. To the Parent's knowledge, there are no
material deficiencies in the Parent's or the Subsidiaries'
performance under any Material Contract. The Parent does not have
any knowledge of any existing laws, regulations, or decrees, that
materially and adversely affect, or may materially and adversely
affect any of the Material Contracts or that would have a Parent
Material Adverse Effect. Except as set forth in Schedule 5.10, no
third party consents to the execution, delivery, and consummation
of this Agreement, the documents contemplated hereby or the
transactions contemplated herein are required pursuant to the terms
of any Material Contract. Except as set forth in Schedule 5.10,
each employment agreement to which the Parent or the Subsidiaries
is a party is in full force and effect, and neither the execution
and delivery of this Agreement nor the consummation of the
transactions contemplated hereby shall cause or result in any
default, termination, or acceleration of any provision in any such
employment agreement or give rise to the obligation of the Parent
or the Subsidiaries to make any severance or change of control
payment.
5.11 TITLE TO ASSETS. Except as set forth in Schedule
5.11, the Parent and the Subsidiaries each has good title, free and
clear of all liens, charges, and encumbrances (except for (a) liens
for non-delinquent taxes and assessments, (b) liens of landlords
and other lessors arising under statute, and (c) other liens,
claims and encumbrances or charges that do not materially detract
from the value of, or impair the use, occupancy or ownership of,
the assets and properties of the Parent) to, or a valid leasehold
interest in, all of the personal property (i) reflected on the
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Parent Balance Sheet or acquired by the Parent or the Subsidiaries
subsequent to the date thereof (other than assets that have been
sold or otherwise disposed of in the ordinary course of business
since the date of the Parent Balance Sheet) or (ii) used in the
business or operations of the Parent. Neither the Parent nor any
predecessor to the Parent has owned, leased, or operated any real
property other than the Parent Real Property.
5.12 ADEQUACY OF ASSETS. The Parent and the Subsidiaries
owns or has a valid leasehold interest in all assets, real and
personal properties, contract rights and licenses necessary for the
continued operation of the Parent or the Subsidiaries in
substantially the same manner in which it has been and is now
operating and for the future operation of the Parent or the
Subsidiaries as presently contemplated. Except as set forth on
Schedule 5.12: (a) each of the Parent or the Subsidiaries owns or
has the right to use pursuant to license, sublicense, agreement, or
permission all Proprietary Rights necessary for the operation of
the business of the Parent or the Subsidiaries as presently
conducted, (b) each Proprietary Right owned or used by the Parent
or the Subsidiaries immediately prior to the Effective Time
hereunder will be owned or available for use by the Parent or the
Subsidiaries on identical terms and conditions immediately
subsequent to the Effective Time hereunder, and (c) the Parent and
the Subsidiaries has taken all necessary action to maintain and
protect each Proprietary Right that it owns or uses.
5.13 CONDITION OF INVENTORY, PROPERTY AND EQUIPMENT.
Schedule 5.13 sets forth a list of the fixed assets of the Parent
and the Subsidiaries, together with the depreciation schedule
associated with such fixed assets. The inventory of the Parent and
the Subsidiaries consists of items of quality and quantity usable
and saleable in the ordinary course of business of the Parent and
the Subsidiaries, except for items reserved against or written off
on the Parent Balance Sheet. All property, plant, and equipment
used by the Parent and the Subsidiaries in the conduct of their
business has been maintained in accordance with standard industry
practices and is in good operating condition and repair, ordinary
wear and tear excepted, and there are no material defects in such
property, plant, or equipment.
5.14 AUTHORIZATION. Except as set forth in Schedule 5.14, the
execution, delivery and performance by Parent of this Agreement and
the consummation by Parent and Merger Sub of the transactions
contemplated hereby require no consents of any party and no action
by or in respect of, or filing with, any governmental body, agency,
official or authority other than (a) the filing of the Certificate
of Merger in accordance with the Corporate Law, (b) compliance with
any applicable requirements of the Act, the Exchange Act, or Blue
Sky laws, and (c) any other filings, approvals or authorizations,
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which, if not obtained, would not, individually or in the
aggregate, have a material adverse effect on Parent or materially
impair the ability of the Parent or Merger Sub to consummate the
transactions contemplated by this Agreement.
5.15 ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. The accounts
receivable reflected on the Balance Sheet contained in the latest
Parent Report filed with the SEC pursuant to the Exchange Act and
all accounts receivable of the Parent and the Subsidiaries that
arose thereafter are valid and arose out of bona fide transactions
in the ordinary course of business. Schedule 5.15 sets forth a
list of any such accounts receivable that the Parent considers to
be doubtful accounts.
5.16 LITIGATION. Except as set forth in Schedule 5.16,
there are no claims, actions, suits, investigations, or proceedings
(public or private) pending against or affecting the Parent, the
Subsidiaries or any of their properties or assets, at law or in
equity, before or by any federal, state, municipal, or other
governmental or non-governmental department, commission, board,
bureau, agency, court, or other instrumentality, or arbitrator or
by any private person or entity. Except as set forth in Schedule
5.16, to the knowledge of the Parent and the Subsidiaries, there
are no claims, actions, suits, investigations, or proceedings
(public or private) threatened against or affecting the Parent, the
Subsidiaries or any of their properties or assets, at law or in
equity, before or by any federal, state, municipal, or other
governmental or non-governmental department, commission, board,
bureau, agency, court, or other instrumentality, or arbitrator or
by any private person or entity, except for any of the foregoing
which would not, individually or in the aggregate, reasonably be
expected to have a Parent Material Adverse Effect. There are no
existing orders, judgments, settlements, injunctions, or decrees of
any court or governmental agency that apply to the Parent, the
Subsidiaries or any of their assets, properties, business, or
operations. No product liability, warranty, or similar claims have
been made against the Parent or the Subsidiaries except routine
claims in the ordinary course of business (i.e., claims relating to
defective products that have been satisfied by the Parent or the
Subsidiaries solely by replacement of products or adjustment or
refunding of purchase price or substantially equivalent credit on
future orders) that, in the aggregate, would not have a Parent
Material Adverse Effect. Neither the Parent nor the Subsidiaries
have entered into any settlement agreements relating to the
compromise or dismissal of any litigation involving the Parent or
the Subsidiaries or any of their properties or assets. Nothing
contained in any settlement agreement to which the Parent or the
Subsidiaries are a party prevents the Parent or the Subsidiaries in
any way from carrying out their business as now conducted or as
presently contemplated to be conducted, in any market, geographical
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area, or application, or interferes with their utilization of their
Proprietary Rights.
5.17 TAXES. All Taxes (as hereinafter defined) required
to be filed by the Parent and the Subsidiaries have been timely
filed and are true, correct, and complete in all material respects,
and all Taxes payable pursuant thereto have been timely paid or
appropriate extensions have been filed for such periods. No
deficiency or adjustment in respect of any Taxes that was assessed
against the Parent or the Subsidiaries remains unpaid and no such
claim or assessment is pending or, to the knowledge of the Parent,
threatened. The Parent and the Subsidiaries have made all
withholding of Taxes required to be made under all applicable
federal, state, and local tax regulations and such withholdings
have either been paid on a timely basis to the respective
governmental agencies or set side in accounts for such purpose or
accrued, reserved against and entered upon the books of the Parent
or the Subsidiaries. There are no outstanding agreements or
waivers extending the statutory period of limitations applicable to
any tax return or tax liability of the Parent or the Subsidiaries,
and there is no proposed liability for any Taxes for which there is
not an adequate reserve reflected on the Parent Balance Sheet. The
Parent has not filed any consent with the Internal Revenue Service
described in Section 341(f) of the Code.
The unpaid taxes of the Parent and the Subsidiaries
(i) did not, as of the end of the most recent period for which
financial statements have been prepared, exceed the reserve for Tax
liability (rather than any reserve for deferred Taxes established
to reflect timing differences between book and Tax income), and
(ii) do not exceed that reserve as adjusted for the passage of time
through the Effective Time in accordance with the past custom and
practice of the Parent and the Subsidiaries in filing their tax
returns. The Parent does not reasonably expect any authority to
assess any additional Taxes for any period for which tax returns
have been filed. There is no dispute or claim concerning any Tax
liability of the Parent or the Subsidiaries either (i) claimed or
raised by any authority in writing, or (ii) as to which the Parent
has knowledge. The Parent has delivered to the Company and the
Principal Shareholders correct and complete copies of all federal
and state income tax returns of the Parent and the Subsidiaries.
Neither the Parent nor the Subsidiaries is a party to any Tax
allocation or sharing agreement. Neither the Parent nor the
Subsidiaries has been a member of an affiliated group filing
federal income tax returns, and does not have any liability for the
Taxes of any person (other than the Parent and the Subsidiaries)
under Treas. Reg. Section 1.1502-6 or any similar provision of
state, local or foreign law, as a transferee or successor, by
contract or otherwise. No item of income attributable to
transactions occurring on or before the Effective Time will be
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required to be included in taxable income by the Parent or the
Subsidiaries in a subsequent taxable year by reason of the Parent
or the Subsidiaries reporting income on the installment sales
method of accounting, the cash method of accounting, the completed
contract method of accounting or the percentage of
complete-capitalized cost method of accounting. Neither the Parent
nor the Subsidiaries has made, and is not under any obligation to
make, payments that are or, if made, would be "parachute payments"
under Section 280G of the Code, and no such obligation will arise
as a result of this Agreement or other agreements entered into in
connection with this Agreement. "Taxes" shall mean all federal,
state, county, local, foreign and other taxes and governmental
assessments, including but not limited to, income taxes, estimated
taxes, withholding taxes, transfer taxes, excise taxes, sales
taxes, real and personal property taxes, ad valorem taxes,
payroll-related taxes, employment taxes, franchise taxes and import
duties, together with any related liabilities penalties, fines or
additions to tax and interest.
5.18 PROPRIETARY RIGHTS.
(a) Except as set forth on Schedule 5.18(a):
(i) To the Parent's knowledge, neither the Parent
nor the Subsidiaries has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any
Proprietary Rights of third parties, (ii) neither the Parent nor
the Subsidiaries (and its employees with responsibility for
Proprietary Rights matters) has received any written charge,
complaint, claims, demand, or notice alleging any such
interference, infringement, misappropriation, or violation
(including any claim that the Parent or the Subsidiaries must
license or refrain from using any Proprietary Rights of any third
party), (iii) to the Parent's knowledge, there is no basis for any
as-yet unasserted charge, complaint, claim, demand, or notice
alleging any such interference, infringement, misappropriation, or
violation (including any claim that the Parent must license or
refrain from using any Proprietary Rights of any third party), or
(iv) to the Parent's knowledge, no third party has interfered with,
infringed upon, misappropriated, or otherwise come into conflict
with any Proprietary Rights of the Parent or the Subsidiaries.
(b) Schedule 5.18(b) also identifies each Proprietary
Right that the Parent owns. Schedule 5.18(b) identifies each
registration that has been issued to the Parent or the Subsidiaries
with respect to any of its Proprietary Rights, identifies each
pending application for registration that the Parent or the
Subsidiaries has made with respect to any of its Proprietary
Rights, identifies each item of copyrightable Proprietary Rights
(whether or not registration has been sought), and identifies each
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license, agreement, or other permission which the Parent or the
Subsidiaries has granted to any third party with respect to any of
their Proprietary Rights and all agreements relating to any of the
Software owned by the Parent or the Subsidiaries, including any
service, nondisclosure or escrow agreements (together with any
exceptions). The Parent and the Subsidiaries have delivered to the
Company and the Principal Shareholders correct and complete copies
of all such patents, registrations, applications, licenses,
agreements, and permissions (as amended to date) set forth in
Schedule 5.18(b). Schedule 5.18(b) also identifies each trade name
or unregistered trademark used by the Parent or the Subsidiaries in
connection with its business. Except as set forth in Schedule
5.18(b), with respect to each Proprietary Right required to be
identified in Schedule 5.18(b) and with respect to each item of
copyrightable Proprietary Rights (whether or not identified in
Schedule 5.18(b):
(i) the Parent or the Subsidiaries, as applicable
possess all right, title, and interest in and to the Proprietary
Rights, free and clear of any lien, license, or other restriction;
(ii) the Proprietary Rights are not subject to
any outstanding injunction, judgment, order, decree, ruling, or
charge; and
(iii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or to
the Parent's knowledge threatened, that challenges the legality,
validity, enforceability, manufacture, use or the ability to
authorize the use (including use by way of reproduction of copies,
distribution of copies, preparation of derivative works, public
performance or display, or any other use of any kind or nature),
sale or ownership of the Proprietary Rights; and
(c) Schedule 5.18(c) identifies each Proprietary Right
that any third party owns and that the Parent or the Subsidiaries
use pursuant to license, sublicense, agreement, or permission. The
Parent has delivered to the Company and the Principal Shareholders
correct and complete copies of all such licenses, sublicenses,
agreements, and permissions (as amended to date) each of which are
identified in Schedule 5.18(c). Except as set forth on Schedule
5.18(c), with respect to each Proprietary Rights required to be
identified in Schedule 5.18(c):
(i) the license, sublicense, agreement, or
permission covering the Proprietary Rights is legal, valid,
binding, enforceable against the Parent or the Subsidiaries and, to
the Parent's knowledge, against the other parties thereto, and in
full force and effect;
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(ii) the license, sublicense, agreement, or
permission will continue to be legal, valid, binding, enforceable
against the Parent or the Subsidiaries and, to the Parent's
knowledge, against the other parties thereto, and in full force and
effect on identical terms following the Effective Time;
(iii) to the Parent's knowledge, no party to the
license, sublicense, agreement, or permission is in breach or
default, and no event has occurred which with notice or lapse of
time would constitute a breach or default or permit termination,
modification, or acceleration thereunder;
(iv) no party to the license, sublicense,
agreement, or permission has repudiated in writing any provision
thereof;
(v) with respect to each sublicense, the
representations and warranties set forth in subsections (i) through
(iv) above are true and correct with respect to the underlying
license;
(vi) the underlying Proprietary Right is not
subject to any outstanding injunction, judgment, order, decree,
ruling, or charge;
(vii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or,
to the knowledge of the Parent, threatened, that challenges the
legality, validity, or enforceability of the underlying Proprietary
Right;
(viii)neither the Parent nor the Subsidiaries
has granted any sublicense or similar right with respect to the
license, sublicense, agreement, or permission; and
(ix) no such licenses, agreements or
permissions commit the Parent or the Subsidiaries to continued
maintenance, support, improvement, upgrade or similar obligation
with respect to any of the Proprietary Rights, which obligation
cannot be terminated by the Parent or the Subsidiaries upon notice
of ninety (90) days or less.
(d) Schedules 5.18(b) and 5.18(c) identify every
Proprietary Right used by the Parent or the Subsidiaries in the
conduct of its business. Except as set forth in Schedule 5.18(b),
all Software owned by the Parent or the Subsidiaries performs
substantially as described in all Documentation for such Software
insofar as such Documentation has to do with the performance,
specifications or design of such Software; and in addition, all
Software owned by the Parent or the Subsidiaries and which has been
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licensed to any third party performs in accordance with the
warranties, if any, given by the Parent or the Subsidiaries in
respect of such Software. Except as set forth in Schedule 5.18(c),
all Software owned by any third party and used by the Parent or the
Subsidiaries pursuant to license, sublicense, agreement or
permission performs in accordance with the warranties, if any,
given by such third party to the Parent or the Subsidiaries, and to
the knowledge of the Parent (and its employees with responsibility
for use and maintenance or service thereof) such Software performs
substantially as required for the conduct of the Parent's or the
Subsidiaries' business.
It is understood and agreed that "Software owned by the
Parent" shall include all Software owned by the Parent and the
Subsidiaries, whether developed in house by the Parent or the
Subsidiaries or purchased by the Parent or the Subsidiaries from
any third party.
5.19 ROYALTIES. All royalties, license fees, and other
fees relating to the Parent's use of Proprietary Rights have been
or will be paid in full as and when due. Except as set forth in
Schedule 5.19, to the Parent's knowledge, the method used by the
Parent to calculate all royalties, license fees, and other fees
relating to the Parent's use or the Subsidiaries' use of
Proprietary Rights is correct and accurate and in accordance with
the terms of any agreements with any third party relating to the
use of such party's Proprietary Rights.
5.20 YEAR 2000 COMPLIANCE. Except as set forth on
Schedule 5.20, each system, comprised of software, hardware,
databases, or embedded control systems (microprocessor controlled,
robotic or other device) (collectively, a "System"), that
constitutes any part of, or is used in connection with the use,
operation or enjoyment of any material tangible or intangible asset
or real property of the Parent or the Subsidiaries and each product
licensed, sold or otherwise distributed by the Parent or the
Subsidiaries, including software, hardware, databases, or embedded
control systems (collectively, a "Product") (a) is designed (or has
been modified) to be used prior to and after January 1, 2000, (b)
will operate without error arising from the creation, recognition,
acceptance, calculation, display, reporting, storage, retrieval,
accessing, comparison, sorting, manipulation, processing or other
use of dates, or date-based, date-dependent or date-related data,
including but not limited to century recognition, day-of-the-week
recognition, leap years, date values and interfaces of date
functionalities, and (c) will not be adversely affected by the
advent of the year 2000 or subsequent years, the advent of the
twenty-first century or the transition from the twentieth century
through the year 2000 and into the twenty-first century
(collectively, items (a) through (c) are referred to herein as
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"Year 2000 Compliant"). Except as set forth on Schedule 5.20, all
licenses for the use of any System-related software, hardware,
databases or embedded control system are certified by the
manufacturer to be Year 2000 Compliant and to contain the
capabilities required to enable Year 2000 Compliance within the
Parent's or the Subsidiaries' computer systems (hardware and
software), or the licenses permit the Parent or a third party to
make all modifications, bypasses, debugging, work-around, repairs,
replacements, conversions or corrections necessary to permit the
System to operate compatibly, in conformance with their respective
specifications, and to be Year 2000 Compliant. No System that is
material to the business, finances, or operations of the Parent or
the Subsidiaries receives data from or communications with any
component or system external to itself (whether or not such
external component or system is the Parent's or the Subsidiaries'
or any third party's) that is not itself Year 2000 Compliant
excepting the parts of the external component or system within
which noncompliance to Year 2000 Compliance will have no effect on
the data or communications sent to the Parent or the Subsidiaries,
nor on the Systems of the Parent or the Subsidiaries. Except as
set forth on Schedule 5.20, the Parent has no reason to believe
that it or the Subsidiaries may incur material expenses arising
from or relating to the failure of any of its Systems or Products
as a result of not being Year 2000 Compliant. Notwithstanding
anything in this Section 5.20 to the contrary, any representation
with respect to a System or Product that was developed wholly by a
third party and not by the Parent or the Subsidiaries shall be
deemed to qualified in its entirety to the Parent's knowledge
regarding the facts or events set forth in such representation.
5.21 LABOR RELATIONS. There are no material
controversies pending or, to the knowledge of the Parent,
threatened, between the Parent or the Subsidiaries and any of their
respective employees, former employees, or applicants for
employment. The Parent and the Subsidiaries have complied in all
respects with all laws relating to the employment of labor,
including any provisions thereof relating to wages, hours, equal
employment opportunity, collective bargaining, federal immigration
law, and the payment of social security and similar taxes, except
as would not be reasonably expected to have a Parent Material
Adverse Effect. The Parent and the Subsidiaries are not liable for
any arrears of wages or any taxes or penalties for failure to
comply with any of the foregoing. None of the employees of the
Parent or the Subsidiaries are covered by any collective bargaining
agreement and, to the knowledge of the Parent, there are no
organizational efforts currently being made or threatened involving
any employees of the Parent or the Subsidiaries. All employee
severance or change of control policies covering any employee of
the Parent or the Subsidiaries are described in or filed as
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exhibits to the Parent Reports and no such employee is entitled to
any severance or change of control benefits not described therein.
5.22 CERTAIN EMPLOYEE MATTERS. Except as set forth on
Schedule 5.22, all current and former members of management, key
(including sales and recruiting) personnel and consultants (whether
employees or independent contractors) of the Parent and the
Subsidiaries have executed and delivered to the Parent or the
Subsidiaries, a confidential information agreement restricting such
person's right to disclose confidential information of the Parent.
Except as set forth on Schedule 5.22, all such members of
management, key personnel and consultants of the Parent and the
Subsidiaries have been party to a "work-for-hire" arrangement or
proprietary rights agreement with the Parent or the Subsidiaries
pursuant to which either (i) in accordance with applicable federal
and state law, the Parent or the Subsidiaries has been accorded
full, effective, exclusive and original ownership of all tangible
and intangible property thereby arising or (ii) there has been
conveyed to the Parent or the Subsidiaries by appropriately
executed instruments of assignment full, effective and exclusive
ownership of all tangible and intangible property thereby arising.
