<PAGE>
As filed with the Securities and Exchange Commission on September 27, 2000
Registration No. 333-41070
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
MCGLEN INTERNET GROUP, INC.
(Name of Small Business Issuer in its Charter)
Delaware 7374 13-3779546
------------------ ---------------------- --------------
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Identification No.)
organization) Number)
3002 Dow Avenue, Suite 114
Tustin, California 92780
(714) 838-1240
----------------------------------
(Address and telephone number of principal executive
offices and principal place of business or intended
principal place of business)
George Lee
Chief Executive Officer
Mcglen Internet Group, Inc.
3002 Dow Avenue, Suite 114
Tustin, California 92780
(714) 838-1240
----------------------------------
(Name, address and telephone number
of agent for service)
Copies of all communications to:
J. Jay Herron, Esq.
Michael L. Hawkins, Esq.
O'Melveny & Myers LLP
114 Pacifica, Suite 100
Irvine, California 92618-3318
(949) 737-2900
<PAGE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [__]
If 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 this Form is a post-effective amendment filed pursuant to Rule
462(d) 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 under the Securities Act, 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, please check the following box. [x]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities Amount to Proposed Proposed Maximum Amount of
To Be Registered be Registered Maximum Offering Aggregate Offering Registration
Price Per Share(1) Price(1) Fee
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.03 par value 4,000,000(2) $1.13(1)(3) $4,520,000(4) $1,193.28
Common Stock, $.03 par value 2,000,000(5) $1.13(5) $2,260,000 $ 596.64
Common Stock, $.03 par value(5) 2,526,235(6) $1.13 $2,854,646 $ 753.63
Common Stock, $.03 par value 1,476,770 $1.11 $1,639,215 $ 432.75
----------------------------------------------------------------------------------------------------------------------------
Total 10,003,005 $11,273,861 $2,976.30(7)
</TABLE>
----------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended (the
"Act"). Original filing fee was based on the average of the high and
low prices of the common stock on July 7, 2000, which was $1.13.
Additional filing fee was based on the average of the high and low
prices of the common stock on September 25, 2000, which was $1.11.
(2) Represents shares which may be issued pursuant to our common stock
purchase agreement with Plumrose Holdings Inc.
(3) The price per common share under the common stock purchase agreement
will vary according to changes in the volume-weighted average daily
price of our common stock during the draw down periods provided for in
the agreement. The purchase price will be equal to 87% of the
volume-weighted average daily price for each trading day within such
draw down pricing periods. The agreement allows for up to 12 draws over
a period of 12 months for amounts up to $2,000,000 per draw.
(4) The maximum net proceeds Mcglen can receive is $24,000,000 less a 5%
cash placement fee payable to its placement agent, Ladenburg Thalmann &
Co. Inc., a 2.5% finders fee payable to Barclay Partners, Inc. and
$1,500 in escrow fees and expenses per draw down.
(5) Represents an estimate of the number of shares that may be issued upon
conversion of the 10% convertible debenture issued to AMRO
International, S.A., including an estimate of the number of shares
issuable upon conversion of principal and any accrued, but unpaid,
interest. The number of shares to be issued upon conversion will vary
according to changes in the volume-weighted average daily price of our
common stock during the pricing period provided for in the agreement.
The conversion price will be equal to 90% of the average of the five
lowest volume-weighted average prices during the twenty-two trading day
period ending on the trading day before the conversion date. The
debenture permits, at the holder's election, the conversion of accrued
but unpaid interest into shares at the same time the principal is
converted.
(6) The remainder of the shares to be registered may be offered for sale
and sold from time to time during the period the registration statement
remains effective, by or for the accounts of the selling stockholders.
These shares include 100,000 shares issuable upon the exercise of a
warrant issued to Plumrose under the common stock purchase agreement.
(7) Additional fee of $470.30 payable with Amendment No. 1. $2,506.00 was
previously paid.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 2000
PROSPECTUS
Mcglen Internet Group, Inc.
Common Stock
All of the shares of common stock being sold are offered by selling
stockholders. We will not receive any proceeds from the sale of the shares by
the selling stockholders. However, we will receive the sale price of any common
stock that we sell to Plumrose Holdings Inc. under the common stock purchase
agreement described in this prospectus or upon the exercise for cash of the
stock purchase warrants held by other selling stockholders, including warrants
we issued to Plumrose. We will pay the costs of registering the shares under
this prospectus, including legal fees.
This prospectus is part of a registration statement that covers the
issuance of up to (i) 4,000,000 shares of our common stock issuable by us from
time to time upon the exercise of an equity line of credit established for us by
Plumrose Holdings Inc.; (ii) 100,000 shares issuable by us upon the exercise of
a warrant owned by Plumrose Holdings Inc.; (iii) 2,000,000 shares issuable upon
conversion of $1,500,000 of our convertible notes held by AMRO International,
S.A.; (iv) 372,449 shares issuable upon exercise of a warrant issued to AMRO
International, S.A.; (v) 49,660 shares issuable by us upon the exercise of a
warrant issued to Ladenburg Thalmann & Co. Inc.; (vi) 250,000 shares owned by
The Lin Law Corporation; (vii) 56,257 shares issuable upon conversion of a
$100,000 convertible note held by Akira Minamino; (viii) 200,000 shares owned
by, and 50,000 shares issuable upon conversion of a $100,000 convertible note
held by, Masamitsu Ishihara; (ix) 42,000 shares issuable upon exercise of
warrants issued to Keiji Miyagawa; (x) 100,000 shares owned by 55 5th Street
Corporation; (xi) 20,000 shares owned by Akihiro Fursato; (xii) 250,000 shares
owned by MacKenzie Shea, Inc.; (xiii) 20,000 shares owned by AGF, Ltd.; (xiv)
60,000 shares owned by Avon Brill, LLC; (xv) 60,000 shares owned by Spyglass
Ventures, Inc.; (xvi) 50,000 shares owned by Glendale Corporation; (xvii) 60,000
shares owned by Haxton Corporation; (xviii) 69,663 shares issuable upon exercise
of a warrant owned by C. Kevin Chuang; (xix) 15,480 shares issuable upon
exercise of a warrant owned by Far East Capital Management; (xx) 43,134 shares
issuable upon exercise of a warrant owned by Escaldade Investors LLC; (xxi)
12,500 shares owned by Robert A. Shuey, III; (xxii) 12,500 shares owned by
Anthony F. Vaccaro, Jr.; (xxiii) 12,500 shares owned by, and 70,000 shares
issuable upon the exercise of an option issued to, Michael A. Colaiacovo, Jr.;
(xxiv) 12,500 shares owned by, and 40,000 shares issuable upon exercise of an
option issued to, Manuel M. Bello; (xxv) 25,000 shares owned by William Gilsing;
(xxvi) 15,000 shares owned by Michael Culver; (xxvii) 125,000 shares owned by
Grant Trexler; (xxviii) 112,500 shares owned by Doug Foster; (xxix) 112,500
shares owned by Peter Janssen; (xxx) 250,000 shares issuable upon conversion of
a promissory note issued to, and 239,699 shares issuable upon the exercise of a
warrant issued to, Synnex Information Technologies, Inc.; (xxxi) 69,663 shares
issuable by us upon the exercise of a warrant issued to Triangle Associates,
LLC; (xxxii) 275,000 shares issuable upon conversion of a promissory note issued
to by Deutsche Financial Services Corporation; (xxxiii) 250,000 shares issuable
upon conversion of a promissory note issued to Ingram Micro, Inc.; and (xxxiv)
500,000 shares issuable by us upon the exercise of a stock option to
Institutional Equity Corporation.
Our common stock is traded on the Nasdaq SmallCap Market System under
the symbol "MIGS." On September 25, 2000, the last reported sales price of our
common stock was $1.19.
The selling stockholders may offer shares of our common stock on The
Nasdaq SmallCap Market, in negotiated transactions or otherwise, or by a
combination of these methods. The selling stockholders may sell the shares
through broker-dealers who may receive compensation from the selling
shareholders in the form of discounts or commissions. Plumrose Holdings Inc. is
an "underwriter" within the meaning of the Securities Act of 1933 in connection
with its sales.
<PAGE>
-----------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 7.
-----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE COMMON STOCK OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Inthis prospectus, references to the "Company," "MIG," "we,"
"us," and "our" all refer to Mcglen Internet Group, Inc.
The date of this prospectus is ________ ___, 2000.
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. This prospectus is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
<PAGE>
TABLE OF CONTENTS
Page
----
Disclosure Regarding Forward-Looking Statements 1
Prospectus Summary 2
Summary Financial Information 4
Risk Factors 5
Use of Proceeds 16
Dividend Policy 16
Selected Historical Financial Data 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Our Business 24
Management 31
Principal Stockholders 35
Certain Transactions 36
Description of Capital Stock 39
Common Stock Purchase Agreement 43
Selling Securityholders and Plan of Distribution 48
Shares Eligible for Future Sale 51
Legal Matters 52
Experts 52
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 53
Market for Our Common Equity 54
Where You Can Find More Information 54
Financial Statements F-1
Until ______________, 2000 (25 days after the commencement of this
offering), all dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When we use words like "intend," "anticipate,"
"believe," "estimate," "plan" or "expect," we are making forward-looking
statements. We believe that the assumptions and expectations reflected in such
forward-looking statements are reasonable, based on information available to us
on the date of this prospectus, but we cannot assure you that these assumptions
and expectations will prove to have been correct or that we will take any action
that we may presently be planning. We have disclosed certain important factors
that could cause our actual results to differ materially from our current
expectations under "Risk Factors" and elsewhere in this prospectus. You should
understand that forward-looking statements made in connection with this offering
are necessarily qualified by these factors. We are not undertaking to publicly
update or revise any forward-looking statement if we obtain new information or
upon the occurrence of future events or otherwise.
1
<PAGE>
PROSPECTUS SUMMARY
Since this is a summary, it does not contain all the information that
may be important to you in evaluating your investment. You should read the
following summary, and the "Risk Factors" section, along with the more detailed
information and Financial Statements and the notes to the Financial Statements
appearing elsewhere in this prospectus or incorporated by reference in this
prospectus, before you decide whether to participate in this offering.
OUR BUSINESS
We are an Internet operating company focused on creating multiple
on-line business divisions targeting specific business-to-business and
business-to-consumer markets. Our centralized technology backbone and operations
infrastructure allow us to rapidly create focused on-line business divisions,
operate at low overhead cost, and maximize return on investment by creating
synergy among our business divisions. Our centralized operations division, which
includes a call center, sourcing, warehousing, fulfillment, accounting, business
development and information technology, supports order processing, logistics,
customer service, financial transactions and core technology for our business
divisions located in Tustin, California. Our business divisions include sales,
marketing, content management, product management and service management teams
focused on building unique customer experiences for each business division.
We currently offer more than 150,000 computer products on our three
operating on-line retail websites: Mcglen.com, AccessMicro.com and
Techsumer.com. We offer different mixtures of computing technology,
entertainment and communications products on these three websites based on the
different target market segments' buying patterns. Mcglen.com, launched in May
1996, and AccessMicro.com, launched in June 1996, both have achieved Customer
Certified Gold Merchant status on BizRate.com, an independent on-line retail
rating guide. Moreover, Gomez Advisor, an independent business rating guide,
consistently ranks Mcglen.com and AccessMicro.com among the best sites to
purchase computing products on the Web in their Internet Computer Store
Scorecard. Techsumer.com was launched in November 1999. Our net sales increased
from $11.5 million for the year ended December 31, 1998 to $27.5 million for the
year ended December 31, 1999 with our acquisition of AccessMicro.com in March
1999 and the launch of Techsumer.com in November 1999.
OUR HISTORY
We were incorporated in Delaware in May 1994. In March 1995, we changed
our name to Wanderlust Interactive, Inc. and in May 1998, we changed our name to
Adrenalin Interactive, Inc. On December 2, 1999, we completed a reverse
acquisition with Mcglen Micro, Inc. in which the stockholders of Mcglen Micro,
Inc. acquired control of the company. As a result of the acquisition, each share
of Mcglen Micro, Inc. was converted into 0.988961 shares of the company, with
approximately 25,485,527 shares being issued. On December 17, 1999, we changed
our name to Mcglen Internet Group, Inc., and changed our ticker symbol on the
Nasdaq SmallCap Market from "ADRN" to "MIGS."
Our executive offices are located at 3002 Dow Avenue, Suite 114,
Tustin, California 92780. Our Internet address is http://www.Mcglen.com.
Information contained on our website is not, and should not be considered, part
of this prospectus.
2
<PAGE>
THE OFFERING
Plumrose Holdings Inc. and we signed a common stock purchase agreement
dated April 10, 2000, for the future issuance and purchase of shares of our
common stock. The transaction closed on April 12, 2000. The stock purchase
agreement establishes what is sometimes termed an equity line of credit or an
equity draw down facility. In general, the draw down facility operates like
this: the investor, Plumrose, has committed up to $24 million to purchase shares
of our common stock over a 12 month period. Once every 22 trading days, we may
request a draw of up to $2,000,000 of that money, subject to a formula based on
the volume-weighted average common stock price and average trading volume. At
the end of a 22-day trading period following the draw down request, we and
Plumrose will calculate the amount of money that Plumrose will provide to us and
the number of shares we will issue to Plumrose in return for that money, based
on the formula in the stock purchase agreement.
Plumrose will receive a thirteen percent (13%) discount to the
volume-weighted average market price for the 22-day period and we will receive
the amount of the draw down less an escrow agent fee of $1,500 and a 5%
placement fee payable to the placement agent, Ladenburg Thalmann & Co. Inc.,
which introduced Plumrose to us. In addition, we are obligated to pay a finders
fee to Barclay Partners, Inc. equal to 2.5% of each draw down. On the exercise
of any given draw down, Ladenburg will also receive warrants to purchase an
amount of shares equaling five percent (5%) of the shares issued to Plumrose in
that draw down. We also have issued to Plumrose warrants to purchase 100,000
shares of our common stock at an exercise price of $1.875, in lieu of a minimum
draw down commitment. The common stock issuable upon exercise of those warrants
is included in the registration statement of which this prospectus is a part. In
addition, the remainder of the shares being registered may be offered for sale
from time to time during the period the registration statement remains
effective, by or for the accounts of the selling stockholders identified in this
prospectus.
The facility is based on a "use-it-or-lose-it" principle. We are under
no obligation to request a draw for any period. However, if we do not request a
draw for a given period, we may never be able to draw those funds again. We may
make up to a maximum of twelve (12) draws; however, the aggregate total of all
draws cannot exceed $24 million and no single draw can exceed $2 million. The
minimum amount we may draw down at any one time is $250,000 unless otherwise
agreed by Plumrose. Given recent declines in the price of our stock and current
trading volumes, we are not currently able to draw on the equity line without a
waiver of the minimum draw down amount.
Securities offered by Mcglen Up to 4,000,000 shares of our common
Internet Group, Inc. stock issuable upon the exercise from
time to time of an equity line of credit
established by Plumrose Holdings Inc.
Securities offered by others Up to 6,003,005 shares.
Common stock to be outstanding after 41,468,970 shares.
the offering (assuming issuance of
the 4,000,000 shares pursuant to our
equity line of credit and exercise of
all options, warrants or convertible
notes for which shares are being
registered in this prospectus)
Use of proceeds Promotion of our websites and general
corporate purposes.
Risk factors An investment in our common stock
involves a high degree of risk. See
"Risk Factors."
Nasdaq SmallCap System trading "MIGS"
symbol
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following financial information should be read together with the
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- -------------------------------------
1998 1999 1999 2000
---------------- ---------------- ---------------- ----------------
(in thousands, except per share data) (in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $ 11,525 $ 27,494 $ 9,969 $ 19,064
Gross profit............................... 1,818 2,069 1,141 1,886
Income (loss) before income taxes.......... 60 (3,511) 8 (2,168)
Net income (loss).......................... 58 (3,512) 8 (2,168)
Net income (loss) per share, basic
and diluted(1).......................... $ -- $ (0.11) $ -- $ (0.07)
Weighted average shares used in
net loss per share, basic
and diluted............................. 20,750 31,734 20,200 31,877
AT DECEMBER 31, AS OF JUNE 30,
------------------------------------- ----------------
1998 1999 2000
---------------- ---------------- ----------------
(in thousands) (in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 437 $ 962 $ 194
Working capital (deficit).................. 168 (1,557) (3,092)
Total assets............................... 1,101 3,304 3,021
Long-term debt and capital leases.......... -- 216 187
Total stockholders' equity (deficit)....... 211 (864) (2,486)
</TABLE>
--------------
(1) For a description of the computation of the net loss per share and the
number of shares used in the per share calculations, see Note 1 of Notes to
Financial Statements.
4
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully review and consider the information below, as well as the other
information contained in this prospectus and incorporated by reference, before
you make an investment in our common stock.
WE INCURRED A SIGNIFICANT LOSS IN 1999.
We incurred a loss of $3.5 million in 1999 and a loss of $2.2 million
for the six months ended June 30, 2000. As of December 31, 1999, we had a
working capital deficit of approximately $1.6 million and a stockholders'
deficit of approximately $864,000. Our auditors have included an explanatory
paragraph in their report for the year ended December 31, 1999, indicating there
is substantial doubt regarding our ability to continue as a going concern. As of
June 30, 2000, we had a working capital deficit of $3.1 million and a
stockholders' deficit of $2.5 million. There can be no assurance that we will be
profitable in the future. Furthermore, future profits, if any, will be dependent
on many factors, including, but not limited to, our ability to return our
operations to profitability in a timely manner, the need for additional
financing, and competition from other electronic commerce retailers. If we are
not able to significantly improve our operating results, we may be required to
cease or substantially curtail our operations.
WE WILL NEED TO OBTAIN ADDITIONAL FINANCING IN THE NEAR FUTURE.
Our capital requirements associated with the expanding operations have
been and will continue to be substantial. We anticipate, based on management's
internal forecasts and assumptions related to operations, that our existing
capital resources may not be sufficient to permit us to maintain and expand
operations and marketing. We are, therefore, likely to require additional
financing to execute our business plan. However, no assurance is given that we
will be able to obtain additional financing when needed, or that, if available,
such financing will be on terms acceptable to us. In any such financing, the
interests of our existing security holders could be substantially diluted.
We anticipate that we will need to raise additional funds in 2000 in
order to fund our current operations, pursue sales growth opportunities, develop
new websites or enhance our existing ones, respond to competitive pressures, or
acquire other businesses. If adequate funds are either not available or not
available on acceptable terms, we may be unable to accomplish these objectives.
Any inability to do so would have a negative effect on our business, revenues,
financial condition and results of operations.
The minimum amount we may draw down at any one time on our equity line
of credit with Plumrose Holdings, Inc. is $250,000 unless otherwise agreed by
Plumrose. Given recent declines in the price of our stock and current trading
volumes, we are not currently able to draw on the equity line without a waiver
of the minimum draw down amount by Plumrose, and we may thus not depend on this
funding source to meet our working capital and capital expenditure requirements.
In addition, even if we obtain a waiver of the minimum draw down amount,
business and economic conditions may not make it feasible to draw down under the
common stock purchase agreement at every opportunity, and draw downs are
available only every 22 trading days. We may need to raise additional capital to
fund more rapid expansion, to develop new and to enhance existing services to
respond to competitive pressures, and to acquire complementary businesses or
technologies. We may not be able to obtain additional financing on terms
favorable to us, if at all. If adequate funds are not available or are not
available on terms favorable to us, we may not be able to effectively execute
our business plan.
If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders will
be reduced. Moreover, these securities may have powers, preferences and rights
that are senior to those of the rights of our common stock.
WE HAVE A LIMITED ON-LINE OPERATING HISTORY THAT PROVIDES LITTLE INFORMATION
WITH WHICH TO EVALUATE OUR ELECTRONIC COMMERCE BUSINESS.
There is little information on which to evaluate our business and
prospects as an electronic commerce company. An investor in our common stock
must consider the risks and difficulties that early-stage companies frequently
encounter in the new and rapidly evolving market of electronic commerce. Such
risks for us include:
5
<PAGE>
o our evolving and unpredictable business model;
o our competitors that have more established electronic commerce
operations;
o our need and ability to manage growth; and
o the rapid evolution of technology in electronic commerce.
To address these risks and uncertainties, we must take various steps,
including:
o improving our customer service and providing outstanding order
fulfillment;
o continuing to develop and upgrade our technology,
infrastructure and systems that support our on-line stores;
o expanding the number of products and categories of merchandise
offered at our on-line stores;
o increasing our customer base to achieve economies of scale;
o attracting, retaining and motivating qualified personnel; and
o making our on-line stores more user-friendly and appealing to
customers.
WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING ANY OF OUR STRATEGIES OR IN ADDRESSING
THESE RISKS AND UNCERTAINTIES, AND EVEN IF WE ACCOMPLISH THESE OBJECTIVES, WE
STILL MAY NOT BE PROFITABLE IN THE FUTURE.
We incurred substantial losses from operations in 1999, and for the six
months ended June 30, 2000. As of December 31, 1999, we had an accumulated
deficit of approximately $3.4 million. We expect to continue to incur
substantial net losses at least through the year 2000. We plan to continue to
enhance our brand name through competitive pricing, marketing and advertising
programs, offering additional categories of merchandise for sale at our on-line
stores and improving and enhancing our technology, infrastructure and systems.
These initiatives will likely result in operating expenses that are higher than
current operating expenses. We will need to generate significant revenues to
achieve profitability, and to maintain that profitability if it is achieved.
Although our revenues from electronic commerce have grown in recent quarters,
such growth rates may not be sustainable and we may not become profitable in the
future.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR OPERATING RESULTS MAY FLUCTUATE
SIGNIFICANTLY.
Because electronic commerce is a new, emerging market, we cannot
accurately forecast our revenues. Although our revenues from electronic commerce
have grown in recent quarters, an investor should not use these past results to
predict our future results. We base our current and future expenditures on our
plans and estimates of future revenues. Our expenses are, to a large degree,
fixed. We may be unable to adjust spending in a timely manner if we experience
an unexpected shortfall in our revenues.
We expect that our future quarterly operating results will fluctuate
significantly because of many factors, many of which we do not control. These
factors include:
o our ability to satisfy and retain existing customers and
attract new customers at a sufficient rate;
o pricing competition, including, but not limited to, pricing
which results in no gross margin on certain products;
o our ability to acquire, price and market merchandise inventory
such that we maintain gross margins in our existing business
and in future product lines and markets;
o our ability to fulfill customer orders;
6
<PAGE>
o the level of traffic at our websites;
o the development, announcement or introduction of new sites,
services or products by us or by our competitors;
o the amount the Internet is used generally and, more
specifically, for the purchase of products such as those that
we offer;
o our ability to upgrade and develop our systems and
infrastructure and attract new employees;
o the occurrence of technical or communications failures, system
downtime and Internet disruptions;
o the amount and timing of operating costs and capital
expenditures that we incur to expand our business;
o governmental regulation and taxation policies;
o disruptions in service by common carriers such as United
Parcel Service or unanticipated increases in shipping and
transaction-processing costs; and
o general economic conditions and economic conditions specific
to the Internet, electronic commerce and the computer
industry.
OUR REVENUES DEPEND ON THE NUMBER OF TIMES CUSTOMERS MAKE PURCHASES AT OUR
ON-LINE STORES.
The amount of sales at our on-line stores depends in part on the number
of customers, the competitiveness of our prices and the availability of
merchandise from our suppliers. We cannot forecast the number of our future
customers, the future pricing strategies of our competitors or the future
availability of merchandise with any degree of certainty. It is clear, however,
that if the number of customers does not increase, if our gross margins decrease
or if the amount of merchandise available to us decreases substantially, our
business will suffer. Because of these and other factors, we believe that
period-to-period comparisons of our historical results of operations are only
partial indicators of our future performance.
OUR OPERATING RESULTS MAY FLUCTUATE DEPENDING ON THE SEASON.
We expect to experience fluctuations in our operating results because
of seasonal fluctuations in traditional retail patterns. Retail sales in the
traditional retail industry tend to be significantly higher in the fourth
calendar quarter of each year than in the preceding three quarters. As a result
of this and other factors, our operating results in one or more future quarters
may fluctuate and, therefore, period-to-period comparisons of our historical
results of operations may not be good indicators of our future performance.
WE MAY SUFFER SYSTEMS FAILURES AND BUSINESS INTERRUPTIONS.
Our success, especially our ability to receive and fulfill customer
orders, largely depends on the efficient and uninterrupted operation of our
computer and telephone communications systems. Almost all of our computer and
communications systems are located at a single leased facility in Tustin,
California. We have experienced temporary power failures and telecommunications
failures from time to time at this facility. Our systems are vulnerable to
damage from fire, earthquakes, floods, power loss, telecommunications failures,
break-ins and other events. Despite any precautions we may take, the occurrence
of natural disasters or other unanticipated problems could cause system
interruptions, delays and loss of critical data and could prevent us from
providing services. Moreover, although we have implemented network security
measures, our servers are vulnerable to computer viruses, physical or electronic
break-ins, attempts by third parties deliberately to exceed the capacity of our
systems and similar disruptions. Any of these events could lead to interruptions
or delays in service, loss of data or the inability to accept and confirm
customer orders. Generally, we do not have redundant systems or a formal
disaster recovery plan, and our coverage limits on our property and business
interruption insurance may not be adequate to compensate us for losses that may
occur.
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WE FACE RISKS OF CAPACITY CONSTRAINTS.
Our revenues depend to a significant degree on the number of customers
who use our on-line stores to buy merchandise. We depend on the satisfactory
performance, reliability and availability of our websites,
transaction-processing systems, network infrastructure, customer support center,
and delivery and shipping systems. These factors are critical to our reputation,
our ability to attract and retain customers and to maintain adequate customer
service levels, and our operating results. Our on-line stores have experienced
periodic temporary capacity constraints from time to time, and we continue to
experience capacity constraints at our customer support center primarily related
to inbound customer telephone inquiries. Capacity constraints could prevent
customers from gaining access to our on-line stores or our customer support
center for extended periods of time and decrease our ability to fulfill customer
orders or decrease our level of customer acquisition or retention. Such
constraints would also decrease the appeal of our on-line stores and decrease
our sales. If the amount of traffic, the number of orders or the amount of
traffic to our websites increases substantially, we may experience capacity
constraints and may need to further expand and upgrade our technology,
transaction-processing systems and network infrastructure. We may be unable to
sufficiently predict the rate or timing of increases in the use of our on-line
stores to enable us to quickly upgrade our systems to handle such increases. In
addition, we may be unable to increase our capacity at our customer support
center to handle the amount of current or future customer telephone inquiries.
WE FACE RISKS RELATING TO SYSTEMS DEVELOPMENT.
We are heavily dependent on our technological systems, some of which
were not designed for electronic commerce but have been modified by us for that
use. Although we upgrade and expand these systems on an ongoing basis, in the
near future we will need to significantly upgrade and expand or replace our
transaction-processing systems to handle increased traffic at our on-line
stores. We will also need to upgrade our systems to improve their scalability.
We also plan to upgrade and expand our systems to add automated customer
service, proactive e-mail and customer feedback features to provide enhanced
customer service, more complete customer data and better management reporting
information. These efforts will require us to integrate newly developed and/or
purchased technologies into our existing systems and to hire more engineering
and information technology personnel in the near future. If we are unable in a
timely manner to hire required personnel, to add new software and hardware, or
to develop and upgrade our existing systems to handle increased traffic, we
could experience unanticipated system disruptions, slower response times,
degraded customer service and a decrease in our ability to fulfill customer
orders.
