As filed with the Securities and Exchange Commission on October 7, 1999
Registration No. 333-85263
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ADRENALIN INTERACTIVE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3779546
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5301 Beethoven Street, Suite 255, Los Angeles, California 90066
(310) 821-7880
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(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JAY SMITH, III
President and Chief Executive Officer
Adrenalin Interactive, Inc.
5301 Beethoven Street, Suite 255, Los Angeles, California 90066
(310) 821-7880
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(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Please send a copy of communications to:
Alexander C. McGilvray, Jr., Esq.
Clark & Trevithick, a Professional Law Corporation
800 Wilshire Boulevard, 12th Floor, Los Angeles, California 90017
Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest investment plans, check the following box. [X]
Page 1 of 42
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
[ ] __________________________________________________________________________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
[ ] __________________________________________________________________________
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Title of Each Class Amount to Proposed maximum Proposed maximum Amount of
of Securities to be Registered be offering price aggregate offering price(3) Registration Fee
registered(1)(2) per unit(3)
<S> <C> <C> <C> <C>
Common Stock, $.03 par value 1,014,661 $ 4.00 $ 4,058,644 $ 1,128.30(4)
========================================================================================================================
</TABLE>
(1) Includes (a) 293, 255 shares of common stock issued to the selling
stockholder pursuant to a purchase agreement, (b) 29,325 shares of common stock
issuable to the selling stockholder pursuant to its exercise of a warrant issued
in connection with the purchase agreement, and (c) an indeterminate number of
shares of common stock, estimated at 692,081 shares, issuable to the selling
stockholder pursuant to the purchase agreement, issuable to the selling
stockholder pursuant to the selling stockholder's exercise of an additional
warrant issuable pursuant to the purchase agreement, and issuable to the selling
stockholder pursuant to certain repricing rights in respect of the shares
purchased and to be purchased by the selling stockholder pursuant to the
purchase agreement.
(2) In accordance with Rule 416 under the Securities Act of 1933, the shares of
common stock offered hereby shall also be deemed to cover an indeterminate
number of securities to be offered or issued to prevent dilution resulting from
stock splits, stock dividends or similar transactions.
(3) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) using the last reported sale price reported by the
Nasdaq SmallCap Market for the common stock on October 4, 1999 which was
$4.00 per share.
(4) $863.86 of this amount has previously been paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
Page 2 of 42
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 6, 1999
PROSPECTUS
ADRENALIN INTERACTIVE, INC.
1,014,661 Shares of
Common Stock, $.03 par value
The selling stockholder of Adrenalin identified on page 23 below may
offer for resale up to 1,014,661 shares of our common stock under this
prospectus. We will not receive any part of the proceeds from this offering by
the selling stockholder; however, as described on page 24 below, we will receive
$750,000 in additional proceeds from the sale of our shares of common stock to
the selling stockholder pursuant to our purchase agreement with it upon
completion of our proposed merger with McGlen Micro, Inc. ("McGlen") and we may
receive additional proceeds if the selling stockholder pays cash in connection
with its exercise of warrants issued or issuable by us pursuant to such purchase
agreement.
Our common stock is traded on the Nasdaq SmallCap Market under the
symbol "ADRN". On October 4, 1999, the last reported sale price of our common
stock on the Nasdaq SmallCap Market was $4.00 per share.
Our offices are located at 5301 Beethoven Street, Suite 255, Los
Angeles, California 90066, and our telephone number is (310) 271-7880.
Purchase of our common stock involves a high degree of risk. You
should purchase shares only if you can afford a loss on your investment. SEE
"RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT CERTAIN FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
---------------------------------
Neither the Securities and Exchange Commission (the "SEC") nor any
state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
---------------------------------
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the SEC is effective. We have not authorized any dealer, salesperson or
other person to give any information or represent anything not contained in this
prospectus. You should not rely on any unauthorized information. This prospectus
is not an offer to sell these securities and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.
THE DATE OF THIS PROSPECTUS IS OCTOBER 6, 1999
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<PAGE>
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY...................................................... 5
WARNING ABOUT FORWARD-LOOKING STATEMENTS................................ 5
RISK FACTORS............................................................ 6
THE COMPANY ............................................................ 23
SELLING STOCKHOLDER..................................................... 28
USE OF PROCEEDS......................................................... 29
PLAN OF DISTRIBUTION.................................................... 29
LEGAL MATTERS........................................................... 30
INDEPENDENT AUDITORS.................................................... 30
WHERE YOU CAN FIND MORE INFORMATION ABOUT US............................ 30
DISCLOSURE OF SEC'S POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES........................................ 31
Page 4 of 42
<PAGE>
PROSPECTUS SUMMARY
BECAUSE THIS IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS AND SHOULD
CAREFULLY CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET FORTH UNDER "RISK
FACTORS" BEFORE YOU DECIDE TO PURCHASE OUR STOCK.
As used in this prospectus, "we", "Adrenalin", "Company", "us" and "our"
refer to Adrenalin Interactive, Inc. and our subsidiaries, unless the context
requires otherwise. Similarly, the term "McGlen" refers to McGlen Micro, Inc.
and its subsidiaries, unless the context requires otherwise. As discussed in
this prospectus, we intend to merge with McGlen. We have supplied all
information contained in this prospectus relating to us and McGlen has supplied
all information contained in this prospectus relating to it.
We develop and sell or license 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.
On April 28, 1999, we entered into a definitive agreement with McGlen and
its principal shareholders pursuant to which we intend to merge with McGlen. On
completion of such merger, which is subject to a number of conditions and may
not occur, McGlen's former shareholders will own approximately 87% of our common
stock.
McGlen is a privately-held corporation formed in May 1996 to sell computer
products over the Internet. Since its formation, McGlen has become a global
Internet retailer of computer hardware and peripheral products and accessories
to individuals, small offices/home offices and corporate customers. McGlen
presently offers approximately 40,000 products to its approximately 120,000
current customers. During the first calendar quarter of 1999, McGlen purchased
one of its competitors, AMT Component, Inc., which sells similar products at
typically lower price points.
As contemplated by our merger agreement with McGlen, we issued, or will
issue, the securities described in this prospectus to the selling stockholder
pursuant to a purchase agreement between us and the selling stockholder. The
selling stockholder may offer its shares for resale pursuant to this prospectus
through public or private transactions, on or off the Nasdaq SmallCap Market, at
prevailing market prices or privately negotiated prices. No period of time has
been fixed within which the shares may be offered or sold.