No employee, agent, consultant or contractor of the Parent or the
Subsidiaries who has contributed to or participated in the
conception and development of proprietary rights of the Parent or
the Subsidiaries has asserted in writing or, to the Parent's
knowledge, threatened any claim against the Parent in connection
with such person's involvement in the conception and development of
the proprietary rights of the Parent or the Subsidiaries and, to
the knowledge of the Parent, no such person has a reasonable basis
for any such claim.
5.23 ENVIRONMENTAL MATTERS. To the Parent's knowledge,
there has been no "release or threatened release of a hazardous
substance" (as defined in CERCLA) or any other release, emission,
disposal, or discharge into the environment or any use, storage,
transport or handling (collectively, "activities") of Hazardous
Material on, under, about, or from the Parent Real Property other
than those activities that have not resulted and could not
reasonably be expected to result in any material liability on the
part of the Parent or the Subsidiaries. To the knowledge of the
Parent, all "hazardous waste" (as defined in RCRA) and the
regulations thereunder) generated at the Parent's real property
have been disposed of at sites that maintain valid permits under
RCRA and any other applicable Environmental Requirement. To the
knowledge of the Parent, there are no underground tanks, PCBs, or
asbestos containing materials on the Parent Real Property. Neither
the Parent nor Subsidiaries have any written notice of any pending
formal or informal assertion by any governmental agency or other
person that the Parent or the Subsidiaries or any predecessor
business or owner or operator of the Parent Real Property may be a
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responsible or potentially responsible party in connection with any
violation or obligation arising under any Environmental Requirement
at any site or facility (including the Parent Real Property
itself.)
5.24 ERISA. Neither the Parent nor the Subsidiaries nor
any ERISA Affiliate of the Parent or the Subsidiaries maintains or
contributes to or is obligated to contribute to, and has ever
maintained or contributed to or been obligated to contribute to,
(i) any Multiemployer Plan, (ii) any a Multiple Employer Plan or
(iii) except as set forth in Schedule 5.24, any Plan, including but
not limited to a Pension Plan. With respect to the Plan(s)
disclosed in Schedule 5.24;
(i) Each such Plan is in compliance in all material
respects with the applicable provisions of ERISA, the Code, and
other federal or state law. Any such Plan which is intended to
qualify under Section 401(a) of the Code has received a favorable
determination letter from the IRS and to the knowledge of the
Parent, nothing has occurred that would cause the loss of such
qualification. The Parent and the Subsidiaries and each ERISA
Affiliate of the Parent has made all required contributions to any
such Plan subject to Section 412 of the Code, and no application
for a funding waiver or an extension of any amortization period
pursuant to Section 412 of the Code has been made with respect to
any such Plan.
(ii) There are no pending claims (other than routine
claims for benefits) or, to the knowledge of the Parent, threatened
claims, actions, or lawsuits, or action by any governmental
authority, with respect to any such Plan, and there has been no
prohibited transaction or violation of the fiduciary responsibility
rules with respect to any such Plan.
(iii) (1) the execution of, and the performance of
the transactions contemplated in, this Agreement will not (either
alone or upon the occurrence of any additional or subsequent
events) constitute an event under any Plan that will or is
reasonably expected to result in any payment (whether of severance
pay or otherwise), acceleration, forgiveness of indebtedness,
vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any employee; (2) no such Plan which
constitutes a Pension Plan (as defined below) has any Unfunded
Pension Liability; (3) neither the Parent nor any ERISA Affiliate
of the Parent has incurred, or reasonably expects to incur, any
material liability under Title IV of ERISA with respect to any such
Plan which constitutes a Pension Plan (other than premiums due and
not delinquent under Section 4007 of ERISA); (4) neither the Parent
nor any ERISA Affiliate of the Parent has incurred, or reasonably
expects to incur, any liability (and no event has occurred which,
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with the giving of notice under Section 4219 of ERISA, would result
in such liability) under Section 4201 or 4243 of ERISA with respect
to a Multiemployer Plan; and (5) neither the Parent nor any ERISA
Affiliate of the Parent has engaged in a transaction that could be
subject to Section 4069 or 4212(c) of ERISA.
5.25 FEES. Except as set forth in Schedule 5.25, there
are no claims for legal, accounting, financial advisory, or
investment bankers' fees, brokerage commissions, finders' fees, or
similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of the Parent or the Subsidiaries.
5.26 BOOKS AND RECORDS. Except as set forth in Schedule
5.26, the financial books, records, and work papers of the Parent
and the Subsidiaries are complete and correct in all material
respects, have been maintained in accordance with good business
practice and accurately reflect the bases for the consolidated
financial condition and results of operations of the Parent
Subsidiaries set forth in the financial statements referred to in
Section 5.7 hereof.
5.27 INSURANCE. The business, properties, and employees
of the Parent and the Subsidiaries are insured by the insurers or
through the funds and with the types and amounts of insurance
(including, but not limited to, property, product liability,
automobile, workers compensation, business interruption, and excess
indemnity insurance) set forth in Schedule 5.27 (the "Parent
Insurance Coverage"). To the knowledge of the Parent, the Parent
Insurance Coverage is in such amount and on such terms as to
adequately cover the risks attendant to the Parent's business.
Neither the Parent nor the Subsidiaries have been denied coverage
by any insurance carrier or has failed or currently fails to
maintain any insurance coverage that may be required by the laws of
the states in which the Parent or the Subsidiaries sells or
manufactures Products or provides services. The premiums due on
the Parent Insurance Coverage that covers calendar year 1998 have
been paid in full and the premiums due for the period from January
1, 1999 to the Effective Time have been or will be paid in full as
and when due. All such insurance complies in all material respects
with the terms of each of its leases and each of the mortgages,
deeds of trust, service agreements with third parties and/or loan
agreements to which the Parent or the Subsidiaries are a party.
5.28 DISCLOSURE. To the Parent's knowledge, no
representation or warranty by the Parent in this Agreement and no
statement contained in any document, certificate, or other writing
prepared by the Parent or its representatives and furnished by the
Parent to the Company pursuant to the provisions hereof,
affirmatively misstates a material fact or omits a material fact
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necessary for such document, certificate, or writing to be, in good
faith, accurately and completely responsive in all material
respects to the purpose identified by the Parent to the Company for
which such information was furnished by the Parent to the Company.
5.29 PURCHASE ACCOUNTING TREATMENT. Parent intends that the
Merger be accounted for under the "purchase" method of accounting.
5.30 SUBSIDIARIES. The Parent has two active, wholly owned
subsidiaries, the Merger Sub and Western Technologies, Inc. The
Parent owns all right, title and interest in and to all of the
issued and outstanding shares of the Merger Sub and Western
Technologies, Inc., free and clear of all liens and encumbrances
and no other person or entity has any ownership or possessory
interest in or to the Merger Sub or Western Technologies, Inc., or
any of their shares, or any rights which may convert or create an
ownership interest in such shares.
ARTICLE VI
INTERIM OPERATING COVENANTS OF THE PARENT AND SUBSIDIARIES
6.1 OPERATIONS. Between the date of this Agreement and the
Effective Time, each of the Parent and the Merger Sub and the
Subsidiaries will:
(a) carry on its business in substantially the same
manner and consistent with past practice as it has heretofore and
not introduce any material new method, or discontinue any existing
material method, of operation or accounting;
(b) maintain its properties and facilities, including
those held under leases, in as good working order and condition as
at present, ordinary wear and tear excepted;
(c) perform all of its material obligations under
agreements relating to or affecting its assets, properties,
business operations and rights;
(d) keep in full force and effect present insurance
policies or other comparable insurance coverage;
(e) use its best efforts to maintain and preserve its
business organization intact, retain its present employees and
maintain its relationship with suppliers, customers and others
having business relationships with it;
(f) file on a timely basis all notices, reports or other
filings required to be filed with or reported to any federal,
state, municipal or other governmental department, commission,
board, bureau, agency or any instrumentality of any of the
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foregoing wherever located with respect to the continuing
operations of the Parent and the Merger Sub;
(g) maintain material compliance with all Governmental
Permits and all laws, rules, regulations and consent orders;
(h) file on a timely basis all complete and correct
applications or other documents necessary to maintain, renew or
extend any site assessment, permit, license, variance or any other
approval required by any governmental authority necessary and/or
required for the continuing operation of the Parent's, the
Subsidiaries and the Merger Sub's business operations, whether or
not such approval would expire before or after the Effective Time;
and
(i) advise the Company promptly in writing of any
material change in any document or Schedule, including without
limitation any Schedule, Exhibit or other information delivered
pursuant to this Agreement.
(j) Complete the formation of the Merger Sub to conform
to the terms of this Agreement.
6.2 NO CHANGE. Between the date of this Agreement and the
Effective Time, the Parent, the Merger Sub and the Subsidiaries
will not, without the prior written consent of the Company or
except as described in this Agreement:
(a) make any change in their Certificate or Articles of
Incorporation or Bylaws;
(b) authorize, issue, transfer, distribute, or register
any of their securities, other than the exercise of previously
existing options and warrants;
(c) declare or pay any dividend or make any distribution
in respect of their capital stock whether now or hereafter
outstanding, or purchase, redeem or otherwise acquire or retire for
value any shares of its capital stock;
(d) enter into any contract or commitment or incur or
agree to incur any liability other than in the ordinary course of
business other than the transactions contemplated by this Agreement
or make any single capital expenditure in excess of $10,000 or in
excess of $100,000 in the aggregate during any consecutive thirty
day period without regard to whether such capital expenditure is in
the ordinary course of business;
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(e) change or promise to change the compensation payable
or to become payable to any director, officer, employee or agent,
or make or promise to make any bonus payment to any such person;
(f) create, assume or otherwise permit the imposition of
any mortgage, pledge or other lien (except for current property
taxes) or encumbrance upon or grant any option or right of first
refusal with respect to any assets or properties whether now owned
or hereafter acquired;
(g) sell, assign, lease or otherwise transfer or dispose
of any property or equipment other than in the ordinary course of
business;
(h) merge or consolidate or agree to merge or
consolidate with or into any firm, corporation or other entity;
(i) waive any material rights or claims;
(j) amend or terminate any material agreement or any
site assessment, permit, license or other right;
(k) enter into any other transaction outside the
ordinary course of its business or prohibited hereunder; or
(l) take any action or suffer or permit any event to
occur that would cause any representation or warranty in this
Agreement to become untrue as of the Effective Time.
6.3 ACCESS; CONFIDENTIAL INFORMATION. Between the date of
this Agreement and the Effective Time, the Parent, the Merger Sub
and the Subsidiaries will afford to the officers and authorized
representatives of the Company, including, without limitation, its
counsel, independent auditors and investment bankers, access to the
facilities, plants, corporate properties and other properties,
books and records of the Parent, the Subsidiaries and the Merger
Sub and will furnish the Company with such additional financial and
operating data and other information as to the business and
properties of the Parent, the Subsidiaries and the Merger Sub as
the Company may from time to time reasonably request. The Parent
and the Merger Sub and the Subsidiaries will cooperate with the
Company, its representatives and counsel in the preparation of any
documents or other material which may be required by any
governmental agency. Except as necessary to comply with the terms
of this Agreement, the rules and regulations of the Nasdaq and the
SEC and the disclosures necessary for the Parent Placement, the
Company will cause all information obtained from the Parent, the
Subsidiaries and the Merger Sub in connection with the negotiation
and performance of this Agreement to be treated as confidential
(except such information which is in the public domain or which the
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Company may be required to disclose to any governmental agency, or
pursuant to any court or regulatory agency order) and will not use,
and will not knowingly permit others to use, any such confidential
information in a manner detrimental to the Parent, the Subsidiaries
or the Merger Sub. The Parent, each of the Subsidiaries and the
Merger Sub covenant and agree not to disclose to any third persons
other than their accountants, brokers, bankers, investment advisers
or legal counsel any of the specific terms or provisions of this
Agreement (including financial terms) prior to or after the date
hereof without the prior written consent of the Company.
6.4 OBTAIN CONSENTS. Promptly after the execution of this
Agreement, the Parent, each of the Subsidiaries and the Merger Sub
shall make all filings and take all steps reasonably necessary to
obtain all approvals and consents required to be obtained by the
Parent, each of the Subsidiaries and the Merger Sub to consummate
the transactions contemplated by this Agreement.
6.5 EXCLUSIVITY. The Parent, the Subsidiaries, and the
Merger Sub agree that they will not (and will use their best
efforts to cause the Parent's, the Subsidiaries' and the Merger
Sub's directors, officers, agents, representatives, and affiliates,
and any other person acting on their behalf not to) enter into any
contract or agreement that has as a purpose a business combination
or merger, an issuance or sale of debt or equity of the Parent or
the Merger Sub (including the capital stock), a sale of a
substantial portion of the assets of the Parent or the Merger Sub,
or a transaction comparable to or similar to the Merger (any of the
foregoing, a "Competing Transaction"). The Parent, the
Subsidiaries, and the Merger Sub will promptly notify the Company
if they receive any offer, inquiry or proposal with respect to a
Competing Transaction and the details thereof, and keep the Company
informed with respect to each such offer, inquiry or proposal. The
Parent, the Subsidiaries, and the Merger Sub will provide the
Company with copies of all such offers, inquiries or proposals
which are in writing.
6.6 LISTING APPLICATION. If required by Nasdaq, the Parent
shall promptly prepare and submit to the Nasdaq a listing
application covering the shares of the Parent Stock issuable in the
Merger, and shall use its best efforts to obtain, prior to the
Effective Time, approval for the listing of such Parent Stock,
subject to official notice of issuance.
ARTICLE VII
INTERIM COVENANTS OF THE COMPANY
7.1 INTERIM OPERATIONS. Prior to the Effective Time, except
as authorized by any other provision of this Agreement, unless the
Parent has consented in writing thereto, the Company will not do
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any of the things enumerated in Section 4.8(b). Further, except as
set forth in Schedule 7.1, the Company:
(a) shall conduct its operations according to its usual,
regular, and ordinary course in substantially the same manner as
heretofore conducted unless otherwise set forth in its business
plan or planned financing activities;
(b) shall use its best efforts to preserve intact its
business organization and goodwill, keep available the services of
its officers, employees, and partners and maintain satisfactory
relationships with those persons having business relationships with
them;
(c) will maintain the existence of and protect its
Proprietary Rights;
(d) will comply in all material respects with applicable
contractual obligations;
(e) will operate the Company businesses in compliance
with all applicable municipal, county, state, federal, and foreign
laws, regulations, ordinances, standards, and orders as now in
effect (including, without limitation, the building, zoning, and
life safety codes as currently applied with respect thereto) where
the failure to comply therewith would have a Company Material
Adverse Effect.
(f) will pay as and when due the accounts payable that
arise in the ordinary course of its business except to the extent
that the amount owing is being duly contested by the Company or
such creditors have agreed to defer collection and such contest
does not have a Company Material Adverse Effect and adequate
reserves therefore are reflected on the Company Balance Sheet in
accordance with the representations and warranties contained in
this Agreement;
(g) will provide to the Parent copies of all material
documents that relate to, and, upon request, with verbal or written
updates concerning the status of any litigation filed as of the
date hereof or filed from and after the date hereof by or against
the Company after the date of this Agreement but prior to the
Closing Date;
(h) Principal Shareholders will afford to the officers
and authorized representatives of the Parent, including, without
limitation, its counsel, independent auditors and investment
bankers, access to the facilities, plants, corporate properties and
other properties, books and records of the Company and its
subsidiary and will furnish the Parent with such additional
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financial and operating data and other information as to the
business and properties of the Company and its subsidiary as the
Parent may from time to time reasonably request. The Company and
the Principal Shareholders will cooperate with the Parent, its
representatives and counsel in the preparation of any documents or
other material which may be required by any governmental agency.
Except as necessary to comply with the terms of this Agreement, the
rules and regulations of the Nasdaq and the SEC and the disclosures
necessary for the Parent Placement, the Parent will cause all
information obtained from the Company and the Principal
Shareholders in connection with the negotiation and performance of
this Agreement to be treated as confidential (except such
information which is in the public domain or which the Parent may
be required to disclose to any governmental agency, or pursuant to
any court or regulatory agency order) and will not use, and will
not knowingly permit others to use, any such confidential
information in a manner detrimental to the Company or the Principal
Shareholders. The Parent, each of the Subsidiaries and the Merger
Sub covenant and agree not to disclose to any third persons other
than their accountants, brokers, bankers, investment advisers or
legal counsel any of the specific terms or provisions of this
Agreement (including financial terms) prior to or after the date
hereof without the prior written consent of the Company and the
Principal Shareholders.
7.2 MEETING OF STOCKHOLDERS. The Company will take all
action necessary in accordance with applicable law and their
respective charter documents to convene a meeting of their
stockholders on or before May 1, 1999, to consider and vote upon
the approval of this Agreement and the transactions contemplated
hereby.
7.3 NOTICES TO HOLDERS OF COMPANY STOCK OPTIONS. The Company
will take all actions necessary in accordance with applicable law
and the terms of the Company Option Plans to provide all required
notice of the Merger to the holders of Company Stock Options.
7.4 EXCLUSIVITY. The Company and the Principal Shareholders
agree that they will not (and will use their best efforts to cause
the Company's directors, officers, agents, representatives, and
affiliates, and any other person acting on their behalf not to)
enter into any contract or agreement that has as a purpose a
business combination or merger, an issuance or sale of debt or
equity of the Company (including the capital stock), a sale of a
substantial portion of the assets of the Company, or a transaction
comparable to or similar to the Merger (any of the foregoing, a
"Competing Transaction"). The Company and the Principal
Shareholders will promptly notify the Parent if they receive any
offer, inquiry or proposal with respect to a Competing Transaction
and the details thereof, and keep the Parent informed with respect
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to each such offer, inquiry or proposal. The Company and the
Principal Shareholders will provide the Parent with copies of all
such offers, inquiries or proposals which are in writing.
ARTICLE VIII
ADDITIONAL COVENANTS OF THE PARTIES
8.1 FILINGS; OTHER ACTION. Subject to the terms and
conditions herein provided, the Company and the Parent shall and
the Subsidiaries and the Merger Sub shall cause any appropriate
other party to: (a) use all reasonable efforts to cooperate with
one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents,
approvals, permits, or authorizations are required to be obtained
prior to the Effective Time from governmental or regulatory
authorities of the United States, the several states and foreign
jurisdictions in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated
hereby and (ii) timely making all such filings and timely seeking
all such consents, approvals, permits, or authorizations; and (b)
use all reasonable efforts to take, or cause to be taken, all other
action and do, or cause to be done, all other things necessary,
proper, or appropriate to consummate and make effective the
transactions contemplated by this Agreement.
8.2 PUBLICITY. Each of the Parent and the Company shall,
subject to the Parent's legal obligations (including requirements
of stock exchanges and other similar regulatory bodies), consult
with each other before issuing any press release or otherwise
making public statements with respect to the transactions
contemplated hereby, and will not issue any such press release or
make any such public statement prior to such consultation.
8.3 FURTHER ACTION. Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the
conditions set forth herein or the waiver thereof, directly or by
or through its officers or directors, perform such further acts and
execute such documents whether before or after the Effective Time
as may be reasonably required to effect the Merger. In addition,
subject to the limitations set forth in this Agreement, and unless
specifically prohibited by applicable law, each party will use its
best efforts to cause all of the conditions to Closing set forth in
this Agreement that are within its control to be satisfied prior
to the Closing Date and will not take any action inconsistent with
its obligations under this Agreement or which could hinder or delay
the consummation of the transactions contemplated by this Agreement
or that would cause any representation, warranty, or covenant made
by it in this Agreement or in any certificate, list, exhibit, or
other instrument furnished or to be furnished pursuant hereto, or
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in connection with the transaction contemplated hereby, to be
untrue in any material respect as of the Effective Time.
8.4 EXPENSES. If the Merger is not consummated, all costs
and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party
incurring such expenses.
8.5 TAX MATTERS. The Parent, the Merger Sub and the Company
will treat and cause the Surviving Corporation to treat the Merger
as a reorganization qualifying under Section 368(a)(2)(E) of the
Code and will file and cause the Surviving Corporation to file all
returns and reports (including without limitation those required
under Treasury Regulation Section 1.368-3) as required and in a
manner consistent with such treatment; (ii) no shareholder is
required to recognize income gain or loss with respect the Merger;
and (iii) they will take no action that will prevent or be
inconsistent with treating the Merger as a reorganization
qualifying under Section 368(a)(2)(E) of the Code.
