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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File No.: 0-27878
MCGLEN INTERNET GROUP, INC.
(Name of small business issuer in its charter)
Delaware 13-3779546
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
3002 Dow Avenue Suite 114 Tustin, California 92780
(Address of principal executive offices)(Zip code)
Issuer's telephone number: (714) 838-1240
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of publicly
traded common equity, as of November 10, 2000 was 31,465,965 shares of Common
Stock.
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MCGLEN INTERNET GROUP, INC.
Index to Form 10-QSB
PART I - FINANCIAL INFORMATION.................................................3
ITEM 1 FINANCIAL STATEMENTS...............................................3
CONDENSED CONSOLIDATED BALANCE SHEETS.......................................4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS.............................5
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS..............................6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................9
Business Factors...........................................................13
Part II - OTHER INFORMATION...................................................14
Item 2. Changes in Securities and Use of Proceeds.........................14
Item 6. Exhibits and Reports on Form 8-K..................................14
SIGNATURE..................................................................14
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PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
3
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<TABLE>
MCGLEN INTERNET GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS SEPTEMBER DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Current Assets: (unaudited)
Cash and cash equivalents $ 46,264 $ 961,666
Accounts receivable, net of allowance for doubtful accounts and
estimated returns of $70,000 at September 30 and December 31, 1999 312,303 558,356
Inventories 211,691 436,017
Prepaid expenses and other current assets 34,305 52,776
Deposits 589,560 386,074
------------- -------------
Total current assets 1,194,123 2,394,889
------------- -------------
Equipment, net 390,981 519,576
Intangible assets 230,072 337,584
Other assets 58,559 52,314
------------- -------------
$ 1,873,735 $ 3,304,363
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 3,240,693 $ 1,933,122
Accrued expenses 185,279 379,768
Line of credit 90,000
Note payable 120,000
Capital lease obligations - current portion 98,898 96,989
Convertible notes payable 1,709,000 200,000
Net current liabilities of discontinued operations 389,500 1,342,620
------------- -------------
Total current liabilities 5,833,370 3,952,499
------------- -------------
Capital lease obligations 162,271 216,172
------------- -------------
Total liabilities 5,995,641 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, 31,465,965
at September 30, 2000 and 31,733,893 at December 31, 1999, shares 943,980 952,017
issued and outstanding
Additional paid in capital 2,828,653 2,204,143
Deferred compensation - (575,971)
Accumulated deficit (7,894,539) (3,444,497)
------------- -------------
Total Stockholders' Deficit (4,121,906) (864,308)
------------- -------------
$ 1,873,735 $ 3,304,363
============= =============
See condensed notes to the consolidated financial statements
</TABLE>
4
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<TABLE>
MCGLEN INTERNET GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 5,485,130 $ 8,507,362 $ 24,549,498 $ 18,476,787
COST OF SALES 5,004,219 8,032,269 22,182,802 16,860,570
------------- ------------- ------------- -------------
GROSS PROFIT 480,911 475,093 2,366,696 1,616,217
------------- ------------- ------------- -------------
OPERATING EXPENSES
Selling, general and administrative
(including $422,781 and $735,682
amortization of deferred compensation
for the three and nine months ended
September 30, 2000, respectively) 2,663,433 1,432,870 6,638,199 2,554,715
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS 2,182,522 957,777 4,271,503 938,498
------------- ------------- ------------- -------------
INTEREST EXPENSE 99,074 695 178,539 12,281
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES (2,281,596) (958,472) (4,450,042) (950,779)
------------- ------------- ------------- -------------
PROVISION FOR INCOME TAXES - - - -
------------- ------------- ------------- -------------
NET LOSS $ (2,281,596) $ (958,472) $ (4,450,042) $ (950,779)
============= ============= ============= =============
BASIC AND DILUTED LOSS PER SHARE ($ 0.07) ($ 0.05) ($ 0.14) ($ 0.05)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
BASIC AND DILUTED 31,465,965 20,200,000 31,689,388 20,200,000
============= ============= ============= =============
See condensed notes to the consolidated financial statements
</TABLE>
5
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<TABLE>
MCGLEN INTERNET GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($4,450,042) ($950,779)
------------ ------------
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 327,824 34,419
Amortization of deferred compensation 735,682 -
Changes in operating assets and liabilities:
Accounts receivable 246,053 (641,718)
Inventories 224,326 (409,320)
Prepaid expenses and other current assets 18,471 2,661
Deposits (203,486) (353,999)