WARNING ABOUT FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this prospectus, and in our public
documents to which we refer, that are subject to risks and uncertainties. These
forward-looking statements include information about possible or assumed future
results of our operations. Also, when we use the words "believe," "expect,"
"intend," "anticipate" or similar expressions, we are making forward-looking
statements. Many possible events or factors could affect our future financial
results and performance. This could cause our results or performance to differ
materially from those we express in our forward-looking statements. You should
consider these risks when you purchase shares of our common stock.
Page 5 of 42
<PAGE>
RISK FACTORS
You should consider carefully the following risks before you decide to buy
shares of our common stock. The risks and uncertainties described below are not
the only ones we face. Additional risks and uncertainties not presently known to
us may also adversely impact our business and proposed business upon completion
of our proposed merger with McGlen. 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 OUR PROPOSED MERGER WITH McGLEN
Our Proposed Merger with McGlen May Not Occur
Although we have signed a definitive agreement to merge with McGlen and
are confident that such merger will take place, our completion of the merger is
subject to a number of conditions and all of such conditions may not be met and
such merger may not be consummated. These conditions include the satisfactory
completion of due diligence investigations of McGlen about us and of us about
McGlen, the preparation and acceptance of final disclosure schedules to the
merger agreement by both us and McGlen, the approval of the merger by our
shareholders and McGlen's shareholders and the approval of the merger by Nasdaq.
If any of such conditions are not met and the proposed merger is not
consummated, we anticipate that our business will be materially adversely
affected and the market price of our common stock will drop significantly.
Our Merger with McGlen Will Require Us to Reapply
for Nasdaq Listing; Possible Reverse Stock Split
We have been advised by Nasdaq that 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 Nasdaq 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.
Page 6 of 42
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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 our proposed merger with McGlen, 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 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
our merger with McGlen 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 Stockholders Will Suffer Immediate and Substantial Dilution
to Their Voting Power As a Result of Our Merger with McGlen
Which May Lower the Market Price of Our Common Stock
Our issuance of shares of our common stock to McGlen's securityholders and
to our business consulting firm which introduced McGlen to us in connection with
the completion of our proposed merger with McGlen 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 our merger with McGlen, any given stockholder's percentage ownership
of our common stock prior to such merger will decrease substantially as a result
of our completion of such merger. The percentage ownership of all of our
pre-merger securityholders (on a fully-diluted basis) 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.
Our Integration of McGlen's Business
Once we complete our proposed merger with McGlen, our future success will
depend, in large part, upon our ability to effectively integrate Adrenalin's 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.
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<PAGE>
Our Need for Additional Financing
Following the consummation of our proposed merger with McGlen, 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.
RISKS RELATING TO OUR FINANCIAL CONDITION
Our Possible Failure to Continue as a Going Concern
In our audited financial statements for our fiscal year ended June 30,
1998, our independent auditors expressed their uncertainty as to our ability to
continue as a going concern. If we do not complete our proposed merger with
McGlen and are thereafter unable to rapidly increase our revenues, begin to
realize profits from ongoing operations or otherwise improve our financial
condition, we may not be able to continue as a going concern or raise additional
capital. This will result in a total loss to purchasers of our common stock.
Sales of Our Common Stock in the Public Market by the Selling Stockholder
and Other Existing Investors Could Cause Our Stock Price to Decline
We have 3,539,343 shares of common stock outstanding and have committed to
issue an additional indeterminate number of shares to the selling stockholder
for $750,000 upon the completion of our proposed merger with McGlen at a per
share price equal to 110% of the closing price for our common stock on the
trading day prior to such funding. We also presently have outstanding options to
purchase an additional 438,653 shares of our common stock (of which 258,360
shares are currently vested). We also have outstanding warrants to acquire an
additional aggregate of 97,656 shares of our common stock and have committed to
issue an additional warrant to the selling stockholder exercisable for 10% of
the number of shares to be purchased by the selling shareholder for the $750,000
to be paid upon the completion of our merger with McGlen at a purchase price
equal to 125% of the closing price of our common stock on the trading day prior
to such funding. The selling stockholder has agreed not to sell more than 33% of
the aggregate number of shares of our common stock owned or issuable to it
pursuant to our purchase agreement with the selling stockholder. This limit
applies to each 30-day period after the date of this prospectus and, to the
extent it is not fully utilized in any period, is cumulative for subsequent
periods. This limitation, however, does not apply with respect to resales of
shares of our common stock made by the selling shareholder pursuant to this
prospectus after the date hereof and before October 10, 1999 if the selling
shareholder waives its repricing rights with respect to the shares it sells
during that time. All but 70,585 shares of our remaining shares of outstanding
common stock are freely tradable without restriction or further registration
under federal securities laws, unless they are purchased by our "affiliates" as
that term is defined in Rule 144 under the Securities Act. Thus, if the selling
stockholder and/or our other existing stockholders sell substantial amounts of
our common stock in the public market during or following this offering, the
Page 8 of 42
<PAGE>
market price of our common stock could decline. Sales in the public market by
the selling stockholder or other existing stockholders may also make it more
difficult for us to sell our common stock or other securities in our anticipated
future financings.
We Have Risk Associated with Our Existing Loan Agreement
We currently owe $396,000 to a financial institution pursuant to a loan
which matures December 31, 1999. Although we believe that we will be able to
renew, replace or repay such loan by the end of 1999, we may not be able to do
so or may not be able to renew or replace such loan on reasonable terms and
conditions.
Volatility of Our Stock Price
Our common stock is presently traded on the Nasdaq SmallCap Market. The
market price of our common stock has historically been volatile. We believe the
market price of our common stock could continue to fluctuate substantially,
based on a variety of factors, including:
- the market's perception of the status of our proposed merger with
McGlen,
- whether or not we complete our proposed merger with McGlen,
- the financial condition and business prospects of McGlen and us,
- the industry segment performance of Internet retailers such as
McGlen,
- quarterly fluctuations in results of our operations,
- timing of our product and press releases,
- changes in our earnings estimates by research analysts,
- announcements of new products or services by our competitors, and
- changes in our accounting treatments or principles.
The market price of our common stock may be affected by our ability to
meet or exceed analysts' or "street" expectations. Any failure to meet or exceed
such expectations could have an adverse effect on the market price of our common
stock. Furthermore, stock prices for many companies fluctuate widely for reasons
that may be unrelated to their operating results. These fluctuations and general
economic, political and market conditions, such as recessions and demand for our
products and services, may affect the market price of our common stock either
negatively or positively.
