SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 9, 1999
--------------------------------
McGLEN INTERNET GROUP, INC.
formerly known as
ADRENALIN INTERACTIVE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-27828 13-3779546
- --------------- ------------ ---------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
18001 Skypark Circle, Suite B-C, Irvine, California 92614
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 851-8078
--------------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
1
<PAGE>
Item 1. Changes in Control of Registrant.
- ------- --------------------------------
(a) A change of control of Registrant occurred on December 3,
1999. Control was acquired by Mike Chen, George Lee and ACST Computers, Inc.,
pursuant to the terms of the Agreement and Plan of Merger, dated April 28, 1999,
a copy of which is incorporated herein by this reference (the "Merger
Agreement"). The new controlling shareholders exchange all of their shares of
McGlen Micro Inc. ("McGlen") in exchange for 25,485,528 shares of common stock
of Registrant. The basis of control of the new controlling shareholders is their
control of the majority of outstanding shares of common stock of Registrant, the
election of the new Board of Directors, which include George Lee and Mike Chen
and the appointment of new executive officers of Registrant which include George
Lee as Secretary and Chief Financial Officer and Mike Chen as President. The
transaction was structured as a reverse triangular merger which resulted in the
merger of Registrant's subsidiary, Adrenalin Acquisition Corporation, into
McGlen, the terms of which were agreed on April 28, 1999 and consummated on
December 2, 1999. On the effective date of the merger, the new controlling
shareholders beneficially owned approximately 87% of the outstanding shares of
common stock of Registrant as set forth below and as more particularly described
in the merger proxy filed by Registrant on October 6, 1999.
Percentage of Shares
Controlling Person Beneficially Owned
------------------ ------------------
George Lee 29.2%
Mike Chen 28.05%
ACST Computers, Inc. 13.55%
The new controlling shareholders acquired control of Registrant
from the Shareholders of Registrant and the former directors of Registrant, Jay
Smith III, Edward MacKay and Robert Wilson, each of which were replaced with the
new board members at Registrant's annual meeting on November 11, 1999. A copy of
the Agreement and Plan of Merger was filed pursuant to Registrant's Form 8-K
filing in May 1999 and along with Registrant's Proxy Statement filed on October
6, 1999. Registrant filed a copy of the Agreement of Merger as an exhibit to its
Form 8-K filed December 8, 1999. Copies of related closing documents to the
merger, including the Opinions of Counsel of counsel for McGlen and counsel for
Adrenalin, the proposed Separation Agreement for Jay Smith, Registrant's former
CEO and director, and the Third Amendment to the Agreement and Plan of Merger
are filed herewith as exhibits to this Form 8-K.
Item 2. Acquisition and Disposition of Assets.
- ------- -------------------------------------
(a) Pursuant to the Merger Agreement, McGlen became a wholly owned
subsidiary of Registrant in a transaction in which all of the outstanding shares
of McGlen were acquired by Registrant each in exchange for 0.9889611 shares of
common stock of Registrant in a transaction in which a total of 25,485,528
shares of common stock of Registrant were issued to the shareholders of McGlen
Micro Inc.
2
<PAGE>
(b) The assets of McGlen which were acquired by Registrant are
described in the Financial Statements attached to Registrant's Proxy Statement,
filed with the Commission on October 6, 1999 and incorporated herein by this
reference. The assets include the business of McGlen and its websites
McGlen.com, Techsumer.com and AccessMicro.com, the subsidiary of McGlen, AMT
Component, Inc. ("AMT") and the inventory, cash, furniture, fixtures, equipment,
intellectual property rights, contracts, personnel, goodwill and other
intangible assets and other assets of McGlen and its wholly owned subsidiary,
AMT and each of their liabilities. McGlen and AMT are e-Commerce businesses
which sell computer hardware, software and peripherals and other electronics
over the Internet to consumers and to businesses, as described in the
description of McGlen set forth in Registrant's Proxy Statement dated October 6,
1999. Registrant intends to continue to use the assets, including McGlen and AMT
as presently operated.
In December 1999, the Board of Directors of the Registrant adopted a formal plan
to discontinue the operations of Western Technologies, Inc. ("Western"), a
wholly owned subsidiary of Registrant. Registrant anticipates fulfilling two of
the software development contract obligations currently being conducted by
Western during the first quarter of 2000. It is anticipated that the remaining
three contracts will be assigned to Western's Vice {resident of Operations for
completion, releasing the Registrant from any further contractual liability.
However, the Registrant would still be responsible for any product liability
issues that may arise from the two completed contracts.
As a result, Registrant recorded a Pro Forma adjustment of $2,205,000 to
write-down the assets of the former company to their estimated net realizable
value and an accrual of $1,075,000 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 net liabilities of the former company have been reclassified as discontinued
operations on the balance sheet and statement of operations for all periods
presented. Net liabilities principally consist of advances on contracts and
accrued losses during the phase out period. Revenues for the discontinued
operations were $2.7 million for the nine months ended September 30, 1999; $2.9
million and $2.8 million for the years ended June 30, 1999 and 1998,
respectively.
Item 4. Changes in Registrant's Certified Accountant.
- ------- --------------------------------------------
(a) As part of its proposed change of control described in
Registrant's Proxy Statement dated October 6, 1999, Registrant's shareholders
elected the accounting firm of Singer, Lewak, Greenbaum & Goldstein to replace
the firm of Drucker, Math & Whitman as Registrant's accountants upon the
occurrence of the change of control and completion of the merger.
The former accountants did not resign or decline to stand for
reelection, but were dismissed on November 11, 1999 to allow the appointment of
Singer, Lewak, the accountants for McGlen prior to the merger.
Registrant's former principal accountants, Drucker, Math &
Whitman's audited financial reports stated qualification that Registrant might
not continue as a going concern. Such statement was unrelated to Drucker, Math &
Whitman's replacement.
The decision to change accountants was recommended and approved by
the Board of Directors and Registrant's shareholders.
Registrant is not aware of any disagreements with Registrant's
former accountant during the past two most recent fiscal years on any matter of
accounting principals or practices, financial statement disclosure or auditing
scope or procedure.
Registrant has provided the former accountant with a copy of the
disclosures Registrant is making in this 8-K in response to the disclosures
required by Regulation S-K, Item 304(a). The former accountant has furnished
Registrant with a letter addressed to the Commission stating its agreement and
absence of any disagreement with the statements made by Registrant in response
to this Item. Registrant has filed herewith the former accountant's letter as an
exhibit to this Form 8-K.
3
<PAGE>
(b) In January 2000, a decision to change accountants was
recommended and approved by the Board of Directors' Audit Committee and a
majority of Registrant's shareholders, electing the accounting firm of BDO
Seidman, LLP to replace Singer, Lewak. Singer, Lewak did not resign but were
dismissed to allow Registrant to appoint a National accounting firm more
familiar with SEC reporting requirements.
Item 5. Other Events.
- ------- ------------
(a) On December 8, 1999, Registrant closed on an offering of
common stock for gross proceeds of $750,000, pursuant to the Common Stock
Purchase Agreement, dated July 12, 1999, as described in Registrant's 8-K filed
July 12, 1999, pursuant to which Registrant issued 138,090 shares of common
stock to Escalade Investors, LLC, for $750,000 and a warrant to purchase 13,809
shares of Registrant's common stock for $6.171875 per share as described in
Section 1.2 and 2.2 of the Common Stock Purchase Agreement. The shares issued to
Escalade Investors, LLC, were registered pursuant to an S-3 Registration
Statement on file with the Commission by Registrant.
Registrant completed a private placement of common stock
originally initiated by McGlen prior to the completion of the merger described
in Item 1 of this Form 8-K (the "McGlen Placement"). Pursuant to the terms of
the McGlen Placement, Registrant initially received gross proceeds of
$1,100,000, upon which it paid a commission of 10% to the Placement Agent,
Redstone Securities, Inc. in the amount of $100,000. Registrant will issue
subscribers in McGlen Placement 0.9889611 shares of common stock of Registrant
in exchange for each share subscribed to under the McGlen Placement.
The foregoing description of the terms of the Escalade financing
are qualified entirely by the terms of the Common Stock Purchase Agreement,
dated July 12, 1999, between Registrant and Escalade Investors, LLC, which is
filed as an exhibit to Registrant's July 12, 1999 Form 8-K, and the terms of the
McGlen Placement, dated September 30, 1999, which is filed herewith as an
exhibit.
The offering sale of securities referred to herein has not been
registered under the Securities Act of 1933, as amended (the "Securities Act")
or qualified under any state or non-U.S. securities laws. Such securities are
being offered and sold in reliance on the exemptions afforded by Regulation D,
promulgated under the Securities Act. The securities may not be transferred or
sold without registration and qualification under the Securities Act and
applicable state and non-U.S. securities laws, unless an exemption from
registration and qualification under the Securities and such laws is then
available.
Item 6. Resignation of Registrant's Directors.
- ------- --------------------------------------
Each of Registrant's former directors: Jay Smith III; Edward
MacKay; and Robert Wilson, has resigned pursuant to the terms of the Agreement
and Plan of Merger, however, Registrant is not aware of any disagreement between
resigning directors and Registrant.
4
<PAGE>
Item 7. Financial Statements and Exhibits.
- ------- ----------------------------------
The financial statements, pro forma financial information and
exhibits thereto of McGlen Micro Inc., which was acquired by of the undersigned.
(a) Financial statements of McGlen.
(b) Pro forma financial information.
(c) Exhibits.
(3) 3.1 Amended Certificate of Incorporation of Adrenalin
Interactive, Inc.
(4) 4.1 Private Placement Memorandum of McGlen Micro Inc., and
related Subscriber Questionnaire and Subscription
Agreement.
(5) 5.1 Opinion of Counsel of Clark & Trevithick.
5.2 Opinion of Counsel of Boyd & Chang, LLP.
(15) 15.1 Letter Regarding Unaudited Interim Financial
Statements.
(16) 16.1 Letter Regarding Change in Certifying Accountant.
(17) 17.1 Letter Regarding Director Resignation for Jay Smith.
17.2 Letter Regarding Director Resignation for Robert
Wilson.
17.3 Letter Regarding Director Resignation for Edward
Mackay.
(21) 21.1 List of Subsidiaries of Registrant.
(99) 99.1 Press Release
5
<PAGE>
Item 8. Change in registrant's Fiscal Year
- ------- ----------------------------------
In connection with the merger between Adrenalin Interactive Inc. and McGlen
Micro, Inc., Registrant will change its year-end to December 31. Registrant will
file its 1999 Form 10-K on or before March 30, 2000.
SIGNATURES
----------
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.
ADRENALIN INTERACTIVE, INC.
January __,1999 By:/s/Mike Chen
----------------------------
Mike Chen, President
6
<PAGE>
McGlen Micro & Adrenalin Merger
-------------------------------
Financial Statements
--------------------
7
<PAGE>
Unaudited Pro Forma Combined Balance Sheet
As of September 30, 1999
<TABLE>
<CAPTION>
Proforma
McGlen & Sub Adrenalin Proforma Proforma Combined
Hist Hist Adj Adj Total
---------- ---------- ---------- ---------- ----------
CURRENT ASSETS
<S> <C> <C> <C> <C> <C>
Cash & cash equivalents 262,237 158,438 (b) 1,890,000 2,152,237
(d) (158,438)
Accounts receivable 981,581 229,559 (d) (229,559) 981,581
Inventory 524,504 524,504
Loan Receivable McGlen 450,000 (450,000) --
Deferred Merger Costs 136,694 (a) (136,694) --
Costs in excess of billing 282,162 (d) (282,162) --
Prepaid expenses and other
current assets 502,188 98,717 (d) (98,717) 502,188
---------- ---------- ---------- ---------- ----------
Total current assets 2,270,510 1,355,570 984,430 (450,000) 4,160,510
---------- ---------- ---------- ---------- ----------
PROPERTY & EQUIPMENT 409,058 253,944 (e) (253,944) 409,058
---------- ---------- ---------- ---------- ----------
OTHER ASSETS
Deposits & Other assets 52,562 24,287 (e) (24,287) 52,562
Patents & licenses -- 2,090,419 (e)(2,090,419) --
---------- ---------- ---------- ---------- ----------
Total other assets 52,562 2,114,706 (2,114,706) 52,562
---------- ---------- ---------- ---------- ----------
TOTAL ASSETS 2,732,130 3,724,220 (1,384,220) (450,000) 4,622,130
========== ========== ========== ========== ==========
</TABLE>
8
<PAGE>
McGlen Micro & Adrenalin Merger
As of September 30, 1999
<TABLE>
<CAPTION>
Proforma
McGlen & Sub Adrenalin Proforma Proforma Combined
Hist Hist Adj Adj Total
---------- ---------- ---------- ---------- ----------
CURRENT LIABILITIES
<S> <C> <C> <C> <C> <C>
Accounts payable & accrued
expenses 1,651,196 532,691 (d) (532,691) 1,651,196
Billings in excess of costs
& estimated earnings -- 26,323 (d) (26,323) --
Notes and loans payable-
current portion -- 484,872 (d) (484,872) --
Due to stockholders 10,000 -- -- 10,000
Convertible notes payable 200,000 200,000
Notes payable-Adrenalin 450,000 (450,000) --
----------- ----------- ---------- -------- ----------
Net current liabilities
of discontinued operations (d) 138,316
(e) 1,075,000 1,213,316
----------- ----------- ---------- -------- ----------
Total current liabilities 2,311,196 1,043,886 169,430 (450,000) 3,074,512
----------- ----------- ---------- -------- ----------
Equipment Lease 327,070 27,367 (e) (27,367) 327,070
----------- ----------- ---------- -------- ----------
TOTAL LIABILITIES 2,638,266 1,071,253 142,063 (450,000) 3,401,582
----------- ----------- ---------- -------- ----------
COMMITMENTS
STOCKHOLDER'S EQUITY
Common stock 266,733 106,180 (a) 859,846 986,368
(b) 20,343
(a) (266,733)
Additional paid in capital 719,040 14,804,178 (a) (13,117,237) 234,180
(b) 1,869,657
(c) (891,909)
(a) 266,733
(a) (136,694)
(d,e)(3,279,589)
Retained earnings (deficit) (891,909) (12,257,391)(a) 12,257,391 --
----------- ----------- ---------- -------- ----------
(c) 891,909
----------- ----------- ---------- -------- ----------
Total stockholders' equity 93,864 2,652,967 (1,526,283) 1,220,548
----------- ----------- ---------- -------- ----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY 2,732,130 3,724,220 (1,384,220) (450,000) 4,622,130
=========== =========== ============ ========= ===========
control -- -- -- --
</TABLE>
9
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF September 30, 1999
Note 1:
The unaudited pro-forma combined balance sheet is based on the individual
consolidated balance sheets of McGlen Micro, Inc. and its wholly owned
subsidiary, AMT Components, Inc.(collectively McGlen), and Adrenalin
Interactive, Inc. (Adrenalin) to reflect the merger between McGlen and
Adrenalin, accounted for as a reverse merger between Adrenalin and
McGlen; discontinuing the software development operations previously
conducted by Western; a private placement of $750,000, less $75,000 in
fees, by Adrenalin pursuant to a common stock purchase agreement which
was conditional on the closing of the reverse merger, and a $1,350,000
private placement by McGlen (net of fees of $135,000) subsequent to the
merger, as if the transactions had taken place on September 30, 1999.
(a) To reflect the recapitalization of McGlen as a result of the merger
between McGlen and Adrenalin accounted for as a reverse merger
between Adrenalin and McGlen.
(b) Assumed sale of 678,090 shares of common stock for proceeds of
$1,890,000, net of expenses of $210,000. In addition, the investor
in the $750,000 private placement received a warrant to purchase
additional common stock at an exercise price equal to 125% of the
closing bid price on the trading day prior to such funding, which
has not been included in the pro forma adjustments. This same
investor also received repricing a option on the stock issued upon
closing of the merger and stock issued by Adrenalin in July 1999.
Registrant will issue 103,788 additional shares of common stock for
two-thirds of the shares subject to repricing. Shares to be issued
under the repricing agreement have not been included in the Weighted
Average Shares Outstanding at September 30, 1999.
(c) S Corporation accumulated deficit reclassified to additional
paid-in-capital.
(d) Reclassification of realizable net assets of software development
operations to Net Current Liabilities of Discontinued Operations.
(e) Charges related to the discontinuance of Western's operations,
including $2,205,000 write-off of patents, property and equipment,
other assets, leases payable, and an accrual of $1,075,000 for
operating losses from 9/30/99 through the anticipated phase out
period.
10
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Consolidated Condensed Statement of Operations
For The Nine Months Ended September 30, 1999
McGlen & Sub Access Adrenalin
Hist Micro Proforma Sub Hist Proforma Combined
Sep-99 Mar-99 Adj Total Sep-99 Adj Total
----------- ----------- ------------ ------------ ------------ ----------- ----------
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales 16,582,546 1,885,468 -- 18,468,014 -- -- 18,468,014
----------- ----------- ------------ ------------ ------------ ----------- ----------
Development Contracts 2,131,915 (d) (2,131,915) --
Royalties 567,570 (d) (567,570) --
----------- ----------- ------------ ------------ ------------ ----------- ----------
Total Revenue 16,582,546 1,885,468 18,468,014 2,699,485 (2,699,485) 18,468,014
Cost of sales 15,052,262 1,588,627 -- 16,640,889 2,352,379 (d) (2,352,379) 16,640,889
----------- ----------- ------------ ------------ ------------ ----------- ----------
Gross profit 1,530,284 296,841 -- 1,827,125 347,106 (d) (347,106) 1,827,125
Operating expenses 2,481,061 326,507 -- 2,807,568 1,046,093 (d) (1,046,093) (c) 2,807,568
----------- ----------- ------------ ------------ ------------ ----------- ----------
Other expenses - write
- -off of goodwill -- -- -- -- (1,610,071) (d) 1,610,071 --
----------- -----------
Loss from continuing
operations before
income taxes (950,777) (29,666) -- (980,443) (2,309,058) (d) 2,309,058 (980,443)
----------- ----------- ------------ ------------ ------------ ----------- ----------
Provision for income
taxes -- --
Loss from continuing
operations (950,777) (29,666) (980,443) -- (980,443)
----------- ----------- ------------ ------------ ------------ ----------- ----------
Discontinued Operations:
Loss from discontinued
Adrenalin software
development business
(net or an income tax
benefit of $0) (d) (2,309,058) (2,309,058)
Loss on disposal of
Adrenalin software
development business, (e) (3,279,589) (3,279,589)
including a provision
of $1,075,000 for
operating losses during ----------- -----------
the phase out period
(net of an income tax
benefit of $0)
Loss from discontinued
operations (5,588,647) (5,588,647)
---------- -----------
Net loss (950,777) (29,666) (980,443) -- (5,588,647) (6,569,090)
=========== ========== ============ ============ ============ =========== ===========
Earnings per share :
From Continuing
Operations (0.03)
=========== ========== ============ ============ ============ =========== ===========
Basic and Diluted -- -- (0.20)
=========== ========== ============ ============ ============ =========== ===========
Weighted Average Shares
Outstanding :
Basic 3,043,823 (a) 32,878,918
=========== ========== ============ ============ ============ =========== ===========
Diluted 3,151,172 (b) 33,009,580
=========== ========== ============ ============ ============ =========== ===========
</TABLE>
11
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Note 2 :
The Unaudited pro forma combined condensed statement of operations is
based on the individual statements of McGlen Micro, Inc and its
wholly owned subsidiary, AMT Components, Inc and Adrenalin
Interactive, Inc. for the nine months ended September 30, 1999 after
giving effect to the pro forma adjustments necessary to reflect the
merger described in Note 1 and the acquisition of AMT components,
Inc. by McGlen Micro, Inc. on March 31, 1999, as if the merger and
acquisition had taken place on January 1, 1999.
(a) Includes estimated number of shares to be issued to McGlen's
stockholders and number of shares to be issued in connection
with Registrant's $2,100,000 private placements (less fees of
$210,000) completed in December 1999..
(b) Includes options issued to McGlen shareholders
(c) Includes merger related expenses of $522,127 for McGlen.
(d) Reclassification of the discontinued software development
operations of Western (see Note 1)
(e) Write-off of net assets related to discontinued software
development operations, $2,205,000, and recording of an accrual
of $1,075,000 for estimated losses during the anticipated phase
out period. No income tax benefits have been allocated to these
losses since there are no realizable tax benefits available to
allocate to the discontinued operations.
12
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description Page
------------------------
<TABLE>
<CAPTION>
Exhibit Page
- ------- ----
<S> <C> <C>
(3) 3.1 Amended Certificate of Incorporation of Adrenalin Interactive, Inc. .......................16
(4) 4.1 Private Placement Memorandum of McGlen Micro Inc.,
and related Subscriber Questionnaire and Subscription Agreement............................18
(5) 5.1 Opinion of Counsel of Clark & Trevithick...................................................65
5.2 Opinion of Counsel of Boyd & Chang, LLP....................................................68
(15) 15.1 Letter Regarding Unaudited Interim Financial Statements....................................71
(16) 16.1 Letter Regarding Change in Certifying Accountant...........................................72
(17) 17.1 Letter Regarding Director Resignation for Jay Smith........................................73
17.2 Letter Regarding Director Resignation for Robert Wilson....................................74
17.3 Letter Regarding Director Resignation for Edward Mackay....................................75
(21) 21.1 List of Subsidiaries of Registrant 76
(99) 99.1 Press Release..............................................................................77
</TABLE>
- --------------------
(1) Incorporated by reference to the corresponding Exhibit previously filed
as an Exhibit to Registrant's Form 8-K filed July 12, 1999.
(2) Incorporated by reference to the corresponding Exhibit previously filed
as an Exhibit to Registrant's Form 8-K filed December 8, 1999.
15
Exhibit (3.1)
-------------
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ADRENALIN INTERACTIVE, INC.
----------------------------------------------
Adopted in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware
-----------------------------------------------
We, JAY SMITH, III and MICHAEL CARTABIANO, the President and Secretary,
respectively, of ADRENALIN INTERACTIVE, INC., a corporation organized and
existing under the laws of the State of Delaware, do hereby certify as follows:
FIRST, that the Certificate of Incorporation of said corporation be
amended as follows:
(1) By striking out the whole of Article FIRST thereof as it
now exists and inserting in lieu and instead thereof a new Article
FIRST reading as follows:
"The name of the corporation (hereinafter the
'corporation') is McGLEN INTERNET GROUP."
(2) By striking out the whole of subsection (a) of Article
FOURTH thereof as it now exists and inserting in lieu and instead
thereof a new subsection (a) of Article FOURTH reading as follows:
(a) The maximum number of shares which the
corporation shall have authority to issue is Fifty-Five
16
<PAGE>
Million (55,000,000), of which Fifty Million (50,000,000)
shares shall be Common Stock, having a par value of $.03 per
share, and Five Million (5,000,000) shares shall be Preferred
Stock, having a par value of $.01 per share.
SECOND, that such amendments have been duly adopted in accordance with
the provisions of the General Corporation Law of the State of Delaware by the
vote of holders of not less than a majority of the shares of outstanding stock
entitled to vote thereon, all in accordance with the provision of Section 242 of
the General Corporation of Law of the State of Delaware.
IN WITNESS WHEREOF, we have signed this certificate this 11th day of
November, 1999.
/s/Jay Smith
---------------------------------
Jay Smith, III, President
/s/Michael Cartabiano
---------------------------------
Michael Cartabiano, Secretary
17
Exhibit 4.1
-----------
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
ACCREDITED INVESTORS ONLY
MCGLEN MICRO INC.
600,000 Shares
of
COMMON STOCK
$25,000 Per Unit
Each Unit Consisting of 10,000 Shares of Common Stock
Minimum Offering of 40 Units ($1,000,000)
Maximum Offering of 60 Units ($1,500,000)
McGlen Micro Inc., a California corporation (the "Company" or "McGlen"), is
in the business of selling computer hardware and software via the Internet
through its website at mcglen.com and its subsidiary AMT Component, Inc., at
accessmicro.com. McGlen intends to merge with Adrenalin Interactive, Inc., a
Delaware corporation, Nasdaq symbol "ADRN" pursuant to which McGlen shall become
a wholly owned subsidiary of Adrenalin and the shareholders of McGlen will
receive 87.5% of the outstanding shares of Adrenalin.
This Private Placement Memorandum (this "Memorandum") relates to the offer
and sale (this "Offering") to accredited investors only, of up to 60 Units
(individually, a "Unit" and together "Units"), each Unit consisting of 10,000
shares (the "Shares") of the Company's Common Stock ("Common Stock"). The Units
will be sold at a subscription price of $25,000 per Unit with a minimum purchase
of one Unit. The minimum number of Units that will be sold in this Offering will
be 40 Units (the "Minimum Offering") and the maximum number of Units that will
be sold in this Offering will be 60 Units (the "Maximum Offering"). There is no
market for the securities of the Company. See "RISK FACTORS" and "DESCRIPTION OF
SECURITIES."
THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). NEITHER THIS MEMORANDUM NOR THE
SECURITIES DESCRIBED HEREIN HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY OTHER GOVERNMENTAL OR
REGULATORY AGENCY NOR HAS ANY SUCH AGENCY PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY SHOULD BE CONSIDERED TO BE SPECULATIVE AND TO
INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
<TABLE>
<CAPTION>
=================================================================================================
Price to Selling Proceeds to the
Investors (1)* Commissions (2)* Company (3)*
------------- ---------------- ------------
<S> <C> <C> <C>
Per Share $ 2.50 $ .25 $ 2.25
Per Unit $ 25,000.00 $ 2,500.00 $ 22,500.00
Total Maximum Offering $ 1,500,000.00 $ 150,000.00 $ 1,350,000.00
=================================================================================================
*Footnotes on following page
</TABLE>
REDSTONE SECURITIES, INC.
