EXHIBIT 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A4
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-25602
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TECH SQUARED INC.
(Exact name of registrant as specified in its charter)
MINNESOTA ▇▇-▇▇▇▇▇▇▇
(State of Incorporation) (I.R.S. Employer
Identification No.)
▇▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
(Address of principal executive offices)
Registrant's telephone number, including area code: (▇▇▇) ▇▇▇-▇▇▇▇
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR
VALUE
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Indicate by check ▇▇▇▇ whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 __
Indicate by check ▇▇▇▇ if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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. / /
As of April 23, 1999, 12,102,950 shares of Common Stock of the Company were
outstanding, and the aggregate market value of the Common Stock of the Company
as of that date (based upon the closing bid price of the Common Stock at that
date on the OTC Bulletin Board quotation system), excluding outstanding shares
beneficially owned by affiliates, was approximately $23,551,234.
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Ex. 1-1
PART I.
ITEM 1. BUSINESS
(a) BUSINESS DEVELOPMENT
GENERAL
Tech Squared Inc. ("Tech Squared") was incorporated under the laws of the
State of Minnesota in 1988 and currently has three wholly-owned subsidiaries,
▇▇▇▇▇ Resources Corporation, a Minnesota corporation ("▇▇▇▇▇"), MacUSA, Inc., a
Minnesota corporation ("MacUSA") and PLI Corporation, a Nevada corporation
("PLI"). Throughout this document the "Company" is used to collectively refer to
Tech Squared Inc. and the subsidiaries discussed above.
The Company's primary business focus is on marketing & selling to the
businesses in the desktop publishing industry through direct catalog mailings
(approximately 72% of total revenues in 1998) and to value added reseller's
(VAR's) and other dealers. The Company's sales have been primarily of Apple
Macintosh-Registered Trademark- and, to a lesser degree, Microsoft Windows
95/Windows NT/Windows/MS-DOS ("Wintel") compatible products such as
(1) microcomputer hardware and peripherals, including desktop computers,
printers and printing related devices, video monitors, electronic media, storage
devices and memory and (2) software programs primarily related to those utilized
in the graphic arts industry from such name brands as Adobe and Quark. Computer
sales were approximately 24% and 19% of total sales of its direct catalog ("DTP
Direct") sales in 1998 and 1997, respectively. DTP Direct's sales of Apple
computers accounted for 97% and 98% of the total computer system sales in 1997
and 1996, respectively.
In February 1999, the board of directors of Tech Squared authorized the
officers of the Company to make investigations and, if appropriate, enter into
preliminary negotiations regarding possible changes in the Company's business
including, but not limited to, strategic alliances, joint ventures, mergers,
sale of the Company's operating business and other alternatives. Such
investigation is at a preliminary stage and no prediction can be made as to
what, if any, transactions or changes will be effected.
(b) BUSINESS OF ISSUER
Tech Squared is a national direct marketer and distributor of microcomputer
hardware and software products primarily for users of Apple
Macintosh-Registered Trademark- personal computers as well as for users of IBM
compatible personal computers. The Company's sales and marketing efforts are
currently targeted (i) at desktop publishing ("DTP"), graphic arts and pre-press
industries through its DTP Direct catalog, (ii) to computer dealers and
value-added resellers through its distribution business, and (iii) to developers
of internal corporate intranet and external Internet sites and managers of local
area networks ("LAN") and wide area networks ("WAN") through its Net Direct
catalog. The Company offers popular brand name hardware, software and
peripherals from leading vendors such as Adobe, Apple, Epson, GCC, Hewlett-
Packard, IBM, Iomega, Kodak, Minolta, Mitsubishi, NEC, Quantum, Quark, Seagate,
Sony, SyQuest, Umax Technologies, Umax Computer Corporation and U.S. Robotics.
The Company markets its products through targeted mailings of its DTP Direct
catalog, which is currently produced six times per year and its Net Direct
catalog which was launched in 1998 and which is currently produced five times
per year. The Company's catalogs, which are mailed throughout the year, include
detailed descriptions and full-color photographs of the products sold by the
Company. In 1998, the Company mailed approximately 2.3 million DTP Direct
catalogs and approximately 1.1 million Net Direct catalogs. The Company also
markets its products to its DTP Direct and Net Direct customers and dealers
through its sales force using outbound telemarketing, to attract and retain its
small to mid-sized business customers.
In 1998 and 1997, a substantial majority of the Company's net sales were
sales of Apple Macintosh-Registered Trademark- compatible products. Apple
Macintosh is a registered trademark of Apple Computer. While the Company
believes it could diversify its product offerings if its customers desired
alternatives, a decline in sales of
Ex. 1-2
Apple Macintosh computers or a decrease in the supply of or demand for software
and peripherals for such computers could have a material adverse impact on the
Company's business. During 1998 the Company continued to expand its Wintel
offerings through its Build-to-Order PC program and has increased the variety of
its Wintel offerings in other categories primarily through its Net Direct
catalog. The Company plans to continue its efforts to expand its Wintel
offerings in 1999. Notwithstanding the Company's efforts to expand these
offerings, the Company is still substantially dependent on sales of
Apple-related products and there is no assurance that the Company will
successfully transition enough sales to Wintel-related products to offset any
decline in the demand for Apple-related products.
DIRECT MARKETING
The Company's direct marketing operations are carried out primarily through
its DTP Direct catalog and through its recently added Net Direct catalog. DTP
Direct markets a broad assortment of DTP and graphics products through a catalog
that is currently published six times per year. The Company published its first
DTP Direct catalog in April. DTP Direct competes on the basis of price,
delivery, depth of product offering and product knowledge. The Company believes
that many of its' customers buy from the Company because of the knowledge and
expertise that the Company's sales force has developed. Computer sales were
approximately 24% and 19% of total sales of its direct catalog ("DTP Direct")
sales in 1998 and 1997, respectively. DTP Direct's sales of Apple computers
accounted for 97% and 98% of the total computer system sales in 1998 and 1997,
respectively.
The Company developed and launched the Net Direct catalog in the second
quarter of 1998. The Net Direct catalog is directed at the developers and
managers of intranet/internet websites offering the necessary hardware and
software that "webmasters" and LAN and WAN managers require to prepare and
maintain websites for corporate and personal use. Although the Company believes
the target market for its Net Direct catalog is substantially larger than for
its DTP Direct catalog market, and that the Net Direct catalog could provide a
significant opportunity for overall revenue growth, there are significant risks
associated with the launch and maintenance of such catalog including; a
completely new target audience, lack of any historical direct marketing data
upon which to base mailing decisions, competitive forces and new product lines.
The launch of the Net Direct catalog had a negative impact on profitability of
the Company in 1998, and will probably continue to have a negative impact on
profitability in 1999 and possibly beyond.
The Company's direct marketing programs are designed to attract new
customers and to stimulate additional purchases from existing customers. The
Company continuously attracts new customers by selectively mailing catalogs to
prospective customers. Names of prospective customers are obtained from various
sources, including vendors, trade publications, and list brokers and are updated
continuously in an attempt to maximize the response rate from each catalog
delivered.
DISTRIBUTION
The Company's dealer division sells computer hardware and software products,
wholesale to computer retailers, value-added resellers ("VARs"), and other
resellers (collectively, the "Distribution Business").
The Company's Distribution Business focuses primarily on the Desktop
Publishing market and expertise in storage devices, which has allowed the
Company to identify many smaller dealers and VARs. Sales and marketing
activities in the Distribution Business include outbound telemarketing
activities to the Company's dealer customer list and a fax and e-mail broadcast
system used to update dealers on current pricing and special offers.
Historically, storage devices have been the largest category of peripheral
device sold by the Company's Distribution Business. Beginning in late 1995 the
Company began broadening the products sold to its dealers and increasing its
customer base. As a result of Apple's decisions to stop licensing its Mac
Ex. 1-3
operating system ("OS") to clone manufacturers and limit distribution of its
computer systems to a few large distributors, the Company's distribution
business experienced a significant reduction in computer systems sales in 1998.
The Company has its own private brand of storage device products marketed under
the "NuDesign-TM-" name. These products have historically been sold primarily to
the Company's mass merchant retail customers. In late 1995, the Company
significantly reduced its sales and marketing activities targeted towards these
mass merchant customers because of the high cost of doing business with them and
because of increasing downward pressure on gross margins. Sales to these mass
merchant customers in 1996 were nominal and were nonexistent in 1997 and 1998.
PURCHASING
The Company purchases from approximately 700 vendors, which includes direct
purchases from manufacturers and from distributors. In 1998, approximately 46%
of the Company's total purchases were from distributors compared to
approximately 27% in 1997 and 20% in 1996. The increase is primarily due to two
factors. The first factor is the elimination of Mac OS clone systems that were
purchased directly from Umax Computer Corporation ("UCC") which resulted in
increased purchases of Apple computer systems from distributors. Additionally,
several manufacturers including Iomega and Seagate discontinued selling to the
Company directly, consequently these products were instead purchased mostly
through distributors. The Company does not maintain any long-term purchase or
supply contracts with any of its vendors instead purchasing primarily on a
purchase order basis. In order to meet customer's needs for product the Company
has continued to focus on drop shipments sent directly to the customers from
participating distributors and vendors. This allows the Company to reduce
freight expense as well as compete with larger competitors as to product
availability and diversification.
In 1998 and 1997, sales of products purchased from ▇▇▇▇▇▇ Micro accounted
for approximately 24% and under 10%, respectively, of total sales. Sales of
products purchased from UCC accounted for approximately 13% and 12% of total
sales in 1997 and 1996, respectively. During 1997, Apple Computer announced its
intention to stop licensing the Mac OS to clone manufacturers, and accordingly
UCC stopped shipping Apple clones in the second quarter of 1998. In 1997 the
Company began shifting its Mac OS CPU sales to Apple, and in the second half of
1998, the Company moved exclusively to Apple for Mac OS CPU sales. There can be
no assurance that any Company supplier will remain in business or that they will
be able to fulfill the Company's supply requirements or its supply schedule. Any
inability to do so by such suppliers or the Company's inability to locate other
suppliers could have a material adverse effect on the Company.
