Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File No.: 0-27878
NORTHGATE INNOVATIONS, INC.
(FORMERLY MCGLEN INTERNET GROUP, INC.)
(Name of registrant as specified in its charter)
Delaware 13-3779546
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
16700 Gale Avenue, City of Industry, California 91745
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (626) 923-6000
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
TITLE OF CLASS
--------------
Common Stock, $.03 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of shares of Common Stock held by
non-affiliates of the registrant on April 12, 2002 was approximately $5,125,814
(computed on the basis of $0.60 per share, the last reported sale price for
shares of the Company's Common Stock on the OTC Bulletin Board as of such date).
As of April 12, 2002, the registrant had outstanding 18,961,162 shares
of Common Stock.
TABLE OF CONTENTS
PAGE
----
PART I.
ITEM 1. BUSINESS OF NORTHGATE.......................................1
ITEM 2. DESCRIPTION OF PROPERTY....................................22
ITEM 3. LEGAL PROCEEDINGS..........................................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........23
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...23
ITEM 6. SELECTED FINANCIAL DATA....................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.31
ITEM 8. FINANCIAL STATEMENTS.......................................31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................31
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.31
ITEM 11. EXECUTIVE COMPENSATION.....................................32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............36
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K...................................................38
SIGNATURES.
Financial Statements and Supplementary Data.
-i-
PART I
ITEM 1. BUSINESS OF NORTHGATE
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about our industry, management's beliefs and certain
assumptions made by management. When used in this report and elsewhere by
management, from time to time, the words "believes," "plans," "estimates,"
"intends," "anticipates," "seeks," and "expects" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. Accordingly, actual
results may differ materially from those anticipated or expressed in such
statements. Potential risks and uncertainties include, among others, those set
forth herein under "Additional Factors That May Affect Future Results."
Particular attention should be paid to the cautionary statements involving our
limited operating history, anticipated losses, unpredictability of future
revenues, potential fluctuations in operating results, systems failures,
business interruptions, capacity constraints, systems development, management of
growth, the intensely competitive nature of the electronic commerce industry and
reliance on third parties, manufacturers, distributors and suppliers. Readers
are cautioned not to place undue reliance on the forward-looking statements,
which speak only as of the date made. Except as required by law, we undertake no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise. Readers, however, should carefully
review the factors set forth in other reports or documents that we file from
time to time with the Securities and Exchange Commission ("SEC").
GENERAL
As used in the following section, "Northgate," "Mcglen," "we," "the Company" and
"our" refer to Northgate Innovations, Inc. (formerly known as Mcglen Internet
Group, Inc.) and our subsidiaries including Western Technologies, Inc., Mcglen
Micro, Inc. and AMT Components, Inc. unless the context requires otherwise. We
were incorporated in Delaware in May 1994. In March 1995, we changed our name to
Wanderlust Interactive, Inc., and in May 1998, we changed our name to Adrenalin
Interactive, Inc. On December 2, 1999, we completed a reverse acquisition with
Mcglen Micro, Inc. in which the stockholders of Mcglen Micro, Inc. acquired
control of the Company. As a result of the acquisition, each share of Mcglen
Micro, Inc. was converted into 0.0988961 shares of our common stock, with
2,548,553 shares being issued. On December 17, 1999, we changed our name to
Mcglen Internet Group, Inc. On March 15, 2002, we changed our name to Northgate
Innovations, Inc.
On March 20, 2002, Lan Plus Corporation ("Lan Plus") completed a reverse
acquisition with Mcglen in which the stockholders of Lan Plus acquired control
of Mcglen. As a result of the acquisition, each share of Lan Plus was converted
into approximately 3.128 shares of our common stock, with approximately
14,113,000 shares being issued (after consideration of the reverse split). In
addition, immediately prior to the close of the merger, the Company also
instituted a 10:1 reverse stock split and the Company's accounts payable to, and
advances from Lan Plus, in the amount of approximately $2.3 million were
converted to common stock eliminating the debt; the stock was then retired to
Treasury and cancelled. The Company will report combined operations with Lan
Plus beginning with its 10-Q for the period ended March 31, 2002.
On March 28, 2002, we changed our ticker symbol on the OTC Bulletin Board to
"NGTE." Our executive offices are located at 16700 Gale Avenue, City of
Industry, California 91745. Our Internet address is http://www.Mcglen.com.
Information contained on our web site is not, and should not be considered, part
of this filing.
BUSINESS
The Company is a brick and mortar developer, manufacturer and distributor of
innovative PCs, peripherals, software, and over 100,000 computer products. The
Company specializes in selling its computers through Television Shopping
Networks, Mail Order Catalog Companies and large Electronic Chain Stores as well
1
as targeting specific business-to-business and business-to-consumer markets
through the Internet. Our operations division, which includes a call center,
sourcing, warehousing, fulfillment, accounting, business development and
information technology, supports order processing, logistics, customer service,
financial transactions and core technology for our business divisions located in
the City of Industry, California. Our business divisions include sales,
marketing, content management, product management and service management teams
focused on building unique customer experiences for each business division.
We currently offer more than 100,000 computer products on our two operating
on-line retail web sites: Mcglen.com and AccessMicro.com. We offer different
mixtures of computing technology, entertainment and communications products on
these web sites based on the different target market segments' buying patterns.
Mcglen.com, launched in May 1996, and AccessMicro.com, launched in June 1996,
have both achieved Customer Certified Gold Merchant status on BizRate.com, an
independent on-line retail rating guide. Moreover, Gomez Advisor, an independent
business rating guide, consistently ranks Mcglen.com and AccessMicro.com among
the top 31 sites to purchase computing products on the Web in their Internet
Computer Store Scorecard.
RECENT DEVELOPMENTS
On October 11, 2000, we entered into an agreement and plan of merger with Lan
Plus Corporation. Lan Plus is a manufacturer of both private-label and branded
turnkey computer products and services, with over ten years of operating
history. On March 21, 2001, we entered into an amended and restated merger
agreement that, among other things, eliminated certain conditions to closing
contained in the original merger agreement. The amended and restated merger
agreement was subsequently amended several times, ending on March 14, 2002. Upon
the close of the merger on March 20, 2002, Lan Plus shareholders received
approximately 3.128 shares of Mcglen common stock for each Lan Plus share they
owned, and owned approximately seventy-five (75%) of the outstanding stock of
Mcglen (after taking into account a 10:1 reverse split that took place
immediately prior to the close of the merger). In addition, the Company changed
its name to Northgate Innovations, Inc. Pursuant to the merger agreement, upon
close of merger, the Company's accounts payable to, and advances from Lan Plus,
in the amount of approximately $2.3 million was converted to common stock
eliminating the debt; the stock was then retired to Treasury and cancelled. The
Company will report combined operations with Lan Plus beginning with its 10-Q
for the period ended March 31, 2002.
Andy Teng, founder, Chairman and Chief Executive Officer of Lan Plus, became the
Chief Executive Officer and Chairman of the Board of the combined company and
Richard Shyu, previously Vice President of Lan Plus became President of the
combined company. Grant Trexler, previously Mcglen's Chief Financial Officer,
became Chief Financial Officer of the combined company. Two of Mcglen's
founders, Mike Chen and Alex Chen, assumed management positions within the new
company. Mike Chen also remained on the Company's Board of Directors.
DISCONTINUED OPERATIONS
In connection with the reverse acquisition of Adrenalin Interactive, Inc. in
December 1999, our board of directors voted to discontinue the operations of
Western Technologies, Inc., Adrenalin's operating subsidiary. Western
principally developed video games for use with Sony, Nintendo and Sega video
game consoles pursuant to funded contracts with video game developers,
entertainment titles for PCs and electronic toys including interactive,
Web-powered toys that are refreshed from a PC via the Internet. Western also
created interactive television games for digital set-top boxes and published or
licensed PC games in 24 countries and 15 languages. We completed two of the
software development contract obligations conducted by Western during the second
quarter of 2000. Two other contracts were terminated. An additional contract was
assigned to Western's former Vice President of Operations for completion,
releasing Mcglen from any further contractual liability. However, we are still
responsible for any product liability issues that may arise from the two
completed contracts.
INTERNET INDUSTRY BACKGROUND
The Internet allows millions of consumers and businesses to share information
and conduct business electronically. International Data Corporation ("IDC")
estimates that the worldwide Internet economy will reach $2.8 trillion by 2003.
2
The growth of the Internet is dependent upon a number of factors, including:
o Increased installed-base and usage of personal computers and
Internet devices;
o Widely available and affordable access to the Internet;
o Awareness and acceptance of Internet among consumers and
businesses; and
o Increase in the capability and availability of network
infrastructure.
INTERNET STRATEGY
Our goal is to create and operate market-focused on-line, retail and wholesale
businesses. We will continue to expand our existing operating business divisions
by enhancing brand recognition, building awareness to our web sites, and
increasing the products and services offerings provided on the web sites. We
intend to capitalize on our existing technology backbone and operations
infrastructure by promoting our web sites to new customers while developing and
implementing programs to retain our current customers. We intend to create
synergy among our operating businesses, and with Lan Plus, to maximize return on
investment.
WEB SITES
We believe our market-focused web sites provide unique on-line experiences to
different target market segments. Based on the target market segment's
expectations and requirements, each of our web sites' content design and product
mixture maximizes the perceived value of our offerings. Mcglen.com offers
computing technology products, targeting information technology professionals.
AccessMicro.com offers computing technology products, targeting small
businesses. We believe ease of use is essential in any successful web site. To
provide a simple and convenient purchasing experience, we developed key features
for our operating web sites. The key features of our web sites include:
o BROWSING - We have categorized our current offering of more
than 100,000 products into product groups, categories and
subcategories. Links to product groups and categories are
placed on each page for convenient "one-click" access. Special
sections are created for special offers and promotional
products to enhance exposure for hot selling, high margin
products that we update daily.
o SPECIALIZED BROWSING - Conventional categorization systems
assign one department, category and subcategory to each
product. For certain product groups, finding the desired
product under this categorization system is difficult. We have
developed a specialized categorization system for certain
product groups to minimize the search effort.
o SEARCHING - We have developed general keyword search, specific
product identification number search and interactive guided
criteria search to facilitate precise product selection with
minimal effort.
o PRODUCT INFORMATION - We provide detailed technical
information for many of the products we offer. Manufacturer
technical support and contact information is also provided.
o CUSTOM CONFIGURATION - We have developed a configuration
engine that allows our customers to interactively configure a
personal computer based on the customer's specification.
o CUSTOMIZABLE DISPLAY FORMAT - To facilitate the purchasing
decision process, visitors can customize the display format,
sorting order and selection criteria for product listings.