The date of this Memorandum is September 30, 1999
18
<PAGE>
Name:
--------------------------
Memorandum No.:
---------------
19
<PAGE>
FOOTNOTES TO COVER PAGE
-----------------------
(1) The offering price for each Unit (the "Offering Price") is payable
in full upon subscription. The minimum subscription is $25,000, however, the
Company reserves the right to accept subscriptions for lesser amounts. The
Offering Price has been determined by the Company and is not based on earnings,
assets, book value or any other recognized criteria for establishing value. No
representation is made that the Units or the Shares have a market value equal
to, or could be resold at, such price, and each prospective investor should make
an independent evaluation of the fairness of the Offering Price.
(2) This Offering is being made on a "best efforts" basis through
Redstone Securities, Inc. (the "Placement Agent"). The Placement Agent will
receive a commission of 10% of the aggregate amount of this Offering.
(3) This figure represents the gross proceeds of this Offering
available to the Company after deduction of the Placement Agent's commissions
but before certain expenses of this Offering such as legal fees, accounting
fees, filing and qualification fees, printing costs, escrow account fees, and
other miscellaneous costs and expenses incurred to sell the Units.
The Units will be offered until October 15, 1999, which offering period
may be extended for up to an additional 45 days (the "Termination Date") at the
discretion of the Company and the Placement Agent (the "Offering Period"). The
Company's counsel, Boyd & Chang, LLP (the "Escrow Agent") has been appointed as
the escrow agent for the subscription of the Units. The Company has agreed to
indemnify the Escrow Agent and provide the Escrow Agent with a general release
for most liability. The proceeds of this Offering (the "Proceeds") will be
deposited in a trust account which may be at risk in the event of a failure of
the institution holding such funds once such funds exceed $100,000. See "PLAN OF
DISTRIBUTION."
20
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TABLE OF CONTENTS
-----------------
PREPARATION BY COMPANY........................................................1
GENERAL INFORMATION...........................................................1
CONFIDENTIAL INFORMATION......................................................1
INVESTOR SUITABILITY STANDARDS................................................2
SUBSCRIPTION PROCEDURE........................................................3
EXECUTIVE SUMMARY.............................................................5
THE OFFERING..................................................................5
RISK FACTORS..................................................................7
THE BUSINESS.................................................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................27
USE OF PROCEEDS..............................................................35
RECENT TRANSACTIONS..........................................................36
CAPITALIZATION...............................................................39
DILUTION ....................................................................40
MANAGEMENT...................................................................41
EXECUTIVE COMPENSATION.......................................................43
PRINCIPAL SHAREHOLDERS.......................................................45
DESCRIPTION OF SECURITIES....................................................46
TERMS OF THE OFFERING........................................................46
SECURITIES MATTERS AND RESTRICTIONS ON TRANSFERABILITY.......................48
LEGAL MATTERS................................................................49
ADDITIONAL INFORMATION.......................................................49
FINANCIAL STATEMENTS.........................................................50
EXHIBITS
EXHIBIT "A" - Subscription Agreement and Subscriber Questionnaire
EXHIBIT "B" - Internal Revenue Service Forms W-8 and W-9
21
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NOTICES
-------
THIS OFFERING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS." SEE "SECURITIES MATTERS AND RESTRICTIONS ON TRANSFERABILITY."
THIS OFFERING IS MADE ONLY TO "ACCREDITED INVESTORS" WHO CAN AFFORD A COMPLETE
LOSS OF THEIR INVESTMENT IN THE COMPANY. SEE "INVESTOR SUITABILITY STANDARDS."
* * *
NO REPRODUCTION OR DISTRIBUTION OF THIS MEMORANDUM IS PERMITTED. THIS
MEMORANDUM CONSTITUTES AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY
ONLY TO THE PERSON WHOSE NAME APPEARS ON THE COVER PAGE, AND ONLY IN
JURISDICTIONS IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE LAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER APPLICABLE SECURITIES LAWS. OFFERS MAY BE
MADE ONLY TO PERSONS WHO ARE "ACCREDITED INVESTORS" (AS DEFINED IN REGULATION D
UNDER THE ACT).
* * *
THIS MEMORANDUM SHALL BE TREATED AS CONFIDENTIAL. ANY REPRODUCTION IN
WHOLE OR IN PART, OR DISTRIBUTION OF THIS MEMORANDUM, OR THE DIVULGENCE OF ANY
OF ITS CONTENTS TO ANY PERSON WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY,
IS PROHIBITED.
* * *
PROSPECTIVE INVESTORS MUST NOT CONSTRUE THE CONTENTS OF THIS MEMORANDUM
AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT HIS OWN
INVESTMENT ADVISER, LEGAL COUNSEL AND TAX ADVISER AS TO, LEGAL, TAX AND RELATED
MATTERS CONCERNING THIS INVESTMENT.
* * *
NO OFFERING LITERATURE OR ADVERTISING IN WHATEVER FORM MAY BE EMPLOYED
IN THIS OFFERING OF THE UNITS EXCEPT FOR THIS MEMORANDUM. NO PERSON HAS BEEN
AUTHORIZED TO MAKE ANY REPRESENTATION WITH RESPECT TO THE UNITS EXCEPT THE
REPRESENTATIONS CONTAINED HEREIN. NO RELIANCE MAY BE PLACED UPON ANY
REPRESENTATIONS, OTHER THAN THOSE SET FORTH IN THIS MEMORANDUM. NEITHER THE
DELIVERY OF THIS MEMORANDUM, NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
MATTERS SET FORTH HEREIN SINCE THE DATE OF THIS MEMORANDUM.
22
<PAGE>
* * *
THE UNITS AND THE COMMON STOCK WHICH COMPRISE THE UNITS ARE NOT
REGISTERED UNDER THE ACT. THEY ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE
SIGNIFICANT RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
* * *
THIS OFFERING IS BEING MADE IN RELIANCE UPON THE AVAILABILITY OF AN
EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE ACT BY VIRTUE OF THE COMPANY'S
INTENDED COMPLIANCE WITH THE PROVISIONS OF SECTION 4(2) THEREOF AND RULE 506
ADOPTED BY THE COMMISSION THEREUNDER. THE SECURITIES OFFERED HEREBY HAVE NOT
BEEN REGISTERED WITH, OR APPROVED OR DISAPPROVED BY, THE COMMISSION, OR BY THE
SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS THE COMMISSION OR ANY
AUTHORITY PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR
ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION CONTRARY TO THE FOREGOING IS
UNLAWFUL.
* * *
THIS OFFERING CAN BE WITHDRAWN BY THE COMPANY AT ANY TIME BEFORE
CONSUMMATION AND IS SPECIFICALLY MADE SUBJECT TO THE CONDITIONS DESCRIBED IN
THIS MEMORANDUM. IN CONNECTION WITH THIS OFFERING AND SALE OF THE UNITS, THE
COMPANY RESERVES THE RIGHT, IN ITS SOLE DISCRETION, TO REJECT ANY SUBSCRIPTION.
* * *
STATEMENTS CONTAINED HEREIN AS TO THE CONTENTS OF ANY AGREEMENT OR
OTHER DOCUMENTS ARE SUMMARIES AND, THEREFORE, ARE NECESSARILY SELECTIVE AND
INCOMPLETE. COPIES OF THE DOCUMENTS REFERRED TO HEREIN MAY BE OBTAINED FROM THE
COMPANY AND ARE AVAILABLE FOR INSPECTION AT THE OFFICES OF THE COMPANY.
* * *
IF ANY PERSON ELECTS NOT TO MAKE AN OFFER TO ACQUIRE THE SECURITIES
OFFERED HEREBY OR SUCH OFFER IS REJECTED IN WHOLE BY THE COMPANY, SUCH PERSON,
BY ACCEPTING DELIVERY OF THIS MEMORANDUM,
23
<PAGE>
AGREES TO RETURN THIS MEMORANDUM AND ALL RELATED DOCUMENTS ENCLOSED HEREWITH OR
FURNISHED SUBSEQUENTLY, TO THE COMPANY AT ITS OFFICES AT MCGLEN MICRO INC., 3002
DOW AVENUE, SUITE 212, TUSTIN, CALIFORNIA 92780.
* * *
SALES OF THE UNITS CAN BE CONSUMMATED ONLY BY ACCEPTANCE BY THE COMPANY
OF OFFERS TO PURCHASE SUCH SECURITIES WHICH ARE TENDERED TO THE COMPANY BY
PROSPECTIVE INVESTORS. NO SOLICITATION OF ANY SUCH OFFER (INCLUDING ANY
SOLICITATION WHICH MAY BE CONSTRUED AS AN "OFFER" UNDER FEDERAL AND/OR STATE
SECURITIES LAWS) TO SUCH PROSPECTIVE INVESTORS IS AUTHORIZED WITHOUT THE PRIOR
APPROVAL BY THE COMPANY.
* * *
PROSPECTIVE INVESTORS AND THEIR AUTHORIZED REPRESENTATIVES, ACCOUNTANTS
AND ATTORNEYS ARE ENCOURAGED TO ASK QUESTIONS OF AND RECEIVE ANSWERS FROM THE
COMPANY CONCERNING THE TERMS AND CONDITIONS OF THIS OFFERING AND TO OBTAIN
ADDITIONAL INFORMATION CONCERNING THE COMPANY OR NECESSARY TO VERIFY THE
ACCURACY OF ANY OF THE INFORMATION CONTAINED HEREIN OR IN ANY DOCUMENT REFERRED
TO HEREIN OR DELIVERED IN CONNECTION HEREWITH.
INVESTORS AND THEIR AUTHORIZED REPRESENTATIVES SHOULD REVIEW THE
FOLLOWING LEGENDS REQUIRED BY CERTAIN JURISDICTIONS AND BE AWARE OF THEIR
CONTENTS. PLEASE REVIEW THE FOLLOWING MATERIAL CAREFULLY TO DETERMINE WHETHER
ANY OF THESE LEGENDS APPLY.
STATE NOTICES AND LEGENDS
-------------------------
FOR RESIDENTS OF ALL STATES
- ---------------------------
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THESE SECURITIES AND THE TERMS OF
THIS OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE
NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY
AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE
ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT
24
<PAGE>
AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
SPECIFIC STATE DISCLOSURES
--------------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH, OR
APPROVED OR DISAPPROVED BY, THE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CALIFORNIA
- ----------
IT IS UNLAWFUL FOR THE HOLDER OF ANY SECURITY TO CONSUMMATE A SALE OR
TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFORE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE
COMMISSIONER'S RULES.
THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS MEMORANDUM HAS
NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY
PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL,
UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATIONS BY SECTION
25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL
PARTIES TO THIS MEMORANDUM ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION
BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
FLORIDA
- -------
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE FLORIDA SECURITIES
AND INVESTOR PROTECTION ACT AND ARE BEING SOLD IN RELIANCE UPON THE EXEMPTION
CONTAINED IN SECTION 517.061(11) OF SUCH ACT.
FLORIDA LAW PROVIDES THAT WHEN SALES ARE MADE TO FIVE OR MORE PERSONS
IN FLORIDA, ANY SALE MADE IN FLORIDA IS VOIDABLE BY THE PURCHASER WITHIN THREE
DAYS AFTER THE FIRST TENDER OF CONSIDERATION IS MADE BY SUCH PURCHASER TO THE
COMPANY, AN AGENT OF THE COMPANY OR AN ESCROW AGENT OR WITHIN THREE DAYS AFTER
THE AVAILABILITY OF THAT PRIVILEGE IS COMMUNICATED TO SUCH PURCHASER, WHICHEVER
25
<PAGE>
OCCURS LATER. THIS OFFERING INVOLVES SALES IN FLORIDA. PAYMENTS FOR TERMINATED
SUBSCRIPTIONS WILL BE PROMPTLY REFUNDED WITHOUT INTEREST.
AS REQUIRED BY SECTION 517.061(11)(A)3, FLORIDA STATUTES, AND RULE 3E-
500.05(5)(A) PROMULGATED THEREUNDER, PROSPECTIVE INVESTORS AND THEIR PURCHASER
REPRESENTATIVES MAY HAVE, AT THE OFFICES OF THE COMPANY AT ANY REASONABLE HOUR,
AFTER REASONABLE PRIOR NOTICE, ACCESS TO THE MATERIALS SET FORTH IN THE RULE,
ANY OTHER MATERIALS RELATING TO THE COMPANY, THE OFFERING DESCRIBED IN THIS
MEMORANDUM OR ANYTHING SET FORTH IN THIS MEMORANDUM WHICH THE COMPANY CAN OBTAIN
WITHOUT UNREASONABLE EFFORT OR EXPENSE. SEE "ADDITIONAL INFORMATION." NO PERSON
IS AUTHORIZED TO MAKE ANY REPRESENTATION WHICH IS NOT IN CONFORMITY WITH THE
INFORMATION CONTAINED HEREIN AND ANY SUCH REPRESENTATIONS SHALL NOT BE RELIED
UPON. ILLINOIS
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECRETARY
OF STATE OF ILLINOIS OR THE STATE OF ILLINOIS, NOR HAS THE SECRETARY OF STATE OF
ILLINOIS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PRIVATE PLACEMENT
MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER SECTION 5 OF THE
ILLINOIS SECURITIES ACT OF 1953. THE SECURITIES MAY NOT BE RESOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF TO ANY PERSON OR ENTITY UNLESS SUBSEQUENTLY REGISTERED
UNDER THE ILLINOIS SECURITIES ACT OF 1953 OR UNLESS AN EXEMPTION FROM
REGISTRATION THEREFROM IS AVAILABLE.
NEW JERSEY
- ----------
THESE SECURITIES ARE OFFERED IN RELIANCE ON AN EXEMPTION FROM
REGISTRATION UNDER THE NEW JERSEY UNIFORM SECURITIES LAW. THE SECURITIES HAVE
NOT BEEN REGISTERED UNDER SAID LAW AND MAY NOT BE RE-OFFERED FOR SALE,
TRANSFERRED OR RESOLD WITHOUT COMPLIANCE WITH THE REGISTRATION PROVISIONS OF
SAID LAW OR AN EXEMPTION THEREFROM. THE BUREAU OF SECURITIES OF NEW JERSEY HAS
NOT PASSED UPON THE ACCURACY OR COMPLETENESS OF THIS MEMORANDUM AND DOES NOT
RECOMMEND OR ENDORSE THE PURCHASE OF THE UNITS.
26
<PAGE>
NEW YORK
- --------
THIS CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DOES NOT KNOWINGLY
CONTAIN ANY UNTRUE STATEMENT OF A MATERIAL FACT OR KNOWINGLY OMIT TO STATE A
MATERIAL FACT NECESSARY TO MAKE THE STATEMENTS MADE, IN THE LIGHT OF THE
CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING. IT CONTAINS A FAIR
SUMMARY OF THE MATERIAL TERMS OF DOCUMENTS PURPORTED TO BE SUMMARIZED HEREIN.
THIS MEMORANDUM HAS NOT BEEN FILED WITH OR REVIEWED BY THE ATTORNEY
GENERAL OF THE STATE OF NEW YORK PRIOR TO ITS ISSUANCE AND USE. THE ATTORNEY
GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON NOR ENDORSED THE MERITS OF
THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
ALL NEW YORK INVESTORS WILL BE REQUIRED TO REPRESENT THAT THEY
UNDERSTAND THAT THE OFFERING MAY BE MADE ONLY TO THOSE NON-ACCREDITED RESIDENTS
OF NEW YORK WHO HAVE A NET WORTH (ALONE OR JOINTLY WITH A SPOUSE, BUT EXCLUSIVE
OF HOME, FURNISHINGS AND AUTOMOBILES) OF THREE TIMES THE AMOUNT OF THE
INVESTMENT AND AN ADJUSTED GROSS INCOME (ALONE OR JOINTLY WITH A SPOUSE, BUT
EXCLUSIVE OF HOME, HOME FURNISHINGS AND AUTOMOBILES) OF FIVE TIMES THE AMOUNT OF
THE INVESTMENT.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT
AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO THE REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
THE COMPANY WILL ONLY ACCEPT SUBSCRIPTIONS FROM ACCREDITED INVESTORS IN
THIS STATE FOR WHOM THE INVESTMENT IS SUITABLE UPON THE BASIS OF FACTS DISCLOSED
BY THAT INVESTOR IN THE SUBSCRIPTION DOCUMENTS, AND IF THE INVESTOR EITHER ALONE
OR WITH ITS REPRESENTATIVE HAS SUCH KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND
BUSINESS MATTERS THAT IT IS CAPABLE OF EVALUATING THE MERITS AND RISKS OF THE
PROSPECTIVE INVESTMENTS.
ALL STATES
- ----------
THE PRESENCE OF A LEGEND FOR ANY GIVEN STATE REFLECTS ONLY THAT A
LEGEND MAY BE REQUIRED BY THAT STATE AND SHOULD NOT BE CONSTRUED TO MEAN AN
OFFER OR SALE MAY BE MADE IN ANY PARTICULAR STATE. THIS MEMORANDUM MAY BE
SUPPLEMENTED BY ADDITIONAL STATE LEGENDS. IF YOU ARE UNCERTAIN AS TO WHETHER OR
27
<PAGE>
NOT OFFERS OR SALES MAY BE LAWFULLY MADE IN ANY GIVEN STATE, YOU ARE ADVISED TO
CONTACT THE COMPANY FOR A CURRENT LIST OF STATES IN WHICH OFFERS OR SALES MAY BE
LAWFULLY MADE.
PRIOR TO ANY SALE HEREUNDER, EACH POTENTIAL INVESTOR AND HIS AUTHORIZED
REPRESENTATIVE(S), IF ANY, ARE INVITED TO ASK QUESTIONS AND OBTAIN ADDITIONAL
INFORMATION FROM THE AUTHORIZED REPRESENTATIVES OF THE COMPANY CONCERNING THE
TERMS AND CONDITIONS OF THIS OFFERING, THE COMPANY AND ANY OTHER RELEVANT
MATTERS (INCLUDING BUT NOT LIMITED TO ADDITIONAL INFORMATION TO VERIFY THE
ACCURACY OF THE INFORMATION INCLUDED HEREIN), TO THE EXTENT THE COMPANY
POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR
EXPENSE. CONTACT MR. GEORGE LEE, MCGLEN MICRO INC., 3002 DOW AVENUE, SUITE 212,
TUSTIN, CALIFORNIA 92780.
28
<PAGE>
PREPARATION BY COMPANY
The information contained in this Memorandum has been supplied and
prepared by McGlen Micro, Inc. and its officers. Neither counsel for the Company
nor the Placement Agents have verified this information and such counsel has
acted only as scriveners to convey the information provided by the Company at
the request of the Company.
GENERAL INFORMATION
Prospective investors should not construe the contents of this
Memorandum or any written or oral communications from McGlen, the Placement
Agent or their employees, agents or affiliates, as tax, legal, investment or
other advice. Each prospective investor must rely solely upon the investor's own
representatives as to tax, legal, accounting, investment and related matters
concerning an investment in the Company and a purchase of Units.
The obligations of the parties to this transaction are set forth in and
governed by the documents referred to in this Memorandum. No person is
authorized to give any information or to make any statement, representation or
warranty not contained in this Memorandum. Any such information may not be
relied upon as having been authorized by the Company. Prospective investors
should carefully review all of the information contained in this Memorandum and
each of the exhibits hereto, especially the Risk Factors, and consult the
Company with any further questions concerning the Company or the information
contained in this Memorandum.
The Company's books and records are kept at the executive offices of
the Company at 3002 Dow Avenue, Suite 212, Tustin, 92780. Each prospective
investor or the investor's authorized representative may review these documents
at any reasonable time. The Company's officers will answer any questions raised
by prospective investors or their authorized representatives in connection with
this Offering and will provide the investors with any additional related
information available to such officers, or such additional related information
that can be acquired without unreasonable effort or expense.
Neither the delivery of this Memorandum nor any sales of the Units
under any circumstances create an implication that there has been no change in
the matters discussed in this Memorandum since the date hereof.
CONFIDENTIAL INFORMATION
This Memorandum and all matters contained herein are strictly
confidential and proprietary to the Company. Each person receiving a copy of
this Memorandum, by accepting such delivery, shall be deemed to have agreed not
to disclose to others or to use any of the information herein contained except
for purposes of evaluating with the investor's financial advisor an investment
in the Units and to return same to the Company if the investors elect not to
subscribe.
1
<PAGE>
INVESTOR SUITABILITY STANDARDS
An investment in the Units should be considered to be speculative,
involves a high degree of risk, and is suitable only for prospective purchasers
who have sufficient financial means to bear such risks, who have other
substantial assets to provide for current needs and future contingencies and
therefore have no need for immediate liquidity with respect to this investment,
and who could withstand a total loss of this investment. No registration
statement has been or will be filed with the Commission in connection with the
offer and sale of the Units. Consequently, sales of the Units offered hereby
will be made only to prospective purchasers who are "accredited investors" as
that term is defined in Rule 501(a) of Regulation D promulgated under the Act.
Certain sales of the Units made outside the United States may be made in
reliance on Regulation S promulgated under the Act, to non-U.S. persons.
Subscribers purchasing Units offered in reliance upon Regulation S will be
required to execute a Regulation S Subscription Agreement, copies of which are
available upon request from the Company or the Placement Agent. Nonetheless,
suitability standards will be imposed as necessary to comply with the exemption
of this Offering from any applicable foreign, federal or state registration or
qualification requirements or for any other reasons the Company deems prudent.
The Company will require that each investor represents in writing that
the investor is an "accredited investor" within the meaning of Rule 501(a) of
Regulation D. Pursuant to Rule 501(a), an individual investor must either: (i)
have (along with a spouse) a net worth which exceeds $1,000,000 at the time of
the purchase; or (ii) have had an individual income in excess of $200,000 in
1997 and 1998 (or joint income with a spouse which exceeds $300,000) and have a
reasonable expectation of reaching the same income level (or joint income level)
in 1999. Accredited investors under Rule 501(a) also include: (i) any bank or
savings and loan association acting in its individual or fiduciary capacity, any
broker-dealer, any insurance company, investment company, business development
company, small business investment company or employee benefit plan (a) if the
investment decision is made by a fiduciary which is a bank, savings and loan
association, insurance company or registered investment advisor, or (b) if the
plan has total assets in excess of $5,000,000, or (c) if a self-directed plan,
the investment decisions are made solely by persons that are accredited
investors; (ii) any private business development company; (iii) any organization
under section 501(c)(3) of the Internal Revenue Code of 1986, as amended, a
corporation, a Massachusetts or similar business trust, or a partnership, not
formed for the specific purpose of acquiring the securities offered, with total
assets in excess of $5,000,000; (iv) any trust with assets in excess of
$5,000,000, not formed for the purpose of buying the securities, the purchase of
which is directed by a "sophisticated" investor; (v) any director or executive
officer of the Company; and (vi) any entity in which all equity owners are
accredited investors. In addition, various jurisdictions may have established
higher or additional suitability standards for their residents. The suitability
standards referred to above represent minimum suitability requirements for
prospective investors and the satisfaction of such standards by a prospective
investor does not necessarily mean that the Units are a suitable investment for
such prospective investor. The Company may make such further inquiry and obtain
such additional information as it deems appropriate with regard to the
suitability of prospective investors in order to comply with applicable state or
local laws, rules, regulations or otherwise.
2
<PAGE>
Each prospective investor must execute and deliver to the Company the
Subscriber Questionnaire and the Subscription Agreement attached hereto as
Exhibit "A" (the "Subscription Documents") in accordance with the procedure
described below. All U.S. investors must complete an IRS form W-9 and all
foreign investors must complete an IRS form W-8, copies of which are attached
hereto as Exhibit "B". The Subscription Documents will be relied upon by the
Company in accepting a prospective investor's subscription for the Units. The
Company, in its sole discretion, will have the right to require other documents
or to refuse any subscription for any reason without liability to the
subscriber.
In addition to meeting these standards pertaining to the economic
ability of the proposed investor to undertake the risks inherent in the purchase
of the Units, each prospective investor will also be required to represent in
writing, among other things, that such investor has either: (i) a pre-existing
business or personal relationship with the executive officers or directors of
the Company; or (ii) such knowledge and experience in financial and business
matters that such investor is capable of evaluating the merits and risks of an
investment in the Units and of making an informed investment decision, or has
retained an attorney, accountant or other financial or business advisor who is
able on behalf of the investor to evaluate the merits and risks of such an
investment and to make an informed investment decision with respect thereto. See
"TERMS OF THE OFFERING and RISK FACTORS."
EACH PROSPECTIVE INVESTOR SHOULD REALIZE THAT SATISFACTION OF THE
FOREGOING MINIMUM SUITABILITY STANDARDS DOES NOT NECESSARILY DETERMINE THAT AN
INVESTMENT IN THE UNITS IS APPROPRIATE FOR SUCH PERSON.
Each investor will also be required to represent that the Units are
being acquired for investment and not with any intention of making a
distribution or resale of the Units, and to agree to certain restrictions on
future transferability of the Units. For these reasons, a purchaser of the Units
must be willing and able to bear the economic risk of such an investment for an
indefinite period of time.