The Company's suppliers make funds available to the Company to promote and
increase sales of their products. The Company typically receives price
protection should a vendor subsequently lower its price.
COMPETITION
DIRECT MARKETING
A substantial number of companies, both large and small, compete in the
retail and wholesale computer industry. Rapid technological advances in hardware
and software, short product life cycles, and continuing downward pressure on
product prices and margins characterize the industry.
A growing segment of the retail computer industry involves sales of computer
hardware and software via the Internet. Companies engaged in such sales are
increasingly becoming a significant competitive factor because they typically
sell their products at lower margins than traditional direct marketing
companies. Additionally, the websites of these companies are readily available
to most consumers for price comparisons causing further price pressure.
The Company's DTP Direct and Net Direct catalogs compete with consumer
electronic and computer retail stores, including superstores, and other direct
marketers of software and computer-related products,
Ex. 1-4
and, to a lesser degree, direct marketing efforts to sell microcomputer
hardware, software and peripherals through the Internet. Additionally, the
Company competes with other direct marketing companies. Some of the catalogs
within this channel include: CDW, Creative Computers' MacMall, MacConnection,
MacWAREHOUSE, MicroWAREHOUSE, Multiple Zones, PC Connection and CompUSA Direct.
DISTRIBUTION BUSINESS
Competition for the Company's Distribution Business comes primarily from the
largest distributors whose general scale of operations supports competitive
pricing for desktop publishing products without need for specialization. These
major distributors and competition include but are not limited to Gates/ Arrow,
▇▇▇▇▇▇ Micro, Merisel, Pinacor and Tech Data. The principal factors on which
competition is based in this market are price, product availability, delivery
time and the willingness of the distributor to extend credit to the reseller.
Nearly all of the Company's competitors have substantially greater
financial, marketing, and technological resources, larger product lines, larger
customer bases, greater name recognition, and greater purchasing power with
vendors than the Company. There can be no assurance that the Company can
continue to compete effectively against existing competitors or competitors that
may enter the market. In addition, price is an important competitive factor in
the personal computer software and hardware market and there can be no assurance
that the Company will not be subject to increased price competition.
BRANDED PRODUCTS
The Company assembles and markets products under several brand names. All
branded products are assembled at the Company's Edina, Minnesota headquarters.
Assembling operations consist of final assembly, testing and formatting of
storage devices into external storage devices which can be "plugged-in" to an
Apple Macintosh computer, as well as upgrades to CPU's. A summary of the brands
that the Company offered in 1998 is as follows:
MIRROR. The Company acquired the rights to the Mirror product line in 1994.
The Company currently markets storage devices under the "Mirror" name. Mirror
branded products are sold primarily through direct channels with emphasis on
sales through the DTP Direct catalog.
NUDESIGN PRO. In 1995, the Company introduced a line of hot swappable
storage systems using the NuDesign Pro brand name. These products are targeted
and sold primarily through the Company's DTP Direct and Net Direct catalogs and
through its Distribution Business.
RETURN POLICY
Certain products identified as such in the Company's DTP Direct catalog,
including tape drives, hard drives, optical drives, and CD-ROM drives may be
returned within 30 days from the date shipped by the Company for a full refund
of the purchase price excluding original shipping charges. Returned product must
be in like new condition, in original packing, complete with all warranty cards,
manuals, cables and other materials as originally shipped, and must not be
modified or damaged. After 30 days from shipment, it is the Company's policy to
not give credit or refunds. The Company attempts to return all products back to
the manufacturer or distributor from which the product was purchased. If the
Company is unsuccessful in returning the product to the respective manufacturer
or distributor it is forced to sell at a reduced price or discard the equipment.
Provisions are made currently for estimated product returns expected to occur
under the Company's return policy and for which it may not be able to return to
the manufacturer or distributor.
Ex. 1-5
DIGITAL RIVER, INC.
In December 1995, the Company's wholly-owned subsidiary, MacUSA, was
granted, by ▇▇▇▇ ▇▇▇▇▇▇▇, the majority shareholder and Chairman of the Board of
Directors of the Company, an option, exercisable through December 31, 2000 (the
"Digital River Option") to acquire 3,200,000 (post-split) shares (the "Digital
River Shares") of Digital River, Inc., a Minnesota corporation ("Digital River")
which was then privately held. At that time, such shares represented
approximately 60% of the outstanding common of Digital River.
Digital River conducted its initial public offering in August 1998. Prior to
such offering, the Company's ownership percentage of Digital River had been
reduced to approximately 23%. Upon completion of such offering, the Company's
ownership percentage was reduced to approximately 19%. Since such offering,
Digital River's shares have been traded on the Nasdaq stock market under the
symbol "DRIV."
In December 1998, the Company participated in Digital River's secondary
offering by exercising and selling 200,000 shares of the Digital River Option
realizing net proceeds of $4,430,000. The Company continues to hold an option to
purchase 3,000,000 shares, which would represent ownership of approximately 15%
of Digital River as of March 15, 1999. The option is not transferable and the
balance is exercisable at any time through December 31, 2000 for total
consideration of $0.93 (ninety-three cents). During the term of the option,
▇▇. ▇▇▇▇▇▇▇ has agreed to vote the Digital River Shares at the direction of the
Company's Board of Directors. As additional consideration, the Company has
agreed to reimburse ▇▇. ▇▇▇▇▇▇▇ for any tax liability incurred in connection
with the transfer of the Option or the shares of Digital River stock issuable
upon the exercise thereunder.
The Digital River Shares are subject to the provisions of the Fujitsu
Modification Agreement dated December 11, 1997 (the "Modification Agreement"),
between ▇▇. ▇▇▇▇▇▇▇, Fujitsu Limited, a company organized under the laws of
Japan ("Fujitsu"), Digital River Inc., and MacUSA (collectively, the "Parties").
Pursuant to the terms of the Modification Agreement, the Parties agreed to
terminate previous agreements entered into in connection with an investment by
Fujitsu in Digital River and entered into the Modification Agreement. Under the
terms of the Modification Agreement, MacUSA remains a party to the agreement to
the extent that ▇▇. ▇▇▇▇▇▇▇ may transfer all shares of Digital River Inc. he
owns, along with any and all rights related thereto pursuant to the agreement or
otherwise to MacUSA, Inc., or Tech Squared Inc.
The following summary of the business of Digital River is extracted from the
Form 10-K filed by Digital River on March 19, 1999: Digital River is a leading
provider of comprehensive electronic commerce outsourcing solutions to software
publishers and online retailers. Digital River has developed a technology
platform that allows it to provide a suite of electronic commerce services to
its software publisher and online retailer clients, including electronic
software delivery ("ESD"). Digital River also provides data mining and
merchandising services to assist clients in increasing Internet page view
traffic to, and sales through, their Web stores. Rather than maintaining its own
branded Web store that would compete with its clients, Digital River provides an
outsourcing solution that allows its clients to promote their own brands while
leveraging Digital River's investment in infrastructure and technology. As of
March 5, 1999, Digital River had contracts with 1,621 software publisher clients
and 1,174 online retailer clients, including Corel Corporation, Cyberian
Outpost, Inc., Lotus Development Corporation, Micro Warehouse, Inc., Network
Associates, Inc., Symantec Corporation, Kmart Corporation, CompUSA, Inc. and
Wal-Mart Stores, Inc., and maintained a database of more than 100,000 software
products from its various software publisher clients, including more than 30,000
software titles and more than 70,000 digital images and fonts. Through March 5,
1999, Digital River had completed more than 610,000 transactions for more than
490,000 unique end-users.
Digital River's proprietary commerce network server ("CNS") technology
serves as the platform for Digital River's solutions. The CNS incorporates
custom software applications that enable ESD, Web store
Ex. 1-6
authoring, fraud prevention, export control, merchandising programs and online
registration, and features a database of more than 100,000 software products.
Using its CNS platform, Digital River creates Web stores for its clients that
replicate the look and feel of each client's Web site. End-users enter the
client site and are then seamlessly transferred to Digital River's system.
End-users can then browse for products and make purchases online, and, once
purchases are made, Digital River delivers the products directly to the
end-user, primarily through ESD. Digital River also provides
transaction-processing services and collects and maintains critical information
about end-users. This information can later be used by Digital River's clients
to facilitate add-on or upgrade sales and for other direct marketing purposes.
Digital River actively manages direct marketing campaigns for its clients, and
also delivers purchase information and Web store traffic statistics to its
clients on a regular basis.
The shares of Digital River common stock are registered with the Securities
and Exchange Commission under the Securities Act of 1934 and Digital River files
reports with the Securities and Exchange Commission pursuant thereto. Further
information regarding Digital River can be obtained from such reports, which are
available from the Commission's ▇▇▇▇▇ database at ▇▇▇.▇▇▇.▇▇▇.
PATENTS AND TRADEMARKS
The Company has obtained a registered and protectable ▇▇▇▇ on the name "Tech
Squared-Registered Trademark-" from the U.S. Patent and Trademark Office. The
Company also uses and claims rights to the names "Mirror-TM-", "Nu Design-TM-",
"NuDesign Pro-TM-", "DTP Direct-TM-" and "Net Direct-TM-" to identify its
products and services. Except with respect to "Tech Squared", the Company has
not filed trademark registration applications or obtained registered and
protectable marks on any of the foregoing names. There can be no assurance that
any application, if filed, will result in the receipt of a registered and
protectable ▇▇▇▇.
The effect of the foregoing tradenames is to provide an identity between the
Company and its products and services. While prior use of a tradename may
establish an exclusive right to its use in connection with the sale of products
and services in a particular market area, registration with the U.S. Patent and
Trademark Office provides such right throughout the United States and a
presumption of damage to the Company should the tradename be infringed. There
can be no assurance that the Company's use of the foregoing tradenames will not
infringe the rights of others or that any of the tradenames used by the Company,
whether or not registered, will be free from future challenge by others.