Other assets (6,245) (36,226)
Accounts payable 1,307,572 860,528
Accrued expenses (181,976) 212,637
Net current liabilities of discontinued operations (608,871) -
------------ ------------
Total adjustments 1,859,350 (331,018)
------------ ------------
Net cash used in operating activities (2,590,692) (1,281,797)
------------ ------------
Cash flows from investing activities:
Purchases of equipment (72,845) (74,658)
------------ ------------
Net cash used in investing activities (72,845) (74,658)
------------ ------------
Cash flows from financing activities:
Borrowings under convertible notes payable 1,609,000 200,000
Borrowings under line of credit 90,000 -
Borrowings under note payable 120,000 450,000
Payments on related party notes payable - (180,000)
Distributions to stockholders' - (8,000)
Proceeds from issuing common shares 720,000
Payments on capital lease obligations (70,865) -
------------ ------------
Net cash provided by financing activities 1,748,135 1,182,000
------------ ------------
Net decrease in cash and cash equivalents (915,402) (174,455)
Beginning of period 961,666 436,692
------------ ------------
End of period $ 46,264 $ 262,237
============ ============
See condensed notes to the consolidated financial statements
</TABLE>
6
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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
September 30, 2000 and the results of operations and cash flows for the three
and nine months September 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, 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
markets. The Company offers over 150,000 computer hardware, software, and
peripheral products servicing resellers, aggregators, information technology
professionals, small offices/home offices, and the corporate market through its
three web sites; Mcglen.com, AccessMicro.com, and Techsumer.com.
7
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3. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company 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, the Company was in violation of
certain covenants related to a line of credit. As a result, the Company's
independent certified public accountants have expressed substantial doubt about
Mcglen's ability to continue as a going concern.
The Company has recently taken a number of steps to 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 through October 2000, the Company renegotiated its debt with its
primary vendors. As a result, the Company converted approximately $345,000 in
accounts payable and accrued liabilities to common stock, converted
approximately $1,228,000 in accounts payable and accrued liabilities into notes
payable, and converted $120,000 convertible debt and accrued interest to common
stock. See below.
During 1999, the Company relied on the proceeds from short-term loans and
private placements of common stock, which aggregated approximately $2.9 million,
to fund operating requirements. The Company raised an additional $950,000 from a
private placement of its common stock in October 2000, and is exploring various
options to raise additional capital during the fourth quarter 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 $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. Such registration
statement has not become effective as of November 13, 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
down's under this line. At November 13, 2000, the Company would not be permitted
to make a draw down under the line.
The investors also received warrants to purchase 372,449 shares of our common
stock at $1.875 and 100,000 warrants priced at $2.316 per share.
In August 2000, the Company engaged Josephthal & Co., Inc. as its financial
advisor and to assist the Company in obtaining additional financing.
In August 2000, the Company entered into an agreement with Mcglen's Founders;
Alex Chen, Mike Chen, and George Lee (the Founders), to provide up to 10 million
shares of their stock, or approximately one-half of their current holdings, to
assist the Company in raising capital to fund its operations, growth, and
development of Mcglen, and mergers and acquisitions.
The Founders have made these shares available for an eighteen-month period and
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 raised by the Company using the
shares included in the pool.
In August 2000, the Company issued 855,000 shares of common stock from the
Fouders Pool to various consultants and employees. The shares issues to
employees were 30% vested upon the date of grant, with the remainder vesting
over a two year period or upon a change of control.
In September 2000, the Company received a $120,000 loan from Lan Plus
Corporation. This loan was repaid in October 2000 through the proceeds of a
private placement of common stock, see below.
8
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In October 2000, the Company received stock subscription agreements for $500,000
of common stock for $0.75 per share, and an additional $500,000 at $0.6875 per
share from Lan Plus Corporation. The Purchaser's of $500,000 at $0.75 per share
also received three year warrants to purchase up to an additional 666,668 shares
of common stock at $1.00 per share. Shares from the Founders Agreement will be
issued to the Purchaser's, resulting in no dilution to current Mcglen
shareholders. Pursuant to the terms of the Founders Agreement, $50,000 of the
funds raised will be remitted to the Founders.