8.6 BROKERS AND FINDERS FEES. Each party shall pay and be
responsible for any broker's, finder's or financial advisory fee
incurred by such party in connection with the transactions
contemplated by this Agreement. The Parent shall be responsible
for its obligations to Mackenzie Shea, Inc. ("MSI") calculated as
issued prior to the determination of the exchange ratio. The
Company shall be responsible for its obligations to MSI calculated
prior to the determination of the Exchange Ratio and the Option
Exchange Ratio.
8.7 COMPANY'S DIRECTORS AND OFFICERS LIABILITY. Parent
agrees that all rights to exculpation and indemnification for acts
or omissions occurring prior to the Effective Time now existing in
favor of the current or former directors or officers of the Company
as provided in its Articles of Incorporation or bylaws or in any
agreement disclosed in writing to Parent prior to the date hereof
shall survive the Merger and shall continue in full force and
effect in accordance with their terms.
8.8 NOTICES OF CERTAIN EVENTS. Each party shall promptly
notify the other party hereto of:
(a) any notice or other communication from any person
alleging that the consent of such person is or may be required in
connection with the transactions contemplated by this Agreement;
(b) any notice or other communication from any
governmental or regulatory agency or authority in connection with
the transactions contemplated by this Agreement; and
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(c) any actions, suits, claims, investigations or
proceedings commenced or, to its knowledge threatened against,
relating to or involving or otherwise affecting such party that, if
pending on the date of this Agreement, would have been required to
have been disclosed pursuant to this Agreement.
8.9 COMPLETION OF DUE DILIGENCE. Each party acknowledges
that this Agreement is being executed prior to the completion of
necessary due diligence and prior to the preparation and review of
the appropriate Schedules and Exhibits. Each party shall grant the
other and each of their officers, attorneys, accountants and
advisors, complete and unfiltered access to all information,
documentation and personnel of the other. Each party shall conduct
such diligence within 30 days of the date of this Agreement unless
such party notifies the other parties in to the Agreement that they
require further time and information to complete their
investigations to their satisfaction, including information
contained or in Schedules or Exhibits to this Agreement.
8.10 PREPARATION OF SCHEDULES AND EXHIBITS. Each party to
this Agreement shall prepare and attach all necessary Schedules and
Exhibits after the execution of this Agreement, but no later than
the Closing Date, which information shall be true and correct as of
the Closing Date, unless otherwise specified therein.
ARTICLE IX
CONDITIONS TO CLOSING
9.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE
MERGER. The respective obligation of each party to effect the
Merger shall be subject to the fulfillment at or prior to the
Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated
hereby shall have been approved in the manner required by
applicable law by the holders of the issued and outstanding shares
of capital stock of the Company and of the Parent.
(b) No party to this Agreement shall be subject to any
order or injunction of a court of competent jurisdiction that
prohibits the consummation of the transactions contemplated by this
Agreement. In the event any such order or injunction shall have
been issued, each party agrees to use its reasonable efforts to
have any such injunction lifted or order reversed.
(c) No action, suit, proceeding, or investigation to
suspend the offering of the Parent Stock in connection with the
Merger shall have been initiated and be continuing, and all
necessary approvals under state securities laws relating to the
issuance or trading of the Parent Stock to be issued to the
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Principal Shareholders in connection with the Merger shall have
been received.
(d) All consents, authorizations, orders, and approvals
of (or filings or registrations with) any governmental commission,
board, or other regulatory body required in connection with the
execution, delivery, and performance of this Agreement shall have
been obtained or made, except for filings in connection with the
Merger and any other documents required to be filed after the
Effective Time.
(e) The Parent Stock to be issued to the Principal
Shareholders in connection with the Merger shall have been approved
for listing on the Nasdaq, subject only to official notice of
issuance.
(f) No action, suit, or proceeding shall be pending or
threatened by or before any court or governmental body in which an
unfavorable judgment, order, or decree would prevent any of the
transactions contemplated hereby or cause any such transaction to
be declared unlawful or rescinded or that could reasonably be
expected to cause a Company Material Adverse Effect or a Parent
Material Adverse Effect.
(g) All documents and instruments to be delivered by the
parties in connection with the transactions contemplated hereby
shall be in form and substance reasonably satisfactory to the
parties and their respective counsel, and the parties shall have
received such other documents and instruments as they may
reasonably request in connection therewith.
(h) Each party to this Agreement shall have completed to
its satisfaction, due diligence investigation on the other, its
shareholders, its business and operations, financial condition,
outstanding liabilities, business prospects and other material
information.
(i) Each party to this Agreement shall have provided the
information necessary to complete the Schedules and Exhibits to
this Agreement and the Schedules and Exhibits must be completed and
the information contained therein must be satisfactory to each
party to this Agreement, in each such party's sole discretion.
(j) This Agreement shall be modified and amended to
reflect changes, provisions, terms and conditions agreed upon by
the parties hereto prior to the Closing.
(k) None of these transactions contemplated hereby shall
have been enjoined by the court or by any federal or state
governmental branch, agency, commission or regulatory authority and
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not suit or other proceeding challenging the transactions
contemplated hereby shall have been threatened or instituted and no
investigative or other demand shall have been made by any federal
or state governmental branch, agency, commission or regulatory
authority.
(l) The Parent shall have had its listing application
for each of the Parent Shares issued pursuant to this Agreement and
its continued listing on Nasdaq approved by Nasdaq.
(m) The Parent or its Board of Directors and the
Subsidiaries or their Board of Directors shall have received the
written opinion of the Parent's financial advisor, to the effect
that, as of the date thereof, the consideration to be paid in
respect of the Company Common Stock is fair from a financial point
of view to the Parent and such opinion has not been withdrawn. An
executed copy of such opinion has been delivered to the Parent.
(n) Each of the Company shareholders shall have executed
a Subscription Agreement in a form reasonably acceptable to the
Parent.
(o) The Merger Sub shall have been formed in accordance
with this Agreement.
9.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER. The obligation of the Company to effect the Merger shall
be subject to the fulfillment at or prior to the Closing Date of
the following conditions:
(a) The Parent, the Subsidiaries and the Merger Sub
shall have performed or be in compliance in all respects with
agreements contained in this Agreement required to be performed on
or prior to the Closing Date. The representations and warranties
of the Parent and the Merger Sub contained in this Agreement and in
any document delivered in connection herewith shall be true and
correct as of the Closing Date, and the Company shall have received
a certificate of the President of the Parent, dated the Closing
Date, certifying to such effect; provided, however, that
notwithstanding anything herein to the contrary, this Section
9.2(a) shall be deemed to have been satisfied even if such
performance has not occurred or such representations or warranties
are not true and correct, unless the failure to perform or the
failure of any of the representations or warranties to be so true
and correct would have or would be reasonably likely to have a
Parent Material Adverse Effect.
(b) There shall have been delivered to the Company
certificates, dated within five days of the Closing Date, of the
Secretary of State of the State of Delaware and the State of
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California, with respect to the incorporation, subsistence, and
good legal standing of the Parent, the Subsidiaries and the Merger
Sub, respectively.
(c) All consents and approvals of any third parties
required in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated
hereby shall have been obtained and delivered to the Company
including a Release from each executive officer and the new
Employment Agreement for Jay Smith, III.
(d) There shall have been delivered to the Company
certificates, dated as of the Closing Date, of the President and
Secretary, respectively, of the Parent and the Merger Sub as set
forth as EXHIBIT 9.2(D), (i) to the effect that the Certificate of
Incorporation of the Parent and Articles of Incorporation of Merger
Sub have not been amended since the date of this Agreement, (ii)
attaching a true and complete copy of the Bylaws of the Parent, the
Subsidiaries and the Merger Sub as in effect on the Closing Date,
(iii) attaching a true and complete copy of the resolutions of the
Board of Directors of the Parent and the Merger Sub approving the
execution and delivery of this Agreement and authorizing the
consummation of the transactions contemplated hereby; and (iv) to
the effect that each of the provisions of Section 9.2(a) are true
and correct as of the Closing Date.
(e) There shall have been delivered to the Company
certificates, dated as of the Closing Date, with respect to the
incumbency and signatures of all officers of the Parent and the
Merger Sub signing this Agreement and any other certificate,
agreement, or instrument delivered on behalf of the Parent and the
Merger Sub in connection with this Agreement.
(f) The Parent shall have delivered to the Company an
opinion of its counsel in the form attached hereto as EXHIBIT
"9.2".
(g) Since the Closing Date, there shall not have been
any material adverse change in the condition (financial or
otherwise), business, properties or assets of the Parent or the
Subsidiaries.
9.3 CONDITIONS TO OBLIGATION OF THE PARENT AND MERGER SUB TO
EFFECT THE MERGER. The obligations of the Parent and the Merger
Sub to effect the Merger shall be subject to the fulfillment at or
prior to the Closing Date of the following conditions:
(a) The Company and the Principal Shareholders shall
have performed in all respects their agreements contained in this
Agreement required to be performed on or prior to the Closing Date.
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The representations and warranties of the Company contained in this
Agreement and in any document delivered in connection herewith
shall be true and correct as of the Closing Date as if made on the
Closing Date, and the Parent shall have received a certificate of
the President of the Company, dated the Closing Date, certifying to
such effect; provided, however, that notwithstanding anything
herein to the contrary, this Section 9.3(a) shall be deemed to have
been satisfied even if such performance has not occurred or such
representations or warranties are not true and correct, unless the
failure to perform or the failure of any of the representations or
warranties to be so true and correct would have or would be
reasonably likely to have a Company Material Adverse Effect.
(b) The Company shall not be in default of any
obligation, where such default cannot be cured by the Closing Date,
under any of the Material Contracts, unless any such defaults,
individually or in the aggregate, would not reasonably be expected
to have a Company Material Adverse Effect, and the Parent shall
have received a certificate of the President or a Vice President of
the Company, dated the Closing Date, certifying to such effect.
(c) All consents and approvals of any third parties
required in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated
hereby shall have been obtained and delivered to the Parent.
(d) There shall have been delivered to the Parent
certificates, dated as of the Closing Date, of the President and
Secretary, respectively, of the Company as set forth as EXHIBIT
9.3(D), (i) to the effect that the Articles of Incorporation of the
Company have not been amended since the date of this Agreement,
(ii) attaching a true and complete copy of the Bylaws of the
Company as in effect on the Closing Date, (iii) attaching a true
and complete copy of the resolutions of the Board of Directors of
the Company approving the execution and delivery of this Agreement
and authorizing the consummation of the transactions contemplated
hereby; and (iv) to the effect that each of the provisions of
Section 9.3(a) are true and correct as of the Closing Date.
(e) There shall have been delivered to the Parent a
certificate, dated within five days of the Closing Date, of the
Secretary of State of the State of California, with respect to the
incorporation, existence, and good legal standing of the Company
and its subsidiary.
(f) There shall have been delivered to the Parent a
certificate, dated as of the Closing Date, with respect to the
incumbency and signatures of all officers of the Company signing
this Agreement and any other certificate, agreement or instrument
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delivered on behalf of the Company in connection with this
Agreement.
(g) The Company shall have delivered to the Parent an
opinion of its counsel in the form attached hereto as EXHIBIT
"9.3(G)".
(h) The Company's shareholders shall have unanimously
approved the Merger.
(i) The Parent's Shareholders shall have approved the
Merger in accordance with Section 5.2(b).
ARTICLE X
TERMINATION
10.1 TERMINATION BY MUTUAL CONSENT. This Agreement may
be terminated and the Merger may be abandoned at any time prior
to the Effective Time, by the mutual consent of the Parent and
the Company.
10.2 TERMINATION BY EITHER PARTY. This Agreement may
be terminated by either party under any of the following
conditions:
(a) the Closing has not occurred by August 31, 1999;
provided that the right to terminate this Agreement pursuant to
this clause shall not be available to any party whose breach of
any provision of this Agreement results in the failure of the
Merger to be consummated by such time;
(b) there shall be any law or regulation that makes
consummation of the Merger illegal or otherwise prohibited or if
any judgment, injunction, order or decree enjoining any party
from consummating the Merger is entered and such judgment,
injunction, order or decree shall have become final and non-
appealable; provided, that the party seeking to terminate this
Agreement pursuant to this clause shall have used its best
efforts to remove such injunction, order or decree.
10.3 EFFECT OF TERMINATION AND ABANDONMENT. In the
event of termination of this Agreement and the abandonment of the
Merger pursuant to this Article XI, all obligations of the
parties hereto shall terminate, except the obligations of the
parties pursuant to this Section 10.2 and Section 6.12 and except
for the provisions of Sections 11.2, 11.3, 11.5, 11.6, 11.7,
11.11, 11.12, and 11.13 and pursuant to any confidentiality
agreement signed by the parties hereto.
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10.4 EXTENSION; WAIVER. At any time prior to the
Effective Time, any party hereto, by action taken by its Board of
Directors, may, to the extent legally allowed, (a) extend the
time for the performance of any of the obligations or other acts
of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties made to such party contained
herein or in any document delivered pursuant hereto, or (c) waive
compliance with any of the agreements or conditions for the
benefit of such party contained herein. Any agreement on the part
of a party hereto to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of
such party.
ARTICLE XI
GENERAL PROVISIONS
11.1 NOTICES. Any notice required to be given hereunder
shall be sufficient if in writing, and sent by facsimile
transmission and by same day or overnight courier service (with
proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid),
addressed as follows:
If to the Parent or the
Merger Sub: Adrenalin Entertainment, Inc.
5301 Beethoven Street
Los Angeles, California 90066
Attn: Jay Smith, III, President
Facsimile: (310) 821-4251
Telephone: (310) 306-7788
With a copy to: Clark & Trevithick
800 Wilshire Boulevard
12th Floor
Los Angeles, California 90017
Attn: Alexander McGilvray, Esq.
Telephone: (213) 629-5700
Facsimile: (213) 624-9441
With a copy to: Sheppard, Mullin, Richter & Hampton,
LLP
333 S. Hope Street, 48th Floor
Los Angeles, CA 90071
Attn: Jon Newby, Esq.
Telephone: (213) 620-1780
Facsimile: (213) 617-5508
If to the Company or the
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Principal: McGlen Micro Inc.
Shareholders: 3002 Dow Avenue, Suite 212
Tustin, CA 92780
Attn: George Lee, President
Facsimile: (714) 918-1951
Telephone: (949) 851-8078
With copies to: Boyd & Chang, LLP
19900 MacArthur Boulevard
Suite 660
Irvine, California 92612
Attn: Patrick R. Boyd
Facsimile: (949) 851-0159
Telephone: (949) 851-9800
or such other address or fax number as any party may specify by
written notice so given, and such notice shall be deemed to have
been delivered as of the date so telecommunicated, personally
delivered, or delivered by courier or 5 days after mailing thereof
if received prior to 5:00 p.m. in the place of receipt and such day
is a business day in the place of receipt. Otherwise, any such
notice, request or communication shall be deemed not to have been
received until the next succeeding business day in the place of
receipt.
11.2 ASSIGNMENT, BINDING EFFECT. Neither this Agreement
nor any of the rights, interests, or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law
or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement shall
be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Nothing in
this Agreement, expressed or implied, is intended to confer on any
person other than the parties hereto or certain stockholders of the
Company (as to Article X of this Agreement) and other named
beneficiaries of covenants or agreements in the Agreement, or their
respective heirs, successors, executors, administrators, and
assigns any rights, remedies, obligations, or liabilities under or
by reason of this Agreement.
11.3 ENTIRE AGREEMENT. This Agreement, the Exhibits, the
Parent Disclosure Schedule, the confidentiality agreements between
the parties hereto and any schedules or agreements delivered in
connection with this Agreement constitute the entire agreement
among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings among the parties
with respect thereto. No information previously provided, addition
to or modification of any provision of this Agreement shall be
binding upon any party hereto unless made in writing and signed by
all parties hereto.
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11.4 AMENDMENT. This Agreement may be amended by the
parties hereto, by action taken by their respective Boards of
Directors, at any time before or after approval of matters
presented in connection with the Merger by the stockholders of the
Company, the Parent and Merger Sub, but after any such stockholder
approval, no amendment shall be made which by law requires the
further approval of stockholders without obtaining such further
approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties
hereto.
11.5 SUBSEQUENT ACTIONS. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that
any deeds, bills of sale, assignments, assurances or any other
actions or things are necessary or desirable to continue in, vest,
perfect or confirm of record or otherwise in the Surviving
Corporation's right, title or interest, in, to or under any of the
rights, properties, privileges, franchises or assets of either of
its constituent corporations acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the
Merger, or otherwise to carry out the intent of this Agreement, the
officers and directors of the Surviving Corporation shall be
authorized to execute and deliver, in the name and on behalf of
either of the constituent corporations of the Merger, all such
deeds, bills of sale, assignments and assurances and to take and
do, in the name and on behalf of each of such corporations or
otherwise, all such other actions and things as may be necessary or
desirable to vest, perfect or confirm any and all right, title and
interest in, to and under such rights, properties, privileges,
franchises or assets in the Surviving Corporation or otherwise
carry out the intent of this Agreement.
11.6 GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of
California without regard to its rules of conflict of laws.
11.7 COUNTERPARTS. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so
executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same instrument.
Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties
hereto. Executed counterparts transmitted by fax shall be
effective as originals.
11.8 HEADINGS. Headings of the Articles and Sections of
this Agreement are for the convenience of the parties only, and
shall be given no substantive or interpretive effect whatsoever.
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11.9 INTERPRETATION. In this Agreement, unless the
context otherwise requires, words describing the singular number
shall include the plural and vice versa, and words denoting any
gender shall include all genders and words denoting natural persons
shall include corporations and partnerships and vice versa.
11.10 WAIVERS. Except as provided in this Agreement, no
action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any party, shall
be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or
be construed as a waiver of any prior or subsequent breach of the
same or any other provision hereunder.
11.11 ATTORNEYS' FEES. If any arbitration, litigation,
action, suit or other proceeding is instituted to remedy, prevent
or obtain relief from a breach of this Agreement, in relation to a
breach of this Agreement or pertaining to a declaration of rights
under this Agreement, the prevailing party will recover all such
party's attorneys' fees incurred in each and every such action,
suit or other proceeding, including any and all appeals or
petitions therefrom. As used in this Agreement, attorneys' fees
will be deemed to be the full and actual cost of any legal services
actually performed in connection with the matters involved,
including those related to any appeal or the enforcement of any
judgment, calculated on the basis of the usual fee charged by
attorneys performing such services, and will not be limited to
"reasonable attorneys' fees" as defined in any statute or rule of
court.
11.12 SURVIVAL. All representations and warranties of any
party contained in this Agreement shall survive the execution and
delivery of this Agreement and the Closing until 18 months after
the Closing.
11.13 INCORPORATION OF EXHIBITS. The Schedules and all
Exhibits and schedules attached
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hereto and referred to herein are hereby incorporated herein and
made a part hereof for all purposes as if fully set forth herein.
11.14 SEVERABILITY. Any term or provision of this
Agreement which is invalid or unenforceable in any jurisdiction
shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement
or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction unless the
same is material to the terms of this Agreement, in the judgment of
either party to this Agreement, in which case the parties shall
negotiate in good faith to revise the same so as to be valid or
enforceable. If any provision of this Agreement is so broad as to
be unenforceable, the provision shall be interpreted to be only so
broad as is enforceable.
11.15 ENFORCEMENT OF AGREEMENT. The parties hereto agree
that irreparable damage would occur in the event that any of the
provisions of this Agreement was not performed in accordance with
its specific terms or was otherwise breached. It is accordingly
agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof, this being in
addition to any other remedy to which they are entitled at law or
in equity.
11.16 CONSENT. Whenever the consent or approval of a
party is required by the terms of this Agreement, unless otherwise
provided, the same shall not be unreasonably withheld or delayed.