RISKS RELATING TO OUR BUSINESS
We Depend on a Few Customers
Approximately 80% of our revenues for our fiscal year ended June 30, 1999
were derived from our funded video game development contracts with four
customers: SouthPeak Interactive, Electronic Arts and THQ. Approximately 52% of
Page 9 of 42
<PAGE>
our revenues during our fiscal year ended June 30, 1998 were derived from our
funded video game development contracts with two customers: Electronic Arts and
THQ. The termination of any of our current contracts by our customers prior to
completion would have a material adverse effect on our business. Our inability
to maintain good relationships with the foregoing and other video game and
electronic toy manufacturers may also adversely affect our ability to obtain
future contracts from such customers.
We Have Risks Associated with Our Funded Development Contracts
Our funded development contracts with video game and electronic toy
manufacturers are generally entered into on a fixed-fee basis. We bear all of
the risks associated with delays and cost overruns, changes requested by our
customers in the specifications for the games and toys for which the customers
are unwilling to pay and programming errors or flaws which cannot be corrected
in a cost-effective or timely manner. We have experienced difficulties and
problems from time to time with delays and cost overruns, uncompensated or
undercompensated changes in specifications and programming errors or flaws in
respect of our funded development contracts. To the extent we continue to
experience such difficulties and problems, our business will be adversely
affected.
Our Dependence on Royalties from Sales of
Products by Game and Toy Manufacturers
A significant portion of our total revenues is derived from royalties on
the sale of video games and electronic toys. We design and develop these games
and toys but we do not manufacture or market them. Our business is partially
dependent upon such video games and electronic toys being accepted and sold in
quantity by others in the consumer marketplace. If our products are not widely
sold, we will not receive significant royalties which will have a material
adverse effect on our business.
Uncertainty of Market Acceptance of Our Products
The markets for our video games and electronic toys are subject to
frequent and rapid changes in technology and consumer preferences. Our business
is dependent upon our ability to obtain funded contracts to develop and
introduce new video games, electronic toys and other products to accommodate
technological advances and consumer preferences. Other software vendors or video
game and toy manufacturers may also develop and market software titles or toys
that render our products obsolete or less marketable. Failure of our new
products to achieve or sustain market acceptance, or our inability to get new
contracts to develop such products, will have a material adverse effect on our
business.
Our Risks Involving Changing Product Platforms
When we develop products for video game or toy manufacturers or on our
own, we must make substantial economic investment in development of such
products one to two years in advance of retail distribution and sales of the
products. If we develop our products for use in platforms that do not achieve
significant market penetration and success, our revenues from those products may
be materially less than anticipated. Some or all of our recently-developed or
proposed products may not be compatible with platforms that achieve high levels
of consumer acceptance. As with products that are not widely sold because of
lack of market acceptance, limited sales of products we develop due to lack of
platform acceptance will have a material adverse effect on our business.
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<PAGE>
Our Risk of Software Errors, Failures or Incompatibility
Our video games and electronic toys and games may contain undetected
errors when first introduced or when new versions are released. We may
experience delays and incur significant technical support expenses in connection
with system compatibility requirements and quality assurance issues. Despite our
testing, errors or incompatibility may be found in our products or releases
after commencement of commercial shipments. This could result in the loss of, or
a delay in, market acceptance of our products, which could have a material
adverse effect on our business.
Our Dependence on Key Personnel
We are substantially dependent on Jay Smith, III, our President and Chief
Executive Officer, Michael Cartabiano, our Vice President and Secretary, and
certain other key employees and consultants. We have an employment agreement
only with Mr. Smith. Our prospects for growth, new products and new sales are
dependent upon the continued active participation of Mr. Smith, Mr. Cartabiano
and our other key employees and consultants. We do not have "key person" life
insurance policies on Mr. Smith, Mr. Cartabiano or any of our other key
employees or consultants. Our loss of the services of Mr. Smith, Mr. Cartabiano
or any of such other key employees or consultants would have a material adverse
effect on our business.
Our Lack of a Full-Time Financial Officer
We do not presently have a full-time person acting as our chief financial
officer. As a result, we may not have the proper oversight for our internal
accounting, financial and management information systems, procedures and
controls to assure our continued viability from an accounting, financial or
management viewpoint. This may adversely affect our business, results of
operations, financial condition and market value of our common stock.
Our Ability to Attract and Retain Personnel
Our prospects for growth and ultimate success are heavily dependent upon
our ability to attract, retain and motivate skilled personnel, including
personnel involved in ongoing product development and other marketing and
management personnel. In particular, our ability to conceptualize, develop,
maintain and enhance our products is substantially dependent upon our ability to
locate, hire and train qualified software engineers, graphic artists, computer
programmers and toy and game inventors. The market for such individuals is
intensely competitive. The software industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. We may not be
able to retain our current personnel or be able to attract, assimilate or retain
other highly qualified personnel in the future. Our inability to attract, hire
or retain the necessary personnel could have a material adverse effect on our
business, operating results and financial condition.
Our High Costs to Maintain a Skilled Labor Force
A high percentage of our work force is either highly skilled computer or
creative-oriented personnel. Such employees are expensive and contribute to a
high monthly payroll for a business of our limited size and revenues. Presently,
a total of 17 of our 36 full-time employees are paid more than $60,000 per year.
Our high payroll creates a high fixed cost and makes it difficult for us to
rapidly adjust to downturns in business in a timely manner. This could have a
material adverse effect on our business.
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<PAGE>
Other Dependence on Proprietary Technology
Our success and ability to compete is dependent in part on our proprietary
technology including our software codes. We rely on a combination of trade
secret, nondisclosure, patent, trademark and copyright law, which may afford
only limited protection. In addition, effective copyright, patent, trademark and
trade secret protection may be unavailable or limited in certain foreign
countries. Others may develop technologies that are similar or superior to our
technology. Despite our efforts to protect our proprietary rights, unauthorized
parties, including customers who receive listings of the source codes for our
products pursuant to the terms of their license or other agreements with us, may
attempt to reverse engineer or copy aspects of our products or to obtain and use
information that we regard as proprietary. As a result, unauthorized use of our
technology may occur.