WE MAY BE UNABLE TO MANAGE OUR GROWTH.
Since our formation in 1996, we have experienced rapid growth. We
intend to pursue the continuation of this growth by further developing our
marketing programs, hiring additional technical support and operations
personnel, and investing in additional facilities and systems. However, we
cannot be certain that our growth will continue at a rapid pace even if we
effectively implement these programs and initiatives. Our ability to
successfully implement our business plan in a rapidly evolving market requires
an effective planning and growth-management process. If we are unable to manage
our growth, we may not be able to implement our business plan, and our business
may suffer as a result. We expect that we will have to expand our business to
address potential growth in the number of customers, to expand our product and
service offerings and to pursue other market opportunities. We expect that we
will need to expand existing operations, particularly those relating to
information technology, customer service and merchandising. We expect that we
will also need to continue to improve our operational, financial and inventory
systems, procedures and controls, and will need to expand, train and manage our
workforce, particularly our information technology staff. Furthermore, we expect
that we will need to continue to manage multiple relationships with various
suppliers, freight companies, warehouse operators, websites, Internet service
providers and other third parties to keep control over our strategic direction
as our electronic commerce business evolves.
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THE ELECTRONIC COMMERCE MARKET IS INTENSELY COMPETITIVE.
The electronic commerce industry is new, rapidly evolving and intensely
competitive. We may not be successful in competing against our present and
future competitors. It is not difficult to enter the electronic commerce market,
and current and future competitors can launch new electronic commerce websites
at relatively low cost. We expect competition in electronic commerce to increase
as retailers, suppliers, manufacturers and direct marketers who have not
traditionally sold computer products and consumer goods directly to consumers
through the Internet enter this market segment. Furthermore, competition may
increase to the extent that mergers and acquisitions result in electronic
commerce companies with greater market share and revenues. Increased
competition, or failure by us to compete successfully, is likely to result in
price reductions, fewer customer orders, reduced gross margins, increased
marketing costs, loss of market share, or any combination of these problems.
We believe that the principal competitive factors affecting our market
are brand name recognition, competitive pricing, quality of customer service,
quality of product information, breadth of merchandise offerings, cost of
customer acquisition and ease of use of electronic commerce sites. Although we
believe we compete adequately with respect to such factors, we cannot assure you
that we can maintain our competitive position against current and potential
competitors, especially those with greater financial, marketing, customer
support, technical and other resources. For instance, recently some competitors
have begun selling certain products at or near the purchase price paid by them
to acquire the products. To improve our competitive position, we are focused on
increasing our level of customer service and maintaining competitive pricing.
Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with suppliers to obtain
exclusive or semi-exclusive sources of merchandise. New competitors or alliances
among competitors, or among competitors and suppliers, may emerge and rapidly
acquire market share. For example, Dell Computer Corporation and Amazon.com,
Inc. have agreed to provide links from their websites to new Web pages that
advertise their respective products. Many of our current and potential
competitors have significantly greater financial, marketing, customer support,
technical and other resources than we do. As a result, they may be able to
secure merchandise from suppliers on more favorable terms than we can, 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 we can.
WE RELY HEAVILY ON CERTAIN MANUFACTURERS, DISTRIBUTORS AND SUPPLIERS.
We rely heavily on certain manufacturers, distributors and suppliers to
supply us with merchandise for sale at our on-line stores. We cannot assure you
that we will be able to develop and maintain satisfactory relationships with
such parties on acceptable commercial terms, or that we will be able to obtain
sufficient quality and quantities of merchandise at competitive prices. Also,
the quality of service provided by such parties may fall below the standard
needed to enable us to conduct our business effectively. We acquire products for
sale both directly from manufacturers and indirectly through distributors and
suppliers. Purchases from Ingram Micro Inc., a distributor of computers and
related products, accounted for approximately 35% of our aggregate merchandise
purchases for 1999. We have no long-term contracts or arrangements with
manufacturers, distributors or suppliers that guarantee availability of
merchandise for our on-line stores. We cannot assure you that current
manufacturers, distributors and suppliers will continue to sell merchandise to
us or otherwise provide merchandise for sale by us or that we will be able to
establish new manufacturer, distributor or supplier relationships that ensure
merchandise will be available for sale by us. We also rely on many of our
distributors and suppliers to ship merchandise to customers. We have limited
control over the shipping procedures of these distributors and suppliers, and
such shipments have often been subject to delays.
WE RELY HEAVILY ON CERTAIN OTHER THIRD PARTIES, INCLUDING INTERNET SERVICE
PROVIDERS AND TELECOMMUNICATIONS COMPANIES.
Our operations depend on a variety of third parties for Internet
access, telecommunications, operating software, order fulfillment, merchandise
delivery and credit card transaction processing. We have limited control over
these third parties, and we cannot assure you that we will be able to maintain
satisfactory relationships with any of them on acceptable commercial terms. We
cannot assure you that the quality of products and services that they provide
will remain at the levels needed to enable us to conduct our business
effectively.
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We rely on Internet service providers to connect our website to the
Internet. From time to time, we have experienced temporary interruptions in our
website's connections and also our telecommunications access. Frequent or
prolonged interruptions of these website connection services could result in
significant losses of revenues. Our website software depends on operating
systems, database and server software that were produced by and licensed from
third parties. From time to time, we have discovered errors and defects in such
software and, in part, we rely on these third parties to correct these errors
and defects promptly.
Third-party distribution centers fulfill a significant portion of the
sales for which we are responsible. Accordingly, any service interruptions
experienced by these distribution centers as a result of labor problems or
otherwise could disrupt or prevent the fulfillment of some of our customers'
orders. In addition, we use United Parcel Service as the primary delivery
service for our products. Our business would suffer if labor problems or other
causes prevented this carrier from delivering our products for significant time
periods. Furthermore, we rely on a single credit card processing service for the
processing of credit card transactions. If computer systems failures or other
problems were to prevent our credit card service from processing our credit card
transactions, we would experience delays and business disruptions. Any such
delays or disruptions in customer service may damage our reputation or result in
a loss of customers.
WE MAY EVENTUALLY BE REQUIRED TO COLLECT SALES TAX FROM MOST OR ALL OF OUR
CUSTOMERS.
We currently collect sales tax on sales of products delivered to
residents in the state of California and drop-shipped from Ingram Micro to
residents of Massachusetts. Various states have tried to impose on direct
marketers the burden of collecting sales taxes on the sale of products shipped
to state residents. The United States Supreme Court affirmed its position that
it is unlawful for a state to impose sales tax collection obligations on an
out-of-state mail order company whose only contacts with the state are the
distribution of catalogs and other advertising materials through the mail and
subsequent delivery of purchased goods from out-of-state locations by parcel
post and interstate common carriers. It is possible that legislation may be
passed to supersede the Supreme Court's decision, or that the Court may change
its position. Additionally, it is uncertain whether any new rules and
regulations may be adopted, in terms of sales tax collection obligations, to
govern electronic commerce companies as the industry continues on its explosive
pace of growth. The imposition of new sales tax collection obligations on us in
states to which we ship products would result in additional administrative
expenses to us. More importantly, though, we may lose one of our most
competitive advantages because of a higher total price of products for our
customers.
SHIPPING AND POSTAGE COULD INCREASE OUR OPERATING EXPENSES.
We ship our products to customers generally by United Parcel Service
and other overnight delivery and surface services. We generally invoice
customers for shipping and handling charges. If we are unable to pass on to our
customers future increases in the cost of commercial delivery services, our
operating results will be adversely affected. Moreover, any increases in postal
costs could have an adverse effect on our operating results.
WE FACE RISKS RELATING TO OUR INVENTORY.
We directly purchase the majority of the merchandise that we sell at
our on-line stores. We assume the inventory, inventory obsolescence and price
erosion risks for products that we purchase directly. These risks are especially
significant because much of the merchandise we sell at our on-line stores (for
example, computer hardware, software and consumer electronics) is characterized
by rapid technological change, obsolescence and price erosion. In the recent
past we have recorded charges for obsolete inventory and have had to sell
certain merchandise at a discount or loss. It is impossible to determine with
certainty whether an item will sell for more than the price we pay for it.
Because we rely heavily on purchased inventory, our success will depend on our
ability to liquidate our inventory rapidly, the ability of our buying staff to
purchase inventory at attractive prices relative to its resale value, and our
ability to manage customer returns and the shrinkage resulting from theft, loss
and misrecording of inventory. If we are unsuccessful in any of these areas, we
may be forced to sell our inventory at a discount or loss.
MOST MERCHANDISE SOLD BY US CARRIES A WARRANTY FROM THE MANUFACTURER OR THE
SUPPLIER, AND WE ARE NOT OBLIGATED TO ACCEPT MERCHANDISE RETURNS.
Nevertheless, we in fact have accepted returns from customers for which
we did not receive reimbursements from our manufacturers or suppliers, and the
levels of returned merchandise in the future might exceed our expectations. We
may also find that we have to accept more returns in the future to maintain
customer satisfaction.
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WE FACE RISKS RELATED TO EXPANSION INTO NEW SERVICES AND BUSINESS AREAS.
To increase our revenues, we will need to expand our operations over
time by promoting new or complementary products or by expanding the breadth and
depth of our product or service offerings. If we expand our operations in this
manner, we will require significant additional development resources and such
expansion may strain our management, financial and operational resources. We may
not significantly benefit in such expansion from the Mcglen brand name or from
the early entry advantage that we have experienced in the on-line computer
products market. Gross margins attributable to new business areas may be lower
than those associated with our existing business activities. We cannot assure
you that our expansions into new product categories, on-line sales formats or
products or service offerings will be timely or will generate enough revenue to
offset their costs. Also, any new product category or product or service
offering that is not favorably received by consumers could damage our brand
reputation.
ELECTRONIC COMMERCE POSES SECURITY RISKS TO US.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely
upon encryption and authentication technology licensed from third parties to
provide secure transmission of confidential information. We cannot assure you
that our security measures will prevent security breaches, and such breaches
could expose us to operating losses, litigation and possible liability. Advances
in computer capabilities, new discoveries in the field of cryptography or other
events or developments may result in a compromise or breach of the algorithms
that we use to protect customer transaction data. A party who is able to
circumvent our security measures could steal proprietary information or
interrupt our operations. We may need to spend a great deal of money and use
other resources to protect against the threat of such security breaches or to
alleviate problems caused by such breaches. Concerns over the security of
on-line transactions and the privacy of users may also inhibit the growth of the
Internet generally, and the World Wide Web in particular, especially as a means
of conducting commercial transactions.
WE ARE DEPENDENT ON INTELLECTUAL PROPERTY.
Our performance and ability to compete are dependent to a significant
degree on our proprietary technology. We rely on a combination of trademark,
copyright and trade secret laws to establish and protect our proprietary rights.
Although we have applied for trademark protection for the Mcglen.com name, this
name is not currently a registered trademark in the United States. We cannot
assure you that we will be able to secure significant protection for this
trademark and our other trademarks or service marks. It is possible that our
competitors or others will adopt product or service names similar to
"Mcglen.com" or other service marks or trademarks of ours, thereby impeding our
ability to build brand identity and possibly confusing customers.
Copyright laws protect our proprietary software. The source code for
our proprietary software also is protected under applicable trade secret laws.
We cannot assure you that the steps we take to protect our software will prevent
misappropriation of our technology or that the agreements we enter into for that
purpose will be enforceable. It might be possible for a third party to copy or
otherwise obtain and use our software or other proprietary information without
authorization, or to develop similar software independently. Policing
unauthorized use of our technology is difficult, particularly because the global
nature of the Internet makes it difficult to control the ultimate destination or
security of software or other data transmitted. The laws of other countries may
not adequately protect our intellectual property.
In the systems and software industries, it is common that companies
receive notices from time to time alleging infringement of patents, copyrights
or other intellectual property rights of others. We may from time to time be
notified of claims that we may be infringing upon patents, copyrights or other
intellectual property rights owned by third parties. Companies may pursue claims
against us with respect to the alleged infringement of patents, copyrights or
other intellectual property rights owned by third parties. Although we believe
we have not violated or infringed upon any intellectual property rights and have
taken measures to protect our own rights, there is no assurance that we will
avoid litigation. Litigation may be necessary to protect our intellectual
property rights and trade secrets, to determine the validity of and scope of the
proprietary rights of others or to defend against third party claims of
invalidity. Any litigation could result in substantial costs and diversion of
resources away from the day-to-day operation of our business.
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Existing copyright, trademark, patent and trade secret laws afford only
limited protection. Existing laws, in combination with the steps we have taken
to protect our proprietary rights, may be inadequate to prevent misappropriation
of our technology or other proprietary rights. Also, such protections do not
preclude competitors from independently developing products with functionality
or features similar or superior to our products and technologies.
We also rely on a variety of technologies that we license from third
parties, such as the database and Internet commerce server applications that we
license. We cannot assure you that these third-party technology licenses will
continue to be available to us on commercially reasonable terms. If we lose any
such licenses, or if we are unable to maintain or obtain upgrades to any of
these licenses, it could delay completion of our proprietary software
enhancements until equivalent technology is identified, licensed or developed,
and integrated.
WE ARE VULNERABLE TO THE RAPID EVOLUTION OF ELECTRONIC COMMERCE AND RELATED
TECHNOLOGY.
The Internet and the electronic commerce industry 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. Changes in the Internet,
electronic commerce and related technology could render our website and
technology obsolete. To remain competitive, we must continue to enhance and
improve the customer service features, responsiveness and functionality of our
website. Our success in achieving these goals depends on our ability to develop
or license new technologies and respond promptly and cost-effectively to
technological advances and emerging industry standards and practices. The
development and licensing of technologies relating to the Internet and
electronic commerce involve significant technical, financial and business risks.
We may not be successful in developing, licensing or integrating new
technologies or promptly adapting our websites, proprietary technology and
transaction-processing systems to customer needs or emerging industry standards.
WE MAY BECOME SUBJECT TO MORE BURDENSOME GOVERNMENT REGULATION.
We are subject, both directly and indirectly, to various laws and
governmental regulations relating to our business. There are currently few laws
or regulations directly applicable to commercial on-line services or the
Internet. However, due to the increasing popularity and use of commercial
on-line services and the Internet, it is possible that new laws and regulations
may be adopted. These laws and regulations may cover issues including, for
example, user privacy, pricing and characteristics and quality of products and
services. Moreover, the applicability to commercial on-line services and the
Internet of existing laws governing issues including, for example, property
ownership, libel and personal privacy, is uncertain and could expose us to
substantial liability. Any new legislation or regulation or the application of
existing laws and regulations to the Internet could have a material and adverse
effect on our business.
In addition, because our services and products are available over the
Internet anywhere in the world, multiple jurisdictions may claim that we are
required to qualify to do business as a foreign corporation in each of those
jurisdictions. Our failure to qualify as a foreign corporation in a jurisdiction
where we are required to do so could subject us to taxes and penalties for the
failure to qualify. It is possible that state and foreign governments might also
attempt to regulate our transmissions of content on our website or prosecute us
for violations of their laws. There can be no assurance that violations of local
laws will not be alleged or charged by state or foreign governments, that we
might not unintentionally violate these laws or that these laws will not be
modified, or new laws enacted, in the future.
For a period of three years, the Internet Tax Freedom Act (ITFA)
effectively bars state or local governments from imposing taxes that would
subject on-line commerce transactions to taxation in multiple states. The ITFA
does not prohibit state or local taxation of on-line commerce products or
services that would otherwise be taxed, such as in states where a company has a
physical presence. The ITFA also provides for the establishment of a commission
to study on-line commerce and to recommend a fair method of taxing Internet
transactions. We cannot be certain that upon expiration of the ITFA, we will not
be subject to further taxation by state or local governments on the sale of
merchandise.
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE.
We depend almost entirely on the Internet for revenue and the increased
use of the Internet for commerce is essential for our business to grow.
Accordingly, our success depends in large part on the continued development of
the infrastructure for providing Internet access and services. The Internet
could lose its viability or its usage could decline due to many factors beyond
our control, including:
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o delays in the development of the Internet infrastructure;
o power outages;
o the adoption of new standards or protocols for the Internet;
or
o changes or increases in governmental regulation.
We cannot be certain that the infrastructure or complementary services
necessary to maintain the Internet as a useful and easy means of buying goods
will be developed or that, if they are developed, the Internet will remain a
viable marketing and sales channel for the types of products and services that
we offer at our on-line stores.
WE FACE RISKS ASSOCIATED WITH MAINTAINING THE VALUE OF OUR DOMAIN NAMES.
We currently hold various Web domain names relating to our brand,
including the Mcglen.com, AccessMicro.com and Techsumer.com domain names. We
cannot assure you that we will be able to acquire or maintain relevant domain
names in all jurisdictions in which we conduct business. Governmental agencies
and their designees generally regulate the acquisition and maintenance of domain
names. The regulation of domain names in the United States and in foreign
countries is subject to change. Governing bodies may establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. The relationship between regulations
governing domain names and laws protecting trademarks and similar proprietary
rights is unclear. Therefore, we may be unable to prevent third parties from
acquiring domain names that are similar to, infringe on or otherwise decrease
the value of our brand and our trademarks and other proprietary rights.
VOLATILITY IN THE UNITED STATES STOCK MARKET, NASDAQ SMALLCAP MARKET AND THE
TECHNOLOGY SECTOR, AS WELL AS OTHER FACTORS, MAY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK.
The trading price of our common stock has been and may continue to be
subject to fluctuations in response to quarter-to-quarter variations in
operating results, changes in earnings estimates by analysts, announcements of
technological innovations or new products introduced by us or our competitors
and other events or factors. The stock market in general, and the shares of
technology companies in particular, have experienced extreme price fluctuations
in recent years. This volatility has had a substantial impact on the market
prices of securities issued by many companies for reasons unrelated to the
operating performance of the companies affected. These broad market fluctuations
may adversely affect the market price of our common stock.
OUR STOCK IS HELD BY RELATIVELY FEW PERSONS.
George Lee, Mike Chen and Alex Chen influence all fundamental matters
affecting Mcglen. Currently, these three persons control more than 60% of the
total combined voting power of the outstanding common stock. Accordingly, these
individuals are able to, among other things, determine the outcome of all
corporate decisions, effect all corporate transactions (including mergers,
consolidations and the sale of all or substantially all of our assets), or
prevent or cause a change in control in the company, without the consent of the
other holders of the common stock.
THE EXERCISE BY US OF OUR DRAW DOWN RIGHTS UNDER OUR EQUITY LINE OF CREDIT AND
THE CONVERSION OF OUTSTANDING CONVERTIBLE NOTES AND EXERCISE OF OUTSTANDING
WARRANTS BY THEIR HOLDERS MAY CAUSE SIGNIFICANT DILUTION.
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. Moreover, the exercise by us of our equity line of
credit could also result in the issuance of a significant number of shares of
our common stock. We cannot predict whether or when any outstanding options and
warrants will be exercised in whole, in part or at all. However, if the market
price of our stock falls and we elect to exercise our draw down rights, or
conversely, if our stock price rises and holders of outstanding options and
warrants elect to exercise these instruments, 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.
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THE ISSUANCE OF SHARES UNDER OUR EQUITY LINE OF CREDIT AND OUTSTANDING
CONVERTIBLE NOTES MAY DEPRESS OUR STOCK PRICE.
The shares issued under our equity line of credit and outstanding
convertible notes convert at floating rates based upon formulas tied to the
market price of our common stock. As such, the lower our stock price is at the
time we draw down on our equity line or the holder of a convertible note
converts, the more shares will have to be issued as a result of that
transaction. For example, as illustrated in more detail by the table presented
under "Description of Capital Stock - Potential Dilution", under our equity line
of credit, if our volume weighted average daily stock price falls by 50% from
one draw down period to another, we will have to issue twice as many shares in
the later period to receive the same draw down amount, up to a maximum of the
lesser of 9.9% of our outstanding common stock on the draw down exercise date or
19.9% of our outstanding common stock on the closing date of the equity line
(equal to approximately 6.4 million shares, but subject to increase with
shareholder approval). Other than the overall limitation of Plumrose to less
than 10% ownership of our total outstanding shares, there is no absolute
limitation on the aggregate number of shares issuable on multiple draw downs on
our equity line. In addition, if the market price of our stock were to fall by
50% from present levels, AMRO and other holders of convertible debt would be
entitled to convert their notes for twice as many shares of our common stock as
they would at today's level. Although AMRO may not convert the note at any one
time for a number of shares that, combined with shares already owned by AMRO,
would exceed 9.9% of our total outstanding stock as of the conversion date, the
note allows AMRO to convert the principal and accrued interest in an unlimited
number of installments, such that there is effectively no absolute limit on the
number of shares that may be issued on multiple conversions of the note. Thus
draw downs on our equity line and the conversion of outstanding convertible
notes when our stock price is low may greatly increase the number of outstanding
shares, which may cause our stock price to fall further, allowing the selling
noteholders in turn to convert their convertible notes into even greater amounts
of common stock, the sale of which could yet further depress our stock price. In
addition, downward price pressure caused by the sale of shares issued on draw
downs under our equity line or the conversion of convertible notes could
encourage short sales by the selling shareholders or others, placing yet more
downward pressure on the price of our common stock.
WE ARE EXPOSED TO THE RISKS OF A GLOBAL MARKETPLACE.
A portion of our products are either produced in, or have major
components produced in, the Asia Pacific region. We have business relationships
with companies located in the region directly, and we engage in U.S. Dollar
denominated transactions with these companies and U.S. divisions and
subsidiaries of these companies. As a result, we may be indirectly affected by
risks associated with international events, including economic and labor
conditions, political instability, tariffs and taxes, availability of products
and currency fluctuations in the U.S. Dollar versus the regional currencies.
Countries in the Asia Pacific region, including Japan, have experienced
weaknesses in their currency, banking and equity markets from time to time.
These weaknesses could adversely affect the supply and prices of products and
components and, ultimately, our results of operations.
WE MAY ENCOUNTER PROBLEMS WITH RESPECT TO OUR CONTINUED LISTING ON THE NASDAQ
SMALLCAP MARKET IN THE FUTURE.
Although our securities are quoted on the Nasdaq SmallCap Market, we
cannot assure you that a trading market for our stock will be maintained. In
addition, we cannot assure you that we will in the future meet the maintenance
criteria for continued quotation of our securities on the Nasdaq SmallCap
Market. The maintenance criteria for the Nasdaq SmallCap Market include, among
other things:
o $2,000,000 in net tangible assets; or $35,000,000 in market
capitalization; or $500,000 net income (in the latest fiscal
year or two of the last three fiscal years);
o a public float of 500,000 shares with a market value equal to
$1,000,000;
o two market makers;
o a minimum bid price of $1.00 per share of common stock; and
o 300 shareholders (defined as round lot holders who own 100 or
more shares of our common stock).
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If we were removed from the Nasdaq SmallCap Market, trading, if any, in
our securities would thereafter have to be conducted in the over-the-counter
market in the so-called "pink sheets" or, if then available, the NASD's OTC
Electronic Bulletin Board. As a result, an investor would find it more difficult
to purchase, dispose of, and obtain accurate quotations as to the value of, our
securities.
In addition, if our common stock is delisted from trading on the Nasdaq
SmallCap Market and the trading price of the common stock is less than $5.00 per
share, trading in the common stock would also be subject to the requirements of
Rule 15g-9 under the Securities Exchange Act of 1934. Under that rule,
broker/dealers who recommend such low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements, including requirements that they
o make an individualized written suitability determination for
the purchaser; and
o receive the purchaser's written consent prior to the
transaction.
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
also requires additional disclosure in connection with any trades involving a
stock defined as a penny stock (generally, any equity security not traded on an
exchange or quoted on Nasdaq SmallCap that has a market price of less than $5.00
per share), including the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
with that market. Such requirements could severely limit the market liquidity of
our securities and the ability of purchasers in this offering to sell their
securities in the secondary market. We cannot assure purchasers of our
securities that our securities will not be delisted or treated as a penny stock.
THE EXERCISE OF OUR EQUITY LINE OF CREDIT MAY MAKE IT DIFFICULT TO EVALUATE A
SHAREHOLDER'S EQUITY POSITION IN THE COMPANY.
The number of shares of our common stock which is issuable upon
exercise from time to time under our equity line of credit will fluctuate based
on the daily volume weighted average price of our common stock as listed on the
Nasdaq SmallCap Stock Market for the twenty-two consecutive trading days prior
to the exercise. Therefore, the percentage of our common stock held by a
shareholder on any given day may be substantially different from another day
depending on our closing bid prices, as the number of shares of our common stock
issuable pursuant to our equity line of credit may vary significantly from day
to day.
We will have broad discretion in the use of the proceeds from the sale
of common stock under the common stock purchase agreement with Plumrose Holdings
Inc., and any failure to apply them effectively could negatively affect our
business prospects.
We expect to use the net proceeds from the draw downs under the common
stock purchase agreement with Plumrose for general corporate purposes. We will
have significant flexibility in applying the net proceeds. You will not have the
opportunity to evaluate the economic, financial or other information on which we
base our decisions on how to use the net proceeds. If we fail to apply the net
proceeds effectively, our business could be negatively affected.
THE ISSUANCE OF PREFERRED STOCK COULD AFFECT VOTING RIGHTS OR DELAY OR PREVENT A
CORPORATE TAKEOVER.
Our Board of Directors is authorized to determine the rights and
restrictions granted to and imposed upon our preferred stock. They can decide
the number of shares of any series of preferred stock and the designation of any
such series. Our Board of Directors may authorize and issue preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of common stock. In addition, the potential issuance
of preferred stock may:
o have the effect of delaying, deferring or preventing a change
in control of the company;
o discourage bids for the common stock at a premium over the
market price of the common stock; and
o adversely affect the market price of the common stock.
15
<PAGE>
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THE OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE.
The issuance of further shares and the eligibility of issued shares for
resale will dilute our common stock and may lower the price of our common stock.
There were 31,860,004 common shares issued and outstanding as of June 29, 2000,
which does not include all of the shares covered by this prospectus. In
addition, 2,721,000 stock options and warrants are outstanding. Excluding the
warrants issued to Plumrose Holdings Inc., approximately 2,401,000 of these
stock options and warrants are vested as of June 29, 2000. Moreover, we may
issue additional shares in acquisitions and may grant additional stock options
to our employees, officers, directors and consultants under our stock option
plan.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by
Plumrose Holdings Inc. that it has obtained under the common stock purchase
agreement. We also will not receive any of the proceeds from the sale of shares
by any other selling stockholder. However, we will receive the sale price of any
common stock we sell to Plumrose under the common stock purchase agreement
described in this prospectus and upon the exercise of warrants held by selling
stockholders that pay the exercise price in cash. We expect to use the proceeds
of any such sales for general working capital purposes.
The use of any proceeds from draw downs under the equity facility or
the exercise of warrants or options, and the timing of such use, will depend on
the availability to us of cash from other sources. Proceeds not immediately
required for the purposes described above will be invested by us principally in
United States government obligations, short term certificates of deposit, money
market funds or other short term, interest-bearing investments.