SUBSCRIPTION PROCEDURE
The execution of a Subscription Agreement constitutes a binding offer to
purchase the Units and an agreement to hold open the offer to purchase the Units
until the subscription is accepted or rejected by the Company. No subscriptions
will be valid unless accepted in writing by an officer of the Company.
Prospective investors who wish to invest must deliver the following items:
1. One originally executed Subscription Agreement and Subscriber
Questionnaire with all blanks completed (in the form attached hereto as Exhibit
"A");
2. A check payable to the order of "Boyd & Chang, LLP, Attorney Client
Trust Account "B", as Escrow Agent for McGlen Micro Inc., in the full amount of
the subscription.
3. A Form W-8 or a Form W-9 (in the form attached hereto as Exhibit
"B").
The completed Subscription Documents and the check for the full amount
subscribed should be returned to the Placement Agent. Wire transfers may be made
directly to the Escrow Agent at:
3
<PAGE>
Boyd & Chang, LLP Attorney-Client Trust Account "B"
National Bank of Southern California
4100 Newport Place, Newport Beach, California
Telephone: (949) 863-2300
ABA routing number 122239801, Acct. No. 04050207
The Proceeds will be held by the Escrow Agent in an non-interest bearing
account until a closing (a "Closing") of the Minimum Offering, at which time the
subscriptions accepted by the Company will be deposited into the Company's
operating account to be used in accordance with the purposes described herein.
Thereafter, the Company may continue to sell the Units until the earlier of the
sale of all the Units or October 15, 1999 (or any extension thereof at the
option of the Company). Upon the acceptance of each Subscription Agreement by
the Company: (i) the net proceeds will be delivered to the Company; and (ii) the
investor will become a holder of the Shares for which the Company has accepted
subscriptions.
EXECUTIVE SUMMARY
THE FOLLOWING IS A PARTIAL SUMMARY OF THIS MEMORANDUM AND IS INTENDED
ONLY FOR CONVENIENT REFERENCE AND SHOULD NOT BE CONSIDERED COMPREHENSIVE OR
COMPLETE. NO PROSPECTIVE INVESTOR SHOULD SUBSCRIBE FOR UNITS UNTIL THE INVESTOR
HAS CAREFULLY REVIEWED THE ENTIRE MEMORANDUM, INCLUDING RISK FACTORS AND ALL
EXHIBITS, AND HAS CONSULTED WITH THE INVESTOR'S PERSONAL, LEGAL, ACCOUNTING,
BUSINESS OR FINANCIAL ADVISORS.
The Company. McGlen Micro Inc., is a global Internet retailer of
computers, hardware and peripheral products, which services small offices/home
offices, technically oriented computer hardware users and corporate purchasers.
McGlen offers approximately 85,000 SKU's at its virtual superstore and that of
its subsidiary AccessMicro.com and currently has a customer list of over
170,000.
The Offering. The Company is offering up to 600,000 shares of Common
Stock in 10,000 Share Units at a price of $25,000 per Unit, for an aggregate
offering price of $1,500,000 (before paying commissions and the expenses of this
Offering). Upon the sale of the Minimum Offering of 40 Units, a closing will be
held and the Company will cause the Escrow Agent to disburse the Proceeds to the
Company after the payment of all commissions, fees and costs associated with
this Offering. Additional closings may be held from time to time until the
earlier to occur of the sale of all of the Units or the Termination Date. The
Units will be sold only to accredited investors. See "DESCRIPTION OF SECURITIES"
and "INVESTOR SUITABILITY STANDARDS."
Plan of Distribution. The Units are being offered on a "best efforts"
basis by Redstone Securities, Inc., and in certain instances at the discretion
of the Placement Agent through other participating NASD member firms. The
Placement Agent will be paid a commission of 10% from each Unit it sells.
Persons desiring to purchase Units will be required to complete, execute and
deliver the Subscription Documents to the Placement Agent. See "SUBSCRIPTION
PROCEDURE."
Use of Proceeds. Assuming that either the minimum or maximum number of
Units are sold, the net proceeds to be received by the Company from the sale of
the Units are estimated to be approximately $900,000 to 1,350,000, after
deducting commissions but prior to deducting the expenses connected with this
Offering. The net proceeds will be used for the continued implementation of the
Company's business plan, sales and marketing, website enhancement and general
working capital until the close of the Company's proposed merger with Adrenalin.
See "USE OF PROCEEDS."
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The Offering
Issuer: McGlen Micro Inc., a California corporation.
Securities Offered: Up to 600,000 shares of Common Stock
Purchase Price: $25,000 per Unit ($2.50 per Share)
Aggregate
Offering Price: $1,500,000 (600,000 Shares)
Use of Proceeds: The Company will use the net proceeds for sales,
marketing, website enhancement and general working
capital. See "USE OF PROCEEDS."
Capital Structure: The Company is authorized to issue 50,000,000
shares of Common Stock, no par value, and has
25,770,000 shares of Common Stock outstanding.
Information Rights: The Company will furnish holders of the
Units with annual financial statements together
with such information and commentary by management
as is usual and customary. The holders of the
Units will also be entitled to receive all other
information provided by the Company to the other
holders of Common Stock.
Voting Rights: Each share of Common Stock shall have one vote.
Risk Factors: The Units and the Common Stock comprising the
Units are subject to numerous and substantial
risks, some of which are described in this
Memorandum. See "RISK FACTORS."
Investor Suitability: The Units will be offered and sold only to
accredited investors. Standards: See "INVESTOR
SUITABILITY STANDARDS."
Offering This Offering will terminate on the earlier of:
(i) the sale of all of the Termination Date:
Units; (ii) the termination of this Offering by
the Company; or (iii) October 15, 1999, unless
extended by the Company. See "SUBSCRIPTION
PROCEDURE."
The preceding summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information appearing elsewhere in
this Memorandum. Prospective investors will be required to represent to the
Company that they have read this Memorandum in its entirety prior to the sale of
any Units to the prospective investor.
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McGlen Micro Inc.
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RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE IN NATURE AND INVOLVE A
HIGH DEGREE OF RISK. THEY SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO
LOSE THEIR ENTIRE INVESTMENT IN THE COMPANY. THEREFORE, EACH PROSPECTIVE
INVESTOR SHOULD, PRIOR TO PURCHASE, CONSIDER VERY CAREFULLY THE FOLLOWING RISK
FACTORS, AS WELL AS ALL OTHER INFORMATION SET FORTH ELSEWHERE IN THIS
MEMORANDUM.
Dependence on the Internet; Risks Associated with Evolving Market
McGlen's future success is substantially dependent on the continued
growth in the use of the Internet. The Internet is relatively new and is rapidly
evolving. The Company's business would be adversely affected if Internet usage
does not continue to grow. Internet usage may be inhibited for a number of
reasons, such as:
o the Internet infrastructure may not be able to support the demands
placed on it or its performance and reliability may decline as
usage grows;
o security and authentication concerns with respect to transmission
over the Internet of confidential information, such as credit card
numbers and attempts by unauthorized computer users ("hackers") to
penetrate online security systems; and
o privacy concerns, such as those related to the placement by
websites of certain information to gather user information, known
as "cookies," on a user's hard drive without the user's knowledge
or consent.
The Company's market is characterized by rapidly changing technologies,
evolving industry standards, frequent new service introductions and changing
customer demands. To be successful, the Company must adapt to rapidly evolving
markets by introducing new services to address the customers' changing demands.
The Company's business, results of operations and financial condition could be
materially affected if it incurred significant costs to adapt, or cannot adapt,
to these changes. Due to the rapidly changing nature of the Internet business,
the Company may be subject to other unknown risks, now and in the future.
Potential Liability for Content and Products Sold Over the Internet
The Company could be exposed to liability for third-party information
that may be accessible through the Company's website. Such claims might assert,
among other things, that, by directly or indirectly providing links to websites
operated by third parties, the Company could be liable for copyright or
trademark infringement or other wrongful actions by such third parties through
such websites. It is also possible that if any third-party content information
provided on the McGlen websites contains errors, consumers might make claims
against McGlen for losses incurred in reliance on such information.
The Company may also enter into agreements with other companies under
which any revenue that results from the purchase of services through direct
links to or from the Company's website is shared. Such arrangements may expose
the Company to additional legal risks and uncertainties, including local, state,
federal and foreign government regulation and potential liabilities to consumers
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McGlen Micro Inc.
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of these services, even if the Company does not directly provide the services.
There is no assurance that any indemnification provided to McGlen in its
agreements with these parties, if available, will be adequate.
Even if any of the possible claims referred to above does not result in
liability to McGlen, the Company could incur significant cost in investigating
and defending against such claims. The imposition of potential liability for
information carried on or disseminated through the Company's system could
require it to implement measures to reduce its exposure to such liability, which
might require the expenditure of substantial resources or limit the
attractiveness of the Company's services to consumers, manufacturers, retailers
and others.
The Company may not be able to obtain and maintain adequate insurance.
The Company's general liability insurance may not cover all potential claims to
which it may be exposed and may not be adequate to indemnify claimants for all
liability that may be imposed. Any imposition of liability that is not covered
by insurance or is in excess of insurance coverage could have a material adverse
effect on the Company's business, results of operations and financial condition.
Risks Associated with Entry into New Business Areas
McGlen may choose to expand operations by developing new websites,
promoting new or complementary products or sales formats, expanding the breadth
and depth of products and services offered or expanding the Company's market
presence through relationships with third parties. The Company may also pursue
new acquisitions or investments. If the Company continues to acquire additional
competitors or other companies, it could face difficulties in assimilating
personnel and operations. In addition, key personnel of the acquired company
might decide not to work for McGlen. Any new business or website launched by the
Company not favorably received by consumers could also damage the reputation of
the Company or its brands. The lack of market acceptance of such efforts or the
inability to generate satisfactory revenues from such expanded services or
products to offset their cost could have a material adverse effect on the
Company's business, results of operations and financial condition.
Voting Control by the Officers and Directors of the Company's Common Stock
The Company's executive officers and directors beneficially own
substantially all of the outstanding shares of Common Stock and assuming the
Maximum Offering is sold, will continue to own over 75% of the outstanding
shares of Common Stock. The Company's officers and directors currently are, and
in the foreseeable future will continue to be, in a position to control the
Company by being able to nominate and elect the Company's Board of Directors.
The Board of Directors establishes corporate policies and has the sole authority
to nominate and elect the Company's officers to carry out those policies.
Prospective investors therefore will have limited participation in the Company's
affairs.
Financial Burden on Investors; Dilution
The Company's present shareholders acquired a controlling interest in
the Company at a nominal cost, which is substantially less than that which the
investors in this Offering will pay for the Shares. A significant part of the
financial risk of the Company's proposed activities will be borne by the
investors who purchase the Units, while certain management, business partners
and existing shareholders stand to realize benefits from significant stock
ownership. Investors in this Offering will pay substantially more per Share than
certain existing shareholders paid for their shares. Upon the completion of this
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McGlen Micro Inc.
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Offering, investors in this Offering will incur a substantial immediate dilution
in the per Share tangible book value of their Shares.
Competitive Market for Technical Personnel and Retention of Key Employees
The Company's success depends in part on its ability to attract, hire,
train and retain qualified managerial, technical and sales and marketing
personnel, particularly its co-founders, Mike Chen and George Lee, its Chief
Marketing Officer, Robert Brown, its Vice President of Business Development,
Alex Chen and its Chief Information Officer, David Chou. The loss of any of
these individuals could have a material adverse effect on the Company's
business, results of operation and financial condition. The Company does not
have long-term employment agreements with many of its key personnel and
maintains no key person life insurance. Competition for such personnel is
intense. In particular, there can be no assurance that the Company will be
successful in attracting and retaining the technical personnel it requires to
conduct and expand its operations successfully. The Company's results of
operations could be materially adversely affected if the Company is unable to
attract, hire, train and retain qualified personnel.
Limited Operating History
McGlen was founded in May 1996 and began retailing computer components
and accessories on the Internet. Accordingly, there is a limited operating
history upon which to base an evaluation of the Company and its business and
prospects. The Company's business and prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in new and rapidly
evolving markets such as electronic commerce. Such risks for McGlen include a
dependence on key vendors for merchandise, an evolving and unpredictable
business model, management of growth, the Company's ability to anticipate and
adapt to a developing market, development of equal or superior Internet retail
operations by competitors, and the ability to identify, attract, retain and
motivate qualified personnel. To address these risks, the Company must, among
other things, continue to expand its vendor channels and buyer resources, manage
product obsolescence and pricing risks, maintain its customer base and attract
significant numbers of new customers, respond to competitive developments,
implement and execute successfully its business strategy and continue to develop
and upgrade its technologies and retailing services. There can be no assurance
that the Company will be successful in doing what is required to address these
risks. A substantial reduction in merchandise availability would have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the Company historically has had relatively low
operating margins and plans to continue to increase its operating expenses
significantly in order to increase the size of its staff, enhance its website,
move to larger facilities, expand its marketing efforts to enhance its brand
image, increase its visibility on other companies' high traffic websites,
purchase larger volumes of merchandise, increase its software development
efforts, and support its growing infrastructure. As a result, McGlen could
experience losses in the future. Further, in view of the rapidly evolving nature
of the Company's business, the Company believes that period-to-period
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance.
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McGlen Micro Inc.
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Financial Uncertainty; Dependence on the Offering
McGlen does not have significant operating capital. Accordingly, the
Company is dependent upon the proceeds of the Offering to grow its operations,
further expand its infrastructure and personnel and conduct meaningful promotion
and advertising prior to its proposed merger with Adrenalin. Even if the Maximum
Offering is sold, the Company will be required to and currently plans to seek
additional financing. There can be no assurance that McGlen will be able to
raise additional capital if needed or, if such additional financing is
available, whether such financing can be secured on satisfactory terms or on
terms not dilutive to investors in this Offering.
Fluctuations in Operating Results
The Company's operating results have fluctuated in the past, and are
expected to continue to fluctuate in the future, due to a number of factors,
many of which are outside the Company's control. These factors include (i) the
Company's ability to attract new customers at a steady rate, manage its
inventory mix and the mix of products offered meet certain pricing targets,
liquidate its inventory in a timely manner, maintain gross margins and maintain
customer satisfaction, (ii) the availability and pricing of merchandise from
vendors, (iii) product obsolescence and pricing erosion, (iv) consumer
confidence in encrypted transactions in the Internet environment, (v) the
timing, cost and availability of advertising on other entities' websites, (vi)
the amount and timing of costs relating to expansion of the Company's
operations, (vii) the announcement or introduction of new types of merchandise,
service offerings or customer services by the Company or its competitors, (viii)
technical difficulties with respect to consumer use of the Company's websites,
(ix) delays in revenue recognition at the end of a fiscal period as a result of
shipping or logistical problems, (x) delays in shipments as a result of strikes
or other problems with the Company's delivery service providers or the loss of
the Company's credit card processor, (xi) the level of merchandise returns
experienced by the Company, and (xii) general economic conditions and economic
conditions specific to the Internet and electronic commerce. As a strategic
response to changes in the competitive environment, the Company may from time to
time make certain service, marketing or supply decisions or acquisitions that
could have a material adverse effect on the Company's quarterly results of
operations and financial condition. The Company also expects that in the future,
like other retailers, it may continue to experience seasonality in its business.
Reliance on Merchandise Vendors
The Company is entirely dependent upon vendors to supply it with
merchandise for sale through the Company's Internet sites. The availability and
pricing of merchandise is unpredictable. In 1998, a substantial percentage of
the Company's gross merchandise sales were derived from merchandise acquired
from a single provider, Ingram Micro. McGlen has no long-term contracts or
arrangements with its vendors that guarantee the availability of merchandise.
There can be no assurance that the Company's current vendors will continue to
sell merchandise to the Company or that the Company will be able to establish
new vendor relationships that ensure merchandise will be available for sale on
the Company's websites. There also exists a substantial risk that McGlen's
vendors might attempt to compete with the Company. The Company also relies on
many of its vendors to process and ship merchandise to customers. The Company
has limited control over the shipping procedures of its vendors, and shipments
by these vendors have often been subject to delays. Although most merchandise
sold by the Company carries a warranty supplied either by the manufacturer or
the vendor, and the Company is not obligated to accept merchandise returns, the
Company in fact has accepted returns from customers for which the Company did
not receive reimbursements from its vendors or manufacturers. If (i) the Company
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McGlen Micro Inc.
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is unable to develop and maintain satisfactory relationships with vendors on
acceptable commercial terms, (ii) the Company is unable to obtain sufficient
quantities of merchandise, (iii) the quality of service provided by such vendors
falls below a satisfactory standard, or (iv) the Company's level of returns
exceeds its expectations, the Company's business, results of operations and
financial condition will be materially adversely affected.
Reliance on Other Third Parties
In addition to its merchandise vendors, the Company's operation depends
on a number of third parties. The Company has limited control over these third
parties and no long-term relationships with any of them. The Company does not
own a gateway (connection) onto the Internet, but instead relies on an Internet
service provider to connect the Company's websites to the Internet. From time to
time, the Company has experienced temporary interruptions in its websites
connections and also its telecommunications access. Continuous or prolonged
interruptions in the Company's websites connections or in its telecommunications
access would have a material adverse effect on the Company's business, results
of operations and financial condition. The Company's operations depend on
operation systems, databases and servers and variety of software developed and
produced by, and licensed from, third parties. The Company has from time to time
discovered errors and defects in the software from these third parties and, in
part, relies on these third parties to correct these errors and defects in a
timely manner.
Risks of a Purchased Inventory Model
While in most cases McGlen has limited inventory and price risk because
it acts as a sales agent for vendors that retain title to the merchandise sold
by the Company, McGlen does purchase some of its merchandise from vendors,
thereby assuming the inventory and price risks of these products to be sold.
These risks are especially significant because much of the merchandise currently
sold by the Company (e.g., computer parts, peripherals and consumer electronics)
is characterized by rapid technological change, obsolescence and price erosion.
With McGlen's increasing reliance on purchased inventory, its success will
depend on its ability to liquidate the inventory rapidly through its sales, the
ability of its buying staff to purchase inventory at attractive prices relative
to the resale value, and its ability to manage customer returns and the
shrinkage resulting from theft, loss and misrecording of inventory. If the
Company is unable to liquidate its purchased inventory rapidly, or if the
Company's buying staff fails to purchase inventory at attractive prices, or if
the Company fails to predict with accuracy the resale prices for its purchased
merchandise, the Company may be forced to sell its inventory at a discount or at
a loss and the Company's business, results of operations and financial condition
would be materially adversely affected.
Competition
The electronic commerce market, particularly on the Internet, is new,
rapidly evolving and intensely competitive, and the Company expects competition
to intensify in the future. The Company currently or potentially competes with a
variety of other companies depending on the type of merchandise and sales format
offered to customers. These competitors include Amazon.com, Buy.com,
Outpost.com, Shopping.com/Compaq, Onsale.com and Dell. Most if not all of these
competitors currently sell products below cost in order to acquire market share.
Current and potential competitors have established or may establish cooperative
relationships among themselves or directly with vendors and suppliers to obtain
exclusive or semi-exclusive sources of merchandise. Accordingly, it is possible
that new competitors or alliances among competitors and vendors may emerge and
rapidly acquire market share. In addition, manufacturers might elect to
liquidate their products directly. Increased competition is likely to result in
10
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McGlen Micro Inc.
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reduced operating margins, loss of market share and a diminished brand
franchise, any one of which could materially adversely affect the Company's
business, results of operations and financial condition. Many of the Company's
current and potential competitors have significantly greater financial,
technical, marketing and other resources than the Company. As a result, they may
be able to secure merchandise from vendors on more favorable terms than the
Company, and they may be able to respond more quickly to changes in customer
preferences or to devote greater resources to the development, promotion and
sale of their merchandise than can the Company.
Management of Growth; Limited Senior Management Resources
The Company has rapidly and significantly expanded its operations and
anticipates that significant expansion of its operations will continue to be
required in order to address potential market opportunities. This rapid growth
has placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources. McGlen expanded from
13 employees as of December 31, 1997, to 34 employees as of December 31, 1998,
and 65 employees as of September 16, 1999. The Company's new employees include
certain key managerial and technical employees who have not yet been fully
integrated into the Company's management team, and the Company expects to add
additional key personnel in the near future. Increases in the number of
employees and the volume of merchandise sales have placed significant demands on
the Company's management, which includes only three executive officers. In order
to manage the expected growth of its operations, the Company will be required to
expand existing operations, particularly with respect to customer service and
merchandising, to improve existing and implement new operational, financial and
inventory systems, procedures and controls, including improvement of its
financial and other internal management systems on a timely basis, and to train,
manage and expand its already growing employee base. The Company also will be
required to expand its accounting staff. Further, the Company's management will
be required to maintain relationships with various merchandise vendors, freight
companies, warehouse operators, other websites and services, Internet service
providers and other third parties and to maintain control over the strategic
direction of the Company in a rapidly changing environment. There can be no
assurance that the Company's current personnel, systems, procedures and controls
will be adequate to support the Company's future operations, that management
will be able to identify, hire, train, retain, motivate and manage required
personnel or that management will be able to manage and exploit existing and
potential market opportunities successfully. If the Company is unable to manage
growth effectively, the Company's business, results of operations and financial
condition will be materially adversely affected.
Risks Associated with Technological Change; Dependence on the Internet
The Internet and electronic commerce industries are characterized by
rapid technological change, changes in user and customer requirements, frequent
new service or product introductions embodying new technologies and the
emergence of new industry standards and practices that could render the
Company's existing website and proprietary technology obsolete. The Company's
performance will depend, in part, on its ability to license leading
technologies, enhance its existing services, develop new proprietary technology
that addresses the increasingly sophisticated and varied needs of its
prospective customers, and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. The
development of websites and other proprietary technology entails significant
technical and business risks. There can be no assurance that the Company will be
successful in using new technologies effectively or adapting its websites and
proprietary technology to customer requirements or emerging industry standards.
If the Company is unable, for technical, legal, financial or other reasons, to
adapt in a timely manner in response to changing market conditions or customer
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McGlen Micro Inc.
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requirements, or if the Company's websites and proprietary technology do not
achieve market acceptance, the Company's business, results of operations and
financial condition would be materially adversely affected.
Government Regulation and Legal Uncertainties
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally and
laws or regulations directly applicable to access to or commerce on the
Internet. Due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing and characteristics
and quality of products and services. Furthermore, the growth and development of
the market for Internet commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies conducting
business over the Internet. The adoption of any additional laws or regulations
may decrease the growth of the Internet, which, in turn, could decrease the
demand for the Company's Internet sales and increase the Company's cost of doing
business or otherwise have an adverse effect on the Company's business, results
of operations and financial condition. Moreover, the applicability of existing
laws to the Internet in various jurisdictions governing issues such as sales
tax, libel and personal privacy is uncertain and may take years to resolve. In
addition, as the Company's service is available over the Internet in multiple
states and foreign countries, and as the Company sells to numerous consumers
residing in such states and foreign countries, such jurisdictions may claim that
the Company is required to qualify to do business as a foreign corporation in
each such state and foreign country. Any such new legislation or regulation, or
the application of laws or regulations from jurisdictions whose laws do not
currently apply to the Company's business, could have a material adverse effect
on the Company's business, results of operations and financial condition.
Risk of System Failure; Single Site
The Company's success is largely dependent upon its communications
hardware and computer hardware, substantially all of which are located at a
leased facility in Tustin, California. The Company's systems are vulnerable to
damage from earthquake, fire, floods, power loss, telecommunications failures,
break-ins and similar events. The Company does not presently have significant
redundant systems or a formal disaster recovery plan. A substantial interruption
in these systems would have a material adverse effect on the Company's business,
results of operations and financial condition. Despite the implementation of
network security measures by the Company, its servers are also vulnerable to
computer viruses, physical or electronic break-ins, deliberate attempts by third
parties to exceed the capacity of the Company's systems and similar disruptive
problems. Computer viruses, break-ins or other problems caused by third parties
could lead to interruptions, delays, loss of data or cessation in service to
users of the Company's services and products. The occurrence of any of these
risks could have a material adverse effect on the Company's business, results of
operations and financial condition.
Internet Commerce Security Risks
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. McGlen
relies on encryption and authentication technology licensed from third parties
to provide the security and authentication necessary to effect secure
transmission of confidential information. There can be no assurance that
advances in computer capabilities, new discoveries in the field of cryptography
or other events or developments will not result in a compromise or breach of the
algorithms used by the Company to protect customer transaction data. If any such
compromise of the Company's security were to occur, it could have a material
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McGlen Micro Inc.
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adverse effect on the Company's business, results of operations and financial
condition. A party who is able to circumvent the Company's security measures
could misappropriate proprietary information, credit card information of
customers or cause interruptions in the Company's operations. McGlen may be
required to expend significant capital and other resources to protect against
the threat of such security breaches or to alleviate problems caused by such
breaches. Concerns over the security of Internet transactions and the privacy of
users may also inhibit the growth of the Internet generally, and the web in
particular, especially as a means of conducting commercial transactions. To the
extent that activities of the Company or third party contractors involve the
storage and transmission of proprietary information, such as credit card
numbers, security breaches could expose McGlen to a risk of loss or litigation
and possible liability. There can be no assurance that the Company's security
measures will prevent security breaches or that failure to prevent such security
breaches will not have a material adverse effect on the Company's business,
results of operations and financial condition.