5. MERGER WITH LAN PLUS CORPORATION
On October 11, 2000, the Company entered into a definitive agreement with Lan
Plus Corporation to merge the two companies. Lan Plus is a manufacturer of both
private-label and branded turnkey computer solutions and services, with over 9
years of operating history.
The merger is subject to customary closing conditions, including due diligence,
shareholder and regulatory approval. Management anticipates the merger closing
in the first quarter of 2001. At the closing of the merger, Lan Plus
shareholders will receive a number of shares such that the Lan Plus shareholders
will own 50.1% of shares of the post merger combined entity.
Lan Plus manufactures computers and turnkey computer offerings through high
profile business partners in the retail, catalog, telemarketing, as well as
other industries. Lan Plus markets under the Northgate(R), Protek(R),
e-Pcdirect(R), and Netway(R) brands, and through private label programs with
systems integrators and resellers. Lan Plus has also developed excellent
corporate clients and actively pursues Internet-based marketing programs for
federal government organizations, such as the U.S. Armed Forces, state and local
government organizations, and various school districts in California, Arizona,
and Virginia.
Andy Teng, founder, Chairman and CEO of Lan Plus, will become the CEO and
Chairman of the Board of the combined company. Richard Shyu, currently President
and COO of Lan Plus, will become President of the combined company. Both will be
added to the Board of Directors at closing. Grant Trexler, currently Mcglen's
CFO, will become CFO of the combined company. Mcglen's Founders, Mike Chen,
George Lee, and Alex Chen, will assume management and executive positions within
the new company.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
RESULTS OF OPERATIONS
The discussion of the "Results of Operations" includes Mcglen Micro, Inc. and
AMT Components, Inc. for the nine months ended September 30, 2000. For the nine
months ended September 30, 1999, AMT Components, Inc. is not included for the
first three months of the period as the acquisition of AMT Components occurred
on March 31, 1999.
9
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Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999
Net sales decreased by $3.0 million, or 35.5%, to $5.5 million for the three
months ended September 30, 2000, compared to $8.5 million for the three months
ended September 30, 1999. The decrease in net sales was a result of the
Company's refocusing its efforts on its key customer base and on SKU's where the
Company believes it has a competitive advantage. The Company also reduced its
advertising programs, narrowed its suppliers, and increased its personalized
direct marketing programs with existing customers.
Gross profit increased by $6,000, or 1.2%, to $481,000 for the three months
ended September 30, 2000, compared to $475,000 for the three months ended
September 30, 1999. The increase in gross profit was directly related to the
Company's efforts to refocus on key products, suppliers, and customers. For the
three months ended September 30, 2000, the Company also faced increased shipping
costs which it was not able to pass along to its customers as compared to the
three months ended September 30, 1999. Gross profit, as a percentage of net
sales, increased to 8.8% for the quarter ended September 30, 2000 from 5.6% for
the same period in 1999. The increase in gross profit margin was due to the
items noted above as well as a change in the Company's product mix. In 2000, the
Company sold a higher proportion of products to its core customer base, which
had a higher profit margin than the business to consumer products sold in the
quarter ended September 30, 1999.
On a forward-looking basis, future gross profit margins may decline from recent
levels. The statement concerning future gross profit is a forward looking
statement that involves certain risks and uncertainties which could result in a
fluctuation of gross margins below those achieved for the three months ended
September 30, 2000. Although the Company believes it provides a high level of
value added services, pricing and gross profit could be negatively impacted by
the activities of larger Internet resellers and product supply and demand.
Operating expenses increased by $1.3 million or 92.9%, to $2.7 million for the
three months ended September 30, 2000, from $1.4 million for same period in the
prior year. The increase in operating expenses was attributable to an increase
in personnel costs and advertising costs in July 2000, an increase in the rate
charged by the Company's credit card processor, and increased rent, consulting
and deferred compensation charges. Payroll and related costs increased by
approximately $202,000, or 67.2%, for the three months ended September 30, 2000
compared to the same quarter of 1999, due to Mcglen senior and mid-level
management hirings. Deferred compensation charges of approximately $423,000, or
7.7% of sales, were recorded during the three months ended September 30, 2000
resulting from stock granted to management and consultants from the Founders
Pool; no such charges occurred during the three months ended September 30, 1999.
Rent increased as Mcglen increased the size of its facilities in April 2000 to
support its increased sales. Depreciation and amortization increased by
approximately $90,000 due to the infrastructure development during 1999 and
2000. Consulting expenses increased by approximately $50,000 for the three
months ended September 30, 2000 as a result of hiring of Peter Janssen &
Associates. Finally, interest expense increased by approximately $98,000 as the
Company's debt increased in 2000.