Certain technology used in the our products is licensed from third
parties. The termination of any of these licenses, or the failure of the
third-party licensors to adequately maintain or update their products, could
result in a delay in our ability to complete certain of our products while we
seek to implement technology offered by alternative sources, and any required
replacement licenses could prove costly. We may also find it necessary or
desirable to obtain other licenses relating to one or more of our future
products or relating to current or future technologies. We may not be able to do
so on commercially reasonable terms or at all.
We Face Intense Competition
The market for our products is characterized by intense competition. We
compete with a multitude of other companies to obtain funded video game and
electronic toy development contracts. Many of our competitors are
well-established, have substantially greater financial resources, greater public
and industry recognition and broader marketing capabilities than us. Certain of
our competitors including Sega, Nintendo and Sony also have the ability to
control the use of our products on their proprietary video game systems. We
believe the principal competitive factors in our market are product quality,
reliability, features, functions, creativeness, performance, price, financial
stability, product reputation, ease of use and quality of support. We may not be
able to compete successfully, and competitors or others may develop technologies
or products that render our products obsolete or less marketable.
Our Fluctuations in Quarterly Revenues and Operating Results
Our revenue and operating results are subject to significant fluctuation
between fiscal quarters. A significant portion of our quarterly revenues is
derived from new projects and contracts. The timing of these projects is subject
to a variety of factors outside our control, such as client marketing budgets
and modifications in client strategies. Additionally, we periodically incur
costs in the hiring and training of employees in anticipation of future
contracts. Moreover, our business is subject to seasonal influences due to the
fact that most of the sales of the products which we design and develop occur
during the holiday selling season. This results in our revenues being higher in
the quarters ending December 31 and March 31 of each year. Our operating results
for any fiscal quarter may not be indicative of the results that may be achieved
for any subsequent fiscal quarter or for a full fiscal year. These fluctuations
may adversely affect the market price of our common stock.
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<PAGE>
Our Amortization of Intangible Assets
Approximately $2,917,000, or 72%, of our total assets as of June 30, 1999
consisted of patents and licenses. Patents and licenses represent the difference
between the aggregate purchase price for the assets acquired and the amount of
such purchase price allocated to the tangible assets so acquired. Our patents
and licenses are presently being amortized over an eight-year period. The
amounts amortized in a particular period constitute non-cash expenses and
decrease our net income (or increase our net loss) in that period. The reduction
in net income (or increase in net loss) resulting from the amortization of our
patents and licenses may have an adverse impact upon the market price of our
common stock.
Our Risks of Doing Business Abroad
We distribute certain of our proprietary products internationally through
distributors, and have entered into licenses to market certain of our products
internationally. Our business may be adversely affected by unfavorable general
economic conditions internationally, including economic downturns, which could
result in the reduction or deferral of purchases of video games and other
electronic toy software by prospective customers. In addition, we are subject to
all of the risks associated with trade restrictions, export duties and tariffs,
fluctuations in foreign currencies and international political, regulatory and
economic developments affecting foreign trade.
We Must Continue to Meet Nasdaq's Listing Maintenance Requirements
Our common stock is presently traded on the Nasdaq SmallCap Market. If we
complete our proposed merger with McGlen, we will have to reapply for listing
with Nasdaq. If our reapplication for listing is approved by Nasdaq, we must
thereafter continue to meet Nasdaq's listing maintenance requirements. To
maintain inclusion on the Nasdaq SmallCap Market, our common stock must continue
to be registered under Section 12(g) of the Exchange Act and we must continue to
have at least $2,000,000 in net tangible assets or $500,000 in income in two of
the last three years, a public float of at least 500,000 shares, $1,000,000 in
market value of public float, a minimum bid price of $1.00 per share, at least
two market makers and at least 300 round lot stockholders. We may not be able to
maintain such standards. If we fail to maintain listing on the Nasdaq SmallCap
Market, the market value of our common stock would likely decline and
stockholders would find it more difficult to dispose of our common stock.
Our Dividend Policy
We have not paid any cash dividends on our common stock since our
inception and do not intend to pay any cash dividends for the foreseeable
future. Our operations may not generate sufficient revenues to enable us to
consider declaring or paying cash dividends. It is anticipated that our future
earnings, if any, in the foreseeable future will be used by us to finance our
future growth.
We Are Subject to Anti-Takeover Considerations
As a Delaware corporation, we are subject to certain anti-takeover
provisions of Delaware law. Certain provisions of Delaware law could have the
effect of delaying, deferring or preventing a change in control of us, may
discourage bids for our common stock and may adversely affect the market price
of our stock.
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Our Potential for Significant Dilution
As noted above, a significant number of shares of our common stock are, or
may in the future become, issuable upon exercise of outstanding options or
warrants previously granted by us. We have also granted repricing rights in
favor of the selling stockholder which may require us to issue a significant
number of additional shares to the selling stockholder for no additional
consideration. We cannot predict whether these repricing rights will become
applicable or whether such options and warrants will be exercised in whole, in
part or at all. However, if shares of our common stock become issuable pursuant
to such repricing rights or if our presently-exercisable options and warrants
having exercise prices at or below the market price for our common stock as of
the date of this prospectus were to be exercised, purchasers of our common stock
could experience immediate substantial dilution in percentage voting power, pro
forma net tangible book value per share of our common stock and earnings (loss)
per share of our common stock.
Limitation of Liability and Indemnification of Our Officers and Directors
Our Certificate includes provisions that eliminate our directors' personal
liability for monetary damages to the fullest extent possible under Section
102(b)(7) of the DGCL (the "Director Liability Provision"). The Director
Liability Provision eliminates the liability of our directors to us and our
stockholders for monetary damages arising out of any violation by a director of
his fiduciary duty of due care. Under the DGCL, however, the Director Liability
Provision does not eliminate liability of a director for (i) breach of the
director's duty of loyalty, (ii) acts or omissions not in good faith or
involving intentional misconduct or knowing violation of law, (iii) payment of
dividends or repurchases or redemptions of stock other than from lawfully
available funds, or (iv) any transaction from which the director derived an
improper benefit. The Director Liability Provision also does not affect a
director's liability under the federal securities laws or the recovery of
damages by third parties. Furthermore, pursuant to the DGCL, the limitation on
liability afforded by the Director Liability Provision does not eliminate our
Directors' personal liability for breach of their duty of due care.