DIVIDEND POLICY
The payment by us of dividends, if any, in the future rests within the
discretion of our Board of Directors and will depend, among other things, upon
our earnings, capital requirements and financial condition, as well as other
relevant factors. We do not contemplate or anticipate paying any dividends upon
our common stock in the foreseeable future.
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<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data should be read in conjunction
with our financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The statement of operations data for the years ended December
31, 1998 and December 31, 1999, and the balance sheet data as of December 31,
1998 and 1999, are derived from the audited financial statements included
elsewhere in this prospectus. The statement of operations data for the six
months ended June 30, 1999 and June 30, 2000, and the balance sheet data as of
June 30, 2000, are derived from the unaudited financial statements included
elsewhere in this prospectus. The historical results are not necessarily
indicative of results to be expected for future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- -------------------------------------
1998 1999 1999 2000
---------------- ---------------- ---------------- ----------------
(in thousands, except per share data) (in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $ 11,525 $ 27,494 $ 9,969 $ 19,064
Cost of sales.............................. 9,707 25,424 8,828 17,179
Gross profit............................... 1,818 2,069 1,141 1,886
Operating expenses
Selling, general and administrative
(including $769,079 amortization of
deferred compensation in 1999 and
$157,351 amortization of deferred
compensation in 2000)................. 1,779 5,549 1,122 3,975
Interest expense (income)............. (20) 31 12 79
---------------- ---------------- ---------------- ----------------
Total operating expenses.......... 1,758 5,580 1,133 4,054
---------------- ---------------- ---------------- ----------------
(Loss) income before income taxes.......... 60 (3,511) 8 (2,168)
Provision for income taxes................. 1 1 -- --
---------------- ---------------- ---------------- ----------------
Net income (loss).......................... 58 (3,512) 8 (2,168)
================ ================ ================ ================
Basic and diluted net income(loss)
per share............................. $ -- $ (0.11) $ -- $ (0.07)
================ ================ ================ ================
Weighted average shares of common stock
outstanding:
Basic and diluted..................... 20,750 31,734 20,200 31,877
================ ================ ================ ================
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------- ----------------
1998 1999 2000
---------------- ---------------- ----------------
(in thousands) (in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 437 $ 962 $ 194
Working capital............................ 168 (1,557) (3,092)
Total assets............................... 1,101 3,304 3,021
Long-term debt and capital leases.......... -- 216 187
Total stockholders' equity (deficit)....... 211 (864) (2,486)
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes that appear elsewhere in
this prospectus. The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs. Our actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below and elsewhere in this prospectus, particularly in "Risk
Factors."
OVERVIEW
Mcglen Internet Group, formerly Adrenalin Interactive, Inc.
("Adrenalin"), was acquired by Mcglen Micro, Inc. in December 1999 through a
transaction in which the stockholders of Mcglen Micro, Inc. acquired control of
us through a reverse acquisition. As a result of the acquisition, each share of
Mcglen Micro, Inc. was converted into 0.9889611 shares of our common stock, with
25,485,527 shares being issued.
In connection with the acquisition, our Board of Directors adopted a
formal plan to discontinue the operations of Western Technologies, Inc., the
operating subsidiary of Adrenalin that developed video games. As such, the
accounting treatment for the reverse acquisition is that of a recapitalization.
The net liabilities of Western have been reclassified as discontinued operations
on the balance sheets for all periods presented. The operations of Adrenalin and
Western are not included in the tables below. See Note 12 to the December 31,
1999 consolidated financial statements included in this prospectus.
Mcglen Micro, Inc. was formed in May 1996 to sell computer products
over the Internet. We have since grown into a global Internet retailer of
computer hardware and peripheral products servicing individuals, small
offices/home offices and the corporate market. As a leading aggregator of
hi-tech products, we offer over 150,000 stock keeping units (SKUs) at our
virtual superstore, www.Mcglen.com. The Mcglen.com superstore has been in
operation for more than three years and already has brand recognition across
120,000 current customers.
We purchased AMT Component, Inc. in March 1999 (operating under the dba
AccessMicro.com), which had been selling similar products at typically lower
price points. In November 1999, we opened the Techsumer.com website which
focuses on "technically-minded consumers."
We have a marketing and promotion program in place that includes web
advertising, hyperlink allegiances, portal alliances and direct one-to-one
marketing. For website development, we plan to enhance our virtual superstore to
provide a community-like experience while shopping on-line. The objectives
behind the website enhancement will be to increase customer interaction and to
offer a more comprehensive array of value-added services.
Our net sales are primarily derived from the sale of personal computer
hardware, software, peripherals and accessories to individual consumers, small
offices and home offices, small and large corporations, and the government
through the Internet. Gross profit consists of net sales less product and
shipping costs.
We derived a substantial percentage of our inventory from a single
provider, Ingram Micro. We have no long-term contracts or arrangements with our
vendors that guarantee the future availability of merchandise. Our management
believes that other suppliers could provide similar inventory on comparable
terms. A change in suppliers, however, could cause a delay in fulfillment of
customer orders and a possible loss of sales, which would affect our operating
results adversely.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30,
2000
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Company's unaudited condensed consolidated financial statements and the notes
thereto included elsewhere herein for the periods ended June 30, 1999 and 2000.
18
<PAGE>
Net sales increased by $9.1 million, or 91.2%, to $19.1 million for the
six months ended June 30, 2000, compared to $10.0 million for the six months
ended June 30, 1999. The increase in net sales was a result of the acquisition
of AMT Components, Inc. (AccessMicro.com) by Mcglen in March 1999, as well as
the Company achieving overall sales and customer growth through its other two
websites, Mcglen.com and Techsumer.com. This growth was achieved through
increased product offerings, an increase in the Company's linking programs with
targeted Mcglen sites, personalized direct marketing programs designed to
generate repeat sales from existing customers, and strategic alliances with
Internet content providers and portal sites.
Gross profit increased by $745,000, or 65.3%, to $1.9 million for the
six months ended June 30, 2000, compared to $1.1 million for the six months
ended June 30, 1999. The increase in gross profit was due to increased sales in
2000 as a result of the Company's marketing efforts, which were described in the
preceding paragraph, and the acquisition of AMT Components, Inc. in March 1999.
Gross profit, as a percentage of net sales decreased to 9.9% for the six months
ended June 30, 2000 from 11.4% for the same period in 1999. The decrease in
gross profit margin was the result of increased margin pressure in the overall
marketplace, a change in the Company's sales mix during the six months ended
June 30, 2000 to more products purchased by consumers which carry a lower margin
than the products sold to Mcglen's core customers in the prior year. Mcglen also
experienced instability in the pricing of memory, a shortage of memory and CPU's
at times during the second quarter of 2000, causing less attractive pricing
being offered to the Company by its suppliers, and, finally, increased costs for
shipping which the Company was not able to pass along to its customers.
Operating expenses increased by $2.8 million, or 250.7 %, to $4.0
million for the six months ended June 30, 2000, from $1.1 million for same
period in the prior year. The increase in operating expenses was attributable to
an increase in personnel costs associated with the increased sales volume, an
increase in advertising costs resulting from increased spending on the Company's
websites, increased credit card processing fees with higher sales as well as an
increase in the rate charged by the Company's credit card processor, and
increased rent, telephone charges and deferred compensation charges. Advertising
increased by approximately $485,000, or 204.8%, as Mcglen increased spending to
promote its brand name awareness and acquire customers. Mcglen conducted almost
all of its advertising on the Internet, primarily through price comparison
search engines and product placements on websites. Payroll and related costs
increased by approximately $777,000, or 178.5%, for the six months ended June
30, 2000 compared to the same period of 1999, as Mcglen hired senior and
mid-level management to support the Company's growth. Deferred compensation
charges of approximately $313,000 was recorded during the six months ended June
30, 2000 resulting from options granted to management and consultants; no such
charges occurred during the six months ended June 30, 1999. Rent increased as
Mcglen increased the size of its facilities in April 2000 to support the growth
in sales. Depreciation and amortization increased by approximately $186,000 due
to the infrastructure development during 1999 and 2000. Finally, as a result of
the Company's growth, credit card processing and phone charges increased by
approximately $376,000 and $78,000, respectively, or 173.1% and 115.0%,
respectively, for the six months ended June 30, 2000, compared to the same
period in 1999.
DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Company's audited consolidated financial statements and the notes thereto
included elsewhere herein for the periods ended December 31, 1999 and 1998,
respectively.
Net sales increased by $16.0 million, or 138.6%, to $27.5 million for
the year ended December 31, 1999, compared to $11.5 million for the year ended
December 31, 1998. The increase in net sales was primarily a result of the
acquisition of AMT Components, Inc. by Mcglen Micro in March 1999, as well as
our aggressively seeking to increase our customer base through increased
advertising expenditures. Proforma net sales, including AMT for all of 1998 and
1999, increased by $13.2 million or 81.8%, to $29.4 million for the year ended
December 31, 1999, compared to $16.2 million for the year ended December 31,
1998.
19
<PAGE>
Gross profit increased by $251,000 or 13.8% to $2,069,000 for the year
ended December 31, 1999, compared to $1,818,000 for the year ended December 31,
1998. The increase in gross profit was due primarily to the AMT Components, Inc.
acquisition in March 1999, which resulted in increased sales. Gross profit, and
proforma gross profit as a percentage of net sales declined to 7.5% and 7.8%,
respectively, for 1999 from 15.8% and 14.1%, respectively, in 1998. The decrease
in gross profit margin was the result of increased margin pressure in the
overall marketplace, particularly in the fourth quarter of 1999, combined with a
shift in our product mix to a higher proportion of complete systems and CPUs
which traditionally have a lower gross profit as a percentage of sales. Many of
our larger competitors were selling their products at or below cost for most of
the year, for example, Buy.com and eCost.com. We responded with price decreases
of our own, especially in the fourth quarter of 1999, combined with an
aggressive customer acquisition plan. Open account sales, which typically have a
lower gross margin, also increased in 1999.
Operating expenses increased by $3,822,000 or 217.4%, to $5,580,000 for
the year ended December 31, 1999, from $1,758,000 for the prior year. The
increase in operating expenses resulted from an increase in personnel costs
associated with the increased sales volume, an increase in advertising costs
resulting from increased spending on the AccessMicro.com website acquired in
March 1999 and the launch of the Techsumer.com website in November 1999.
Advertising increased by approximately $557,000 on a proforma basis as we
increased spending to promote our brand name awareness. We conducted almost all
of our advertising on the Internet, primarily through price comparison websites.
Additionally, we added additional facilities, staff and capital infrastructure
to support growth in 1999 and the future. Depreciation and amortization
increased by approximately $120,000 due to the development of our
infrastructure.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital need has been the funding of operations
and working capital requirements created by its rapid growth. Historically, the
Company's primary sources of financing have been private placements of stock and
borrowings from its stockholders, private investors and financial institutions.
Cash used by operations was approximately $2.4 million for the six months ended
June 30, 2000. Cash was used to fund the Company's growth in sales, to establish
brand name awareness of its websites and to fund the Company's loss from
operations.
The Company has incurred a loss from operations during the last twelve
months and had a working capital deficit and shareholders' deficit at June 30,
2000. For the year ended December 31, 1999, the Company's independent certified
public accountants included a modification to their opinion, which indicated
there is substantial doubt about the Company's ability to continue as a going
concern. The Company is attempting to raise additional capital to meet future
working capital requirements, but may not be able to do so. Should the Company
not be able to raise additional capital, it may have to severely curtail
operations.
During the six months ended June 30, 2000, the Company's capital
expenditures were approximately $41,000, compared to $42,000 in 1999, primarily
for computer software and hardware.
The Company has two credit facilities of up to $1.0 million with a
financial institution and a supplier (the "Creditors"). The credit facilities
function in lieu of a vendor trade payable for inventory purchases and are
included in accounts payable. The facilities are cancelable upon 30 days or less
advance notice and do not bear interest if paid within 30 days of the date the
inventory is purchased. The credit facilities are secured by substantially all
of the Company's assets and are personally guaranteed by the Company's majority
shareholders. One of the credit facilities requires the Company to maintain a
minimum level of subordinated debt plus tangible net worth. At June 30, 2000,
the Company was not in compliance with this covenant and management has entered
into discussions with the lender to waive the covenant.
Since computer retailers typically have low product gross margins,
Mcglen's ability to regain profitability is dependent upon its ability to
increase net sales. To the extent that Mcglen's marketing efforts do not result
in significantly higher net sales, Mcglen will be materially adversely affected.
There can be no assurance that sufficient revenues will be generated from the
sale of its products to enable Mcglen to regain profitability on a quarterly or
annual basis. In view of the rapidly evolving nature of Mcglen's business and
its limited operating history, Mcglen believes that period-to-period comparisons
of its operating results, including gross profit and operating expenses as
percentage of net sales are not necessarily meaningful and should not be relied
upon as an indication of future performance.
20
<PAGE>
Mcglen believes that the key factor affecting its long-term financial
success is its ability to attract and retain customers in a cost effective
manner. Currently, Mcglen seeks to expand its customer base and encourage repeat
buying through internal and other sales and marketing programs. Such programs
include: (i) brand development, (ii) online and off-line marketing and
promotional campaigns, (iii) linking programs with targeted Mcglen sites, (iv)
personalized direct marketing programs designed to generate repeat sales from
existing customers, (v) strategic alliances with Internet content providers and
portal sites, and (vi) the development of a one-stop online marketplace.
Mcglen expects to experience significant fluctuations in its future
operating results due to a variety of factors, many of which are outside its
control. Factors that may affect its operating results include the frequency of
new product releases, success of strategic alliances, mix of product sales and
seasonality of sales typically experienced by retailers. Sales in the computer
retail industry are significantly affected by the release of new products.
Infrequent or delayed new product releases can negatively impact the
overall growth in retail sales. Gross profit margins for hardware, software and
peripheral products vary widely, with computer hardware generally having the
lowest gross profit margins. While Mcglen has some ability to affect its product
mix through effective up-selling of high margin products, its sales mix will
vary from period to period and Mcglen's gross margins will fluctuate
accordingly.
The Company incurred a net loss from operations for the three and six
months ended June 30, 2000, and had a working capital deficit of over $3.2
million and shareholders' deficit of approximately $2.5 million at June 30,
2000. The Company will require additional equity and/or debt capital in order to
meet future working capital needs and to accomplish its combined short-term and
long-term business objectives. The Company has identified several corporate
finance consultants who have signed agreements to assist the Company in raising
additional capital. In April 2000, the Company signed agreements which provided
the Company with a $1.5 million bridge loan and a $24 million equity line of
credit. The $24 million equity line of credit can be funded through twelve (12)
monthly draws of up to $2 million each, commencing one month after the effective
date of a registration statement which the Company filed in July 2000. The
shares sold under the equity line of credit will be at a price equal to 87% of
the volume-weighted average price for the Company's common stock for 22 days
prior to the draw down. The equity line of credit agreement contains certain
conditions whereby the investor's obligation to fund the draw down is reduced if
the Company's stock price drops below a threshold price, as defined.
Accordingly, the Company cannot make any assurances that it will be able to
complete any draw downs under this line. At September 25, 2000, the Company
would not be permitted to make a draw down under the line without a waiver of
the minimum draw down price from Plumrose.
Our ability to complete any such future equity and/or debt financing
will depend upon our then financial condition, results of operations and future
business prospects as well as market conditions at the time such additional
equity and/or debt financing is consummated. Many of the factors that will
influence the Company's ability to conduct any such future financing will be
outside of its control. For these reasons, it cannot make any assurances that it
will successfully complete the equity financing discussed above. Should the
Company be unable to raise additional capital, it may have to severely curtail
operations.
The Company has recently taken a number of steps to conserve its
available cash and eliminate unprofitable business. In July 2000, the Company
refocused its efforts on its key customer base and on SKU's where the Company
believes it has a competitive advantage. As a result, sales have declined and
the Company laid-off approximately 35% of its workforce. During July 2000, the
Company also stopped making payments to the Creditors and its largest supplier.
Management has successfully negotiated to convert the then outstanding balance
with its largest supplier to a note with payments weekly beginning August 4,
2000. Interest is at 18% and the note is scheduled to be repaid prior to
December 31, 2000. As a result of the covenant violation discussed above, and
the Company being in arrears on their payments to the Creditors, the Creditors
can initiate a default notice on the facilities at any time. However, management
is currently in discussions with both Creditors and believes that the overdue
balances can be converted to notes which will be repaid over time.
Management is in the process of redesigning its AccessMicro.com and
Mcglen.com websites to focus on the Company's core business to business
customers. Management expects the new websites to be deployed in the third
quarter of 2000.
If Mcglen is successful in securing additional capital, the Company
anticipates expenditures of up to $1.5 million for improvements in software,
hardware, and other infrastructure investments.
21
<PAGE>
As part of its growth strategy, the Company may, in the future, acquire
other companies or websites, in the same or complementary lines of business. Any
such acquisition and the ensuing integration of the operations of the acquired
company with those of Mcglen would place additional demands on Mcglen's
management and operating and financial resources. Additionally, the Company is
engaged in an ongoing evaluation of potential new websites, which may be created
internally. Any such development and the ensuing integration of the operations
of the new website with those of Mcglen would place additional demands on
Mcglen's management and operating and financial resources. Management has been
approached by several acquisition candidates over the past three months and will
continue to evaluate each potential candidate as they are presented. Management
cannot be certain any such acquisition will occur, or the outcome if one were to
occur.
INCOME TAXES
Prior to March 1999, we elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code and California Franchise tax reporting
purposes. Accordingly, our results of operations for the year ended December 31,
1998 and the period ended March 15, 1999 are reported on our stockholders'
federal income tax returns. No federal income tax is therefore reported in the
Statement of Operations for 1998. Income taxes in 1998 and 1999 represent the
California franchise tax applied to S Corporations at a rate of 1.5% and minimum
taxes due.
For the period from March 16, 1999 to December 31, 1999, the difference
between the amount of income tax benefit recorded and the amount of income tax
benefit calculated using the federal statutory rate of 34% is due to net
operating losses having a valuation allowance, due to uncertainties regarding
our realization of these benefits in future years. Accordingly, no tax benefit
has been provided for the period ended December 31, 1999.
As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $8,759,000 and $3,803,000, respectively. The net
operating loss carryforwards will expire at various dates beginning in 2012
through 2014 for federal purposes and 2002 through 2004 for state purposes, if
not utilized. Utilization of the net operating loss carryforwards may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net operating
loss carryforwards prior to utilization.
YEAR 2000
Computer systems, software packages, and microprocessor dependent
equipment may cease to function or generate erroneous data during the year 2000
or thereafter. The problem affects those systems or products that are programmed
to accept a two-digit code in date code fields. To correctly identify dates
after December 31, 1999, a four-digit date code field must be created in order
for these systems and products to be what is commonly termed "year 2000
compliant."
In prior reports, we have discussed the nature and progress of our
plans to become year 2000 ready. We experienced no significant disruptions in
mission critical information technology and non-information technology systems,
and we believe those systems successfully responded to the year 2000 date
change. We are not aware of any material problems resulting from year 2000
issues, either with our products, our internal systems or the products and
services of third parties. Although we have not experienced any material year
2000 problems or disruptions since January 1, 2000, there can be no assurance
that such problems or disruptions will not occur in the future. We will continue
to monitor our mission critical computer applications and those of our suppliers
and vendors throughout the year 2000 to ensure that any latent year 2000 matters
that may arise are addressed promptly.
22
<PAGE>
INFLATION
Inflation has not had a material impact upon operating results, and we
do not expect it to have such an impact in the future. There can be no
assurances, however, that our business will not be affected by inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which we
are required to adopt effective in our fiscal year 2000. SFAS No. 133 will
require us to record all derivatives on the balance sheet at fair value. We do
not currently engage in hedging activities. We will adopt SFAS No. 133, as
amended by SFAS 137 and 138, for the year ending December 31, 2000 and we expect
the adoption to have no effect.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101), which broadly
addresses how companies report revenues in their financial statements. We do not
expect this standard will have a material effect, if any, on our financial
position, results of operations or cash flows.
23
<PAGE>
OUR BUSINESS
GENERAL
As used herein, "Mcglen," "we," "us," "the Company" and "our" refer to
Mcglen Internet Group, Inc. and our subsidiaries including Western Technologies,
Inc., Mcglen Micro, Inc. and AMT Components, Inc. unless the context requires
otherwise. Western is the operating subsidiary of Adrenalin Interactive, Inc.
We were incorporated in Delaware in May 1994. In March 1995, we changed
our name to Wanderlust Interactive, Inc., and in May 1998, we changed our name
to Adrenalin Interactive, Inc. On December 2, 1999, we completed a reverse
acquisition with Mcglen Micro, Inc. in which the stockholders of Mcglen Micro,
Inc. acquired control of us. As a result of the acquisition, each share of
Mcglen Micro, Inc. was converted into 0.988961 shares of our common stock, with
approximately 25,485,527 shares being issued. On December 17, 1999, we changed
our name to Mcglen Internet Group, Inc., and changed our ticker symbol listed
under the Nasdaq SmallCap System to "MIGS."
BUSINESS
We are an Internet operating company focused on creating multiple
on-line business divisions targeting specific business-to-business and
business-to-consumer markets. Our centralized technology backbone and operations
infrastructure allow us to rapidly create focused on-line business divisions,
operate at low overhead cost, and maximize return on investment by creating
synergy among our business divisions. Our centralized operations division, which
includes call center, sourcing, warehousing, fulfillment, accounting, business
development and information technology, supports order processing, logistics,
customer service, financial transactions, and core technology for our business
divisions are located in Tustin, California. Our business divisions include
sales, marketing, content management, product management and service management
teams focused on building unique customer experiences for each business
division.
We currently offer more than 150,000 computer products on our three
operating on-line retail websites: Mcglen.com, AccessMicro.com, and
Techsumer.com. We offer different mixtures of computing technology,
entertainment and communications products on these three websites based on the
different target market segment's buying patterns. Mcglen.com, launched in May
1996, and AccessMicro.com, launched in June 1996, both have achieved Customer
Certified Gold Merchant status on BizRate.com, an independent on-line retail
rating guide. Gomez Advisor, an independent business rating guide, consistently
rank Mcglen.com and AccessMicro.com among the best sites to purchase computing
products on the web in their Internet Computer Store Scorecard. Techsumer.com
was launched in November 1999. Our net sales increased from $11.5 million for
the year ended December 31, 1998 to $27.5 million for the year ended December
31, 1999 with the Company's acquisition of AccessMicro.com in March 1999 and the
launch of Techsumer.com in November 1999.
We operate in one industry segment.
DISCONTINUED OPERATIONS
In connection with the reverse acquisition of Adrenalin Interactive,
Inc. in December 1999, our Board of Directors voted to discontinue the
operations of Western Technologies, Inc., Adrenalin's operating subsidiary.
Western principally developed 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 that are refreshed from a PC via the Internet. Western also
created interactive television games for digital set-top boxes and published or
licensed PC games in 24 countries and 15 languages. We completed two of the
software development contract obligations conducted by Western during the second
quarter of this year. Western has requested that two other contracts be
terminated. An additional contract has been assigned to Western's former Vice
President of Operations for completion, releasing Mcglen from any further
contractual liability. However, we will still be responsible for any product
liability issues that may arise from the two completed contracts.
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INDUSTRY BACKGROUND
The Internet allows millions of consumers and businesses to share
information and conduct business electronically. International Data Corporation
("IDC") estimates that the worldwide Internet economy will grow past $1 trillion
in 2001, and reach $2.8 trillion by 2003. IDC also predicts that the number of
users who make purchases over the Web will jump from 31 million in 1998 to more
than 183 million in 2003.
The growth of the Internet is dependent upon a number of factors,
including:
o Increased install-base and usage of personal computers and
Internet devices;
o Widely available and affordable access to the Internet;
o Awareness and acceptance of Internet among consumers and
businesses; and
o Increase in the capability and availability of network
infrastructure.
STRATEGY
Our goal is to create and operate market-focused on-line businesses. We
will continue to expand our existing operating business divisions by enhancing
brand recognition, building awareness to our websites, and increasing the
products and services offerings provided on the websites. We intend to
capitalize on our existing technology backbone and operations infrastructure by
developing and operating new businesses targeting specific market segments
worldwide. We intend to create synergy among our operating businesses to
maximize return on investment.
WEBSITES
We believe our market-focused websites provide unique on-line
experiences to different target market segments. Based on the target market
segment's expectations and requirements, each of our websites' content design
and product mixture maximizes the perceived value of our offerings. Mcglen.com
offers computing technology products, targeting information technology
professionals. AccessMicro.com offers computing technology products, targeting
small businesses. Techsumer.com offers computing technology, communication
products and entertainment products, targeting technologically-proficient
consumers. We believe ease of use is essential in any successful website. To
provide a simple and convenient purchasing experience, we developed key features
for our operating websites. The key features of our websites include:
o BROWSING - We have categorized our current offering of more
than 150,000 products into product groups, categories and
subcategories. Links to product groups and categories are
placed on each page for convenient "one-click" access. Special
sections are created for special offers and promotional
products to enhance exposure for hot selling, high margin
products that we update daily.
o SPECIALIZED BROWSING - Conventional categorization systems
assign one department, category and subcategory to each
product. For certain product groups, finding the desired
product under this categorization system is difficult. We have
developed a specialized categorization system for certain
product groups to minimize the search effort.
o SEARCHING - We have developed general keyword search, specific
product identification number search and interactive guided
criteria search to facilitate precise product selection with
minimal effort.
o PRODUCT INFORMATION - We provide detailed technical
information for many of the products we offer. Manufacturer
technical support and contact information is also provided.
o CUSTOM CONFIGURATION - We have developed a configuration
engine that allows our customers to interactively configure a
personal computer based on the customer's specification.
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o CUSTOMIZABLE DISPLAY FORMAT - To facilitate the purchasing
decision process, visitors can customize the display format,
sorting order and selection criteria for product listings.
o RELATED PRODUCTS LINKS - At each product detail page, links to
related categories are conveniently placed for one-click
access to relevant products. Links to selected products'
options and accessories are placed on the same page for easy
access.
o ON-LINE ACCOUNT AND ORDERING SYSTEM - Our on-line ordering
engine is designed for intuitive usage and minimal data entry
for first-time and repeat customers. Customers can create an
on-line account as they make a purchase for the first time. On
each subsequent visit the customer will be able to check order
status, review past orders, and place new orders without
entering shipping, billing and credit card information again.
Our websites also incorporate features that allow us to leverage
website traffic to generate additional revenue sources:
o Advertising - Several locations on each page of our websites
are available for advertisers seeking exposure to our targeted
audience base. These locations are also available for in-house
promotions and cross-promotional activities.
o Manufacturer Stores - We offer manufacturers the promotional
opportunity to create a "manufacturer store" within our
websites. Each manufacturer store is dedicated to one
manufacturer's product offerings. Manufacturers can create
promotional programs, detailed literature and enhanced product
images to merchandise their products.
PRODUCTS, SERVICES AND EXPANSION
We intend to offer additional products and services on our existing
on-line stores, and to create additional on-line stores for different market
segments. We also intend to expand into Asia/Pacific regions by forming
strategic partnerships with established companies in the region.
MARKETING
Our marketing strategy is to promote and increase brand awareness of
our current storefronts, including AccessMicro.com (a marketplace for small
business), Mcglen.com (a marketplace for IT professionals), and Techsumer.com (a
marketplace for technology consumers). Through various incentive programs and
excellent customer care and support, we also intend to build customer loyalty
and encourage repeat purchases.