10
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Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September
30, 1999
Net sales increased by $6.1 million, or 32.9%, to $24.6 million for the nine
months ended September 30, 2000, compared to $18.5 million for the nine months
ended September 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 attaining 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 $750,000, or 46.4%, to $2.4 million for the nine
months ended September 30, 2000, compared to $1.6 million for the nine months
ended September 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 increased to 9.6
% for the nine months ended September 30, 2000 from 8.7% for the same period in
1999. The increase in gross profit margin was the result of favorable product
marketing and pricing strategies in Q1 - 2000, a change in the Company's sales
mix during the three months ending September 30, 2000 focusing on sales of
higher margin products sold to Mcglen's core customers.
Operating expenses increased by $4.1 million, or 157.7 %, to $6.6 million for
the nine months ended September 30, 2000, from $2.6 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 to market 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 $1.2 million, or 316.0%, 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 $966,000, or 138.4%, for the nine months ended September 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 $736,000 were recorded during the nine months ended September 30,
2000 resulting from options and stock granted to management and consultants; no
such charges occurred during the nine months ended September 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 $296,000 due to the infrastructure development during 1999 and
2000 and the amortization of the AMT intangible assets. Finally, as a result of
the Company's growth, credit card processing and phone charges increased by
approximately $338,000 and $62,000, respectively, or 77.4% and 44.7%,
respectively, for the nine months ended September 30, 2000, compared to the same
period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital need has been the funding of operations and
working capital requirements. 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 $2.6 million for the nine months ended September
30, 2000.
The Company has incurred a loss from operations during the last fifteen months
and had a working capital deficit and shareholders' deficit at September 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 will have to severely curtail
operations.
11
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During the nine months ended September 30, 2000, the Company's capital
expenditures were approximately $73,000, compared to $75,000 in 1999, primarily
for computer software and hardware. During the three months ended September 30,
1999, the Company also entered into capital leases of approximately $327,000,
primarily for computer hardware and software.
The Company had two credit facilities of up to $1.0 million with a financial
institution and a supplier (the Creditors). The credit facilities functioned in
lieu of a vendor trade payable for inventory purchases and are included in
accounts payable at September 30, 2000. The facilities were canceled in October
2000. One of the credit facilities is secured by substantially all of the
Company's assets and personally guaranteed by the Company's majority
shareholders. This credit facility also required the Company to maintain a
minimum level of subordinated debt plus tangible net worth. In September 2000,
the credit facility was converted to a note payable and the related security,
guarantees, and covenants were transferred to the note. At September 30, 2000,
the Company was not in compliance with this covenant. However, at October 31,
2000, the Company was in compliance with this covenant.
Since computer retailers typically have low product gross margins, Mcglen's
ability to become profitable 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 become profitable 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.
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 nine months
ended September 30, 2000, and had a working capital deficit of over $4.6 million
and shareholders' deficit of approximately $4.1 million at September 30, 2000.
The Company will require additional equity and/or debt capital in order to meet
working capital needs and to accomplish its combined short-term and long-term
business objectives. The Company entered into an agreement with Josephthal &
Co., Inc. 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 SB-2
registration statement that 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 down's under this line. At November 13, 2000, the Company
would not be permitted to make a draw down under the line.
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The Company's ability to complete any such future equity and/or debt financing
will depend upon its 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 will 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 certain creditors and its largest supplier. During
July through October 2000, the Company renegotiated its debt with its primary
vendors. As a result, the Company converted approximately $345,000 in accounts
payable and accrued liabilities to common stock, converted approximately
$1,228,000 in accounts payable and accrued liabilities into notes payable, and
converted $120,000 convertible debt and accrued interest to common stock.
In September 2000, the Company received a $120,000 loan from Lan Plus
Corporation. This loan was repaid in October 2000 through the proceeds of a
private placement of common stock, see below.
In September 2000, the Company entered into an agreement with Mcglen's Founders;
Alex Chen, Mike Chen, and George Lee (the Founders), to provide up to 10 million
shares of their stock, or approximately one-half of their current holdings, to
assist the Company in raising capital to fund its operations, growth, and
development of Mcglen, and mergers and acquisitions.
The Founders have made these shares available for an eighteen-month period and
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 raised by the Company using the
shares included in the pool.