3
o RELATED PRODUCTS LINKS - At each product detail page, links to
related categories are conveniently placed for one-click
access to relevant products. Links to selected products'
options and accessories are placed on the same page for easy
access.
o ON-LINE ACCOUNT AND ORDERING SYSTEM - Our on-line ordering
engine is designed for intuitive usage and minimal data entry
for first-time and repeat customers. Customers can create an
on-line account as they make a purchase for the first time. On
each subsequent visit the customer will be able to check order
status, review past orders, and place new orders without
entering shipping, billing and credit card information again.
INTERNET MARKETING
Our Internet marketing strategy is to promote and increase brand awareness of
our current storefronts, including AccessMicro.com (a marketplace for small
business) and Mcglen.com (a marketplace for IT professionals). Through various
incentive programs and customer care and support, we also intend to build
customer loyalty and encourage repeat purchases.
We are executing this strategy through the following channels:
o forming alliances with various shopping portals;
o actively maintaining opt-in customer mailing lists;
o broadening product offerings;
o creating repeat buyer incentive programs; and
o building partnerships with manufacturers and vendors.
We believe that the use of multiple marketing channels reduces reliance on any
one source of customers, lowers customer acquisition costs and maximizes brand
awareness.
ON-LINE AND TRADITIONAL ADVERTISING
We have implemented a broad-based, multi-media advertising campaign that
includes both on-line and traditional advertising, designed to drive high-value
traffic to our web sites. Our current on-line advertising focuses on a variety
of web sites that have a proven ability to drive buyers to our sites. These
partners have typically included PriceWatch, Ziff Davis, CNET and various
smaller partner sites. Additionally, efforts in direct marketing in resulted in
high levels of success through e-mail marketing as well as a weekly promotional
newsletter. We believe our newsletter to be very effective in informing
subscribers of the latest and the best products available today.
Clicktrade.com, a site of Link-Exchange, is our primary outsource partner to
support our affiliate program. We pay Link-Exchange on a per-click basis to
affiliate partners. Our affiliate program has been in place since early 1998,
and we increased our exposure in the Link-Exchange network aligning ourselves
with additional affiliate partners in 2000 and 2001.
MERCHANDISING
We currently host two sites with product compositions including computing,
entertainment and communication products. By utilizing these sites
(www.Mcglen.com and www.AccessMicro.com), we have the ability to gear our
marketing campaigns to different segments of the market-- the small office/home
office market and the IT professionals market. The merger with Lan Plus will
allow us to expand our marketing reach through their web sites, Lan-plus.com,
epcdirect.com and myshoppingclub.com.
4
Our approach to merchandising allows Mcglen to offer each segment of our target
audience a unique shopping experience, giving Mcglen the advantage of pricing
flexibility, the ability to offer our customers only what is relevant to their
needs, focused cross-selling and up-selling of products, and the potential of
expanding our products and services to each one of these markets.
By utilizing distinct web sites, we are also able to tailor a unique shopping
experience for each segment of our target audience. For example, targeting IT
professionals, our Mcglen.com site offers a clean design and easy access,
together with a no-nonsense functionality, that allows these customers to find
their desired products and purchase them in the shortest amount of time
possible.
Because each web site is targeted to a specific audience, we are able to
cross-sell and up-sell our products more effectively than our competitors. For
example, knowing that the customers from our AccessMicro.Com site are of the
small office/home office market segment, we may "up-sell" a customer who is
purchasing an ink-jet printer an entry-level laser printer because speed of
print jobs would be a major concern of these customers.
Since Mcglen already has concentrated customer bases, we are able to expand our
services to best benefit each individual market. Mcglen will continue to add
products and services that will enhance, rather than fragment, the shopping
experience of each individual market segment. These advantages are in addition
to the advantages Mcglen and other e-tailers already enjoy over traditional
retailers, such as: the ability to instantly change prices when our costs
change, a virtually unlimited amount of display and shelf space, and the ability
to offer our customers much greater access to product information.
CUSTOMER SERVICE
We believe that our ability to establish and maintain long-term relationships
with our customers, and to encourage repeat visits and purchases, depends, in
part, on the strength of our customer support and service operations as well as
our staff. We seek to achieve frequent automated e-mail communication with our
customers to continually improve customer service for our stores and services.
We offer toll-free phone numbers and e-mail addresses for sales, technical
support, return merchandise and general customer service. Many of our
competitors only offer e-mail support. We will continue to acquire new tools and
technology to improve customer satisfaction.
WAREHOUSING, FULFILLMENT AND DISTRIBUTION
We obtain our products from a network of distributors, wholesalers,
manufacturers and software publishers. In 2001, more than 50% of our products
were purchased through Lan Plus. A substantial amount of products that we carry
in inventory is purchased and shipped "on demand" (that is, after we receive
orders, we purchase products required to fill orders received). We "cross dock"
on a daily basis (that is, receive products from vendors and ship those same
products to customers the same day). We carry approximately seven days' worth of
inventory in house. We also rely on our distributors and wholesalers to ship
products directly to our customers. Our distribution partners, such as Ingram
Micro, Battery-Biz, Viking Components, and Transcend Information Systems, have
distribution centers throughout the United States and can fulfill a majority of
in-stock products within 24 hours. We have established strategic partnerships
with manufacturers to custom-configure personal computers based on our
customer's requirement and ship the configured system directly to our customers.
TECHNOLOGY
Our site management, search, customer interaction, transaction processing and
fulfillment systems consist of a combination of our own proprietary technologies
and third-party technology. We may enhance the capability and scalability of our
systems through acquisition of new third-party technologies and in-house
development. The software applications we use have the capability for accepting
and verifying orders, managing orders, creating customer interaction
instructions, automatically selecting fulfillment methods, assigning inventory
to customer orders, managing shipment of products to customers, recording
tracking numbers, and authorizing and charging customer credit cards with
address verification.
5
The hosting of our Web servers is subcontracted to an Internet data center
specialist, Exodus Communications, Inc. Exodus has an extensive national network
backbone with redundant Internet connections to multiple Internet access points,
a secure physical environment, climate control and redundant power supply.
Exodus provides Mcglen access to the facility 24 hours a day, seven days a week.
Exodus also monitors our Web servers continuously.
COMPETITION
Although the electronic commerce industry is still in its infancy, it has
matured substantially in recent years as witnessed by the consolidation of its
major players. Many of our competitors have either gone out of business or been
acquired by other firms through bankruptcy. Furthermore, we have seen
competition arise from manufacturers and suppliers who have not traditionally
sold their products through the Internet.
We currently compete with a variety of companies that sell computer, electronics
and communication products to consumers and businesses through a variety of
media. These companies are larger and have more financial resources than we do
and include:
o Traditional catalog-based merchants that have developed a
significant electronic commerce offering, such as CDW
Computers Centers, Inc., Micro Warehouse, Inc., Insight
Enterprises, Inc., Multiple Zones International, Inc. and
PCMall, Inc.;
o Companies with electronic commerce sites such as, Buy.com
Inc., Dell Computer Corporation and NECX Office;
o Companies offering Internet auctions, such as uBid, Inc.,
Amazon.com, Inc., Yahoo! Inc., and eBay Inc.;
o Companies whose primary business is not on-line retailing but
who derive significant revenue from electronic commerce,
including America Online, Inc., Yahoo! Inc. and QVC, Inc.;
o Traditional retailers of personal computer products such as
CompUSA, Inc.;
o Manufacturers such as Dell Computer Corporation and Gateway,
Inc. who sell directly to the consumer via the Internet;
o Mass merchandisers such as Wal-Mart Stores, Inc., Costco
Wholesale Corporation and Best Buy Co., Inc. that primarily
sell through traditional retail channels but have also
developed an Internet presence; and
o Office product retailers such as Office Depot Inc. and
Staples, Inc. that primarily sell through traditional retail
channels but also sell over the Internet.
We believe the principal competitive factors affecting our market are
competitive pricing, quality of customer service, accuracy of technical product
information, quality and ease of use of web sites, breadth of product offerings,
brand recognition and cost of customer acquisition. We believe we compete
adequately in all these areas with the exception of brand recognition, where
companies with much greater financial and marketing resources have made the
establishment of a strong brand name much more costly and difficult. To maintain
and improve our competitive position, we must continue to be competitive in all
the areas mentioned above, while boosting our brand recognition without
significantly increasing our cost of customer acquisition.
SALES TAX
We currently collect sales tax on sales of products delivered to residents in
the state of California and dropped shipped from Ingram Micro to residents of
Massachusetts. Various states have tried to impose on direct marketers the
burden of collecting sales taxes on the sale of products shipped to state
6
residents. The United States Supreme Court affirmed its position that it is
unlawful for a state to impose sales tax collection obligations on an
out-of-state mail order company whose only contacts with the state are the
distribution of catalogs and other advertising materials through the mail and
subsequent delivery of purchased goods from out of state locations by parcel
post and interstate common carriers. It is possible that legislation may be
passed to supersede the Supreme Court's decision, or that the Court may change
its position. Additionally, it is uncertain whether any new rules and
regulations may be adopted, in terms of sales tax collection obligations, to
govern electronic commerce companies as the industry continues its growth. The
imposition of new sales tax collection obligations on Mcglen in states to which
we ship products would result in additional administrative expenses to Mcglen.
More importantly, though, we may lose one of our most competitive advantages in
terms of a higher total price of products for our customers.
GOVERNMENT REGULATION
We are subject, both directly and indirectly, to various laws and governmental
regulations relating to our business. There are currently few laws or
regulations directly applicable to commercial on-line services or the Internet.
However, due to the increasing popularity and use of commercial on-line services
and the Internet, it is possible that a number of laws and regulations may be
adopted. These laws and regulations may cover issues including, for example,
user privacy, pricing and characteristics and quality of products and services.