We are executing this strategy through the following channels:
o forming alliances with various shopping portals;
o actively maintaining opt-in customer mailing list;
o broadening product offerings;
o creating repeat buyer incentive programs; and
o building partnerships with manufacturers and vendors.
We believe that the use of multiple marketing channels reduces reliance
on any one source of customers, lowers customer acquisition costs and maximizes
brand awareness.
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ON-LINE AND TRADITIONAL ADVERTISING
We have implemented a broad-based, multi-media advertising campaign
that includes both on-line and traditional advertising, designed to drive
high-value traffic to our website. Our current on-line advertising focuses on a
variety of websites that have a proven ability to drive buyers to our site.
These partners include Ziff Davis, CNET and various smaller partner sites. In
April 1999, we began deploying various brand-building print ads. We plan to
increase our brand exposure by moving part of our acquisition program into
catalog printings. We believe these traditional advertising venues can increase
awareness of our websites, increase customer loyalty and repeat customer buy
rates, and promote the benefits of e-commerce to a much broader audience than
can be addressed on the Internet alone. Additionally, efforts in direct
marketing in 1999 resulted in high levels of success through e-mail marketing as
well as a weekly promotional newsletter. We are currently working with our
advertising vendors to bring more content and choice to enhance existing
mailers. We believe our newsletter to be very effective in informing subscribers
of the latest and the best products available today. Our no-nonsense approach
has met with great success and in 2000 we intend to increase our effort to
personalize these offerings based on specific customer shopping habits.
Clicktrade.com, a site of Link-Exchange, is our primary outsource
partner to support our affiliate program. We pay Link-Exchange on a per-click
basis to affiliate partners. Our affiliate program has been in place since early
1998, and we intend to increase our exposure in the Link-Exchange network to
align ourselves with additional affiliate partners in 2000.
MERCHANDISING
We currently host three sites with product compositions including
computing, entertainment and communication products. By utilizing these three
sites (www.Mcglen.com, www.AccessMicro.com and www.Techsumer.com), we have the
ability to gear our marketing campaigns to three different segments of the
market--the consumer market, the small office/home office market and the IT
professionals market.
Our approach to merchandising allows us to offer each segment of our
target audience a unique shopping experience, giving us the advantage of pricing
flexibility, the ability to offer our customers only what is relevant to their
needs, focused cross-selling and up-selling of products, and the potential of
expanding our products and services to each one of these niche markets.
By utilizing three distinct websites, we are also able to tailor a
unique shopping experience for each segment of our target audience. For example,
targeting IT professionals, our Mcglen.com site offers a clean design and easy
access, together with a no-nonsense functionality, that allows these customers
to find their desired products and purchase them in the shortest amount of time
possible.
Because each website is targeted to a specific audience, we are able to
cross-sell and up-sell our products more effectively than our competitors. For
example, knowing that the customers from our AccessMicro.Com site are of the
small office/home office market segment, we may "up-sell" a customer who is
purchasing an ink-jet printer an entry-level laser printer because speed of
print jobs would be a major concern of these customers.
Since Mcglen already has three concentrated customer bases, we are able
to expand our services to best benefit each individual market. For example,
Techsumer.com offers and will continue to expand its offering of DVDs, while
Mcglen.com and AccessMicro.com will not carry this product line. Mcglen will
continue to add products and services that will enhance, rather than fragment,
the shopping experience of each individual market segment.
These advantages are in addition to the advantages Mcglen and other
e-tailers already enjoy over traditional retailers, such as: the ability to
instantly change prices when our costs change, a virtually unlimited amount of
display and shelf space, and the ability to offer our customers much greater
access to product information.
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CUSTOMER SERVICE
We believe that our ability to establish and maintain long-term
relationships with our customers, and to encourage repeat visits and purchases,
depends, in part, on the strength of our customer support and service operations
as well as our staff. We seek to achieve frequent automated e-mail communication
with our customers to continually improve customer service for our stores and
services. We offer toll-free phone numbers and e-mail addresses for sales,
technical support, return merchandise and general customer service. We will
continue to acquire new tools and technology to improve customer satisfaction.
WAREHOUSING, FULFILLMENT AND DISTRIBUTION
We obtain our products from a network of distributors, wholesalers,
manufacturers and software publishers. We carry a limited amount of our most
popular products in inventory. A substantial amount of products that we carry in
inventory is purchased and shipped "on demand" (that is, after we receive
orders, we purchase products required to fill orders received). We "cross dock"
on a daily basis (that is, receive products from vendors and ship those same
products to customers the same day). We carry approximately four days' worth of
inventory in house. We also rely on our distributors and wholesalers to ship
products directly to our customers. Our distribution partners, such as Ingram
Micro, Tech Data and Synnex Technologies, have multiple distribution centers
throughout the United States and can fulfill a majority of in-stock products
within 24 hours. We have established strategic partnerships with manufacturers
to custom-configure personal computers based on our customer's requirement and
ship the configured system directly to our customers.
TECHNOLOGY
Our site management, search, customer interaction, transaction
processing and fulfillment systems consist of a combination of our own
proprietary technologies and third-party technology. We plan to enhance the
capability and scalability of our systems through acquisition of new third-party
technologies and in-house development. The software applications we use have the
capability for accepting and verifying orders, managing orders, creating
customer interaction instructions, automatically selecting fulfillment methods,
assigning inventory to customer orders, managing shipment of products to
customers, recording tracking numbers, and authorizing and charging customer
credit cards with address verification.
The hosting of our Web servers is subcontracted to an Internet data
center specialist, Exodus Communications, Inc. Exodus an extensive national
network backbone with redundant Internet connections to multiple Internet access
points, a secure physical environment, climate control and redundant power
supply. Exodus provides us access to the facility 24 hours a day, seven days a
week. Exodus also monitors our Web servers continuously.
We have acquired third-party technology to track customer buying
patterns and make additional purchase recommendations. We are in the process of
implementing this technology.
COMPETITION
Although the electronic commerce industry is still in its infancy, it
has matured substantially in recent years as witnessed by the consolidation of
its major players. Furthermore, we have seen competition arise from
manufacturers and suppliers who have not traditionally sold their products
through the Internet. This has resulted in our being wedged in between the
large, market-share dominating, razor-thin profit margin, money-losing
"e-giants" and the small, low-cost, high-profit-margin, mom-and-pop "e-shops."
We currently compete with a variety of companies that sell computer,
electronics and communication products to consumers and businesses through a
variety of media. These companies are larger and have more financial resources
than we do and include:
o Traditional catalog-based merchants that have developed a
significant electronic commerce offering, such as CDW
Computers Centers, Inc., Micro Warehouse, Inc., Insight
Enterprises, Inc., Multiple Zones International, Inc. and
Creative Computers, Inc.;
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o Companies with electronic commerce sites such as Beyond.com
Corporation, Buy.com Inc., Outpost.Com, Dell Computer
Corporation and NECX Office and Personal Technology Center (in
which Gateway 2000, Inc. has a minority stake), and electronic
software distributors such as Digital River, Inc.;
o Companies offering Internet auctions, such as ONSALE, Inc.,
uBid, Inc., Amazon.com, Inc., Yahoo! Inc., Internet Shopping
Network, Inc. and eBay Inc.;
o Companies whose primary business is not on-line retailing but
who derive significant revenue from electronic commerce,
including America Online, Inc., Yahoo! Inc. and QVC, Inc.;
o Traditional retailers of personal computer products such as
CompUSA, Inc. and Computer City;
o Manufacturers such as Dell Computer Corporation and Gateway
2000, Inc. who sell directly to the consumer via the Internet;
o Mass merchandisers such as Wal-Mart Stores, Inc., Costco
Wholesale Corporation and Best Buy Co., Inc. that primarily
sell through traditional retail channels but have also
developed an Internet presence; and
o Office product retailers such as Office Depot Inc. and
Staples, Inc. that primarily sell through traditional retail
channels but also sell over the Internet.
We believe the principal competitive factors affecting our market are
competitive pricing, quality of customer service, accuracy of technical product
information, quality and ease of use of websites, breadth of product offerings,
brand recognition and cost of customer acquisition. We believe we compete
adequately in all these areas with the exception of brand recognition, where
companies with much greater financial and marketing resources have made the
establishment of a strong brand name much more costly and difficult. To maintain
and improve our competitive position, we must continue to be competitive in all
the areas mentioned above, while boosting our brand recognition without
significantly increasing our cost of customer acquisition.
SALES TAX
We currently collect sales tax on sales of products delivered to
residents in the state of California and dropped shipped from Ingram Micro to
residents of Massachusetts. Various states have tried to impose on direct
marketers the burden of collecting sales taxes on the sale of products shipped
to state residents. The United States Supreme Court affirmed its position that
it is unlawful for a state to impose sales tax collection obligations on an
out-of-state mail order company whose only contacts with the state are the
distribution of catalogs and other advertising materials through the mail and
subsequent delivery of purchased goods from out of state locations by parcel
post and interstate common carriers. It is possible that legislation may be
passed to supersede the Supreme Court's decision, or that the Court may change
its position. Additionally, it is uncertain whether any new rules and
regulations may be adopted, in terms of sales tax collection obligations, to
govern electronic commerce companies as the industry continues on its explosive
pace of growth. The imposition of new sales tax collection obligations on us in
states to which we ship products would result in additional administrative
expenses to us. More importantly, though, we may lose one of our most
competitive advantages in terms of a higher total price of products for our
customers.
GOVERNMENT REGULATION
We are subject, both directly and indirectly, to various laws and
governmental regulations relating to our business. There are currently few laws
or regulations directly applicable to commercial on-line services or the
Internet. However, due to the increasing popularity and use of commercial
on-line services and the Internet, it is possible that a number of laws and
regulations may be adopted. These laws and regulations may cover issues
including, for example, user privacy, pricing and characteristics and quality of
products and services. Moreover, the applicability to commercial on-line
services and the Internet of existing laws governing issues including, for
example, property ownership, libel and personal privacy is uncertain and could
expose us to substantial liability. Any new legislation or regulation or the
application of existing laws and regulations to the Internet could have a
material and adverse effect on our business.
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In addition, because our services and products are available over the
Internet anywhere in the world, multiple jurisdictions may claim that we are
required to qualify to do business as a foreign corporation in each of those
jurisdictions. Our failure to qualify as a foreign corporation in a jurisdiction
where we are required to do so could subject us to taxes and penalties for the
failure to qualify. It is possible that state and foreign governments might also
attempt to regulate our transmissions of content on our Web site or prosecute us
for violations of their laws. There can be no assurance that violations of local
laws will not be alleged or charged by state or foreign governments, that we
might not unintentionally violate these laws or that these laws will not be
modified, or new laws enacted, in the future.
For a period of three years, the Internet Tax Freedom Act (ITFA)
effectively bars state or local governments from imposing taxes that would
subject on-line commerce transactions to taxation in multiple states. The ITFA
does not prohibit state or local taxation of on-line commerce products or
services that would otherwise be taxed, such as in states where a company has a
physical presence. The ITFA also provides for the establishment of a commission
to study on-line commerce and to recommend a fair method of taxing Internet
transactions. We cannot be certain that upon expiration of the ITFA, we will not
be subject to further taxation by state or local governments on the sale of
merchandise.
EMPLOYEES
As of September 15, 2000, we employed 39 full-time employees and 8
part-time employees. We consider our employee relations to be good. None of our
employees is represented by a labor union, and we have experienced no work
stoppages. Competition for qualified personnel in the electronic commerce
industry is intense, particularly for software development and other
technically-oriented positions.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1999 and 1998, $91,000 and $63,000
was expensed, respectively, for research and development related to our
websites. As of December 31, 1999, there was $229,000 capitalized software
development costs, net of accumulated amortization of $21,000.
BACKLOG
At December, 31, 1999 and 1998, we did not have a significant backlog
of customer orders.
PROPERTIES
We lease approximately 8,000 square feet of office space and warehouse
space in Tustin, California, pursuant to two non-cancelable leases expiring in
2003 and 2004. This facility serves as our primary distribution center, call
center, and administrative offices.
We also lease approximately 13,140 square feet of office space in Los
Angeles, California, pursuant to a non-cancelable lease expiring on January 31,
2002. Approximately 50% of such office space is currently subleased to a former
Vice President of Western Technologies, Inc. under a sublease expiring in
September 2000, with an option for an extension for an additional six months.
This option has not been formally exercised as of September 20, 2000, but the
sublessee has given oral notice of his intent to extend the sublease. The
remaining office space is subleased through the end of the lease term.
We believe that our present facilities are adequate for our current
needs.
LEGAL PROCEEDINGS
There is no material litigation currently pending against us.
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MANAGEMENT
The following table sets forth certain information regarding our
executive officers and directors:
Name Age Position
---- --- --------
George Lee 29 Chief Executive Officer and Director
Mike Chen 27 President, Chief Technology Officer,
Secretary and Director
Peter Janssen 58 Chairman of the Board
Calbert Lai 44 Director
David P. Jones 52 Director
Grant Trexler 38 Chief Financial Officer
Jiunn-Cheng (Alex) Chen 27 Executive Vice President, Business
Development
GEORGE LEE is one of our founders and has served as our Chief Executive
Officer and a Director since May 1996. He is responsible for capital growth,
organizational growth, development of sales, marketing and internal operations
of the company. From March 1994 to May 1995, he was a sales representative for
Eva Airways, and prior to that he was employed at Immortal Service Inc. Mr. Lee
received his Bachelor of Arts in Economics from the University of California at
Irvine in 1993.
MIKE CHEN is one of our founders and has served as our President, Chief
Technology Officer, Secretary and Director since May 1996. He is responsible for
capital growth, organizational growth coordination of corporate activities, and
development of proprietary technologies. Prior to founding the Company in 1996,
he was an independent software programmer. Mr. Chen received his Bachelor of
Science in Electrical Engineering and Computer Science in 1995 from the
University of California at Berkeley.
PETER JANSSEN has served as our Chairman of the Board since December
1999. In September 1995, he founded Peter Janssen & Associates, a technology
consulting firm specializing in sales marketing and channel marketing
strategies. From October 1993 to September 1995, Mr. Janssen was head of
Merchandising and Marketing at Egghead Software, where he helped implement one
of the first Internet retail sites, Egghead.com. Before joining Egghead, Mr.
Janssen headed sales and marketing for several technology start-ups including
Mindset, Amdek (a division of Wyse), Nexgen Microsystems and Acer. Early in his
career, Mr. Janssen spent 18 years at Sears, where he helped develop the Sears
Business System Center. He received his Bachelor of Arts in Economics from UCLA.
CALBERT LAI has served as a Director since December 1999. A 15-year
veteran of Silicon Valley, Mr. Lai has been the President, co-founder and senior
business strategist at I-Storm, a publicly traded e-commerce consulting firm,
and a founding partner and Chief Executive Officer of Lai, Venuti and Lai
Advertising ("LVL") since 1986. At LVL, he provided strategic marketing and
consulting services for technology clients such as IBM, HP, Sun Microsystems,
Cisco and NEC. LVL underwent a pre-packaged Chapter 11 bankruptcy reorganization
while Mr. Lai was an executive officer, prior to merging with I-Storm in 1999.
Mr. Lai was also responsible for the launch into the U.S. retail channel of the
Acer PC in 1993 and the Palm Pilot in 1996. Mr. Lai previously held executive
positions in the Business Affairs and Community Relations Department at Stanford
University, where he previously received a Bachelor of Arts in English and
Creative Writing.
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DAVID P. JONES, Ph.D., has served as a director since April 2000. From
1995 to the present, Dr. Jones has been the President of Aon Consulting Inc.'s
Human Resources Consulting Group, which is recognized as a premier organization
dedicated to employee assessment and workforce development. Prior to joining
Aon, Dr. Jones was the President and founder of HRStrategies, a human resources
consulting firm, which was acquired by the Aon family of companies in 1995.
GRANT TREXLER joined us as Chief Financial Officer in January 2000.
Prior to this, Mr. Trexler served as the Director of Finance and Administration
for El Monte RV, the nation's second largest motor home rental dealer, beginning
in July 1996. From August 1994 through May 1996, Mr. Trexler was the CFO of
Creative Computers, which completed its initial public offering and one
follow-on offering during this period. At Creative Computers, he was responsible
for implementing internal accounting and budgeting systems, financial reporting,
and financial due diligence. Prior to joining Creative, Mr. Trexler spent nine
years at PricewaterhouseCoopers, most recently as a Senior Manager in its
Mergers and Acquisitions group. Mr. Trexler holds a Masters in Business
Administration and a Bachelor of Arts from California Polytechnic State
University - San Luis Obispo, and is a Certified Public Accountant.
ALEX CHEN has served since March 1999 as our Executive Vice President,
Business Development. In July 1996, he founded, and until March 1999 he served
as President and Chief Executive Officer of, AMT Components, Inc., which was
acquired by us in March 1999. In 1998, Mr. Chen was selected by Entrepreneur
Magazine as one of the "Top 100 Entrepreneurs." He received his Bachelor of Arts
in Economics from the University of California at Berkeley in 1996.
* There are no family relationships among any of our directors or
executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee is responsible for making recommendations to the
Board of Directors as to the selection of our independent auditor, maintaining
communication between the Board and the independent auditor, reviewing the
annual audit report submitted by the independent auditor, and determining the
nature and extent of issues, if any, presented by such audit warranting
consideration by the Board. The current members of this Committee are Peter
Janssen, Calbert Lai and David P. Jones.
DIRECTORS' COMPENSATION
Non-employee directors receive a fee of $750 for each meeting of the
Board attended, no additional fees for any meetings of any committee of the
Board attended, and reimbursement of their actual expenses.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Upon completion of the reverse merger with Mcglen Micro, Inc. on
December 2, 1999, we entered into five-year employment agreements with George
Lee and Mike Chen. The agreements provide that Mr. Lee serve as our Chief
Executive Officer and that Mr. Chen serve as our President and Vice President of
Technology. Each is to receive a base salary of $80,000 per year for his
services plus certain benefits (company automobile, four weeks of vacation, paid
medical insurance, and reimbursement for out-of-pocket expenses incurred in the
course of our business). Each is also entitled to receive bonuses and stock
options as determined by our Board of Directors. Mr. Lee and Mr. Chen are to use
their reasonable efforts to manage our business and affairs. Each may be
terminated by us for cause, but is to be paid in the amount of the full value of
the agreement if he is terminated without cause. Each agreement automatically
terminates if the respective executive becomes permanently disabled or dies.
Upon completion of the reverse merger with Mcglen Micro, Inc., we
entered into a three-year employment agreement with Alex Chen. The terms and
conditions of this agreement are substantially identical with those of our
agreements with George Lee and Mike Chen, other than that the term of our
agreement with A. Chen is three years, and A. Chen is to serve as our Vice
President of Business Development.
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On January 17, 2000 we entered into a three-year employment agreement
with Grant Trexler. The agreement provides that Mr. Trexler serve as our Chief
Financial Officer for a base salary of $130,000 per year and certain benefits
(automobile allowance, two weeks of vacation, and reimbursement for medical
insurance.). He is also entitled to receive a bonus of up to 10% of his salary
and the option to purchase up to 120,000 shares of our common stock with an
exercise price of $1.25 per share. Mr. Trexler is to devote his full time and
efforts to his duties and use his best efforts to manage our financial business
and affairs. He may be terminated by us for cause, but must be paid three
months' salary as severance if he is terminated without cause. His agreement
automatically terminates if he becomes permanently disabled or dies.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
(a) The following Summary Compensation Table sets forth the names,
positions and annual compensation paid by us for the years ended
December 31, 1999, 1998, and 1997 to George Lee, our Chief Executive
Officer. No other current executive officer or key employee had
compensation which exceeded $100,000 in these years.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
Name and Position Fiscal Salary ($) Bonus ($) Securities Underlying All Other
----------------- Year ---------- --------- Options (#) Compensation ($)
---- ----------- ----------------
<S> <C> <C> <C> <C> <C>
George Lee, Chief Executive Officer 1999 49,000 - 500,000(1) 1,800(2)
1998 48,000 - - -
1997 12,000 - - -
</TABLE>
(1) In connection with the Company's reverse acquisition of
Adrenalin in December 1999, all unvested options were
canceled. Mr. Lee had 400,000 options canceled as a result
thereof.
(2) Reflects health insurance costs paid by the Company on Mr.
Lee's behalf.
(b) The following table sets forth certain information with respect to all
stock options granted by us during 1999 to Mr. Lee:
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
INDIVIDUAL GRANTS
Name Number of Securities % of Total Options Exercise Price Expiration Date
---- Underlying Options Granted to Employees ($/Sh) ---------------
Granted (#) in Fiscal Year ------
----------- --------------
<S> <C> <C> <C> <C>
George Lee 500,000 17.5% $0.10 2/28/05(1)
</TABLE>
(1) In connection with the Company's reverse acquisition of
Adrenalin in December 1999, all unvested options were
canceled. Mr. Lee had 400,000 options canceled as a result
thereof.
(c) The following table sets forth certain information with respect to the
exercise of stock options during 1999 and the value of unexercised
stock options held by Mr. Lee at December 31, 1999:
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST
YEAR AND YEAR-END (YE) OPTION VALUES
<CAPTION>
Name Value of Unexercised Shares Acquired Value Number of Securities Underlying
---- In-the-Money Options YE ($) On Exercise (#) Realized Unexercised Options at YE
Exercisable/Unexercisable --------------- -------- Exercisable/Unexercisable
------------------------- -------------------------
<S> <C> <C> <C> <C>
George Lee $400,000/0 None N/A 100,000/0
</TABLE>
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INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our certificate of incorporation provides that none of our directors
shall be liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability
o for any breach of the director's duty of loyalty to us or our
stockholders;
o acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
o under section 174 of the Delaware General Corporation Law; or
o for any transaction from which such director derives improper
personal benefit.
The effect of this provision is to eliminate our rights and those of
our stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of his or her
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described
above. The limitations summarized above, however, do not affect our ability or
that of our stockholders to seek non-monetary remedies, such as an injunction or
rescission, against a director for breach of his or her fiduciary duty.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers, or persons controlling us pursuant to the foregoing provisions, we
have been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in our affairs since the date
hereof or that the information contained herein is correct as of any date
subsequent to the date hereof. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making the offer is not qualified to do so or to anyone
to whom it is unlawful to make such offer or solicitation.
34
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 20, 2000, the number of
shares of our common stock held of record or beneficially: (i) by each person
who held of record, or was known by us to own beneficially, more than 5% of the
outstanding shares of the our common stock; (ii) by each of our current
executive officers and directors; and (iii) by all of our current executive
officers and directors as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES OWNED(1)(2) PERCENT OF OUTSTANDING SHARES OF
BENEFICIAL OWNER COMMON STOCK
<S> <C> <C>
Mike Chen 8,870,793(3) 28.1%
3002 Dow Avenue, Suite 114
Tustin, CA 92780
George Lee 8,637,922(3) 27.4%
3002 Dow Avenue, Suite 114
Tustin, CA 92780
Alex Chen 2,350,526(3) 7.5%
3002 Dow Avenue, Suite 114
Tustin, CA 92780
MacKenzie Shea, Inc. 1,760,932 5.6%
657 Third Street
San Francisco, CA 94107
Grant Trexler 503,438 1.6%
3002 Dow Avenue, Suite 114
Tustin, CA 92780
Peter Janssen 450,000 1.4%
3002 Dow Avenue, Suite 114
Tustin, CA 92780
David P. Jones 160,000 *
3002 Dow Avenue, Suite 114
Tustin, CA 92780
Calbert Lai 100,000 *
3002 Dow Avenue, Suite 114
Tustin, CA 92780
All current executive officers and 21,072,679 67.0%
directors as a group (7 persons)
</TABLE>
* Less than 1%.
(1) Except as otherwise indicated and subject to applicable community
property and similar statutes, the persons listed as beneficial owners
of the shares of our common stock have sole voting and dispositive
power with respect of such shares.
(2) For purposes of computing the percentages, the number of shares of
common stock outstanding includes shares purchasable within 60 days
upon exercise of outstanding stock options, as follows: Mr. Lee, Mr.
Jones, and Mr. Lai (100,000 shares each), Mr. M. Chen (120,000 shares),
Mr. A. Chen (70,000 shares), Mr. Trexler (150,000 shares), Mr. Janssen
(225,000 shares), and all executive officers and directors as a group
(865,000).
(3) On August 15, 2000 the Company entered into an agreement with George
Lee, Mike Chen and Alex Chen (the "Founders") under which the Founders
agreed to provide up to 10 million shares of their Mcglen common stock,
comprising approximately one-half of their total holdings, to assist us
in raising capital to fund our operations, growth and development. See
"Certain Transaction - Founders Agreement." The individual commitments
of the Founders under the agreement are as follows: George Lee
4,666,667 shares; Mike Chen 4,666,667 shares; and Alex Chen 666,666
shares. The Founders made the shares available for an 18-month period
and any shares not used for permitted purposes at the end of that
period will be retained by the Founders.
35
<PAGE>
CERTAIN TRANSACTIONS
ACQUISITION OF AMT
On March 15, 1999, Mcglen Micro, Inc. ("Mcglen Micro") completed the
acquisition of AMT Components, Inc. (AMT). Alex Chen, Mcglen Micro's Vice
President of Business Development, was a principal shareholder of AMT. Under the
terms of the acquisition, Mcglen Micro exchanged 450,000 shares of Mcglen
Micro's common stock (calculated prior to Mcglen Micro's 10 for 1 stock split),
which constituted approximately 17.5% of Mcglen Micro's common stock at the time
of the acquisition, for all of AMT's assets.
REVERSE ACQUISITION (MERGER) WITH MCGLEN MICRO
On December 2, 1999, Adrenalin consummated a reverse acquisition with
Mcglen Micro. The resulting reorganization was to form Mcglen Internet Group,
Inc. ("Mcglen"). Under the terms of the Agreement and Plan of Merger (the
"Merger Agreement"), Adrenalin agreed to exchange approximately 87.5% of the
shares of Adrenalin common stock for all of the outstanding shares of Mcglen
Micro. One share of Mcglen Micro's common stock was converted into approximately
one share of Adrenalin's common stock. The Merger Agreement is set forth in full
in Adrenalin's Form 8-K, dated April 30, 1999.
MACKENZIE SHEA, INC.
Mcglen Micro was introduced to Adrenalin by MacKenzie Shea, Inc.
("MSI"). Pursuant to its engagement letter, MSI received 2,010,932 of the
outstanding shares of Mcglen, for coordinating the Merger and advising and
assisting Adrenalin and Mcglen Micro in raising a minimum of $3,000,000. Mcglen
Micro was also required to pay MSI $7,500 per month during the term of MSI's
engagement with Mcglen Micro.