"PARENT"
ADRENALIN INTERACTIVE, INC., a
California corporation
By: /s/ Jay Smith, III
---------------------------------
Jay Smith, III, President and
Chairman
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<PAGE>
"MERGER SUB"
ADRENALIN ACQUISITION
CORPORATION, a California
corporation
By: /s/ Jay Smith, III
---------------------------------
Jay Smith, III, President
By: /s/ Jay Smith, III
---------------------------------
Jay Smith, III, Secretary
"THE COMPANY"
MCGLEN MICRO INC., a California
corporation
By: /s/ George Lee
---------------------------------
George Lee, President
By: /s/ Mike Chen
---------------------------------
Mike Chen, Secretary
"THE PRINCIPAL SHAREHOLDERS"
/s/ George Lee
- ---------------------------------
GEORGE LEE, an individual
/s/ Mike Chen
- ---------------------------------
MIKE CHEN, an individual
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<PAGE>
ACST COMPUTERS, INC., a California
corporation
By: /s/ Alex Chen
-------------------------------
Alex Chen, President and
Chairman
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<PAGE>
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This First Amendment dated July 23, 1999 ("First Amendment") to that
certain Agreement and Plan of Merger ("Merger Agreement") dated as of April 28,
1999, entered into by and among Adrenalin Interactive, Inc., a Delaware
corporation (the "Parent"), Adrenalin Acquisition Corporation, a California
corporation and a wholly owned subsidiary of the Parent ("Merger Sub"), McGlen
Micro, Inc., a California corporation (the "Company"), George Lee, Mike Chen,
and ACST Computers, Inc., a California corporation (collectively, the "Principal
Shareholders") (the Parent, the Merger Sub, the Company and the Principal
Shareholders, collectively, the "Parties") with reference to the following
facts:
A. Pursuant to Section 11.4 of the Merger Agreement, the Parties
desire to amend the Merger Agreement to extend the termination date of thereof.
NOW, THEREFORE, IN CONSIDERATION OF the mutual promises set forth
herein and other good and valuable consideration, the receipt and adequacy of
which is hereby acknowledged, the parties agree as follows:
1. Amendment of the Merger Agreement/Extension of Time. The date set forth
in Section 10.2(a) of the Merger Agreement is hereby changed to October 31,
1999.
2. Ratification. Except as amended pursuant to this First Amendment, the
Merger Agreement is hereby ratified and confirmed and shall remain in full force
and effect in accordance with its terms.
3. Counterparts. This First Amendment may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
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IN WITNESS WHEREOF, the Parties have caused this First Amendment to
be executed as of the date first written above.
"PARENT" "THE PRINCIPAL SHAREHOLDERS"
ADRENALIN INTERACTIVE, INC.,
a California corporation /s/ George Lee
------------------------------------
By /s/ Jay Smith George Lee, an individual
----------------------------
Jay Smith, III, /s/ Mike Chen
President and Chairman ------------------------------------
Mike Chen, an individual
"MERGER SUB"
ACST COMPUTERS, INC.,
ADRENALIN ACQUISITION CORPORATION, a California corporation
a California corporation
By /s/ Alex Chen
By /s/ Jay Smith ---------------------------------
----------------------------- Alex Chen, President and Chairman
Jay Smith, III, President
By /s/ Jay Smith
-----------------------------
Jay Smith, III, Secretary
"THE COMPANY"
ADRENALIN ACQUISITION CORPORATION,
a California corporation
By /s/ George Lee
_____________________________
George Lee, President
By /s/ Mike Chen
_____________________________
Mike Chen, Secretary
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<PAGE>
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Second Amendment dated October 4, 1999 ("Second Amendment")
hereby amends that certain Agreement and Plan of Merger, dated as of April 28,
1999, as amended by that certain First Amendment to Agreement and Plan of
Merger, dated as of July 23, 1999 (collectively, the "Merger Agreement"),
entered into by and among Adrenalin Interactive, Inc., a Delaware corporation
(the "Parent"), Adrenalin Acquisition Corporation, a California corporation and
a wholly owned subsidiary of the Parent ("Merger Sub"), McGlen Micro, Inc., a
California corporation (the "Company"), George Lee, Mike Chen, and ACST
Computers, Inc., a California corporation (collectively, the "Principal
Shareholders") (the Parent, the Merger Sub, the Company and the Principal
Shareholders, collectively, the "Parties"), with reference to the following
facts:
A. Pursuant to Section 11.4 of the Merger Agreement, the Parties
desire to amend the Merger Agreement to extend the termination date thereof.
NOW, THEREFORE, IN CONSIDERATION OF the mutual promises set forth
herein and other good and valuable consideration, the receipt and adequacy of
which is hereby acknowledged, the Parties agree as follows:
1. Amendment of the Merger Agreement/Extension of Time. The date set forth
in Section 10.2(a) of the Merger Agreement is hereby changed to November 30,
1999.
2. Ratification. Except as amended pursuant to this Second Amendment, the
Merger Agreement is hereby ratified and confirmed and shall remain in full force
and effect in accordance with its terms.
3. Counterparts. This Second Amendment may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
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<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Second Amendment to
be executed as of the date first written above.
"PARENT" "THE PRINCIPAL SHAREHOLDERS"
ADRENALIN INTERACTIVE, INC., /s/ George Lee
a Delaware corporation --------------------------------
George Lee, President
By /s/ Jay Smith
_____________________________
Jay Smith, III, President and /s/ Mike Chen
Chairman --------------------------------
Mike Chen, Secretary
"MERGER SUB" ACST COMPUTERS, INC.,
a California corporation
ADRENALIN ACQUISITION
CORPORATION,
a California corporation By /s/ Alex Chen
_____________________________
Alex Chen, President and Chairman
By /s/ Jay Smith
_____________________________
Jay Smith, III, President and
Secretary
"THE COMPANY"
MCGLEN MICRO INC.,
a California corporation
By /s/ George Lee
_____________________________
George Lee, President
By /s/ Mike Chen
_____________________________
Mike Chen, Secretary
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<PAGE>
APPENDIX C
----------
SEE ATTACHED
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<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ADRENALIN INTERACTIVE, INC.
ADRENALIN INTERACTIVE, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
FIRST: The amendment to this corporation's Certificate of Incorporation
set forth below was proposed and declared advisable by a unanimous written
consent of the members of the board of directors of this corporation in a
resolution adopted pursuant to Section 141(f) of the General Corporation
Law of the State of Delaware, and duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware:
RESOLVED, that the Certificate of Incorporation of this corporation
is amended by changing the Article thereof numbered subsection (a) of
Article "FOURTH" so that, as amended, said Article shall be and read
as follows:
"(a) The maximum number of shares which the corporation shall
have the authority to issue is Fifty-Five Million, (55,000,000) of
which Fifty Million (50,000,000) shares shall be Common Stock having
a par value of $.03 per share (Common Stock) and Five Million
(5,000,000) shares shall be Preferred Stock, having a par value of
$0.01 per share (Series Preferred Stock)."
SECOND: That said amendment was duly adopted by a written consent of not
less than a majority of the stockholders of this corporation pursuant to
Section 228(a) of the General Corporation Law of the State of Delaware
IN WITNESS WHEREOF, this corporation has caused this certificate to be
signed by the undersigned officer as of the _____ day of ________, 1999
By:__________________________
Name:
Title:
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APPENDIX D
----------
SEE ATTACHED
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<PAGE>
ANNEX D
-------
Adrenalin Interactive, Inc.
---------------------------
1999 Long-Term Stock Incentive Plan
-----------------------------------
1. The Plan
(a) Purpose. The purpose of this 1999 Long-Term Stock Incentive Plan
(the "Plan") is to promote the long-term financial success of Adrenalin
Interactive, Inc. (the "Company") by providing a means to attract, retain and
award individuals who can and do contribute to such success. By using
stock-based compensation, the recipients of awards under the Plan will have
incentives to devote their maximum effort and skills to the advancement,
betterment and prosperity of the Company and its Stockholders.
(b) Effective Date. To serve this purpose, the Plan will become
effective upon its approval by the affirmative vote of a majority of the shares
present or represented by proxy at the Company's 1999 Annual Meeting of
Stockholders. No award may be granted pursuant to the Plan subsequent to the
tenth anniversary of its effective date.
2. Administration
(a) Committee. The Plan shall be administered by a Committee,
appointed by the Board of Directors of the Company, which shall consist of no
less than two of its members, all of whom shall not be current or former
employees of the Company (the "Committee"); provided, however, that the Board of
Directors of the Company may assume, at its sole discretion, administration of
the Plan.
(b) Powers and Authority. The Committee's powers and authority
include, but are not limited to, selecting individuals who are employees of or
consultants to the Company and any subsidiary of the Company or other entity in
which the Company has a significant equity or other interest as determined by
the Committee; determining the types and terms and conditions of all awards
granted, including performance and other earnout and/or vesting contingencies;
permitting transferability of awards to third parties; interpreting the Plan's
provisions; and administering the Plan in a manner that is consistent with its
purpose. The Committee may delegate the grant of awards to persons who are not
officers or directors to the Chief Executive Officer on such terms as it may
determine.
(c) Award Prices. For Plan purposes, all stock options and stock
appreciation rights shall have an exercise price which shall reflect 100% of the
fair market value of a share of the common stock of the Company, par value
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[$0.03] ("Share") on the applicable date as determined by the Committee. The
applicable date shall be the date on which the award is granted, except that the
Committee may provide that the applicable date may be: (i) the day on which an
award recipient was hired, promoted or such similar singular event occurred,
provided that the grant of such award occurs within 90 days following such
applicable date; or (ii) in the case of a stock option or stock appreciation
right granted retroactively in tandem with or as a substitution for another
previously granted stock option or stock appreciation right, the applicable date
for such prior award.
3. Shares Subject to the Plan
(a) Maximum Shares Available for Delivery. Subject to Section 3(d),
the maximum number of Shares that may be delivered to participants and their
beneficiaries under the Plan shall be equal to the sum of ______________. In
addition, any Shares granted under the Plan which are forfeited back to the
Company because of the failure to meet an award contingency or condition shall
again be available for delivery pursuant to new awards granted under the Plan.
Any Shares covered by an award (or portion of an award) granted under the Plan,
which is forfeited or canceled, expires or is settled in cash, shall be deemed
not to have been delivered for purposes of determining the maximum number of
Shares available for delivery under the Plan. Likewise, if any stock option is
exercised by tendering Shares, either actually or by attestation, to the Company
as full or partial payment in connection with the exercise of a stock option
under this Plan or any prior plan of the Company, only the number of Shares
issued net of the Shares tendered shall be deemed delivered for purposes of
determining the maximum number of Shares available for delivery under the Plan.
Further, Shares issued under the Plan through the settlement, assumption or
substitution of outstanding awards or obligations to grant future awards as a
result of acquiring another entity shall not reduce the maximum number of Shares
available for delivery under the Plan.
(b) Other Plan Limits. Subject to Section 3(d), the following
additional maximums are imposed under the Plan. The maximum number of Shares
that may be delivered through stock options intended to comply with Section 422
of the Internal Revenue Code ("incentive stock options") shall be equal to the
maximum number of shares available for delivery pursuant to the Plan. The
maximum number of Shares that may be issued in conjunction with awards granted
pursuant to Section 4(d) shall be ________. The maximum number of shares that
may be covered by awards granted to any one individual pursuant to Sections 4(b)
and 4(c) shall be _______ during any consecutive three calendar years. The
maximum payment that can be made for awards granted to any one individual
pursuant to Sections 4(d) and 4(e) shall be [$5,000,000] for any single or
combined performance goals established for a specified performance period. If a
payment under Sections 4(d) or 4(e) is made in Shares, the value of such Shares
for determining this maximum individual payment amount will be the closing price
of a Share on the first day of the applicable performance period. A specified
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performance period for purposes of this performance goal payment limit shall not
exceed a sixty (60) consecutive month period.
(c) Payment Shares. Subject to the overall limitation on the number
of Shares that may be delivered under the Plan, the Committee may use available
Shares as the form of payment for compensation, grants or rights earned or due
under any other compensation plans or arrangements of the Company, including the
plan of any entity acquired by the Company.
(d) Adjustments for Corporate Transactions. The Committee may
determine that a corporate transaction has affected the price per Share such
that an adjustment or adjustments to outstanding awards are required to preserve
(or prevent enlargement of) the benefits or potential benefits intended at time
of grant. For this purpose a corporate transaction will include, but is not
limited to, any stock dividend, stock split, extraordinary cash dividend,
recapitalization, reorganization, merger, consolidation, split-up, spin-off,
combination or exchange of shares, or other similar occurrence. In the event of
such a corporate transaction, the Committee may, in such manner as the Committee
deems equitable, adjust (i) the number and kind of shares which may be delivered
under the Plan pursuant to Sections 3(a) and 3(b); (ii) the number and kind of
shares subject to outstanding awards; and (iii) the exercise price of
outstanding stock options and stock appreciation rights; as well as make any
other adjustments that the Committee determines as equitable.
(e) Duration of Options. The Company shall fix the term or duration
of Options, provided that such term shall not exceed ten (10) years from the
date the Option is granted, and that such term shall be subject to the
provisions of I.R.C.422, if applicable.
4. Types of Awards
(a) General. An award may be granted singularly, in combination with
another award(s) or in tandem whereby exercise or vesting of one award held by a
participant cancels another award held by the participant. Subject to Section
2(c), an award may be granted as an alternative to or replacement of an existing
award under the Plan or under any other compensation plans or arrangements of
the Company, including the plan of any entity acquired by the Company. The types
of awards that may be granted under the Plan include:
(b) Stock Option. A stock option represents a right to purchase a
specified number of Shares during a specified period at a price per Share which
is no less than that required by Section 2(c). A stock option may be in the form
of an incentive stock option or in a form which does not qualify for favorable
federal tax treatment. The Shares covered by a stock option may be purchased by
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means of a cash payment or such other means as the Committee may from
time-to-time permit, including (i) tendering (either actually or by attestation)
Shares valued using the market price at the time of exercise, (ii) authorizing a
third party to sell Shares (or a sufficient portion thereof) acquired upon
exercise of a stock option and to remit to the Company a sufficient portion of
the sale proceeds to pay for all the Shares acquired through such exercise and
any tax withholding obligations resulting from such exercise; (iii) crediting
towards the purchase price amounts from individuals' deferred compensation
account balances, including accrued dividend equivalent balances; or (iv) any
combination of the above.
(c) Stock Appreciation Right. A stock appreciation right is a right
to receive a payment in cash, Shares or a combination, equal to the excess of
the aggregate market price at time of exercise of a specified number of Shares
over the aggregate exercise price of the stock appreciation rights being
exercised.
(d) Stock Award. A stock award is a grant of Shares or of a right to
receive Shares (or their cash equivalent or a combination of both) in the
future. Each stock award shall be subject to such conditions, restrictions and
contingencies as the Committee shall determine at the time of the grant. These
may include continuous service and/or the achievement of performance goals. The
performance goals that may be used by the Committee for such awards shall
consist of cash generation targets, profit, revenue and market share targets,
profitability targets as measured by return ratios, and stockholder returns. The
Committee may designate a single goal criterion or multiple goal criteria for
performance measurement purposes with the measurement based on absolute Company
or business unit performance and/or on performance as compared with that of
other publicly-traded companies.
(e) Cash Award. A cash award is a right denominated in cash or cash
units to receive a payment, which may be in the form of cash, Shares or a
combination, based on the attainment of pre-established performance goals and
such other conditions, restrictions and contingencies as the Committee shall
determine. The performance goals that may be used by the Committee for such
awards shall consist of cash generation targets, profits, revenue and market
share targets, profitability targets as measured by return ratios and
stockholder returns. The Committee may designate a single goal criterion or
multiple goal criteria for performance measurement purposes with the measurement
based on total Company or business unit performance and/or on performance as
compared with that of other publicly-traded companies.
5. Award Settlements and Payments
(a) Dividends and Dividend Equivalents. An award may contain the
right to receive dividends or dividend equivalent payments which may be paid
either currently or credited to a participant's account. Any such crediting of
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dividends or dividend equivalents or reinvestment in Shares may be subject to
such conditions, restrictions and contingencies as the Committee shall
establish, including the reinvestment of such credited amounts in Share
equivalents.
(b) Payments. Awards may be settled through cash payments, the
delivery of Shares, the granting of awards or combination thereof as the
Committee shall determine. Any award settlement, including payment deferrals,
may be subject to such conditions, restrictions and contingencies as the
Committee shall determine. The Committee may permit or require the deferral of
any award payment, subject to such rules and procedures as it may establish,
which may include provisions for the payment or crediting of interest, or
dividend equivalents, including converting such credits into deferred Share
equivalents.
6. Plan Amendment and Termination
(a) Amendments. The Company's Board of Directors may amend this Plan
as it deems necessary and appropriate to better achieve the Plan's purpose
provided, however, that (i) the Share limitations set forth in Sections 3(a) and
3(b) cannot be increased and (ii) the minimum stock option and stock
appreciation right exercise prices set forth in Section 2(c) cannot be changed,
unless such a plan amendment is properly approved by the Company's stockholder
in compliance with the requirements of any rules promulgated under Section 16 of
the Securities Exchange Act of 1934 or such other Federal or State laws or
regulations as may be applicable.
(b) Plan Suspensions and Termination. The Board of Directors of the
Company may suspend or terminate this Plan at any time. Any such suspension or
termination shall not of itself impair any outstanding award granted under the
Plan or the applicable participant's rights regarding such award.
7. Miscellaneous
(a) No Individual Rights. No person shall have any claim or right to
be granted an award under the Plan. Neither the Plan nor any action taken
hereunder shall be construed as giving any employee or other person any right to
continue to be employed by or to perform services for the Company, any
subsidiary or related entity. The right to terminate the employment of or
performance of services by any Plan participant at any time and for any reason
is specifically reserved to the employing entity. No person shall have any right
of a shareholder by virtue of an option, SAR, or stock award, except with
respect to stock actually issued to him, and the issuance of shares of common
stock shall confer no retroactive right to dividends.
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(b) Binding Arbitration. Any dispute or disagreement regarding
participation and/or an award recipient's rights under the Plan shall be settled
solely by binding arbitration in accordance with the applicable rules of the
American Arbitration Association. The Plan, its validity, interpretation, and
administration, and the rights and obligations of all persons having an interest
therein, shall be governed by and construed in accordance with the laws of the
State of Delaware, except to the extent that such laws may be preempted by
Federal law.
(c) Unfunded Plan. The Plan shall be unfunded and shall not create
(or be construed to create) a trust or a separate fund or funds. The Plan shall
not establish any fiduciary relationship between the Company and any participant
or beneficiary of a participant. To the extent any person holds any obligation
of the Company by virtue of an award granted under the Plan, such obligation
shall merely constitute a general unsecured liability of the Company and
accordingly shall not confer upon such person any right, title or interest in
any assets of the Company.
(d) Other Benefit and Compensation Programs. Unless otherwise
specifically determined by the Committee, settlements of awards received by
participants under the Plan shall not be deemed a part of a participant's
regular, recurring compensation for purposes of calculating payments or benefits
from any Company benefit plan or severance program. Further, the Company may
adopt other compensation programs, plans or arrangements as it deems
appropriate.
(e) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any award, and the Committee shall determine
whether cash shall be paid or transferred in lieu of any fractional Shares, or
whether such fractional Shares or any rights thereto shall be canceled.
(f) Limit on Distribution. Notwithstanding any other provision of
the Plan, the Company shall have no liability to deliver any Shares under the
Plan or make any other distribution of benefits under the Plan unless such
delivery or distribution would comply with all applicable laws (including,
without limitation, the requirements of the Securities Act of 1933), and the
applicable requirements of any securities exchange or similar entity.
(g) Tax Withholding. Whenever the Company proposes or is required to
distribute Shares under the Plan, the Company may require the recipient to remit
to the Company an amount sufficient to satisfy any Federal, state and local tax
withholding requirements prior to the delivery of any certificate for such
Shares or, in the discretion of the Committee, the Company may withhold from the
Shares to be delivered Shares sufficient to satisfy all or a portion of such tax
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withholding requirements. Whenever under the Plan payments are to be made in
cash, such payments may be net of an amount sufficient to satisfy any Federal,
state and local tax withholding requirements.
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APPENDIX E
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SEE ATTACHED
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================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
================================================================================
FORM 10-KSB
-----------------------
[X] Annual Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1999
[ ] Transition Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File No.: 0-27878
--------------------------------------
ADRENALIN INTERACTIVE, INC.
(Name of small business issuer in its charter)
Delaware 13-3779546
(State or other jurisdiction (IRS Employer
of incorporation or organization Identification No.)
5301 Beethoven Street, Suite 255, Los Angeles, CA 90066
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (310) 821-7880
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.03 per share,
(Title of each class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No ____
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ].
The issuer's revenues for its fiscal year ended June 30, 1999 were
$2,880,936.
The aggregate market value of shares of Common Stock held by
non-affiliates of the registrant as reported by the Nasdaq SmallCap Market on
September 20, 1999 was $11,259,210 (computed on the basis of $3.50 per share,
the last reported sale price for shares of the Company's Common Stock on the
Nasdaq SmallCap Market as of such date).
As of September 20, 1999, the registrant had outstanding 3,539,343 shares
of Common Stock.