Moreover, the applicability to commercial on-line services and the Internet of
existing laws governing issues including, for example, property ownership, libel
and personal privacy is uncertain and could expose Mcglen to substantial
liability. Any new legislation or regulation or the application of existing laws
and regulations to the Internet could have a material and adverse effect on our
business.
In addition, because our services and products are available over the Internet
anywhere in the world, multiple jurisdictions may claim that we are required to
qualify to do business as a foreign corporation in each of those jurisdictions.
Our failure to qualify as a foreign corporation in a jurisdiction where we are
required to do so could subject Mcglen to taxes and penalties for the failure to
qualify. It is possible that state and foreign governments might also attempt to
regulate our transmissions of content on our web site or prosecute Mcglen for
violations of their laws. There can be no assurance that violations of local
laws will not be alleged or charged by state or foreign governments, that we
might not unintentionally violate these laws or that these laws will not be
modified, or new laws enacted, in the future.
The Internet Tax Freedom Act (ITFA) currently bars state or local governments
from imposing taxes that would subject on-line commerce transactions to taxation
in multiple states. The ITFA does not prohibit state or local taxation of
on-line commerce products or services that would otherwise be taxed, such as in
states where a company has a physical presence. The ITFA also provides for the
establishment of a commission to study on-line commerce and to recommend a fair
method of taxing Internet transactions. We cannot be certain that upon
expiration of the ITFA, we will not be subject to further taxation by state or
local governments on the sale of merchandise.
EMPLOYEES
As of April 12, 2002, all of our employees had been transferred to Northgate
Innovations, Inc. Approximately 25 full-time employees and 1 part-time employee
are employed by Northgate and directly contributed to the fulfillment of orders
for Mcglen.com and AccessMicro.com . We consider our employee relations to be
good. None of our employees is represented by a labor union, and we have
experienced no work stoppages. Competition for qualified personnel in the
electronic commerce industry is intense, particularly for software development
and other technically-oriented positions.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 2001, 2000 and 1999, $0, $28,000 and $91,000
was expensed, respectively, for research and development related to our web
sites. As of December 31, 2001, there was $264,000 capitalized software
development costs; accumulated amortization of $264,000 has been recorded for
these assets.
7
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information contained in this report, the following factors
could affect our actual results and could cause such results to differ
materially from those achieved in the past or expressed in our forward-looking
statements.
An investment in our common stock involves a high degree of risk. You should
carefully review and consider the information below, as well as the other
information contained in this report and incorporated by reference.
WE INCURRED SIGNIFICANT LOSSES IN 2001, 2000 AND 1999.
We incurred a loss of $1.3 million in 2001, $5.7 million in 2000, and $3.5
million in 1999. As of December 31, 2001, we had a working capital deficit of
approximately $1.8 million and a stockholders' deficit of approximately $2.7
million. On a pro forma basis (after consideration of debt conversions and the
repayment of leases payable in March 2002) we had a working capital deficit of
approximately $0.5 million and a stockholders' deficit of approximately $1.5
million at December 31, 2002. Our auditors have included an explanatory
paragraph in their report for the year ended December 31, 2001, indicating there
is substantial doubt regarding our ability to continue as a going concern. There
can be no assurance that we will be profitable in the future. Furthermore,
future profits, if any, will be dependent on many factors, including, but not
limited to, our ability to return our operations to profitability in a timely
manner, the need for additional financing, and competition from other electronic
commerce retailers. If we are not able to significantly improve our operating
results, we may be required to cease or substantially curtail our operations.
OUR STOCK IS TRADED ON NASD'S OVER THE COUNTER ELECTRONIC BULLETIN BOARD
Our securities trading is conducted in the NASD's OTC Electronic Bulletin Board.
As a result, an investor may find it more difficult to purchase, dispose of, and
obtain accurate quotations as to the value of, our securities.
In addition, since the trading price of our common stock is less than $5.00 per
share, trading in the common stock is also be subject to the requirements of
Rule 15g-9 under the Securities Exchange Act of 1934. Under that rule,
broker/dealers who recommend such low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements, including requirements that they:
o make an individualized written suitability determination for
the purchaser; and
o receive the purchaser's written consent prior to the
transaction.
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also
requires additional disclosure in connection with any trades involving a stock
defined as a penny stock (generally, any equity security not traded on an
exchange or quoted on Nasdaq SmallCap that has a market price of less than $5.00
per share), including the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
with that market. Such requirements may severely limit the market liquidity of
our securities and the ability of purchasers of our stock to sell their
securities in the secondary market.
WE HAVE A SIX YEAR ON-LINE OPERATING HISTORY THAT PROVIDES LITTLE INFORMATION
WITH WHICH TO EVALUATE OUR ELECTRONIC COMMERCE BUSINESS.
There is little information on which to evaluate our business and prospects as
an electronic commerce company. An investor in our common stock must consider
the risks and difficulties that early-stage companies frequently encounter in
the new and rapidly evolving market of electronic commerce. Such risks for
Mcglen include:
o our evolving and unpredictable business model;
o our competitors that have more established electronic commerce
operations;
o our need and ability to manage growth; and
8
o the rapid evolution of technology in electronic commerce.
To address these risks and uncertainties, we must take various steps, including:
o improving our customer service and providing outstanding order
fulfillment;
o continuing to develop and upgrade our technology,
infrastructure and systems that support our on-line stores;
o expanding the number of products and categories of merchandise
offered at our on-line stores;
o increasing our customer base to achieve economies of scale;
o attracting, retaining and motivating qualified personnel; and
o making our on-line stores more user-friendly and appealing to
customers.
WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING ANY OF OUR STRATEGIES OR IN ADDRESSING
THESE RISKS AND UNCERTAINTIES, AND EVEN IF WE ACCOMPLISH THESE OBJECTIVES, WE
STILL MAY NOT BE PROFITABLE IN THE FUTURE.
We incurred substantial losses from operations in 2001, 2000 and 1999. As of
December 31, 2001, we had an accumulated deficit of $10.5 million. We may
continue to incur net losses in the foreseeable future. We will need to generate
additional revenues to achieve profitability, and to maintain that profitability
if it is achieved.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR OPERATING RESULTS MAY FLUCTUATE
SIGNIFICANTLY.
Because electronic commerce is a new, emerging market, we cannot accurately
forecast our revenues. While our revenues from electronic commerce may increase
in certain quarters, an investor should not use these past results to predict
our future results. We base our current and future expenditures on our plans and
estimates of future revenues. Our expenses are, to a large degree, fixed. We may
be unable to adjust spending in a timely manner if we experience an unexpected
shortfall in our revenues. We expect that our future quarterly operating results
will fluctuate significantly because of many factors, many of which we do not
control. These factors include:
o our ability to satisfy and retain existing customers and
attract new customers at a sufficient rate;
o pricing competition, including, but not limited to, pricing
which results in no gross margin on certain products;
o our ability to acquire, price and market merchandise inventory
such that we maintain gross margins in our existing business
and in future product lines and markets;
o our ability to fulfill customer orders;
o the level of traffic at our web sites;
o the development, announcement or introduction of new sites,
services or products by Mcglen or by our competitors;
o the amount the Internet is used generally and, more
specifically, for the purchase of products such as those that
we offer;
o our ability to upgrade and develop our systems and
infrastructure and attract new employees;
9
o the occurrence of technical or communications failures, system
downtime and Internet disruptions, including disruptions which
may be caused by periodic interruptions in electrical service;
o the amount and timing of operating costs and capital
expenditures that we incur to expand our business;
o governmental regulation and taxation policies;
o disruptions in service by common carriers such as United
Parcel Service or unanticipated increases in shipping and
transaction-processing costs; and
o general economic conditions and economic conditions specific
to the Internet, electronic commerce and the computer
industry.
OUR REVENUES DEPEND ON THE NUMBER OF TIMES CUSTOMERS MAKE PURCHASES AT OUR
ON-LINE STORES.
The amount of sales at our on-line stores depends in part on the number of
customers, the competitiveness of our prices and the availability of merchandise
from our suppliers. We cannot forecast the number of our future customers, the
future pricing strategies of our competitors or the future availability of
merchandise with any degree of certainty. It is clear, however, that if the
number of customers does not increase, if our gross margins decrease or if the
amount of merchandise available to Mcglen decreases substantially, our business
will suffer. Because of these and other factors, we believe that
period-to-period comparisons of our historical results of operations are only
partial indicators of our future performance.
OUR OPERATING RESULTS MAY FLUCTUATE DEPENDING ON THE SEASON.
We expect to experience fluctuations in our operating results because of
seasonal fluctuations in traditional retail patterns. Retail sales in the
traditional retail industry tend to be significantly higher in the fourth
calendar quarter of each year than in the preceding three quarters; revenue is
typically lowest in the second quarter of the year. As a result of this and
other factors, our operating results in one or more future quarters may
fluctuate and, therefore, period-to-period comparisons of our historical results
of operations may not be good indicators of our future performance.
WE MAY SUFFER SYSTEMS FAILURES AND BUSINESS INTERRUPTIONS.
Our success, especially our ability to receive and fulfill customer orders,
largely depends on the efficient and uninterrupted operation of our computer and
telephone communications systems. Almost all of our computer and communications
systems are located at a single leased facility. We have experienced temporary
power failures and telecommunications failures from time to time at this
facility. Our systems are vulnerable to damage from fire, earthquakes, floods,
power loss, telecommunications failures, break-ins and other events. Despite any
precautions we may take, the occurrence of natural disasters or other
unanticipated problems could cause system interruptions, delays and loss of
critical data and could prevent Mcglen from providing services. Moreover,
although we have implemented network security measures, our servers are
vulnerable to computer viruses, physical or electronic break-ins, attempts by
third parties deliberately to exceed the capacity of our systems and similar
disruptions. Any of these events could lead to interruptions or delays in
service, loss of data or the inability to accept and confirm customer orders.
Generally, we do not have redundant systems or a formal disaster recovery plan,
and our coverage limits on our property and business interruption insurance may
not be adequate to compensate Mcglen for losses that may occur.
WE FACE RISKS OF CAPACITY CONSTRAINTS.