NON-OPERATING ASSETS
In addition to the Digital River Shares, The Company owns certain assets
that are not related to its core operations, or to its future operating plans. A
brief summary of these assets is as follows:
CAM DESIGNS, INC. The Company owns shares of Cam Designs, Inc., ("CAM
Designs") common stock (the "Cam Designs Shares"). Cam Designs, a Delaware
corporation, is the parent company of MGA Holdings Ltd., a United Kingdom
corporation ("MGA") which shares are virtually all of the assets of Cam Designs.
MGA designs and engineers prototypes and tools for the automobile and aerospace
industries. Cam Designs' common stock is quoted on the NASDAQ National Market
under the symbol "CMDA." During the first quarter of 1998, the Company sold a
portion of the Cam Design Shares resulting in realized gains of approximately
$5,000. On October 21, 1998, Cam Designs Inc. announced that it had agreed to
have MGA placed in receivership because of its inability to secure adequate
banking facilities and reduce outstanding debt. The value of the remaining
shares of Cam Designs was reduced to zero.
MINING PROPERTIES
The Company owns certain land or mining rights to land in two different
areas in Montana, known to have historically produced gold and silver from
mining operations. See "ITEM 2. Description of Property." The Company sold a
portion of the property located near Virginia City, Montana in December 1998.
The total remaining land area either owned or leased by the Company is
approximately 1,900 acres. The
Ex. 1-7
Company intends to continue soliciting offers for the remaining property, and
does not intend to further develop these mining properties because it believes
the cost and risks involved would be significant. The Company wrote down the
value of the remaining assets by $538,000. See "ITEM 3. Legal Proceedings--
Hanover Gold Litigation".
EMPLOYEES
The Company employs approximately 100 people, all of whom are located at the
Company's headquarters in Edina, Minnesota. There are approximately 50 employees
in sales, marketing, technical support and customer service, and the remaining
employees are in operations and corporate administration.
RISK FACTORS
In evaluating the Company and its business, you should carefully consider
the following risk factors as well as all of the information contained in this
report. The following risk factors are not exhaustive. In addition to the
factors discussed in this annual report, among the other factors that could
cause actual results to differ materially are the following: business conditions
and growth in the personal computer industry and the general economy;
significant changes in the consumer demand for computers and requirements
related to relative platforms such as Apple vs. Wintel; competitive factors such
as rival computer and peripheral product sellers and price pressures;
availablity of vendor products at reasonable prices; inventory risks due to
shifts in market demand; and other risks represented from time to time in
reports filed by the Company with the Securities and Exchange Commission,
including this Form 10-K.
LOSSES
The Company has incurred losses from operations in 1996 and 1998 and net
losses during each of 1996, 1997 and 1998. The Company expects losses from
operations to continue for the foreseeable future.
RISKS RELATED TO NEW LINE OF BUSINESS
The Company's recently-launched Net Direct catalog involves significant
risks including a completely new target audience, lack of any historical direct
marketing data upon which to base mailing decisions, competitive forces, and new
product lines. The launch of the Net Direct catalog had a negative impact on the
Company's profitability in 1998 and will likely continue to have a negative
impact on profitability in 1999 and, possibly, beyond.
RISKS RELATED TO DIGITAL RIVER
The Company's net worth is substantially tied to the market price of Digital
River common stock. At December 31, 1998, over 90 percent of the Company's
assets, as shown on its balance sheet, consisted of its investment in Digital
River. The stock of Digital River has been subject to significant volatility in
the public market since Digital River's initial public offering in August 1998.
The Company's investment in Digital River is at-risk and subject to such
volatility.
The shares of Digital River beneficially held by the Company represent
approximately 15 percent of the outstanding common stock of Digital River. As a
result, such shares are subject to restrictions on transferability, both legal
and market-imposed. If the Company were to attempt to liquidate its investment
in Digital River, it would likely cause the trading price of Digital River
common stock to decline significantly.
The Company's investment in Digital River is also subject to all of the
risks associated with the business of Digital River, as published or announced
by Digital River from time to time, including those
Ex. 1-8
set forth in Digital River's filings with the Securities and Exchange
Commission, such as its recently-filed Form 10-K.
The Company is also subject to a significant tax liability upon any sale of
shares of Digital River common stock. The distribution of shares of Digital
River common stock to the shareholders of the Company would likely be treated as
a sale, subjecting the Company to significant tax liability for such a
distribution. Accordingly, the Company's ability to realize any profit from the
exercise of its option to acquire Digital River shares and sell such shares
would be subject to a significant reduction by such taxes.
CONTINUED DEVELOPMENT OF ELECTRONIC COMMERCE AND INTERNET INFRASTRUCTURE
DEVELOPMENT
An increasing portion of sales are made over the Internet in part because of
the growing use and acceptance of the Internet by end-users. This growth is a
recent development. No one can be certain that acceptance and use of the
Internet will continue to develop or that a sufficiently broad base of consumers
will adopt and continue to use the Internet and other online services as a
medium of commerce. Sales of computer-related products over the Internet do not
currently represent a significant portion of overall computer product sales.
Growth of Internet sales is dependent on potential customers using the Internet
in addition to traditional means of commerce to purchase products. The Company
cannot accurately predict the rate at which they will do so.
COMPETITION
The Company is subject to significant competition from a number of
companies, both large and small. Further, recent technological advances, shorter
product life cycles, and increased sales via the Internet subject the Company to
further risk and continuing downward pressure on product prices and margins.
Many of the Company's competitors have significantly greater resources, access
to manufacturers, purchasing power and name recognition than the Company. Some
competitors, including an increasing number of Internet retailers, are now
marketing their products at or below cost. There can be no assurance the Company
will be able to compete effectively.
PRIVACY CONCERNS WITH RESPECT TO LIST DEVELOPMENT AND MAINTENANCE
The Company mails catalogs and sends electronic messages to names in its
proprietary customer database and to potential customers whose names are
obtained from rented or exchanged mailing lists. World-wide public concern
regarding personal privacy has subjected the rental and use of customer mailing
lists and other customer information to increased scrutiny. Any domestic or
foreign legislation enacted limiting or prohibiting these practices could
negatively affect the Company's business, financial condition and results of
operations.
MANAGEMENT INFORMATION SYSTEMS
The Company depends on the accuracy and proper use of its management
information systems. Many of the Company's key functions depend on the quality
and effective utilization of the information generated by its management
information systems, including: --its ability to manage its inventory and
accounts receivable collections; --its ability to purchase, sell and ship its
products efficiently and on a timely basis; --its ability to maintain its
operations. These systems require continual upgrades to most effectively manage
the Company's operations and customer data base.
CHANGES IN MANAGEMENT
The Company has experienced several changes in its management over the last
year. Such changes could have a negative impact on the Company's ability to
conduct business effectively and to compete.
Ex. 1-9
CONTROL BY MANAGEMENT
The Company's executive officers and directors currently beneficially own
over 50% of the outstanding Common Stock of the Company. Accordingly, the
Company's management is able to exercise substantial control over the election
of directors and over the operations of the Company. This concentration of
ownership could also have the effect of delaying, deferring or preventing a
change in control of the Company or effecting a change in control, which may not
be favored by the Company's other shareholders.
VOLATILITY OF STOCK PRICE
The technology sector of the United States stock market, and particularly
the group of Internet-related stocks within this sector, has experienced
substantial volatility in recent periods. The value of our common stock is
influenced by numerous conditions that impact the technology sector or the stock
market in general, whether or not such events relate to or reflect upon our
operating performance.
REDUCTIONS IN INCENTIVE PROGRAMS, SHIFTING OF INVENTORY RISK
The Company acquires products for resale both directly from manufacturers
and indirectly through distributors and other sources. Many of these
manufacturers and distributors provide us with incentives such as supplier
reimbursements, price protection payments, rebates and other similar
arrangements. The increasingly competitive computer hardware market has already
resulted in reduction and/or elimination of some of these incentive programs.
For example, Apple has initiated a number of restrictions on resellers,
including: --more restrictive price protection and other terms; and --reduced
advertising allowances and incentives. Additionally, manufacturers are limiting
return rights and are also taking steps to reduce their inventory exposure by
supporting "build to order" programs authorizing distributors and resellers to
assemble computer hardware under the manufacturers' brands. These trends reduce
the costs to manufacturers and shift the burden of inventory risk to resellers
like the Company which could negatively impact its business, financial condition
and results of operations. In addition, certain Wintel manufacturers including
Compaq Computer Corp. have recently expanded their direct sales efforts. The
continuing impact of these matters may adversely affect the Company's business,
financial condition and results of operations.
SEASONALITY
Fluctuations in the Company's net sales from period to period can be
expected due to a number of factors, including the timing of new product
introductions by the Company's major vendors and their competitors, seasonal
cycles commonly seen in computer-related industries, and changes in product mix
and product pricing. As a result, the operating results for any particular
period are not necessarily indicative of the results of any future period.
Y2K RISKS
The Company's computer system, and those of third parties with whom it does
business, will be affected by issues and problems related to changes required as
a result of the year 2000 problem ("Y2K"). The Company has identified and is
undertaking certain modifications or conversions to make its systems Y2K
compliant. While the Company has exercised its best efforts to identify and
remedy any potential Y2K exposures within its control, certain risks exist with
vendors and suppliers which, to a significant extent, are beyond the immediate
control of the Company. Failure to achieve timely completion of required
modifications or conversions or failure of the third parties with whom the
Company has relationships to be Y2K compliant could have a material affect on
the financial condition and operations of the Company. In addition, customers
may delay purchase decisions because of the uncertainty about Y2K issues.
Ex. 1-10
LACK OF LONG-TERM PURCHASING AGREEMENTS
The Company does not maintain any long-term purchase or supply contracts
with any of its vendors instead purchasing primarily on a purchase order basis.
No assurance can be given that the Company will be able to purchase needed
inventory at favorable prices when needed to meet sales commitments.