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PART I
Item 1. Description of Business.
General
We were incorporated in Delaware in May 1994. In March 1995, we changed
our name to Wanderlust Interactive, Inc. In May 1998, we again changed our name
to Adrenalin Interactive, Inc. On December 29, 1998, we effected a 1-for-3 share
reverse stock split in our common stock.
As used herein, "Adrenalin", "we", "us" and "our" refer to Adrenalin
Interactive, Inc. and our subsidiaries including Western Technologies, Inc.
("Western"), unless the context requires otherwise. Similarly, the term "McGlen"
refers to McGlen Micro, Inc. and its subsidiaries, unless the context requires
otherwise. As discussed herein, we intend to merge with McGlen. We have supplied
all information contained in this report relating to us and McGlen has supplied
all information contained in this report relating to it.
Our Business
We principally develop video games for use with Sony, Nintendo and Sega
video game consoles pursuant to funded contracts with video game developers,
entertainment titles for PCs and electronic toys including interactive,
Web-powered toys which are refreshed from a PC via the Internet. We also create
interactive television games for digital set-top boxes and publish or license PC
games in 24 countries and 15 languages.
McGlen's Business
McGlen was formed in May 1996 to sell computer products over the
Internet. McGlen considers itself a global Internet retailer of computer
hardware and peripheral products servicing individuals, small offices/home
offices and the corporate market. McGlen offers approximately 40,000
stockkeeping units (SKUs) at its virtual superstore, www.mcglen.com. McGlen
recently purchased a competitor, AMT Component, Inc., and now also operates
AccessMicro.com, which sells similar products at typically lower price points.
The McGlen.com superstore has been in operation for more than three years and
has approximately 120,000 current customers. McGlen has a marketing and
promotion program in place that includes Web advertising, hyperlink allegiances,
portal alliances, and direct one-to-one marketing. For website development,
McGlen plans to enhance its virtual superstore to provide a community-like
experience while shopping online. The objectives behind the website enhancement
are to increase customer interaction and to offer a more comprehensive array of
value-added services.
Our Material Developments During Fiscal 1997 and 1998
We completed an initial public offering of our Common Stock in March
1996. We used the net proceeds of our initial public offering principally to
establish our New York headquarters and to produce two CD-ROM games based upon
the Pink Panther(TM) character. We completed such two CD-ROM games in September
1996 and September 1997. We initially marketed such games through distributors
in the United States and we now license such games for distribution by others
both in the United States and in numerous foreign countries.
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In February 1997, we acquired all of the outstanding stock of Western as
well as certain assets and liabilities of Smith Engineering, a sole
proprietorship, from Jay Smith III, our current President, Chief Executive
Officer and Treasurer. Western designs and develops video and computer games and
electronic toys and electronic consumer products, mostly pursuant to funded
contracts with other name-brand manufacturers.
After expending most of the funds raised in our initial public offering
to produce the two Pink Panther(TM) CD-ROM games, we realized that the
development costs of such CD-ROM games greatly exceeded both the short-term and
long-term anticipated revenue streams from such products and shifted our focus
to pre-funded or contract design and development work, such as that historically
conducted by Western. In September 1997, we substantially downsized our New York
office and shifted our headquarters to Western's offices located in Los Angeles.
In April 1998, we closed our New York office permanently, terminated our New
York office lease, subleased almost 50% of our Los Angeles office and production
space and consolidated our entire staff in our remaining Los Angeles office and
production space.
Our Material Developments During Fiscal 1999
Our Business and Results of Operations
We continued to concentrate on funded game and toy development projects
in fiscal 1999. We completed the programming and development of Brunswick
Bowling on both the PC and Sony PlayStation for THQ. We also completed Tiger
Woods Golf on the Sony PlayStation for Electronic Arts. Electronic Arts has sold
well over 500,000 units of Tiger Woods Golf which has earned us an additional
$300,000 in gross royalties. We will earn another $200,000 in gross royalties if
more than 1,000,000 units of Tiger Woods Golf are sold.
During fiscal 1999, we continued to reduce our operating losses. Before
our one-time, non-recurring write-off of goodwill in fiscal 1999 of $1,579,132,
we realized operating losses of $1,166,602 during fiscal 1999. Our fiscal 1999
operating losses were approximately 49% less than our operating losses of
$2,307,831 in fiscal 1998 and approximately 74% less than our operating losses
of $4,486,396 in fiscal 1997. At the end of fiscal 1999, we determined to write
off all of our goodwill recognized as a result of our prior acquisition of all
of the outstanding capital stock of Western as well as certain assets and
liabilities of Smith Engineering in February 1997. This write-off brought our
total losses in fiscal 1999 up to $2,745,734.
During fiscal 1999, we have started several new projects, summarized as
follows:
o Flintstones Bowling - We began development on a new game for SouthPeak
Interactive called Flintstones Bowling. It uses a license from Warner Bros. for
the Flintstones characters in which the characters ride in a large bowling ball
through unique canyon-like environments to knock down pins and collect objects.
o Internet Toys - We have developed and licensed the technology for an
action figure for Steve Austin, a primary character of the World Wrestling
Federation. The toy was developed for JAKKS Pacific and is part of our joint
venture with MagiTech.
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o WCW Game Boy - We have started developing products for Nintendo's
Color Game Boy, a very popular handheld game machine. This first game uses World
Championship Wrestling characters in various fighting arenas. This is the first
in what we believe will be a series of projects for the Color Game Boy.
o Brunswick Bowling - We are developing the next generation of Brunswick
Bowling for the Sony PlayStation. Completion is expected early in fiscal 2000
and this game represents a substantial improvement and upgrade over the previous
PlayStation game.
o Video Football - We recently completed negotiations for a multi-year
contract for video football games on the Sony PlayStation. This would include a
commitment to create a new game each year for the next three years for this
property and may include another football property as well.
During fiscal 1998, our Board of Directors concluded that, as part of
our long-term strategy for becoming profitable, we should enter into a business
combination with another entity. In October 1997, we engaged a business
consulting firm to assist us in, among other things, seeking a business
combination partner or partners. In the ensuing months, we actively reviewed
a variety of possible business combinations with a number of other companies as
well as other strategic alternatives. However, none of these opportunities came
to fruition.
Our Proposed Merger with McGlen
In February 1999, our business consulting firm identified McGlen as a
possible business combination candidate. After two months of discussions and
negotiations, we entered into a definitive agreement on April 28, 1999 with
McGlen and its principal shareholders, which provides for the merger of one of
our wholly-owned subsidiaries with and into McGlen. We publicly announced our
proposed merger with McGlen on April 30, 1999.
Upon completion of our merger with McGlen, McGlen's outstanding common
stock will be automatically converted into the right to receive the number of
shares of our Common Stock calculated such that McGlen's outstanding common
stock (calculated on a fully-diluted basis) plus 117,302 of the shares of our
Common Stock recently sold by us in our recent financing (as discussed below)
will equal, in the aggregate, 87.5% of our then outstanding shares of Common
Stock (calculated on a fully-diluted basis). For purposes of such calculations,
"fully-diluted basis" means all outstanding shares of common stock plus all
shares of common stock issuable upon the exercise or conversion of all options,
warrants, convertible securities or other rights to acquire common stock having
exercise or conversion prices which are less than the value of the common stock
into which such securities are exercisable or convertible, but specifically
excludes any shares issuable pursuant to an agreement between McGlen and Synnex
Information Technologies, Inc. to be assumed by us upon completion of our
proposed merger with McGlen.
Similarly, McGlen's outstanding options, warrants and other rights to
purchase shares of McGlen's common stock will be automatically converted into
options, warrants and similar rights to purchase whole shares of our Common
Stock, with appropriate adjustments in the number of shares purchasable and the
exercise prices based upon the above-referenced exchange ratio for conversion of
McGlen's common stock into shares of our Common Stock.
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Under our agreement with our business consulting firm, we will be
required to issue to such business consulting firm, upon completion of our
proposed merger with McGlen, shares equaling 5% of our Common Stock outstanding
(calculated on a fully-diluted basis as described above) immediately prior to
the merger.
Under McGlen's agreement with the same business consulting firm (which
will become our obligation upon the completion of our merger with McGlen), we
will be required to issue to such business consulting firm, upon completion of
our proposed merger with McGlen, shares equaling 4% of our post-merger Common
Stock outstanding (calculated on a fully diluted basis as described above). If
such business consulting firm assists McGlen in raising at least $2,500,000
prior to our merger with it, we will be required to issue to such business
consulting firm upon completion of our merger with McGlen, an additional 1.5% of
our post-merger Common Stock outstanding (calculated on a fully-diluted basis as
described above). Our merger agreement with McGlen provides, in turn, that the
shares to be issued to such business consulting firm will reduce, on a
share-for-share basis, the shares of our Common Stock to be issued to McGlen's
securityholders in our merger with it.
All shares of our Common Stock issued to McGlen's former shareholders in
our proposed merger with McGlen, as well as all of our shares issuable upon
exercise of McGlen's former options, warrants and other rights to purchase
shares of its Common Stock automatically converted into options, warrants and
similar rights to purchase shares of our Common Stock and all of our shares
issued to the business consulting firm which represents both us and McGlen as
discussed above, will be "restricted securities" as that term is defined in Rule
144 under the Securities Act of 1933, as amended (the "Securities Act"), and,
accordingly, such shares must be held indefinitely unless such shares are
subsequently registered under the Securities Act or an exemption from
registration is available.
Our completion of our proposed merger with McGlen is subject to a number
of conditions and, although we are confident that such merger will take place,
such conditions may not be met and such merger may not be consummated. These
conditions include, without limitation, the satisfactory completion of due
diligence investigations by both us and McGlen, the preparation and acceptance
of final disclosure statements by both us and McGlen, the approval of the merger
by the shareholders of both us and McGlen and regulatory approval by Nasdaq. In
this latter regard, Nasdaq has advised us that our consummation of our proposed
merger with McGlen will constitute a "reverse merger" within the meaning of Rule
4330 of Nasdaq's Marketplace Rules and that we will need to reapply for listing
on the Nasdaq SmallCap Market upon completion of our proposed merger. In order
for such application to be accepted, we will need to meet the initial listing
requirements set forth in Nasdaq's Marketplace Rules including a minimum bid
price for our Common Stock of at least $4.00 per share.
In July 1999, we retained Billich Associates to render an opinion as to
the fairness of our proposed merger with McGlen from a financial point of view
to our stockholders. Billich Associates has delivered its opinion to us that, in
its view, such proposed merger is fair to our shareholders from a financial
point of view.
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Our Recent Financing
As contemplated by our merger agreement with McGlen, we consummated a
financing pursuant to a purchase agreement entered into on July 12, 1999 with
Escalade Investors, LLC ("Escalade"). Under this purchase agreement, we sold
293,255 shares of our Common Stock to Escalade for gross proceeds of $1,250,000
($4.2625 per share, which was 110% of the closing price of our Common Stock on
July 9, 1999) and received an irrevocable commitment from Escalade to purchase
an additional $750,000 of our Common Stock upon the completion of our proposed
merger with McGlen. The $750,000 will be placed into escrow within three
business days after we deliver written notice to Escalade that the SEC has
approved the proxy statement soliciting the consent of our shareholders for our
proposed merger with McGlen. The $750,000 will be held in the escrow pending the
closing of our merger with McGlen. The price per share of our Common Stock to be
paid by Escalade for the $750,000 in escrow will be equal to 110% of the closing
price for our Common Stock on the trading day prior to such funding.
Escalade also received, at no additional cost, a three-year warrant to
purchase 29,325 additional shares of our Common Stock at an exercise price of
$4.843 per share (which was 125% of the closing price of our Common Stock on
July 9, 1999). Upon the funding of the $750,000, Escalade will also receive, at
no additional cost, an additional three-year warrant covering a number of shares
of our Common Stock equal to 10% of the number of shares of our Common Stock it
receives in consideration for such $750,000. Such additional warrant will have
an exercise price equal to 125% of the closing price for our Common Stock on the
trading day prior to such funding.
The warrants issued or issuable by us to Escalade may be exercised by
Escalade on a "cashless exercise" basis to the extent that the average market
value of the shares of our Common Stock issuable upon exercise of such warrants
for the five trading days prior to exercise exceeds the aggregate exercise price
for the shares as to which the warrants are being exercised.
If the average closing price for our Common Stock for the two 90-day
periods immediately subsequent to October 10, 1999 (subject to certain
adjustments) does not equal 115% and 118%, respectively, of the aggregate price
paid by Escalade for such Common Stock, Escalade has repricing rights under our
purchase agreement with it such that we will be required to issue additional
shares to Escalade for no additional consideration so that the value of the
purchased shares plus the additional shares equals 115% or 118%, as applicable,
of the aggregate purchase price paid by Escalade for such Common Stock.
The proceeds raised by us from such financing have been, and will be,
used to fund our immediate operational obligations, our payables, our expenses
arising from our proposed merger with McGlen (including legal and accounting
fees and other merger-related expenses) and our loan to McGlen described below.
Under our purchase agreement with Escalade, we agreed to register all
shares of our Common Stock issued or issuable to it, including shares of our
common stock issued upon exercise of the warrants described above, pursuant to a
registration statement which becomes effective by October 10, 1999. We also
agreed to use our best efforts to keep the registration statement effective
until July 12, 2001, until Escalade no longer holds or has the right to acquire
shares or until all of its shares may be sold pursuant to Rule 144 under the
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Securities Act, whichever comes first. We also agreed to bear all reasonable
expenses, other than underwriting discounts, selling commissions, selling
concessions and other expenses incurred by Escalade and other than legal fees in
excess of $4,500 incurred by Escalade, in connection with the registration and
sale of the shares of our Common Stock being offered by it. After such
registration statement becomes effective, Escalade may not sell more than
33-1/3% of the shares of our Common Stock it holds in any 30-day period.
Our purchase agreement with Escalade also provides that we may not offer
or sell shares of our Common Stock or securities convertible into shares of our
Common Stock without Escalade's prior written consent until the date which is
180 days after the latter of the effective date of the above-referenced
registration statement or the funding of the remaining $750,000 by Escalade.
Escalade's consent is not required in connection with securities sold pursuant
to the our proposed merger with McGlen, securities sold in an underwritten
public offering with gross proceeds of at least $10,000,000, securities sold for
an effective price per share of our Common Stock equal to or greater than the
weighted average of the price per share paid and to be paid by Escalade for
shares that are "restricted securities" throughout such 180-day period and under
certain other circumstances;
We are not obligated to issue additional shares of our Common Stock to
Escalade to the extent such issuance would violate Nasdaq's rules relating to
limitations on the amount of shares that can be issued without stockholder
approval. However, we are required to seek such approval and, if we do not
obtain it, we will be obligated to redeem, at a redemption price equal to 120%
of the price paid by Escalade, such number of shares of our Common Stock held by
Escalade such that we can issue the additional shares without violating the
limitations imposed by Nasdaq.
Our Loan to McGlen
On July 23, 1999, we loaned $500,000 to McGlen. The loan was made from a
portion of the proceeds of the financing with Escalade described above, as
required by the terms of our merger agreement with McGlen.
Under the terms of the note issued to us by McGlen evidencing such loan,
the loan has a term of 366 days (although McGlen may prepay the principal
without penalty or premium). The outstanding principal amount of the loan
accrues interest at an 8% annual rate. In the event of a default, the total
amount outstanding becomes immediately due and payable in full at our option.
McGlen may use the proceeds of the loan only for working capital or other
corporate purposes until the loan has been repaid in full. We and McGlen also
entered into a security agreement which provides us with a junior security
interest in McGlen's assets. McGlen's indebtedness to us evidenced by the note
is also subordinate in right of payment to the prior payment in full of the
principal amount of any currently existing secured obligation of McGlen or its
subsidiaries and any future vendor/supplier accounts which from time to time
require a security interest in McGlen's assets, and all related interest, fees,
expenses, refinancings thereof and other amounts payable with respect thereto.
Our Marketing and Sales
We rely primarily on Jay Smith III, our current President, Chief
Executive Officer and Treasurer, and Michael Cartabiano, our current Vice
President and Secretary, for sales and licensing of our products and proposed
products to brand-name manufacturers, distributors and licensees.
Page 7 of 48
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<PAGE>
We also rely on our contacts and relationships within the industry to
license our concepts and obtain development contracts. In addition, we are
constantly seeking new relationships and customers.
Our Product Development
The development of our products and product concepts is generally
performed in-house with our full-time employees plus occasional freelance
artists, animators, writers or programmers. We maintain a schedule and budgeting
system designed to control our development costs and to meet our deadlines.
Our product development capabilities include programming for a variety
of game systems including PCs, Sony PlayStations and Sega Saturn systems.
Artwork and graphics include two-dimensional animation for the Pink Panther(TM)
CD-ROM games developed by us and three-dimensional animation and graphics for
other games developed by us. Audio includes sound effects, music and voiceover
in a variety of formats. Producers direct the design and development of each of
the games and are involved in each step of such development.
We also license the manufacturing and distribution of certain of our
products to marketing firms, both domestic and international.
Our Competition
The markets for our products are characterized by intense competition.
We expect that companies which have developed similar products, as well as other
companies with the financial resources and expertise that would enable them to
attempt to develop competitive products, make it more difficult for us to get
contracts to develop such products. Many of our competitors such as Sega,
Nintendo and Sony are well-established, have much greater financial resources,
much greater public and industry recognition and much broader marketing
capabilities than us. They also have the ability to control the use of our
products on their proprietary systems. We believe the principal competitive
factors in our markets are product quality, reliability, features, functions,
creativeness, performance, price, financial stability, product reputation, ease
of use and quality of support. A number of companies offer competitive products
addressing our markets. We may not be able to compete successfully, or our
competitors or others may develop technologies or products that render our
products or product concepts obsolete or less marketable.
Our Intellectual Property Rights
We presently own approximately 40 patents in various areas ranging from
circuit boards to toys. Some of the patents are mechanical design patents, some
are software or article patents and some are for basic technology ranging from
hardware to optical. We also have an aggregate of five trademarks which are
registered or in the process of being registered.
We have historically treated, and intend to continue to treat, our
products and product concepts and software as proprietary and have relied, and
will continue to rely, primarily on a combination of trademark, copyright and
trade secret laws and employee and third-party nondisclosure agreements to
protect our intellectual property rights.
Page 8 of 48
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<PAGE>
Our Research and Development
With our shift in focus to pre-funded or contract design and development
work during fiscal 1998, we do not presently spend any material amounts on
research or development activities relating to new products which we intend to
own and market.
Our Employees
As of June 30, 1999, we employed 33 people on a full-time basis,
including persons engaged in game design, writing, research, sound, art,
animation, computer programming, management and administration. At June 30,
1999, we also employed 4 persons as part-time employees. We believe that our
relations with our employees are satisfactory.
Item 2. Description of Property.
We presently lease approximately 13,140 rentable square feet of office
and production space in Los Angeles, California pursuant to a noncancellable
lease expiring on January 31, 2002 at a current minimum monthly rent equal to
$15,768. We currently sublease approximately 10% of such office and production
space to an unrelated third-party sublessee for an aggregate of $1,300 in
monthly rent. We believe that our present lease provides us with adequate space
for the foreseeable future.
As noted above, we terminated our New York office lease as a part of the
down-sizing of our staff and facilities in or about April 1998 and presently
have no further liabilities in respect of such New York office lease.
Item 3. Legal Proceedings
We are not presently a party to any pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matter to a vote of our security holders during
the fourth quarter of fiscal 1999.
Page 9 of 48
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<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Our Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "ADRN". The following table sets forth, for our last two fiscal
years, the high and low quarterly sales prices for our Common Stock as
reported by the Nasdaq SmallCap Market:
Common Stock*
-------------
Quarter Ended High Low
------------- ---- ---
Fiscal 1998
September 30, 1997 $1.19 $0.25
December 31, 1997 2.25 0.44
March 31, 1998 0.88 0.38
June 30, 1998 3.81 0.63
Fiscal 1999
September 30, 1998 $4.60 $1.85
December 31, 1998 1.85 1.50
March 31, 1999 3.70 0.75
June 30, 1999 8.50 3.38
- ----------------------------
* Figures through December 31, 1998 have been adjusted to reflect our 3-for-1
reverse stock split effected on December 29, 1998.
(b) On September 8, 1999, there were 439 holders of record of our Common
Stock. We believe that there are significantly more beneficial holders
of our Common Stock as approximately 71% of our Common Stock is held in
"street" name.
(c) No cash dividends have been paid on our Common Stock, and we do not
anticipate paying cash dividends on our Common Stock in the
foreseeable future.