Our revenues depend to a significant degree on the number of customers who use
our on-line stores to buy merchandise. We depend on the satisfactory
performance, reliability and availability of our web sites,
transaction-processing systems, network infrastructure, customer support center,
and delivery and shipping systems. These factors are critical to our reputation,
10
our ability to attract and retain customers and to maintain adequate customer
service levels, and our operating results. Our on-line stores have experienced
periodic temporary capacity constraints from time to time, and we continue to
experience capacity constraints at our customer support center primarily related
to inbound customer telephone inquiries. Capacity constraints could prevent
customers from gaining access to our on-line stores or our customer support
center for extended periods of time and decrease our ability to fulfill customer
orders or decrease our level of customer acquisition or retention. Such
constraints would also decrease the appeal of our on-line stores and decrease
our sales. If the amount of traffic, the number of orders or the amount of
traffic to our web sites increases substantially, we may experience capacity
constraints and may need to further expand and upgrade our technology,
transaction-processing systems and network infrastructure. We may be unable to
sufficiently predict the rate or timing of increases in the use of our on-line
stores to enable Mcglen to quickly upgrade our systems to handle such increases.
In addition, we may be unable to increase our capacity at our customer support
center to handle the amount of current or future customer telephone inquiries.
WE FACE RISKS RELATING TO SYSTEMS DEVELOPMENT.
We are heavily dependent on our technological systems, some of which were not
designed for electronic commerce but have been modified by Mcglen for that use.
In the future, we may also upgrade and expand our systems to add automated
customer service, proactive e-mail and customer feedback features to provide
enhanced customer service, more complete customer data and better management
reporting information. These efforts would require Mcglen to integrate newly
developed and/or purchased technologies into our systems and to hire more
engineering and information technology personnel in the future. If we are unable
in a timely manner to hire required personnel, to add new software and hardware,
or to upgrade our existing systems to handle increased traffic, we could
experience unanticipated system disruptions, slower response times, degraded
customer service and a decrease in our ability to fulfill customer orders.
THE ELECTRONIC COMMERCE MARKET IS INTENSELY COMPETITIVE.
The electronic commerce industry is new, rapidly evolving and intensely
competitive. Several e-commerce companies have failed in the past eighteen
months, some with larger financial resources than Mcglen. We may not be
successful in competing against our present and future competitors. It is not
difficult to enter the electronic commerce market, and current and future
competitors can launch new electronic commerce web sites at relatively low cost.
We expect competition in electronic commerce to increase as retailers,
suppliers, manufacturers and direct marketers who have not traditionally sold
computer products and consumer goods directly to consumers through the Internet
enter this market segment. Furthermore, competition has increased to the extent
that mergers and acquisitions result in electronic commerce companies with
greater market share and revenues. Increased competition, or failure by Mcglen
to compete successfully, is likely to result in price reductions, fewer customer
orders, reduced gross margins, increased marketing costs, loss of market share,
or any combination of these problems.
We believe that the principal competitive factors affecting our market are brand
name recognition, competitive pricing, quality of customer service, quality of
product information, breadth of merchandise offerings, cost of customer
acquisition and ease of use of electronic commerce sites. Although we believe we
compete adequately with respect to such factors, we cannot assure you that we
can maintain our competitive position against current and potential competitors,
especially those with greater financial, marketing, customer support, technical
and other resources. For instance, some competitors sell certain products at or
near the purchase price paid by them to acquire the products. To improve our
competitive position, we are focused on increasing our level of customer service
and maintaining competitive pricing.
Current and potential competitors have established or may establish cooperative
relationships among themselves or directly with suppliers to obtain exclusive or
semi-exclusive sources of merchandise. New competitors or alliances among
competitors, or among competitors and suppliers, may emerge and rapidly acquire
market share. Many of our current and potential competitors have significantly
greater financial, marketing, customer support, technical and other resources
than we do. As a result, they may be able to secure merchandise from suppliers
on more favorable terms than we can, and they may be able to respond more
quickly to changes in customer preferences or to devote greater resources to the
development, promotion and sale of their merchandise than we can.
11
WE RELY HEAVILY ON CERTAIN MANUFACTURERS, DISTRIBUTORS AND SUPPLIERS.
We rely heavily on certain manufacturers, distributors and suppliers to supply
Mcglen with merchandise for sale at our on-line stores. We cannot assure you
that we will be able to develop and maintain satisfactory relationships with
such parties on acceptable commercial terms, or that we will be able to obtain
sufficient quality and quantities of merchandise at competitive prices. Also,
the quality of service provided by such parties may fall below the standard
needed to enable Mcglen to conduct our business effectively. We acquire products
for sale both directly from manufacturers and indirectly through distributors
and suppliers. Purchases from Ingram Micro Inc., a distributor of computers and
related products, accounted for approximately 12% and 24% of our aggregate
merchandise purchases for 2001 and 2000. Purchases from Lan Plus Corporation
accounted for more than 50% of our aggregate merchandise purchases for 2001. We
have no long-term contracts or arrangements with manufacturers, distributors or
suppliers that guarantee availability of merchandise for our on-line stores. We
cannot assure you that current manufacturers, distributors and suppliers will
continue to sell merchandise to Mcglen or otherwise provide merchandise for sale
by Mcglen or that we will be able to establish new manufacturer, distributor or
supplier relationships that ensure merchandise will be available for sale by
Mcglen. We also rely on many of our distributors and suppliers to ship
merchandise to customers. We have limited control over the shipping procedures
of these distributors and suppliers, and such shipments have often been subject
to delays.
WE RELY HEAVILY ON CERTAIN OTHER THIRD PARTIES, INCLUDING INTERNET SERVICE
PROVIDERS AND TELECOMMUNICATIONS COMPANIES.
Our operations depend on a variety of third parties for Internet access,
telecommunications, operating software, order fulfillment, merchandise delivery
and credit card transaction processing. We have limited control over these third
parties, and we cannot assure you that we will be able to maintain satisfactory
relationships with any of them on acceptable commercial terms. We cannot assure
you that the quality of products and services that they provide will remain at
the levels needed to enable Mcglen to conduct our business effectively.
We rely on Internet service providers to connect our web site to the Internet.
From time to time, we have experienced temporary interruptions in our web site's
connections and also our telecommunications access. Frequent or prolonged
interruptions of these web site connection services could result in significant
losses of revenues. Our web site software depends on operating systems, database
and server software that were produced by and licensed from third parties. From
time to time, we have discovered errors and defects in such software and, in
part, we rely on these third parties to correct these errors and defects
promptly.
Third-party distribution centers fulfill a significant portion of the sales for
which we are responsible. Accordingly, any service interruptions experienced by
these distribution centers as a result of labor problems or otherwise could
disrupt or prevent the fulfillment of some of our customers' orders. In
addition, we use United Parcel Service as the primary delivery service for our
products. Our business would suffer if labor problems or other causes prevented
this carrier from delivering our products for significant time periods.
Furthermore, we rely on a single credit card processing service for the
processing of credit card transactions. If computer systems failures or other
problems were to prevent our credit card service from processing our credit card
transactions, we would experience delays and business disruptions. Any such
delays or disruptions in customer service may damage our reputation or result in
a loss of customers.
WE MAY EVENTUALLY BE REQUIRED TO COLLECT SALES TAX FROM MOST OR ALL OF OUR
CUSTOMERS.
We currently collect sales tax on sales of products delivered to residents in
the state of California and drop-shipped from Ingram Micro to residents of
Massachusetts. Various states have tried to impose on direct marketers the
burden of collecting sales taxes on the sale of products shipped to state
residents. The United States Supreme Court affirmed its position that it is
unlawful for a state to impose sales tax collection obligations on an
out-of-state mail order company whose only contacts with the state are the
distribution of catalogs and other advertising materials through the mail and
subsequent delivery of purchased goods from out-of-state locations by parcel
post and interstate common carriers. It is possible that legislation may be
passed to supersede the Supreme Court's decision, or that the Court may change
its position. Additionally, it is uncertain whether any new rules and
regulations may be adopted, in terms of sales tax collection obligations, to
govern electronic commerce companies as the industry continues on its explosive
pace of growth. The imposition of new sales tax collection obligations on Mcglen
in states to which we ship products would result in additional administrative
expenses to Mcglen. More importantly, though, we may lose one of our most
competitive advantages because of a higher total price of products for our
customers.
12
SHIPPING AND POSTAGE COULD INCREASE OUR OPERATING EXPENSES.
We ship our products to customers generally by United Parcel Service and other
overnight delivery and surface services. We generally invoice customers for
shipping and handling charges. If we are unable to pass on to our customers
future increases in the cost of commercial delivery services, our operating
results will be adversely affected. Moreover, any increases in postal costs
could have an adverse effect on our operating results.
WE FACE RISKS RELATING TO OUR INVENTORY.
We directly purchase the majority of the merchandise that we sell at our on-line
stores. We assume the inventory, inventory obsolescence and price erosion risks
for products that we purchase directly. These risks are especially significant
because much of the merchandise we sell at our on-line stores (for example,
computer hardware, software and consumer electronics) is characterized by rapid
technological change, obsolescence and price erosion. In the recent past we have
recorded charges for obsolete inventory and have had to sell certain merchandise
at a discount or loss. It is impossible to determine with certainty whether an
item will sell for more than the price we pay for it. Because we rely heavily on
purchased inventory, our success will depend on our ability to liquidate our
inventory rapidly, the ability of our buying staff to purchase inventory at
attractive prices relative to its resale value, and our ability to manage
customer returns and the shrinkage resulting from theft, loss and mis-recording
of inventory. If we are unsuccessful in any of these areas, we may be forced to
sell our inventory at a discount or loss.
MOST MERCHANDISE SOLD BY MCGLEN CARRIES A WARRANTY FROM THE MANUFACTURER OR THE
SUPPLIER, AND WE ARE NOT OBLIGATED TO ACCEPT MERCHANDISE RETURNS.
Nevertheless, we in fact have accepted returns from customers for which we did
not receive reimbursements from our manufacturers or suppliers, and the levels
of returned merchandise in the future might exceed our expectations. We may also
find that we have to accept more returns in the future to maintain customer
satisfaction.
WE FACE RISKS RELATED TO EXPANSION INTO NEW SERVICES AND BUSINESS AREAS.