Risk of Capacity Constraints; Reliance on Internally Developed Systems; System
Development Risks
A key element of the Company's strategy is to generate a high volume of
traffic on, and use of, its websites. Accordingly, the satisfactory performance,
reliability and availability of the Company's websites, transaction-processing
systems and network infrastructure are critical to the Company's reputation and
its ability to attract and retain customers, as well as maintain adequate
customer service levels. The Company's revenues depend on the number of visitors
who shop on its websites and the volume of orders it fulfills. Any systems
interruptions that result in the unavailability of the Company's websites or
reduced order fulfillment process would reduce the volume of goods sold and the
attractiveness of the Company's product and service offerings. The Company may
experience periodic systems interruptions from time to time. Currently, the
Company is experiencing a significant increase in customer telephone inquiries
regarding pending orders resulting in an overload of its telephone system. The
telephone system requires major enhancements immediately to handle the current
telephone volume. Any substantial increase in the volume of traffic on the
Company's websites or the number of orders placed by customers will require the
Company to expand and upgrade further its technology, transaction-processing
systems and network infrastructure. There can be no assurance that the Company
will be able to accurately project the rate or timing of increases, if any, in
the use of its websites or timely expand and upgrade its systems and
infrastructure to accommodate such increases.
The Company uses a combination of industry supplied software and
internally developed software and systems for its websites, search engine, and
substantially all aspects of transaction processing, including order management,
cash and credit card processing, shipping and accounting and financial systems.
Any substantial disruptions or delays in any of its systems would have a
material adverse effect in the Company's business, prospects, financial
condition and results of operations.
Dependence of Continued Growth of Online Commerce
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of commerce by consumers. Rapid growth in
the use of and interest in the web, the Internet and other online services is a
recent phenomenon, and there can be no assurance that acceptance and use will
continue to develop or that a sufficiently broad base of consumers will adopt,
and continue to use, the Internet and other online services as a medium of
commerce. Demand and market acceptance for recently introduced products and
services over the Internet are subject to a high level of uncertainty. The
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McGlen Micro Inc.
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Company relies, and will continue to rely, on consumers who have historically
used traditional means of commerce to purchase merchandise. For the Company to
be successful, these consumers must accept and utilize novel ways of conducting
business and exchanging information. In addition, the Internet and other online
services may not be accepted as a viable commercial marketplace for a number of
reasons, including potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies and performance
improvements. To the extent that the Internet and other online services continue
to experience significant growth in the number of users, their frequency of use
or an increase in their bandwidth requirements, there can be no assurance that
the infrastructure for the Internet and other online services will be able to
support the demands placed on them. In addition, the Internet or other online
services could lose their viability due to delays in the development or adoption
of new standards and protocols required to handle increased levels of Internet
or other online service activity, or due to increased governmental regulation.
Changes in or insufficient availability of telecommunications services to
support the Internet or other online services could also result in slower
response times and adversely affect usage of the Internet and other online
services generally and the Company in particular. If use of the Internet and
other online services does not continue to grow or grows more slowly than
expected, or if the infrastructure for the Internet and other online services
does not effectively support growth that may occur, or if the Internet and other
online services do not become a viable commercial marketplace, the Company's
business, prospects, financial condition, and results of operations would be
materially adversely affected.
Year 2000
The Company will be interacting with certain computer programs in
connection with credit card transactions and programs used by the Company's
vendors and suppliers. These programs may refer to annual dates only by the last
two digits, e.g., "99" for "1999." Problems are anticipated to arise for many of
these programs in the year 2000 ("Year 2000 Problems") when "00" is mistaken for
"1900." The Company has taken this problem into account with respect to its own
internal programs and believes that its own internal software is not susceptible
to Year 2000 Problems. The Company will not, however, be certain that its own
systems are free from Year 2000 Problems until after the Millennium, when it
will be too late to correct undiscovered problems before they potentially
adversely effect the Company's operations. The Company has not made a formal
assessment of programs used by service providers or other third parties,
including the financial institutions processing credit card transactions, with
which the Company may have to interact, nor the Company's vulnerability which
may result from any such party's failure to remediate their own Year 2000
problems. There can be no guarantee that the systems of the Company or other
companies on which the Company relies will be converted timely and will not have
an adverse effect on the Company's systems and the Company's business,
prospects, financial condition and results of operations.
Availability of Merchandise; Vendor Credit for the Company
Although the Company's merchandising division maintains relationships
with vendors which it believes will offer competitive sources of supply, and
believes that other sources are available for most of the merchandise it will
sell or may sell in the future, there can be no assurance that suppliers will be
able to obtain the quantity of brand or quality of items that management
believes are optimum. The unavailability of certain product lines could
adversely impact the Company's operating results. Most of the Company's vendors
are not prepared to advance normal levels of credit to the Company. The
Company's current sales volumes are also limited by the gross account
limitations placed upon credit card sales by the Company's Visa/Mastercard and
other credit card service providers. An unwillingness to extend credit along
with a substantial increase in sales volume will cause the Company to exceed its
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McGlen Micro Inc.
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current credit limit, thus requiring additional amounts of capital to finance
the Company's operations, and reduce returns, if any, on invested capital.
Sales and Other Taxes
The Company does not currently collect sales or other similar taxes with
respect to shipments of goods to consumers into states other than California.
One or more states may seek to impose sales tax collection obligations on
out-of-state companies such as the Company, which engage in online commerce. In
addition, any new operation in states outside California could subject shipments
into such states to state sales taxes under current or future laws. A successful
assertion by one or more states or any foreign country that the Company should
collect sales or other taxes on the sale of merchandise could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
Restrictions on Transfer
Neither the Units nor the Shares contained in the Units may be resold
unless such sale is registered under the Act or qualifies for an exemption from
registration under the Act and all applicable state securities laws. The Units
and the Shares should be considered a suitable investment only for investors
whose financial position is such that they will be able to hold the Units and
the Shares for an indefinite period. Some state laws may impose additional
restrictions on transfer of the Units or the Shares.
Best Efforts Offering
This Offering is being made on a "best efforts" basis. No commitment
exists to purchase all or any part of the Units being offered hereby. There is
no guarantee that the Company will be able to sell any of the Units.
Limitation of Liability
The Company's Articles of Incorporation, as amended, provide that the
Company's directors shall not be personally liable for monetary damages to the
Company or its shareholders for a breach of fiduciary duty as directors, subject
to limited exceptions. Although such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission, the
presence of these provisions in the Articles of Incorporation, as amended, could
prevent the recovery of monetary damages against the Company's directors.
No Dividends
The Company has never paid any cash or other dividends on its common
stock. Payment of dividends is within the discretion of the Board of Directors
and will depend upon the Company's earnings, capital requirements and financial
condition, and other factors deemed relevant by the Board. For the foreseeable
future, the Board of Directors intends to retain future earnings, if any, to
finance its business operations and does not anticipate paying any cash
dividends with respect to the Common Stock.
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McGlen Micro Inc.
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Arbitrary Price
The price for the Units and the Shares has been determined arbitrarily
by the Company. The Offering price should not be regarded as an indication of
any future market price of the Company's capital stock and has no relation to
the value of the Company or the Common Stock.
Projections and Forward-Looking Statements
This Memorandum contains statements regarding matters that are not
historical facts and constitute forward-looking statements within the meaning of
Section 27A of the Act and Section 21E of the Securities Exchange Act of 1934.
These statements often refer to the Company's future plans, projections,
objectives, expectations and intentions and the assumptions underlying or
relating to these statements. These statements are generally identified by
reference to such words as "expects," "anticipates," "hopes," "plans,"
"intends," "believes," "estimates" and similar expressions evidencing future
intentions. Because the outcome of the events described in such forward-looking
statements is subject to risks and uncertainties and in the nature of
projections or predictions of future events which may not occur, actual results
may differ materially from those expressed in or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, it can
give no assurances that its expectations will be achieved. The level of future
revenues of the Company, and its profitability, if any, are impossible to
accurately predict due to uncertainty as to possible changes in economic, market
and other circumstances. Certain of the factors that could cause actual results
to differ from the Company's expectations are set forth in these Risk Factors.
Prospective investors are urged to consent with their own advisors with respect
to any revenue, financial, business and other projections contained herein.
New Software and Server
The Company has recently purchased and adopted a new server and related
software for accounting, inventory and purchasing control. A few of the
Company's employees is experienced in the operation of the new server and
software. Since the Company is dependent upon its server to support every aspect
of its business, if the Company is unable to quickly adapt to the new system, it
could have a material adverse effect upon the Company's results of operations.
Risks Related to the Adrenalin Merger
Uncertainty of Completion of Merger. The Company has priced the Units
and the Shares in this Offering based upon the expectation that the proposed
merger between the Company and Adrenalin Interactive, Inc. (Nasdaq Symbol: ADRN)
will be completed (the "Merger"). The consummation of the Merger is subject to a
number of conditions including, without limitation, approval by Nasdaq, the SEC
approval of a Merger proxy and approval by the shareholders of Adrenalin and the
completion of this Offering. If for any reason the Merger is not completed, the
Company will be required to pay back certain loans from Adrenalin (as described
herein "Adrenalin"). If the Merger is not completed, the Company will not have
any liquidity in its stock and may not have any other means to leverage its
revenues to obtain multiples achieved by publicly traded Companies. Such
illiquidity could have a material adverse effect upon the Company's ability to
raise additional capital. In addition, if the Merger is not consummated, the
attention and effort devoted to the integration of the two companies will have
significantly diverted management's attention from other significant operating
issues, and could have a material adverse effect on the Company's results of
operations. See "RECENT TRANSACTIONS."
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McGlen Micro Inc.
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The Market Price of Adrenalin Could Decline as a Result of the Merger.
Even if the Merger is consummated, the market price of Adrenalin's common stock
could decline as a result of the Merger if: (i) the integration of Adrenalin and
the Company is unsuccessful; (ii) the combined company does not achieve the
perceived benefits of the Merger as rapidly or to the extent anticipated by
financial analysts; or (iii) the Merger's financial effect on the combined
company is not consistent with the expectation of financial analysts.
Inability to Manage Public Company. The Management of the Company has
little experience in operating a public company or to the reporting and investor
and market relation responsibilities or market sensitivity attendant thereto.
There is no assurance that the Company's executive officers will be able to
manage the operations of a public company and the financially troubled
subsidiary of Adrenalin, Western Technologies. The failure to effectively manage
the combined entity could have a material adverse effect upon the Company's
results of operations.
Financial Impact of Merger. Each of Adrenalin and the Company has and
will continue to expend substantial sums on legal and accounting fee, investment
advisors, and consulting services and each company has dedicated substantial
management resources to the Merger. Adrenalin is not profitable and has
substantial debt and trade payables. The Company will inherit each of these
problems and liabilities. If the Company fails to generate substantial revenues
and earnings, the cost of the Merger and the liabilities of Adrenalin could have
a material adverse effect on the Company's results of operations.
FOR ALL OF THE REASONS STATED IN THESE RISK FACTORS AND OTHERS,
INCLUDING THOSE SET FORTH HEREIN, THESE SECURITIES INVOLVE A HIGH DEGREE OF
RISK. ANY PERSON CONSIDERING AN INVESTMENT IN THE SECURITIES OFFERED IN THIS
MEMORANDUM SHOULD BE AWARE OF THESE AND OTHER FACTORS SET FORTH IN THIS
MEMORANDUM. THESE SECURITIES SHOULD ONLY BE PURCHASED BY PERSONS WHO CAN AFFORD
A TOTAL LOSS OF THEIR INVESTMENT IN THE COMPANY AND HAVE NO IMMEDIATE NEED FOR A
RETURN OF OR ON THEIR INVESTMENT.
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McGlen Micro Inc.
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THE BUSINESS
The Company
McGlen Micro Inc. is a leading Internet operating company focused on
creating branded ecommerce marketplaces/ storefronts targeting business to
business and business to consumer markets. Formed in May 1996, McGlen has grown
into a leading Internet provider of desktop, and mobile computing products,
including hardware, software, peripherals, accessories and services targeting
technology oriented consumers and business professionals in small, medium and
large sized businesses.
McGlen currently operates two companies with two distinct marketplace/
storefronts, AccessMicro.com and McGlen.com, each providing a wide array of
computing products to business professionals and technology enabled consumers
respectively. Utilizing McGlen's two unique companies, and by leveraging the
Company's distribution network of over 85,000 stock keeping units ("SKUs"),
McGlen enables consumers to individually research, evaluate, compare, integrate
and purchase computing products and services based on their individual needs,
desires and motivations. McGlen's dynamically responsive online content and vast
choice of products creates a one-stop shopping capability for consumers, 24
hours a day, seven days a week.
The Company's online shopping experience is based on McGlen's unique and
aggressive selling strategy which focuses on creating an online experience.
McGlen provides multiple shopping capabilities based on individual preferences
and features, an easy to navigate interface, extensive product research,
integration and information tools and powerful search capabilities.
In order to build and enhance McGlen's corporate brand and the
individual brand positions for AccessMicro.com and McGlen.com, McGlen is
currently planning multiple marketing programs, advertisements and co-ops.
McGlen is currently entering into business development, marketing and
promotional alliances with content, website and media properties. McGlen will
also be re-branding McGlen.com in October 1999, as Techsumer.com. Techsumer.com
will replace McGlen.com and will continue to be positioned as the Online Market
for Technology Consumers. AccessMicro.com will continue to be positioned as the
Online Market for Business Professionals.
Revenue & Growth
The Company has grown rapidly since its inception in 1996 when it
focused primarily on memory products. Additional growth has been as the result
the acquisition of AccessMicro.com storefront. McGlen is currently finalizing
the reverse acquisition of Adrenaline Interactive (Nasdaq: ADRN). McGlen's
combined (accessmicro.com and McGlen.com) net sales revenues are projected to
reach $35.0 million for the year ending 1999, up nearly 100% from a revenue base
of $16 million for the year ended December 31, 1998.
McGlen's quarterly net sales revenue has increased consecutively from
Q3/98 to Q3/99 from $3.9 million, to $4.6 million, $6.1 million and $8.1
million, respectively. McGlen is currently acquiring new consumers at an average
rate of nearly 15,000 per month up from 8,000 in 1998, McGlen has current total
consumer list of over 170,000. McGlen has an average repeat consumer base of
nearly 28% for second time buyers which has increased from 19% in the year
ending 1998. For the year ending 2000 McGlen believes that the repeat purchase
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McGlen Micro Inc.
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rate will increase to an estimated 40%. McGlen companies are currently
experiencing an average transaction size of approximately $220 per order for
AccessMicro.com and $237 for McGlen.com.
McGlen's Market
According to Jupiter Communications, a prominent on-line market research
firm, the marketplace for online purchases by consumer in North America is
expected to grow from nearly $50.8 billion in 1998 to approximately $1.4
trillion by 2003. Of this total available market, Jupiter estimates that the
business to consumer portion will grow from $7.8 billion in 1999 to an estimated
$108 billion in 2003. Jupiter also estimates that the business to business
portion of this market will grow from $43 billion in 1999 to an estimated $1.3
trillion market by 2003. In the combined total available market, Jupiter
estimates that by 2003 the largest online revenue opportunity will be the sale
of computer products, communications products and consumer electronics,
estimated to be $14.5 billion in the North American market.
In order to capitalize on the additional market growth outside McGlen's
current market, McGlen will move to expand the Company's focus in the areas of
communications products and consumer electronics based entertainment products.
Business Strategy
McGlen recognizes the unique opportunity created by the Internet medium.
In the Company's effort to become the leading provider of technology products
for business professional and technology consumers, McGlen is focusing on the
following business strategy elements:
Create a Leading eCommerce Business Model, eCommerce Engine and Website
Experience.
McGlen has developed a proprietary business model which it believes
results in a profitable return based on multiple revenue points, ranging from
product sales through customized up-selling and cross selling of additional
product and services, to the primary purchase consideration and
advertising/merchandising subsidies. McGlen believes that in order to succeed in
the online retailing marketplace, the Company must focus on one basic concept:
the website based on the utilization of one part content and one part commerce.
McGlen believes this concept that this is key to creating a robust online
shopping experience that is more convenient, more responsive, more personal, and
more intuitive than provided in traditional brick and mortar settings. McGlen
utilizes a number of Internet technologies combined with its proprietary
database which it believes provides a unique purchasing experience for the
Company's consumers. McGlen's utilization of content creates an attractive
median for vendors and manufacturers to effectively merchandise their products
for sale, while providing McGlen with a revenue stream from merchandising and
promotional fees. Further, McGlen hopes that the high entertainment value of the
sites create a reason for consumers to return to the sites to see additional
offerings available. McGlen will continue to focus on re-marketing to consumers
once they have purchased by creating custom, personalized pages that greet
consumers and immediately offer special configurations based on their past
purchase and shopping behaviors.
Diversify & Integrate the Product Portfolio
By diversifying the product portfolio to focus on computing,
communications and entertainment products, McGlen's marketplaces are able to
offer consumers a greater variety of products and prices in categories that
consumer and business professionals commonly own. Each marketplace will appeal
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McGlen Micro Inc.
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to a certain consumer segment, providing consumers an in depth selection of name
brand, unbranded, private label, surplus and refurbished products. The extensive
product line of each marketplace/storefront serves to differentiate McGlen
companies from other e-tailers offering more than the "plain vanilla" selection
most competitors offer. In addition, since the majority of brand name products
come from major distributors, McGlen's portfolio of unbranded and refurbished
goods decreases its dependence on those suppliers and creates an opportunity for
higher gross margins. Currently, unbranded and refurbished items account for 23%
of net sales at average gross margins of 20%.
Further by focusing on products that have a level of interconnect
capability within one product silo, or category, such as the computing category,
where a piece of software can be sold to a desktop computing product, McGlen
marketplaces can provide additional up-sell attachments of products to the
consumers primary sale. This interconnectivity also exists between product
silos. This allows products such as communication products and computing
products to be integrated by the user online using the website in the
Techsumer.com marketplace or the AccessMicro.com marketplaces respectively.
Create World Class Brand
McGlen believes that both Techsumer.com and AccessMicro.com are well
positioned to become leading brand names in Internet commerce due to
management's experience in marketing, sales, distribution and development and
application of proprietary information technology. McGlen operates in a market
in which its brand names are critical to attracting high quality vendors and a
high level of consumer traffic. Accordingly, McGlen's strategy is to promote,
advertise and increase its marketplace/storefront visibility through a variety
of marketing and promotional techniques.
Develop Strategic Alliances
Since many of McGlen's online competitors are supplied by the same few
distributors such as Ingram Micro and Tech Data, McGlen believes that developing
strategic alliances with other distributors will prove to be an operational and
competitive advantage. In pursuit of this strategy, McGlen entered into a
strategic alliance with Synnex Information Technologies Inc. ("Synnex"), a
division of the largest distributor of computer related products in Taiwan. The
benefits of this alliance include higher margins, better terms of sale, and the
leveraging of the Synnex relationship to negotiate direct contracts with other
select manufacturers.
Increase Direct Supply from Device Manufacturers
Acquiring products directly from manufacturers is an additional
component to McGlen's model for profitability and growth. The benefits of
augmenting the distributor relationship with direct manufacturer relationships
are improved gross margins and better terms of sale. Direct relationships with
the manufacturer also serves as a competitive advantage given that the universe
of component manufacturers is large and fragmented. In choosing manufacturers
with whom to do business, McGlen selects only those with a proven reputation of
offering high quality products. McGlen currently acquires some of its battery,
memory, media, and printer accessory products directly from manufacturers.
Leverage Low Cost Infrastructure
McGlen does not incur normal expenses necessary to support a traditional
retail operation, which requires inventory, warehouse facilities, retail store
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McGlen Micro Inc.
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space and attendant personnel. McGlen establishes its vendor relationships where
it acts as a principal and arranges the order fulfillment, payment verification,
shipping functions and consumer support, which enables it to take advantage of
the savings from eliminating those traditional retail expenses.
Cross Merchandising and One to One Marketing
McGlen will utilize data mining techniques to analyze storefront traffic
and purchase history. This should allow McGlen to develop products and services
based upon consumer needs. By promoting purchases from repeat buyers, McGlen
simultaneously develops brand loyalty, one of the most powerful and cost
effective marketing assets. In addition, average order sizes have been
historically higher for repeat purchases than for first time purchases.
Currently, over 35% of McGlen's net sales are from repeat buyers. To increase
this number, McGlen will increase the frequency and appeal of its direct
marketing efforts to existing consumers. Furthermore, McGlen will increase the
interactivity of its website to provide a community-like experience, which it
believes will encourage consumers to return repeatedly.
Develop Broad Appeal Merchandising
McGlen's merchandising strategy is designed to appeal to all classes of
consumers. McGlen intends to become a one-stop, high technology shopping service
by virtue of its broad merchandise mix. McGlen expects to provide the Internet
shopper with merchandise selection and pricing unmatched by any other current
category leader.
Ensure High Consumer Satisfaction
McGlen believes buyers are initially attracted by bargain prices and
quality merchandise in a friendly and community enhanced environment.
Accordingly, McGlen intends to continue offering its consumers a wide array of
opportunities to buy desired merchandise at low prices through a visually
stimulating and user friendly interface which is rich in both product SKUs and
product description content. Not all products are purely sold at the lowest
price equation. McGlen will also focus on up-selling or cross-selling better
value products and better-featured products utilizing McGlen's unique shopping
experiences through each marketplace. In addition to online order tracking,
McGlen provides consumers online sales counseling through an innovative chat
mechanism, as well as pre and post sales support utilizing both e-mail and
telephone support.
Marketing Strategy
McGlen's primary marketing objectives are to:
o Increase viewer traffic to McGlen company marketplace/sites by
promoting the Techsumer.com and AccessMicro.com brand names;
o Promote repeat purchases through strong consumer loyalty,
satisfaction and experience, and
o Increase up-sell and cross-sell product attach rates for
incremental revenue opportunities.
McGlen intends to build strong consumer loyalty through the use of
consumer preference and behavioral data obtained as a result of monitoring its
consumers' activities online. In contrast to traditional direct marketing
efforts, McGlen's personalized notification services send consumers information
on updated prices, new product availability and new service enhancements. By
offering consumers a compelling and personalized value proposition, McGlen seeks
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McGlen Micro Inc.
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to increase the number of visitors who make a purchase, thus encouraging repeat
visits and purchases. Loyal, satisfied consumers also generate word of mouth
advertising and are able to reach thousands of other users through online
methods.
McGlen's advertising philosophy is based on measurable effectiveness. As
a traditionally profitable company, McGlen believes that growth of revenue
through marketing should not come at the expense of the bottom line. Therefore,
to increase consumer awareness and the consumer base, McGlen plans to focus its
marketing approach to one that encompasses multiple elements:
Build a virtual community
McGlen believes that by building a virtual community on its website, it
can attract more consumers and maintain higher levels of loyalty from these
consumers. McGlen intends to create an interactive, community like feel to the
online shopping experience. For example, consumers/members will be able to set
up profiles, provide product feedback, play interactive online games with each
other, and communicate in real-time chat rooms. The virtual community "feel"
will create an online shopping experience that attracts and retains consumers.
WebBased Advertising
McGlen will advertise online with other computer related sites and offer
product promotions through these sites. Each advertising project will be
evaluated with respect to cost, exclusivity, and exposure based on click through
ratios and conversion ratios.
Alliances with Major Websites
McGlen believes that although niche based advertising will attract
desired consumers who are more likely to purchase, the growth of the Internet
population will include general populations that have more diverse interests.
The intent of advertising and alliances with major portals is to target this
forthcoming general population, who can help build brand recognition for McGlen
through informal channels.
Linking programs
According to Word-Of-Net, an online service that measures the number of
links to a particular site, McGlen is reported to have approximately 15,500
links from other sites on the web as of September 1999. These links, most of
which are free to McGlen, allow potential consumers to simply click on the link
and become connected to McGlen's site from search engines, manufacturers' sites,
general interest sites, and community sites. McGlen intends to seek out link
affiliates as a cost-effective means of advertising.
Direct marketing to current consumers
McGlen currently sends promotional offers via E-mail to current
consumers. With the enhancement of the McGlen websites to accommodate consumer
profiles, McGlen will include one to one marketing efforts to the overall
program.
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McGlen Micro Inc.
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Competitive Overview
In the market for computer related products, McGlen faces competition
from a spectrum of category competitors. A consumer who wishes to purchase
high-tech products has the following options:
================================================================================
CATEGORY SAMPLE COMPETITORS
- --------------------------------------------------------------------------------
Traditional "brick and mortar" CompUSA and MicroCenter
retailers
- --------------------------------------------------------------------------------
Mail-order cataloguers CDW, MicroWarehouse and Insight
- --------------------------------------------------------------------------------
Online retailers Buy.com, Outpost.com, NECX and
Onsale.com/ Egghead.com
- --------------------------------------------------------------------------------
Manufacturers who sell directly Dell and Gateway
online
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Online service providers AOL and the Microsoft Network (MSN)
================================================================================
McGlen believes that traditional retailers and mail-order cataloguers
cannot effectively compete with the convenience, affordability and selection
offered by an online superstore like McGlen.com. With the number of online
purchasers growing at a compound annual rate of roughly 40%, offline sales are
sure to decrease as a percentage of the total market.
McGlen encounters the tightest competition from the flurry of other
online sites that offer computer products over the Internet, including Buy.com,
Outpost.com, Onsale.com and NECX.