Our Certificate also includes provisions that require us to indemnify our
directors, officers, employees and agents to the fullest extent permitted by
Section 145 of the DGCL ("Section 145"). Section 145 provides that a director,
officer, employee or agent of a corporation: (i) shall be indemnified by the
corporation for expenses actually and reasonably incurred in defense of any
action or proceeding if such person is sued by reason of his service to the
corporation, to the extent that such person has been successful in defense of
such action or proceeding, or in defense of any claim, issue or matter raised in
such litigation, (ii) may, in actions other than actions by or in the right of
the corporation (such as derivative actions), be indemnified for expenses
actually and reasonably incurred, judgments, fines and amounts paid in
settlement of such litigation, even if he is not successful on the merits, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation (and in a criminal proceeding,
if he did not have reasonable cause to believe his conduct was unlawful), and
(iii) may be indemnified by the corporation for expenses actually and reasonably
incurred (but not judgments or settlements) of any action by the corporation or
of a derivative action (such as a suit by a shareholder alleging a breach by the
director or officer of a duty owed to the corporation), even if he is not
successful, provided that he acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation,
provided that no indemnification is permitted without court approval if the
director or officer has been adjudged liable to the corporation.
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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. McGlen's subsidiary, AMT Component, Inc., was
formed in 1997. 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. In
particular, it must retain 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 our proposed merger
with McGlen 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. 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.
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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 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. 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's current
vendors may not continue to sell merchandise to it or Ingram Micro may attempt
to compete with McGlen in the future. In such events, McGlen may not 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 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.
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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, or 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.
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
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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
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
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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, sales tax, libel and
personal privacy is uncertain and may take years to resolve. In addition, as
McGlen's services and products are 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.
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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 limited 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 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.
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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 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 has
attempted to ensure 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.
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.
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THE COMPANY
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.
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 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
discussed below, 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.
Page 23 of 42
<PAGE>
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.
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 began 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 recently
sold by us to the selling stockholder (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
Page 24 of 42
<PAGE>
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 the merger.
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.
Under our agreement with our business consulting firm, we will be required
to issue to such business consulting firm, upon completion of our 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 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 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
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<PAGE>
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. As discussed on pages 4
and 5 above, we will need to increase our net tangible assets to $4,000,000 and
we will need a minimum bid price for our common stock of at least $4.00 per
share in order to meet Nasdaq's initial listing requirements.
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.
Our Recent Financing
As contemplated by our merger agreement with McGlen, we recently
consummated a financing pursuant to a purchase agreement with the selling
stockholder. Under this purchase agreement, we sold 293,255 shares of our common
stock to the selling stockholder 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 the selling stockholder to purchase
an additional $750,000 of our common stock upon the completion of our merger
with McGlen. The $750,000 will be placed into escrow within three business days
after we deliver written notice to the selling shareholder that the SEC has
approved the proxy statement soliciting the consent of our shareholders for our
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
the selling stockholder 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.
The selling stockholder 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, the selling
stockholder will also receive, at no additional cost, an additional three-year
warrant covering a number of shares of common stock equal to 10% of the number
of shares of 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 the selling stockholder may be
exercised by the selling stockholder 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 the selling stockholder for such common stock, the selling stockholder
has repricing rights under our purchase agreement with it such that we will be
required to issue additional shares to the selling stockholder 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 the selling stockholder for such common stock.
Page 26 of 42
<PAGE>
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 the selling stockholder, 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.
We also agreed to use our best efforts to keep the registration statement
effective until July 12, 2001, until the selling stockholder 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 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 the selling
stockholder and other than legal fees in excess of $4,500 incurred by the
selling stockholder, in connection with the registration and sale of the shares
of our common stock being offered by it.
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 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 any
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 the selling stockholder 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.
Page 27 of 42
<PAGE>
SELLING STOCKHOLDER
The following table presents information regarding the selling
stockholder. As described on pages 21 and 22 above, the shares of common stock
listed below represent the shares which the selling stockholder purchased from
us on July 12, 1999, an indeterminate number of shares of common stock which the
selling stockholder has agreed to purchase from us for a total price of $750,000
upon completion of our proposed merger with McGlen, the shares of common stock
which the selling stockholder may own upon its exercise of a warrant issued by
us to it on July 12, 1999, an indeterminate number of shares which the selling
stockholder may own upon its exercise of an additional warrant to be issued by
us to it upon completion of our proposed merger with McGlen and an indeterminate
number of shares which the selling stockholder may own as the result of the
repricing rights granted by us to the selling stockholder.
Shares Beneficially Shares
Selling Stockholder Owned Before Offering(1) Offered(2)
------------------- --------------------- -------
Escalade Investors, LLC
c/o WEC Asset Management, LLC
One World Trade Center, Suite 4563
New York, New York 10046 1,014,661 1,014,661
- ---------------------------
(1) Represents (a) 293,255 shares purchased on July 12, 1999, (b) 29,325 shares
issuable upon exercise of a warrant acquired on July 12, 1999, and (c) an
indeterminate number of shares, estimated at 692,081 shares, to be issued upon
completion of our merger with McGlen, issuable upon exercise of an additional
warrant to be issued upon completion of our merger with McGlen, and issuable as
a result of the repricing rights granted by us to the selling stockholder as to
the 293,255 shares sold by us to it in July 1999 and the shares to be sold by us
to it upon completion of our merger with McGlen. The actual number of shares to
be issued to the selling shareholder under clause (c) above is dependent upon
the market price of our common stock in the future and may be higher or lower
than the number indicated.
(2) Assumes all of the shares beneficially owned by the selling stockholder are
sold.
Page 28 of 42
<PAGE>
USE OF PROCEEDS
The proceeds from the resale of shares of the selling stockholder's common
stock will belong to the selling stockholder. We will not receive any proceeds
from such resales of common stock. However, we will receive $750,000 in proceeds
from the sale of shares of our common stock to the selling stockholder upon
completion of our proposed merger with McGlen and we may receive additional
proceeds if the selling stockholder partially or totally exercises its warrants
issued or issuable by us for cash. The actual amount of proceeds to be received
by us, if any, upon the selling stockholder's exercise of such warrants will
depend on, among other things, the extent to which the warrants are exercised by
the selling stockholder for cash as opposed to being exercised pursuant to the
"cashless exercise" provisions applicable to such warrants (we will not receive
any proceeds from the "cashless exercise" of the warrants by the selling
stockholder but the selling stockholder will receive fewer shares of the common
stock pursuant to these "cashless exercise" provisions). We intend to use the
$750,000 in proceeds from the sale of our common stock to the selling
shareholder and any proceeds received from the exercise of such warrants for
cash for general working capital purposes.