To increase our revenues, we will need to expand our operations over time by
promoting new or complementary products or by expanding the breadth and depth of
our product or service offerings. If we expand our operations in this manner, we
may require significant additional development resources and such expansion may
strain our management, financial and operational resources. We may not
significantly benefit in such expansion from the Mcglen brand name or from the
early entry advantage that we have experienced in the on-line computer products
market. Gross margins attributable to new business areas may be lower than those
associated with our existing business activities. We cannot assure you that our
expansions into new product categories, on-line sales formats or products or
service offerings will be timely or will generate enough revenue to offset their
costs. Also, any new product category or product or service offering that is not
favorably received by consumers could damage our brand reputation.
ELECTRONIC COMMERCE POSES SECURITY RISKS TO MCGLEN.
A significant barrier to electronic commerce and communications is the secure
transmission of confidential information over public networks. We rely upon
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information. Mcglen has experienced security
breaches in the past. Although we believe current security measures are
adequate, we cannot assure you that our security measures will prevent future
security breaches, and such breaches could expose Mcglen to operating losses,
litigation and possible liability. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments may
result in a compromise or breach of the algorithms that we use to protect
customer transaction data. A party who is able to circumvent our security
measures could steal proprietary information or interrupt our operations. We may
need to spend a great deal of money and use other resources to protect against
the threat of such security breaches or to alleviate problems caused by such
breaches. Concerns over the security of on-line transactions and the privacy of
users may also inhibit the growth of the Internet generally, and the World Wide
Web in particular, especially as a means of conducting commercial transactions.
13
WE ARE DEPENDENT ON INTELLECTUAL PROPERTY.
Our performance and ability to compete are dependent to a significant degree on
our proprietary technology. We rely on a combination of trademark, copyright and
trade secret laws to establish and protect our proprietary rights. Although we
have applied for trademark protection for the Mcglen.com name, this name is not
currently a registered trademark in the United States. We cannot assure you that
we will be able to secure significant protection for this trademark and our
other trademarks or service marks. It is possible that our competitors or others
will adopt product or service names similar to "Mcglen.com" or other service
marks or trademarks of ours, thereby impeding our ability to build brand
identity and possibly confusing customers.
Copyright laws protect our proprietary software. The source code for our
proprietary software also is protected under applicable trade secret laws. We
cannot assure you that the steps we take to protect our software will prevent
misappropriation of our technology or that the agreements we enter into for that
purpose will be enforceable. It might be possible for a third party to copy or
otherwise obtain and use our software or other proprietary information without
authorization, or to develop similar software independently. Policing
unauthorized use of our technology is difficult, particularly because the global
nature of the Internet makes it difficult to control the ultimate destination or
security of software or other data transmitted. The laws of other countries may
not adequately protect our intellectual property.
In the systems and software industries, it is common that companies receive
notices from time to time alleging infringement of patents, copyrights or other
intellectual property rights of others. We may from time to time be notified of
claims that we may be infringing upon patents, copyrights or other intellectual
property rights owned by third parties. Companies may pursue claims against
Mcglen with respect to the alleged infringement of patents, copyrights or other
intellectual property rights owned by third parties. Although we believe we have
not violated or infringed upon any intellectual property rights and have taken
measures to protect our own rights, there is no assurance that we will avoid
litigation. Litigation may be necessary to protect our intellectual property
rights and trade secrets, to determine the validity of and scope of the
proprietary rights of others or to defend against third party claims of
invalidity. Any litigation could result in substantial costs and diversion of
resources away from the day-to-day operation of our business.
Existing copyright, trademark, patent and trade secret laws afford only limited
protection. Existing laws, in combination with the steps we have taken to
protect our proprietary rights, may be inadequate to prevent misappropriation of
our technology or other proprietary rights. Also, such protections do not
preclude competitors from independently developing products with functionality
or features similar or superior to our products and technologies.
We also rely on a variety of technologies that we license from third parties,
such as the database and Internet commerce server applications that we license.
We cannot assure you that these third-party technology licenses will continue to
be available to Mcglen on commercially reasonable terms. If we lose any such
licenses, or if we are unable to maintain or obtain upgrades to any of these
licenses, it could delay completion of our proprietary software enhancements
until equivalent technology is identified, licensed or developed, and
integrated.
WE ARE VULNERABLE TO THE RAPID EVOLUTION OF ELECTRONIC COMMERCE AND RELATED
TECHNOLOGY.
The Internet and the electronic commerce industry are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service or product introductions embodying new technologies, and the emergence
of new industry standards and practices. Changes in the Internet, electronic
commerce and related technology could render our web site and technology
obsolete. To remain competitive, we must continue to enhance and improve the
customer service features, responsiveness and functionality of our web site. Our
success in achieving these goals depends on our ability to develop or license
new technologies and respond promptly and cost-effectively to technological
advances and emerging industry standards and practices. The development and
licensing of technologies relating to the Internet and electronic commerce
involve significant technical, financial and business risks. We may not be
successful in developing, licensing or integrating new technologies or promptly
adapting our web sites, proprietary technology and transaction-processing
systems to customer needs or emerging industry standards.
14
WE MAY BECOME SUBJECT TO MORE BURDENSOME GOVERNMENT REGULATION.
We are subject, both directly and indirectly, to various laws and governmental
regulations relating to our business. There are currently few laws or
regulations directly applicable to commercial on-line services or the Internet.
However, due to the increasing popularity and use of commercial on-line services
and the Internet, it is possible that new laws and regulations may be adopted.
These laws and regulations may cover issues including, for example, user
privacy, pricing and characteristics and quality of products and services.
Moreover, the applicability to commercial on-line services and the Internet of
existing laws governing issues including, for example, property ownership, libel
and personal privacy, is uncertain and could expose Mcglen to substantial
liability. Any new legislation or regulation or the application of existing laws
and regulations to the Internet could have a material and adverse effect on our
business.
In addition, because our services and products are available over the Internet
anywhere in the world, multiple jurisdictions may claim that we are required to
qualify to do business as a foreign corporation in each of those jurisdictions.
Our failure to qualify as a foreign corporation in a jurisdiction where we are
required to do so could subject Mcglen to taxes and penalties for the failure to
qualify. It is possible that state and foreign governments might also attempt to
regulate our transmissions of content on our web site or prosecute Mcglen for
violations of their laws. There can be no assurance that violations of local
laws will not be alleged or charged by state or foreign governments, that we
might not unintentionally violate these laws or that these laws will not be
modified, or new laws enacted, in the future.
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE.
We depend almost entirely on the Internet for revenue and the increased use of
the Internet for commerce is essential for our business to grow. Accordingly,
our success depends in large part on the continued development of the
infrastructure for providing Internet access and services. The Internet could
lose its viability or its usage could decline due to many factors beyond our
control, including:
o delays in the development of the Internet infrastructure;
o power outages;
o the adoption of new standards or protocols for the Internet;
or
o changes or increases in governmental regulation.
We cannot be certain that the infrastructure or complementary services necessary
to maintain the Internet as a useful and easy means of buying goods will be
developed or that, if they are developed, the Internet will remain a viable
marketing and sales channel for the types of products and services that we offer
at our on-line stores.
WE FACE RISKS ASSOCIATED WITH MAINTAINING THE VALUE OF OUR DOMAIN NAMES.
We currently hold various Web domain names relating to our brand, including the
Mcglen.com and AccessMicro.com domain names. We cannot assure you that we will
be able to acquire or maintain relevant domain names in all jurisdictions in
which we conduct business. Governmental agencies and their designees generally
regulate the acquisition and maintenance of domain names. The regulation of
domain names in the United States and in foreign countries is subject to change.
Governing bodies may establish additional top-level domains, appoint additional
domain name registrars or modify the requirements for holding domain names. The
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may be
unable to prevent third parties from acquiring domain names that are similar to,
infringe on or otherwise decrease the value of our brand and our trademarks and
other proprietary rights.
15
VOLATILITY IN THE UNITED STATES STOCK MARKET, THE NASD OTC MARKET AND THE
TECHNOLOGY SECTOR, AS WELL AS OTHER FACTORS, MAY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK.
The trading price of our common stock has been and may continue to be subject to
fluctuations in response to quarter-to-quarter variations in operating results,
changes in earnings estimates by analysts, announcements of technological
innovations or new products introduced by Mcglen or our competitors and other
events or factors. Recently, the stock market in general and the shares of
Internet-related companies in particular have experienced significant price
fluctuations. The market price may continue to fluctuate significantly in
response to various factors, including without limitation:
o quarterly variations in operating results;
o the announcement of technological innovations;
o the announcement of management changes;
o the introduction of new services by Mcglen and its
competitors;
o changes in estimates by securities analysts;
o market conditions in the industry;
o announcements and actions by competitors;
o limited trading volume of our securities on the
Over-the-Counter Bulletin Board;
o regulatory and judicial actions; and
o general economic conditions.
A SUBSTANTIAL PORTION OF OUR STOCK IS HELD BY LAN PLUS CORPORATION SHAREHOLDERS.
Upon completion of our reverse merger with Lan Plus Corporation in March 2002,
its shareholders, Andy Teng, Richard Shyu and the Lan Plus Corporation ESOP
influence all fundamental matters affecting Mcglen. As of April 15, 2002, these
three entities/persons controlled approximately 75% of the total combined voting
power of the outstanding common stock. Accordingly, they are able to wield
considerable influence in, among other things, determining the outcome of
corporate decisions, effecting corporate transactions (including mergers,
consolidations and the sale of all or substantially all of our assets), or
preventing or causing a change in control in the company.
WE ARE EXPOSED TO THE RISKS OF A GLOBAL MARKETPLACE.
A portion of our products are either produced in, or have major components
produced in, the Asia Pacific region. We have business relationships with
companies located in the region directly, and we engage in U.S. Dollar
denominated transactions with these companies and U.S. divisions and
subsidiaries of these companies. As a result, we may be indirectly affected by
risks associated with international events, including economic and labor
conditions, political instability, tariffs and taxes, availability of products
and currency fluctuations in the U.S. Dollar versus the regional currencies.
Countries in the Asia Pacific region, including Japan, have experienced
weaknesses in their currency, banking and equity markets from time to time.
These weaknesses could adversely affect the supply and prices of products and
components and, ultimately, our results of operations.