Competition
The online commerce market is new, rapidly evolving and intensely
competitive. Current and new competitors can launch new sites at a relatively
low cost. In addition, the computer products retail industry is intensely
competitive. McGlen currently or potentially competes with a variety of other
companies. These competitors include (i) various traditional computer retailers
including CompUSA and MicroCenter, (ii) various mail-order retailers including
CDW, MicroWarehouse, Insight, PC Connection and Creative Computers, (iii)
various Internet-focused computer retailers including Egghead.com, software.net
Corporation and NECX Direct, (iv) various manufacturers that sell directly over
the Internet including Dell, Gateway, Apple and many software companies, (v) a
number of online service providers including America Online and the Microsoft
Network that offer computer products directly or in partnership with other
retailers, (vi) some non-computer retailers such as Wal-Mart that sell a limited
selection of computer products in their stores and (vii) computer products
distributors which may develop direct channels to the consumer market. Increased
competition from these and other sources could require McGlen to respond to
competitive pressures by establishing pricing, marketing and other programs or
seeking out additional strategic alliances or acquisitions, any of which could
have a material adverse effect on the business, prospects, financial condition
and results of operations of McGlen. McGlen believes that the principal
competitive factors in its market are brand recognition, selection, price,
variety of value-added services, ease of use, site content, fulfillment,
reliability, quality of search tools, customer service and technical expertise.
Many of McGlen's current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition, and significantly
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McGlen Micro Inc.
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greater financial, marketing and other resources than McGlen. In addition,
online retailers may be acquired by, receive investments from or enter into
other commercial relationships with larger, well-established and well-financed
companies as use of the Internet and other online services increases. McGlen is
aware that certain of its competitors have and may continue to adopt aggressive
pricing or inventory availability policies and devote substantially more
resources to website and systems development than McGlen. Increased competition
may result in reduced operating margins, loss of market share and a diminished
brand franchise, any of which would have a material adverse effect on McGlen.
Moreover, companies that control access to transactions through network access
or Web browsers currently promote, and will likely continue to promote
competitors of McGlen. There can be no assurance that McGlen will be able to
respond effectively to increasing competitive pressures or to compete
successfully with current and future competitors.
"Pure-Play" Online Retailers
Out of the "pure-play" e-commerce companies, the early market share
leaders are Beyond.com, Buy.com, Outpost.com, NECX and Onsale. These companies
often sell their products at near wholesale prices, and while they do offer a
competitive selection of items, they (with the exception of NECX) typically
purchase their products from the same group of major distributors such as Ingram
Micro and Tech Data. Thus, they are subject to a risky dependence on common
suppliers. Furthermore, these online superstores rely heavily on advertising
revenue to supplement their less profitable trade operations, and none of them
have demonstrated positive profits in any period in their financial history.
Recent New Entrants
The addition of direct manufacturers and web content providers to the
online superstore scene adds even more competition to an already crowded market.
Dell Computer, with the help of IBM, has launched Gigabuys.com, a superstore
that will offer roughly 30,000 SKUs. Gateway, with the help of NECX, has
developed SpotShop.com, an online outlet that will offer Gateway and third-party
offerings. Other new entrants include Compaq and Microsoft.
The threat of direct online selling from the major computer distributors
such as Ingram Micro and Tech Data also presents a challenge. While these
distributors are currently operating only in the indirect channel, the threat of
eroding margins and increased competition could force them to enter the direct
channel. This would create an opportunity for online retailers that are able to
forge direct relationships with manufacturers, eliminating the distributor.
Competitive Positioning
McGlen realizes the challenges faced by the dynamic competitive
landscape and believes that it can establish a significant portion of the online
retailing market by following its core strategy of operating a network of
high-margin, niche market specialty stores. Unlike other "pure-play" e-commerce
companies, McGlen will offer online product expertise and assistance through its
segmented specialty stores and virtual community experience, ultimately
providing the customer a higher level of service, a greater selection and added
convenience. On the operational front, McGlen will seek to continue to establish
more lucrative contracts and alliances with manufacturers and distributors.
Additionally, McGlen has the advantage of having a profitable operating history,
unlike most of the large online retailers who have yet to turn a profit in any
given period.
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McGlen Micro Inc.
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In response to the threat posed by the large manufacturers and
distributors who are eager to establish a superstore presence online, McGlen
intends to continue to offer a broad selection of higher-margin unbranded
products to supplement its brand-name items with the aim that this will
differentiate its product portfolio from the brand name manufacturers and
distributors. Furthermore, McGlen intends to continue to expand on the number of
direct relationships with other manufacturers and distributors (e.g. Synnex, the
U.S. subsidiary of one of the largest distributor in Taiwan).
Offices
McGlen operates McGlen.com and AccessMicro.com from its principal
executive offices, located at 3002 Dow Avenue, Suite 212, Tustin, CA 92780, Tel:
(949) 851-8078. These offices consist of approximately 4,058 square feet of
office. McGlen has four years remaining on a five year lease. The monthly rent
is $3,490. McGlen also leases approximately 2,000 square feet of office space in
Irvine, California, from which McGlen operates AMT Component, Inc. under a three
year lease which expires in July 13, 2001. McGlen pays $2,200 per month.
McGlen's current facilities are inadequate for its current size. McGlen intends
to use part of the proceeds to move to a larger facility. The Company is
presently searching for a facility of approximately 25,000 square feet. The
Company anticipates that the monthly rent on such a facility will be
approximately $25,000 per month and that the facility will be adequate to meet
the Company's needs for the foreseeable future.
Proprietary Rights
McGlen regards its copyrights, trademarks, trade dress, trade secrets,
and similar intellectual property as critical to its success. McGlen intends to
rely on trademark and copyright law, trade secret protection and confidentiality
or license agreements with its employees, customers, partners and others to
protect its proprietary rights. McGlen has filed an application for the
registration of its tradename "McGlen.com" with the United States Patent and
Trademark Office. Effective trademark, copyright, and trade secret protection
may not be available in every country in which McGlen's products are made
available through the Internet. McGlen is aware that third parties, particularly
competitors, have, from time to time, copied significant portions of McGlen's
website design and directory listings for use in competitive Internet services.
The distinctive elements of McGlen's web-sites may not be protectible under
copyright law. McGlen cannot guarantee the steps McGlen has taken to protect its
proprietary rights will be adequate.
Many parties are actively developing search, indexing, e-commerce and
other web-related technologies. McGlen believes that such parties will continue
to take steps to protect these technologies, including seeking patent
protection. Disputes regarding the ownership of such technologies are likely to
arise in the future. For example, McGlen is aware that a number of patents have
been issued in the areas of electronic commerce, online auctions, web-based
information indexing and retrieval, online direct marketing, common Web graphics
formats and mapping technologies. McGlen anticipates that additional third party
patents will be issued in the future. McGlen has not received any infringement
claims against McGlen in the form of letters, lawsuits and other forms of
communication. In the event that there is a determination that McGlen has
infringed such third-party patent rights, McGlen could incur substantial
monetary liability and be prevented form using the rights in the future.
25
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McGlen Micro Inc.
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Employees
McGlen has 65 employees of which 7 are administrative and 5 are
management. The Company is not a party to any collective bargaining agreements.
The Company believes that its relations with its employees are good.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the financial condition and results of
operations of McGlen and its wholly owned subsidiary AMT Component Inc. ("AMT")
should be read in conjunction with the Financial Statements, including the Notes
thereto, for each of McGlen and AMT and the Risk Factors, included elsewhere in
this Memorandum.
Overview
McGlen is a global Internet retailer of computer hardware, software and
peripheral products to the consumer and small office/home office marketplace.
With more than 85,000 SKUs, McGlen offers an online "superstore" at
www.McGlen.com and through its subsidiary AMT with AccessMicro.com, that provide
onestop shopping for domestic and international customers, 24 hours a day, seven
days a week. McGlen's online stores feature a fun, easy to navigate interface,
competitive pricing, extensive product information and powerful search
capabilities.
McGlen has grown rapidly since its inception in 1996. McGlen had net
income of $59,719 and $151,507 for the years ended December 31, 1998, and 1997,
respectively. Costs associated with the acquisition of AMT and the merger with
Adrenalin, caused McGlen to suffer a small loss in the first two quarters of
1999. AMT had net income of $131,410 for the period ended December 31, 1998 and
lost $21,500 in the first year of its operations which ended December 31, 1997.
Since computer retailers typically have low product gross margins,
McGlen's ability to regain profitability is dependent upon its ability to
increase net sales. To the extent that McGlen's marketing efforts do not result
in significantly higher net sales, McGlen will be materially adversely affected.
There can be no assurance that sufficient revenues will be generated from the
sale of its products to enable McGlen to regain profitability on a quarterly or
annual basis. In view of the rapidly evolving nature of McGlen's business and
its limited operating history, McGlen believes that period to period comparisons
of its operating results, including gross profit and operating expenses as
percentage of net sales, or similar results concerning AMT, are not necessarily
meaningful and should not be relied upon as an indication of future performance.
McGlen believes that the key factor affecting its long-term financial
success is its ability to attract and retain customers in a cost effective
manner. Currently, McGlen seeks to expand its customer base and encourage repeat
buying through internal and other sales and marketing programs. Such programs
include: (i) brand development, (ii) online and offline marketing and
promotional campaigns, (iii) linking programs with targeted McGlen sites, (iv)
personalized direct marketing programs designed to generate repeat sales from
existing customers, (v) strategic alliances with Internet content providers and
portal sites, and (vi) the development of a one-stop online marketplace.
McGlen expects to experience significant fluctuations in its future
operating results due to a variety of factors, many of which are outside its
26
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McGlen Micro Inc.
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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 upselling of high margin products, its sales mix will vary
from period to period and McGlen's gross margins will fluctuate accordingly.
McGlen's Results of Operations: for the Fiscal Years Ended December 31, 1998,
and 1997.
The following sets forth selected items from McGlen's statements of
operations and the percentages that such items bear to net sales for the fiscal
years ended December 31, 1998 ("FY98") and December 31, 1997 ("FY97").
Analysis of significant difference
<TABLE>
<CAPTION>
% of % of %
1998 Sales 1997 Sales Difference Difference
---- ----- ---- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales 11,525,307 100% 3,660,899 100% 7,864,408 215%
Cost of Sales 9,707,247 84% 2,991,119 82% 6,716,128 225%
Gross Profit 1,818,060 16% 669,780 18% 1,148,280 171%
Operating Expenses 1,778,646 15% 520,324 14% 1,258,322 242%
Income from operations 39,414 0 149,456 4% (110,042) (74%)
Interest income 5,105 .04% 752 .02% 4,353 579%
(expenses)
Other income 15,200 0% 1,299 .0% 13,901 1170%
Net income 59,719 1% 151,507 4% (91,788) (61%)
</TABLE>
FY98 compared with FY97
Net Sales: Net sales for the year ended December 31, 1998, increased by
$7,864,408 or 215% to $11,525,307 compared to $3,660,899 for the year ended
December 31, 1997. During the last quarter of 1997, McGlen completed and
introduced the McGlen.com website, which featured and promoted products from
Ingram Micro. The Ingram Micro name is more widely recognized and thus McGlen
turned towards a mass market concept. Prior to this, McGlen had focused on more
"niche" selling to specialty markets, primarily memory related. With the change
towards the end of 1997, McGlen experienced a large spike in volume during 1998.
Cost of Sales: Cost of sales for the year ended December 31, 1998,
increased by $6,716,128 or 225% to $9,707,247 compared to $2,991,119 for the
year ended December 31, 1997. McGlen was able to control costs due to the
27
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McGlen Micro Inc.
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ability to jump from one vendor to another based on pricing. McGlen had
established negotiated rates with some vendors, such as Battery Biz, however,
for the most part, McGlen relied on the bargaining power of its purchasing
department which was headed by George Lee. The incremental increase corresponds
to the increase in sales volume.
Operating Expenses: Operating expenses for the year ended December 31,
1998, increased by $1,258,322 or 242% to $1,778,646 compared to $520,324 for the
year ended December 31, 1997. The major components of McGlen's operating
expenses are analyzed as follows:
Advertising expenses for the year ended December 31, 1998, increased by
$131,584 or 148% to $220,524 compared to $88,940 for the year ended December 31,
1997. McGlen conducted most of its advertising on the Internet, primarily
through price comparison websites. McGlen increased advertising to increase its
brand name awareness. Many websites were acquired by larger companies, which
consolidated ownership and increased McGlen's advertising costs during 1998.
Credit charge expenses for the year ended December 31, 1998, increased
by $247,970 or 21 times to $259,608 compared to $11,638 for the year ended
December 31, 1997.
Shipping charges for the year ended December 31, 1998, increased by
$187,712 or 114% to $352,559 compared to $164,847 for the year ended December
31, 1997. This was primarily the result of increases in the volume of
purchases/sales of Ingram's products. Ingram dropship's to McGlen's customers
and charges McGlen for the shipping.
Payroll for the year ended December 31, 1998, increased by $339,814 or
285% to $458,863 compared to $119,049 for the year ended December 31, 1997. This
was due to increases in staffing required to meet McGlen's growth.
AMT Results of Operations: for the Year Ended December 31, 1998, and 1997
The following sets forth items from AMT's statements of operations and
the percentages that such items bear to net sales for the fiscal years ended
December 31, 1998 ("FY98") and December 31, 1997 ("FY97").
Analysis of significant difference
<TABLE>
<CAPTION>
% of % of %
1998 Sales 1997 Sales Difference Difference
---- ----- ---- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales 4,634,744 100% 1,503,040 100% 3,131,704 208%
Cost of Sales 3,818,691 82% 1,150,663 77% 2,668,028 232%
Gross Profit 816,053 18% 352,377 23% 463,676 132%
Operating Expenses 684,793 15% 373,877 25% 310,916 83%
Gain/Loss from operations 131,260 2.8% (21,500) (1%) 152,760 710%
Interest income (expenses) 150 - - - 150 100%
Other income - - - - - 0.0%
Net income 131,410 2.8% (21,500) (1%) 152,910 710%
</TABLE>
28
<PAGE>
FY98 compared with FY97
Net Sales: Net sales for the year ended December 31, 1998, increased by
$3,131,704 or 208% to $4,634,744 compared to $1,503,040 for the year ended
December 31, 1997. The increase was mainly attributed to the fact that fiscal
year 1998 was the first full year that AMT had on-line purchasing ability for
its customers. The Internet rendered AccessMicro.com much more visible to
potential customers.
Cost of Sales: Cost of sales for the year ended December 31, 1998,
increased by $2,668,028 or 231% to $3,818,691 compared to $1,150,663 for the
year ended December 31, 1997. AMT experienced an increase in the amount of
laptop memory sales and sales of other products.
Gross Profit: Gross profit ratio for the year ended December 31, 1998,
decreased by 5% to 18% as compared to 23% for the first quarter of 1998. This
was mainly due to the change in sales mix. AMT sold more items lower profit
margin than in 1997.
Operating Expenses: Operating expenses for the year ended December 31,
1998 increased by $310,916 or 83% to $684,793 compared to $373,877 for the year
ended December 31, 1997. The major components of AMT's operating expenses are
analyzed as follows.
Advertising expenses increased by $78,613 or 65% from $120,613 for the
year ended December 31, 1997, to $199,226 for the year ended December 31, 1998,
primarily due to advertising and promotional activity by AMT through the
Internet. The costs of Internet advertising are typically higher than
traditional print advertising previously utilized by AMT.
Credit services increased by $31,547 or 36% from $88,354 for the year
ended December 31, 1997, to $119,901 for the year ended December 31, 1998. The
increase was primarily due to increases in sales volume, despite the fact that
AMT was able to obtain a lower interest rate due to the increase in sales
volume.
Shipping charges increased by $137,225 or 216% from $63,359 for the
year ended December 31, 1997, to $200,584 for the year ended December 31, 1998.
AMT believes that this increase was in line with the increase in sales.
Salaries and wages increased by $106,866 or 258% from $41,421 for the
year ended December 31, 1997, to $148,287 for the year ended December 31, 1998.
Additional staffing was required to meet AMT's milestones for continued growth
and there was general wage increases at the end of 1998.
Web development charges increased by $51,049 or 100% from nil for the
year ended December 31, 1997. This was attributed to the increase in
expenditures for the improvements to AMT's website.
29
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McGlen Micro Inc.
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Consolidated McGlen and AMT Results of Operations: for the Six Months Ended June
30, 1999 and 1998
The following sets forth selected items from the consolidated McGlen
and AMT statements of operations and the percentages that such items bear to net
sales for the six months ended June 30, 1999, and June 30, 1998.
Period ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
% of % of %
1999 Sales 1998 Sales Difference Difference
---- ----- ---- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales 11,854,893 100% 5,996,738 100% 5,858,155 98%
Cost of Sales 9,978,868 84% 4,786,659 80% 5,192,210 108%
Gross Profit 1,876,025 16% 1,210,080 20% 665,945 55%
Operating Expenses 1,897,998 16% 849,886 14% 1,048,112 123%
Gain/Loss from operations (21,973) (.19%) 360,194 6.01% (382,167) (106%)
Interest income (expenses) 2,793 .05% (2,793) (100%)
Net income (21,973) (.19%) 362,987 6.05% (384,960) (106%)
</TABLE>
Net Sales: Net sales are comprised of product sales, net of returns and
allowances. Product sales are comprised of computer hardware, software and
accessories. Net sales increased by $5,858,155 or 98% from $5,996,738 for the
six months ended June 30, 1998 to $11,854,893 for the Six months ended June 30,
1999. McGlen believes that this increase was primarily a result of the
successful launch of its new website that featured Ingram Micro's products, an
increased drive towards a mass marketing concept and an increase customer base
and repeat purchases from existing customers.
Cost of Sales: Cost of sales consists of the cost of the merchandise
McGlen sells. Cost of sales increased $5,192,210 or 108% from $4,786,659 for the
six months ended June 30, 1998, to $9,978,868 for the six months ended June 30,
1999. This increase was the result of an increase in product sales volume.
Gross Profit: Gross profit ratio for the six months ended June 30,
1999, decreased by 4% to 16% as compared to 20% for the same period in 1998.
During 1998, McGlen made an attempt to expand the market share of its products
by lowering its selling price. Additionally, the decrease was attributable to
sales mix of products.
Operating Expenses: Operating expenses for the six months ending June
30, 1999, increased by $1,048,112 or 123% to $1,897,998 compared to $849,886 for
the same six month period in 1998. Major components of operating expenses are
analyzed as follows.
Credit services increased by $128,100 or 90% from $141,847 for the six
months ending June 30, 1998, to $269,947 for the six months ending June 30,
1999. Credit services charges are traditionally approximately two percent of
sales. McGlen considers the increase reasonable.
30
<PAGE>
McGlen Micro Inc.
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Shipping charges increased by $357,131 or 229% from $155,675 for the
six months ending June 30, 1998, to $512,806 for the six months ending June 30,
1999. McGlen believes that the increase was in line with the increase in sales.
Payroll increased by $260,302 or 131% from $198,515 in the first six
months of 1998, to $458,816 in the first six months of 1999. Additional staffing
was required to meet the goal for continued growth and there was a general wage
raise at the end of the year.
Professional services increased by $21,597 or 153% from $14,123 in
first six months of 1998, to $35,720 in first six months of 1999. Telephone
expenses as a percentage of sales are consistent with the prior period.
Advertising, Sales and Marketing: Advertising, sales and marketing
expenses consist primarily of fees paid to strategic partners, advertising and
promotion costs, sales, marketing and customer service personnel and related
expenditures, as direct selling expenses. For the six months ending June 30,
1999, advertising, sales and marketing expenses increased by $145,851 or 93%
from $157,631 for the six months ended June 30, 1998, to $303,482. As a
percentage of net sales, advertising, sales and marketing expense decreased from
2.63% for the six months ended June 30, 1998, to 2.56% for the six months ended
June 30, 1999. The dollar increases from quarter to quarter are primarily a
result of costs associated with increasing sales. McGlen intends to pursue more
branding and advertising campaigns and may enter into other marketing alliances
and, as a result, may experience increases in its sales and marketing expenses
in future periods.
Net Loss: As a result of the foregoing factors, McGlen incurred a net
loss of $21,973 for the six months ended June 30, 1999 and a net profit of
$362,987 for the six months ended June 30, 1998, respectively.
Liquidity and Capital Resources
As of June 30, 1999, McGlen had $330,738 in cash and cash equivalents
compared to $159,096 as of March 31, 1999. As of June 30, 1999, McGlen had
material capital commitments consisted of $137,254 in obligations outstanding
under capital leases.
McGlen has a $1.0 million "ceiling" credit agreement with Synnex
Information Systems, Inc.("Synnex"), pursuant to which Synnex may, at its
option, extend credit to us from time to time to purchase from Synnex. McGlen
has net terms of 30 days to pay Synnex for the products purchased. To date,
McGlen has paid all obligations within 30 days and has incurred no extra
expenses under this facility. All of McGlen's assets are pledged as security
interest to secure this facility. As of August 9, 1999, McGlen has an
outstanding balance of approximately $300,000 under this facility.
McGlen also has a $400,000 credit agreement with Reseller Credit
Corporation ("Reseller"), the asset financing company of Ingram Micro, Inc.
McGlen has net terms of 30 days to pay Reseller for the products purchased. To
date, McGlen has paid all notes within 30 days and has incurred no extra
expenses under this facility. All of McGlen's assets are pledged as security
interest to secure this facility. As of August 9, 1999, McGlen has an
outstanding balance of approximately $400,000 under this facility.
31
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McGlen Micro Inc.
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McGlen does not believe that its current cash and cash equivalents and
short term investments will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures for the next 12 months. If available
cash and cash generated from operations is insufficient to satisfy our liquidity
requirements, McGlen may seek to sell additional equity or debt securities or
obtain a credit facility. The sale of additional equity or convertible debt
securities could result in additional dilution to McGlen's and our stockholders.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us or McGlen, if at all.
Year 2000 Compliance
McGlen's State of Readiness: McGlen (and its subsidiary) uses a
significant number of computer software programs and operating systems in its
internal operations, including applications used in order processing, inventory
management, distribution, financial business systems and various administrative
functions. To determine the effect, if any, of the Year 2000 Problem on its
operations, it recently began an audit of its internal information systems in
August 1999. Upon completion of this process, McGlen hopes to determine that its
systems are able to correctly interpret the upcoming Year 2000 and whether
principal information systems correctly define the Year 2000 and thus, determine
if the Year 2000 Problem will have material impact on its systems. McGlen also
intends to contact third parties in an effort to determine the extent to which
the failure of these parties to timely identify and correct their own problems
associated with the Year 2000 Problem may affect McGlen. The third parties
include suppliers, strategic partners and key service providers (including
contract warehouse and McGlen hosting service providers). This review is ongoing
and will continue through the end of 1999.
Costs Associated with the Year 2000 Problem: To date the costs incurred
to conduct the review of McGlen's internal information systems and to identify
the impact of the Year 2000 Problem on third parties have been immaterial and
McGlen expects that the additional costs incurred to complete this review will
also be immaterial. The costs McGlen will incur to address the Year 2000 Problem
could increase materially if in completing the review of its internal
information systems, McGlen identifies noncompliant systems which must be
replaced or modified or if it identifies any other problem related to the Year
2000 Problem which must be addressed.
Risks Associated with the Year 2000 Problem: To the extent that McGlen
assessment fails to identify any noncompliant systems operated by McGlen or by
third parties, the Year 2000 Problem could have a material adverse effect on
McGlen's operations. Such failure could result in systems interruptions or
failures including the inability to process and ship orders, to collect credit
card payments and to provide effective customer service, which could cause the
loss of business and customers and could subject McGlen to claims for damages.
The severity of these possible problems would depend on the nature of the
problem and how quickly it could be corrected or an alternate implemented, which
is unknown at this time.
Contingency Plan: McGlen believes that its efforts towards Year 2000
compliance are behind schedule. McGlen will continue to monitor the need for a
contingency plan based on the results of its Year 2000 compliance review once
the review is completed.
32
<PAGE>
McGlen Micro Inc.
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Material Changes in Operations for the Six Months Ended June 30, 1999
On March 31, 1999, McGlen completed the acquisition of AMT Component,
Inc., which resulted in nearly a 100% increase in combined sale revenue. McGlen
issued approximately 17.5% of its outstanding shares to the shareholders of AMT
Component, Inc. McGlen also entered into an agreement to merge with us in the
same period. Both the acquisition and the merger caused McGlen to expend an
inordinate amount of resources on legal fees, accounting fees and consulting
fees.
Forward Looking Statements
This report may contain forward looking statements. Such statements are
based on McGlen's and AMT's management's current expectations and are subject to
a number of factors and uncertainties that could cause actual results or
outcomes to differ materially from those described in such forwardlooking
statements. These statements address or may address the following subjects: Year
2000 readiness, results of operations, customer growth and retention; expansion
of systems capacity and development of technology; losses or earnings; operating
expenses, including, without limitation, marketing expense and technology and
development expense; revenue growth; and international sales. We caution
investors that there can be no assurance that actual results, outcomes or
business conditions will not differ materially from those projected or suggested
in such forwardlooking statements as a result of various factors, including,
among others, its limited operating history, unpredictability of future revenues
and operating results, the continued growth of online commerce, risks associated
with international sales, system failure and capacity constraints and
competitive pressures. For further information, refer to the more specific Risk
Factors and uncertainties discussed throughout this report.
USE OF PROCEEDS
The Company currently intends to use the Proceeds of this Offering to
pay the anticipated expenses of this Offering and for the uses described below.