RETURNS
The Company's policies provide that some products may be returned within 30
days for a full refund. The Company attempts to return all products back to the
manufacturer or distributor from which the product was purchased. If the Company
is unsuccessful in returning such products to the respective manufacturer or
distributor, the Company may incur a loss on such transaction.
RELIANCE ON APPLE/TRANSITION TO WINTEL
The Company's sales of Apple computers accounted for 92% and 98% of the
total computer system sales in 1998 and 1997, respectively. The Company plans to
continue its efforts to expand its Wintel offerings in 1999. Notwithstanding the
Company's efforts to expand these offerings, the Company is still substantially
dependent on sales of Apple-related products and there is no assurance that the
Company will successfully transition enough sales to Wintel-related products to
offset any decline in the demand for Apple-related products. Also, while the
Company believes it could diversify its product offerings if its customers
desired alternatives, a decline in sales of Apple Macintosh computers or a
decrease in the supply of or demand for software and peripherals for such
computers could have a material adverse impact on the Company's business.
GOVERNMENT REGULATION
The Company currently collects Minnesota sales tax on sales made within the
State of Minnesota. Various states have attempted to impose on direct marketers,
the burden of collecting use 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 use tax collection obligations on an out-of-state
mail order company whose only contact with the state were the distribution of
catalogs and other advertising materials through the mail and subsequent
delivery of purchased goods by parcel post and interstate common carriers. If
legislation is passed to overturn the United States Supreme Court's decision,
the imposition of a use tax collection obligation on the Company in states to
which it ships products would result in additional administrative expenses to
the Company, could result in price increases to the customer, and could have a
material adverse effect on the Company.
The United States Department of State and Department of Commerce restrict
the export of encrypting technology outside of the United States. Although
Digital River does not currently believe its method of conducting business is
impacted to any significant degree by these restrictions, any significant change
in these rules or interpretations or any failure by Digital River to comply with
existing or future restrictions could have a material adverse impact on the
business of Digital River.
INCREASES IN POSTAGE, SHIPPING AND PAPER COSTS
Increases in postal or shipping rates and paper costs could significantly
impact the cost of producing and mailing our catalogs and shipping customer
orders. Postage prices and shipping rates increase periodically and we have no
control over future increases. The United States Postal Service recently
increased postal rates. Paper prices historically have been cyclical and we have
experienced substantial increases in the past. Significant increases in postal
or shipping rates and paper costs could adversely impact our business, financial
condition and results of operations, particularly if we cannot pass on such
increases to our customers or offset such increases by reducing other costs. In
addition, strikes or other
Ex. 1-11
service interruptions by the postal service or third party couriers, such as
Federal Express, could undermine our ability to deliver products on a timely
basis.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate headquarters are located at ▇▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇. The Company leases approximately 31,000 square feet of
office and warehouse space. The lease for the location expires on June 30, 1999
and the total monthly rent is approximately $18,000.
Digital River currently occupies approximately 7,000 square feet of
warehouse space at the Company's corporate headquarters. Prior to August 1998,
the offices of Digital River were also located in the Company's facilities. The
Company bills Digital River for the leased space, and prior to 1999, certain
related costs such as direct labor costs, phone services, general liability
insurance and janitorial services through an administrative charge. Total
charges by the Company to Digital River for administrative expenses were
approximately $207,000, $160,000 and $82,000 in 1998, 1997 and 1996,
respectively.
During 1997, the Company began performing fulfillment services for Digital
River on physical shipments of products, for which Digital River pays the
Company a fulfillment fee. The Company billed Digital River approximately
$246,000 and $8,000 for these services in 1998 and 1997, respectively. Digital
River has notified the Company that the fulfillment services the Company is
providing will be discontinued during the second quarter of 1999.
The Company owns rights in certain non-operating mining properties primarily
in two locations. The Company disposed of a portion of its mining property in
December 1998. The total land area still either owned or leased by the Company's
▇▇▇▇▇ subsidiary includes approximately 1,900 acres. The property, which is in
and around the Alder Gulch, near Virginia City, Montana, includes a total of
58 unpatented lode-mining claims and 3 patented lode claims. ▇▇▇▇▇ also owns a
51% interest in 56 1/2 lode mining claims including 24 1/2 patented and
32 unpatented claims near Rimini, Montana approximately 20 miles southwest of
Helena, Montana. See "ITEM 1 Business--Business of Issuer--Non Operating
Assets."
ITEM 3. LEGAL PROCEEDINGS
Except as discussed below, there are no material pending legal,
governmental, administrative or other proceedings to which the Company is a
party or to which any of its property is subject.
HANOVER GOLD LITIGATION
In 1996, the Company entered into an Asset Purchase Agreement for the sale
of substantially all of its mining properties and rights in the Alder Gulch area
(the "Property") in exchange for 525,000 shares of Hanover Gold Company, Inc.
("Hanover") common stock (the "Hanover Shares") The Agreement, the Property and
400,000 of the Hanover Shares were to be held in escrow pending completion of a
registration statement covering the resale of the Hanover Shares and consent by
the Company.
In October 1996 Hanover filed a registration statement covering the Hanover
Shares and filed suit against the Company in the United States District Court
Eastern District of Washington. The complaint sought to force the Company to
break escrow and release title the Property in exchange for 400,000 Hanover
Shares held in escrow, along with certain other damages. The Company filed a
counter-claim, which included claims of fraud and violation of securities laws.
In April 1998, both parties agreed to the dismissal of all claims,
counterclaims and cross-claims without prejudice. The Hanover Shares held by the
court were returned to Hanover, and the mining claims and rights were returned
to the Company.
Ex. 1-12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the year ended December 31, 1998.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Company's common stock is quoted on the local over-the-counter market
and is quoted on the OTC Bulletin Board quotation system under the Symbol
"TSQD". The following table sets forth, for each of the calendar periods
indicated, the quarterly high and low bid quotations for the Company's Common
Stock as reported by the OTC Bulletin Board. The prices in the table represent
prices between dealers, and do not include adjustments for retail ▇▇▇▇-ups,
markdowns or commissions and may not represent actual transactions.
YEAR HIGH LOW
---- -------- --------
1998 Fourth quarter...................................... $3.78 $0.47
Third quarter....................................... 7.63 1.00
Second quarter...................................... 4.00 1.44
First quarter....................................... 2.44 1.38
1997 Fourth quarter...................................... $3.88 $0.57
Third quarter....................................... 0.85 0.36
Second quarter...................................... 0.43 0.19
First quarter....................................... 0.69 0.30
HOLDERS
As of March 12, 1999, there were approximately 157 holders of record of
common stock. The Company believes the actual number of beneficial owners is
significantly greater than the 157 reported above.
DIVIDENDS
Tech Squared Inc. has never declared cash dividends on its common stock and
management intends to retain any earnings for use in its operations and does not
anticipate declaring any cash dividends in the foreseeable future. The Company
has 160,000 shares of preferred stock outstanding. The holders of these
preferred shares may be entitled to a 12% cumulative dividend that has not been
paid since December 1994. The total dividend owing as of December 31, 1998 is
approximately $88,000.
Pursuant to an Agreement and Plan of Merger effective as of May 9, 1995, a
wholly-owned subsidiary of the immediate predecessor of the Company merged with
and into MacUSA (the "Merger"). Prior to the Merger, MacUSA declared a dividend
of $1,188,000 payable to the former shareholders of MacUSA in connection with
the conversion of MacUSA from a Subchapter S corporation to a C corporation. The
Company paid approximately $261,000 of this dividend during 1995, approximately
$201,000 in 1996, approximately $201,000 in 1997 and approximately $200,000 in
1998. The remainder of the dividend payable was paid in February 1999.
SALES OF UNREGISTERED SECURITIES
During the three-month period ended December 31, 1998 the Company did not
sell any of its securities in transactions not registered under the Securities
Act of 1933.
Ex. 1-13
ITEM 6. SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ENDED:
----------------------------------------------------
1998(2) 1997(1) 1996 1995 1994
(IN THOUSANDS) -------- -------- -------- -------- --------
Net Sales...................................... $38,800 $36,995 $37,387 $42,136 $46,645
Gross Profit................................... 4,971 4,467 3,911 3,285 5,867
Income/(loss) from operations.................. (864) 402 (849) (1,511) 526
Net loss applicable to common shares........... (567) (1,032) (651) (1,652) 424
Net income/(loss) excluding Digital
River(3)(4).................................. 1,294 344 (203) (1,566) 416
Total assets................................... 117,444 7,600 8,620 9,739 8,971
Long term debt & long term portion of dividend
payable to officer/shareholder............... 84 298 298 393 --
Redeemable preferred stock 12% cumulative
Convertible.................................. 248 217 198 185 --
Stockholders' equity........................... 70,457 2,190 1,214 2,238 1,982
Cash dividends declared per common share....... -- -- -- 0.13 0.03
------------------------
(1) Beginning January 1, 1997, the Company began to account for its investment
in Digital River using the equity method of accounting (see Item 7.
Management's Discussion and Analysis of Financial Condition). Prior to 1997
Digital River was consolidated with the Company's results.
(2) Beginning August 12, 1998, the Company began to account for its investment
in Digital River as "available-for-sale" securities.
(3) Reflects operating results of the Company excluding Digital River.
(4) The fiscal year ended 1998 includes investment income of $4,047,000 on the
sale of 200,000 shares of Digital River stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained in this annual report are forward-looking
statements within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934 that involve a number of risks and uncertainties. Such
forward-looking information may be identified by words such as "will," "maybe,"
"expects" or "anticipates." In addition to the factors discussed in this annual
report, among the other factors that could cause actual results to differ
materially are the following: business conditions and growth in the personal
computer industry and the general economy; significant changes in the consumers
demand for computers and requirements related to relative platforms such as
Apple vs. Wintel, competitive factors such as rival computer and peripheral
product sellers and price pressures; availability of vendor products at
reasonable prices; inventory risks due to shifts in market demand; and other
risks presented from time to time in reports filed by the Company with the
Securities and Exchange Commission, including this Form 10-K.