16
THE ISSUANCE OF ADDITIONAL PREFERRED STOCK COULD AFFECT VOTING RIGHTS OR DELAY
OR PREVENT A CORPORATE TAKEOVER.
Our Board of Directors is authorized to determine the rights and restrictions
granted to and imposed upon our preferred stock. They can decide the number of
shares of any series of preferred stock and the designation of any such series.
Our Board of Directors may authorize and issue additional preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of common stock. In addition, the potential issuance
of preferred stock may:
o have the effect of delaying, deferring or preventing a change
in control of the company;
o discourage bids for the common stock at a premium over the
market price of the common stock; and
o adversely affect the market price of the common stock.
SHARES ELIGIBLE FOR PUBLIC SALE COULD ADVERSELY AFFECT OUR STOCK PRICE.
The issuance of further shares and the eligibility of issued shares for resale
will dilute our common stock and may lower the price of our common stock. There
were 18,961,162 common shares issued and outstanding as of April 12, 2002. In
addition, approximately 360,000 stock options and warrants were outstanding
at December 31, 2001, most of which were fully vested. Moreover, we may issue
additional shares in acquisitions and may grant additional stock options to our
employees, officers, directors and consultants under our stock option plan.
IF MCGLEN AND LAN PLUS DO NOT INTEGRATE THEIR OPERATIONS QUICKLY AND
EFFECTIVELY, SOME OR ALL OF THE POTENTIAL BENEFITS OF THE MERGER MAY NOT BE
REALIZED.
In order to achieve the benefits of the merger, Mcglen must successfully combine
its business with Lan Plus' business and make Lan Plus' technologies, products
and services operate together with Mcglen's technologies, products and services.
This integration may require the partial or wholesale conversion or redesign of
some or all of the technologies, products and services of either Mcglen or Lan
Plus. The companies may not be able to integrate their technologies and
operations quickly or smoothly, in which case serious harm to the combined
company's business, financial condition and prospects may result. Integrating
the two businesses will entail significant diversion of management's time and
attention. In addition, the combined entity may be required to spend additional
money and resources on integration issues that would otherwise be spent on
developing its business and services or other matters.
THE SUCCESS OF THE COMBINED COMPANY DEPENDS IN PART ON THEIR ABILITY TO RETAIN
KEY PERSONNEL AFTER THE MERGER, AND WE MAY NOT BE ABLE TO DO SO.
The success of the combined company after the merger depends in part on the
continued service of key Lan Plus and Mcglen personnel. Despite its efforts to
hire and retain quality employees, the combined company might lose some of Lan
Plus' and Mcglen's key employees following the merger. Mcglen and Lan Plus have
different corporate cultures. Some Lan Plus and Mcglen employees may be
unwilling to work for the combined company. Competitors may also recruit Lan
Plus or Mcglen employees during integration, as is common in high technology
mergers. In addition, some Lan Plus employees will acquire significant amounts
of Mcglen common stock in the merger. As a result, the companies may be required
to provide significant incentives for some of Lan Plus' employees to remain with
the combined company.
Similarly, the future performance of the combined company depends on its
continuing ability to attract and retain highly qualified technical and
managerial personnel following the merger. Competition for qualified management,
engineering, technical, sales and marketing employees is intense. If Lan Plus or
Mcglen employees leave as a result of the merger or if the combined company
cannot attract and retain qualified personnel, the combined company's business
would be harmed.
THE MERGER COULD HARM KEY THIRD PARTY RELATIONSHIPS.
Present and potential relationships of Mcglen and Lan Plus with customers and
other third parties with whom they have relationships may be harmed by the
merger. Uncertainties following the merger may cause these parties to delay
17
decisions regarding these relationships. Any changes in these relationships
could harm the combined company's business. In addition, Lan Plus customers may,
in response to the announcement of the merger, delay or defer decisions
concerning Lan Plus. Lan Plus could experience a decrease in expected revenue as
a consequence of customers' uncertainties associated with the merger. Any delay
or deferral in those decisions by Lan Plus customers could have a material
adverse effect on Lan Plus' or the combined company's business.
FROM TIME TO TIME LAN PLUS HAS INVESTED IN SHORT SALES OF SECURITIES
Lan Plus' management routinely invests the company's excess operating funds in
the stock market. From time to time, management invests these funds in short
sales of stock which they typically cover within 60 days of the date of the
short purchase. Short sales typically have a higher degree of risk than
traditional stock purchases and management attempts to limit the concentration
of short sales in the company's overall invested and cash portfolio. At December
31, 2001 and 2000, approximately $426,000 and $460,000, respectively, was
invested in short sales of common stock and unrealized losses of $102,000 and
$51,000, respectively, were recorded on these investments. Management covered
the December 31, 2000 short sales in January 2001, recording a gain of $9,000.
BUSINESS OF LAN PLUS CORPORATION
GENERAL
Lan Plus Corporation (Lan Plus or the "Company") is a leading marketer of
personal computers ("PCs") and related products and services. Lan Plus
manufactures, markets and supports a broad line of desktop PCs, servers and
workstations used by individuals, families, businesses, government agencies and
educational institutions. The Company also offers diversified products and
services such as software, peripherals, Internet access service and support
programs.
Lan Plus' strategy is to deliver the best value to customers by offering
quality, high-performance PCs and other products and services employing the
latest technology at competitive prices and by providing outstanding service and
support.
BUSINESS OPERATIONS
Lan Plus' business model is based on delivering turnkey drop-ship programs
allowing our channel partners, allowing its channel partners in catalog, TV
Shopping and Retail Chain Stores, to market PCs with no inventory risk while
maximizing its partners' and the Company's profit. This concept, together with
its flexible, build-to-order manufacturing process, enables Lan Plus to achieve
high inventory turnover, reduced inventory levels, and allows the Company to
rapidly incorporate new technologies and components into its product offerings.
Lan Plus has sold over one million PCs to date, and maintains a database of its
customers to provide a broader range of services to these customers. Lan Plus
maintains a web site at www.lan-plus.com, as well as epcdirect.com and
myshoppingclub.com. The lan-plus.com web site offers information about new
product offerings and technical support advice. In addition, regular surveys of
customers also provides Lan Plus valuable marketing, service and product
information.
PRODUCTS AND SERVICES
The Company's PC Systems business develops, markets, manufactures, sells and
supports a wide range of high performance desktop systems and network servers
under the Lan Plus, Northgate, Protek, e-Pcdirect, and Netway brand names. Lan
Plus also sells, resells and supports a variety of additional peripherals,
software and services. Systems built by the Company use microprocessors
manufactured by Intel Corporation and Advanced Micro Devices. Lan Plus offers
pre-configured PC's with differing memory and storage configurations, and
various operating systems and application software, as well as built-to-order
systems. The Company also offers a variety of hardware components and
peripherals to complement its desktop systems and network servers, including
monitors, modems, graphics cards, accelerators, and CD-ROM and DVD drives. In
addition, Lan Plus offers numerous hardware services and e-services, many
through third party service providers. Phone support, and web-based support and
services, are available 24 hours a day, seven days a week, 365 days per year.
18
TECHNICAL SUPPORT
Technical support and customer service representatives respond to a variety of
inquiries from customers, including questions concerning product offerings,
order status and post-installation hardware and software issues. Many inquiries
are resolved over the telephone without the need to repair or replace system
components. When repairs are necessary, Lan Plus may ship a replacement part or
system and advise customers via telephone regarding installation.
Alternatively, customers may elect to ship a system directly to Lan Plus for
repair. Technical support services are also provided through the Company's web
sites. These services enable customers to access system-specific information and
recent software updates for many of the software programs and drivers included
with the computer systems. In addition, many of systems are sold with system
diagnostic and repair software that has been optimized for the Company's
products.
SALES AND MARKETING
End-user customers are comprised primarily of small- and medium-sized
businesses, governmental entities and private consumers. In general, similar
sales and marketing approaches across all of these different customer groups, as
the demand levels of the various groups respond similarly to changes in market
prices and overall general economic conditions.
Lan Plus markets its systems primarily through high profile business partners in
retail, catalog, telemarketing, and other industries. The Company also sells a
limited number of systems through customer-direct relationships supported by
advertising, direct mail, telephone sales, field sales representatives, and its
web sites.
INTERNET BUSINESS - ACCESS AND E-COMMERCE
In April 1999, Lan Plus announced a wide-ranging relationship with the Microsoft
Network, Inc. (MSN) intended to accelerate distribution of each company's
products and services, including joint Internet service on either Lan-Plus.com
or MSN offered by Lan Plus in connection with product sales. This agreement was
terminated in 2001. The Company currently sells Earthlink or NetZero Internet
service bundled with its systems.
The Internet has emerged as a global platform that allows millions of people to
share information, communicate and conduct business. International Data
Corporation, or IDC, estimates that there were approximately 144 million
Internet users worldwide at the end of 1998 and that the number of users will
grow to approximately 602 million by the end of 2003. The increased availability
of compelling media content on the Internet has enabled the Internet to compete
with traditional media such as television and radio for the attention of
consumers and serve as an effective channel for marketing goods and services.
The PC is the primary means by which consumers access the Internet. According to
IDC, PCs accounted for approximately 95% of the access devices connected to the
Internet in the United States at the end of 1998. The increase in the number of
people with Internet access that was enabled by the proliferation of
lower-priced PCs has fueled the growth of Internet shopping, or e-commerce.
Lan Plus is committed to refining and extending the advantages of its business
model by moving even greater volumes of product sales, service and support to
the Internet. The Internet provides greater convenience and efficiency to
customers and, in turn, to the Company.
CUSTOMERS
Lan Plus develops and utilizes its customer relationships to understand
end-users' needs and to deliver high quality computer products and services
tailored to meet those needs. For large corporate and institutional customers,
the Company works with the customer prior to the sale to plan a strategy to meet
that customer's current and future technology needs. After a sale, it begins a
direct relationship with the end user by establishing customer service and
technical personnel contact with the customer, often on a pro-active basis. Lan
19
Plus also establishes direct relationships with small-to-medium businesses and
individuals, through account representatives, telephone sales representatives or
Internet contact. These direct customer relationships provide information about
customers' plans and requirements and enable the Company to weigh customers'
needs against emerging technologies.