Assuming at least the Minimum Offering is sold, the net proceeds, after offering
commissions but before other expenses, are expected to be approximately $900,000
and assuming the Maximum Offering is sold the net proceeds are expected to be
approximately $1,350,000. It is anticipated that the Proceeds of this Offering
will fund the Company through the completion of the Adrenalin Merger if all of
the Units are sold. There is no assurance that the Company can complete the
Maximum Offering during that period. The anticipated uses of the net proceeds
are as follows:
<TABLE>
<CAPTION>
Assumes Sale of Assumes Sale of
Minimum Offering Maximum Offering
---------------- ----------------
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
General Operating Expenses $360,000 40% $400,000 40%
Marketing and Advertising $360,000 40% $600,000 44%
Engineering and Development $180,000 20% $350,000 26%
TOTAL $900,000 100% $1,350,000 100%
-------- ---- ---------- ----
</TABLE>
33
<PAGE>
McGlen Micro Inc.
- --------------------------------------------------------------------------------
o General Operating Expenses
The Company intends to allocate proceeds to hire additional operational
and support staff to facilitate the increase in volume. Funds will be used for
legal and merger expenses pertaining to the acquisition of Adrenaline
Interactive as well as associated facilities expansion. Additional funds will be
used as general operating capital for inventory and credit purposes.
o Marketing Expenses
The Company intends to use a large portion of these proceeds to create
and build brand awareness for the McGlen brands, including Techsumer.com and
AccessMicro.com. The Company will focus on targeted advertising activities in
the areas of print, online, and some radio campaigns including the creation of
targeted online promotions to acquire additional customers. Additional funds
will be used for P/R, market research, and the staffing of key marketing
positions.
o Engineering Expenses
The Company intends to use a large portion of these proceeds to design
and deploy its commerce engine to ensue that the required products can be
processed in accordance with the demand creation activities being developed by
the marketing department. Investments will be made in the areas of hardware,
software, hosting services, application development, and database management.
Additional funds will be used to staff key positions.
RECENT TRANSACTIONS
Acquisition of AMT
On March 15, 1999, the Company completed the acquisition of AMT
Component Inc. ("AMT"). Alex Chen, the Company's Vice President of Marketing was
the principal shareholder of AMT. Under the terms of the acquisition, the
Company exchanged 450,000 shares of the Company's common stock (calculated prior
to the Company's 10 for 1 stock split), which constituted approximately 17.5% of
the Company's common stock at the time of the acquisition for all of AMT's
assets. If the Company fails to conduct an IPO or merge with a public company by
December 31, 1999, the purchase interest paid to the former AMT shareholders
will increase to approximately 20% of the Company and the Company will be
required to issue an additional 255,000 shares of Common Stock (2,550,000
calculated after the 10 for 1 stock split) to AMT.
Merger with Adrenalin
On April 30, 1999, the Company announced the signing of a definitive
agreement for a reverse merger, pursuant to which the Company is to be acquired
by Adrenalin Interactive, Inc., a Nasdaq small cap company trading under the
symbol ADRN. Adrenalin currently operates a sole subsidiary, Western
Technologies, Inc. Western Technologies, Inc., is a developer of interactive
games and electronic toys based in Los Angeles, California. Under the terms of
the Agreement and Plan of Merger (the "Merger Agreement"), Adrenalin will
exchange approximately 87.5% of the shares of Adrenalin common stock for all of
the outstanding shares of the Company. One share of the Company's common stock
34
<PAGE>
McGlen Micro Inc.
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will be converted into approximately one share of Adrenalin's common stock. The
merger is expected to be completed in the fourth quarter of 1999, and is subject
to numerous conditions, regulatory approval, and approval by Adrenalin's
shareholders. The Merger Agreement is set forth in full in Adrenalin's Form 8-K,
dated April 30, 1999. Adrenalin completed its initial public offering in March
1996. Its operating results for the fiscal years ended June 30, 1998, and 1997,
included revenues of approximately $2,756,698 and $1,504,420, respectively, and
net losses of approximately $2,307,831 and $4,486,396, respectively.
Mackenzie Shea, Inc.
The Company was introduced to Adrenalin by Mackenzie Shea, Inc.
("MSI"). Pursuant to its engagement letter, MSI is entitled to receive up to
5.5% of the outstanding shares of Adrenalin, calculated after the Merger with
Adrenalin, for coordinating the merger with Adrenalin and advising and assisting
the Company in raising a minimum of $3,000,000. The Company is also required to
pay MSI $7,500 per month during the term of MSI's engagement with the Company.
Upon completion of the merger with Adrenalin, the Company's shareholders and
Adrenalin will experience dilution from the issuance of stock to MSI.
Loan From Adrenalin
Adrenalin loaned the Company $500,000 of the proceeds from Adrenalin's
approximately $2,000,000 private placement it completed in July 1999. The loan
is secured by a security interest in the Company's assets and bears interest at
the rate of 8% per annum. The loan is due 366 days from the date of the first
advance. The Company has paid $50,000 to Adrenalin as partial satisfaction to
the Loan.
Convertible Notes
On June 16, 1999, the Company borrowed $100,000 from Mr. Akira Miramino
and $100,000 from Mr. Masamitsu Ishihara. As a result of this transaction, the
Company executed two Convertible Promissory Notes with identical terms and
conditions whereby the Company promises 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 Common Stock at $2.00 per share any time prior to the Due
Date. The Common Stock issued upon conversion of the Notes will provide the
investors with "piggyback" registration rights. As a commission for arranging
the loans, McGlen paid Pacific Rim Access a commission of $20,000 and issued a
warrant to Pacific Rim Access to purchase 10,000 shares of McGlen's common stock
for $2.00 per Share, which shares also had "piggyback" registration rights,
subject to underwriter approval, limitation and lockups. Keiji Miyagawa is the
owner of Pacific Rim Access.
Issuance of Stock as Compensation to The Lin Law Corporation
The Lin Law Corporation started providing business consulting,
investment consulting and legal consulting services ot the Company in August
1998. Pursuant to the engagement agreement between The Lin Law Corporation and
the Company, the Company has the option to issue stock as compensation for
services rendered by The Lin Law Corporation. Due to cash flow issues, upon
35
<PAGE>
McGlen Micro Inc.
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presentation of the invoice for services rendered by The Lin Law Corporation
from August to December 1998, which amounted to approximately $76,000, the
Company elected to issue 75,000 shares of the Company's Common Stock in lieu of
cash as compensation for the services rendered by The Lin Law Corporation. The
Lin Law Corporation received registration rights and piggyback registration
rights to the 75,000 shares received.
Finance Transaction with Synnex Information Technologies, Inc.
On May 11, 1999, the Company 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 the
Company with favorable pricing terms on products Synnex distributes in the
United States and other markets serviced by the Company. In exchange, the
Company has provided to Synnex the following: (i) the option to elect a member
of the Company's Board of Directors; (ii) the ability to convert the entire
$1,000,000 into Common Stock at the price of $1.88 at any time for 3 years;
(iii) demand and "piggyback" registration rights; (iv) information rights; (v)
antidilution rights; and (vi) certain other favorable rights. The Company
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.
Brokers Fees for the Synnex Transaction
The Company paid a commission to Triangle Associates, LLC, in the form
of warrants to purchase the Company's Common Stock at a discount of up to 25% of
the price of this Offering up to a maximum aggregate exercise price of $750,000,
at any time for 3 years. The Company has 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 is
payable in monthly installments within 1999. Steve Chen is the principal owner
and manager of Triangle Associates, LLC.
Agreement With First Securities Van Kasper
The Company has entered into an engagement agreement with First
Securities Van Kasper ("FSVK"), which provides that FSVK will use its reasonable
efforts to raise up to $10,000,000 for the Company after the Company's
completion of its proposed merger with Adrenalin (the "FSVK Placement"). FSVK
will receive a commission of 7% of the amount of the securities sold and a
warrant to purchase shares of the surviving parent equal to 7% of the Shares
sold at the same price as paid by the investors in the FSVK placement.
Recent Financing
In September 1999, The Company entered into an agreement with Pacific
Rim Access (the "PacRim Agreement") to immediately raise $800,000. Pursuant to
the PacRim Agreement, the Company sold 320,000 shares of Common Stock to a group
of Japanese investors for $2.50 per share, which shares will have "piggyback"
registration rights, subject to underwriter approval, limitations and lockups.
The Company has agreed to pay Pacific Rim Access a commission equal to 10% of
the purchase price paid for the shares for an aggregate commission of $80,000
and issue to Pacific Rim Access a warrant to purchase shares of Common Stock
equal to 10% of those sold to the investors or 32,000 shares of common stock.
The warrant will have an exercise price of $2.50 per share and the underlying
36
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McGlen Micro Inc.
- --------------------------------------------------------------------------------
shares will have "piggyback" registration rights subject to underwriter
approval, limitations and lockups. The placement was made in accordance with the
provision of Rule 506 promulgated under Regulation D of the Act.
Amended Articles of Incorporation
The Company has recently amended its Articles of Incorporation to
increase its authorized shares of Common Stock to 50,000,000 shares and to
declare a 10 for 1 stock split whereby each outstanding share of Common Stock
was converted into 10 shares of Common Stock.
37
<PAGE>
McGlen Micro Inc.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 22, 1999, including the sale by the Company of the Minimum Offering of
400,000 Shares and the Maximum Offering of 600,000 Shares. See "RECENT FINANCIAL
TRANSACTIONS."
<TABLE>
<CAPTION>
As Adjusted
-----------
$1,000,000 $1,500,000
Minimum Maximum
September 22, 1999 Offering Offering
------------------ -------- --------
<S> <C> <C> <C>
Cash on Hand $916,130 $1,816,130 $2,266,130
Shareholders Equity, $77,310 $78,510 $79,110
Common Stock, no par
value; 50,000,000 shares
authorized; 25,770,000 shares
issued and outstanding, actual;
26,170,000 shares as adjusted,
minimum; 26,370,000 shares as
adjusted, maximum
Additional Paid in Capital $918,463 $1,817,263 $2,266,663
Retained Earnings $56,562 $56,562 $56,562
TOTAL CAPITALIZATION $1,052,335 $1,952,335 $2,402,335
========= ========= ==========
</TABLE>
The Company's current stockholders presently own 25,770,000 shares of
the Company's Common Stock for which many such shareholders have paid nominal
cash consideration.
38
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McGlen Micro Inc.
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DILUTION
After the Closing of this Offering with Proceeds to the Company in the
Minimum Offering of $1,000,000 and in the Maximum Offering of $1,500,000, the
investors in this Offering will have an immediate and substantial dilution in
their investment of up to approximately $2.42 per share and $2.41, per share,
respectively. Shareholders prior to this Offering would have a total increase of
up to approximately $.05 per share. See "RISK FACTORS."
<TABLE>
<CAPTION>
Assumes Sale Assumes Sale
of of
September 22, 1999 400,000 Shares 600,000 Shares
------------------ -------------- --------------
<S> <C> <C> <C>
Shares Outstanding 25,770,000 26,170,000 26,370,000
Net Equity $1,052,335 $1,952,335 $2,402,335
Equity Per Share $0.04 $0.08 $0.09
Price Per Share in this Offering....................................................................$2.50
Net Tangible Book Value Prior to....................................................$.04
this Offering
Increase Attributable to Investors .................................................$.03
in this Offering (Minimum Offering)
Increase Attributable to Investors .................................................$.05
in this Offering (Maximum Offering)
Proforma Net Tangible Book
Value Per Share After this
Offering
Minimum Offering...........................................................................$.08
Maximum Offering...........................................................................$.09
----
Dilution Per Share to Purchasers
in this Offering
Minimum Offering...........................................................................$2.42
=====
Maximum Offering...........................................................................$2.41
=====
</TABLE>
39
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McGlen Micro Inc.
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MANAGEMENT
The Company's Board of Directors currently consists of George Lee, Mike
Chen, Calbert Lai and Peter Janssen. The following table sets forth information
about the present directors and the senior officers of McGlen.
Name Age Office
---- --- ------
George Lee 28 Chief Executive Officer, Director
Mike Chen 26 President, Chief Technology Officer, Director
Calbert Lai 43 Director
Peter Janssen 57 Director
Robert Brown 34 Chief Marketing Officer
David Chou 28 Chief Information Officer
George Lee
Co-Founder and Chief Executive Officer, Director. George is responsible
for capital growth, organizational growth, development of sales and marketing,
and internal operations and finances for the Company. Prior to founding McGlen,
he held positions in sales at Eva Airways, and in freight forwarding at Immortal
Service. George graduated from the University of California at Irvine in 1993
and was conferred a bachelor of art degree in economics.
Mike Chen
Co-Founder and President, Chief Technology Officer, Director. Mike is
responsible for the development and coordination of proprietary information
technology applications, including the website storefront, internal logistics
applications, and financial reporting tools. Prior to founding McGlen, he was an
independent software programmer. Mike graduated from the University of
California at Berkeley in 1995 with a degree in Electrical Engineering and
Computer Science.
Robert Brown
Chief Marketing Officer. Robert joined the Company in June 1999, to
direct the Company's corporate and Internet marketing strategies. From 1997
until joining McGlen, he was Director of Global Sales and Marketing for Philips
Mobile Computing Group, developers of the Philips Nino and Velo. From 1995 to
1997, Robert was Director of Strategic Marketing for Mitsubishi Wireless
Communications, Inc., a leading global wireless handset manufacturer and creator
of the first Internet connected handset. From 1992 to 1995, he was the Global
Brand Manager for AST Computer/Samsung. He has also held senior marketing and
technical management positions with Seagate Technology, Panasonic and TRW Space
Systems. Robert received his Bachelor of Arts in Industrial Engineering from San
Diego State University.
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McGlen Micro Inc.
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Calbert Lai
Director. A 15-year veteran of Silicon Valley, Cal is the President,
Co-Founder and senior business strategist at I-Storm, a publically traded
e-commerce consulting firm. Prior to forming I-Storm and its subsidiary, Cal was
a founding partner and the Chief Executive Officer of Lai, Venuti and Lai
Advertising ("LVL"), where he provided strategic marketing and consulting
services for technology clients such as IBM, HP, Sun, Cisco and NEC, and helped
launch many successful hi-tech products such as the Palm Pilot. Mr. Lai
previously held executive positions in the business affairs and community
relations departments at Stanford University. He received a B.A. in English and
Creative Writing from Stanford University in 1978.
Peter Janssen
Director. Peter is the founder of Peter Janssen & Associates ("PJA"), a
technology consulting firm specializing in sales marketing and channel marketing
strategies. Prior to founding PJA, Peter 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, Peter headed sales and marketing for
several technology start ups including Mindset, Amdek (a division of Wyse),
Nexgen Microsystems and Acer. At Acer, he developed the company's consumer
channel into a $500 million business. Early in his career, Peter spent 18 years
at Sears, where he helped develop the Sears Business System Center. He received
his Bachelors of Arts in Economics from UCLA.
David Chou
Chief Information Officer. David is responsible for designing and
developing the technical infrastructure for the Company, setting the technical
architectural direction in which the Company is to evolve and building/managing
an efficient IT organization. Prior to joining the Company, David worked as a
Java consultant for Sun Microsystems, Inc., where he helped major corporations
to design/develop applications and technical architectures. Prior to joining Sun
Microsystems, Inc., David was a Senior Developer at Sempra Energy, where he was
responsible for leading a small team of developers and developing large-scale
applications. David graduated from UC Berkeley in 1994 with a degree in
Industrial Engineering and Operations Research.
---------------------
The Company is not aware of any "family relationships" (as defined in
Item 401(d) of Regulation S-K promulgated by the Securities and Exchange
Commission) between any of the directors and/or any of the executive officers.
41
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McGlen Micro Inc.
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EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
annual and long-term compensation of the executive officers and other employees
of the Company. All officers and directors will be reimbursed for any reasonable
expenses incurred on behalf of the Company.
Name Position Base Salary
---- -------- -----------
George Lee Chairman of the Board, CEO $ 80,000
Mike Chen President and Chief Technology Officer,
Director $ 80,000
Robert Brown Chief Marketing Officer $ 155,000
David Chou Chief Information Officer $ 105,000
Employment Agreements
George Lee. The Company has entered into an Executive Employment
Agreement with George Lee to serve as the Company's Chief Executive Officer for
a term of 5 years, which will commence on the effective date of the merger and
terminate 5 years thereafter. The Employment Agreement provides for an initial
base salary of $80,000 per year. His Employment Agreement also provides for
certain bonuses and stock options.
Mike Chen. The Company has entered into an Executive Employment
Agreement with Mike Chen to serve as the Company's President and Chief
Technology Officer for a term of 5 years, which will commence on the effective
date of the merger and terminate 5 years thereafter. The Employment Agreement
provides for an initial base salary of $80,000 per year. His Employment
Agreement also provides for certain bonuses and stock options.
Robert Brown. The Company has entered into an Executive Employment
Agreement with Robert Brown to serve as the Company's Chief Marketing Officer
for a term of 3 years, which commences on September 1, 1999, and terminates on
December 31, 2002. The Employment Agreement provides for an initial base salary
of $155,000 per year. His Employment Agreement also provides for options to
purchase 1,010,000 shares of Common Stock 500,000 at $1.00 per share and 510,000
at 120 day average market price per share prior to the vesting of the options,
which vest in various increments over the next 36 months.
Alex Chen. The Company has entered into an Executive Employment
Agreement with Alex Chen to serve as the Company's Vice President of Business
Development for a term of 2 years, which commences on October 1, 1999 and
terminates on September 30, 2001. The Employment Agreement provides for an
initial base salary of $75,000 per year. His Employment Agreement also provides
for certain bonuses and options to purchase 350,000 shares of Common Stock.
David Chou. The Company has entered into an Executive Employment
Agreement with David Chou to serve as the Company's Chief Information Officer
for a term of 2 years which commences on October 1, 1999, and terminates on
42
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McGlen Micro Inc.
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September 30, 2001. The Employment Agreement provides for an initial base salary
of $105,000 per year. His Employment Agreement also provides for certain bonuses
and options to purchase 260,000 shares of Common Stock.
The Company has certain other employment and consulting agreements with
other employees and consultants.
Directors Compensation
The Company may reimburse directors for any reasonable expenses
pertaining to attending meetings, including travel, lodging and meals and
presently pays outside directors $750 per meeting for their service to the
Company. The Company as agreed to issue options to outside directors (directors
who are not principal shareholders or officers, which are presently limited to
Peter Janssen and Calbert Lai, to purchase up to 100,000 shares of the Company's
common stock for $1.00 per share, 20,000 of which vested upon their acceptance
of Board of Directors appointments and 20,000 of which vest at the end of each
year the directors serve, for a period of 4 years. The Company has entered into
indemnification and reimbursement agreements with its outside directors.
Stock Option Plan
The Board of Directors adopted and the shareholders have approved the
Company's 1999 Stock Plan for Incentive and Non-Qualified Stock Options (the
"Plan") in December 1998. The Plan was established to furnish incentives for
employees, consultants and other participants to continue their service to the
Company. There are 2,500,000 shares of Common Stock authorized for issuance upon
exercise of options and stock appreciation rights granted under the Plan, which
have been designated to vest over a 5 year period. As of the date of this
Memorandum, 1,725,000 options to purchase shares of Common Stock under the Plan
had been issued and 352,500 options has vested. The Plan will be administered by
the Company's Board of Directors. The Company may have to issue additional
stock, options or other incentives to attract and retain qualified management
and directors, both advisory and voting. Such plans and incentives could have a
dilutive effect on the Common Stock.
Indemnification of Officers and Directors
The Company's bylaws provide that the Company may indemnify its
officers and directors, employees and agents and former officers, directors,
employees and agents (unless the conduct of such person is finally adjudged to
have been grossly negligent or to constitute willful misconduct), against
expenses including attorneys' fees, judgments, fines, and amounts paid in
settlement and reasonable incurred by him or her in connection with such action,
suit, or proceeding, including any appeal thereof, subject to the qualifications
contained in California law as it now exists. Expenses (including attorneys'
fees) incurred in defending a civil or criminal action, suit, or proceeding will
be paid by the Company in advance of the final disposition of such action, suit,
or proceeding upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount, unless it shall ultimately be
determined that he or she is not entitled to be indemnified by the Company as
authorized in the bylaws. Indemnification thereunder shall continue as to a
person who has ceased to be a director, officer, employee or agent, and shall
inure to the benefit of the heirs, executors, and administrators of such person.
The foregoing rights of indemnification are not to be deemed exclusive of any
other rights to which any such person may otherwise be entitled apart from the
bylaws. California law generally provides that a corpora tion shall have such
power to indemnify such persons to the extent they acted in good faith in a
43
<PAGE>
McGlen Micro Inc.
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manner reasonably believed to be in, or not opposed to, the best interests of
the Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful. In the event any such
person shall be judged liable for negligence or misconduct, such indemnification
shall apply only if approved by the court in which the action was pending. Any
other indemnification shall be made only after the determination by the Board
(excluding any directors who were party to such action), by independent legal
counsel in a written opinion, or by a majority vote of stockholders (excluding
any stockholders who were parties to such action).
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
PRINCIPAL SHAREHOLDERS
The following table sets forth the number of shares of the Company's
Common Stock beneficially owned as of the date of this Memorandum and as
adjusted to reflect the sale of the Minimum Offering of 400,000 Shares and
Maximum Offering of 600,000 Shares by the Company, by: (i) owners of more than
5% of the Company's Common Stock; (ii) each executive officer and director of
the Company that owns Common Stock; and (iii) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Percentage of Beneficial Ownership
----------------------------------
Actual
Number of Shares Prior to If Minimum If Maximum
Beneficial Owner Beneficially Owned Offering Offering Sold Offering Sold
- ---------------- ------------------ -------- ------------- -------------
<S> <C> <C> <C> <C>
George Lee 10,000,000 38.80% 38.21% 37.92%
Mike Chen 10,000,000 38.80% 38.21% 37.92%
ACST Computers, Inc.1 4,500,000 17.46% 17.20% 17.07%
All Officers and
Directors as a Group 20,000,000 77.61% 76.42% 75.84%
</TABLE>
Directors Cal Lai and Peter Janssen each own 20,000 vested options to
purchase Common Stock at $1.00 per share, but do not own any actual shares of
the Company's Common Stock. The Company's only other shareholders are The Lin
Law Corporation, Jimmy Chen and Teresa Wu. See "RECENT TRANSACTION."
- --------
1 ACST Computers, Inc., is the former owner of the Company's subsidiary,
AMT Component Inc., and is controlled by Alex Chen, the Company's Vice
President Business Development.
44
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McGlen Micro Inc.
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DESCRIPTION OF SECURITIES
Shares
This Offering consists of a minimum of 40 Units and a maximum of 60
Units. Each Unit consists of 10,000 Shares of the Company's Common Stock, no par
value per Share. The terms, conditions, preferences and rights of the Common
Stock are briefly summarized below.
Common Stock
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, no par value per share. As of the date of this Memorandum, there
were 25,770,000 shares of Common Stock outstanding.
Each issued and outstanding share of Common Stock entitles the holder
to one vote on all matters submitted to a vote of stockholders. The Articles of
Incorporation, as amended, make no provision for conversion rights, redemption
privileges or sinking funds with respect to the Company's securities. Upon any
liquidation, dissolution or winding up of the affairs of the Company, holders of
Common Stock are entitled to receive pro rata all of the assets available for
distribution to shareholders. Assets will be available to shareholders only
after payment or provision for payment of all debts and other liabilities of the
Company.
Dividend Policy
The Company intends to retain all earnings for the purpose of financing
the further development of the Company. The payment by the Company of future
dividends, if any, is within the discretion of the Board of Directors and will
depend upon the Company's earnings, if any, its capital requirements and
financial condition, as well as other relevant factors. The Board of Directors
does not intend to declare any dividends on the Common Stock in the foreseeable
future, but instead intends to retain all earnings, if any, for development and
expansion of the Company's operations. See "RISK FACTORS."
TERMS OF THE OFFERING
The Company will sell a minimum of 40 Units or 400,000 Shares and up to
a maximum of 60 Units or 600,000 Shares in this Offering, at a purchase price of
$25,000 per Unit for an aggregate Maximum Offering price of $1,500,000 (before
paying any commissions and the expenses of this Offering). Each Unit consists of
10,000 shares of Common Stock. The minimum purchase is one Unit, however, the
Company reserves the right to accept subscriptions for fractional Units. This
Offering will be made pursuant to an exemption from registration provided by
Section 4(2) of the Act and Rule 506 of Regulation D promulgated under the Act
and exemptions available under applicable state securities acts. Accordingly,
the Units will only be sold to accredited investors. See "DESCRIPTION OF
SECURITIES" and "INVESTOR SUITABILITY STANDARDS."
Subscription Period
No Units will be sold unless the Company has received and accepted
subscriptions from purchasers for a minimum of 40 Units. Upon the sale of the
Minimum Offering, a Closing may be held and the Company may cause the Escrow
45
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McGlen Micro Inc.
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Agent to disburse the Proceeds to the Company, after the payment of all costs
associated with this Offering, including commissions to the Placement Agent, and
any costs or fees. Additional closings may be held from time to time until the
earlier to occur of the sale of all of the Units or the Termination Date.
Payment and Escrow
Upon execution and delivery of a Subscriber Questionnaire, a
Subscription Agreement and Internal Revenue Service Forms W-8 and W-9 in the
forms attached hereto as Exhibits "A" and "B", a purchaser of Units must pay the
full purchase price of Units for which they have subscribed. The Escrow Agent
will promptly return subscription funds to a subscriber if at least 40 Units
offered hereby are not subscribed for and accepted by the Company on or prior to
the Termination Date.