The Company sells computer and peripheral products. The Company's business
has historically been targeted primarily at the graphic arts market, which
currently includes primarily Macintosh-related products. More recently, the
Company's business has also been targeted at the intranet and external Internet
network markets.
Prior to 1997, the consolidated financial statements included the accounts
of Tech Squared Inc. and its wholly owned subsidiaries (the "Company"), and
Digital River, Inc. ("Digital River"), which the Company controlled through its
bargain purchase option. As a result of private placements of Digital River
common stock in 1997, the Company's ownership percentage of Digital River was
reduced from 60% at December 31, 1996 to approximately 35% at December 31, 1997.
During 1998, Digital River completed various private placements and an initial
public offering of its common stock which resulted in net proceeds to
Ex. 1-14
Digital River of approximately $36,300,000 and issuance of 6,500,000 new shares
of Digital River common stock. Through August 11, 1998, the date of Digital
River's initial public offering, the Company recorded gain on issuance of stock
by Digital River of approximately $4,374,000, net of deferred income taxes,
which was recorded as an adjustment to stockholders' equity. In December 1998,
Digital River completed a follow-on public offering in which Digital River sold
2,200,000 additional shares of common stock and received net proceeds totaling
$48,100,000. The Company participated in the follow-on as a selling shareholder
by exercising a portion of the Digital River Option and selling 200,000 shares
of the Digital River Common Stock. The impact of the issuance of additional
shares by Digital River and the exercise and sale of a portion of the Digital
River Option by the Company resulted in a reduction in the Company's effective
ownership of Digital River from approximately 35% at December 31, 1997 to
approximately 15% as of December 31, 1998. As a result, beginning August 12,
1998, the Company is accounting for its investment in Digital River as
"available-for-sale" securities, which, as of December 31, 1998 are valued at
$35.50 per share, the closing market price on such date.
The following is a summary of the operating results of Tech Squared Inc.
including Digital River for the year ended December 31, 1998, 1997 and 1996,
respectively (in 000's, except per share information).
TECH SQUARED INC.,
INCLUDING DIGITAL RIVER
------------------------------------
1998 1997 1996
-------- -------- --------
Net loss applicable to common shares........................ $ (567) $(1,032) $ (651)
Net loss per share applicable to common share............... $(0.05) $ (0.10) $ (0.06)
Summarized condensed consolidated financial information for Tech Squared
Inc. excluding Digital River operations is as follows (in 000's, except per
share information):
BALANCE SHEET INFORMATION
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
Current assets.............................................. $ 10,254 $5,465 $6,171
Total assets................................................ 117,444 6,761 7,490
Current liabilities......................................... 6,841 4,895 5,945
Stockholders' equity........................................ 70,457 1,351 1,254
OPERATING INFORMATION
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
Net sales................................................... $38,800 $36,995 $37,276
Operating expenses.......................................... 5,835 4,065 4,047
Net income/(loss)(1) ....................................... 1,294 344 (203)
Per share................................................... $ 0.12 $ 0.03 $ (0.02)
------------------------
(1) The fiscal year ended 1998 includes investment income of $4,047,000 on the
sale of 200,000 shares of Digital River stock.
Ex. 1-15
(a) RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following discussion sets forth information with regard to the results
of operations of the Company, not including the results of operation of Digital
River. In some prior reports, results of operations included a portion of the
operations of Digital River. In August 1998, the Company's deemed ownership
percentage of Digital River was reduced below 20% and, since such date, the
Company has accounted for its investment in Digital River as available-for-sale
securities.
NET SALES
Net sales for 1998 totaled $38,800,000 compared to $36,995,000 for 1997. The
4.9% increase in sales was mainly attributable to a 5.9% increase in sales to
DTP Direct catalog customers through the addition of an outbound sales group and
the addition of the Net Direct catalog, which contributed $1,342,000 to net
sales. The increases were partially offset by an 8.7% decrease in sales to the
Company's distribution customers, which was primarily due to the elimination of
Macintosh clone system sales. The Company also experienced a 14.4% reduction in
product returns in 1998 compared to 1997 largely due to continued focus and
attention Company-wide to product returns and awareness.
Fluctuations in the Company's net sales from period to period can be
expected due to a number of factors, including the timing of new product
introductions by the Company's major vendors and their competitors, seasonal
cycles commonly seen in computer-related industries, and changes in product mix
and product pricing. As a result, the operating results for any particular
period are not necessarily indicative of the results of any future period.
GROSS PROFIT
Gross profit for 1998 was $4,971,000 or 12.8% of net sales compared to
$4,467,000 or 12.1% of net sales in 1997. Gross profit as a percentage of sales
increased in 1998 due to an increase in fulfillment fee revenue and a reduction
in variable overhead expenses. The Company expects ongoing competitive pressure
on gross margins in 1999 and beyond.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $3,101,000 or 8.0% of net sales in
1998 compared to $1,883,000 or 5.1% of net sales in 1997. The increase was
primarily due to an increase in the number of outbound sales consultants from 3
to 12, an increase in net marketing costs related to the development, production
and distribution of DTP Direct catalogs, and the costs related to the
development, production and distribution of a new catalog, Net Direct. Although
the Company believes the potential target market for the Net Direct catalog is
substantially larger than that for the DTP Direct catalog, and that the Net
Direct catalog could provide significant opportunity for revenue growth, there
are significant costs and risks associated with the launch and maintenance of a
new catalog including: a completely new target audience, lack of any historical
direct marketing data on which to base mailing decisions, competitive forces and
new product lines. The launch of the Net Direct catalog had a negative impact on
the profitability of the Company in 1998, and will probably continue to have a
negative impact on profitability in 1999 and possibly beyond.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for 1998 were $2,734,000 compared to
$2,182,000 for 1997. The increase was attributable to several factors including
the reallocation of certain payroll and employee-related expenses, consulting
fees related to the enhancement of the Company's accounting and computer
systems, and transaction processing fees and charges from third-party credit
card and similar providers.
Ex. 1-16
INVESTMENT INCOME/(LOSS)
The Company recorded investment income of $3,781,000 in 1998 compared to
$27,000 in 1997. In December 1998, the Company recognized investment income of
$4,048,000 when it exercised an option to purchase 200,000 shares of Digital
River Common Stock and sold such shares in Digital River's follow-on public
offering.
During 1998, the Company recorded net investment loss of $267,000 on
available-for-sale securities of Cam Designs Inc. due to Cam Designs Inc.
announcing that it had agreed to have its operations placed in receivership
because of its inability to secure adequate banking facilities.
LOSSES ON MINING ASSETS
In December 1998, the Company sold a portion of its mining assets and
reduced the book value of the remaining assets by $538,000 to management's best
estimate based on the value of consideration received upon such partial sale and
an independent appraisal performed in the fourth quarter.
INTEREST EXPENSE, NET
Net interest expense for 1998 was approximately $97,000 compared to
approximately $85,000 in 1997. The increase in interest expense is primarily due
to an increase in the average outstanding balance on the Company's line of
credit.
INCOME TAXES
The Company recorded an income tax provision in 1998 of $988,000. There was
no income tax provision recorded in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales for 1997 totaled $36,995,000 compared to $37,387,000 for 1996. The
decline in sales was mainly attributable to a 13.5% decline in the Company's
distribution sales due to a significant decline in sales of hard drives, optical
drives, scanners and media. The decline in sales to the Company's distribution
customers was partially offset by an increase in DTP Direct catalog sales of
$1,205,000 or 5.2% compared to 1996 levels. Sales from the DTP Direct catalog
increased primarily due to an increase in Mac systems sales, printers and
graphics software. The Company also experienced a 20% reduction in product
returns in 1997 compared to 1996 primarily due to increased focus and attention
Company-wide to product returns and awareness.
Fluctuations in the Company's net sales from period to period can be
expected due to a number of factors, including the timing of new product
introductions by the Company's major vendors and their competitors, seasonal
cycles commonly seen in computer-related industries, and changes in product mix
and product pricing. As a result, the operating results for any particular
period are not necessarily indicative of the results of any future period.
GROSS PROFIT
Gross profit for 1997 was $4,467,000 or 12.1% of net sales compared to
$3,911,000 or 10.5% of net sales in 1996. Gross profit as a percentage of net
sales increased in 1997 due to a reduction in inventory obsolescence and to an
increase in DTP Direct catalog sales, which generally have a higher margin, as a
percentage of total sales. DTP Direct catalog sales gross margins increased from
17.2% in 1996 to 18.1% in 1997.
Ex. 1-17
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $1,883,000 or 5.1% of net sales in
1997 compared to $2,016,000 or 5.4% of net sales in 1996 excluding Digital River
selling and marketing expense of $68,000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for 1997 were $2,182,000 compared to
$2,031,000 for 1996. The increase in 1997 was primarily due to an increase in
payroll and related costs including the addition of a new President and COO in
late 1996.
GAIN ON SALE OF SECURITIES
Gain on sale of securities for 1997 was approximately $27,000. There was no
gain on sale of securities in 1996.
INTEREST EXPENSE, NET
Net interest expense for 1997 was approximately $85,000 compared to
approximately $43,000 in 1996. The increase in interest expense was primarily
due to an increase in the average outstanding balance on the Company's line of
credit.
INCOME TAXES
The Company recorded no income tax provision in 1997 or in 1996 due to the
availability of net operating loss carryforwards from prior years to offset any
tax expense.
(b) LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at December 31, 1998, consisted
of liquid funds, a revolving line of credit agreement with US Bancorp National
Association ("US Bank"), and vendor trade credit lines.
As of December 31, 1998 the Company had working capital of $3,413,000. At
December 31, 1998, such working capital reflected the current portion of a
dividend declared but not yet paid to the Company's majority shareholder and
Chairman, in the amount of approximately $200,000. The remaining balance of the
dividend was paid in February 1999. In December 1998, the Company received
proceeds of $4,430,000 on the exercise and sale of 200,000 shares of its Digital
River Option.