PLAN OF DISTRIBUTION
Shares of our common stock offered by the selling stockholder for resale
hereunder may be effected by or for the account of the selling stockholder from
time to time in transactions (which may include block transactions) in the
Nasdaq SmallCap Market, in negotiated transactions, through a combination of
such methods of sale, or otherwise, at fixed prices that may be changed, at
market prices prevailing at the time of sale or at negotiated prices. The
selling stockholder may effect such transactions by selling the shares of our
common stock directly to purchasers, through broker-dealers acting as agents for
the selling stockholder or to broker-dealers who may purchase such shares of
common stock as principals and thereafter sell such shares from time to time in
any one or more such transactions. In effecting sales, broker-dealers engaged by
the selling stockholder may arrange for other broker-dealers to participate.
Such broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the selling stockholder and/or the purchasers of
the shares of common stock for whom such broker-dealers may act as agents or to
whom they may sell as principals, or both (which compensation, as to a
particular broker-dealer, might be in excess of customary commissions).
The selling stockholder has agreed not to sell more than 33% of the
aggregate number of shares of our common stock owned or issuable to it pursuant
to our purchase agreement with the selling stockholder. This limit applies to
each 30-day period after the date of this prospectus and, to the extent it is
not fully utilized in any period, is cumulative for subsequent periods. This
limitation, however, does not apply with respect to resales of shares of our
common stock made by the selling shareholder pursuant to this prospectus after
the date hereof and before October 10, 1999 if the selling shareholder waives
its repricing rights with respect to the shares it sells during that time.
Our registration of the shares of our common stock issued or issuable to
the selling stockholder does not necessarily mean that the selling stockholder
will sell any or all of the shares covered by this prospectus.
Page 29 of 42
<PAGE>
The selling stockholder and any broker-dealers or agents that are involved
in selling such shares of our common stock may be deemed to be "underwriters"
within the meaning of Section 2(a)(11) of the Securities Act. In such event, any
discounts, concessions or commissions received by such broker-dealers or agents
and any profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We have agreed to bear all reasonable expenses of registration of the
shares of common stock offered by the selling stockholder for resale, other than
any underwriting discounts, selling commissions, selling concessions and other
expenses, if any, payable to broker-dealers in connection with any sale of the
shares of common stock and the selling stockholder's legal fees in excess of
$4,500, all of which will be borne by the selling stockholder and/or by the
purchasers of such shares.
Subject to certain exceptions, we have also agreed to indemnify the
selling stockholder and its officers, directors and any persons who control the
selling stockholder against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments to which the selling stockholder or
its officers, directors and controlling persons may be required to make in
respect thereof.
LEGAL MATTERS
The validity of the shares offered hereby was passed upon for us by Clark
& Trevithick, a Professional Law Corporation, Los Angeles, California. Members
of such law firm presently own an aggregate of 13,333 shares of our common
stock.
INDEPENDENT AUDITORS
Our consolidated financial statements as of June 30, 1999 and 1998 and for
the two fiscal years ended June 30, 1999 and 1998 appearing in our Annual Report
on Form 10-KSB for the year ended June 30, 1999 filed with the SEC on September
24, 1999 were audited by Drucker, Math & Whitman, P.C., independent auditors, as
indicated in their report thereon with respect thereto, and are incorporated
herein by reference upon the authority of such firm as experts in giving said
report.
The financial statements of McGlen as of December 31, 1998 and 1997 and
for the two fiscal years ended December 31, 1998 and 1997 and the financial
statements of AMT Component, Inc. as of December 31, 1998 and for the fiscal
your ended December 31, 1998, the assets and liabilities of which were acquired
by McGlen on March 31, 1999, appearing in our definitive Schedule 14A Proxy
Statement filed with the SEC on October 6, 1999 were audited by Singer Lewak
Greenbaum & Goldstein LLP, independent auditors, as indicated in their reports
thereon with respect thereto, and are incorporated herein by reference upon the
authority of such firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any documents we file at the
SEC's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the SEC at 1-800-732-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
from the SEC's Web site at http://www.sec.gov.
Page 30 of 42
<PAGE>
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to documents we file with the SEC. The information incorporated by
reference is considered to be part of this prospectus. Information that we later
file with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until
the selling stockholder sells all of the shares of our common stock covered by
this prospectus:
1. Annual Report on Form 10-KSB for the year ended June 30, 1999 filed
on September 24, 1999;
2. Current Reports on Form 8-K filed on December 30, 1998, March 23,
1999, April 30, 1999, June 10, 1999 and July 13, 1999;
3. Definitive Schedule 14A Proxy Statement filed on October 6, 1999;
and
4. The description of our common stock contained in our registration
statement on Form 8-A filed with the SEC on February 23, 1996 (and
an amendment thereto filed with the SEC on Form 8-A/A on March 12,
1996)
This prospectus is part of a registration statement we filed with the SEC.
You may request a copy of the registration statement or any of the above
filings, at no cost, by writing or telephoning our President and Chief Executive
Officer at the following address and telephone number:
Jay Smith, III
President and Chief Executive Officer
Adrenalin Interactive, Inc.
5301 Beethoven Street, Ste. 255
Los Angeles, CA 90066
(310) 821-7880
DISCLOSURE OF SEC'S POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Pursuant to a registration rights agreement between us and the selling
stockholder, we have agreed, to the extent permitted by law, to indemnify the
selling stockholder and its officers, directors and any person who controls the
selling stockholder against any losses, claims, damages, liabilities, cost and
expenses arising out of or relating to (i) any untrue statement or alleged
untrue statement of a material fact contained in this prospectus, the related
registration statement and any amendments or supplements to this prospectus or
such registration statement, (ii) the omission or alleged omission to state
herein or therein a material fact required to be stated herein or therein, or
necessary to make the statements herein or therein, in light of the
circumstances under which they were made not misleading, or (iii) any violation
Page 31 of 42
<PAGE>
or alleged violation by us of the Securities Act, the Exchange Act or any state
securities law, except to the extent that such liabilities arise out of or are
based upon (i) any information furnished in writing to us by the selling
stockholder expressly for use in this prospectus, the related registration
statement and any amendments or supplements to this prospectus or such
registration statement, (ii) the failure of the selling stockholder to deliver
or cause to be delivered this prospectus or any amendments or supplements
thereto in connection with its resale of the shares of common stock which are
the subject of this prospectus, or (iii) the delivery of this prospectus or any
amendments or supplements thereto in connection with its resale of the shares of
common stock which are the subject of this prospectus after receiving notice
from us that this prospectus or any amendments or supplements thereto should not
be used. The foregoing indemnity does not apply to amounts paid by the selling
stockholder in settlement of any such liability if the settlement is effected
without our consent which was not unreasonably withheld. In addition, the
selling stockholder has agreed to indemnify us and our officers, directors, and
agents against any losses, claims, damages, liabilities, costs or expenses
arising out of or based upon and in conformity with written information
furnished by the selling stockholder expressly for use in this prospectus, the
related registration statement and any amendments or supplement to this
prospectus or such registration statement, subject to the same limitations and
conditions as are applicable to our indemnification of the selling stockholder.