Plan of Distribution
The Units will be offered on a "best-efforts" basis by the Placement
Agent. The Company has agreed to indemnify the Placement Agent against certain
liabilities, including liabilities under the Act, insofar as indemnification for
liabilities arising under the applicable securities laws may be permitted to the
Placement Agent. In the event any investor independently uses the services of an
investment advisor or purchaser representative in connection with the purchase
of Units, the payment of any commissions, fees or similar compensation, will be
the sole responsibility of that investor, and neither the Company nor the
Placement Agent will have any liability for such compensation.
Placement Agent Agreement
The Company entered into an agreement with Redstone Securities, Inc.,
dated September 14, 1999, pursuant to which Redstone agreed to act as Placement
Agent of up to 60 Units (the "Placement Agent Agreement"). The Placement Agent
Agreement provides that Redstone shall act as the exclusive Placement Agent in
this Offering, that Redstone anticipates funding of the Minimum Offering within
three weeks of delivery of this Memorandum, that the Company shall pay Redstone
a placement fee equal to 10% of the gross proceeds of this Offering and
reimburse Redstone for travel and other out-of-pocket expenses under the
Offering and provide indemnification as set forth above.
Closing
This Offering will automatically terminate on the earlier to occur of
the sale of all of the Units or October 15, 1999, or any extension thereof at
the discretion of the Company. At such time during the Offering Period as
subscriptions for 40 Units have been received and accepted by the Company, the
Company may hold a Closing, after which time net proceeds will be made available
to the Company for the purposes described in "USE OF PROCEEDS." In the event
such a Closing is held, the Company may continue to sell Units and deposit net
proceeds from such sales directly into its operating account from the escrow
account and begin using the Proceeds from such sales in accordance with the
purposes described herein until the earlier of the sale of all of the Units or
the end of the Offering Period. See "USE OF PROCEEDS."
46
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McGlen Micro Inc.
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Escrow Agreement
The Company has entered into an Escrow Agreement with the Escrow Agent
in which all funds received from investors will be held in a non
interest-bearing account controlled by the Escrow Agent. The funds in the escrow
account will not be released to the Company until subscriptions for 40 Units or
funds totaling $1,000,000 are in the escrow account and the Escrow Agent has
received joint instructions from the Company and the Placement Agent authorizing
the Escrow Agent to release the funds. In the event that the Minimum Offering
has not been received by the Escrow Agent by October 15, 1999, (or any extension
thereof up to an additional 45 days agreed to by the Company), all funds
received by the Escrow Agent will be returned to the respective investors,
without interest or deduction.
The funds in the Escrow Account may be at risk in the event of a failure
of the financial institution in which the funds are deposited, once such funds
exceed $100,000, the limit of federal deposit insurance. Prior to the use of the
Proceeds from the sale of the Units, the Company presently intends to invest
such Proceeds in either United States Treasury bills or money market mutual
funds that invest in government securities or other securities guaranteed by the
United States Government, or in a separately designated interest-bearing bank
account or certificate of deposit. Any interest earned on such funds from the
time they are deposited into the escrow account until they are utilized by the
Company will belong to the Company. See "RISK FACTORS."
SECURITIES MATTERS AND RESTRICTIONS ON TRANSFERABILITY
The Units and the Common Stock offered hereby are "securities" as
defined by the Act and state securities laws. Neither the Units nor the Common
Stock have been registered under the Act in reliance upon the "private offering"
exemption from registration contained in Section 4(2) of the Act and Rule 506 of
Regulation D and have not been registered under the securities laws of the
states where the Units are being offered.
As a result of various Commission guidelines and judicial case law which
has developed in connection with the exemption from registration provided by
Section 4(2) of the Act, this Offering is limited to investors who are
"accredited investors." See "INVESTOR SUITABILITY STANDARDS." Representations of
each prospective investor with regard to the foregoing, as set forth in the
Subscriber Questionnaire, will be reviewed by the Company to determine whether
the Units may lawfully be offered to and purchased by the prospective investor.
The Company has the right to refuse a subscription for Units in its sole
discretion if it determines that the prospective investor does not meet the
suitability requirements or that the Units otherwise are not an appropriate
investment for the prospective investor.
As a result of reliance by the Company on the federal and state
exemptive provisions noted above, the Units and the Common Stock purchased in
this Offering will be subject to certain restrictions affecting their
transferability. The Units and the Common Stock may not be resold or transferred
by any investor to any person without effective registration thereof being filed
under Federal and state securities laws or the availability of an exemption from
registration. Each investor will be required to complete, execute and deliver to
the Company a Subscription Agreement in the form attached hereto as Exhibit "A"
representing that the Units are being purchased solely for the investor's own
account, for investment purposes only and with no present intention of
participating directly or indirectly in a public distribution of the Units and
that the Units and the Common Stock will not be transferred by the investor in
violation of the federal and state securities laws.
47
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McGlen Micro Inc.
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LEGAL MATTERS
The Company is not presently a party to any lawsuits.
ADDITIONAL INFORMATION
No person is authorized by the Company to give any information or to
make any representations in connection with this Offering other than those
contained in this Memorandum, or in agreements or other documents summarized or
referenced herein or delivered herewith. Any information, data or representation
not contained or referenced in this Memorandum must not be relied upon as having
been authorized by the Company.
There are many documents which are relevant to the transactions
contemplated by this Memorandum and the rights and obligations of the respective
parties. The statements contained in this Memorandum constitute only summaries
of certain provisions of such documents, do not purport to be a complete
description of every term and condition thereof, and are qualified in their
entirety by reference to the actual documents. As with any summary, some details
and exceptions have been omitted. If any of the statements in this Memorandum
are in conflict with any of the terms of any such documents, the terms of such
documents will govern. Thus, reference is hereby made to the actual documents
for a complete understanding of their contents. Copies of all documents relating
to this Offering and the transactions contemplated herein are available for
inspection at the offices of the Company during ordinary business hours and
copies thereof will be made available to any prospective investor or the
investor's designated advisors upon written request to the Company.
During the course of this Offering and prior to the sale of any Units,
prospective investors or their designated advisors are entitled to ask questions
of management of the Company or any persons acting on management's behalf
concerning the terms and conditions of this Offering or the business of the
Company, and to obtain any additional information, to the extent management
possesses such information or can acquire it without unreasonable effort or
expense, necessary to verify the accuracy and adequacy of the information
provided. Such inquiries and requests for additional information are encouraged,
and should be directed to:
George Lee, CEO
McGlen Micro Inc.
3002 Dow Avenue, Suite 212
Tustin, California 92780
Telephone: (949) 851-8078
Facsimile: (714) 918-1951
Information regarding Adrenalin can be obtained from the U.S. Securities and
Exchange Commission or freeedgar.com under the symbol ADRN. Such information or
information on the Company's websites should not be deemed to be part of this
Memorandum. See "RISK FACTORS - Risks Related to the Adrenalin Merger."
The Company has reserved the right in its sole discretion to accept or
reject any potential investor and to limit the number of Units acquired by any
one investor. Any funds rejected will be immediately returned to the proposed
investor.
48
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McGlen Micro Inc.
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FINANCIAL STATEMENTS
The Company's audited financial statements prepared by Singer, Lewak,
Greenbaum & Goldstein, LLP, dated as of December 31, 1998 and unaudited
financial statements as of June 30, 1999, follow.
49
<PAGE>
McGlen Micro Inc.
- --------------------------------------------------------------------------------
EXHIBIT "A"
Subscription Agreement and Subscriber Questionnaire
50
<PAGE>
McGlen Micro Inc.
- --------------------------------------------------------------------------------
Purchaser's Name:
----------------------
Date:
----------------------------------
Number of Units:
-----------------------
Total Investment: $
--------------------
MCGLEN MICRO INC.,
a California corporation
SUBSCRIPTION AGREEMENT
McGlen Micro Inc.
3002 Dow Avenue
Suite 212
Tustin, CA 92780
Attn: George Lee, President
Dear Mr. Lee:
1. Application. The undersigned, intending to be legally bound, hereby
subscribes for the number of Units set forth above (the "Units") of McGlen Micro
Inc., a California corporation (the "Company"), each Unit consisting of 10,000
shares of the Company's common stock (the "Shares"). The undersigned understands
that this subscription may be accepted or rejected in whole or in part by the
Company in its sole discretion and that this subscription is and shall be
irrevocable unless the Company for any reason rejects this subscription.
2. Escrow of Funds.
---------------
(a) Until the sale of a minimum of 40 Units, subscription proceeds
will be held in a non interest-bearing escrow account with the Escrow Agent as
described in the Company's Private Placement Memorandum (the "Memorandum"), as
Escrow Agent, for the benefit of the undersigned. If the Company rejects all or
a portion of this subscription, the Company will promptly mail or cause to be
mailed to the undersigned a check for all, or the appropriate portion, of the
amount submitted with the subscription.
(b) Upon the receipt and acceptance of subscriptions for an
aggregate of 40 Units, a closing (the "Closing") of the sale of the Units will
be held, at which time the funds will be released to the Company after payment
of any commissions payable to the Placement Agent and escrow fees and the
undersigned will receive certificates representing the undersigned's Shares
purchased hereunder. Additional closings may be held from time to time until the
earlier to occur of the sale of all the Units or the termination of the
Offering. If the Company has not received and accepted subscriptions for an
aggregate of 40 Units by October 15, 1999 (subject to the Company's right to
extend the offering period for an additional 45 days), all subscription proceeds
will be promptly refunded. After all refunds have been made, the Company and its
directors, officers, shareholders, employees and agents and the Placement Agent
will have no further liability to the undersigned.
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McGlen Micro Inc.
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3. Representations and Warranties.
-------------------------------
The undersigned represents and warrants as follows:
(a) The undersigned has received, at least 48 hours prior to
the date hereof, and carefully reviewed the Memorandum, including all attached
exhibits and, has relied only on the information contained in the Memorandum
delivered to the undersigned; no oral representations have been made or oral
information furnished to the undersigned in connection with the purchase of the
Units which were in any way inconsistent with the Memorandum; and the
undersigned and/or his advisors have had a reasonable opportunity to ask
questions of and receive answers from the Company concerning the Units, the
Shares and the Company.
(b) In addition to his own evaluation, the undersigned has
relied upon his duly authorized Purchaser Representative(s), and/or professional
advisor(s), if any identified in the Subscriber's Questionnaire executed by the
undersigned in evaluating such Units as an investment. Either the undersigned
has a pre-existing personal or business relationship with the Company or by
reason of his own business or financial experience or the business and financial
experience of the undersigned's professional advisor(s) (who is not affiliated
with or compensated directly or indirectly by the Company or any affiliate or
selling agent of the Company with whom he has consulted and upon whose advice he
has relied, the undersigned has the capacity to protect his interests in
connection with this transaction. Either the undersigned or the undersigned
together with the Purchaser Representative referred to above, if any, with whom
he has consulted and upon whose advise he has relied, has such knowledge and
experience in business and financial matters as will enable the undersigned to
evaluate the merits and risks of the prospective investment in the Company and
to make an informed investment decision. The undersigned has been advised in
writing by his Purchaser Representative, if any, prior to having acknowledged in
writing such Purchaser Representative and prior to signing the Subscriber's
Questionnaire and this Subscription Agreement, of any material relationship
between such Purchaser Representative or its affiliates and the Company, or
their affiliates, which currently exists, is mutually understood to be
contemplated or which has existed at any time during the previous two years, and
any compensation received or to be received as a result of such relationship or
in connection with the purchase of the Units.
(c) The undersigned is able to bear the economic risks of an
investment in the Units for an indefinite period and at the present time could
afford the loss of such investment.
(d) The undersigned meets at least one of the following
conditions:
(i) The undersigned, alone or jointly with his spouse,
has a net worth of at least One Million Dollars ($1,000,000); OR
(ii) The undersigned, alone, had a gross income for the
prior year and has a prospective gross income for the current year of at least
Two Hundred Thousand Dollars ($200,000); OR --
(iii) The undersigned jointly with his spouse, had a gross
income for the prior year and has a prospective gross income for the current
year of at least Three Hundred Thousand Dollars ($300,000);
(e) The undersigned understands that neither the Units nor the
Shares have been registered under the Securities Act of 1933, as amended (the
"Act"), or registered or qualified under applicable Blue Sky laws, and are being
offered pursuant to the non-public offering exemptions thereunder and that in
this connection the Company is relying on the representations set forth in this
Subscription Agreement and the information provided in the Subscriber's
Questionnaire;
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McGlen Micro Inc.
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(f) The undersigned understands and agrees that (i) the Shares
when issued will be "restricted securities" as described in the Act and that the
Units and the Shares sold to the undersigned may not be offered or transferred
in any manner unless they are subsequently registered under the Act (or there is
an applicable exemption from such registration) and qualified or registered
under applicable Blue Sky laws (or there is an applicable exemption from such
qualification or registration); (ii) an opinion of counsel acceptable to the
Company has been rendered stating that such offer or transfer will not violate,
or cause the Company to violate, any federal or state securities law; (iii) all
applicable provisions described in the Memorandum are complied with before any
Units or Shares sold to the undersigned may be transferred; and (iv) they are
not being acquired with a view towards resale, fractionalization, division or
distribution.
(g) The information which the undersigned has provided in the
Subscriber's Questionnaire is, to the undersigned's best knowledge and belief,
true and correct on the date hereof and the representations contained therein
are hereby confirmed and should any such information (including the location of
his residence) change prior to the date the undersigned receives the Company's
acceptance of this Subscription Agreement, the undersigned agrees to immediately
provide the Company with the corrected information.
(h) The undersigned and his professional advisor or Purchaser
Representative have been furnished with all materials relating to the Company or
anything set forth in the Memorandum which they have requested and have been
afforded the opportunity to make inquiries of and have received answers from
representatives of the Company concerning the Company, the terms and conditions
of the Offering of the Units or any other matters relating to the Company, and
have further afforded the opportunity to obtain any additional information
necessary to verify the accuracy of any representations or information set forth
in the Memorandum and exhibits attached thereto (to the extent the Company
possesses such information or could acquire it without unreasonable effort or
expense);
(i) The undersigned has been furnished and has carefully read
the Memorandum including the materials which are exhibits thereto or enclosed
therewith or otherwise supplied to the undersigned, and is aware that:
(i) Investment in the Company and the Shares is
speculative and involves high economic and other risks and dependence upon a
number of factors which cannot be controlled or foreseen as outlined in the
Memorandum including the possibility of a total loss of his investment in the
Company; and
(ii) No federal or state agency has passed upon the Units
or the Shares being offered, made any finding or determination as to the
fairness or accuracy of information contained in the Memorandum or endorsed the
Memorandum, the Shares or the Units.
(j) If the undersigned is a partnership or corporation, such
partnership or corporation was not formed for the purpose of investing in the
Company.
(k) The undersigned and his purchaser representative, if any,
understand that any certificates representing the Shares shall bear a legend,
restricting the transferability of the Shares.
4. Indemnification.
----------------
The undersigned agrees to indemnify and hold harmless the
Placement Agent for the Company, the Company, and its agents, representatives
53
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McGlen Micro Inc.
- --------------------------------------------------------------------------------
and employees from and against all liability, damage, loss, cost and expense
(including reasonable attorneys' fees) which they may incur by reason of the
failure of the undersigned to fulfill any of the terms or conditions of this
Subscription Agreement, or by reason of any inaccuracy or omission in the
information furnished by the undersigned herein or any breach of the
representations and warranties made by the undersigned herein or in connection
with the Memorandum, or in any document provided by the undersigned to the
Company.
5. Agreement with Respect to Resale and Assignment. The undersigned
agrees that no Units or Shares will be resold nor any rights or interests in and
under this Agreement assigned without complete compliance with all the terms and
provisions contained in the Memorandum and its exhibits, any legends contained
on the Share certificates and any applicable federal or state securities or Blue
Sky laws.
6. Blue Sky Matters. It is anticipated that the Units and the Shares
will be offered for sale in several states. The securities laws ("Blue Sky
Laws") of certain of these states require certain conditions and restrictions
relating to the offering to be disclosed. A description of the relevant
conditions and restrictions is set forth in the Memorandum.
7. Miscellaneous.
-------------
(a) This Subscription Agreement shall survive the death or
disability of the undersigned and shall be binding upon the undersigned's heirs,
executors, administrators, successors and permitted assigns.
(b) This Subscription Agreement has been duly and validly
authorized, executed and delivered by the undersigned and constitutes the valid,
binding and enforceable agreement of the undersigned. If this Subscription
Agreement is being completed on behalf of a corporation, partnership or trust,
it has been completed and executed by an authorized corporate officer, general
partner or trustee.
(c) The Memorandum, this Subscription Agreement and the documents
referred to herein constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and together supersede all prior
discussions or agreements in respect thereof; provided, however, that any
capitalized terms not defined in this Subscription agreement shall have the
meaning set forth in the Memorandum.
(d) Within five (5) days after receipt of a written request from the
Company, the undersigned agrees to provide such information, to execute and
deliver such documents and to take, or forbear from taking, such actions or
provide such further assurances as reasonably may be necessary to correct any
errors in documentation, to comply with any and all laws to which the Company is
subject or to effect the terms of the Memorandum.
(e) The Company shall be notified immediately of any change in any
of the information contained above occurring prior to the undersigned's purchase
of the Units or at any time thereafter for so long as the undersigned is a
holder of the Units or the Shares.
THE UNITS AND THE SHARES REFERRED TO HEREIN HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF CERTAIN STATES.
THESE SECURITIES MUST BE ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A
54
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McGlen Micro Inc.
- --------------------------------------------------------------------------------
VIEW TOWARD DISTRIBUTION OR RESALE, AND MAY NOT BE MORTGAGED, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED OR OFFERED TO BE SO TRANSFERRED WITHOUT
(i) AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND THE REGULATIONS PROMULGATED PURSUANT THERETO,
UNLESS EXEMPT THEREFROM, AND REGISTRATION UNDER APPLICABLE STATE SECURITIES
LAWS, UNLESS EXEMPT THEREFROM, (ii) AN OPINION OF COUNSEL, THAT ANY SUCH
TRANSACTION SHALL NOT VIOLATE, OR CAUSE THE COMPANY TO VIOLATE, ANY FEDERAL OR
STATE SECURITIES LAWS, AND (iii) COMPLIANCE WITH ALL APPLICABLE PROVISIONS
PRESCRIBED IN THE MEMORANDUM. THE SECURITIES OFFERED HEREBY HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE
SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE
FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE
ACCURACY OR ADEQUACY OF THE MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
BY SIGNING BELOW, THE UNDERSIGNED HEREBY ACKNOWLEDGES THAT HE HAS
RECEIVED, AND UNDERSTANDS THE TERMS OF THE MEMORANDUM INCLUDING THE DESCRIPTION
OF CERTAIN RISKS ASSOCIATED WITH THIS INVESTMENT.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement as of the date first written above.
Subscription Amount: Residence or Business Address:
---------------------
- -----------------------------------------
- -----------------------------------------
(Signature of Subscriber) Street
- ----------------------------------------- -----------------------------------
(Print or Type Name) City State Zip Code
Social Security or Taxpayer Identification Mailing Address (if different
No. from Residence or Business Address)
--------------------------------------
-----------------------------------
U.S. Citizen _______ Yes _______ No Street
-----------------------------------
City State Zip Code
Name of Prospective Purchaser: __________________________________________
55
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McGlen Micro Inc.
- --------------------------------------------------------------------------------
Date:
-----------------
Memorandum Number:
-----------------
MCGLEN MICRO INC.,
a California corporation
SUBSCRIBER QUESTIONNAIRE
The information provided herein is being furnished for the purpose of
enabling MCGLEN MICRO INC. (the "Company"), to determine whether an offer and
sale of a unit ("Unit") of 10,000 shares of common stock (the "Shares") may be
made to the undersigned prospective purchaser ("Prospective Purchaser") in
compliance with certain exemptions from the registration requirements of the
Securities Act of 1933, as amended ("Act"), and the qualification or
registration requirements of applicable state securities laws ("Blue Sky Laws")
and in accordance with the suitability standards implemented by the Company.
All Prospective Purchasers must complete the questions designated by
"All Subscribers" in Part I. In addition, individuals must complete the
questions designated by "Individuals" in Part I and each of the questions in
Part II. Organizations (e.g., corporations, partnerships or trusts) must
complete the questions designated by "Organizations" in Part I and each of the
questions in Part III. Please answer each question, indicating, as applicable,
"none" or "not applicable" where no affirmative response is appropriate. If
necessary, attach additional pages in answering any question. All answers should
be printed or typed.
THIS QUESTIONNAIRE IS REQUIRED FOR COMPLIANCE WITH APPLICABLE LAW.
THE INFORMATION SET FORTH HEREIN WILL BE KEPT CONFIDENTIAL.
PART I - TO BE FILLED OUT BY ALL PROSPECTIVE PURCHASERS
1. Name of Prospective Purchaser (All Subscribers).
-----------------------------------------------
Provide the full legal name of the Prospective Purchaser(s) in
the precise manner in which the Units and the Shares, if issued, would be held.
In the case of organizations, provide the type of entity (e.g., corporation,
partnership, or trust) and its state of organization.
2. Revocable Trust (Organizations).
-------------------------------
If the Prospective Purchaser is a trust, please indicate
whether the grantor has the power to revoke the trust at any time and regain
title to trust assets.
Yes No
----- -----
56
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McGlen Micro Inc.
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If the answer to this question is yes, the remaining
information in this Questionnaire should be given as to the grantor(s).
3. Residence Address and Telephone Number (Individuals).
----------------------------------------------------
Please indicate your residence address and telephone number.
4. Length of Residence (Individuals).
---------------------------------
How long have you lived at your present residence?
If you have lived at your present address for less than one
year, please give the addresses of all other residences during the last one year
period.
5. Business Address and Telephone Number (All Subscribers).
-------------------------------------------------------
Please indicate your business address and telephone number.
6. Method of Investment Evaluation (All Subscribers).
-------------------------------------------------
Please select and initial one of the following alternatives:
----- ALTERNATIVE ONE: The undersigned has such knowledge and
experience in financial and business matters so as to be
capable of evaluating the merits and risks of an investment in
the Units and does not desire to utilize the services of any
other person in connection with evaluating such merits and
risks. As evidence of the requisite degree of knowledge and
experience, the undersigned hereby offers the information
provided in this Subscriber Questionnaire.
----- ALTERNATIVE TWO: The undersigned intends to utilize the
services of a purchaser representative acceptable to the
Company ("Purchaser Representative") in connection with
evaluating the merits and risks of an investment in the Units.
The undersigned hereby appoints the following named person(s)
57
<PAGE>
to be the undersigned's Purchaser Representative(s) in
connection with evaluating the merits and risks of an
investment in the Units and the Shares:
If applicable, list name(s), address(es), and telephone
number(s) of Purchaser Representative(s):
The undersigned hereby attaches an Subscriber Representative
Questionnaire concerning the above-named Purchaser Representative(s).
The undersigned represents that the undersigned and the
above-named Purchaser Representative(s) have such knowledge and experience in
financial and business matters that together they are capable of evaluating the
merits and risks of an investment in the Units and the Shares.
PART II - TO BE FILLED OUT BY INDIVIDUALS ONLY
1. Income and Net Worth.
--------------------
(Note: To calculate "income" for purposes herein, please use
adjusted gross income as reported on the relevant federal tax return).
(a) Is your net worth in excess of $1,000,000? (For purposes of
this question, you may include your spouse's net worth and may include the fair
market value of your home, home furnishings and automobiles.)
Yes No
----- -----
(b) Was your individual income during the past two years in
excess of $200,000 or your joint income with your spouse during the past two
years in excess of $300,000 and do you anticipate that it will reach the same
level in the current year?
Yes No
----- -----
(c) Does this investment exceed ten percent (10%) of your net
worth? (For purposes of this question, you may include your spouse's net worth
and may include the fair market value of your home, home furnishings and
automobiles.)
Yes No
----- -----
(d) Estimated income for 1999 (Individual _____ Joint _____)
Less than $ 50,000 _____ $ 50,000 to $ 69,999 _____
$ 70,000 to $ 99,999 _____ $100,000 to $149,999 _____
$150,000 to $199,999 _____ $200,000 to $299,999 _____
$300,000 or above _____
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McGlen Micro Inc.
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(e) Last year's income was (Individual _____ Joint _____)
Less than $ 50,000 _____ $ 50,000 to $ 69,999 _____
$ 70,000 to $ 99,999 _____ $100,000 to $149,999 _____
$ 150,000 to $199,999 _____ $200,000 to $299,999 _____
$300,000 or above _____
(f) Income for 1997 was (Individual _____ Joint _____)
Less than $ 50,000 _____ $ 50,000 to $ 69,999 _____
$ 70,000 to $ 99,999 _____ $100,000 to $149,999 _____
$ 150,000 to $199,999 _____ $200,000 to $299,999 _____
$300,000 or above _____
(g) Estimated net worth (exclusive of home, home
furnishings and automobiles):
Less than $100,000 _____ $100,000 to $149,999 _____
$150,000 to $249,999 _____ $250,000 to $399,999 _____
$400,000 to $999,999 _____ $1,000,000 or above _____
2. Business.
--------
(a) Please indicate your present business affiliation and your
present title. Describe generally the nature of your duties.
(b) Please indicate any corporations of which you are a
director or any partnerships in which you are a general partner.
(c) Please briefly describe principal positions held during the
last five years and length of time at each position. What is sought is a
sufficient description to enable the Issuer to determine the extent of your
financial and business background.
3. Education.
---------
Please describe any education following high school, including degrees
obtained and schools attended.
4. Prior Investment Experience.
---------------------------
(a) Please indicate how frequently you invest in marketable
securities (e.g., publicly-traded stocks, bonds and debentures):
[ ] often [ ] occasionally [ ] seldom [ ] never
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McGlen Micro Inc.