For the year ended December 31, 2001, approximately 66% of Lan Plus' gross
revenues were from sales of PCs through channel partners drop-shipped to
consumers. This concentration of sales allows the Company to maintain a low-cost
infrastructure while establishing preferred vendor status with large leading
retailers. Lan Plus intends to continue to sell the majority of our PCs and
monitors to a limited number of large customers for the foreseeable future.
The growth in Lan Plus' net sales and earnings to date has resulted primarily
from the sale of desktop PCs to individuals, home offices, small businesses and
corporate customers, and to governmental entities and educational institutions
in the U.S. market. Sales and earnings have also grown due to the ongoing
diversification of the Company's revenue stream with the introduction and
expansion of new products and services, including software, peripheral devices,
Internet access and general merchandise. Management believes that most of our
continued growth will come from four areas: (a) the domestic consumer market,
including the developing market for family-use PCs such as Internet Appliances
and Home Networking; (b) businesses and institutions, including home offices,
small to medium-size businesses, as well as Fortune 1000 companies, governmental
entities and educational institutions; (c) the continued expansion of our
general merchandise offerings; and (d) the expansion of service and product
offerings to customers, including Internet access, e-commerce, and peripherals.
MANUFACTURING
Lan Plus operates manufacturing facilities in City of Industry, California. The
Company's manufacturing process consists of assembly, functional testing and
quality control of its computer systems. Production teams are used to assemble
most of the Company's desktop PCs with each member of a production team trained
to do several tasks, increasing flexibility and efficiency. Testing and quality
control processes are also applied to components, parts and subassemblies
obtained from suppliers. The Company's build-to-order manufacturing process is
designed to allow it to quickly produce customized computer systems and to
achieve rapid inventory turnover and reduced inventory levels, which lessens
exposure to the risk of declining inventory values. This flexible manufacturing
process also allows Lan Plus to incorporate new technologies or components into
product offerings quickly. Each PC is shipped from the Company's manufacturing
facilities ready-for-use, with an operating system and application software
already installed.
Quality control is maintained through the testing of components, parts and
subassemblies at various stages in the manufacturing process. Quality control
also includes a burn-in period for completed units after assembly, on-going
production reliability audits, failure tracking for early identification of
production and component problems and information from our customers obtained
through our direct relationships and service and support programs. Lan Plus'
desktop computer manufacturing operations have been assessed and certified as
meeting the requirements of the International Organization for Standardization
(ISO) 9002. ISO 9002 certification recognizes compliance with international
standards for quality assurance.
PRODUCT DEVELOPMENT
Lan Plus' expenditures on research, development and engineering in each of the
last three years were less than 1% of net sales. The Company maintains close and
cooperative relationships with many of its suppliers and with other technology
developers. These working partnerships allow Lan Plus to use its business model
and build-to-order manufacturing process to deliver, on a timely and
cost-effective basis, those emerging technologies that are most relevant to its
customers. These relationships have also enabled Lan Plus to evaluate the latest
developments in PC technology and to quickly introduce new products and new
product features to the market. Lan Plus believes that its strong relationships
with suppliers will continue to give it access to new technology and enhance the
Company's ability to bring the latest technology to market on a timely basis.
Direct relationships with customers also enable Lan Plus to obtain valuable
market information, which it uses to assist in developing new product offerings.
Lan Plus must evaluate, obtain and incorporate new hardware, software, storage,
communications and peripherals technologies that are primarily developed by
others while taking steps to ensure that new products are compatible with
industry standards and that they meet cost objectives based on competitive
pricing targets.
20
PRODUCT QUALITY, WARRANTIES AND TECHNICAL SUPPORT
Lan Plus believes PC customers have in recent years become increasingly
sophisticated in their purchasing decisions, with quality and reliability
becoming increasingly important. The Company works closely with its suppliers to
develop high-quality components, manufactured to Lan Plus specifications. Lan
Plus believes that customers judge quality by evaluating the performance and
reliability of a company's products, as well as a company's ability to provide
comprehensive service and support for its PCs.
Lan Plus believes product warranties are an important part of achieving customer
satisfaction and maintaining its image. In general, it provides a 30-day
money-back guarantee for customer returns. Shipping and handling charges to and
from the customer are non-refundable. Lan Plus provides competitive warranty
packages on all of their manufactured products, ranging from one year to five
years. In many cases, customers have the option of customizing their limited
warranty to suit their particular needs.
On-line support solutions combine preloaded, automated system-repairing software
and online diagnostic and computer maintenance programs to deliver automated
technical support for Lan Plus customers.
Lan Plus provides a number of other basic technical support options to its
customers through their web sites, as well as through a variety of other
methods, including e-mail, fax and telephone support. Many of these technical
support options are available to customers without charge.
PATENTS, TRADEMARKS AND LICENSES
Lan Plus works closely with PC component suppliers and other technology
developers to stay abreast of the latest developments in PC technology and has
obtained patent licenses for some technologies where these licenses are
necessary or advantageous, some of which require significant royalty payments.
In addition, it has entered into nonexclusive licensing agreements with
Microsoft Corporation for various operating system and application software, as
well as various software licensing agreements with other companies.
From time to time, other companies and individuals assert exclusive patent,
copyright, trademark or other intellectual property rights to technologies or
marks that are important to the technology industry or our business. We evaluate
each claim relating to our products and, if appropriate, seek a license to use
the protected technology. The licensing agreements generally do not require the
licensor to assist us in duplicating its patented technology nor do these
agreements protect us from trade secret, copyright or other violations by us or
our suppliers in developing or selling these products.
COMPETITION
The PC industry is highly competitive, especially with respect to pricing and
the introduction of new products and product features. Lan Plus competes
primarily by expanding the total available market with flexible services, while
avoiding conflict in "high volume but low profit channels".
Lan Plus competes with a number of personal computer manufacturers including
Dell Computer, Inc., Gateway, Inc., Compaq Computer Corporation, Hewlett-Packard
Company, e-Machines, Systemax, among others. These manufacturers sell their
products through different combinations of national and regional distributors,
dealers, value-added resellers, retail stores and through the direct channel.
Most of Lan Plus' current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a substantially larger
installed base of customers than they do. In addition, many of its competitors
have nationally-known brands or well-established relationships and have
extensive knowledge of our industry. Moreover, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address consumer
needs or to combine hardware product and service offerings. The introduction of
low-priced PCs combined with the brand strength, extensive distribution channels
and financial resources of the larger PC vendors may cause Lan Plus to lose
market share.
21
Competitive factors in our markets include logistics, on-line technical support
and services, Call Center management, OEM relationships with major component
manufacturers, price, new technology, variety of products, software and
features, marketing and sales capability.
SEASONALITY
Operating results have been subject to seasonality and to quarterly and annual
fluctuations. Factors involved include new product developments or
introductions, availability of components, changes in product mix and pricing
and product reviews and other media coverage. Historically, sales have increased
in the third and fourth quarters due, in part, to back-to-school and holiday
spending.
EMPLOYEES
As of April 12, 2002, Lan Plus had approximately 166 regular employees. It has
never experienced a work stoppage due to labor difficulties and believes that
its employee relations are good.
FACILITIES
Lan Plus' corporate headquarters and distribution facility is located in City of
Industry, California. The Company leases approximately 58,000 square feet
pursuant to a lease that expires in 2013, unless terminated earlier or extended.
Under the terms of the lease, Lan Plus makes monthly payments of approximately
$30,000 to its CEO, who owns the property.
GOVERNMENT REGULATION
Lan Plus' business is subject to regulation by various federal and state
governmental agencies including the U.S. Federal Communications Commission, the
U.S. Federal Trade Commission, Department of Justice, the U.S. Department of
Commerce and the U.S. Consumer Products Safety Commission.
Some risks of costs and liabilities related to environmental matters are
inherent in Lan Plus' business, and its operations are subject to federal, state
and local environmental regulatory requirements relating to environmental and
waste management. Lan Plus periodically generates and handles limited amounts of
materials that are considered hazardous waste under applicable law and contracts
for the off-site disposal of these materials. Lan Plus management believes its
business is operated in compliance with applicable environmental regulations.
BACKLOG
Lan Plus does not believe that backlog is a meaningful indicator of sales that
can be expected for any period, and there can be no assurance that the backlog
at any point in time will translate into sales in any subsequent period. Levels
of unfilled orders for systems fluctuate depending upon component availability,
demand for some products, the timing of large volume customer orders and
production schedules. Customers frequently change delivery schedules and orders
depending on market conditions and other reasons.
ITEM 2. DESCRIPTION OF PROPERTY
In December 2000, we moved our operations to a 50,000 square foot warehouse
owned by Lan Plus Corporation, of which we were subleasing less than 2,000
square feet. We also leased approximately 13,140 square feet of office space in
Los Angeles, California, pursuant to a non-cancelable lease that expired on
January 31, 2002. Approximately 50% of such office space was subleased to a
former Vice President of Western Technologies, Inc. under a sublease which
expired in September 2001. In September 2001, the Company stopped paying the
remaining $22,000 in lease payments required under the lease. Management has
begun the process of placing Western in Chapter 7 bankruptcy; the unpaid lease
commitments are included in net current liabilities of discontinued operations
at December 31, 2001.
The Company believes that its present facilities are adequate for its current
needs.
22
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently a party to any pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2001.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Northgate's common stock is traded on the Over-the-Counter Bulletin Board under
the symbol "NGTE." On March 28, 2002, Mcglen changed its ticker symbol from MIGS
to NGTE in connection with the consummation of the reverse merger with Lan Plus
Corporation. The following table sets forth the range of the high and low
closing sales prices for Mcglen's common stock, for the periods indicated, as
reported by the Nasdaq SmallCap Market (for periods on and prior to April 12,
2001) and the Over-the-Counter Bulletin Board (for periods after April 12,
2001). The effect of the Company's March 2002 10:1 reverse stock split is not
reflected in the table below. Quotations reflect inter-dealer prices without
retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions:
Price Range of Common Stock
---------------------------
High Low
---- ---
Year Ended December 31, 2000
----------------------------
FIRST QUARTER $5.31 $3.31
SECOND QUARTER 3.63 1.03
THIRD QUARTER 1.81 0.50
FOURTH QUARTER 1.09 0.13
Year Ended December 31, 2001
----------------------------
FIRST QUARTER $0.88 $0.16
SECOND QUARTER $0.33 $0.10
THIRD QUARTER $0.27 $0.09
FOURTH QUARTER $0.21 $0.07
On April 12, 2002, the closing price of the Company's Common Stock as reported
on the Over the Counter Market was $0.60 per share. On April 12, 2002, there
were 304 holders of record of our Common Stock.