(d) We did not issue or sell any equity securities during the fourth quarter
of fiscal 1999 which were not registered under the Securities Act.
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<PAGE>
Item 6. Management's Discussion and Analysis or Plan or Operation.
(a) Results of Operations.
During fiscal 1999, we realized revenues of $2,880,936, an
increase of $124,238, or approximately 4.5%, over our revenues of $2,756,698 for
fiscal 1998. We believe that our growth in revenues during fiscal 1999 was
limited during the last two quarters of such year due to our management's focus
on matters relating to our proposed merger with McGlen. We realized $2,156,754
in revenues from our toy and game development contracts during fiscal 1999 as
compared to $1,886,497 during fiscal 1998. Our increased toy and game
development contract revenue during fiscal 1999 was principally due to a greater
number of significant contracts and our more efficient utilization of our unique
skills. Royalty income was $724,182 during fiscal 1999 as compared to $870,201
in fiscal 1998 and $601,713 in fiscal 1997.
Our operating expenses of $4,047,538 during fiscal 1999
(exclusive of the goodwill write-off discussed below) were $998,155 less than
our operating expenses of $5,045,693 during fiscal 1998, an improvement of
approximately 20%. Although our expenses related to our toy and game development
contracts increased to $1,922,460 in fiscal 1999 as compared to $1,533,917 in
fiscal 1998, such increase was more than offset by our reduction in our selling,
general and administrative expenses from $2,367,973 in fiscal 1998 to $1,305,169
in fiscal 1999 and the elimination of our research and development expenses in
fiscal 1999 as compared to $152,126 in fiscal 1998. Our approximately 52%
reduction in our selling, general and administrative expenses in fiscal 1999
from fiscal 1998 resulted from our improved management of our non-production
related expenses and the elimination of our expenses related to our New York
office closed during fiscal 1998. Our interest expense was $55,057 in fiscal
1999 as compared to $60,663 in fiscal 1998 and $37,086 in fiscal 1997.
Prior to our write-off of goodwill as discussed below, we
realized operating losses of $1,166,602 during fiscal 1999, which was
approximately 49% less than our operating losses of $2,307,831 in fiscal 1998.
Our improvement in operating losses during fiscal 1999 was primarily due to a
combination of higher revenues and a significant reduction in our selling,
general and administrative expenses from fiscal 1998. An aggregate of $764,852
of our operating losses in fiscal 1999 were the result on non-cash charges for
depreciation and amortization of intangible assets, including amortization in
respect of our patents and licenses and the write-off of advance royalties.
Another $99,244 of such losses during fiscal 1999 resulted from non-cash charges
relating to our issuance of securities in exchange for consulting services.
At the end of fiscal 1999, we elected to write off the entire
amount of our remaining unamortized goodwill of $1,579,132 appearing on our
balance sheet which arose from our prior acquisition of all of the
outstanding common stock of Western and certain of the assets and liabilities of
Smith Engineering in February 1997. Such write-off has streamlined our
operations in preparation for our pending merger with McGlen but has resulted in
our reporting total net losses of $2,745,734 for fiscal 1999.
Due to our continued net losses in fiscal 1999, we had an
accumulated deficit of $11,896,785 at June 30, 1999 as compared to an
accumulated deficit of $9,151,051 at June 30, 1998.
Page 11 of 48
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<PAGE>
(b) Liquidity and Capital Resources.
As a result of our continued losses during fiscal 1999, we began
a search for additional equity capital in the latter part of fiscal 1999 to fund
our continued operations through at least the completion of our proposed merger
with McGlen. In July 1999, we successfully raised gross proceeds of $1,250,000
from the sale of shares of our Common Stock to Escalade and received an
irrevocable commitment from Escalade to purchase another $750,000 worth of our
Common Stock upon completion of our proposed merger with McGlen. See "Our
Material Developments During Fiscal 1999-Our Recent Financing" commencing on
page 5 of this report.
If our proposed merger with McGlen takes place, of which we can
give no assurance, we anticipate that we will require additional equity and/or
debt capital in order for us and McGlen to accomplish our combined short-term
and long-term business objectives. If our proposed merger with McGlen does not
take place, which we do not presently anticipate, we will definitely need to
raise additional equity and/or debt capital if we are to continue in business.
Under either scenario, we presently have no preliminary or definitive agreement
to complete any such additional financing with any other person or persons.
Accordingly, we cannot make any assurances that we will be able to raise any
such required additional capital. In addition, our ability to complete any such
future equity and/or debt financing will depend upon our then financial
condition, results of operations and future business prospects as well as market
conditions at the time such additional equity and/or debt financing is
consummated. Many of the factors which will influence our ability to conduct any
such future financing will be outside of our control. For these reasons, we
cannot make any assurances that we will successfully complete any such required
equity and/or debt financing.
Safe Harbor Statement
---------------------
Statements contained in this report which are not historical facts,
including statements about our business strategies and our expectations about
existing products and product development opportunities, market and industry
segment growth, demand for and acceptance of our existing products and product
concepts, are forward looking statements that involve risks and uncertainties.
These include, but are not limited to, product demand and market acceptance
risks; the impact of competitive products and pricing; the results of financing
efforts; the loss of any significant customers; the effect of our accounting
policies; the effects of economic conditions and trade, legal, social and
economic risks such as import, licensing and trade restrictions; the results of
our execution our business plan and the impact on us of our relationships with
our lenders, investors, customers and vendors.
Item 7. Financial Statements.
Our financial statements listed below are included on pages F-1 through
F-21 following the signature page to this report:
Title of Document Page
Independent Auditors' Report F-1
Consolidated Balance Sheet F-2
June 30, 1999
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<PAGE>
Consolidated Statements of Operations F-3
Years Ended June 30, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity F-4
Years Ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows F-6
Years Ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements F-8
Years Ended June 30, 1999 and 1998
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
(a) Information Relating to Executive Officers and Directors.
The following table sets forth certain information relating to
our current executive officers and directors:
Position(s) with
Name Age the Company
---- --- ----------------
Jay Smith, III 59 President, Chief Executive
Officer, Treasurer and
Director
Michael Cartabiano 48 Vice President and
Secretary
Robert A.D. Wilson 48 Director
Edward H. MacKay 65 Director
Jay Smith III. Mr. Smith has been one of our directors since
February 1997. In May 1997, Mr. Smith was appointed as our President, Chief
Executive Officer and Treasurer. Mr. Smith also served as our Secretary from
September 1997 to May 1998. Prior to our acquisition of Western, Mr. Smith
served as the founder, President and sole shareholder of Western. Mr. Smith was
also the sole owner of Smith Engineering. Mr. Smith owned and operated Western
and Smith Engineering for approximately 17 years and 23 years, respectively,
prior to our acquisition of the stock of Western and certain of the assets of
Smith Engineering in February 1997. Mr. Smith has over 30 years' experience in
engineering, invention and research and development in the electronic toy
Page 13 of 48
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<PAGE>
and game industry and mechanical and electronic consumer products. Prior to
establishing Western and Smith Engineering, Mr. Smith served as a founding
partner of California R&D Center, the Vice President of Engineering of Innova,
Inc., a toy and doll designer for Mattel Toys and a member of the Space Program
Technical staff at TRW, Inc. Mr. Smith holds a B.S. Degree in Engineering
Mechanics from Virginia Institute of Technology and an M.S. Degree in Applied
Mechanics with California Institute of Technology.
Michael Cartabiano. Mr. Cartabiano's association with Western
began in 1994. In February 1997, Mr. Cartabiano was appointed to manage our toy
and game group. Mr. Cartabiano was appointed as our Vice President in February
1998 and as our Secretary in May 1998. Mr. Cartabiano has approximately 25 years
of experience in the consumer products industry having previously held the
position of Vice President of Design for Mattel Toys in El Segundo, California
from 1987 to 1993. Mr. Cartabiano has also held research and development
management positions at Tonka Toys in Minnetonka, Minnesota, Milton Bradley
Games in East Longmeadow, Massachusetts, and Hasbro Products in Pawtucket, Rhode
Island. Mr. Cartabiano earned his B.S. degree from the University of Bridgeport
in Connecticut in 1973.
Robert A.D. Wilson. Mr. Wilson first became one of our directors
in November 1997. Mr. Wilson has been Chairman and majority owner of Sound
Technology PLC, an electronics distribution company located in the United
Kingdom, since 1978. In addition, Mr. Wilson serves as Vice Chairman of Alesis
Studio Electronics, Inc., an international manufacturing and marketing company
for studio electronics located in California. Currently, Mr. Wilson is a
director of Business Link, a United Kingdom government sponsored initiative to
new and emerging industries, and is Chairman of the British Music Fairs Ltd., as
well as past President of the Music Industries Association.
Edward H. MacKay. Mr. MacKay first became one of our directors
in February 1999. Since October 1998, Mr. MacKay has been CEO of Cyberdat. From
1995 to 1997, he was Executive Vice President, Chief Operating Officer and Chief
Financial Officer of Visicom Laboratories, a developer of software and hardware
for C41 applications for the U.S. Navy. From 1981 to 1995, he was Chief
Executive Officer and Chairman of the Board of ATM Service Corporation, an
automated teller machine service business.
There are no family relationships among any of our directors or
executive officers.
(b) Section 16(a) Reporting Delinquencies.
The following executive officers and directors failed to file on
a timely basis one or more reports required to be filed by them under Section
16(a) of the Exchange Act during or with respect to fiscal 1999:
Number of
Name of Executive Number of Late Transactions
Officer or Director Capacity or Capacities Reports Filed Reported Late
- ------------------- ---------------------- ------------- -------------
Michael Cartabiano Vice President and Secretary 1 1
Robert A.D. Wilson Director 2 1
Edward H. MacKay Director 2 1
Thomas A. Schultz Former Director 2 2
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<PAGE>
As of the date hereof, we are not aware of the continued failure
of any of our current officers and directors to file such required reports.
Item 10. Executive Compensation.
(a) The following Summary Compensation Table sets forth the names,
positions and annual compensation paid by us for each of our fiscal years ended
June 30, 1999, 1998 and 1997 to Jay Smith, III, our current President, Chief
Executive Officer and Treasurer, and Michael Cartabiano, our only other current
executive officer or key employee whose aggregate annual compensation exceeded
$100,000 during fiscal 1999:
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities All Other
Fiscal Salary Bonus Underlying Options Compensation
Name and Position(s) Year ($) ($) (#) ($)
- -------------------- ------ ------ ----- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Jay Smith, III, President, 1999 $149,300 -0- -0- $21,294(1)
Chief Executive Officer, 1998 150,000 -0- 233,333 $23,461(2)
Treasurer and Director 1997 57,775(3) -0- -0- -0-(4)
Michael Cartabiano, 1999 130,000 -0- 333 -0-
Vice President and 1998 118,240 -0- 58,333 -0-(5)
Secretary 1997 n/a n/a 6,333 n/a
</TABLE>
- --------------------------
(1) Reflects legal fees and costs we paid in defense of a lawsuit against
Mr. Smith d/b/a Smith Engineering and the reimbursement of automobile
costs for Mr. Smith, but excludes $25,407 received by Mr. Smith pursuant
to his license agreement with Western (See Item 12(a)).
(2) Reflects legal fees and costs we paid in respect of the defense of a
lawsuit against Mr. Smith d/b/a Smith Engineering and the reimbursement
of automobile costs for Mr. Smith, but excludes $143,403 received by Mr.
Smith pursuant to his license agreement with Western (See Item 12(a)).
(3) Reflects Mr. Smith's salary from February 1997 through June 30, 1997
after our acquisition of Western.
(4) Excludes $69,928 received by Mr. Smith pursuant to his license agreement
with Western referred to in
footnote 1 above.
(5) Excludes $55,200 received by Mr. Cartabiano pursuant to a
royalty-sharing arrangement with Western entered into prior to the
Company's acquisition of Western in February 1997 and subsequently
modified and supplemented (See Item 12(b)).
Page 15 of 48
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<PAGE>
(b) The following table sets forth certain information with respect to
all stock options granted by us during fiscal 1999 to Messrs. Smith and
Cartabiano:
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
--------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise
Granted in Fiscal Price Expiration
Name (#) Year ($/Sh) Date
---- ---------- ---------- -------- ----------
Jay Smith, III -0- -0- n/a n/a
Michael Cartabiano 333 1.56% $1.00 01/31/04
(c) The following table sets forth certain information with respect to
the exercise of stock options during fiscal 1999 and the value of unexercised
stock options held by Messrs. Smith and Cartabiano at the end of fiscal 1999:
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END (FYE) OPTION VALUES
--------------------------------------------
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options Options At FYE ($)
Shares Acquired At FYE Exercisable/ Exercisable/
Name On Exercise(#) Value Realized Unexercisable Unexercisable
- ---- --------------- -------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Jay Smith, III None n/a 145,068/99,098 $290,136/$198,196
Michael Cartabiano None n/a 43,721/21,278 $105,739/$51,850
</TABLE>
(d) Executive Officer Employment Contracts.
1. On December 16, 1997, we entered into a three-year employment
agreement with Mr. Smith (the "Smith Employment Agreement"). The Smith
Employment Agreement provides that he will serve as our President and Chief
Executive Officer and receive a base salary of $150,000 per year for his
services. Mr. Smith is also entitled to receive bonuses based upon our
achievement of our goals as determined by our Board of Directors. The Smith
Employment Agreement also provides that Mr. Smith will devote all of his
business time, attention and energy to our business and will be subject to a
one-year covenant not to directly compete with us after his relationship with us
ends. Mr. Smith is also entitled to participate in all group health and
insurance programs and other fringe benefits or retirement plans available to
other of our employees.
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<PAGE>
The Smith Employment Agreement automatically terminates upon Mr. Smith's
death, permanent disability or involuntary termination for cause. If Mr. Smith
is terminated without cause (which is deemed to include Mr. Smith's resignation
after we: (a) reduce his monthly base compensation by more than 25% other than
as a result of a decrease in the compensation of all of our executive officers
based upon our financial performance; (b) significantly change Mr. Smith's
duties, responsibilities, authority, powers or functions; (c) require Mr. Smith
to relocate to an office more than 25 miles from our current executive offices
in Los Angeles; or (d) fail to perform any of our material obligations to Mr.
Smith), we will be obligated to: (i) pay Mr. Smith a lump-sum payment equal to
$150,000; (ii) continue to provide Mr. Smith's other employment benefits at our
expense 12 months; (iii) enter into a post-termination consulting agreement with
Mr. Smith pursuant to which Mr. Smith will be required to provide no more than
10 hours of consulting services per week to us and will be entitled to receive
the sum of $150 for each hour actually worked; and (iv) grant Mr. Smith a
120-day exclusive option to repurchase all of the stock of Western for Western's
then net book value as reflected on our books and records.
The Smith Employment Agreement also provided that Mr. Smith was to be
awarded stock options to purchase up to 233,333 share of our Common Stock at an
exercise price equal to $1.875 per share. Such options have a 10-year term and
become exercisable at the rate of 19,244 shares at the end of each calendar
quarter of Mr. Smith's employment under the Smith Employment Agreement from and
after December 16, 1997.
Page 17 of 48
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<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of September 20, 1999, the number of
shares of our Common Stock held of record or beneficially: (i) by each person
who held of record, or was known by us to own beneficially, more than 5% of the
outstanding shares of the our Common Stock; (ii) by each of our current
executive officers and directors; and (iii) by all of our current executive
officers and directors as a group:
Percent of
Names and Address Number of Outstanding Shares
of Beneficial Owner Shares Owned (1) of Common Stock(2)
------------------- ---------------- ------------------
Jay Smith, III
5301 Beethoven St.
Los Angeles, CA 90066 406,095(3) 11.0%
Michael Cartabiano
5301 Beethoven St.
Los Angeles, CA 90066 43,721(4) 1.2%
Robert A.D. Wilson
Letchworth Point
Dunhams Lane
Letchworth, Hertfordshire
SG6 1 AND England 80,843 2.3%
Edward H. Mackay
1643 Fuerte Hills Drive
El Cajon, CA 92020 25,000(5) 0.7%
Escalade Investors, LLC
One World Trade Center, Ste. 4563
New York, New York 10046 322,580(6) 9.0%
All current executive officers
and directors as a group
(four persons) 555,659(7) 14.8%
------------------------
(1) Except as otherwise indicated and subject to applicable community
property and similar statutes, the persons listed as beneficial
owners of the shares of our Common Stock have sole voting and
dispositive power with respect of such shares.
Page 18 of 48
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<PAGE>
(2) For purposes of computing the percentages, the number of shares
of Common Stock outstanding includes shares purchasable within 60
days upon exercise of outstanding stock options and warrants, as
follows: Mr. Smith (164,512 shares), Mr. Cartabiano (43,721
shares), Mr. Mackay (25,000 shares), Escalade Investors, LLC
(29,325 shares) and all executive officers and directors as a
group (233,233 shares).
(3) Includes 241,583 shares of Common Stock owned of record by a
family trust established for the benefit of Mr. Smith and his
spouse and 164,512 shares purchasable within 60 days upon
exercise of outstanding stock options.
(4) All of the shares of Common Stock beneficially owned by Mr.
Cartabiano are shares purchasable within 60 days upon exercise of
outstanding stock options.
(5) All of the shares of Common Stock beneficially owned by Mr.
Mackay are shares purchasable within 60 days upon exercise of
outstanding options.
(6) Includes 29,325 shares purchasable within 60 days upon exercise
of an outstanding warrant.
(7) Includes 233,233 shares of Common Stock purchasable within 60
days upon exercise of outstanding stock options.
Item 12. Certain Relationships and Related Transactions.
(a) In February 1997, we acquired all of the issued and outstanding
capital stock of Western and certain of the assets and liabilities of Smith
Engineering from Jay Smith, III, our current President, Chief Executive Officer,
Treasurer and Director, in exchange of 267,666 shares of our Common Stock. As a
part of such acquisition, Western entered into a license agreement with Mr.
Smith (the "Smith License Agreement") pursuant to which Mr. Smith granted to
Western the exclusive right to use and market patents and license agreements
owned by Mr. Smith and Smith Engineering. The Smith License Agreement provides
that 75% of the revenues of such patents and licenses are to be retained by
Western and 25% are to be retained by Mr. Smith until Mr. Smith receives the
aggregate sum of $2,000,000 from such patents and licenses, after which time no
further revenue is to inure to Mr. Smith and the patents and licenses will be
assigned to Western. During fiscal 1999, Mr. Smith received an aggregate of
$25,407 in revenues pursuant to the Smith License Agreement. During fiscal 1998,
Mr. Smith received an aggregate of $143,303 in revenues pursuant to the Smith
License Agreement.
(b) Michael Cartabiano, our Vice President and Secretary is entitled to
share in certain royalties generated by us in respect of certain products
created by him pursuant to an arrangement entered into between Mr. Cartabiano
and Western prior to our acquisition of Western, which arrangement has been
modified and supplemented subsequent to our acquisition of Western. During
fiscal 1999, Mr. Cartabiano did not receive any revenues pursuant to such
arrangement. During fiscal 1998, Mr. Cartabiano received an aggregate of $55,200
in revenues pursuant to such arrangement.
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<PAGE>
(c) On November 18, 1997, we entered into a consulting agreement with
Kayne International, Inc., a business consulting firm with which Thomas A.
Schultz, a former director, is affiliated (the "Kayne Consulting Agreement").
The Kayne Consulting Agreement, which expired on December 31, 1998, provided
that we were to pay Kayne the sum of $1,500 per day plus expenses for all
business consulting services rendered to us by Mr. Schultz on behalf of Kayne.
During fiscal 1998, we paid Kayne the sum of $163,000 in fees for the consulting
services performed by Mr. Schultz under the Kayne Consulting Agreement (which
sum includes the issuance date value of an aggregate of 73,333 shares of our
Common Stock issued to Kayne on May 12, 1998 at a price equal to $1.875 per
share in lieu of previously accrued but unpaid consulting fees due Kayne
thereunder).
(d) On April 10, 1998, we entered into a consulting agreement with
Robert A.D. Wilson, a director, pursuant to which Mr. Wilson agreed to provide
certain consulting services to us in exchange for 8,333 shares of our Common
Stock issued to Mr. Wilson at a deemed price of $1.875 per share.
Item 13. Exhibits and Reports on Form 8-K.
<TABLE>
(a) Exhibits.
<CAPTION>
Exhibit
No. Description Page No.