In October 2000, the Company received stock subscription agreements for $500,000
of common stock for $0.75 per share, and an additional $500,000 at $0.6875 per
share from Lan Plus Corporation. The Purchaser's of $500,000 at $0.75 per share
also received three year warrants to purchase up to an additional 666,668 shares
of common stock at $1.00 per share. Shares from the Founders Agreement will be
issued to the Purchaser's and Lan Plus Corporation, resulting in no dilution to
current Mcglen shareholders. Pursuant to the terms of the Founders Agreement,
$50,000 of the funds raised was remitted to the Founders.
MERGER WITH LAN PLUS CORPORATION
On October 11, 2000, the Company entered into a definitive agreement with Lan
Plus Corporation to merge the two companies. Lan Plus is a manufacturer of both
private-label and branded turnkey computer solutions and services, with over 9
years of operating history. The merger is subject to customary closing
conditions. Management anticipates the merger closing in the first quarter of
2001. At the closing of the merger, Lan Plus shareholders will receive a number
of shares such that the Lan Plus shareholders will own 50.1% of shares of the
post merger combined entity.
Lan Plus manufactures computers and turnkey computer offerings through high
profile business partners in the retail, catalog, telemarketing, as well as
other industries. Lan Plus markets under the Northgate(R), Protek(R),
e-Pcdirect(R), and Netway(R) brands, and through private label programs with
systems integrators and resellers. Lan Plus has also developed excellent
corporate clients and actively pursues Internet-based marketing programs for
federal government organizations, such as the U.S. Armed Forces, state and local
government organizations, and various school districts in California, Arizona,
and Virginia.
Andy Teng, founder, Chairman and CEO of Lan Plus, will become the CEO and
Chairman of the Board of the combined company. Richard Shyu, currently President
and COO of Lan Plus, will become President of the combined company. Both will be
added to the Board of Directors at closing. Grant Trexler, currently Mcglen's
CFO, will become CFO of the combined company. Mcglen's founders, Mike Chen,
George Lee, and Alex Chen, will assume management and executive positions within
the new company.
BUSINESS FACTORS
Except for historical information, all of the statements, expectations and
assumptions contained in the foregoing are forward-looking statements. The
realization of any or all of these expectations is subject to a number of risks
and uncertainties and it is possible that the assumptions made by management may
not materialize. In addition, there can be no assurances that current sales
levels will be sustained, and that the nine month trends for sales will continue
in future periods. In addition to the factors set forth above, other important
factors that could cause actual results to differ materially from expectations
include lack of working capital to carry out the Company's business plan,
competition from companies either currently in the market or entering the
market; competition from other Internet, catalog and retail store resellers and
price pressures related thereto; uncertainties surrounding the supply of and
demand for computer and computer related products; reliance on the Company's
vendors; and risks due to shifts in market demand and/or price erosion of owned
inventory. This list of risk factors is not intended to be exhaustive. Reference
should also be made to the risk factors set forth from time to time in the
Company's SEC reports, including but not limited to those set forth in the
section entitled "Certain Factors Affecting Future Results" in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
1. In August 2000, the Company issued 855,000 shares of common stock from the
Fouders Pool to various consultants and employees. The shares issues to
employees were 30% vested upon the date of grant, with the remainder
vesting over a two year period or upon a change of control.
This common stock and the related warrants 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.
2. On October 2, 4, and 11, 2000, the Company received stock subscription
agreements for $500,000 of common stock for $0.75 per share, and an
additional $500,000 at $0.6875 per share from Lan Plus Corporation $1
million in total). The Purchaser's of $500,000 at $0.75 per share also
received three year warrants to purchase up to an additional 666,668 shares
of common stock at $1.00 per share. Shares from the Founders Agreement will
be issued to the Purchaser's and Lan Plus Corporation, resulting in no
dilution to current Mcglen shareholders. Pursuant to the terms of the
Founders Agreement, $50,000 of the funds raised was remitted to the
Founders.
This common stock and the related warrants 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. Exhibits. The exhibit index attached hereto is incorporated
herein by reference.
b. Reports on Form 8-K - none
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mcglen Internet Group, Inc.
Date: November 13, 2000 By /s/ Grant Trexler
---------------------------------
Grant Trexler
Chief Financial Officer
(Duly Authorized Officer of the Registrant
and Principal Financial Officer)
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
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