CONVERTIBLE NOTES
On June 16, 1999, Mcglen Micro borrowed $200,000 from two investors. As
a result of this transaction, Mcglen Micro executed two Convertible Promissory
Notes (the "Notes") with identical terms and conditions whereby Mcglen Micro
promised to repay each investor the loan amount 18 months from the execution of
the Notes (the "Due Date"), plus 10% interest per annum payable quarterly in
arrears. The investors have the right to convert the loan amount into the common
stock of Mcglen at $2.00 per share at any time prior to the Due Date. The Notes
grant the investors "piggyback" registration rights with respect to the shares
issuable upon conversion of the Notes. For arranging the loans, Mcglen Micro
paid Pacific Rim Access a commission of $20,000 and issued a warrant to Keiji
Miyagawa, President of Pacific Rim Access, to purchase 10,000 shares of Mcglen
Micro's common stock for $2.00 per share (pre-reverse merger split), which
shares also had "piggyback" registration rights, subject to underwriter
approval, limitation and lockups. Each of the rights to receive shares of Mcglen
Micro common stock related to the Notes is an obligation of Mcglen following the
Merger. Mcglen has recently agreed to reduce the exercise price of this warrant
to $1.00 per share.
FINANCE TRANSACTION WITH SYNNEX INFORMATION TECHNOLOGIES, INC.
On May 11, 1999, Mcglen Micro entered into an alliance with Synnex
Information Technologies, Inc. ("Synnex"), which is the wholly-owned U.S.
subsidiary of Synnex, one of the largest computer manufacturers in Taiwan.
Pursuant to the terms of the Synnex agreement, Synnex will provide payment terms
of net 30 days on up to $1,000,000 in trade payables and will provide us with
favorable pricing terms on products Synnex distributes in the United States and
other markets serviced by us. In exchange, we have provided to Synnex the
following: (i) the option to elect a member of our Board of Directors; (ii) the
ability to convert the entire $1,000,000 into common stock at the price of
$4.172 at any time for 3 years; (iii) demand and "piggyback" registration
rights; (iv) information rights; (v) antidilution rights; and (vi) certain other
favorable rights. Mcglen Micro promised to pay a commission consisting of cash
and warrants to Triangle Associates, LLC, as described below. There are no
assurances that Synnex will not cancel the credit terms in the future.
36
<PAGE>
BROKERS FEES FOR THE SYNNEX TRANSACTION
Mcglen Micro paid a commission to Triangle Associates, LLC, in the form
of warrants to purchase Mcglen Micro's common stock at various prices between
$4.1719 and $5.5625 per share up to a maximum aggregate exercise price of
$337,500, at any time for three years. Mcglen Micro also agreed to pay Triangle
Associates, LLC, a cash commission equal to 5% of the amount of a trade credit
line extended or investment made by Synnex over an 18 month period. The cash
commission was paid in 1999. Steve Chang is the principal owner and manager of
Triangle Associates, LLC.
PRE-MERGER MCGLEN FINANCINGS
In September 1999, Mcglen Micro entered into an agreement with Pacific
Rim Access (the "PacRim Agreement") to raise $800,000. Pursuant to the PacRim
Agreement, Mcglen Micro sold 320,000 shares of common stock to a group of
Japanese investors for $2.50 per share. These shares will have "piggyback"
registration rights, subject to underwriter approval, limitations and lockups.
For arranging the investments, Mcglen Micro paid Pacific Rim Access a commission
of $80,000 and issued warrants to Keiji Miyagawa, President of Pacific Rim
Access, to purchase 32,000 shares of Mcglen Micro's common stock for $2.50 per
share (pre-reverse acquisition split). Mcglen has recently agreed to reduce the
exercise price of this warrant to $1.00 per share for 11,000 shares and $2.00
per share for the remaining 21,000 shares. These shares also have "piggyback"
registration rights, subject to underwriter approval, limitations and lockup.
Immediately prior to the Merger, Mcglen Micro sold 600,000 shares of
common stock for $2.50 per share in a private placement pursuant to Rule 506.
Redstone Securities, Inc., acted as placement agent in the offering, for which
Redstone received a commission equal to 10% of the gross proceeds of the
offering.
PRE-MERGER ADRENALIN FINANCING BY ESCALDADE
Prior to the Merger, Adrenalin consummated a financing pursuant to a
purchase agreement to sell 293,255 shares of common stock to Escaldade
Investors, LLC ("Escaldade") for gross proceeds of $1,250,000 ($4.2625 per
share, which was 110% of the closing price of Adrenalin's common stock on July
9, 1999) and received an irrevocable commitment from Escaldade to purchase an
additional $750,000 of Adrenalin's common stock upon the completion of the
Merger. The $750,000 was placed into escrow until the SEC approved the proxy
statement soliciting the consent of the Company's shareholders for the Merger
and was released upon the closing of the Merger. The price per share of common
stock paid by Escaldade for the $750,000 in escrow, $5.43, was equal to 110% of
the closing price for the common stock on the trading day prior to such funding.
138,090 shares were issued to Escaldade in the $750,000 financing.
Escaldade received a three-year warrant to purchase 29,325 additional
shares of common stock at an exercise price of $4.843 per share (which was 125%
of the closing price of the common stock on July 9, 1999). Upon the funding of
the $750,000, Escaldade also received an additional three-year warrant to
purchase 13,809 additional shares of common stock at an exercise price of $6.79
per share (which was 125% of the closing price of the common stock for the
common stock on the trading day prior to such funding).
The warrants issued by the Company to Escaldade may be exercised on a
"cashless exercise" basis to the extent that the average market value of the
shares of 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.
37
<PAGE>
The agreement with Escaldade allowed for repricing rights if the
average closing price for Mcglen's common stock for the two 90-day periods
immediately subsequent to October 10, 1999 (subject to certain adjustments) did
not equal 115% and 118%, respectively, of the aggregate price paid by Escaldade
for the stock. These rights required the Company, if these price targets were
not met, to issue additional shares to Escaldade for no additional consideration
so that the value of the purchased shares plus the additional shares equaled
115% or 118%, as applicable, of the aggregate purchase price paid by the
Escaldade for the stock. Escaldade exercised its repricing rights relating to
two-thirds of the shares it obtained in the financing in January 2000 and
received an additional 103,775 shares of the Company's common stock. Escaldade
exercised its repricing rights relating to the final one-third of the shares it
obtained in the financing in April 2000 and received an additional 39,352 shares
of the Company's common stock. Escaldade has no more repricing rights under the
agreement.
BRIDGE LOAN FROM AMRO INTERNATIONAL, S.A.
On April 10, 2000, we received a bridge loan in the amount of
$1,500,000 from AMRO International, S.A., and simultaneously issued a 10%
Convertible Debenture (the "Debenture") whereby we promised to repay to AMRO the
whole amount of the loan on September 30, 2001, plus 10% interest per annum
payable quarterly. AMRO has the right, at any time after September 14, 2000, to
convert the principal or any portion thereof, and any accrued but unpaid
interest, into our common stock at a conversion price per share equal to 90% of
the market price of the stock on the date of conversion. In connection with the
same transaction we issued a warrant (the "Warrant") to AMRO to purchase up to
372,449 shares of our common stock for $2.316 per share, which is equal to 115%
of the daily volume weighted average price of our common stock on April 14,
2000, the last trading day prior to the closing of the loan. Two-thirds of the
shares covered by the Warrant are immediately exercisable, and the remaining
one-third of shares will become exercisable on July 26, 2000 only if we have not
redeemed the Debenture under the terms of that instrument. In addition, if we
have not redeemed the Debenture in full on or prior to July 26, 2000, AMRO can
demand that we file a registration statement to register any shares covered by
the Warrant as well as at least 200% of the number of shares issuable upon
conversion of the Debenture and any additional shares we consider necessary to
cover any accrued interest on the Debenture.
FOUNDERS AGREEMENT
On August 15, 2000 we entered into an agreement with George Lee, Mike
Chen and Alex Chen (the "Founders") under which the Founders agreed to provide
up to 10 million shares of their Mcglen common stock, comprising approximately
one-half of their total holdings, to assist us in raising capital to fund our
operations, growth and development without causing additional dilution for our
other shareholders. Under the agreement, our Board of Directors may use the pool
for specified purposes including capital creation, mergers or acquisitions,
business development, management incentives, growth related activities and
remittance to treasury. The Founders made the shares available for an 18-month
period and any shares not used for permitted purposes at the end of that period
will be retained by the Founders. Under the agreement, the Founders are entitled
to receive a fee equal to 5% of the amount of cash we raise using the shares
included in the pool. George Lee and Mike Chen are members of our Board of
Directors.
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common
stock, $0.03 par value per share, and 5,000,000 shares of preferred stock, $0.01
par value per share. As of September 20, 2000, there were 31,465,965 shares of
common stock and no shares of preferred stock outstanding.
COMMON STOCK
Subject to preferences that may be applicable to any prior rights of
holders of outstanding preferred stock having prior rights as to dividends, the
holders of outstanding shares of our common stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board from time to time may determine. Holders of our common
stock are entitled to one vote for each share held on all matters submitted to a
vote of shareholders. Cumulative voting for the election of directors is not
authorized by our certificate of incorporation, which means that the holders of
a majority of the shares voted can elect all of the directors then standing for
election.
The common stock is not entitled to preemptive rights and is not
subject to conversion or redemption. Upon our liquidation, dissolution or
winding-up, the assets legally available for distribution to stockholders are
distributable ratably among the holders of the common stock after payment of
liquidation preferences, if any, on any outstanding stock having prior rights on
such distributions and payment of other claims of creditors. Each outstanding
share of common stock is, and all shares of common stock to be outstanding upon
completion of this offering will be upon payment therefor, duly and validly
issued, fully paid and nonassessable.
PREFERRED STOCK
The Board is authorized, subject to any limitations prescribed by
Delaware law, to issue preferred stock in one or more series. The Board can fix
the rights, preferences and privileges of the shares of each series and any
qualifications, limitations or restrictions thereon.
The Board may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, under certain circumstances, have the
effect of delaying, deferring or preventing a change in control of the Company.
We have as of the date of this prospectus not designated any series of
preferred stock.
WARRANTS
This registration statement includes for registration shares issuable
upon the exercise of warrants issued to each of the following parties:
Plumrose Holdings Inc.
----------------------
On April 26, 2000, in connection with our Common Stock Purchase
Agreement with Plumrose Holdings Inc. ("Plumrose"), we issued to Plumrose a
warrant to purchase 100,000 shares of our common stock at an exercise price of
$1.875, which was the closing bid price of our common stock on the trading day
prior to the closing date. If no registration statement for the shares covered
by the warrant is effective on the date of exercise, the warrants issued by the
Company to Plumrose may be exercised on a "cashless exercise" basis to the
extent that the average of the high and low trading prices per share of common
stock issuable upon exercise of such warrants on the trading day immediately
preceding the date of exercise exceeds the aggregate exercise price for the
shares as to which the warrants are being exercised. Under a registration rights
agreement entered into with Plumrose, we are required to prepare and file a
registration statement with the Securities and Exchange Commission ("SEC") at
our expense on or before May 27, 2000 to permit a public offering and resale of
the securities covered by the Common Stock Purchase Agreement and the warrant.
If the registration statement is not declared effective by August 31, 2000,
Plumrose may terminate the equity line of credit.
39
<PAGE>
AMRO International, S.A.
------------------------
As consideration for a bridge loan from AMRO International, S.A. in the
amount of $1,500,000 pursuant to a loan agreement dated April 10, 2000, we
issued to AMRO, in addition to a 10% Convertible Debenture (the "Debenture"), a
warrant to purchase up to 372,449 shares of our common stock for $2.316 per
share, which is equal to 115% of the daily volume weighted average price of our
common stock on April 14, 2000, the last trading day prior to the closing of the
loan. As of September 20, 2000, all of the shares covered by the Warrant are
exercisable. Because we did not redeem the Debenture in full on or prior to July
26, 2000, AMRO can demand that we file a registration statement to register any
shares covered by the Warrant as well as at least 200% of the number of shares
issuable upon conversion of the Debenture and any additional shares we consider
necessary to cover any accrued interest on the Debenture. The Warrant expires on
April 17, 2002.
Ladenburg Thalmann & Co. Inc.
-----------------------------
In consideration of its role as placement agent in the transaction with
AMRO, we also issued to Ladenburg Thalmann & Co. Inc. ("Ladenburg") a warrant to
purchase up to 49,660 shares of our common stock at any time between April 17,
2000 and April 17, 2002 for an exercise price of $2.0137. Other than the number
of shares covered and the exercise price, the warrant issued to Ladenburg is in
form and substance identical to that delivered to Plumrose.
Keiji Miyagawa
--------------
On June 16, 1999 and September 22, 1999, Mcglen Micro, Inc. ("Mcglen
Micro") issued warrants to Keiji Miyagawa to purchase, respectively, 10,000
shares of Mcglen Micro common stock at $2.00 per share and 32,000 shares at
$2.50 per share (both pre-reverse acquisition split). In consideration of
Miyagawa's assistance in the Company's discussions with certain convertible
noteholders regarding conversion of their notes, the Company has recently agreed
to reduce the exercise price of the June 16 warrant to $1.00 per share and the
September 22 warrant to $1.00 per share for 11,000 shares and $2.00 for the
remaining 21,000 shares. All of the shares subject to these warrants have
"piggyback" registration rights, subject to underwriter approval, limitation and
lockups. Each warrant expires two years after issuance.
C. Kevin Chuang
---------------
On May 6, 1999, in exchange for his assistance in securing an alliance
with Synnex Information Technologies, Inc. ("Synnex"), Mcglen Micro issued to C.
Kevin Chuang three warrants to purchase its common stock worth a total of up to
$337,500 as follows: $112,500 at the closing price of the reverse merger between
Adrenalin Interactive, Inc. and Mcglen Micro, $112,500 at a 10% discount to the
closing price, and $112,500 at a 25% discount to the closing price. Based on the
reverse merger closing price of $5.5625, the three warrants give the holder the
right to purchase a total of 69,663 shares. The warrants are currently
exercisable and will expire on May 6, 2001.
Far East Capital Management
---------------------------
On May 6, 1999, in exchange for its assistance in securing the alliance
with Synnex, Mcglen Micro issued to Far East Capital Management Ltd. Three
warrants to purchase its common stock worth a total of up to $75,000 as follows:
$25,000 at the closing price of the reverse merger between Adrenalin
Interactive, Inc. and Mcglen Micro, $25,000 at a 10% discount to the closing
price, and $25,000 at a 25% discount to the closing price. Based on the reverse
merger closing price of $5.5625, the three warrants give the holder the right to
purchase a total of 15,480 shares. The warrants are currently exercisable and
will expire on May 6, 2001.
40
<PAGE>
Escaldade Investors LLC
-----------------------
In connection with a financing pursuant to a purchase agreement to sell
$2,000,000 of common stock to Escaldade Investors, LLC, we issued to Escaldade
two three-year warrants to purchase a total of 43,134 shares of common stock
(29,325 shares at an exercise price of $4.843 per share and 13,809 shares at an
exercise price of $6.79 per share). The warrants issued by us to Escaldade may
be exercised on a "cashless exercise" basis to the extent that the average
market value of the shares of common stock issuable upon exercise of the
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.
Synnex Information Technologies, Inc.
-------------------------------------
In connection with its entry into an alliance with Synnex, Mcglen Micro
issued to Synnex a warrant to purchase up to $1 million of Mcglen Micro's common
stock at the price of $4.1719 per share, or 239,699 shares. The initial exercise
of the warrant must be for a number of shares that will result in an aggregate
exercise price of at least $500,000. The warrant is currently exercisable and
will expire on May 17, 2004.
Triangle Associates, LLC
------------------------
On May 6, 1999, in exchange for its assistance in securing the alliance
with Synnex, Mcglen Micro issued to C. Kevin Chuang three warrants to purchase
its common stock worth a total of up to $337,500 as follows: $112,500 at the
closing price of the reverse merger between Adrenalin Interactive, Inc. and
Mcglen Micro, $112,500 at a 10% discount to the closing price, and $112,500 at a
25% discount to the closing price. Based on the reverse merger closing price of
$5.5625, the three warrants give the holder the right to purchase a total of
69,663 shares. The warrants are currently exercisable and will expire on May 6,
2001.
CONVERTIBLE DEBT
This registration statement includes for registration shares issuable
upon the conversion of convertible debt instruments issued to each of the
following parties:
AMRO International, S.A.
------------------------
On April 10, 2000, we received a bridge loan in the amount of
$1,500,000 from AMRO International, S.A., and simultaneously issued a 10%
Convertible Debenture (the "Debenture") whereby we promised to repay to AMRO the
whole amount of the loan on September 30, 2001, plus 10% interest per annum
payable quarterly. AMRO has the right, at any time after September 14, 2000, to
convert the principal or any portion thereof, and any accrued but unpaid
interest, into our common stock at a conversion price per share equal to 90% of
the market price of the stock on the date of conversion.
Akira Minamino
--------------
On June 16, 1999, Mcglen Micro issued a convertible promissory note to
Akira Minamino in the principal sum of $100,000. The note carries an interest
rate of 10% per annum, and matures eighteen months after the issuance date. This
note may be converted by the holder at any time prior to repayment into shares
of our common stock at $2.00 per share. The Company has recently agreed to
convert the principal and accrued interest at $1.00 per share, or 112,514
shares. Half of these shares are included for registration in this registration
statement, and the other 56,257 shares have "piggyback" registration rights.
Masamitsu Ishihara
------------------
On June 16, 1999, Mcglen Micro issued a convertible promissory note to
Masamitsu Ishihara in the principal sum of $100,000. The note carries an
interest rate of 10% per annum, and matures eighteen months after the issuance
date. This note may be converted by the holder at any time prior to repayment
into shares of our common stock at $2.00 per share. All shares issued on such
conversion have "piggyback" registration rights.
41
<PAGE>
TRANSFER AGENT AND REGISTRAR
Our Transfer Agent and Registrar is American Stock Transfer & Trust
Company. Their address is 40 Wall Street, New York, New York 10005.
POTENTIAL DILUTION
We have entered into certain agreements under which the number of
shares issuable under those agreements varies based on the then-current market
price of our Common Stock. Set forth below is a table indicating the potential
dilution under these agreements based on hypothetical assumptions regarding
declines in the market price of our Common Stock.
<TABLE>
<CAPTION>
=============================== ========================= ====================================================================
HOLDER INSTRUMENT SHARES ISSUABLE
------------------------------- ------------------------- --------------------------------------------------------------------
PRESENTLY 25% DECLINE IN 50% DECLINE IN 75% DECLINE IN
STOCK PRICE STOCK PRICE STOCK PRICE
------------------------------- ------------------------- -------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
PLUMROSE HOLDINGS, INC.(1) EQUITY LINE OF CREDIT(2) 2,000,000 2,666,667 4,000,000 8,000,000
------------------------------- ------------------------- -------------- ------------------ ----------------- ----------------
AMRO INTERNATIONAL, S.A.(3) CONVERTIBLE DEBENTURE(4) 1,500,000 2,000,000 3,000,000 6,000,000
=============================== ========================= ============== ================== ================= ================
</TABLE>
(1) Shares issued under the equity line are priced at 87% of the
volume weighted average price for the 22 trading days prior to
the date Mcglen requests a draw down. See "Common Stock
Purchase Agreement". Table assumes an average draw down price
of $1.00 per share.
(2) Represents shares issuable with respect to a single draw down
of $2,000,000.
(3) Shares issued upon conversion of the convertible debenture are
priced at 90% of the volume weighted average price for the 5
lowest trading days during the 22 trading days prior to
conversion. Table assumes a conversion price of $1.00.
(4) Assumes conversion of $1.5 million principal and no conversion
of accrued interest.
42
<PAGE>
COMMON STOCK PURCHASE AGREEMENT
OVERVIEW
Plumrose Holdings, Inc. and we signed a common stock purchase agreement
dated April 12, 2000, for the future issuance and purchase of shares of our
common stock. The transaction closed on April 12, 2000. The common stock
purchase agreement establishes what is sometimes termed an equity line of credit
or an equity draw down facility. In general, the draw down facility operates
like this: the investor, Plumrose, has committed up to $24 million to purchase
shares of our common stock over a 12-month period. Once every 22 trading days,
we may request a draw of up to $2,000,000 of that money, subject to a formula
based on the average common stock price and average trading volume. Each draw
down must be for at least $250,000 unless otherwise agreed by Plumrose. At the
end of a 22-day trading period following the draw down request, we and Plumrose
will calculate the amount of money that Plumrose will provide to us and the
number of shares we will issue to Plumrose in return for that money, based on
the formula in the common stock purchase agreement.
Plumrose will receive a thirteen percent (13%) discount to the average
daily market price of our common stock for the 22-day period, weighted by
trading volume. We will receive the amount of the draw down less an escrow agent
fee of $1,500 and a 5% placement fee payable to the placement agent, Ladenburg
Thalmann & Co. Inc., which introduced Plumrose to us. In addition, we are
obligated to pay a finders fee to Barclay Partners, Inc. equal to 2.5% of each
draw down. On the exercise of any given draw down, Ladenburg will also receive
warrants to purchase an amount of shares equaling five percent (5%) of the
shares issued to Plumrose in that draw down.
The facility is based on a "use-it-or-lose-it" principle. We are under
no obligation to request a draw for any period. However, if we do not request a
draw for a given period, we may never to be able to draw those funds again. We
may make up to a maximum of twelve (12) draws; however, the aggregate total of
all draws cannot exceed $24 million and no single draw can exceed $2 million.
In lieu of providing Plumrose with a minimum aggregate draw down
commitment, we have issued to Plumrose a stock purchase warrant to purchase
100,000 shares of our common stock with an exercise price of $1.875, which was
the volume-weighted average share price on April 11, 2000, the day prior to the
closing date. The warrant expires April 26, 2002.
Based on a review of our trading volume and stock price history and the
number of draw downs we estimate making, we are registering 4,000,000 shares of
common stock for possible issuance under the common stock purchase agreement and
100,000 shares underlying the warrants for common shares delivered to Plumrose.
The listing requirements of The Nasdaq SmallCap Market prohibit us from issuing
20% or more of our issued and outstanding common shares, without stockholder
approval. Based on shares of common stock issued and outstanding on April 12,
2000, the date of closing of the common stock purchase agreement, we may not
issue more than approximately 6.4 million shares under the common stock purchase
agreement without the approval of our stockholders. At such time, our officers
and directors as a group may own sufficient shares of our common stock to
approve such an issuance.
As noted above, the minimum amount we may draw down at any one time is
$250,000 unless otherwise agreed by Plumrose. Given recent declines in the price
of our stock and current trading volumes, we are not currently able to draw on
the equity line without a waiver of the minimum draw down amount by Plumrose.
THE DRAW DOWN PROCEDURE AND THE STOCK PURCHASES
We may request a draw down by faxing a draw down notice to Plumrose,
stating the amount of the draw down we wish to exercise and the minimum
threshold price, if any, at which we are willing to sell the shares. The next 22
trading days immediately following the draw down notice are used to determine
the actual amount of money Plumrose will provide and the number of shares we
will issue in return. The 23rd trading day is the draw down exercise date when
the amount of the draw and the number of shares to be issued are calculated and
delivered based on the formulas below.
43
<PAGE>
AMOUNT OF THE DRAW
The amount of the draw down is the amount we have requested, except
that the amount is capped based on the following formula:
o Average daily trading volume for the 45 trading days
immediately prior to the date we give notice of the draw down,
multiplied by 22;
multiplied by
o The average of the volume-weighted average daily prices for
the 22 trading days immediately prior to the date we give
notice of the draw down;
multiplied by
o 20%.
If the volume-weighted average daily price for any given trading day is
below the threshold price set by us in the draw down notice during the 22
trading days immediately following the date we give notice, then the draw down
amount that Plumrose is obligated to pay us is correspondingly reduced by 1/22
for each day that is below the threshold price. Thus, if the daily price for a
day is below the threshold price we will not issue any shares and Plumrose will
not purchase any shares for that day.
NUMBER OF SHARES
To determine the number of shares of common stock we must issue in
connection with a draw down, take 1/22 of the draw down amount and for each of
the 22 trading days immediately following the date we give notice of the draw
down, divide it by 87% of the volume-weighted average daily trading price of our
common stock on such date. The 87% accounts for Plumrose's 13% discount. The sum
of these 22 daily calculations produces the number of common shares we will
issue, unless the volume-weighted average daily price for any given trading day
is below the threshold amount, in which case that day is not part of the sum.
SAMPLE CALCULATION OF STOCK PURCHASES
The following is an example of the calculation of the draw down amount
and the number of shares we would issue to Plumrose in connection with that draw
down based on hypothetical assumptions.
SAMPLE DRAW DOWN AMOUNT CALCULATION
Suppose that we provide a draw down notice to Plumrose that we wish to
draw down $2,000,000, which is the maximum amount for any draw. The average
daily trading volume for the 45 trading days prior to the notice is 200,000. The
average of the volume-weighted average daily prices of our common stock for the
22 trading days prior to the notice is $2.00. The maximum amount we can draw
down under the formula is capped at $1,760,000, so we can draw down $1,760,000
of the $2,000,000 requested.
Suppose that our notice specifies a threshold amount of $1.50, below
which we will not sell any shares to Plumrose during this draw down period. If
the volume-weighted average daily price of our common shares for each of the
next 22 trading days following the draw down notice is at least $1.50, we will
be able to draw the maximum $1,760,000 amount. If on the other hand the
volume-weighted average daily price of our common shares is below $1.50 on two
of those 22 days, for example, the $1,760,000 would be reduced by 1/22 for each
of those days and our draw down amount would be 20/22 of $1,760,000, or
$1,600,000.
44
<PAGE>
SAMPLE CALCULATION OF NUMBER OF SHARES
Assume that the draw down amount for the draw down period is $1,760,000
and assume that the volume-weighted average daily price for our common shares is
as set forth in the table below. Suppose that our notice specifies a threshold
amount of $1.50. The number of shares to be issued based on any trading day
during the draw down period is calculated from the formula: (1/22 of the draw
down amount) divided by (87% of the volume-weighted average daily price).
For example, for the first trading day in the example in the table
below, the calculation is as follows: (1/22 of $1,760,000) divided by (87% of
$2.00 per share) or 45,977 shares. Perform this calculation for each of the 22
measuring days, excluding any days on which the volume-weighted average daily
price is below the $1.50 threshold amount, and add the results to determine the
number of shares to be issued, which in this example is 951,640.
<TABLE>
<CAPTION>
TRADING DAY VOLUME-WEIGHTED AVERAGE 1/22 OF REQUESTED DRAW NUMBER OF SHARES OF COMMON
----------- ------------------------ ----------------------- ---------------------------
DAILY STOCK PRICE DOWN AMOUNT STOCK TO BE ISSUED FOR THE
----------------- ----------- --------------------------
TRADING DAY
-----------
<S> <C> <C> <C>
1 $2.00 $80,000.00 45,977
2 2.25 80,000.00 40,868
3 2.00 80,000.00 45,977
4 1.75 80,000.00 52,545
5 1.50 80,000.00 61,303
6 1.75 80,000.00 52,545
7 1.50 80,000.00 61,303
8 1.25 ** **
9 1.375 ** **
10 1.50 80,000.00 61,303
11 1.75 80,000.00 52,545
12 2.00 80,000.00 45,977
13 1.75 80,000.00 52,545
14 2.00 80,000.00 45,977
15 2.25 80,000.00 40,868
16 2.125 80,000.00 43,272
17 2.25 80,000.00 40,868
18 2.50 80,000.00 36,782
19 2.25 80,000.00 40,868
20 2.125 80,000.00 43,272
21 2.25 80,000.00 40,868
22 2.00 80,000.00 45,977
-------------- ---------
Total $1,600,000.00 951,640
============== =========
</TABLE>
* The share prices are illustrative only and should not be interpreted as a
forecast of share prices or the expected or historical volatility of the
share prices of our common stock.