------- --------------------------------------------------------------------------- --------
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of April 28, 1999, among Adrenalin,
Adrenalin's subsidiary, McGlen and McGlen's principal shareholders,
incorporated by reference from Exhibit 2.1 to our Current Report on Form 8-K,
dated April 30, 1999 ("April 30 Form 8-K"). N/A
2.2 First Amendment to Agreement and Plan of Merger, dated July 23, 1999,
among Adrenalin, Adrenalin's subsidiary, McGlen and McGlen's principal
shareholders, incorporated by reference from Exhibit 2.1 to our Current Report
on Form 8-K, dated July 23, 1999 ("July 23, 1999 Form 8-K"). N/A
3.1 Certificate of Incorporation of Adrenalin, as amended, incorporated by
reference from Exhibit 3.1 to our Registration Statement on Form SB-2, No.
333-00178 ("1996 Registration Statement"). N/A
3.2 Certificate of Amendment of Certificate of Incorporation of Adrenalin, filed
with the Delaware Secretary of State on May 14, 1998, incorporated by
reference from Exhibit 3.1 to our Current Report on Form 8-K, dated June 3,
1998. N/A
3.3 Bylaws of Adrenalin, as amended, incorporated by reference from Exhibit 3.2
to our 1996 Registration Statement. N/A
4.1 Common Stock Purchase Agreement, dated July 12, 1999, between Adrenalin
and Escalade, incorporated by reference from Exhibit 4.1 to our Current Report
on Form 8-K, dated July 12, 1999 ("July 12, 1999 Form 8-K"). N/A
Page 20 of 48
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<PAGE>
4.2 Registration Rights Agreement, dated July 12, 1999, between Adrenalin and
Escalade, incorporated by reference from Exhibit 4.2 to our July 12, 1999 Form
8-K. N/A
4.3 Form of Warrant issued and to be issued by Adrenalin to Escalade,
incorporated by reference from Exhibit 4.3 to our July 12, 1999 Form 8-K. N/A
4.4 Form of Escrow Instructions to be entered into between Adrenalin and
Escalade, incorporated by reference from Exhibit 4.4 to our July 12, 1999 Form
8-K. N/A
4.5 Form of Warrant issued to affiliates and transferees of Mackenzie Shea, Inc.
("MSI"), incorporated by reference from Exhibit 4.1 to our Quarterly Report on
Form 10-QSB for our quarterly period ended March 31, 1998 ("March 1998
Form 10-QSB"). N/A
4.6 Form of Incentive Stock Option Agreement issued to our executive officers and
key employees pursuant to our 1995 Stock Option Plan, incorporated by
reference from Exhibit 4.2 to our March 1998 Form 10-QSB. N/A
4.7 Form of Nonqualified Stock Option Agreement issued to our outside directors,
business consultants and other service providers, incorporated by reference
from Exhibit 4.3 to our March 1998 Form 10-QSB. N/A
4.8 Form of Warrant issued to Lloyd Wade Securities, Inc. ("LWSI") and three of
its principals, incorporated by reference from Exhibit 4.4 to our March 1998
Form 10-QSB. N/A
4.9 Form of Warrant to Purchase Common Stock issued to affiliates and transferees
of MSI, incorporated by reference from Exhibit 4.3 to our 1998 Registration
Statement. N/A
10.1 Agreement, dated October 1, 1997, as amended, between Adrenalin and MSI
relating to business consulting services provided to Adrenalin by MSI,
incorporated by reference from Exhibit 10.1 to our Form 10-KSB for our fiscal
year ended June 30, 1998 ("1998 Form 10-KSB"). N/A
10.2 Letter Agreement, dated November 18, 1997, as amended on April 21, 1998
and August 31, 1998, between Adrenalin and Kayne relating to management
consulting services provided to Adrenalin by Kayne, incorporated by reference
from Exhibit 10.2 to our 1998 Form 10-KSB. N/A
10.3 Employment Agreement, dated December 16, 1997, between Adrenalin and Jay
Smith, III, incorporated by reference from Exhibit 10.1 to our March 1998
Form 10-QSB. N/A
10.4 Consulting Agreement, dated April 10, 1998, between Adrenalin and Robert
A.D. Wilson relating to general consulting services provided to Adrenalin by
Mr. Wilson, incorporated by reference from Exhibit 10.5 to our 1998 Form 10-
KSB. N/A
10.5 Optional Advance Note ("Variable Note") for $400,000 Plus Interest, dated
June 30, 1998, issued by Adrenalin to Bay Area Financial Corporation,
incorporated by reference from Exhibit 10.8 to our 1998 Form 10-KSB. N/A
Page 21 of 48
Page 276 of 303
<PAGE>
10.6 Secured Promissory Note, dated July 23, 1999, by McGlen to Adrenalin in the
principal amount of $500,000 and payable on July 23, 2000, incorporated by
reference from Exhibit 10.1 to our Current Report on Form 8-K, dated July 23,
1999. N/A
10.7 Adrenalin's 1995 Stock Option Plan, as amended, incorporated by reference
from Exhibit 10.4 to our 1996 Registration Statement. N/A
10.8 Amendment No. 2 to Adrenalin's 1995 Stock Option Plan, dated December 1,
1997, incorporated by reference from Exhibit 10.13 to our 1998 Form 10-KSB. N/A
10.9 Adrenalin's 1996 Stock Option Plan, as amended, incorporated by reference
from Exhibit A to Adrenalin's definitive proxy materials in respect of
Adrenalin's 1996 Annual Meeting of Shareholders. N/A
10.10 Amendment No. 2 to Adrenalin's 1996 Stock Option Plan, dated December 1,
1997, incorporated by reference from Exhibit 10.15 to our 1998 Form 10-KSB. N/A
10.11 Acquisition Agreement among Adrenalin, Western and Jay Smith III d/b/a
Smith Engineering, dated as of December 30, 1996, incorporated by reference
from Exhibit 7(c)(1) to our Current Report on Form 8-K, dated February 4,
1997 ("1997 Form 8-K"). N/A
10.12 License Agreement, dated February 4, 1997, between Western and Jay Smith,
III, incorporated by reference from Exhibit 7(c)(2) to our 1997 Form 8-K. N/A
21 Subsidiaries of Adrenalin. 47
27 Financial Data Schedules. 48
</TABLE>
(b) Reports on Form 8-K.
1. On April 30, 1999, we filed a Current Report on Form 8-K announcing
our plan to raise between $500,000 and $2,000,000 of additional capital pursuant
to a private placement to accredited investors.
2. On April 30, 1999, we filed a second Current Report on Form 8-K
correcting certain information relating to our proposed private placement
erroneously reported by Dow Jones.
3. On April 30, 1999, we filed a third Current Report on Form 8-K
announcing our proposed merger with McGlen.
4. On June 10, 1999, we filed a Current Report on Form 8-K announcing
the termination of our proposed private placement announced on April 30, 1999
and the commencement of a new plan to raise $2,000,000 of additional capital
pursuant to a private placement to accredited investors.
5. On July 13, 1999, we filed a Current Report on Form 8-K announcing
that we had successfully consummated a $2,000,000 private placement with
Escalade.
Page 22 of 48
Page 277 of 303
<PAGE>
6. On July 26, 1999, we filed a Current Report on Form 8-K announcing
that we had loaned $500,000 to McGlen and had amended our merger agreement with
McGlen to extend the termination date to October 31, 1999.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: September 22, 1999
ADRENALIN INTERACTIVE, INC.
By: /s/ Jay Smith
-----------------------------
Jay Smith III, President, Chief
Executive Officer and Treasurer
(principal executive, financial and
accounting officer)
Page 23 of 48
Page 278 of 303
<PAGE>
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Jay Smith President, Chief Executive Officer, September 22, 1999
- ---------------------- Treasurer and Director
Jay Smith, III
/s/ Michael Cartabiano Vice President and Secretary September 22, 1999
- ----------------------
Michael Cartabiano
/s/ Robert A.D. Wilson Director September 22, 1999
- ----------------------
Robert A.D. Wilson
/s/ Edward H. Mackay Director September 22, 1999
- ----------------------
Edward H. Mackay
Page 24 of 48
Page 279 of 303
<PAGE>
ADRENALIN INTERACTIVE, INC.
AND SUBSIDIARY
FOR THE YEARS ENDED JUNE 30, 1999
AND JUNE 30, 1998
Page 280 of 303
<PAGE>
Independent Auditors' Report
Board of Directors
Adrenalin Interactive, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Adrenalin
Interactive, Inc. and subsidiary ("Company") as of June 30, 1999, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the years ended June 30, 1999 and 1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Adrenalin Interactive, Inc. and subsidiary as of June 30, 1999, and the
consolidated results of its operations and its consolidated cash flows for the
years ended June 30, 1999 and 1998, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, which raises substantial doubt as to the Company's ability to
continue as a going concern. Management's plans in regard to this are discussed
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Drucker, Math & Whitman, P.C.
North Brunswick, New Jersey
September 17, 1999
F-1
Page 281 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Balance Sheet
June 30, 1999
ASSETS
Current assets:
Cash and cash equivalents $ 134,608
Accounts receivable, net of allowance for
doubtful accounts of $13,355 89,595
Costs and estimated earnings in excess
of billings on uncompleted contracts 103,146
Prepaid expenses 35,804
-----------
Total current assets 363,153
-----------
Fixed assets, net 258,827
-----------
Other assets:
Patents and licenses, net of accumulated
amortization of $1,098,355 2,196,711
Security deposits and other 25,465
Deferred merger costs 100,383
Deferred private placement costs 86,805
-----------
2,409,364
-----------
$ 3,031,344
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes and loans payable, current portion $ 12,360
Accounts payable and accrued liabilities 540,075
Billings in excess of costs and estimated
earnings on uncompleted contracts 158,874
-----------
Total current liabilities 711,309
-----------
Notes and loans payable, non-current portion 424,253
-----------
Total liabilities 1,135,562
-----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value;
authorized, 100,000 shares;
issued and outstanding, none -
Common stock, $.03 par value;
authorized, 20,000,000 shares;
issued and outstanding, 3,229,422 96,883
Additional paid-in capital 13,695,684
Accumulated deficit ( 11,896,785)
-----------
Total shareholders' equity 1,895,782
-----------
$ 3,031,344
===========
See notes to consolidated financial statements. F-2
Page 282 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Operations
For the year ended June 30,
-----------------------------
1999 1998
------------ ------------
Revenues:
Development contracts $2,156,754 $1,886,497
Royalties 724,182 870,201
----------- -----------
2,880,936 2,756,698
----------- -----------
Expenses:
Cost of development contracts 1,922,460 1,533,917
Research and development - 152,126
Selling, general and administrative 1,305,169 2,367,973
Depreciation and amortization 764,852 931,014
Write-off of goodwill 1,579,132 -
Interest expense, net 55,057 60,663
----------- -----------
5,626,670 5,045,693
----------- -----------
Loss before income taxes ( 2,745,734) ( 2,288,995)
Income taxes - 18,836
----------- -----------
Net loss ($2,745,734) ($2,307,831)
=========== ===========
Per share information:
Basic:
Net loss per share ($ .90) ($ 1.10)
=========== ===========
Weighted average shares outstanding 3,043,823 2,105,804
=========== ===========
Diluted:
Net loss per share ($ .90) ($ 1.10)
=========== ===========
Weighted average shares outstanding 3,174,485 2,236,219
=========== ===========
See notes to consolidated financial statements. F-3
Page 283 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For the years ended June 30, 1999 and 1998
Additional Total
Common stock paid-in Accumulated shareholders'
Shares Amount capital deficit equity
--------- ------- ---------- ----------- ------------
Balances,
June 30, 1997
as previously
reported 5,041,228 $50,412 $11,504,573 ($6,843,220) $4,711,765
Effect of 1 for
3 split (3,360,819)
--------- ------- ----------- ---------- ----------
Balances,
June 30, 1997
as adjusted 1,680,409 50,412 11,504,573 ( 6,843,220) 4,711,765
Sept. 1997, issued
in exchange for
convertible
debentures 45,138 1,354 79,896 81,250
October 1997,
issued for capital 95,000 2,850 168,150 171,000
raising services ( 171,000) ( 171,000)
November 1997, issued
in exchange for
convertible
debentures 45,138 1,354 79,896 81,250
November 1997,
issued in settlement
of accounts payable 16,667 500 29,500 30,000
March 1998,
issued in settlement
of note payable 39,177 1,175 59,372 60,547
March 1998, issued
for services 50,000 1,500 75,751 77,251
May 1998, issued
for services 106,333 3,190 196,185 199,375
May 1998, issued
in exchange for
convertible
debentures 66,540 1,997 100,503 102,500
May 1998, issued
in settlement of
accounts payable 110,951 3,329 206,794 210,123
June 1998, issued
for services 33,333 1,000 99,000 100,000
Issued for cash,
common stock and
100,000 warrants 400,000 12,000 588,000 600,000
Costs related to
issuance of common
stock and warrants ( 202,075) ( 202,075)
(continued) F-4
Page 284 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
Additional Total
Common stock paid-in Accumulated shareholders'
Shares Amount capital deficit equity
--------- ------- ---------- ----------- ------------
Common stock
subscription
receivable 208,334 6,250 493,750 500,000
Costs related to
common stock
subscription
receivable ( 65,000) ( 65,000)
Issued 60,000 options
for services 226,146 226,146
Issued 300,000 warrants 396,808 396,808
for capital
raising services ( 396,808) ( 396,808)
Net loss for the year
ended June 30, 1998 ( 2,307,831)( 2,307,831)
--------- ------- ----------- ---------- ----------
Balances,
June 30, 1998 2,897,020 $86,911 $13,469,441 ($9,151,051) $4,405,301
========= ======= =========== ========== ==========
Balances,
June 30, 1998 2,897,020 $86,911 $13,469,441 ($9,151,051) $4,405,301
September 1998,
issued for services 35,000 1,050 51,450 52,500
September 1998,
issued in exchange
for warrants 19,736 592 ( 592) -
December 1998,
adjustment for
fractional shares
from reverse split ( 185) ( 5) ( 5)
January and February
1999, issued
in exchange for
warrants 217,765 6,533 ( 6,533) -
February 1999, issued
in settlement of
accounts payable 18,423 553 27,081 27,634
February 1999, 70,000
options issued for
services 46,724 46,724
April 1999, warrants
exercised for cash 41,663 1,249 108,113 109,362
Net loss for the year
ended June 30, 1999 ( 2,745,734)( 2,745,734)
--------- ------- ----------- ----------- ----------
Balances,
June 30, 1999 3,229,422 $96,883 $13,695,684 ($11,896,785) $1,895,782
========= ======= =========== =========== ==========
See notes to consolidated financial statements. F-5
Page 285 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the year ended June 30,
----------------------------
1999 1998
------------- -------------
Cash flows from operating activities:
Net loss ($2,745,734) ($2,307,831)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Write-off of goodwill 1,579,132 -
Write-off of license rights 100,000 100,000
Amortization 491,440 542,871
Depreciation 171,927 288,143
(Gain) loss on disposal of fixed
assets ( 26,500) 250,669
Allowance for doubtful accounts ( 32,395) 22,250
Common stock issued for services 52,500 376,625
Options issued for services 46,724 226,146
Change in:
Accounts receivable 123,504 34,027
Costs and estimated earnings in
excess of billings on uncompleted
contracts ( 88,060) 5,514
Prepaid expenses 38,970 ( 50,274)
Other assets ( 6,236) 36,722
Accounts payable and accrued
liabilities ( 37,759) 101,363
Billings in excess of costs and
estimated earnings on uncompleted
contracts 122,819 ( 94,230)
Deferred private placement costs ( 86,805) -
Deferred merger costs ( 100,383) -
---------- ----------
Net cash used in operating activities ( 396,856) ( 468,005)
---------- ----------
Cash flows from investing activities:
Purchase of fixed assets ( 100,635) ( 22,463)
Proceeds from sale of fixed assets 50,800 -
---------- ----------
Net cash used in investing activities ( 49,835) ( 22,463)
---------- ----------
(Continued) F-6
Page 286 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
For the year ended June 30,
----------------------------
1999 1998
------------- -------------
Cash flows from financing activities:
Issuance of common stock and
warrants, net of costs of
issuance $ - $ 397,927
Payments on notes and loans
payable ( 412,817) ( 1,234,004)
Proceeds from notes and loans 339,331 1,291,512
Payments on due to officer ( 55,935) ( 27,365)
Proceeds from common stock
subscription 435,000 -
Proceeds from exercise of warrants 109,357 -
---------- ----------
Net cash provided by financing
activities 414,936 428,070
---------- ----------
Decrease in cash and cash equivalents ( 31,755) ( 62,398)
Cash and cash equivalents,
beginning 166,363 228,761
---------- ----------
Cash and cash equivalents, ending $ 134,608 $ 166,363
========== ==========
Cash paid during the year for:
Interest $ 46,327 $ 61,073
========== ==========
Income taxes $ - $ 32,633
========== ==========
Noncash investing and financing activities: See Note 18.
See notes to consolidated financial statements. F-7
Page 287 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
1. Summary of significant accounting policies and business activity:
Business activity and basis of presentation:
The consolidated financial statements of Adrenalin Interactive, Inc. and
subsidiary ("Company") include the accounts of Adrenalin Interactive,
Inc. (formerly Wanderlust Interactive, Inc.) ("Adrenalin"), its
wholly-owned subsidiary, Western Technologies, Inc. ("Western"), and
certain assets and certain liabilities of Smith Engineering ("SE"),
which was a sole proprietorship prior to the acquisition discussed in
Note 3. Intercompany transactions and balances have been eliminated. The
Company is located in Los Angeles, California.
Adrenalin is engaged in the creation, development, publishing, marketing
and selling of interactive multimedia software entertainment titles on
CD-ROM for personal computers.
Western is engaged in the invention and development (including
engineering and software development) of electronic designs, technology,
and software, principally for toys and electronic games. Western
licenses or sells inventions, designs, and software to independent
manufacturers and publishers. Such manufacturers and publishers
generally pay advance royalties or development fees and may pay
additional royalties based on products sold. Western also provides
product development services to manufacturers.
SE is inactive at June 30, 1999.
The Company's customers are concentrated in the toy and electronic
entertainment industries. These industries are characterized by rapid
changes in technology and customer preferences.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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 from those
estimates.
Reverse stock split:
On December 29, 1998, the Company effected a 1 for 3 "reverse" stock
split. All share, option, warrant, per share and weighted average share
amounts have been restated to reflect this reverse stock split.
Cash and cash equivalents:
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
F-8
Page 288 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
1. Summary of significant accounting policies and business activity
(continued):
Concentration of credit risk:
Financial instruments which subject the Company to concentrations of
credit risk consist of temporary cash investments and accounts
receivable. The Company places its temporary cash investments with high
quality financial institutions. At times, the Company's cash balances
with these institutions exceed the current insured amount under the
Federal Deposit Insurance Corporation. Accounts receivable are primarily
from development contracts. The Company reviews its accounts receivable
monthly and provides allowances for potential uncollectible accounts.
Fixed assets:
Fixed assets consist primarily of computers, leasehold improvements and
furniture, and are stated at cost. Amortization of leasehold
improvements is provided on a straight-line basis over the shorter of
the estimated useful lives of the improvements or the life of the lease.
Depreciation is provided on a straight-line basis over the estimated
useful lives of the related assets.
Patents and licenses:
The Company amortizes patents and licenses over their estimated useful
lives. The Company revised its estimate of the useful lives during the
fiscal year ended June 30, 1998 from four years to eight years. For the
year ended June 30, 1998 the effect of applying the new estimated life
was to reduce amortization expense by $425,170, and to decrease net loss
by $425,170, and net loss per share by $0.21. The Company assesses the
recoverability of patents and licenses, and whenever continued adverse
circumstances indicate impairment, a write-off will be recorded. Based
on continued cash flow from these assets, no write-off is required at
June 30, 1999.
Goodwill:
Goodwill represents the excess of cost over the fair value of assets
acquired and was amortized using the straight-line method over 40 years.
At the end of the fiscal year ended June 30, 1999 the Company
re-assessed the recoverability of its goodwill and wrote-off the
remaining balance of $1,579,132.
Capitalized software:
Capitalized software (fully amortized at June 30, 1999) consists of
salaries and other costs incurred to develop software from the time
technical feasibility is established thru the date the product is ready
for sale. Amortization begins when the software is available for general
release and is calculated on a product-by-product basis using the faster
of the straight-line method over the estimated useful life or based on
expected units of sale. Amortization expense was $24,254 for the year
ended June 30, 1999 and $75,684 for the year ended June 30, 1998.
F-9
Page 289 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
1. Summary of significant accounting policies and business activity
(continued):
Development contract revenue and cost recognition:
Revenues from fixed-price and modified fixed-price development contracts
are recognized on the percentage-of-completion method measured by the
percentage that costs incurred to date bear to total estimated costs.