The Company has a Revolving Line of Credit Agreement with US Bank through
June 1999. Borrowings under the $2,500,000 line of credit with US Bank are
payable on demand, limited by eligible percentages of accounts receivable and
inventory and bear interest at the prime rate plus 1.75%. In December 1998, the
Company paid down the line of credit, and obtained from US Bank a release of the
guarantee by the Chairman. As of December 31, 1998 the Company had unused
availability under the discretionary revolving line of credit of approximately
$1,685,000 and outstanding borrowings of $7,000.
The Company has a flooring program with a financing company covering up to
$633,000 in inventory purchases. The flooring program is secured by a standby
letter of credit in the amount of $560,000 issued pursuant to the Company's line
of credit with US Bank. The Company uses the flooring program to take advantage
of better programs with its major distributors.
As of December 31, 1998, inventory levels decreased slightly to $1,784,000
compared to $1,890,000 at December 31, 1997. Capital expenditures totaled
$345,000 in 1998 compared to $168,000 in 1997. The increase in capital
expenditures in 1998 was primarily due to computer system upgrades and
modifications and office renovation.
Ex. 1-18
The Company believes that funds generated from management of receivables and
inventory levels, advances under its discretionary line of credit, further
expansion of lines with trade creditors, cash on hand and potential proceeds
from the sale of its investments, will be sufficient to fund its operations
through the end of 1999. However, maintaining an adequate level of working
capital through the end of 1999, and thereafter depends in part on the success
of the Company's sales and marketing efforts, the Company's ability to control
operating expenses, and the Company's ability to maintain its relationships with
its bank and its suppliers. Furthermore, funding of the Company's operations in
future periods may require additional investments in the Company in the form of
equity or debt. There can be no assurance that the Company will achieve desired
levels of sales or profitability, or those future capital infusions will be
available on terms acceptable to the Company, if at all.
YEAR 2000 COMPLIANCE
The Company's computer system and those of third parties with whom it does
business will be affected by issues and problems related to changes required as
a result of the year 2000 problem ("Y2K"). The Company's three key systems and
assets that may be directly impacted by the Y2K issue are its financial and data
system, its telephone system and its voice mail system. The financial and data
system requirements have been assessed and are currently being upgraded and
modified to be Y2K compliant. Anticipated rollout and testing of the Y2K
compliant system is expected in April 1999. The telephone system is believed to
be Y2K compliant, and testing is scheduled for the second quarter of 1999. The
voice mail system is currently being analyzed to determine the degree of upgrade
needed. The upgrade to the voice mail system will be rolled out and tested
during the second quarter of 1999. The Company incurred expenses to modify its
systems and the upgrading of its current system to be Y2K compliant totaling
approximately $35,000 in 1998, and anticipates additional costs of approximately
$50,000 in 1999. Maintenance and modification costs incurred by the Company
specifically related to Y2K will be expensed as incurred and costs of new
software (whether purchased or internally developed) will be capitalized and
amortized over the useful life of the applicable software.
While the Company has exercised its best efforts to identify and remedy any
potential Y2K exposures within its control, certain risks exist with vendors and
suppliers which, to a significant extent, are beyond the immediate control of
the Company. To date, the Company has not identified any vendors or suppliers
who will not be Y2K compliant; however, this analysis is still in process. The
Company plans to develop appropriate contingency plans if non-compliant vendors
are identified. Failure to achieve timely completion of required modifications
or conversions or failure of the third parties with whom the Company has
relationships (e.g., vendors, clients, credit card processors) to be Y2K
compliant could have a material affect on the financial condition and operations
of the Company. The Company, however, is unable to assess disruption that may
occur as a result of supplier's and customer's non-compliance. Because the
Company markets products manufactured by multiple sources and typically sells
the products as "packages', Y2K problems affecting the Company's vendors may
have a significant affect on the Company. In addition, customers may delay
purchase decisions because of the uncertainty about Y2K issues.
ITEM 7A. MARKET RISK DISCLOSURES
The Company's primary exposure to market risk relates to potential
fluctuations in the price of it's 3,000,000 shares of Digital River, Inc. common
stock that it holds through a bargain purchase option. The fair value of the
Digital River common stock could decrease and result in a reduction of the
Company's net assets and comprehensive income. The Company does not enter into
derivatives or other financial instruments.
The 3,000,000 Digital River shares are valued at $66,051,000 (net of
deferred taxes of $40,449,000) in Tech Squared's balance sheet as of
December 31, 1998. That valuation was based upon the closing market price of
Digital River common stock of $35.50 per share on December 31, 1998. A $5 and
$10 per share reduction in the market price of the Digital River common stock
would result in a $9,420,000 and
Ex. 1-19
$18,840,000 reduction, respectively, in the net assets and comprehensive income
of Tech Squared. Such a decrease would not impact net loss or cash flows.
ITEM 8. FINANCIAL STATEMENTS
The balance sheets of the Company as of December 31, 1998 and 1997, and the
related statements of operations, comprehensive income (loss), shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998 are included in this report on pages F-1 to F-16. The index to
the financial statements appears on page F-1. The financial statements were
audited by ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP, whose related report of independent accountants
appears on page F-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Public Accountants.................... 22
Consolidated Balance Sheets................................. 23
Consolidated Statements of Operations....................... 24
Consolidated Statements of Comprehensive Income (Loss)...... 25
Consolidated Statements of Stockholders' Equity............. 26
Consolidated Statements of Cash Flows....................... 27
Notes to Consolidated Financial Statements.................. 28
Ex. 1-21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tech Squared Inc.:
We have audited the accompanying consolidated balance sheets of Tech Squared
Inc. (a Minnesota corporation) and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, comprehensive
income (loss), stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tech Squared Inc. and
Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP
Minneapolis, Minnesota
February 19, 1999
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
1998 1997
------------ ----------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 4,436,276 $ 300
Restricted cash........................................... 229,466 143,623
Available-for-sale securities............................. -- 467,438
Trade accounts receivable, less allowance for doubtful
accounts of $365,000 and $180,000, respectively......... 3,387,907 2,727,883
Inventories............................................... 1,783,905 1,890,480
Prepaids and other current assets......................... 416,666 234,936
------------ ----------
Total current assets.................................. 10,254,220 5,464,660
Property and Equipment, net................................. 499,874 346,419
Receivable From Officer/Stockholder......................... -- 201,512
Mining Assets............................................... 190,000 748,276
Investment in Digital River................................. 106,500,000 839,202
------------ ----------
$117,444,094 $7,600,069
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit.................................. $ 7,395 $ 765,728
Current maturities of long-term debt...................... 15,000 80,000
Accounts payable.......................................... 5,008,449 2,816,959
Accrued compensation and benefits......................... 205,156 239,748
Other accrued expenses.................................... 1,404,776 791,743
Dividend payable to officer/shareholder................... 200,000 200,721
------------ ----------
Total current liabilities............................. 6,840,776 4,894,899
Dividend Payable to Officer/Shareholder..................... 83,857 283,136
Long-Term Debt, less current maturities..................... -- 15,000
Deferred Income Taxes....................................... 39,815,000 --
Redeemable Preferred Stock, 12% cumulative convertible, $1
par value, 1,000,000 shares authorized; 160,000 shares
issued and outstanding.................................... 247,744 216,700
------------ ----------
Commitments and Contingencies (Note 7)
Stockholders' Equity:
Common stock, no par value, 25,000,000 shares authorized;
11,603,075 and 10,375,037 shares issued and outstanding,
respectively............................................ 3,990,200 3,189,436
Stock subscription receivable............................. (284,000) --
Retained earnings (accumulated deficit)................... 2,894,345 (912,539)
Unrealized gain (loss) on available-for-sale securities... 63,856,172 (86,563)
------------ ----------
Total stockholders' equity............................ 70,456,717 2,190,334
------------ ----------
$117,444,094 $7,600,069
============ ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996
----------- ----------- -----------
Net sales............................................. $38,800,270 $36,995,277 $37,386,715
Cost of sales......................................... 33,829,265 32,527,878 33,475,525
----------- ----------- -----------
Gross profit.................................... 4,971,005 4,467,399 3,911,190
----------- ----------- -----------
Selling and marketing expenses........................ 3,101,205 1,882,729 2,083,961
General and administrative expenses................... 2,734,190 2,182,458 2,676,190
----------- ----------- -----------
Total operating expenses........................ 5,835,395 4,065,187 4,760,151
----------- ----------- -----------
Income (loss) from operations......................... (864,390) 402,212 (848,961)
Gain on sale of securities............................ 3,780,872 26,646 --
Loss on mining assets................................. (538,276) -- --
Interest expense, net................................. (96,677) (85,078) (43,068)
Equity in loss from Digital River..................... (1,829,207) (1,356,370) --
----------- ----------- -----------
Income (loss) before income taxes and minority
interest
in losses of Digital River........................ 452,322 (1,012,590) (892,029)
Provision for income taxes............................ 988,000 -- --
----------- ----------- -----------
Loss before minority interest....................... (535,678) (1,012,590) (892,029)
Minority interest in losses of Digital River.......... -- -- 275,634
----------- ----------- -----------
Net loss............................................ (535,678) (1,012,590) (616,395)
Preferred stock dividends............................. 31,045 19,200 35,000
----------- ----------- -----------
Net loss applicable to common shares................ $ (566,723) $(1,031,790) $ (651,395)
=========== =========== ===========
Net loss per common share, basic and diluted.......... $ (0.05) $ (.10) $ (.06)
=========== =========== ===========
Weighted average common shares outstanding, basic
and diluted......................................... 11,050,724 10,374,870 10,374,870
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996
----------- ----------- ---------
Net loss................................................ $ (535,678) $(1,012,590) $(616,395)
----------- ----------- ---------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities--