Our Certificate of Incorporation (the "Certificate") also includes
provisions that eliminate our directors' personal liability for monetary damages
to the fullest extent possible under Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"). These provisions eliminate the liability of each
of our directors to us and our stockholders for monetary damages arising out of
any violation by such director of his fiduciary duty of due care. Under the
DGCL, however, such provisions do not eliminate liability of any of our
directors for (i) breach of such director's duty of loyalty, (ii) acts or
omissions not in good faith or involving intentional misconduct or knowing
violation of law, (iii) payment of dividends or repurchases or redemptions of
stock other than from lawfully available funds, or (iv) any transaction from
which such director derived an improper benefit. Such provisions also do not
affect a director's liability under the federal securities laws or the recovery
of damages by third parties. Furthermore, pursuant to the DGCL, the limitation
on liability afforded by such provisions does not eliminate a director's
personal liability for breach of the director's duty of due care. Although our
directors would not be liable for monetary damages to us or our stockholders for
negligent acts or omissions in exercising their duty of due care, our directors
remain subject to equitable remedies, such as actions for injunction or
rescission, although these remedies, whether as a result of timeliness or
otherwise, may not be effective in all situations. With regard to our directors
who also serve as our officers, these persons would be insulated from liability
only with respect to their conduct as our directors and would not be insulated
from liability for acts or omissions in their capacity as our officers.
Our Certificate also includes provisions that require us to indemnify our
directors, officers, employees and agents to the fullest extent permitted by
Section 145 of the DGCL. Section 145 of the DGCL provides that a director,
officer, employee or agent of a corporation: (i) shall be indemnified by the
corporation for expenses actually and reasonably incurred in defense of any
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<PAGE>
action or proceeding if such person is sued by reason of his service to the
corporation, to the extent that such person has been successful in defense of
such action or proceeding, or in defense of any claim, issue or matter raised in
such litigation, (ii) may, in actions other than actions by or in the right of
the corporation (such as derivative actions), be indemnified for expenses
actually and reasonably incurred, judgments, fines and amounts paid in
settlement of such litigation, even if he is not successful on the merits, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation (and in a criminal proceeding,
if he did not have reasonable cause to believe his conduct was unlawful), and
(iii) may be indemnified by the corporation for expenses actually and reasonably
incurred (but not judgments or settlements) of any action by the corporation or
of a derivative action (such as a suit by a shareholder alleging a breach by the
director or officer of a duty owed to the corporation), even if he is not
successful, provided that he acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation,
provided that no indemnification is permitted without court approval if the
director or officer has been adjudged liable to the corporation.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that, in the
opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
- ------------------------------------------------------
The following table sets forth the various expenses payable by us in
connection with the sale and distribution of the shares of common stock being
registered. All amounts shown are estimates, except the SEC registration fee.
Amount
------
SEC registration fee................................. $ 1,128
Legal fees and expenses.............................. 20,000
Accounting fees and expenses......................... 3,000
Miscellaneous expenses............................... 1,000
Total $25,128
=======
Item 15. Indemnification of Directors and Officers.
- ----------------------------------------------------
See "Disclosure of SEC's Position on Indemnification for Securities Act
Liabilities" commencing on page 26 of the prospectus.
Item 16. Exhibits.
- -------------------
Exhibit No. Item
- ---------- -------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of April 28, 1999,
among the registrant, McGlen and McGlen's principal
shareholders, incorporated by reference from Exhibit 2.1 to
the registrant's current report on Form 8-K, filed April 30,
1999.
4.1 Common Stock Purchase Agreement, dated July 12, 1999, between
the registrant and the selling stockholder, incorporated by
reference from Exhibit 4.1 to the registrant's current report
on Form 8-K, filed July 13, 1999 (the "July 1999 Form 8-K).
4.2 Registration Rights Agreement, dated July 12, 1999, between
the registrant and the selling stockholder, incorporated by
reference from Exhibit 4.2 to the July 1999 Form 8-K.
4.3 Form of Warrant between the registrant and the selling
stockholder, incorporated by reference from Exhibit 4.3 to the
July 1999 Form 8-K.
II-1
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<PAGE>
4.4 Form of Escrow Instructions between the registrant and the
selling stockholder, incorporated by reference from Exhibit
4.4 to the July 1999 Form 8-K.
5.1 Opinion of Clark & Trevithick, a Professional Law Corporation.
23.1 Consent of Clark & Trevithick, a Professional Law Corporation
(included in Exhibit 5.1).
23.2 Consent of Drucker, Math & Whitman, P.C.
23.3 Consent of Singer Lewak Greenbaum & Goldstein LLP in respect
of its audit of the financial statements of McGlen
incorporated by reference.
23.4 Consent of Singer Lewak Greenbaum & Goldstein LLP in respect
of its audit of the financial statements of AMT Component,
Inc. incorporated by reference.
24.1 Power of Attorney (previously filed).
Item 17. Undertakings.
- -----------------------
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
provided, however, that the undertakings set forth in paragraphs (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act that are incorporated by reference in the registration
statement.
II-2
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<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b) Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions summarized in Item 15
above, or otherwise, the registrant has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Los Angeles, State of California, on October 6, 1999.
ADRENALIN INTERACTIVE, INC.
By: /s/ Jay Smith, III
--------------------------
Jay Smith, III, President,
Chief Executive Officer and Treasurer
II-3
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<PAGE>
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Date Signature Title
---- --------- -----
/s/ Jay Smith, III
October 6, 1999 ____________________________
Jay Smith, III President, Chief Executive
Officer, Treasurer and
Director (principal
executive, financial and
accounting officer)
/s/ Michael Cartabiano
October 6, 1999 ____________________________
Michael Cartabiano Vice President and Secretary
/s/ Edward H. Mackay
October 6, 1999 ____________________________
Edward H. Mackay Director
/s/ Robert A.D. Wilson
October 6, 1999 ____________________________
Robert A.D. Wilson Director
Page 37 of 42
<PAGE>
EXHIBITS 5.1 AND 23.1
October 6, 1999
Adrenalin Interactive, Inc.