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(b) Please indicate how frequently you invest in unmarketable
securities (e.g., unregistered stock, limited partnership interests or
securities issued by privately held companies):
[ ] often [ ] occasionally [ ] seldom [ ] never
(c) Please briefly describe the nature of your investment
experience identified in your answers to (a) and (b) above, and any other
investment experience not covered above which would indicate your ability to
evaluate an investment in the Units and the Shares. If additional space is
necessary, please use the opposite side of this page or attach additional pages.
(d) Do you make your own investment decisions with respect to
the investments listed above?
Yes No
----- -----
(e) What are the principal sources of your investment knowledge
or advice? (Check all that apply)
First hand experience
-----
Broker(s)
-----
Attorney(s)
-----
Financial publications
-----
Investment Adviser(s)
-----
Accountant(s)
-----
PART III - TO BE FILLED OUT BY ORGANIZATIONS ONLY
1. Organization.
------------
(a) Date organization was formed:
(b) Was the organization formed for the specific purpose of
entering into the proposed transaction?
Yes No
----- -----
(c) How many equity holders does this organization have?
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McGlen Micro Inc.
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(d) What is the Federal Employer Identification Number of the
organization?
(e) Describe the type of business conducted by the
organization.
2. Total Assets.
------------
Are the total assets of the undersigned organization in excess
of $5,000,000?
Yes No
----- -----
3. Certain Organizations.
---------------------
The organization is one or more of the following (check each
applicable paragraph):
- ----- (a) A bank as defined in Section 3(a)(2) of the Act or a
savings and loan association or other institution as
defined in Section 3(a)(5)(A) of the Act (whether
acting in its individual capacity or fiduciary
capacity).
- ----- (b) A broker or dealer registered pursuant to Section 15
of the Securities Exchange Act of 1934.
- ----- (c) An employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974
("ERISA") for which the investment decision is being
made by a plan fiduciary, as defined in Section 3(21)
of ERISA, which is either a bank, a savings and loan
association, an insurance company or a registered
investment advisor.
- ----- (d) An employee benefit plan within the meaning of ERISA
with total assets in excess of $5,000,000.
- ----- (e) A self-directed employee benefit plan within the
meaning of ERISA with investment decisions made solely
by persons who are "accredited investors" as defined
in Regulation D under the Act.
Note: The accredited investor(s) who makes the investment decisions
for a self-directed plan also must complete an Subscriber
Questionnaire as if such accredited investor was investing in
the Company in an individual capacity.
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McGlen Micro Inc.
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PART IV - SIGNATURE
The undersigned understands that the Company will be relying on the
accuracy and completeness of the undersigned's responses to the foregoing
questions, and the undersigned represents, warrants and acknowledges that each
of the following statements are true:
(a) The answers to the above questions are complete and correct and may
be relied upon by the Company in determining whether the transaction is exempt
from registration under the Act and registration or qualification under any Blue
Sky Laws, and any applicable rules and regulations promulgated by any regulatory
agency in connection with the offer and sale of the Units and the Shares.
(b) The undersigned will notify the Company immediately of any material
change in any of such information occurring prior to the acceptance of the
undersigned's subscription.
(c) The undersigned will provide such additional information about the
undersigned as may be requested by the Company.
(d) In order for the undersigned to purchase Units, the Company may
require the undersigned to use a Purchaser Representative.
PROSPECTIVE PURCHASER
(Individuals)
(Signature)
(Printed Name)
(Signature)*
(Printed Name)*
Dated: , 1999.
--------------------------
* If joint ownership
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McGlen Micro Inc.
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PROSPECTIVE PURCHASER
(Organizations)
(Name of Entity)
(Type of Entity)
(State of Organization)
(Signature of Officer)
(Printed Name and Title of Signing Officer)
Dated: , 1999.
-----------------------------
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McGlen Micro Inc.
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EXHIBIT "B"
Internal Revenue Service Forms W-8 and W-9
64
McGlen Micro Inc.
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Exhibit 5.1
December 2,1999
A0078-031
McGlen Micro Inc.
3002 Dow Avenue
Suite 212
Tustin, CA 92780
Re: Merger Between McGlen Micro Inc. and Adrenalin Interactive, Inc.
----------------------------------------------------------------
Gentlemen:
We have acted as counsel to Adrenalin Interactive, Inc., a Delaware
corporation ("ADRN"), and Adrenalin Acquisition Corporation, a California
corporation (the "Merger Sub") (together, the "Companies"), in connection with
the Agreement and Plan of Merger, dated as of April 28, 1999 (the "Agreement"),
among ADRN, the Merger Sub and McGlen and the related Exhibits, Schedules and
ancillary agreements (collectively, the "Closing Documents"). We have also acted
as counsel to Western Technologies, Inc., a California corporation ("WTI"). All
capitalized terms used in this opinion which are not defined herein shall have
the meanings subscribed to such terms in the Agreement.
In rendering the opinions set forth herein, we have examined and relied
on originals or copies, certified or otherwise identified to our satisfaction,
of the following documents:
(a) The Agreement;
(b) The Closing Documents;
(c) The Articles or Certificates of Incorporation of the Companies
and WTI;
(d) The Certificate of Qualification of Foreign Corporation of ADRN
in the State of California;
(e) The Bylaws of the Companies and WTI; and
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McGlen Micro Inc.
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(f) Such other documents as we have deemed necessary or appropriate
as a basis for the opinions set forth below.
Based upon the foregoing, and subject to the limitations,
qualifications, exceptions and assumptions set forth herein, we are of the
opinion that:
1. ADRN is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all necessary power and
authority to execute and deliver the Agreement and to perform its obligations
thereunder. ADRN is duly authorized to do business as a foreign corporation in,
and is in good standing in, the State of California and has all necessary power
and authority to execute and deliver the Agreement and, where appropriate, the
Closing Documents and to perform its obligations thereunder. ADRN is authorized
to issue 50,000,000 shares of common stock, $.03 par value, of which 3,548,986
shares are presently issued and outstanding and 5,000,000 shares of preferred
stock, $.01 par value, of which no shares are presently issued or outstanding.
Except as disclosed on ADRN's disclosure schedules to the Agreement, there are,
to our knowledge, no other outstanding equity securities of ADRN.
2. The Merger Sub is a corporation duly organized validly existing and
in good standing under the laws of the State of California, is a wholly-owned
subsidiary of ADRN and has all necessary power and authority to execute and
deliver the Agreement and, where appropriate, the Closing Documents and to
perform its obligations thereunder.
3. WTI is a corporation duly organized validly existing and in good
standing under the laws of the State of California and is a wholly-owned
subsidiary of ADRN.
4. The execution and delivery by ADRN and Merger Sub of the Agreement
and the Closing Documents and their performance of their obligations thereunder
have been duly and validly authorized by all necessary action on the part of
ADRN and the Merger Sub. The Agreement and the Closing Documents have been duly
executed and delivered, where applicable, by ADRN and the Merger Sub and
constitute the valid and binding obligations of each of them, enforceable
against each of them in accordance with their respective terms, except as
enforcement relating to or affecting the enforcement of creditors' rights
generally and the availability of equitable remedies that may be subject to
general principles of equity including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing, the possible
unavailability of specific performance or injunctive relief and the discretion
of the court before which any proceeding, whether in equity or a
5. Except as disclosed on ADRN's disclosure schedules to the Agreement,
neither the execution and delivery of the Agreement or the Closing Documents nor
the consummation by the Companies of any of the transactions contemplated in the
Agreement or the Closing Documents, or the fulfillment of, or compliance with,
the terms and provisions thereof, will conflict with or result in a violation of
any of the Articles or Certificate of Incorporation or Bylaws of either of the
Companies or, to our knowledge, any contract or agreement to which either of the
Companies or WTI is subject.
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6. Except as disclosed on ADRN's disclosure schedules to the Agreement,
the execution, delivery and performance by the Companies of the transactions
contemplated thereby, do not and will not, to our knowledge, result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration, lien or other encumbrance) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
license, contract, agreement or other instrument or obligation to which any of
the Companies or WTI is a party or by which any of the properties or assets of
any of the Companies or WTI may be bound, or violate any law or statute
applicable to any of the Companies or WTI or, to our knowledge, any order, writ,
injunction, decree, rule or regulation applicable to any of the Companies or WTI
or any of the properties or assets of any of the Companies or WTI, except for
violations, breaches or defaults which would not have a Parent Material Adverse
Effect.
With respect to the aforementioned documents, we have assumed the
genuineness of all signatures, the authenticity of all items submitted to us as
originals, the conformity with originals of all items submitted to us as copies
and the due authority of all persons executing the same.
This opinion is being delivered solely for the benefit of McGlen and its
shareholders in connection with the transactions contemplated by the
introductory paragraph to this opinion. Except as may be required by applicable
laws and governmental regulations, this opinion may not be quoted, filed with
any governmental authority or other regulatory agency or otherwise circulated or
utilized for any other purpose without our prior written consent.
Very truly yours,
/s/Clark and Trevithick
-----------------------
CLARK & TREVITHICK
67
McGlen Micro Inc.
- --------------------------------------------------------------------------------
Exhibit 5.2
-----------
December 2, 1999
Adrenalin Interactive, Inc.
5301 Beethoven Street
Los Angeles, California 90066
Re: Merger Between Adrenalin Interactive, Inc. and McGlen Micro Inc.
----------------------------------------------------------------
Gentlemen:
- ----------
We have acted as counsel to McGlen Micro Inc., a California corporation
("McGlen") in connection with the Agreement and Plan of Merger (the "Agreement")
dated as of April 28, 1999, among McGlen, Adrenalin Interactive, Inc. and
Adrenalin Acquisition Corporation, including the related Schedules, Exhibits and
ancillary agreements (the "Closing Documents").
In rendering the opinions set forth herein, we have examined and relied on
originals or copies, certified or otherwise identified to our satisfaction, of
the following documents:
(a) The Agreement;
(b) The Articles of Incorporation of McGlen;
(c) The Bylaws of McGlen; and
(d) Such other documents as we have deemed necessary or appropriate as a
basis for the opinions set forth below.
Based upon the foregoing, and subject to the limitations, qualifications,
exceptions and assumptions set forth herein, we are of the opinion that:
1. McGlen is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has all necessary power
and authority to execute and deliver the Agreement and to perform its
obligations thereunder. McGlen is authorized to issue 50,000,000 shares of
common stock, no par value, of which to the best of our knowledge, 25,770,000
shares of common stock are issued and outstanding. There are no other
outstanding shares of McGlen's equity securities.
2. The execution and delivery of the Agreement and the Closing Documents by
McGlen and the Principal Shareholders as defined in the Agreement and their
performance of the obligations thereunder have been duly and validly authorized
68
<PAGE>
McGlen Micro Inc.
- --------------------------------------------------------------------------------
by all necessary action on the part of McGlen and each Principal Shareholder and
constitute a valid and binding obligation of each enforceable against each of
them in accordance with their respective terms, except as enforcement relating
to or affecting the enforcement of creditors rights generally and the
availability of the equitable remedies that may be subject to general principles
of equity including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing, the possible unavailability of
specific performance or injunctive relief and the discretion of the court before
which any proceeding, whether in equity or at law, may be brought.
3. AMT Component, Inc., is a wholly owned subsidiary of McGlen, which is a
corporation duly formed, organized, validly existing and in good standing under
the laws of the State of California.
4. Neither the execution and delivery of the Agreement nor the consummation
by McGlen and each principal shareholder of any of the transactions therein
contemplated, or the fulfillment of, or compliance with, the terms and
provisions thereof, will conflict with or result in a violation of any of the
Articles of Incorporation or Bylaws of McGlen or any contract or agreement to
which any of these are subject.
5. Except as disclosed on McGlen's disclosure schedules to the Agreement,
the execution, delivery and performance by McGlen of the transactions
contemplated thereby, do not and will not to our knowledge, result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration, lien or other encumbrance) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
license, contract, agreement or other instrument or obligation to which McGlen
is a party or by which any of its properties or assets may be bound; or violate
any law or statute applicable to McGlen or, to our knowledge, any order, writ,
injunction, decree, rule or regulation applicable to McGlen or any of its
properties or assets, except for violations, breaches or defaults which would
not have a Company Material Adverse Effect as set forth in the Agreement.
With respect to the aforementioned documents, we have assumed the
genuineness of all signatures, the authenticity of all items submitted to us as
originals, the conformity with originals of all items submitted to us as copies
and the due authority of all persons executing the same.
69
<PAGE>
McGlen Micro Inc.
- --------------------------------------------------------------------------------
This opinion is being delivered solely for the benefit of Adrenalin and its
shareholders in connection with the transaction contemplated by the introductory
paragraph to this opinion. Except as may be required by applicable laws and
governmental regulations, it may not be quoted, filed with any governmental
authority or other regulatory agency or otherwise circulated or utilized for any
other purpose without our prior written consent.
Very truly yours,
/s/Boyd and Chang
-----------------
BOYD & CHANG, LLP
70
McGlen Micro Inc.
- --------------------------------------------------------------------------------
Exhibit 15.1
------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference of our report, dated
April 14, 1999, relating to the financial statements of McGlen Micro, Inc.,
previously filed in Adrenalin Interactive, Inc.'s Definitive 14A Proxy Statement
filed with the SEC on October 6, 1999, in this current report on Form 8-K of
McGlen Internet Group dated January 14, 2000.
/s/Singer Lewak Greenbaum & Goldstein, LLP
- ------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
January 14, 2000
71
Exhibit 16.1
------------
Drucker, Math & Whitman, P.C.
- --------------------------------------------------------------------------------
2886 U.S. Highway #1
Route 1 & Finnegarte Lane
North Brunswick, NJ 08902
Telephone 732-821-8200
Fax 732-821-7711
January 17, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: McGlenn Internet Group, Inc.(formerly known as Adrenalin Interactive, Inc.,)
File No. 0-27828
We were previously the principal accountant for McGlen Internet Groupm Inc.
(formerly known as Adrenalin Interactive, Inc.) and, under the date of September
17, 1999, we reported on the consolidated financial statements of Adrenalin
Interactive, Inc. and subsidiary as of June 30, 1999, and for each of the two
years then ended. On January 14, 2000 , our appointment as principal accountant
was terminated. We have read McGlen Internet Group, Inc.'s statements included
under item 4 of its Form 8-K dated January 17, 1000 and we agree with such
statements regarding our dismissal, our independent Auditors' Report and the
absence of disagreements on matters of accounting principles or practices,
financial statement disclosures of auditing scope or procedures.
Very Truly yours,
/s/Drucker, Math & Whitman, P.C.
--------------------------------
Drucker, Math & Whitman, P.C.
72
Exhibit 17.1
------------
Letter Regarding Director Resignation for Jay Smith
TO THE BOARD OF DIRECTORS OF
ADRENALIN CORPORATION
The undersigned, Jay Smith III, hereby resigns as a Director, President,
Chief Financial Officer and Secretary of ADRENALIN ACQUISITION CORPORATION, a
California corporation, effective as of the date hereof.
Dated: December __, 1999
/s/Jay Smith III
----------------
Jay Smith III
73
Exhibit 17.2
------------
Letter Regarding Director Resignation for Robert Wilson
-------------------------------------------------------
TO THE BOARD OF DIRECTORS OF
ADRENALIN CORPORATION
The undersigned, Robert A. D. Wilson, hereby resigns as a Director,
President, Chief Financial Officer and Secretary of ADRENALIN ACQUISITION
CORPORATION, a California corporation, effective as of the date hereof.
Dated: December __, 1999
/s/Robert A. D. Wilson
----------------------
Robert A. D. Wilson
74
Exhibit 17.3
------------
Letter Regarding Director Resignation for Edward Mackay
-------------------------------------------------------
TO THE BOARD OF DIRECTORS OF
ADRENALIN CORPORATION
The undersigned, Edward H. MacKay, hereby resigns as a Director,
President, Chief Financial Officer and Secretary of ADRENALIN ACQUISITION
CORPORATION, a California corporation, effective as of the date hereof.
Dated: December __, 1999
/s/Edward H. MacKay
-------------------
Edward H. MacKay
75
Exhibit 21.1
------------
List of Subsidiaries of Registrant
----------------------------------
ACST Computers, Inc.
Western Technologies, Inc.
76
Exhibit 99.1
------------
Thursday December 16, 3:38 pm Eastern Time
Company Press Release
Mcglen Internet Group to Continue to Trade On Nasdaq Small Cap
TUSTIN, Calif.--(BUSINESS WIRE)--Dec. 16, 1999--Mcglen Internet Group (Nasdaq:
ADRN - news)
Company To Trade Under The Symbol MIGS
Beginning Friday, December 17, 1999
Mcglen Internet Group (MIG) (NASDAQ: ADRN - news), a leading Southern California
e-Commerce based, internet operating company, today announced that it has
received approval from NASDAQ for its common stock to continue to be traded on
the NASDAQ Small cap Market. The company has also received approval to change
its symbol to "MIGS" and will begin trading under its new symbol on Friday,
December 17, 1999. MIG has been an early pioneer in the field of business to
consumer (B2C) and business to business (B2B) e-commerce based retailing, with a
focus on technology based products through its separate and unique storefront
exchanges including Mcglen.com (www.mcglen.com), AccessMicro.com
(www.accessmicro.com) and now through Techsumer.com (www.techsumer.com). Each
MIG subsidiary provides balance to MIG's operating portfolio, while supporting a
strong revenue base. Further, each storefront exchange extends the reach and
penetration of over 150,000 unique products and services to meet the varied
needs of the 200,000+ business and consumer-oriented customers MIG currently
serves. The Mcglen Internet Group (NASDAQ: MIGS - news) is a leading e-commerce
based internet operating company (IOC) focused on creating branded, Internet
storefront exchanges, providing unlimited global access to technology oriented
products and services for business to business (B2B) and business to consumer
(B2C) marketplaces. MIG has a developed a unique distributed network enterprise
and distribution system mated to an array of unique storefront exchanges that
are popular with business and consumer oriented customers. MIG's corporate
offices are located in Tustin, CA. The statements set forth above with respect
to Mcglen Internet Group or MIG, the benefits thereof and the potential growth
of the company are forward looking statements within the meaning of that term in
the Private Securities Litigation Reform Act of 1995. As such, they are
inherently uncertain and should not be unduly relied upon. As to potential
future growth, uncertainties include the ability to successfully manage the
companies' businesses, technologies and management, the availability of
sufficient capital to expand the businesses, customer acceptance on new
products, competition and other uncertainties associated with introducing new
businesses. [GRAPHIC OMITTED]
Contact:
McGlen Internet Group
Robert Brown
Chief Marketing Officer
949/797-9007
949/851-0251 (fax)
or
Wolfe Axelrod Associates
Stephen D. Axelrod, CFA
Bella Wagner (Media)
212/370-4500
212/370-4505 (fax)
77
<PAGE>
Friday December 17, 11:47 am Eastern Time
Company Press Release
Mcglen Internet Group Websites Ranked Among Top E-Commerce Sites On the Web
Mcglen.com And AccessMicro.com Achieved Customer Certified Gold Merchant Status
On BizRate.com
TUSTIN, Calif.--(BUSINESS WIRE)--Dec. 17, 1999-- Mcglen.com And AccessMicro.com
Rated Among Best Computing Sites
On The Web By Gomez Advisors.
Mcglen Internet Group (MIG) (NASDAQ: MIGS - news), a leading Southern California
e-Commerce based, Internet operating company, today announced that two of its
storefront exchanges have been rated among the top Internet sites on the Web for
technology products as well as among the most reliable on the Web. We are
thrilled to have been ranked among the top e-commerce sites by two of the
leading web site and consumer rating firms," said George Lee, MIG's Chief
Executive Officer. "These rankings continue to validate our commitment to
creating reliable, individual resources for Business to Consumer and Business to
Business based-customers to obtain the latest in technology products, through an
intuitive, and personal online customer experience." Description of "ratings"
BIZRATE.COM Mcglen.com and AccessMicro.com achieved Customer Certified Gold
Merchant Status, placing the company's respective Business to Consumer and
Business to Business storefront exchanges among the most reliable retail sites
on the Web. "As more and more consumers recognize BizRate.com as a symbol of
customer buying confidence through the Customer Certified Gold Merchant Program,
it will continue to benefit the customers of both Mcglen.com and AccessMicro.com
by demonstrating our commitment to customer satisfaction and experience, said
Robert Brown, MIG's Chief Marketing Officer. Through BizRate.com's programs,
consumers will be directed to look for the BizRate.com certification on merchant
sites through BizRate.com's referrals. Well-known Internet companies that have
achieved BizRate.com Customer Certified Gold Merchant Status include Office
Depot (NYSE: ODP - news), Proflowers.com, Garden.com, Virtual Vineyards, 911
Gifts, and many others. According to Media Metrix, BizRate.com is one of the
highest-trafficked sites (21st, October 1999) in the e-commerce arena. "Our
merchants are committed to exceeding the expectations of their customers," said
Chuck Davis, CEO and president of BizRate.com. "By becoming 'BizRate.com
Customer Certified,' MIG is helping first-time and repeat shoppers make educated
decisions when buying online and allowing them to continually benchmark their
high customer satisfaction ratings with other sites." About BizRate.com Founded
in 1996, BizRate.com is an unbiased, independent rating guide built on the
experience of millions of actual online buyers. The BizRate.com site combines
valuable consumer information with a powerful set of shopping tools that help
people find the store or product they want, as well as offers recommendations
based on user-specified criteria. BizRate.com is the only company trusted by
more than 2,700 e-businesses to collect this direct consumer feedback and
transactional information at the point-of-purchase. The online store performance
ratings, derived from this data, denote the only statistically rigorous way of
differentiating retailers on "quality of service" metrics. BizRate.com's
information will appear on Consumer Reports Online and in Consumer Reports
magazine and is currently available through top Internet portals such as
AltaVista (NASDAQ: CMGI - news), Microsoft Network (NASDAQ: MSFT - news), Go
Network (NYSE: GO - news), Snap (NASDAQ: NBCI - news) and Go2Net (NASDAQ: GNET
news). GOMEZ ADVISORS Gomez Advisors ranked Mcglen.com and AccessMicro.com among
the best sites to purchase computing products on the web. Mcglen.com's and
AccessMicro.com's ratings were among the highest possible for the categories of
Overall Ranking, Ease of Use, Customer Confidence, On-Site Resources,
Relationship Services and Overall Cost of products sold on the site. "We are
pleased that consumers continue to see the strong value that Mcglen.com and
AccessMicro.com individually provide to consumers and businesses, especially
against very large well-recognized brands such as Buy.com, CDW.com (NASDAQ: CDWC
- - news), Egghead.com (NASDAQ: EGGS - news), MicroWarehouse.com and
ValueAmerica.com (NASDAQ: VUSA - news), said Robert Brown, MIG Chief Marketing
Officer. "We believe that our ranking demonstrates that what is more important
to customers is their shopping experience and the satisfaction they glean from
that experience. Unfortunately, customers are bombarded with brand-based
advertising messages from others, which quickly prove to be irrelevant when a
customer reaches a prospective site and then encounters mediocrity. We believe
78
<PAGE>
that brands are built and enforced through customer experience and satisfaction,
not through multi-million dollar advertising campaigns which only generate a
higher level of (aided) brand awareness," Brown added. Gomez.com (www.gomez.com)
is the recognized online leader in providing consumer and business-based
e-commerce research, tools and analysis to empower consumers to make informed
online purchasing decisions. The Gomez.com site has grown into a premier online
hub for both consumers and businesses to evaluate online service and product
providers through nationally recognized Internet Scorecards that rank the
performance and quality of the online service offerings for selected industries
including brokerage firms, banks, travel agents, autos, auctions and
booksellers. The Mcglen Internet Group, (NASDAQ: MIGS - news; www.mcglen.net) is
a leading e-commerce based Internet operating company (IOC) focused on creating
branded, Internet storefront exchanges, providing unlimited global access to
technology oriented products and services for business to business (B2B) and
business to consumer (B2C) marketplaces. MIG has a developed a unique
distributed network enterprise and distribution system mated to an array of
unique storefront exchanges that are popular with business and consumer oriented
customers. MIG's corporate offices are located in Tustin, CA. The statements set
forth above with respect to MIG, the benefits thereof and the potential growth
of the company are forward looking statements within the meaning of that term in
the Private Securities Litigation Reform Act of 1995. As such, they are
inherently uncertain and should not be unduly relied upon. As to potential
future growth, uncertainties include the ability to successfully manage the
company' businesses, technologies and management, the availability of sufficient
capital to expand the businesses, customer acceptance on new products,
competition and other uncertainties associated with introducing new businesses.
[GRAPHIC OMITTED]
- ----------------
Contact:
McGlen Internet Group, Inc.
Robert Brown, Chief Marketing Officer
(949) 797-9007, (949) 851-0251 fax
or
Wolfe Axelrod Associates
Stephen D. Axelrod, CFA
Bella Wagner (Media)
(212) 370-4500, (212) 370-4505 fax
79
<PAGE>
Monday December 27, 6:01 pm Eastern Time
McGlen Internet Group Inc. Is New Name of Adrenalin
Interactive, Inc.
McGlen Internet Group Inc. Effective New Name of Adrenalin Interactive, Inc.
Dec. 17, 1999--Adrenalin Interactive, Inc. began trading under the new name,
McGlen Internet Group Inc. (Nasdaq:MIGS news). The company is listed on the
Nasdaq Smallcap System, and trades under the ticker symbol MIGS.
80