Unrealized holding gains (losses) arising during
the year.......................................... 67,723,607 (199,917) (260,000)
Less--Reclassification adjustment for gains included
in net loss....................................... (3,780,872) (26,646) --
----------- ----------- ---------
Other comprehensive income (loss)....................... 63,942,735 (226,563) (260,000)
----------- ----------- ---------
Comprehensive income (loss)............................. $63,407,057 $(1,239,153) $(876,395)
=========== =========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31
RETAINED
COMMON STOCK STOCK EARNINGS
----------------------- SUBSCRIPTION (ACCUMULATED
SHARES AMOUNT RECEIVABLE DEFICIT)
---------- ---------- ------------ ------------
Balance, December 31, 1995................... 10,374,870 $3,302,066 $ -- $ (1,463,569)
Net loss................................... -- -- -- (616,395)
Payment for shares to effect Jaguar Group,
Ltd. merger.............................. -- (193,485) -- --
Preferred stock dividends.................. -- -- -- (35,000)
Final allocation of purchase price to
effect Jaguar Group, Ltd. merger......... -- 80,522 -- --
Net change in unrealized loss on
available-for-sale securities............ -- -- -- --
---------- ---------- ---------- ------------
Balance, December 31, 1996................... 10,374,870 3,189,103 -- (2,114,964)
Net loss -- -- -- (1,012,590)
Gain on sale of stock by Digital River..... -- -- -- 2,234,215
Preferred stock dividends.................. -- -- -- (19,200)
Warrants exercised......................... 167 333 -- --
Net change in unrealized loss on
available-for-sale securities............ -- -- -- --
---------- ---------- ---------- ------------
Balance, December 31, 1997................... 10,375,037 3,189,436 -- (912,539)
Net loss................................... -- -- -- (535,678)
Preferred stock dividends.................. -- -- -- (31,045)
Payment for options exercised.............. 1,228,038 800,764 (284,000) --
Gain on sale of stock by Digital River..... -- -- -- 4,373,607
Net change in unrealized gain on
available-for-sale securities............ -- -- -- --
---------- ---------- ---------- ------------
Balance, December 31, 1998................... 11,603,075 $3,990,200 $ (284,000) $ 2,894,345
========== ========== ========== ============
UNREALIZED
GAIN (LOSS) ON
SECURITIES TOTAL
-------------- -----------
Balance, December 31, 1995.................................. $ 400,000 $ 2,238,497
Net loss.................................................. -- (616,395)
Payment for shares to effect Jaguar Group, Ltd. merger.... -- (193,485)
Preferred stock dividends................................. -- (35,000)
Final allocation of purchase price to effect Jaguar Group,
Ltd. merger............................................. -- 80,522
Net change in unrealized loss on available-for-sale
securities.............................................. (260,000) (260,000)
----------- -----------
Balance, December 31, 1996.................................. 140,000 1,214,139
Net loss.................................................. -- (1,012,590)
Gain on sale of stock by Digital River.................... -- 2,234,215
Preferred stock dividends................................. -- (19,200)
Warrants exercised........................................ -- 333
Net change in unrealized loss on available-for-sale
securities.............................................. (226,563) (226,563)
----------- -----------
Balance, December 31, 1997.................................. (86,563) 2,190,334
Net loss.................................................. -- (535,678)
Preferred stock dividends................................. -- (31,045)
Payment for options exercised............................. -- 516,764
Gain on sale of stock by Digital River.................... -- 4,373,607
Net change in unrealized gain on available-for-sale
securities.............................................. 63,942,735 63,942,735
----------- -----------
Balance, December 31, 1998.................................. $63,856,172 $70,456,717
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996
----------- ------------ ----------
Operating Activities:
Net loss................................................ $ (535,678) $ (1,012,590) $ (616,395)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities-....................
Depreciation and amortization......................... 174,931 191,737 244,599
Equity in losses of Digital River..................... 1,829,207 1,356,370 --
Gain on sale of securities............................ (3,780,872) (26,646) --
Minority interest in Digital River.................... -- -- (275,634)
Loss on mining assets................................. 538,276 -- --
Change in operating assets and liabilities:
Trade accounts receivable........................... (660,024) 151,317 (573,104)
Inventories......................................... 106,575 16,066 1,612,822
Prepaids and other current assets................... (181,730) 110,787 173,297
Accounts payable.................................... 2,191,490 (1,457,016) (511,199)
Accrued compensation and benefits................... (34,592) 52,098 44,804
Other accrued expenses.............................. 730,033 280,090 (32,865)
----------- ------------ ----------
Net cash provided by (used in) operating
activities...................................... 377,616 (337,787) 66,325
----------- ------------ ----------
Investing Activities:
Change in restricted cash............................... (85,843) (143,623) --
Purchase of property and equipment...................... (345,012) (168,016) (244,047)
Patents and organization costs.......................... -- -- (27,964)
Proceeds from sale of securities........................ 4,709,272 272,646 --
Proceeds from sale of mining assets..................... 20,000 -- --
Decrease in cash due to deconsolidation of Digital
River................................................. - (799,721) --
Change in officer/stockholder receivable................ 201,512 -- 4,288
----------- ------------ ----------
Net cash provided by (used in) investing activities... 4,499,929 (838,714) (267,723)
----------- ------------ ----------
Financing Activities:
Net borrowings (payments) on revolving line of credit... (758,333) 486,363 (377,277)
Issuance of common stock, net........................... 516,764 -- --
Stock repurchase........................................ -- -- (37,500)
Dividends paid.......................................... (200,000) (208,120) (200,730)
Proceeds from issuance of Digital River long-term debt,
net................................................... -- -- 848,093
----------- ------------ ----------
Net cash provided by (used in) financing activities... (441,569) 278,243 232,586
----------- ------------ ----------
Increase (decrease) in cash and cash equivalents.......... 4,435,976 (898,258) 31,188
Cash and cash equivalents, beginning of year.............. 300 898,558 867,370
----------- ------------ ----------
Cash and cash equivalents, end of year.................... $ 4,436,276 $ 300 $ 898,558
=========== ============ ==========
Supplemental cash flow information:
Cash paid for interest.................................. $ 112,770 $ 93,970 $ 50,375
Cash paid for income taxes.............................. -- -- --
Noncash Financing Activities:
Dividends accrued....................................... 31,045 19,200 35,000
Noncash repurchase of shares............................ -- -- 178,485
Stock subscription receivable........................... 284,000 -- --
Decrease in various accounts upon deconsolidation of
Digital River:
Prepaids and other current assets....................... -- (8,934) --
Property and equipment.................................. -- (106,617) --
Debt issuance costs..................................... -- (147,413) --
Patents and organization costs.......................... -- (133,488) --
Convertible debentures.................................. -- (998,750) --
Accounts payable........................................ -- (142,445) --
Other accrued liabilities............................... -- (93,621) --
The accompanying notes are an integral part of these consolidated financial
statements.
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS AND OPERATIONS
Tech Squared Inc. and its wholly owned subsidiaries (the Company) is a
national direct marketer and distributor of microcomputer hardware and software
products primarily for users of Apple Macintosh-Registered Trademark- personal
computers and IBM-compatible personal computers. The Company's sales and
marketing efforts are currently targeted at desktop publishing, graphic arts and
prepress industries through its catalog, "DTP Direct," to computer dealers and
value-added resellers through its distribution business, and to developers of
internal corporate intranet and external Internet sites and managers of local
area networks and wide area networks through its "Net Direct" catalog.
Prior to January 1, 1997, the consolidated financial statements included the
accounts of the Company and Digital River, Inc. (Digital River), an on-line
distributor of software products via the Internet. In December 1995, the Company
obtained a bargain purchase option to acquire 3,200,000 shares of Digital River
common stock from the Company's majority stockholder and Chairman, representing
at the time a 60% ownership in Digital River. The option is not transferable and
is exercisable at any time through December 31, 2000 for a total exercise price
of $1. During 1997, Digital River converted all of its outstanding debentures
and issued additional common stock pursuant to private placements which reduced
the Company's effective control from 60% at December 31, 1996 to approximately
35% at December 31, 1997. As a result of the reduction in the Company's
ownership percentage, the financial results of Digital River are no longer
consolidated with those of the Company. Beginning January 1, 1997, the Company
accounted for its investment in Digital River using the equity method of
accounting. Digital River sold additional shares of common stock in 1998 through
private placements and its initial public offering of common stock. The
following amounts were recorded as credits to retained earnings in the
accompanying statement of stockholders' equity as a result of the 1997 and 1998
sales of stock by Digital River:
YEAR ENDED DECEMBER 31
-----------------------
1998 1997
---------- ----------
Increase to investment in Digital River.............. $6,964,607 $2,234,215
Deferred income taxes................................ 2,591,000 --
---------- ----------
Gain on sale......................................... $4,373,607 $2,234,215
========== ==========
On August 11, 1998, Digital River completed an initial public offering of
3,000,000 shares of common stock. This caused the Company's ownership to
decrease to approximately 19%. As of August 12, 1998, the Company began
accounting for its investment in Digital River as an available-for-sale security
in accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which is
valued at $35.50 per share, the closing market price at December 31, 1998. In
December 1998, the Company participated in Digital River's follow-up offering by
selling 200,000 shares, further reducing the Company's ownership to
approximately 15% as of December 31, 1998. The sale of 200,000 shares in
December 1998 resulted in proceeds of $4.4 million and a realized gain of
$4,048,000 which is recorded as gain on sale of securities in the accompanying
statement of operations. The cost of the shares was determined using the
historical cost for financial reporting purposes. Unrealized holding gains and
losses are recognized in comprehensive income, net of deferred taxes. The cost
and gross unrealized holding gains related to the Digital River shares was
$5,610,000 and $100,890,000
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
as of December 31, 1998. Deferred income taxes recorded on the balance sheet
related to the Digital River shares totaled $40,449,000 as of December 31, 1998.
Digital River had total assets of $80,328,000 and $3,405,000 as of
December 31, 1998 and 1997, respectively. For the years ended December 31, 1998,
1997 and 1996, Digital River recorded a net loss of $13,798,000, $3,485,000 and
$689,000 on net sales of $20,911,000, $2,472,000 and $111,000, respectively.