** Excluded because the volume-weighted average daily price is below the
threshold specified in our hypothetical draw down notice.
We would receive $1,600,000 less the 5% fee to the placement agent,
less the 2.5% finder's fee to Barclay Partners, Inc., less a $1,500 escrow fee,
or $1,478,500. The delivery of the requisite number of shares and payment of the
draw will take place through an escrow agent, Epstein, Becker & Green, P.C. of
New York. The escrow agent pays 95% of the draw to us - after subtracting its
escrow fee - and 5% to Ladenburg Thalmann & Co. Inc., our placement agent, in
satisfaction of placement agent fees. We are then required to remit 2.5% of the
draw to Barclay Partners, Inc., in satisfaction of the finder's fee. Only one
draw down can occur during this 22-day draw down period.
45
<PAGE>
NECESSARY CONDITIONS BEFORE PLUMROSE IS OBLIGED TO PURCHASE OUR SHARES
The following conditions must be satisfied before Plumrose is obligated
to purchase the common shares that we wish to sell from time to time:
o A registration statement for the shares we will be issuing
must be declared effective by the Securities and Exchange
Commission and must remain effective and available as of the
draw down settlement date for making resales of the common
shares purchased by Plumrose;
o There can be no material adverse change in our business,
operations, properties, prospects or financial condition;
o We must not have merged or consolidated with or into another
company or transferred all or substantially all of our assets
to another company, unless the acquiring company has agreed to
honor the common stock purchase agreement;
o No statute, rule, regulation, executive order, decree, ruling
or injunction may be in effect which prohibits consummation of
the transactions contemplated by the common stock purchase
agreement;
o No litigation or proceeding adverse to us, Plumrose or their
affiliates, can be pending, nor any investigation by any
governmental authority threatened against us or them seeking
to restrain, prevent or change the transactions contemplated
by the common stock purchase agreement or seeking damages in
connection with such transactions; and
o Trading in our common shares must not have been suspended by
the Securities and Exchange Commission or The Nasdaq Stock
Market, nor shall minimum prices have been established on
securities whose trades are reported by Nasdaq.
On each draw down settlement date for the sale of common shares, we
must deliver an opinion from our counsel about these matters.
A further condition is that Plumrose may not purchase more than 19.9%
of our common shares issued and outstanding on April 12, 2000, the closing date
under the common stock purchase agreement, without obtaining approval from our
shareholders for such excess issuance. In addition, the common stock purchase
agreement does not permit us to draw down funds if the issuance of shares of
common stock to Plumrose pursuant to the draw down would result in Plumrose
owning more than 9.9% of our outstanding common stock on the draw down exercise
date.
RESTRICTIONS ON FUTURE FINANCINGS
The common stock purchase agreement limits our ability to raise money
by selling our securities for cash at a discount to the market price until the
earlier of twelve months from the effective date of the Registration Statement
or the date which is 60 days after Plumrose has purchased the maximum of
$24,000,000 worth of common stock from us under the common stock purchase
agreement.
46
<PAGE>
There are exceptions to this limitation for securities sold in the
following situations:
o in a registered public offering which is underwritten by one
or more established investment banks;
o in one or more private placements where the purchasers do not
have registration rights;
o pursuant to any presently existing or future employee benefit
plan which plan has been or is approved by our stockholders;
o pursuant to any compensatory plan for a full-time employee or
key consultant;
o in connection with a strategic partnership or other business
transaction, the principal purpose of which is not simply to
raise money; and
o in a transaction to which Plumrose gives its written approval.
COSTS OF CLOSING THE TRANSACTION
At the closing of the transaction on April 12, 2000, we delivered the
requisite opinion of counsel to Plumrose and paid the escrow agent, Epstein
Becker & Green P.C., $20,000 for Plumrose's legal, administrative and escrow
costs and for the ordinary services of the escrow agent for the closing of the
draw downs. We also paid Ladenburg Thalmann & Co. Inc. an additional $35,000 for
its expenses.
TERMINATION OF THE COMMON STOCK PURCHASE AGREEMENT
Plumrose may terminate the equity draw down facility under the common
stock purchase agreement if any of the following events occurs:
o We suffer a material adverse change in our business,
operations, properties, or financial condition;
o Our common shares are delisted from The Nasdaq SmallCap Market
unless such delisting is in connection with the listing of
such shares on the Nasdaq National Market or a comparable
stock exchange in the United States;
o We file for protection from creditors;
o We complete a financing that violates the limitations on
financings contained in the common stock purchase agreement;
o The registration statement of which this prospectus is a part
has not become effective by August 31, 2000; or
o Our officers and directors cease to own or control at least
35% of our outstanding common stock.
INDEMNIFICATION OF PLUMROSE
Plumrose is entitled to customary indemnification from us for any
losses or liabilities suffered by it based upon material misstatements or
omissions from the registration statement and the prospectus, except as they
relate to information supplied by Plumrose to us for inclusion in the
registration statement and prospectus.
47
<PAGE>
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The table below sets forth certain information, as of the date of this
prospectus, with respect to the amount and percentage ownership of each Selling
Securityholder before this offering, the number of shares covered by this
prospectus with respect to each Selling Securityholder, and the amount and
percentage ownership of each Selling Securityholder after this offering
(assuming the issuance of the 4,000,000 shares being registered in this
prospectus with respect to our equity line of credit and the exercise of all
options, warrants and convertible notes for which shares are being registered by
this prospectus). None of the Selling Securityholders has had any position,
office, or other material relationship with us within the past three years,
other than as disclosed in this prospectus.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
SELLING SECURITYHOLDERS
---------------------------------------------------------------------------------------------------------------------------
NAME OF SELLING SECURITYHOLDER TOTAL NUMBER OF NUMBER OF OWNED TOTAL NUMBER OF %OWNED % OWNED
SHARES OWNED SHARES BEING SHARES BEING BEFORE AFTER
REGISTERED REGISTERED OFFERING(1) OFFERING(2)
PURSUANT TO
WARRANTS,
OPTIONS,
CONVERTIBLE
NOTES, EQUITY
LINE
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Plumrose Holdings Inc. -- -- 4,100,000 * 9.9%
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
AMRO International, S.A. -- -- 2,372,449 * 5.7%
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Ladenburg Thalmann & Co. Inc. -- -- 49,660 * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
The Lin Law Corporation 850,000 250,000 -- 2.7% 2.0%
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Akira Minamino -- -- 56,257 * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Masamitsu Ishihara 200,000 200,000 50,000 * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Keiji Miyagawa -- -- 42,000 * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
55 5th Street Corporation 100,000 100,000 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Akihiro Fursato 20,000 20,000 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
MacKenzie Shea, Inc. 1,760,932 250,000 -- 5.6% 4.2%
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
AGF, Ltd. 20,000 20,000 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Avon Brill, LLC 60,000 60,000 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Spyglass Ventures, Inc. 60,000 60,000 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Glendale Corporation 50,000 50,000 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Haxton Corporation 60,000 60,000 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
C. Kevin Chuang -- -- 69,663 * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Far East Capital Management -- -- 15,480 * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Escaldade Investors LLC 21,252 -- 43,134 * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Robert A. Shuey, III 12,500 12,500 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Anthony F. Vaccaro, Jr. 12,500 12,500 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Michael A. Colaiacovo 12,500 12,500 70,000 * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
48
<PAGE>
---------------------------------------------------------------------------------------------------------------------------
SELLING SECURITYHOLDERS
---------------------------------------------------------------------------------------------------------------------------
NAME OF SELLING SECURITYHOLDER TOTAL NUMBER OF NUMBER OF OWNED TOTAL NUMBER OF %OWNED % OWNED
SHARES OWNED SHARES BEING SHARES BEING BEFORE AFTER
REGISTERED REGISTERED OFFERING(1) OFFERING(2)
PURSUANT TO
WARRANTS,
OPTIONS,
CONVERTIBLE
NOTES, EQUITY
LINE
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Manuel M. Bello 12,500 12,500 40,000 * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
William Gilsing 50,000 25,000 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Michael Culver 30,000 15,000 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Grant Trexler 332,500 125,000 -- 1.1% *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Doug Foster 225,000 112,500 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Peter Janssen 225,000 112,500 -- * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Synnex Information Technologies, -- -- 489,699 * 1.2%
Inc.
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Triangle Associates, LLC -- -- 69,663 * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Deutsche Financial Services -- -- 275,000 * *
Corporation
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Ingram Micro Inc. -- -- 250,000 * *
------------------------------------ ----------------- -------------------- ------------------ ------------- --------------
Institutional Equity Corporation -- -- 500,000 * 1.2%
(formerly Redstone Securities)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* less than 1%.
(1) Based upon a total number of shares of Common Stock
outstanding of 31,465,965.
(2) Based upon a total number of shares of Common Stock
outstanding of 41,468,970.
The shares and warrants or options held by the Selling Securityholders
may be sold or otherwise disposed of from time to time by the Selling
Securityholders, or by their pledgees, donees, transferees or other successors
in interest, should they or any other parties determine to make such sales. We
are unable to predict whether or when they will determine to proceed with sales
of common stock, warrants and/or options, as determination will be made by the
Selling Securityholders or other parties. The sale or other disposition of
common stock and/or warrants by the Selling Securityholders, or by pledgees,
donees, transferees or other successors in interest, may be effected from time
to time in transactions (which may include block transactions) on the Nasdaq
SmallCap Market, the over-the-counter market or otherwise, in private sales or
in negotiated transactions, through the writing of options on common stock or
warrants, or a combination of methods of sale, at fixed prices which may be
changed, at market prices prevailing at the time of sale, at prices related to
prevailing market prices, or at negotiated prices. The Selling Securityholders
or other parties may effect such transactions by selling common stock or
warrants to or through broker-dealers or otherwise, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Securityholders and/or the purchasers of common stock and/or
warrants for whom such broker-dealers may act as agent or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer might be
in excess of customary commissions). In addition, any common stock or warrants
covered by this prospectus which qualify for sale pursuant to Rule 144
promulgated under the Securities Act may be sold under Rule 144 rather than
pursuant to this prospectus.
49
<PAGE>
Under the Exchange Act and the regulations thereunder, any person
engaged in a distribution of the shares of common stock offered by this
prospectus may not simultaneously engage in market making activities with
respect to the shares of common stock during the applicable `cooling off'
periods prior to the commencement of such distribution. In addition, and without
limiting the foregoing, the Selling Securityholders will need to comply with
applicable provisions of the Exchange Act and the rules and regulations
thereunder, which provisions may limit the timing of purchases and sales of
common stock by the Selling Securityholders.
The Selling Securityholders and any broker-dealers that act in
connection with the sale of common stock and/or warrants hereunder might be
deemed to be 'underwriters' within the meaning of Section 2(11) of the
Securities Act and any commissions received by them and any profit on the resale
of common stock or warrants as principal might be deemed to be underwriting
discounts and commissions under the Securities Act.
We have agreed to pay all expenses of registration, provided, however,
that all selling and other expenses incurred by the Selling Securityholders will
be paid by the Selling Securityholders.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices of our common stock. Upon the
consummation of this offering, we will have 41,468,970 shares of common stock
outstanding (assuming complete draw down of the shares being registered in this
prospectus for our equity line and no exercise of any outstanding options or
warrants), of which 17,122,510 shares of common stock will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act.
The remaining 24,346,460 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144 or 701 promulgated under the Securities Act. These rules are summarized
below.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this prospectus, a person who has beneficially owned shares of
our common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
o 1% of the number of shares of common stock then outstanding;
or
o the average weekly trading volume of the common stock on the
Nasdaq SmallCap Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to
that sale.
Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors who purchases shares from
us in connection with a compensatory stock or option plan or other written
agreement is eligible to resell such shares 90 days after the effective date of
this offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in Rule 144.
51
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for us by O'Melveny & Myers LLP, Irvine, California.
EXPERTS
The financial statements of the Mcglen Internet Group, Inc. as of
December 31, 1999 and for the year then ended included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the period set forth in
their report (which contains an explanatory paragraph regarding the Company's
ability to continue as a going concern) appearing elsewhere in this prospectus
and in the Registration Statement, and are included in reliance upon such report
given on the authority of said firm as experts in auditing and accounting.
The financial statements of the Mcglen Internet Group, Inc. as of
December 31, 1998 and for the year then ended included in this Prospectus and in
the Registration Statement have been audited by Singer Lewak Greenbaum &
Goldstein LLP, independent certified public accountants, to the extent and for
the period set forth in their report appearing elsewhere in this prospectus and
in the Registration Statement, and are included in reliance upon such report
given on the authority of said firm as experts in auditing and accounting.
52
<PAGE>
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our certificate of incorporation provides that none of our directors
shall be liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability
o for any breach of the director's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
o under section 174 of the Delaware General Corporation Law; or
o for any transaction from which the director derives improper
personal benefit.
The effect of this provision is to eliminate our rights and those of
our stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of his or her
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described
above. The limitations summarized above, however, do not affect our ability or
that of our stockholders to seek non-monetary remedies, such as an injunction or
rescission, against a director for breach of his or her fiduciary duty.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers, or persons controlling our Company pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in our affairs since the date
hereof or that the information contained herein is correct as of any date
subsequent to the date hereof. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making the offer is not qualified to do so or to anyone
to whom it is unlawful to make such offer or solicitation.
53
<PAGE>
MARKET FOR OUR COMMON EQUITY
Our common stock is traded on the Nasdaq SmallCap Market under the
symbol "MIGS." In December 1999, we changed our ticker symbol from ADRN to MIGS
in connection with the consummation of the reverse merger between Adrenalin
Interactive, Inc. and Mcglen Micro, Inc. The following table sets forth the
range of the high and low closing sales prices for our Common Stock, for the
periods indicated, as reported by the Nasdaq SmallCap Market:
Price Range of Common Stock*
--------------------------------
High Low
--------------- -------------
Year Ended December 31, 1998
----------------------------
FIRST QUARTER $0.88 $0.38
SECOND QUARTER 3.81 0.63
THIRD QUARTER 4.60 1.85
FOURTH QUARTER 1.85 1.50
Year Ended December 31, 1999
----------------------------
FIRST QUARTER $3.70 $0.75
SECOND QUARTER 8.50 3.38
THIRD QUARTER 4.63 2.25
FOURTH QUARTER 15.00 2.50
Year Ending December 31, 2000
-----------------------------
FIRST QUARTER $5.31 $3.31
SECOND QUARTER 3.63 1.03
THIRD QUARTER (through 1.81 0.50
September 25, 2000)
* Figures through December 31, 1998 have been adjusted to reflect Adrenalin's
3-for-1 reverse stock split effected on December 29, 1998.
On September 25, 2000, the closing price of our common stock as
reported on the Nasdaq SmallCap Market was $1.19 per share. On September 20,
2000, there were 275 holders of record of our common stock.
We have never paid cash dividends on our common stock, and do not
anticipate paying cash dividends on our common stock. We intend to retain our
earnings, if any, to finance the growth and development of our business.
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.
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 Chief Financial Officer at
the following address and telephone number:
Grant Trexler
Chief Financial Officer
Mcglen Internet Group, Inc.
3002 Dow Avenue, Suite 114
Tustin, CA 92780
(714) 838-1240 x223
54
<PAGE>
FINANCIAL STATEMENTS
Information in response to this item is set forth in the Financial
Statements, beginning on Page F-4 of this filing.
55
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Certified Public Accountants F-2
Consolidated Financial Statements:
Balance Sheets as of December 31, 1999 and 1998 F-4
Statements of Operations for the Years Ended December 31, 1999
and 1998 F-5
Statements of Cash Flows for the Years Ended December 31, 1999
and 1998 F-6
Statements of Changes in Stockholders' (Deficit) Equity for the
Years Ended December 31, 1999 and 1998 F-7
Notes to Financial Statements F-8
Balance Sheets as of June 30, 2000 and December 31, 1999 F-21
Statements of Operations for the Six Months Ended June 30, 2000
and 1999 F-22
Statements of Cash Flows for the Six Months Ended June 30, 2000
and 1999 F-23
Statement of Changes in Stockholders' Deficit for the Six Months
Ended June 30, 2000 F-24
Notes to Financial Statements F-25
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of the Mcglen Internet Group,
Inc. Tustin, CA
We have audited the accompanying consolidated balance sheet of the
Mcglen Internet Group, Inc., as of December 31, 1999 and the related
consolidated statements of operations, cash flows and changes in stockholders'
(deficit) equity for the year ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Mcglen
Internet Group, Inc., at December 31, 1999, and the results of their operations
and their cash flows for the year ended December 31, 1999, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered a loss from
operations, has negative working capital, is in violation of debt covenants, and
needs to raise additional funds to accomplish its objectives. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Los Angeles, CA
March 11, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of the Mcglen Internet Group,
Inc. Tustin, CA
We have audited the accompanying balance sheet of the Mcglen Internet
Group, Inc., as of December 31, 1998 and the related statements of operations,
cash flows and changes in stockholders' (deficit) equity for the year ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Mcglen Internet
Group, Inc., at December 31, 1998, and the results of its operations and its
cash flows for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Singer Lewak Greenbaum & Goldstein LLP
Santa Ana, CA
April 14, 1999
F-3
<PAGE>
<TABLE>
MCGLEN INTERNET GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
ASSETS (Note 4) 1999 1998
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 961,666 $ 436,692
Accounts receivable, net of allowance for doubtful accounts and
estimated returns of $70,000 and $0 at December 31, 1999 and 1998 558,356 350,048
Inventories (Note 1) 436,017 115,184
Prepaid expenses and other current assets 52,776 8,112
Deposits (Note 1) 386,074 148,189
------------ ------------
Total current assets 2,394,889 1,058,225
------------ ------------
Equipment, net (Note 3) 519,576 41,750
Intangible assets (Note 1) 337,584 -
Other assets (Note 1) 52,314 700
------------ ------------
$ 3,304,363 $ 1,100,675
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Accounts payable (Note 4) $ 1,933,122 $ 610,429
Accrued expenses 379,768 79,736
Capital lease obligations - current portion (Note 3) 96,989 -
Convertible notes payable - related parties (Note 5) - 200,000
Convertible notes payable (Note 5) 200,000 -
Net current liabilities of discontinued operations (Note 1 and 12) 1,342,620 -
------------ ------------
Total current liabilities 3,952,499 890,165
------------ ------------
Capital lease obligations (Note 3) 216,172 -
------------ ------------
Total liabilities 4,168,671 890,165
------------ ------------
Commitments and contingencies (Note 9)
Stockholders' (deficit) equity (Notes 1, 5, 7, and 12)
Preferred stock, $0.01 par value; 5,000,000 shares authorized,
none issued or outstanding - -
Common stock, $0.03 par value; authorized 50,000,000 shares,
31,733,893 in 1999 and 20,750,000 in 1998 shares issued and outstanding 952,017 62,250
Additional paid in capital 2,204,143 72,250
Deferred compensation (575,971) -
Accumulated (deficit) earnings (3,444,497) 75,510
------------ ------------
Total Stockholders' (Deficit) Equity (864,308) 210,510
------------ ------------
$ 3,304,363 $ 1,100,675
============ ============
See accompanying notes to the consolidated financial statements
</TABLE>
F-4
<PAGE>
<TABLE>
MCGLEN INTERNET GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
NET SALES $ 27,493,774 $ 11,525,307
COST OF SALES 25,424,325 9,707,247
------------- -------------
GROSS PROFIT 2,069,449 1,818,060
------------- -------------
OPERATING EXPENSES
Selling, general and administrative (including $769,079
amortization of deferred compensation in 1999) 5,548,993 1,778,646
Interest expense (income) 31,463 (20,305)
------------- -------------
Total operating expenses 5,580,456 1,758,341
------------- -------------
(LOSS) INCOME BEFORE INCOME TAXES (3,511,007) 59,719
============= =============
PROVISION FOR INCOME TAXES 1,000 1,300
------------- -------------
NET (LOSS) INCOME $ (3,512,007) $ 58,419
------------- -------------
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE $ (0.11) $ -
============= =============
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
BASIC AND DILUTED 31,733,893 20,750,000
============= =============
See accompanying notes to the consolidated financial statements
</TABLE>
F-5
<PAGE>
<TABLE>
MCGLEN INTERNET GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(3,512,007) $ 58,419
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 171,888 6,614
Amortization of deferred compensation 769,079 -
Increase in allowance for doubtful accounts 70,000 -
Increase in inventory reserves 92,949 7,608
Common stock issued for services - 75,000
Changes in operating assets and liabilities:
Accounts receivable (278,308) (92,575)
Inventories (413,782) (56,654)
Prepaid expenses and other current assets (44,664) (8,112)
Deposits (237,885) (145,624)
Other assets (17,821) -
Accounts payable 1,322,692 277,029
Accrued expenses 300,032 49,889
------------ ------------
Total adjustments 1,734,180 113,175
------------ ------------
Net cash (used in) provided by operating activities (1,777,827) 171,594
------------ ------------
Cash flows from investing activities:
Purchases of equipment (208,772) (39,949)
Acquisition of Adrenalin (68,834) -
Notes receivable - related parties (33,793) -
------------ ------------
Net cash used in investing activities (311,399) (39,949)
------------ ------------
Cash flows from financial activities:
Borrowings under convertible notes payable 200,000 -
Payments on convertible notes payable - related parties (180,000) (24,061)
Borrowings under convertible notes payable - related parties - 200,000
Distributions to stockholders' (8,000) (84,000)
Payments on capital lease obligations (63,270) -
Net proceeds from sale of common stock 2,665,470 -
------------ ------------
Net cash provided by financing activities 2,614,200 91,939
------------ ------------
Net increase in cash and cash equivalents 524,974 223,584
Beginning of period 436,692 213,108
------------ ------------
End of period $ 961,666 $ 436,692
============ ============
See accompanying notes to the consolidated financial statements
</TABLE>
F-6
<PAGE>
<TABLE>
MCGLEN INTERNET GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<CAPTION>
Total
Additional Accumulated Stockholders'
Common Stock Paid-in Deferred Earnings Equity
Shares Amount Capital Compensation (Deficit) (Deficit)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 20,000,000 $ 60,000 - - $ 101,091 $ 161,091
Distributions to stockholders - - - - (84,000) (84,000)
Common stock issued in exchange for
accounts payable 750,000 2,250 72,750 - - 75,000
Net income - - - - 58,419 58,419
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 20,750,000 62,250 72,750 - 75,510 210,510
Distributions to stockholders - - - - (8,000) (8,000)
Conversion of notes payable 200,000 600 19,400 - - 20,000
Shares issued in acquisition of AMT
Components, Inc. 4,500,000 13,500 388,594 - - 402,094
Private placements prior to reverse
acquisition 320,000 960 719,040 720,000
Deferred compensation relating to
stock options - - 1,345,050 ($1,345,050) - -
Amortization of deferred compensation
relating to stock options - - - 769,079 - 769,079
Stock split in connection with reverse
acquisition (284,472) 687,256 (687,256) - - -
Shares issued in recapitalization 3,539,343 106,179 7,384,287 - - 7,490,466
Costs related to reverse acquisition
transaction (Note 1) 2,010,932 60,328 (8,962,248) - - (8,901,920)
Private placements of stock 698,090 20,943 1,924,057 - - 1,945,470
Net loss - - - - (3,512,007) (3,512,007)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 31,733,893 $ 952,017 $ 2,204,143 $ (575,971) $(3,444,497) $ (864,308)
============ ============ ============ ============ ============ ============
See accompanying notes to the consolidated financial statements
</TABLE>
F-7
<PAGE>
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF COMPANY
Mcglen Internet Group, formerly Adrenalin Interactive, Inc.
("Adrenalin"), was acquired by Mcglen Micro, Inc. in December 1999 through a
transaction in which the stockholders of Mcglen Micro, Inc. acquired control of
us through a reverse acquisition. As a result of the acquisition, each share of
Mcglen Micro, Inc. was converted into 0.9889611 shares of our common stock, with
25,485,527 shares being issued. In addition, under the terms of the acquisition
agreement between us, Mcglen Micro, Inc., and a consulting firm who arranged the
acquisition, the consulting firm received 2,010,932 shares of common stock upon
completion of the acquisition. The value of these shares has been accounted for
as a cost of the recapitalization. The equity section of the balance sheet and
earnings per share information have been retroactively restated to reflect the
exchange ratio established in the acquisition agreement and the issuance of
shares to the consulting firm.
In connection with the acquisition, our Board of Directors adopted a
formal plan to discontinue the operations of Western Technologies, Inc., the
operating subsidiary of Adrenalin that developed video games. As such, the
accounting treatment for the reverse acquisition is that of a recapitalization.
The net liabilities of Western have been reclassified as discontinued operations
on the balance sheets for all periods presented. See Note 12.
In March 1999, we acquired all of the assets and assumed the
liabilities of AMT Components, Inc., (AMT) dba AccessMicro.com, in exchange for
4,500,000 shares of stock (pre-recapitalization). The purchase price of the AMT
acquisition was allocated to the acquired assets based on the estimated fair
values at the date of acquisition. This resulted in an excess of purchase price
over net assets acquired of approximately $400,000 which has been allocated to
goodwill and customer lists acquired and is being amortized on a straight-line
basis over 3 to 7 years. The operating results for AMT have been included in the
consolidated financial statements from the date of acquisition. At December 31,
1999, included in Other Assets is a $33,793 loan, due in 2002, from Mcglen to
the former President of AMT, and currently an officer of Mcglen, with interest
at 5%.
We are an Internet operating company focused on creating multiple
on-line business divisions targeting specific business-to-business and
business-to-consumer markets. We offer over 150,000 computer hardware, software,
and peripheral products servicing individuals, small offices/home offices, and
the corporate market through our three web sites: Mcglen.com, AccessMicro.com,
and Techsumer.com.
GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that we will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. We had a loss of approximately $3.5 million for the year ended
December 31, 1999 and had a negative working capital of approximately $1.6
million as of December 31, 1999. Additionally, we are in violation of certain
covenants related to a line of credit. As a result, our independent certified
public accountants have expressed substantial doubt about our ability to
continue as a going concern.
During 1999, we relied on the proceeds from short-term loans and
private placement of our common stock, which aggregated approximately $2.9
million, to fund our operating requirements. We are exploring various options to
raise additional operating capital during 2000.
We have signed agreements which provide for a $1.5 million bridge loan
and a $24 million private placement of stock. The interest rate on the bridge
loan is 10%, payable quarterly, or in full upon redemption or conversion, and
matures eighteen months from the closing date. The bridge loan may be converted
by the investor 150 days after the closing date at 90% of the daily volume
weighted average price (VWAP) of the Company's common stock for the 22 trading
days prior to notice of conversion.
F-8
<PAGE>
The investors also received warrants to purchase 472,449 shares our
common stock at 115% of our closing common stock price the day prior to the
closing date.
The $24 million equity private placement will be funded through twelve
$2 million draws on an equity line of credit with the same investor as the $1.5
million bridge loan, commencing on the effective date of a registration
statement which we are required to file for the private placement and continuing
for twelve months thereafter. The private placement will be at a price equal to
87% of the VWAP for our common stock for 22 trading days prior to the draw down.
The private placement agreement contains certain conditions whereby the
investor's obligation to fund the draw down is reduced if our stock price drops
below a threshold price, as defined.