A contract is considered complete when all costs, except insignificant
items, have been incurred.
Contract costs include all direct labor, subcontractor and other costs
and those indirect costs related to contract performance, such as
indirect salaries, employee benefits, insurance, and payroll taxes.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance,
customer acceptance of work done, technological developments and
estimated profitability may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of
amounts billed. The liability, "Billings in excess of costs and
estimated earnings on uncompleted contracts", represents billings in
excess of revenues recognized.
Royalty revenue:
Royalties earned by the Company as a result of development contracts are
generally reported by the licensees on a calendar quarter basis. The
Company recognizes such royalty revenue when received. Royalties earned
by the Company as a result of its publishing segment are recognized as
earned.
Income (loss) per share:
Basic income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted income (loss) per
share is computed as above while giving effect to all potential common
shares (but not giving effect to securities that would have an
antidilutive effect, as would occur in loss years) that were outstanding
during the period.
F-10
Page 290 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
2. Going concern:
The accompanying consolidated financial statements have been prepared on
a going concern basis which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The
Company has suffered recurring losses from operations and, at June 30,
1999, has a working capital deficiency. These circumstances raise
substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts and/or the amount of liabilities that might be
necessary should the Company be unable to continue in existence.
Continuation of the Company as a going concern is dependent on achieving
profitable operations and additional equity above that obtained in July,
1999; see "Subsequent events" note. Management's plans to achieve
profitability and equity include developing new products, obtaining new
customers, and merging with another entity; see "Subsequent events"
note.
3. Acquisition:
On February 4, 1997, Adrenalin closed on an acquisition agreement
between Adrenalin, Western, SE and Mr. Jay Smith, III ("Mr. Smith"). The
agreement provided for the sale of 100% of the outstanding shares of
stock of Western and certain assets and certain liabilities of SE in
exchange for 266,667 shares (adjusted for the 1 for 3 split) of the
Company's common stock. As part of the acquisition, a license agreement
was entered into between Western and Mr. Smith in which Mr. Smith
granted to Western the exclusive right to use and market patents and
license agreements owned by Mr. Smith. The license agreement provides
that 75% of the revenues from such patents and licenses will be retained
by Western and 25% will be retained by Mr. Smith until Mr. Smith
receives an aggregate revenue from such patents and licenses of
$2,000,000, at which time no further revenue will inure to Mr. Smith.
The business combination has been accounted for using the purchase
method.
The cost of the acquired enterprise was $5,082,000. The Company issued
266,667 shares (adjusted for the 1 for 3 split) of common stock with an
assigned value of $15 each (adjusted for the 1 for 3 split) and assumed
liabilities in excess of assets which amounted to $1,082,000.
Acquired goodwill was amortized over forty years using the straight-line
method, thru June 30, 1999, at which date the balance was written-off.
F-11
Page 291 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
4. Accounts receivable:
June 30, 1999
-------------
Completed contracts $ -
Contracts in progress 60,000
Other 42,950
-----------
102,950
Less allowance for doubtful accounts 13,355
-----------
$ 89,595
===========
5. Billings in excess of costs and estimated earnings on uncompleted
contracts:
June 30, 1999
-------------
Costs incurred $1,515,199
Estimated earnings 94,681
-----------
1,609,880
Less billings to date ( 1,665,608)
----------
($ 55,728)
===========
Included in the accompanying consolidated balance sheet under the
following:
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 103,146
Billings in excess of costs
and estimated earnings on
uncompleted contracts ( 158,874)
----------
($ 55,728)
===========
6. Fixed assets, net:
June 30, 1999
-------------
Computers $1,247,936
Furniture 127,015
Leasehold improvements 19,544
----------
1,394,495
Less accumulated depreciation
and amortization 1,135,668
-----------
$ 258,827
==========
F-12
Page 292 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
7. Notes and loans payable:
June 30, 1999
-------------
Unsecured note payable, due December 30, 1999.
Interest only (at prime plus 3.5%)
is payable monthly. Prime was 7.75%
at June 30, 1999. Personally guaranteed
by an officer/shareholder and his wife and
secured by a Second Trust Deed on the
officer/shareholder's residence. $396,000
Other unsecured notes and capital lease obligation 40,613
--------
436,613
Current portion 12,360
--------
$424,253
========
8. Convertible debentures:
In May, 1995, the Company issued units consisting of convertible
debentures and common stock. An aggregate of $507,500 of debentures
payable and 155,125 shares (adjusted for the 1 for 3 split) of common
stock were issued to various investors in exchange for $1,015,000. The
debentures were due in May, 1997. The Company offered the debenture
holders two options in lieu of payment: 1) Conversion into shares of
common stock at the rate of $0.60 (not adjusted for the 1 for 3 split)
per share or, 2) extend the due date for one year in exchange for 200
shares (not adjusted for the 1 for 3 split) of common stock for each
$1,000 so extended. As of June 30, 1997, 134,720 shares (adjusted for
the 1 for 3 split) of common stock were issued in exchange for $242,500
of convertible debentures, and 4,333 shares (adjusted for the 1 for 3
split) were issued to extend the due date of $65,000 of convertible
debentures. During the year ended June 30, 1998, 156,817 shares
(adjusted for the 1 for 3 split) of common stock were issued in exchange
for $265,000 of convertible debentures, and accrued interest thereon. At
June 30, 1998, no convertible debentures were outstanding.
F-13
Page 293 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
9. Stock options:
In the fiscal year ended June 30, 1995, the Company adopted the 1995
Stock Option Plan ("95 Plan"). In September, 1995, the Company amended
the 95 Plan. The 95 Plan (as amended) provides for the granting of
options to purchase up to 360,000 shares of common stock at an exercise
price equal to the fair market value of the common stock (110% of fair
market value for a holder of in excess of 10%) on the date of the grant.
No options have been exercised to date.
95 Plan activity during the year ended June 30, 1999 (adjusted for the 1
for 3 split) follows:
Average
Shares Price
------ -------
Outstanding at beginning of year 81,658 $1.59
Granted 21,660 0.90
Exercised - -
Forfeited 9,830 2.12
-------
Outstanding at end of year 93,488 $1.39
======= =====
Options exercisable at June 30, 1999 55,712 $1.45
======= =====
Weighted average remaining
contractual life, years 3.8
=======
Options outstanding at June 30, 1999:
Shares Price
------ -------
5,000 $ 0.66
2,500 0.84
13,827 1.00
58,333 1.41
12,162 1.88
1,666 3.28
------
93,488
======
95 Plan activity during the year ended June 30, 1998 (adjusted for the 1
for 3 split) follows:
Average
Shares Price
------ -------
Outstanding at beginning of year 106,498 $6.18
Granted 80,167 1.59
Exercised - -
Forfeited 105,007 6.24
-------
Outstanding at end of year 81,658 $1.59
======= =====
Options exercisable at June 30, 1998 27,008 $1.59
======= =====
Weighted average remaining
contractual life, years 4.6
======= F-14
Page 294 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
9. Stock options (continued):
In July, 1996, the Company adopted the 1996 Stock Option Plan ("96
Plan"). The 96 Plan provides for the granting of options to purchase up
to 360,000 shares of common stock at an exercise price equal to the fair
market value of the common stock (110% of fair market value for a holder
of in excess of 10%) on the date of the grant. No options have been
exercised to date.
96 Plan activity during the year ended June 30, 1999 (adjusted for the 1
for 3 split) follows:
Average
Shares Price
------ -------
Outstanding at beginning of year 13,500 $ 1.88
Granted - -
Exercised - -
Forfeited - -
--------
Outstanding at end of year 13,500 $ 1.88
======== ======
Options exercisable at June 30, 1999 10,125 $ 1.88
======== ======
Weighted average remaining
contractual life, years 2.6
========
Options outstanding at June 30, 1999:
Shares Price
------ -------
13,500 $ 1.88
======= ======
96 Plan activity during the year ended June 30, 1998 (adjusted for the 1
for 3 split) follows:
Average
Shares Price
------ -------
Outstanding at beginning of year 39,417 $ 4.08
Granted - -
Exercised - -
Forfeited 25,917 $ 5.25
--------
Outstanding at end of year 13,500 $ 1.88
======== ======
Options exercisable at June 30, 1998 6,750 $ 1.88
======== ======
Weighted average remaining
contractual life, years 3.6
========
F-15
Page 295 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
9. Stock options (continued):
Non-plan options:
Non-plan option activity during the year ended June 30, 1999 (adjusted
for the 1 for 3 split) follows:
Average
Shares Price
------ -------
Outstanding at beginning of year 318,329 $ 2.42
Granted 70,000 1.02
Exercised 24,999 0.63
Forfeited 14,999 0.63
--------
Outstanding at end of year 348,331 $ 2.20
======== ======
Options exercisable at June 30, 1999 232,218 $ 2.28
======== ======
Weighted average remaining
contractual life, years 7.0
========
Options outstanding at June 30, 1999:
Shares Price
------ -------
45,000 $ 0.75
8,333 1.20
25,000 1.50
256,665 1.88
13,333 15.00
--------
348,331
========
Non-plan option activity during the year ended June 30, 1998 (adjusted
for the 1 for 3 split) follows:
Average
Shares Price
------ -------
Outstanding at beginning of year 31,665 $ 7.41
Granted 286,664 1.87
Exercised - -
Forfeited - -
--------
Outstanding at end of year 318,329 $ 2.42
======== ======
Options exercisable at June 30, 1998 97,777 $ 2.72
======== ======
Weighted average remaining
contractual life, years 8.0
========
F-16
Page 296 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
10. Accounting for stock based compensation:
The Company follows the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, no compensation cost has been
recognized in the consolidated financial statements for the employee
stock options issued.
Had compensation cost for the Company's employee stock option plans been
recognized based on the fair value at the grant date for awards
consistent with the provisions of SFAS 123, the Company's net loss and
loss per share (adjusted for the 1 for 3 split) would have been as
indicated below:
Year ended Year ended
June 30, 1999 June 30, 1998
------------- -------------
Net loss - as reported $2,745,734 $2,307,831
Net loss - pro forma $2,842,548 $2,445,099
Loss per share - as reported $0.90 $1.10
Loss per share - pro forma $0.93 $1.17
For the years ended June 30, 1999 and 1998, respectively, the fair value
of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: expected volatility of 228% and 209%;
risk-free interest rate of 6.0% and 6.0%; and expected lives of 4.5 and
6.4 years.
11. Commitments and contingencies:
Commitments:
In February, 1997, the Company entered into a three year employment
agreement with an officer providing for base salary of $150,000 per
year.
In May, 1995, the Company entered into a four year nonexclusive license
agreement with Metro-Goldwyn-Mayer Inc., ("MGM") which provides for use
of the "Pink Panther" character. The agreement was amended in May of
1996, and the Company paid $300,000 as a nonrefundable advance royalty,
to be applied to future royalties. The agreement provides for payment of
the greater of a percentage royalty on wholesale prices or an absolute
minimum per unit sold. The agreement also provides for the shipment of
minimum copies by certain due dates. Failure to ship such minimum copies
may cause termination of the agreement. The agreement grants MGM a right
of first negotiation and last refusal in regards to distribution of the
licensed products. MGM also has the right to approve, at its sole
discretion, the Company's software titles that contain the "Pink
Panther" character.
The Company wrote off $100,000 of the advance royalty in each year of
the three years ended June 30, 1999, as a result of weaker than expected
sales of the licensed product.
F-17
Page 297 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
11. Commitments and contingencies (continued):
Commitments (continued):
The Company is obligated under a lease agreement for office space in Los
Angeles, California. Minimum monthly payments of $15,768 (subject to a
minimum 3% increase) are due through January 31, 2002. Future minimum
rental commitments under the lease are 2000, $189,216; 2001, $194,892;
2002, $83,641. Rent expense for the fiscal years ended June 30, 1999 and
1998 was $184,826 and $208,566, respectively.
The Company leases computer equipment under several operating leases
that are substantially similar. These leases have expiration dates from
fiscal years ending 2000 to 2002. Future minimum lease payments are:
2000, $11,012; 2001, $6,691; 2002,$3,387.
12. Initial public offering:
In March and April, 1996, the Company closed an initial public offering
of common stock and redeemable warrants. In connection with such
offering, the investment banker received, for nominal consideration,
five year warrants to purchase 43,333 shares (adjusted for the 1 for 3
split) of common stock and 70,000 redeemable warrants (adjusted for the
1 for 3 split). These warrants are exercisable at any time during a four
year period ending March 20, 2001 for $18.00 per share (adjusted for the
1 for 3 split) of common stock and $.90 per redeemable warrant (adjusted
for the 1 for 3 split).
13. Related party transactions:
During the year ended June 30, 1998, the Company incurred $45,830 of
legal fees and disbursements to a law firm. For the year ended June 30,
1999 legal fees and disbursements of $6,555 were incurred to the same
law firm. A partner in that firm was an officer/shareholder/director,
and is currently a shareholder.
In May, 1998, the Company issued 73,333 shares of common stock at a
deemed price of $1.875 (adjusted for the 1 for 3 split) to a business
consulting firm with which a director of the Company is affiliated and
8,333 shares (adjusted for the 1 for 3 split) of common stock to another
director as consideration for consulting services.
14. Income taxes:
For income tax purposes, as of June 30, 1999 the Company has deferred
start-up costs and a net operating loss carryforward approximating the
financial accounting net loss since inception. The start-up costs are
being amortized over five years commencing during the third quarter of
fiscal 1997. The net operating loss carryforward will begin to expire in
2013. These items result in a deferred tax asset of approximately
$4,000,000. However, a valuation reserve has been recorded for the full
amount due to the uncertainty of realization of the deferred tax asset.
F-18
Page 298 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
15. Business segment information and foreign revenue:
The Company's operations have been classified into two business
segments: publishing and development contracts. Prior to the Company's
acquisition of Western, it operated as a publisher.
For the fiscal year ended June 30, 1999:
Development
Publishing contracts Total
---------- ----------- -----------
Revenues $ 186,000 $2,695,000 $2,881,000
Operating income
(loss) 18,000 ( 2,764,000) ( 2,746,000)
Total assets 199,000 2,832,000 3,031,000
Depreciation and
amortization 126,000 639,000 765,000
Capital expenditures - 125,000 125,000
For the fiscal year ended June 30, 1998:
Development
Publishing contracts Total
---------- ----------- -----------
Revenues $ 460,000 $2,300,000 $2,760,000
Operating loss 1,620,000 670,000 2,290,000
Total assets 820,000 4,765,000 5,585,000
Depreciation and
amortization 305,000 625,000 930,000
Capital expenditures - 20,000 20,000
Foreign royalties for the fiscal year ended June 30, 1999 and 1998 were
$170,000 and $518,000, respectively.
16. Concentration of credit risk and major customers:
The Company deals with a relatively small number of customers which
account for revenues and receivables as presented below:
% of Revenues % of Receivables
Year ended June 30, As of June 30,
------------------- --------------
1999 1998 1999
---- ---- ----
Customer "A" 26% 27% 67%
Customer "B" 22% 25% -
Customer "C" 32% - -
F-19
Page 290 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
17. Private offering and warrants issued:
During the fiscal year ended June 30, 1998, the Company effected a
private offering of 400,000 shares (adjusted for the 1 for 3 split) of
common stock and 100,000 warrants (adjusted for the 1 for 3 split) for
aggregate consideration (net of expenses) of $397,927. The warrants are
exercisable at $3.75 per share, and expire one year from the date of
issuance.
During the fiscal year ended June 30, 1998, the following warrants,
exercisable upon issuance, were issued for capital raising services:
16,667 exercisable at $3.75 per share, expiring January 14, 2001 166,667
exercisable at $0.75 per share, expiring December 31, 2004 116,666
exercisable at $1.875 per share, expiring December 31, 2004
These warrants were valued using the Black Scholes pricing model (see
Note 10 for assumptions) which resulted in a valuation of $396,808.
18. Supplemental disclosure of noncash investing and financing activities:
During the fiscal year ended June 30, 1998:
See Note 8 regarding convertible debentures converted.
156,817 shares issued in exchange for $265,000 of convertible
debentures.
127,618 shares issued in settlement of $240,123 of accounts payable.
39,177 shares issued in settlement of $60,547 of notes payable.
189,666 shares issued for consulting services.
On June 30, 1998, subscription agreements for an aggregate of 208,334
shares (adjusted for the 1 for 3 split) of common stock were executed.
Net proceeds were received in July, 1998 in the amount of $435,000.
During the fiscal year ended June 30, 1999:
35,000 shares issued for consulting services.
18,423 shares issued in settlement $27,634 of accounts payable.
237,502 shares issued upon cashless exercise of warrants for 274,998
shares of common stock.
Options for 70,000 shares of common stock issued for services.
$24,969 of furniture was acquired by capital lease.
F-20
Page 300 of 303
<PAGE>
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1999 and 1998
19. Subsequent events:
Private placement:
On July 12, 1999, the Company and a private investor entered into a
Stock Purchase Agreement ("Agreement") under which the Company issued
293,255 shares of common stock for $1,250,000. Additional shares (and
three year warrants) for an aggregate additional consideration of
$750,000 are required to be issued and purchased upon the closing of the
merger discussed below. The Agreement provides for two repricing periods
which may result in issuance of additional shares if the average bid
price during specified 90 day periods does not equal or exceed 115% (or
118% for the second repricing period) of the purchase price(s). In
addition to the 293,255 shares issued, the Company issued a warrant for
29,325 shares exercisable at $4.843 per share through and including July
31, 2002. The Company also agreed to prepare and file with the SEC a
registration statement, at its own expense, related to the shares (and
warrants) issued.
At June 30, 1999, costs related to the private placement aggregated
$86,805 which amount is reflected in "Other assets" on the consolidated
balance sheet. These costs will be deducted from the proceeds of the
private placement during the fiscal year ended June 30, 2000.
Loan transaction:
On July 23, 1999, the Company entered into a loan transaction with
McGlen Micro, Inc. ("McGlen") (see below re: contemplated merger) under
which the Company loaned $500,000 to McGlen. The loan is evidenced by a
secured subordinated promissory note, is due one year from issuance, and
bears interest at 8%.
Contemplated merger:
The Company is in the process of consummating a "reverse" merger. At its
annual meeting, which is scheduled in October, 1999, the Company will
seek stockholder approval for an Agreement and Plan of Merger dated
April 28, 1999 ("Merger Agreement"). If the Merger Agreement is
approved, McGlen will become a wholly-owned subsidiary of the Company
and the Company will issue to McGlen security holders shares of the
Company's common stock and options to purchase shares of the Company's
common stock equaling approximately 87% of the shares that will be
outstanding immediately following the "reverse" merger. If the merger is
completed, the Company will be required to issue 5% of its common stock
outstanding immediately prior to such merger to a consulting firm.
At June 30, 1999, costs related to the merger aggregated $100,383 which
amount is reflected in "Other assets" on the consolidated balance sheet.
These costs will be deducted from shareholders' equity if the merger is
consummated. If the merger is not consummated, such costs will be
charged to operations during the fiscal year ended June 30, 2000.
F-21
Page 301 of 303
<PAGE>
Exhibit 21
----------
Subsidiaries of Adrenalin Interactive, Inc.
------------------------------------------
Jurisdiction of
Name of Subsidiary Organization Percentage Ownership
- ------------------ -------------- --------------------
Western Technologies, Inc. California 100%
Adrenalin Acquisition Corp. California 100%
Adrenalin Entertainment, Inc. California 100%
(name holding subsidiary only)
Page 302 of 303
<PAGE>
Exhibit 27
----------
FINANCIAL DATA SCHEDULE
PERIOD-TYPE YEAR
FISCAL-YEAR-END JUN-30-1999
PERIOD-END JUN-30-1999
CASH 134,608
SECURITIES 0
RECEIVABLES 102,950
ALLOWANCES 13,355
INVENTORY 0
CURRENT-ASSETS 363,153
PP&E 1,394,498
DEPRECIATION 1,135,670
TOTAL-ASSETS 3,031,344
CURRENT-LIABILITIES 711,309
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 96,883
OTHER-SE 1,798,899
TOTAL-LIABILITY-AND-EQUITY 3,031,344
SALES 0
TOTAL-REVENUES 2,880,936
CGS 0
TOTAL-COSTS 1,922,460
OTHER-EXPENSES 3,649,153
LOSS-PROVISION 0
INTEREST-EXPENSE 55,057
INCOME-PRETAX (2,745,734)
INCOME-TAX 0
INCOME-CONTINUING (2,745,734)
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME (2,745,734)
EPS-PRIMARY (0.90)
EPS-DILUTED (0.90)
Page 303 of 303