5301 Beethoven Street, Suite 255
Los Angeles, CA 90066
Re: Form S-3 Registration Statement
Dear Ladies and Gentlemen:
We have acted as counsel to Adrenalin Interactive, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the Form S-3
Registration Statement (No. 333-85263) (the "Registration Statement"), filed by
the Company with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
registration by the Company of 1,014,661 shares (the "Shares") of common
stock,$0.03 par value per share (the "Common Stock"), of the Company
representing: (a) 293,255 shares of Common Stock issued to the Selling
Stockholder on July 12, 1999 pursuant to that certain Common Stock Purchase
Agreement, dated July 12, 1999 (the "Purchase Agreement"), between the Company
and the Selling Stockholder; (b) 29,325 shares of Common Stock issuable to the
Selling Stockholder pursuant to its exercise of a warrant issued on July 12,
1999 under the Purchase Agreement; and (c) an indeterminate number of shares,
estimated at 692,081 shares, of Common Stock issuable to the Selling Stockholder
upon completion of the Company's merger with McGlen under the Purchase
Agreement, issuable to the Selling Stockholder pursuant to its exercise of an
additional warrant issuable upon completion of the Company's merger with McGlen
under the Purchase Agreement, and issuable to the Selling Stockholder as a
result of the repricing rights granted by the Company to the Selling Stockholder
under the Purchase Agreement in respect of the shares of Common Stock issued or
issuable to the Selling Stockholder under the Purchase Agreement.
This opinion is being furnished to you in accordance with the
requirements of Item 601(b)(5) of Regulation S-B promulgated under the
Securities Act.
In connection with the opinions hereinafter given, we have examined
copies of the following documents: (i) the Registration Statement; (ii) the
Purchase Agreement; (iii) the form of the warrants issued and issuable to the
Selling Stockholder under the Purchase Agreement; (iv) the Articles of
Incorporation of the Company, as currently in effect; (v) the Bylaws of the
Company, as currently in effect; (vi) a specimen certificate representing the
Shares; and (vii) copies of certain resolutions adopted by the Board of
Directors of the Company relating to, among other things, the Purchase
Agreement, the Shares and related matters. We have also examined originals or
copies certified or otherwise identified to our satisfaction of such other
corporate records and certificates of public officials as we have deemed
necessary or advisable for the purposes of this opinion. We have assumed the
authenticity of all documents submitted to us as originals, the genuineness of
all signatures, the legal capacity of natural persons and the conformity to
Page 38 of 42
<PAGE>
originals of all copies of all documents submitted to us. We have relied upon
the certificates of all public officials with respect to the accuracy of all
matters contained therein.
Based upon and subject to the foregoing, and assuming: (i) the
conformity of the certificates representing the Shares to the form of specimen
thereof examined by us; (ii) the due execution and delivery of such
certificates; and (iii) the receipt of the consideration for the Shares
designated in the resolutions approving the issuance of the Shares, we are of
the opinion that the Shares have been duly authorized by requisite corporate
action by the Company, and when the Shares have been issued, delivered and paid
for in accordance with the terms and conditions of the Purchase Agreement or in
accordance with the exercise provisions contained in the warrants issued or
issuable pursuant to the Purchase Agreement, will be validly issued, fully paid
and nonassessable.
Nothing herein shall be deemed an opinion as to the laws of any
jurisdiction other than the State of Delaware.
This opinion is intended solely for the use of the Company in
connection with the registration of the Shares. It may not be relied upon by any
other person or for any other purpose, or reproduced without the written consent
of this firm; provided, however, we hereby consent to the filing of this opinion
as an exhibit to the Registration Statement. In giving this consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act or the rules and regulations of the SEC
promulgated thereunder.
Certain members of our firm beneficially own an aggregate of 13,333
shares of Common Stock.
Very truly yours,
/s/ Clark & Trevithick
------------------------------
CLARK & TREVITHICK,
a Professional Law Corporation
2
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<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-85263) of
Adrenalin Interactive, Inc., relating to the registration of 1,014,661 shares of
common stock of Adrenalin Interactive, Inc., of our report, dated September 17,
1999, on the consolidated financial statements of Adrenalin Interactive, Inc.
and subsidiary as of and for the fiscal years ended June 30, 1999 and 1998
appearing commencing on page F-1 of Adrenalin Interactive, Inc.'s Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1999 filed with the SEC on
September 24, 1999, and to the use of our name, and the statements with respect
to us, under the heading "Independent Auditors" in the Prospectus to such
Amendment No. 1 to Form S-3 Registration Statement.
/s/ Drucker, Math & Whitman, P.C.
-----------------------------------
DRUCKER, MATH & WHITMAN, P.C.
North Brunswick, New Jersey
October 6, 1999
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<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Prospectus
constituting part of Amendment No. 1 to the Registration Statement on Form S-3
(No. 333-85263) of Adrenalin Interactive, Inc., of our report, dated April 14,
1999, except as to the information presented in Notes 9 and 10, for which the
dates are April 30 and April 28, 1999, respectively, on the financial statements
of McGlen Micro, Inc. as of and for the fiscal years ended December 31, 1998 and
1997, appearing on pages F-23 through F-36 of Adrenalin Interactive, Inc.'s
Definitive 14A Proxy Statement filed with the SEC on October 6, 1999. We also
consent to the reference to our firm under the heading "Independent Auditors" in
the Prospectus to the aforementioned Registration Statement.
/s/ Singer Lewak Greenbaum & Goldstein LLP
------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 7, 1999
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<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of Amendment No. 1 to the Registration Statement on Form S-3
(No. 333-85263) of Adrenalin Interactive, Inc., of our report, dated June 22,
1999, on the financial statements of AMT Component, Inc. (dba Access Micro
Technology and RAM Warehouse) for the year ended December 31, 1998, which appear
on pages F-37 through F-47 of Adrenalin Interactive, Inc.'s Definitive 14A Proxy
Statement filed with the SEC on October 6, 1999. We also consent to the
reference to our firm under the heading "Independent Auditors" in the Prospectus
to the aforementioned Registration Statement.
/s/ Singer Lewak Greenbaum & Goldstein LLP
------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Santa Ana, California
October 7, 1999
Page 42 of 42