We are dependent on the proceeds from the above financing effort and
any other such financing efforts for the continuation and expansion of our
operations. We expect that our cash on hand, combined with the funds that we
expect to raise from new debt and/or equity financings during 2000, will be
sufficient to fund operating and capital expenditures at least through December
2000. However, there can be no assurances that we will be able to complete such
financings on a timely basis and/or under acceptable terms and conditions. To
the extent that adequate working capital is not available to fund our
operations, management will consider a variety of alternatives, including
delaying the introduction of new marketing efforts and reducing or suspending
operations.
The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include our accounts and those of
our wholly-owned subsidiaries, Mcglen Micro, Inc. and Western Technologies, Inc.
All significant inter-company balances and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS
All highly liquid debt instruments purchased with an original maturity
of three months or less are considered cash equivalents.
REVENUE RECOGNITION
For sales of merchandise owned and warehoused by us, we recognize the
sales amount as revenue upon verification of the credit card transaction
authorization and shipment of the merchandise. We also sell merchandise from
suppliers on a "drop-ship" basis. We take title to this merchandise from the
time it is shipped by the supplier until it is received by the customer. We
recognize the sale upon verification of the credit card transaction
authorization and shipment of the merchandise to the customer by the supplier.
In instances where the credit card authorization has been received but the
merchandise has not yet been shipped, we defer revenue recognition until the
merchandise is shipped.
INVENTORIES
We account for inventory under the first-in first-out method. Inventory
is carried at lower of cost or market realization. We had reserves of $101,000
and $8,000 for lower of cost or market, and potential excess and obsolete
inventory at December 31, 1999 and 1998, respectively.
MERCHANDISE RETURN POLICY
Merchandise sold by us carries the return policy of the manufacturer of
the merchandise. We provide for allowances for estimated future returns at the
time of shipment to the customer based on historical experience.
F-9
<PAGE>
DEPOSITS
Deposits represent funds held by credit card processing companies as
security for potential credit card charge backs against us. Such funds can be
held up to 180 days subsequent to the termination of activity between us and the
processor.
EQUIPMENT
Equipment is stated at cost. Depreciation is computed using the
straight-line method based on the estimated useful lives of the assets, which
range from three to five years. Leasehold improvements are stated at cost and
depreciation is computed using the straight-line method over the shorter of the
useful life of the asset or the term of the lease.
SOFTWARE DEVELOPMENT COSTS
In accordance with SOP 98-1, internal and external costs incurred to
develop internal-use computer software are expensed during the preliminary
project stage and capitalized during the application development stage and
amortized over three years. During the years ended December 31, 1999 and 1998,
$91,000 and $63,000 was expensed, respectively. As of December 31, 1999, there
was $229,000 capitalized software development costs, net of accumulated
amortization of $21,000.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
We review long-lived assets for impairment when events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
In the event the sum of the expected undiscounted future cash flows resulting
from the use of the asset is less than the carrying amount of the asset, an
impairment loss equal to the excess of the asset's carrying value over its fair
value is recorded.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred. Advertising
expense was $905,000 and $221,000 for the years ended December 31, 1999 and
1998, respectively.
INCOME TAXES
We follow the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements and tax returns. Deferred
tax assets and liabilities are determined based upon the difference between the
financial statement and tax bases of assets and liabilities, using the enacted
tax rates in effect for the year in which the differences are expected to
reverse. A valuation allowance is provided when it is more likely than not that
deferred tax assets will not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of our financial instruments, consisting primarily
of stock subscriptions receivable, receivables, accounts payable and notes
payable, approximates fair value due to the maturity of these financial
instruments and the borrowing costs to us.
F-10
<PAGE>
STOCK-BASED COMPENSATION
We have adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires disclosure of the compensation cost for
stock-based incentives granted after January 1, 1995 based on the fair value at
grant date for awards. We account for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees."
NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share excludes dilution and is computed by
dividing net loss by the weighted average number of common shares outstanding
during the reported periods. Diluted net loss per share reflects the potential
dilution that could occur if stock options and other commitments to issue common
stock were exercised. During the year ended December 31, 1999, 2,938,275 options
and 493,264 warrants to purchase common shares were anti-dilutive and have been
excluded from the weighted average share computation. No options or warrants
were outstanding on December 31, 1998.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject us to a concentration of
credit risk consist of accounts receivable from individuals and merchants, and
deposits held by credit card processing companies, located in the United States.
Sales are generally made through credit cards and are pre-approved. We maintain
an allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable and potential credit losses. Such losses
have been immaterial.
CONCENTRATION OF SUPPLIERS
We are dependent upon key distributors for merchandise. For the years
ended December 31, 1999 and 1998, one distributor accounted for approximately
34.9% and 75.0%, respectively, of total purchases. Management believes other
suppliers could provide similar merchandise on comparable terms. A change in
suppliers, however, could cause a delay in fulfillment of customer orders and a
possible loss of sales, which would affect operating results adversely.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which we
are required to adopt effective in our fiscal year 2000. SFAS No. 133 will
require us to record all derivatives on the balance sheet at fair value. We do
not currently engage in hedging activities. The Company will adopt SFAS No. 133
for the year ending December 31, 2000 and the adoption is expected to have no
effect.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 1998
financial statements to conform to the December 31, 1999 presentation.
F-11
<PAGE>
2. BUSINESS COMBINATIONS
As discussed in Note 1, we acquired all the assets of AMT Components,
Inc. in March 1999 (see Note 1).
The following unaudited pro forma combined results of operations for us
assumes that the AMT acquisition was completed on January 1, 1998:
DECEMBER 31,
1999 1998
------------- -------------
Net sales $ 29,379,243 $ 16,160,050
Gross profit $ 2,291,545 $ 2,281,557
(Loss) income before taxes $ (3,541,672) $ 191,129
Net (loss) income $ (3,541,672) $ 188,366
Net (loss) income per share $ (0.11) $ 0.01
3. EQUIPMENT
Equipment consists of the following at December 31:
1999 1998
------------- -------------
Computer hardware and equipment $ 337,849 $ 55,533
Computer software 291,328 -
Other 11,560 -
------------- -------------
640,737 55,533
Less accumulated depreciation (121,161) (13,783)
------------- -------------
$ 519,576 $ 41,750
============= =============
We lease certain equipment, computer hardware and software under
capital leases. The following is a summary of this equipment at December 31:
1999
-------------
Computer hardware and equipment $ 244,232
Computer software 132,200
-------------
376,432
Less accumulated depreciation (68,170)
-------------
$ 308,263
=============
The following is a schedule of future minimum payments required under
capital leases, together with their estimated present values as of December 31,
1999:
2000 $ 124,775
2001 100,874
2002 76,905
2003 54,314
2004 17,849
----------
Total minimum lease payments 374,717
Less amount representing interest (61,556)
----------
Present value of minimum lease payments 313,161
Current portion (96,989)
----------
$ 216,172
==========
Certain of these leases are personally guaranteed by our majority
stockholders.
F-12
<PAGE>
4. ACCOUNTS PAYABLE LINES OF CREDIT
At December 31, 1999, we had a $500,000 and a $1 million line of credit
with two finance companies to finance purchases from two of our primary
suppliers. The lines of credit provide for borrowings secured by substantially
all of our assets. The $500,000 line of credit is cancelable upon 30 days' or
less advance notice and is personally guaranteed by our majority shareholders.
The $1 million line contains an automatic renewal feature unless canceled by
either party upon thirty days' written notice by either party. Amounts owed
under these lines are included in accounts payable. Advances under the $1
million line do not bear interest, whereas advances under the $500,000 line do
not bear interest if paid within 30 days of the inventory purchase date.
Interest on the advances not paid within 30 days is charged at the finance
company's prime rate plus 3.25% (11% at December 31, 1999). The $500,000 line
contains certain covenants that require us to maintain a minimum level of
tangible net worth (as defined). At December 31, 1999, we were not in compliance
with this covenant, and, therefore, the finance company can initiate a default
on the facility at any time. Management is attempting to re-negotiate the
covenants.
5. CONVERTIBLE SUBORDINATED DEBT AND RELATED PARTY CONVERTIBLE NOTES
PAYABLE
We were obligated under the following at December 31: 1999 1998
---------- ----------
Convertible notes payable to two individuals, dated $ 200,000 -
June 18, 1999. Interest payable at 10% per annum.
Notes and accrued interest due December 18, 2000.
Notes are convertible at $2.00 per share.
Convertible notes payable to two individuals related - $ 200,000
to our majority shareholders, dated December 15, 1998. ---------- ----------
Interest payable at 5% per annum. In 1999 $20,000 of
the notes were converted to common stock, with the
remaining balance being repaid.
$ 200,000 $ 200,000
========== ==========
6. INCOME TAXES
Prior to March 1999, we elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code and California Franchise tax reporting
purposes. Accordingly, results of our operations for the year ended December 31,
1998 and the period ended March 15, 1999 are reported on our stockholders'
federal income tax returns. No federal income tax is therefore reported in the
Statement of Operations for 1998. Income taxes in 1998 and 1999 represent the
California franchise tax applied to S Corporations at a rate of 1.5% and minimum
taxes due.
For the period March 16, 1999 to December 31, 1999, the difference
between the amount of income tax benefit recorded and the amount of income tax
benefit calculated using the federal statutory rate of 34% is due to net
operating losses having a valuation allowance, due to uncertainties regarding
our realization of these benefits in future years. Accordingly, no tax benefit
has been provided for the period ended December 31, 1999.
As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $8,759,000 and $3,803,000, respectively. The net
operating loss carryforwards will expire at various dates beginning in 2012
through 2014 for federal purposes and 2002 through 2004 for state purposes, if
not utilized. Utilization of the net operating loss carryforwards may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net operating
loss carryforwards prior to utilization.
F-13
<PAGE>
Under FAS 109, "Accounting for Income Taxes," deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. At
December 31, 1999, we had a deferred tax asset of approximately $2,978,000
resulting from the operating loss carryforward. However, based upon
uncertainties regarding our realization of this asset in future years, a
valuation allowance has been provided for the full amount of the deferred tax
asset.
7. STOCKHOLDERS' EQUITY
PRE-MERGER MCGLEN FINANCINGS
In September 1999, we entered into an agreement with a company to raise
$720,000, net of commission. Pursuant to this agreement, we sold 320,000 shares
of common stock for $2.50 per share.
Immediately prior to the Merger, we sold 600,000 shares of common stock
for $2.50 per share in a private placement pursuant to Rule 506. The placement
agent in the offering received a commission equal to 10% of the gross proceeds
of the offering; the net proceeds to us were $1,350,000.
PRE-REVERSE ACQUISITION (MERGER) ADRENALIN FINANCING
Prior to the Merger, Adrenalin received an irrevocable commitment from
an investor to purchase $750,000 of Adrenalin's common stock upon the completion
of the Merger. The $750,000 was placed into escrow until the SEC approved the
proxy statement soliciting the consent of our shareholders for the Merger and
was released upon the closing of the Merger. 138,090 shares were issued in the
$750,000 financing at $5.43 per share.
The investor received a three-year warrant to purchase 29,325
additional shares of common stock at an exercise price of $4.843 per share. Upon
the funding of the $750,000, they also received an additional three-year warrant
to purchase 13,809 additional shares of common stock at an exercise price of
$6.79 per share.
This financing agreement allowed for repricing rights if our stock
price dropped below certain prices as defined in the agreement. The buyer
exercised its repricing rights relating to two-thirds of the shares it obtained
in the financing in January 2000 and received 103,775 shares of our common
stock. The buyer exercised its repricing rights relating to the final one-third
of the shares it obtained in the financing in April 2000 and received 39,352
shares of our common stock, see Note 13.
Pursuant to the purchase agreement, we filed an S-3 Registration
Statement to register all shares of common stock issued or issuable, including
shares of common stock issued upon exercise of the warrants described above. We
are required to keep the Registration Statement effective until July 12, 2001,
or until the buyer 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 Act, whichever
comes first.
WARRANTS
Warrant activity for the year ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Number Warrant price Weighted Average
of shares per share Price per Share
--------- --------- ---------------
<S> <C> <C> <C>
Outstanding at January 1, 1999 --
Issued in connection with private placements 70,829 $1.98 to $6.17 $3.65
Issued in connection with development agreements 379,102 $4.08 to $5.44 $4.37
Assumed in connection with acquisition 43,333 $18.00 $18.00
Exercised 0
---------
Outstanding at December 31, 1999 493,264 $1.98 to $18.00 $ 5.46
========= =============== ======
</TABLE>
In 1996, we closed an initial public offering of common stock and redeemable
warrants. In connection with the offering, the investment banker received, for
nominal consideration, five-year warrants to purchase 43,333 shares of common
stock (which are included in the table above as "assumed in connection with
acquisition").
F-14
<PAGE>
CONVERSION OF NOTES PAYABLE
In December 1998, two individuals related to our majority stockholders
loaned us $200,000 as evidenced by convertible promissory notes. The two notes
bore interest at 5%, matured in January 2000, and contained a conversion option
to convert $10,000 of each note into 100,000 shares of our stock (prior to
applying the reverse acquisition conversion ratio). In 1999, $10,000 of each
note was converted into 100,000 shares of common stock (200,000 shares in total)
and the remaining balances were repaid.
EMPLOYEE STOCK OPTION PLANS
We have several stock option plans under which options to acquire
shares may be granted to our consultants, directors, officers and certain
employees including the stock option plans acquired through various
acquisitions. We accounts for these plans using the intrinsic value method under
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees." Terms and conditions of our option plans, including exercise
price and the period in which options are exercisable, generally are at the
discretion of the Board of Directors; however, no options are exercisable for
more than 10 years after date of grant.
Beginning in 1999, we granted stock options to attract and retain key
employees. In connection with the grant of options to employees we recorded
deferred compensation of $1,345,050 for the aggregate differences between the
exercise price of the options at their date of grant and the fair market value
for accounting purposes of the common shares subject to these options. Such
amount is included as a reduction of stockholders' equity and is being amortized
on a straight line vesting method over the option vesting periods, which range
from one to three years. We recognized approximately $769,000 in compensation
expense for the year ended December 31, 1999 relating to these options.
The following table summarizes employee stock option plan activity:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------
Number Price per Weighted
of shares share Average Price
--------- ----- Per Share
---------
<S> <C> <C> <C>
Outstanding January 1, 1999 - -
Options granted 3,193,790 $0.10 - $3.63 $0.54
Assumed in connection with acquisition 92,156 $0.66 - $3.28 1.77
Options exercised - -
Options forfeited (1,179,336) 0.10
------------ ------
Outstanding December 31, 1999 2,106,610 $0.91
============ ======
</TABLE>
In February 2000, our Board of Directors approved the 1999 Stock Option
Plan (the "1999 Plan") for issuance of common stock to eligible participants.
The 1999 Plan provides for the granting of incentive stock options and
non-qualified stock options. Options generally expire after 10 years. We have
granted non-qualified options to certain of our employees and directors to
purchase common stock. The terms of the options provide for vesting, over a 1-
to 3-year period, except for options to purchase 183,247 shares of common stock
at December 31, 1999 which vested upon completion of our reverse acquisition.
F-15
<PAGE>
NON -PLAN OPTIONS
Non-plan option activity for the year ended December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------
Number Price per Weighted
of shares share Average Price
--------- ----- Per Share
---------
<S> <C> <C> <C>
Outstanding January 1, 1999 - -
Options granted - -
Assumed in connection with acquisition 831,665 $0.75 - $15.00 $3.05
Options exercised - -
Options forfeited - -
Outstanding December 31, 1999 831,665 $0.75 - $15.00 $3.05
========= =======
</TABLE>
We entered into an agreement with a consultant in August 1999 to
perform certain market consultation and corporate finance services. In
consideration for the services to be performed by the consultant, we granted
500,000 stock options with various exercise prices between $2.50 and $5.00 per
share, included in the table above.
F-16
<PAGE>
The following table summarizes information about our stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------
Range of Number Weighted Weighted Number Weighted
Exercise Price Outstanding at Average Average Exercisable at Average
-------------- December 31, Remaining Exercise December 31, Exercise
1999 Contractual Life (Yrs) Price 1999 Price
---- ---------------------- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$ 0.10 637,385 1.9 $ 0.10 408,936 $ 0.10
0.75 - 1.20 53,333 0 0.82 53,333 0.82
0.99 1,255,981 2.7 0.99 182,958 0.99
1.00 8,328 4.0 1.00 5,496 1.00
1.50 25,000 1.2 1.50 25,000 1.50
1.88 82,162 2.7 1.88 66,227 1.88
1.88 239,999 0 1.88 239,999 1.88
2.47 1,088 1.8 2.50 494 2.50
2.50 - 5.00 500,000 0 3.45 500,000 3.45
3.28 1,666 3.4 3.28 1,100 3.28
3.63 120,000 3.0 3.63 0 3.63
15.00 13,333 2.0 15.00 13,333 15.00
---------- ----------
$0.10 - $15.00 2,938,275 1.8 $ 1.42 1,496,876 $ 1.88
============== ========== === ======= ========== =======
</TABLE>
Pro forma information regarding net loss and net loss per share is
required by SFAS 123, and has been determined as if we had accounted for our
employee stock purchase plan and employee stock options granted under the fair
value method of SFAS 123. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model for the single option
approach with the following assumptions: risk-free interest rate of 5.8%,
volatility factor of the expected market price of our common stock of 30%, an
expected life of the options of 3 years from the grant date, a 20% forfeiture
rate, and a dividend yield of zero. The average fair value of options at the
date of grant was $1.69 per share during 1999.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net loss over the options' vesting period. Our
historical and pro forma information follows:
December 31, 1999
-----------------
Net loss As reported $3,512,007
Pro forma $4,293,106
Basic EPS As reported $0.11
Pro forma $0.14
Diluted EPS As reported $0.11
Pro forma $0.14
STOCK SPLITS
On May 1, 1998, we effected a 33.33 for 1 split of our Common Stock. On
April 30, 1999, our Board of Directors approved a 10 for 1 stock split. All
common shares and per share data have been retroactively adjusted to reflect the
stock splits.
F-17
<PAGE>
8. SEGMENT INFORMATION
In 1998, we adopted Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information" (SFAS
No. 131). SFAS No. 131 requires companies to report financial and descriptive
information about its reportable operating segments, including segment profit or
loss, certain specific revenue and expense items, and segment assets, as well as
information about the revenues derived from our products or services, the
countries in which the company earns revenues and holds assets, and major
customers. SFAS No. 131 also requires companies that have a single reportable
segment to disclose information about products and services, information about
geographic areas, and information about major customers. SFAS No. 131 requires
the use of the management approach to determine the information to be reported.
The management approach is based on the way management organizes the enterprise
to assess performance and make operating decisions regarding the allocation of
resources. It is management's opinion that we have only one reportable segment,
no concentration of customers in one specific geographic area within the United
States, and no major customers, as defined.
9. COMMITMENTS
We lease our office facilities and equipment under non-cancelable
operating leases which provide for minimum annual rentals and escalations based
on increases in real estate taxes and other operating expenses. Minimum annual
operating lease commitments at December 31, 1999 were as follows:
Year Ending December 31,
------------------------
2000 $124,630
2001 110,994
2002 98,238
2003 66,026
2004 53,522
Thereafter 4,471
---------
Total minimum payments $346,887
=========
Rent expense was $90,284 and $42,462 for the years ended December 31,
1999 and 1998, respectively. In January 2000, we agreed to lease additional
warehouse and office space. The amounts due under this lease are included in the
commitments listed above. In March 2000, we agreed to sub-lease a certain
portion of the facility previously occupied by Western to its former Vice
President. The sub-lease is $7,026 per month for six months, at which time there
is an option to extend the sub-lease for an additional six months.
We have entered into employment agreements with various officers for
periods of three to five years. These agreements require us to pay annual
salaries of approximately $465,000 and are generally terminable with three to
twelve months' severance pay.
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash paid during the year ended December 31:
Interest $ 20,614 $ 285
Income Taxes $ 1,863 $ 2,201
Non-cash investing and financing activities:
Equipment acquired under capital lease obligations $ 376,432 -
Conversion of convertible notes payable - related parties to equity $ 20,000 -
Conversion of accounts payable to equity - $ 75,000
Acquisition of Adrenalin Interactive, Inc. $1,105,286 -
Acquisition of AMT Components, Inc. $ 402,164 -
Net current liabilities of discontinued operations assumed in $1,342,620 -
connection with acquisition of Adrenalin
</TABLE>
F-18
<PAGE>
11. FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1999, we recorded net adjustments that
increased our net loss by approximately $981,000. These adjustments primarily
consist of $250,000 write-off of various accounts receivable, $167,000 write-off
of inventory, recording $101,000 of inventory reserves, recording $43,000
amortization of goodwill for the AMT acquisition, $344,000 of deferred
compensation expense, and other accruals of $76,000.
12. DISCONTINUED OPERATIONS
Upon consummation of the reverse acquisition, our Board of Directors
adopted a formal plan to discontinue the operations of Western Technologies,
Inc. (Western). Western is our wholly-owned subsidiary and was acquired as part
of the reverse acquisition between Adrenalin Interactive, Inc. and Mcglen Micro,
Inc. We anticipate fulfilling two of the software development contract
obligations currently being conducted by Western during April 2000. Western has
requested that two other contracts be terminated. An additional contract has
been assigned to Western's former Vice President of Operations for completion,
releasing us from any further contractual liability. However, Mcglen would still
be responsible for any product liability issues that may arise from the two
completed contracts.
As a result, we recorded an adjustment of $2,214,000 to write-down the
assets of Western to their estimated net realizable value and an accrual of
$650,000 for operating losses during the phase-out period. No income tax
benefits have been allocated to the write-down or the losses as there are no
realizable taxable benefits available to allocate to the discontinued
operations.
The operations of Western have been reclassified as net liabilities of
discontinued operations on the balance sheet at December 31, 1999.
Information relating to the operations of Western for the years ended
December 31, 1999 and 1998 are as follows:
1999 1998
------------ ------------
Net revenue $ 3,234,315 $ 2,524,920
Expenses 6,271,714 4,660,223
------------ ------------
Loss from discontinued operations (3,037,399) (2,135,303)
Loss from disposal of Western Technologies, Inc. (2,864,048) -
------------ ------------
Net loss $(5,901,447) $(2,135,303)
============ ============
Included in the 1999 net loss are write-offs of patents, goodwill, and
property and equipment of $2,020,000, $1,579,000, and $217,000, respectively.
F-19
<PAGE>
The assets and liabilities of Western are included in the accompanying
consolidated balance sheet as of December 31, 1999 as follows:
1999
------------
Current assets:
Cash $ 17,491
Accounts and other receivables 6,170
Prepaid expenses and other assets 69,010
Costs in excess of billings 394,134
------------
Total current assets 486,805
------------
Current liabilities:
Accounts payable and accrued liabilities 556,601
Billings in excess of costs on contracts 453,156
Notes payable 143,430
Accrued losses on development contracts 479,394
Loss on disposal 650,000
------------
Total current liabilities 1,829,425
------------
Net current liabilities $(1,342,620)
============
Included in notes payable for Western at December 31, 1999, is a
$396,000 note to a finance company, interest only, at prime plus 3.5% (11.5% at
December 31, 1999). The Note is personally guaranteed by our former CEO and his
wife and is secured by a Second Trust Deed on their residence. In December 1999,
the note was extended until December 30, 2000. Two other notes to finance
companies in the amount of approximately $79,000 were repaid in January 2000.
13. SUBSEQUENT EVENTS (UNAUDITED)
In January 2000, we were was notified by a stockholder of his desire to
reprice certain stock issued to the stockholder in July and December 1999 per
the terms of a private placement agreement. As a result, an additional 103,775
shares of stock were issued to this stockholder. In April 2000, this stockholder
exercised its repricing rights relating to the final one-third of the shares it
obtained in the private placement agreement and received an additional 39,352
shares of our common stock.
In March 2000, we entered into $109,000 convertible promissory note
agreements with certain individuals (Lenders). If we do not have a capital
infusion or any other type of financing within six months of the date of the
loan, the Lenders have an option to convert the debt into our stock at 90% of
the low five day VWAP of our common stock for the twenty-two consecutive trading
days prior to the trading date on which notice of conversion is given by the
Lenders. In connection with the agreement, we also gave the Lenders warrants to
purchase our stock equal to 33% of the number of shares converted by the debt
holder, at 115% of the average closing price of our common stock for 10 days
prior to the date of the loan. If the loan is not repaid by the due date, the
Lender's receive an additional warrant to purchase our stock equal to 17% of the
number of shares converted by the debt holder, at 115% of the average closing
price of our common stock for 10 days prior to the date of the loan. The debt
and accrued interest thereon is due September 30, 2000 with interest payable at
10%.