The Company has never paid cash dividends on its Common Stock, and does not
anticipate paying cash dividends on its Common Stock in the future. The Company
intends to retain its earnings to finance the growth and development of its
business.
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from the
financial statements of the Company, which have been prepared in accordance with
United States generally accepted accounting principles. The consolidated
financial statements of the Company for the years ended December 31, 1999, 2000
and 2001, and as of December 31, 1999, 2000 and 2001, and the related report of
BDO Seidman LLP are included elsewhere in this report. The financial statements
as of December 31, 1998 and 1997, and for the years then ended, have been
derived from financial statements audited by Singer Lewak Greenbaum & Goldstein
LLP. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements included elsewhere in this report.
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales ...................................... $ 3,661 $ 11,525 $ 27,494 $ 30,145 $ 21,231
Cost of sales .................................. 2,991 9,707 25,425 27,136 18,936
--------- --------- --------- --------- ---------
Gross profit ................................... 670 1,818 2,069 3,009 2,295
Selling, general and administrative .......... 520 1,779 5,549 8,461 4,006
--------- --------- --------- --------- ---------
Income (loss) from operations ............... 150 39 (3,480) (5,452) (1,711)
Interest (income) expense ................... (2) (20) 31 517 235
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item .......................... 152 59 (3,511) (5,969) (1,946)
Provision for income taxes ..................... 3 1 1 1 1
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ........ 149 58 (3,512) (5,970) (1,947)
Extraordinary item, gain on retirement of debt . - - - 239 639
--------- --------- --------- --------- ---------
Net income (loss) .............................. $ 149 $ 58 ($ 3,512) ($ 5,731) ($ 1,308)
========= ========= ========= ========= =========
Basic and diluted income (loss) per share before
extraordinary item .......................... $ 0.10 - ($ 1.11) ($ 1.88) ($ 0.55)
========= ========= ========= ========= =========
Basic and diluted net income (loss) per share .. $ 0.10 - ($ 1.11) ($ 1.80) ($ 0.37)
========= ========= ========= ========= =========
Weighted average shares of common stock
outstanding:
Basic and diluted ........................... 2,000 2,075 3,173 3,175 3,551
========= ========= ========= ========= =========
DECEMBER 31,
------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents .......... $ 213 $ 437 $ 962 $ 2 $ 80
Working capital (deficit) .......... 150 168 (1,558) (2,721) (1,852)
Total assets ....................... 548 1,100 3,304 1,528 915
Long-term debt and capital leases .. - - 416 958 992
Total stockholders' equity (deficit) 161 211 (864) (3,099) (2,653)
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere herein.
OVERVIEW
Mcglen Internet Group (Mcglen or the Company), formerly Adrenalin Interactive,
Inc. (Adrenalin), was acquired by Mcglen Micro, Inc. in December 1999 through a
transaction in which the stockholders of Mcglen Micro, Inc. acquired control of
the Company through a reverse acquisition. As a result of the acquisition, each
share of Mcglen Micro, Inc. was converted into 0.09889611 shares of the Company,
with approximately 2,548,600 shares being issued.
In connection with the acquisition, the Board of Directors of the Company
adopted a formal plan to discontinue the operations of Western Technologies,
Inc. (Western), the operating subsidiary of Adrenalin that developed video
games. As such, the accounting treatment for the reverse acquisition is that of
a recapitalization. The net liabilities of Western have been reclassified as
discontinued operations on the balance sheets for all periods presented. The
operations of Adrenalin and Western are not included in the tables below. See
Note 12 to the consolidated financial statements included in this report.
Mcglen Micro, Inc. was formed in May 1996 to sell computer products over the
Internet. Mcglen has since grown into a global Internet retailer of computer
hardware and peripheral products servicing individuals, small offices/home
offices, and the corporate market. As an aggregator of hi-tech products, Mcglen
offers over 100,000 stockkeeping units (SKUs) at its virtual superstore,
www.Mcglen.com. The Mcglen.com superstore has been in operation for more than
three years and already has brand recognition across 100,000 current customers.
Mcglen purchased AMT Component, Inc. (AMT) in March 1999, which operates the
AccessMicro.com web site and sells similar products at typically lower price
points. In November 1999, Mcglen opened the Techsumer.com website which focused
on "technologically minded consumers," Mcglen closed this web site in 2001.
On March 20, 2002, the Company closed its merger with Lan Plus. At the closing
of the merger, Lan Plus shareholders received a number of shares such that they
now own approximately 75% of the Company. In addition, at the close of the
merger, the Company also instituted a 10:1 reverse stock split and changed its
name to Northgate Innovations, Inc. Pursuant to the merger agreement, upon close
of merger, the Company's accounts payable to, and advances from Lan Plus, in the
amount of approximately $2.3 million was converted to common stock eliminating
the debt; the stock was then retired to Treasury and cancelled. The Company will
report combined operations with Lan Plus beginning with its 10-Q for the period
ended March 31, 2002.
The Company purchases a substantial percentage of its products from a single
distributor. Additionally, purchases from Lan Plus Corporation accounted for
more than 50% of our aggregate merchandise purchases for 2001. Mcglen has no
long-term contracts or arrangements with its vendors that guarantee the
availability of merchandise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses Mcglen's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, including those related to customer incentives, product
returns, bad debts, inventories, intangible assets, financing operations,
warranty obligations, and contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
25
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements. Mcglen maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. If the financial condition of Mcglen's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Mcglen provides for the estimated cost of
product warranties at the time revenue is recognized. While the products Mcglen
sells are covered by third party manufacturer warranties, Mcglen may have
products returned by customers that Mcglen may not be able to recover from the
manufacturer. Returns of this nature have been immaterial in the past; however,
should actual product failure rates increase or the manufacturers go out of
business, Mcglen may be forced to cover these warranty costs and the costs may
differ from Mcglen's estimates. Mcglen writes down its inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are
less favorable than those projected by management, additional inventory
write-downs may be required. We assess the impairment of identifiable
intangibles, and related goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors we consider
important which could trigger an impairment review include the following:
o significant underperformance relative to expected historical
or projected future operating results;
o significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; and
o significant negative industry or economic trends.
When we determine that the carrying value of intangibles, and related goodwill
may not be recoverable based upon the existence of one or more of the above
indicators of impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated the percentage of net
sales represented by certain items reflected in the Company's consolidated
statements of operations. There can be no assurance that the trends in sales
growth or operating results will continue in the future. The discussion of the
"Results of Operations" includes AMT since the date of acquisition, March 31,
1999.
PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----
Net sales 100.00% 100.00% 100.00%
Cost of sales 89.19 90.02 92.47
------- ------- -------
Gross profit 10.81 9.98 7.53
Operating expenses 17.67 24.86 17.46
Deferred compensation expenses 1.20 3.20 2.73
Interest expense 1.11 1.72 0.11
------- ------- -------
Loss before income taxes and extraordinary item (9.17) (19.80) (12.77)
Provision for income taxes - - -
------- ------- -------
Loss before extraordinary item (9.17) (19.80) (12.77)
Extraordinary item 3.01 0.79 -
------- ------- -------
Net loss (6.16%) (19.01%) (12.77%)
======== ======== ========
26
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Net sales decreased by $8.9 million, or 29.6%, to $21.2 million for the year
ended December 31, 2001, compared to $30.1 million for the year ended December
31, 2000. The decrease in net sales was primarily a result of the Company's
decision in July 2000 to focus its efforts on the business to business sector
(B2B), a return to a focus on products where the Company has a niche in the
marketplace and where the Company believes it has a strategic advantage in
product procurement and distribution, and a shift away from the business to
consumer market (B2C).
Gross profit decreased by approximately $700,000 or 23.3% to $2.3 million for
the year ended December 31, 2001, compared to $3.0 million for the same period
in the prior year. The decrease in gross profit was directly related to the
decrease in net sales as the Company focused its operations on the business to
business sector (B2B), a return to a focus on products where the Company has a
niche in the marketplace and where the Company believes it has a strategic
advantage in product procurement and distribution, and a shift away from the B2C
market in July 2000. Gross profit as a percentage of sales increased to 10.8%
for the year ended December 31, 2001, compared to 10.0% for the year ended
December 31, 2000. The increase in the gross profit margin was directly related
to the change in the Company's operations in July 2000, away from lower margin
B2C customers, memory and CPU's.
Selling, general and administrative expenses decreased by $4.5 million or 52.9%,
to $4.0 million for the year ended December 31, 2001, from $8.5 million for the
same period in the prior year. The decrease in operating expenses was
attributable to a decrease in personnel costs associated with the decreased
sales volume, a decrease in advertising costs resulting from decreased spending
on the placement of Company's websites on various shopping comparison search
engines, decreased credit card processing fees with lower sales volume as well
as a decrease in the rate charged by the Company's credit card processor, and
decreased stock compensation expense relating to options and stock issued to
consultants and employees, and decreased telephone charges. Advertising
decreased by approximately $1.3 million, or 73.6%, as Mcglen decreased spending,
primarily price comparison search engines and product placements on websites.
Payroll and related costs decreased by approximately $900,000, or 43.3%, for the
year ended December 31, 2001 compared to the same period of 2000, as Mcglen
consolidated positions and reduced head count. Mcglen employed more than 100
staff as of July 1, 2000 as compared to less than 30 staff at December 31, 2001.
Stock compensation charges decreased by approximately $600,000, or 62.9% as
Mcglen did not issue any stock or stock options at below market prices in 2001
and several employees who were issued options at lower than market prices left
the Company in Spring 2000. Bad debt expenses decreased by $140,000 or 59.3% to
less than $100,000 for the year ended December 31, 2001 due to the Company
reducing its open account sales and tightening its credit policies. The majority
of the Company's bad debt write-off in 2001 was related to funds held by the
Company's former credit card processor. Investor relations expenses decr