F-20
<PAGE>
MCGLEN INTERNET GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
Current Assets:
Cash and cash equivalents $ 194,339 $ 961,666
Accounts receivable, net of allowance for
doubtful accounts and estimated returns of
$70,000 at June 30, 2000 and December 31, 1999 742,108 558,356
Inventories 468,530 436,017
Prepaid expenses and other current assets 116,993 52,776
Deposits 705,655 386,074
------------ ------------
Total current assets 2,227,625 2,394,889
------------ ------------
Equipment, net 436,958 519,576
Intangible assets 294,578 337,584
Other assets 61,559 52,314
------------ ------------
$ 3,020,720 $ 3,304,363
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 2,104,353 $ 1,933,122
Accrued expenses 618,814 379,768
Line of credit 90,000 -
Capital lease obligations - current portion 101,189 96,989
Convertible notes payable 1,809,000 200,000
Net current liabilities of discontinued
operations 596,684 1,342,620
------------ ------------
Total current liabilities 5,320,040 3,952,499
------------ ------------
Capital lease obligations 186,830 216,172
------------ ------------
Total liabilities 5,506,870 4,168,671
------------ ------------
Stockholders' deficit
Preferred stock, $0.01 par value; 5,000,000
shares authorized, none issued or outstanding - -
Common stock, $0.03 par value; authorized
50,000,000 shares, 31,877,033 at June 30, 2000
and 31,733,893 at December 31, 1999, shares
issued and outstanding 956,312 952,017
Additional paid in capital 2,215,480 2,204,143
Deferred compensation (44,999) (575,971)
Accumulated deficit (5,612,943) (3,444,497)
------------ ------------
Total Stockholders' Deficit (2,486,150) (864,308)
------------ ------------
$ 3,020,720 $ 3,304,363
============ ============
See condensed notes to the consolidated financial statements
F-21
<PAGE>
MCGLEN INTERNET GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
FOR THE SIX MONTHS
ENDED JUNE 30,
2000 1999
------------- -------------
NET SALES $ 19,064,368 $ 9,969,425
COST OF SALES 17,178,583 8,828,301
------------- -------------
GROSS PROFIT 1,885,785 1,141,124
------------- -------------
OPERATING EXPENSES
Selling, general and administrative
(including $ 157,351 amortization
of deferred compensation in 2000) 3,974,766 1,121,845
Interest expense 79,465 11,586
------------- -------------
Total operating expenses 4,054,231 1,133,431
------------- -------------
(LOSS) INCOME BEFORE INCOME TAXES (2,168,446) 7,693
------------- -------------
PROVISION FOR INCOME TAXES - -
------------- -------------
NET (LOSS) INCOME $ (2,168,446) $ 7,693
============= =============
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE $ (0.07) $ -
============= =============
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
BASIC AND DILUTED 31,877,033 20,200,000
============= =============
See condensed notes to the consolidated financial statements
F-22
<PAGE>
MCGLEN INTERNET GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
FOR THE SIX MONTHS
ENDED JUNE 30,
2000 1999
------------ ------------
Cash flows from operating activities:
Net (loss) income $(2,168,446) $ 7,693
------------ ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 185,480 -
Amortization of deferred compensation 312,901 -
Changes in operating assets and liabilities:
Accounts receivable (183,752) (129,013)
Inventories (32,513) (191,863)
Prepaid expenses and other current assets (64,217) 2,661
Deposits (319,581) (224,504)
Other assets (7,387) (6,600)
Accounts payable 485,513 87,509
Accrued expenses (75,235) 133,606
Net current liabilities of discontinued
operations (512,233) -
------------ ------------
Total adjustments (211,024) (328,204)
------------ ------------
Net cash used in operating activities (2,379,470) (320,511)
------------ ------------
Cash flows from investing activities:
Purchases of equipment (40,984) (42,051)
Notes receivable - related parties (1,858) -
------------ ------------
Net cash used in investing activities (42,842) (42,051)
------------ ------------
Cash flows from financial activities:
Borrowings under convertible notes payable 1,609,000 200,000
Borrowings under line of credit, net 90,000 -
Payments on related party notes payable - (70,000)
Distributions to stockholders - (8,000)
Payments on capital lease obligations (44,015) -
------------ ------------
Net cash provided by financing activities 1,654,985 122,000
------------ ------------
Net decrease in cash and cash equivalents (767,327) (240,562)
Beginning of period 961,666 436,692
------------ ------------
End of period $ 194,339 $ 196,130
============ ============
See condensed notes to the consolidated financial statements
F-23
<PAGE>
<TABLE>
MCGLEN INTERNET GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(unaudited)
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL ACCUMULATED STOCKHOLDERS'
------------ PAID-IN DEFERRED EARNINGS EQUITY
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) (DEFICIT)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 31,733,893 $ 952,017 $ 2,204,143 $ (575,971) $(3,444,497) $ (864,308)
Issuance of stock under private placement
agreement 103,788 3,115 (3,115) - - 0
Reclassification of deferred compensation - - (218,071) 218,071 - 0
Amortization of deferred compensation - - - 157,351 - 157,351
Net loss - - - - (613,599) (613,599)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2000 31,837,681 $ 955,131 $ 1,982,958 $ (200,549) $(4,058,096) $(1,320,556)
------------ ------------ ------------ ------------ ------------ ------------
Issuance of stock under private 39,352 1,181 (1,181) - - 0
placement agreement
Amortization of deferred compensation - - - 155,550 - 155,550
Reversal of provision for loss on - - 233,703 - - 233,703
discontinued operations
Net loss - - - - (1,554,847) (1,554,847)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 31,877,033 $ 956,312 $ 2,215,480 $ (44,999) $(5,612,943) $(2,486,150)
============ ============ ============ ============ ============ ============
See condensed notes to the consolidated financial statements
</TABLE>
F-24
<PAGE>
MCGLEN INTERNET GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated interim financial statements include the accounts of
Mcglen Internet Group, Inc. (a Delaware corporation) and its wholly owned
subsidiaries (the "Company") and have been prepared, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such regulations. These financial
statements should be read in conjunction with the audited financial statements
and the notes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1999.
In the opinion of management, the accompanying financial statements
contain all adjustments necessary to present fairly the financial position of
the Company at June 30, 2000 and the results of operations and cash flows for
the six months ended June 30, 2000 and 1999. The results of operations for the
interim periods are not necessarily indicative of the results of operations for
the full year.
2. OVERVIEW AND RECENT DEVELOPMENTS
Mcglen Internet Group (Mcglen or the Company), formerly Adrenalin
Interactive, Inc. (Adrenalin), was acquired by Mcglen Micro, Inc. in December
1999 through a transaction in which the stockholders of Mcglen Micro, Inc.
acquired control of the Company through a reverse acquisition. As a result of
the acquisition, each share of Mcglen Micro, Inc. was converted into 0.9889611
shares of the Company, with 25,485,527 shares being issued. In addition, under
the terms of the acquisition agreement between the Company, Mcglen Micro, Inc.,
and a consulting firm, who arranged the acquisition, the consulting firm
received 2,010,932 shares of common stock upon completion of the acquisition.
The value of these shares has been accounted for as a cost of the
recapitalization. The equity section of the balance sheet and earnings per share
information have been retroactively restated to reflect the exchange ratio
established in the acquisition agreement and the issuance of shares to the
consulting firm.
In connection with the acquisition, the Board of Directors of the
Company adopted a formal plan to discontinue the operations of Western
Technologies, Inc. (Western), the operating subsidiary of Adrenalin that
developed video games. As such, the accounting treatment for the reverse
acquisition is that of a recapitalization. The net liabilities of Western have
been reclassified as discontinued operations on the balance sheets for all
periods presented.
In March 1999, the Company acquired all of the assets and assumed the
liabilities of AMT Components, Inc., (AMT) dba AccessMicro.com, in exchange for
4,500,000 shares of stock (pre-recapitalization). The purchase price of the AMT
acquisition was allocated to the acquired assets based on the estimated fair
values at the date of acquisition. This resulted in an excess of purchase price
over net assets acquired of approximately $400,000 which has been allocated to
goodwill and customer lists acquired and is being amortized on a straight-line
basis over 3 to 7 years. The operating results for AMT have been included in the
consolidated financial statements from the date of acquisition.
Mcglen Internet Group, Inc. is an Internet operating company focused on
creating multiple on-line business divisions targeting specific
business-to-business and business-to-consumer markets. The Company offers over
150,000 computer hardware, software, and peripheral products servicing
individuals, small offices/home offices, and the corporate market through its
three web sites: Mcglen.com, AccessMicro.com, and Techsumer.com.
F-25
<PAGE>
3. GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that we will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. We had a loss of approximately $3.5 million for the year ended
December 31, 1999 and had a negative working capital of approximately $1.6
million as of December 31, 1999. Additionally, we are in violation of certain
covenants related to a line of credit. As a result, our independent certified
public accountants have expressed substantial doubt about our ability to
continue as a going concern.
The Company has recently taken a number of steps to conserve its
available cash and eliminate unprofitable business. In July 2000, the Company
refocused its efforts on its key customer base and on SKU's where the Company
believes it has a competitive advantage. As a result, sales have declined and
the company laid off approximately 35% of its workforce. During July 2000, the
Company also stopped making payments to certain creditors and its largest
supplier. Management has successfully negotiated to convert the then outstanding
balance with its largest supplier to a note with payments weekly beginning
August 4, 2000. Interest is at 18% and the note is scheduled to be repaid prior
to December 31, 2000. As a result of the covenant violation discussed above, and
the Company being in arrears on their payments to the supplier and a financial
institution with which the Company has credit facilities (the "Creditors"), the
Creditors can initiate a default notice on the facilities at any time. However,
management is currently in discussions with both Creditors and believes that
both the overdue balances can be converted to notes which will be repaid over
time. The debt owed to the Creditors is secured by substantially all of the
Company's assets and personal guarantees of the Company's majority shareholder.
Management is in the process of redesigning its AccessMicro.com and
Mcglen.com websites to focus on the Company's core business to business
customers. Management expects the new websites to be deployed in the third
quarter of 2000.
During 1999, we relied on the proceeds from short-term loans and
private placement of our common stock, which aggregated approximately $2.9
million, to fund our operating requirements. We are exploring various options to
raise additional operating capital during 2000.
4. DEBT AND EQUITY TRANSACTIONS
In April, 2000, the Company signed agreements which provided the
Company with a $1.5 million bridge loan and a $24 million equity line of credit.
The interest rate on the bridge loan is 10%, payable quarterly, or in full upon
redemption or conversion, and matures eighteen months from the closing date. The
bridge loan may be converted by the investor 150 days after the closing date at
90% of the daily volume weighted average price (VWAP) of the Company's common
stock for the 22 trading days prior to notice of conversion. The $24 million
equity line of credit can be funded through twelve (12) monthly draws of up to
$2 million each, commencing one month after the effective date of a SB-2
registration statement which the Company filed in July 2000. The shares sold
under the equity line of credit will be at a price equal to 87% of the volume
weighted average price for the Company's common stock for 22 days prior to the
draw down. The minimum amount the Company may draw down at any one time is
$250,000 unless otherwise agreed by Plumrose. Given recent declines in the price
of the Company's stock and current trading volumes, the Company is not currently
able to draw on the equity line without a waiver of the minimum draw down
amount. Accordingly, the Company cannot make any assurances that it will be able
to complete any draw downs under this line.
The investors also received warrants to purchase 372,449 shares of our
common stock at $1.875 and 100,00 warrants priced at $2.316 per share.
F-26
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation provides that none of our directors
shall be liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability
o for any breach of the director's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
o under section 174 of the Delaware General Corporation Law; or
o for any transaction from which such director derives improper
personal benefit.
The effect of this provision is to eliminate our rights and those of
our stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of his or her
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described
above. The limitations summarized above, however, do not affect our ability or
that of our stockholders to seek non-monetary remedies, such as an injunction or
rescission, against a director for breach of his or her fiduciary duty.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers, or persons controlling our Company pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
It is expected that the following expenses will be incurred in
connection with the issuance and distribution of the common stock being
registered. All such expenses are being paid by us.
SEC Registration fee $ 2,506.00
*Printing and EDGARization $ 2,000.00
*Accountants' fees and expenses $ 10,000.00
*Attorneys' fees and expenses $ 40,000.00
*Miscellaneous $ 5,494.00
------------
*Total $ 60,000.00
------------
*Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
1. In June 1998, the Company effected a private offering of 400,000
shares (adjusted for the 1 for 3 split) of Common Stock and 100,000 warrants
(adjusted for the 1 for 3 split) for aggregate consideration (net of expenses)
of $397,927. The warrants have expired. These securities were issued without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance upon the exemption from the registration requirements of the
Securities Act set forth in Section 4(2) of the Securities Act.
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<PAGE>
2. During the Company's fiscal year ended June 30, 1998, the Company
issued the following securities, without registration under the Securities Act:
156,817 shares were issued in exchange for $265,000 of convertible
debentures;
127,618 shares were issued in settlement of $240,123 of accounts
payable;
39,177 shares were issued in settlement for $60,547 of notes payable;
and
189,666 shares were issued for consulting services.
These securities were issued without registration under the Securities
Act in reliance upon the exemption from the registration requirements of the
Securities Act set forth in Section 4(2) of the Securities Act.
3. On June 30, 1998, subscription agreements for an aggregate of
208,334 shares (adjusted for the 1 for 3 split) of Common Stock were executed.
Net proceeds were received in July, 1998 in the amount of $435,000.
These securities were issued without registration under the Securities
Act in reliance upon the exemption from the registration requirements of the
Securities Act set forth in Section 4(2) of the Securities Act.
4. On January 18, 1999, the issuer granted nonqualified stock options
to purchase up to 45,000 shares of the issuer's Common Stock at an exercise
price equal to $0.75 per share to a consultant to the Company. 50% of such
options vested as of the date of grant and 50% vest on and as of the date that
the issuer consummates the acquisition of another entity pursuant to which the
issuer maintains its listing on the Nasdaq SmallCap Market (whether such
acquisition occurs by means of a merger or consolidation, a stock-for-stock
exchange, a purchase of all or substantially all of the assets of another entity
in exchange for the issuer's Common Stock or other equity securities or other
reorganization whereby the issuer acquires ownership of not less than a majority
of the voting power or voting interest of such other entity). The options expire
on January 17, 2004. These securities were issued without registration under the
Securities Act in reliance upon the exemption from the registration requirements
of the Securities Act set forth in Section 4(2) of the Securities Act. No
underwriter was employed in connection with the grant of such options and no
underwriting discounts or commissions were paid in connection therewith.
5. In January and February 1999, the issuer issued an aggregate of
217,765 shares of Common Stock pursuant to the cashless exercise by transferees
of MacKenzie Shea, Inc. ("MSI") of an aggregate of 249,998 post-split warrants
originally issued to MSI by the Company in October and December 1997. These
securities were issued without registration under the Securities Act in reliance
upon the exemption from the registration requirements of the Securities Act set
forth in Section 4(2) of the Securities Act. No underwriter was employed in
connection with such issuance and no underwriting discounts or commissions were
paid in connection therewith.
6. In February 1999, the Company issued an aggregate of 18,423 shares
of Common Stock at a price equal to $1.50 per share to two providers of services
in exchange for such providers' cancellation of an aggregate of $27,634.50 of
accounts payable owed by the Company to such providers. These securities were
issued without registration under the Securities Act in reliance upon the
exemption from the registration requirements of the Securities Act set forth in
Section 4(2) of the Securities Act. No underwriter was employed in connection
with such issuance and no underwriting discounts or commissions were paid in
connection with such issuance.
7. On February 22, 1999, the issuer granted nonqualified stock options
to purchase up to 25,000 shares of the issuer's Common Stock to a new Director,
Edward H. Mackay, at an exercise price equal to $1.50 per share. Such options
were 100% vested as of the date of grant and such options expire on February 21,
2004. These securities were issued without registration under the Securities Act
in reliance upon the exemption from the registration requirements of the
Securities Act set forth in Section 4(2) of the Securities Act. No underwriter
was employed in connection with the grant of such options and no underwriting
discounts or commissions were paid in connection therewith.
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<PAGE>
8. During the Company's fiscal year ended June 30, 1999, the Company
issued the following securities without registration under the Securities Act:
35,000 shares issued for consulting services.
18,423 shares issued in settlement of $27,634 of accounts payable.
237,502 shares issued upon cashless exercise of warrants for 274,998
shares of Common Stock.
Options for 70,000 shares of Common Stock issued for services.
$24,969 of furniture was acquired by capital lease.
These securities were issued without registration under the Securities
Act in reliance upon the exemption from the registration requirements of the
Securities Act set forth in Section 4(2) of the Securities Act.
9. On July 12, 1999, the Company and a private investor entered into a
Stock Purchase Agreement under which the Company issued 293,255 shares of Common
Stock for $1,250,000. An additional 138,090 shares for an aggregate additional
consideration of $750,000 were issued and purchased upon the closing of the
reverse merger between Mcglen and Adrenalin. The agreement provided for two
repricing periods which resulted in the issuance of 143,127 additional shares.
In addition to the shares issued, the Company issued a warrant for 29,325 shares
exercisable at $4.843 per share through July 31, 2002 and a warrant for 13,809
shares exercisable at $6.172 per share through December 3, 2002. These
securities were issued without registration under the Securities Act in reliance
upon the exemption from the registration requirements of the Securities Act set
forth in Section 4(2) of the Securities Act.
10. The Company entered into a purchase agreement to sell 293,255
shares of common stock to Escaldade Investors, LLC ("Escaldade") in July 1999,
which allowed for repricing rights if Mcglen's stock price dropped below certain
prices as defined in the agreement. Escaldade exercised its repricing rights
relating to two-thirds of the shares it obtained in the financing in January
2000 and received 103,775 shares of the Company's common stock. Escaldade
exercised its repricing rights relating to the final one-third of the shares it
obtained in the financing in April 2000 and received an additional 39,352 shares
of the Company's common stock. These securities were issued without registration
under the Securities Act in reliance upon the exemption from the registration
requirements of the Securities Act set forth in Section 4(2) of the Securities
Act.
11. On April 10, 2000, the Company issued a $1.5 million convertible
debenture to AMRO International, S.A. (the "Convertible Debenture"). The
Convertible Debenture is convertible, at the option of the holder, into shares
of Common Stock of the Company at a conversion price equal to 90% of the market
price of a share of Common Stock of the Company on the date of conversion. The
Convertible Debenture was issued without registration under the Securities Act
in reliance upon the exemption from the registration requirements of the
Securities Act set forth in Section 4(2) of the Securities Act.
12. On April 10, 2000, in connection with the issuance of the
Convertible Debenture, the Company issued to AMRO International, S.A. a warrant
to purchase 372,449 shares of Common Stock of the Company (the "AMRO Warrant")
at an exercise price of $2.316 per share. The AMRO Warrant was issued without
registration under the Securities Act in reliance upon the exemption from the
registration requirements of the Securities Act set forth in Section 4(2) of the
Securities Act.
13. On April 10, 2000, the Company issued to Ladenburg Thalman & Co. a
warrant to purchase 49,660 shares of Common Stock of the Company (the "Ladenburg
Warrant") at an exercise price of $2.0137 per share in connection with its role
as placement agent in connection with the issuance of the Convertible Debenture
to AMRO International, S.A. The Ladenburg Warrant was issued without
registration under the Securities Act in reliance upon the exemption from the
registration requirements of the Securities Act set forth in Section 4(2) of the
Securities Act.
14. On April 26, 2000, the Company issued to Plumrose Holdings, Inc. a
warrant to purchase 100,000 shares of Common Stock of the Company (the "Plumrose
Warrant") at an exercise price of $1.875 per share. The Plumrose Warrant was
issued under the terms of a Common Stock Purchase Agreement between the Company
and Plumrose Holdings, Inc. The Plumrose Warrant was issued without registration
under the Securities Act in reliance upon the exemption from the registration
requirements of the Securities Act set forth in Section 4(2) of the Securities
Act.
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<PAGE>
ITEM 27. EXHIBITS
Exhibit No. Description
----------- ------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of April 28, 1999, among
Adrenalin, Adrenalin's subsidiary, Mcglen Micro, Inc. and Mcglen
Micro, Inc.'s principal shareholders, incorporated by reference
from Exhibit 2.1 to our Current Report on Form 8-K, dated April
30, 1999.
2.2 First Amendment to Agreement and Plan of Merger, dated July 23,
1999, among Adrenalin, Adrenalin's subsidiary, Mcglen Micro, Inc.
and Mcglen Micro, Inc.'s principal shareholders, incorporated by
reference from Exhibit 2.1 to our Current Report on Form 8-K,
dated July 23, 1999 ("July 23, 1999 Form 8-K").
2.3 Second Amendment to Agreement and Plan of Merger, dated October 4,
1999, by and among Adrenalin Interactive, Inc., Adrenalin
Acquisition Corporation, Mcglen Micro, Inc. and the shareholders
of Mcglen Micro, Inc., incorporated by reference from Exhibit 2.3
to Amendment No. 1 filed April 17, 2000 to our Form 10-KSB for the
year ended December 31, 1999 ("April 2000 Form 10-KSB/A").
2.4 Third Amendment to Agreement and Plan of Merger, dated December 2,
1992, by and among Adrenalin Interactive, Inc., Adrenalin
Acquisition Corporation, Mcglen Micro, Inc. and the shareholders
of Mcglen Micro, Inc., incorporated by reference from Exhibit 2.4
to our April 2000 Form 10-KSB/A.
3.1 Amended Certificate of Incorporation of Adrenalin Interactive,
Inc., incorporated by reference from Exhibit 3.1 to our Current
Report on Form 8-K, dated December 8, 1999.
3.2 Bylaws of Mcglen Internet Group, Inc., incorporated by reference
from Exhibit 3.2 to our April 2000 Form 10-KSB/A.
3.3 Certificate of Amendment of Certificate of Incorporation of
Adrenalin, filed with the Delaware Secretary of State on December
6, 1999, incorporated by reference from Exhibit 3.1 to our Current
Report on Form 8-K, dated February 1, 2000 ("February 1, 2000 Form
8-K").
4.1 Common Stock Purchase Agreement, dated July 12, 1999, between
Adrenalin and Escaldade, incorporated by reference from Exhibit
4.1 to our Current Report on Form 8-K, dated July 12, 1999 ("July
12, 1999 Form 8-K").
4.2 Registration Rights Agreement, dated July 12, 1999, between
Adrenalin and Escaldade, incorporated by reference from Exhibit
4.2 to our July 12, 1999 Form 8-K.
4.3 Form of Warrant issued and to be issued by Adrenalin to Escaldade,
incorporated by reference from Exhibit 4.3 to our July 12, 1999
Form 8-K.
4.4 Form of Escrow Instructions to be entered into between Adrenalin
and Escaldade, incorporated by reference from Exhibit 4.4 to our
July 12, 1999 Form 8-K.
4.5 Form of Warrant issued to affiliates and transferees of MacKenzie
Shea, Inc. ("MSI"), incorporated by reference from Exhibit 4.1 to
our Quarterly Report on Form 10-QSB for our quarterly period ended
March 31, 1998 ("March 1998 Form 10-QSB").
4.6 Warrant to Purchase Common Stock issued to Redstone Securities,
Inc. ("Redstone"), dated August 12, 1999.
4.7 Private Placement Memorandum, dated September 30, 1999, between
Mcglen Micro, Inc. and Redstone, incorporated by reference from
Exhibit 4.1 to our February 1, 2000 Form 8-K.
II-4
<PAGE>
4.8 Loan Agreement, dated as of April 10, 2000, between Mcglen
Internet Group, Inc. and the Lenders signatory thereto.
4.9** Common Stock Purchase Agreement, dated April 12, 2000, between
Mcglen Internet Group, Inc. and Plumrose Holdings Inc.
4.10 Stock Purchase Warrant, dated as of April 12, 2000, issued to
Plumrose Holdings Inc.
4.11 Stock Purchase Warrant, dated as of April 12, 2000, issued to
Ladenburg Thalmann & Co. Inc.
5.15* Opinion of O'Melveny & Myers, LLP.
10.1 1999 Stock Option Plan of Mcglen Micro, Inc., as amended, as
adopted by the Company after the merger with Adrenalin
Interactive, Inc., incorporated by reference from Exhibit 10.1 to
our April 2000 Form 10-KSB/A.
10.2 Consulting Agreement, dated October 1, 1997, as amended, between
Adrenalin Interactive, Inc. and MSI, incorporated by reference
from Exhibit 10.1 to our Form 10-KSB for the year ended June 30,
1998.
10.3 Letter Agreement, dated November 18, 1997, as amended on April 21,
1998 and August 31, 1998, between Adrenalin and Kayne relating to
management consulting services provided to Adrenalin by Kayne,
incorporated by reference from Exhibit 10.2 to our Form 10-KSB for
the year ended June 30, 1998 ("June 1998 Form 10-KSB").
10.4 Employment Agreement, dated December 16, 1997, between Adrenalin
and Jay Smith, III, incorporated by reference from Exhibit 10.1 to
our March 1998 Form 10-QSB.
10.5 Consulting Agreement, dated April 10, 1998, between Adrenalin and
Robert A.D. Wilson relating to general consulting services
provided to Adrenalin by Mr. Wilson, incorporated by reference
from Exhibit 10.5 to our June 1998 Form 10-KSB.
10.6 Optional Advance Note for $400,000 plus Interest, dated June 30,
1998, issued by Adrenalin to Bay Area Financial Corporation,
incorporated by reference from Exhibit 10.8 to our June 1998 Form
10-KSB.
10.7 Secured Promissory Note, dated July 23, 1999, by Mcglen to
Adrenalin in the principal amount of $500,000 and payable on July
23, 2000, incorporated by reference from Exhibit 10.1 to our
Current Report on our July 23, 1999 Form 8-K.
10.8 Adrenalin's 1995 Stock Option Plan, as amended, incorporated by
reference from Exhibit 10.4 to our Registration Statement on Form
SB-2, No. 333-00178.
10.9 Amendment No. 2 to Adrenalin's 1995 Stock Option Plan, dated
December 1, 1997, incorporated by reference from Exhibit 10.13 to
our June 1998 Form 10-KSB.
10.10 Adrenalin's 1996 Stock Option Plan, as amended, incorporated by
reference from Exhibit A to Adrenalin's definitive proxy materials
in respect of Adrenalin's 1996 Annual Meeting of Shareholders.
10.11 Amendment No. 2 to Adrenalin's 1996 Stock Option Plan, dated
December 1, 1997, incorporated by reference from Exhibit 10.15 to
our June 1998 Form 10-KSB.
10.12 Acquisition Agreement among Adrenalin, Western and Jay Smith III
d/b/a Smith Engineering, dated as of December 30, 1996,
incorporated by reference from Exhibit 7(c)(1) to our Current
Report on Form 8-K, dated February 4, 1997 ("February 4, 1997 Form
8-K").
10.13 License Agreement, dated February 4, 1997, between Western and Jay
Smith, III, incorporated by reference from Exhibit 7(c)(2) to our
February 4, 1997 Form 8-K.
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<PAGE>
10.14 Convertible Promissory Note, dated March 20, 2000, by and between
Mcglen Internet Group, Inc. and various Lenders introduced by
Institutional Equity Holdings Corporation, incorporated by
reference from Exhibit 10.14 to our April 2000 Form 10-KSB/A.
10.15 Employment Agreement, dated January 1, 2000, between Mcglen
Internet Group, Inc. and Grant Trexler, incorporated by reference
from Exhibit 10.15 to our April 2000 Form 10-KSB/A.
10.16 Employment Agreement, dated December 2, 1999, between Adrenalin
Interactive, Inc. and George Lee, incorporated by reference from
Exhibit 10.16 to our April 2000 Form 10-KSB/A.
10.17 Employment Agreement, dated December 2, 1999, between Adrenalin
Interactive, Inc. and Mike Chen, incorporated by reference from
Exhibit 10.17 to our April 2000 Form 10-KSB/A.
10.18 Employment Agreement, dated December 2, 1999, between Adrenalin
Interactive, Inc. and Alex Chen, incorporated by reference from
Exhibit 10.18 to our April 2000 Form 10-KSB/A.
10.20 Employment Agreement, dated September 1, 1999, between Mcglen
Micro, Inc. and Robert Brown, incorporated by reference from
Exhibit 10.20 to our April 2000 Form 10-KSB/A.
10.21 2000 Stock Option Plan.
10.22 Founders Agreement, dated August 15, 2000, between Mcglen Internet
Group, Inc. and George Lee, Mike Chen and Alex Chen.
21 Subsidiaries of Mcglen Internet Group, Inc., incorporated by
reference from Exhibit 21 to our April 2000 Form 10-KSB/A.
23.1* Consent of O'Melveny & Myers, LLP (included in Exhibit 5.1).
23.2*** Consent of BDO Seidman, LLP.
23.3*** Consent of Singer Lewak Greenbaum & Goldstein LLP.
27 Financial Data Schedules.
* To be filed by amendment.
** Amended version of Exhibit 4.12 previously submitted with
registration statement on Form SB-2 filed July 10, 2000.
*** Previously filed.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly authorized this
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, in the City of Tustin, State of California, on September 27, 2000.
MCGLEN INTERNET GROUP, INC.
By: /s/ George Lee
-----------------------------------
George Lee, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chief Executive Officer and Director (Principal September 27, 2000
/s/ George Lee Executive Officer)
--------------------------------------
George Lee
September 27, 2000
President, Chief Technology Officer, Secretary and
/s/ Mike Chen Director
--------------------------------------
Mike Chen
Chief Financial Officer (Principal Financial Officer September 27, 2000
/s/ Grant Trexler and Principal Accounting Officer)
--------------------------------------
Grant Trexler
September 27, 2000
* Chairman of the Board
--------------------------------------
Peter Janssen
September 27, 2000
* Director
--------------------------------------
Calbert Lai
September 27, 2000
* Director
--------------------------------------
David P. Jones
</TABLE>
* By: /s/Grant Trexler
---------------------------------
Grant Trexler
Attorney-in-Fact
II-7