Digital River currently occupies approximately 7,000 square feet of
warehouse space at the Company's corporate headquarters. Prior to August 1998,
the offices of Digital River were also located in the Company's facilities. The
Company bills Digital River for the leased space, and prior to 1999, certain
related costs such as direct labor costs, phone services, general liability
insurance and janitorial services through an administrative charge. Total
charges by the Company to Digital River for administrative expenses were
approximately $207,000, $160,000 and $82,000 in 1998, 1997 and 1996,
respectively.
During 1997, the Company began performing fulfillment services for Digital
River on physical shipments of products, for which Digital River pays the
Company a fulfillment fee. The Company billed Digital River $246,000 and $8,000
for these services in 1998 and 1997, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
RESTRICTED CASH
Restricted cash represents amounts held in escrow by certain financial
service providers.
INVENTORIES
Inventories, consisting primarily of products held for resale, are stated at
the lower of cost or market, as determined by the first-in, first-out inventory
method.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of furniture, equipment and leasehold
improvements, are stated at cost. For financial reporting purposes, depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, generally five years, or for leasehold improvements, over the length
of the lease.
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Property and equipment consisted of the following at December 31:
1998 1997
----------- -----------
Furniture and equipment............................. $ 1,551,112 $ 1,224,304
Leasehold improvements.............................. 159,134 140,929
----------- -----------
1,710,246 1,365,233
Less--Accumulated depreciation and amortization..... (1,210,372) (1,018,814)
----------- -----------
$ 499,874 $ 346,419
=========== ===========
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment to the customer.
Certain product sales to end users are made pursuant to a 30-day cash back
refund policy. A reserve for returns is established based on historical trends.
ADVERTISING COSTS
Advertising costs related to mailed direct-response advertising are deferred
and charged to expense over the period during which the related sales are
expected to occur. The cost of nondirect-response advertising is charged to
expense the first time the advertising takes place. The Company uses an
accelerated amortization schedule for its "DTP Direct" catalog whereby
approximately 90% of the costs are amortized in the first four months and fully
amortized by the sixth month. Direct-response-related advertising expense was
$1,000,000, $371,000 and $491,000 in 1998, 1997 and 1996, respectively.
INCOME TAXES
Deferred income tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using currently enacted tax rates in effect for the years in which
the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts expected to be realized.
NET LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing net loss applicable to
common shares by the weighted average number of shares of common stock
outstanding during the year. The computation of diluted earnings per common
share is similar to the computation of basic loss per common share, except that
the denominator is increased for the assumed conversion of convertible
securities and the exercise of dilutive options using the treasury stock method.
The shares used in computing basic and diluted earnings per share were the same
for the years ended December 31, 1998, 1997 and 1996. Options and warrants
totaling 4,452,974, 5,661,484 and 6,201,958 were excluded from dilutive earnings
per share in 1998, 1997 and 1996, respectively, as their effect is antidilutive.
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," on
January 1, 1998. SFAS No. 130 establishes standards for reporting and display in
the financial statements of net income and the components of all other nonowner
changes in equity, referred to as comprehensive income. The Company has elected
to present comprehensive income (loss) as a separate statement in the
accompanying consolidated financial statements.
The Company also adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in 1998. SFAS No. 131 requires disclosure
of business and geographic segments in the consolidated financial statements of
the Company. The adoption of the disclosure requirements of SFAS No. 131 had no
impact on the Company's consolidated financial statements as there is only one
reportable segment.
2. INVESTMENTS:
The Company acquired the following assets in a merger in 1995 that are not
related to its current operations or to its future operating plans.
CAM DESIGNS, INC.
Cam Designs, Inc. (Cam Designs), a Delaware corporation, is the parent
company of MGA Holdings Ltd., a United Kingdom corporation which designs,
engineers and prototypes tools for the automobile and aerospace industries.
During 1998, the Company sold a portion of its holdings of Cam Designs stock for
$288,600, resulting in realized gains of approximately $5,000. Cost was
determined using the average cost method. In October 1998, Cam Designs announced
that its United Kingdom companies were placed in receivership because Cam
Designs could not secure adequate bank financing. Due to Cam Designs distressed
financial situation, the Company wrote off the balance of the Cam Designs stock
during 1998 and recognized a loss of $272,000.
During 1997, the Company sold shares resulting in realized gains on sale of
Cam Designs common stock of $27,500, less commissions and fees. As part of a
settlement agreement, the Company is required to hold shares of Cam Design stock
with an escrow agent. The number of escrow shares will be adjusted downward and
released from escrow as payments, set forth in the agreement, are made. These
shares remain in escrow at December 31, 1998.
Unrealized gains and losses resulting from the Cam Designs holdings are
recorded in other comprehensive income in the accompanying financial statements.
Unrealized holding gains (losses) were $0, ($87,000), and $140,000 as of
December 31, 1998, 1997, and 1996, respectively. The cost of the shares for
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
2. INVESTMENTS: (CONTINUED)
financial reporting purposes was $0, $574,000, and $800,000 as of December 31,
1998, 1997, and 1996, respectively.
MINING ASSETS
The Company holds certain mining properties and rights in the Alder Gulch
area of the Virginia City Mining District in southwest Montana, and also near
Rimini, Montana. These properties and rights were obtained in a 1995 merger. In
December 1998, the Company sold a portion of these assets and reduced the
remaining assets to the estimated fair value based upon an independent appraisal
performed on the properties.
3. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT:
The Company has a revolving credit agreement with a bank which expires in
June 1999. Borrowings under the $2,500,000 line are payable on demand, limited
by eligible percentages of accounts receivable and inventory, as defined, and
bear interest at the prime rate plus 1.75%. Borrowings under the agreement are
secured by substantially all the Company's assets. Borrowings on the line
averaged $751,000, $642,000 and $638,000 at average interest rates of 10.10%,
10.25% and 10.25% in 1998, 1997 and 1996, respectively.
Long-term debt consisted of the following at December 31:
Note payable, with interest at 7.5%...................... $ 15,000 $ 95,000
Less--Current portion.................................... (15,000) (80,000)
-------- --------
$ -- $ 15,000
======== ========
The Company has a flooring program with a financing company covering up to
$633,000 in inventory purchases. As of December 31, 1998, the flooring program
is secured by a standby letter of credit in the amount of $560,000 issued
pursuant to the Company's line of credit with the bank.
4. INCOME TAXES:
As of December 31, 1998, the Company had net operating loss carryforwards
[NOL's] of approximately $2.0 million. Certain restrictions caused by the change
in ownership could limit annual utilization of the net operating loss
carryforwards. The NOL's expire in various years from 1999 to 2007. The Company
recorded a full valuation allowance in 1998 and 1997 due to the uncertainty
associated with the Company's ability to realize the benefits related to net
operating losses generated.
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
4. INCOME TAXES: (CONTINUED)
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows for the years ended December 31:
1998 1997 1996
-------- -------- --------
U.S. statutory rate.......................... 34.0% (34.0)% (34.0)%
State taxes, net of federal benefit.......... 3.2 (3.2) (3.2)
Digital River net losses..................... 181.2 49.7 20.0
Increase (decrease) in valuation allowance... -- (12.5) 17.2
-------- -------- --------
Effective income tax rate.................... 218.4% --% --%
======== ======== ========
Significant components of the Company's deferred tax assets and liabilities
are as follows as of December 31:
1998 1997
------------- -----------
Deferred tax assets:
Inventories..................................... $ 114,000 $ 159,000
Accrued expenses and reserves................... 292,000 184,000
Net operating loss carryforwards and credits.... 853,000 999,000
Investments..................................... 664,000 684,000
------------- -----------
1,923,000 2,026,000
Deferred tax valuation allowance................ (1,183,000) (1,183,000)
------------- -----------
Total deferred tax assets......................... 740,000 843,000
------------- -----------
Deferred tax liabilities:
Depreciation and other.......................... (106,000) (12,000)
Investment in Digital River..................... (40,449,000) (831,000)
------------- -----------
Total deferred tax liabilities.................... (40,555,000) (843,000)
------------- -----------
Net deferred tax liability........................ $ (39,815,000) $ --
============= ===========
5. STOCK OPTIONS AND WARRANTS:
MACUSA PLAN
In 1995, the Company's stockholders approved the MacUSA 1995 Stock Option
Plan (the "MacUSA Plan"), reserving and granting options for 2,870,016 shares of
the Company's common stock. Options granted under the MacUSA Plan have been
granted at the current market price on the date of grant. Such options generally
vest six years from the date of grant and may vest earlier in the event certain
targeted net income is achieved. At December 31, 1998, 199,996 of these options
remain outstanding.
TECH SQUARED INC. 1995 STOCK OPTION PLAN
In December 1995, the Company's board of directors approved the Tech Squared
Inc. 1995 Stock Option Plan (the 1995 Plan) and reserved 2,500,000 shares for
future grant. In July 1997, the Company's board of directors approved an
increase to the maximum number of shares available for grant under the
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
5. STOCK OPTIONS AND WARRANTS: (CONTINUED)
1995 Plan to 4,000,000 shares, subject to shareholder approval. Options granted
under the 1995 Plan are granted at not less than the current market price on the
date of grant, cannot remain outstanding for over ten years and generally become
exercisable over a period of four years. Options outstanding under the 1995 Plan
totaled 2,642,000, 3,600,500 and 2,425,000 in 1998, 1997 and 1996, respectively.
As of December 31, 1998, 373,857 options in the Plan remain to be granted.
1995 NON-EMPLOYEE DIRECTOR OPTION PLAN
Also in December 1995, the Company's board of directors approved the Tech
Squared Inc. 1995 Non-Employee Director Option Plan (the Plan), reserving
350,000 shares of stock for future grant. The Plan allows each director to be
granted options for up to 60,000 shares, exercisable at the share price on the
date of issuance. These options vest over a two-year period and remain
exercisable for a period of seven years. Of previously granted shares, 140,000
remain outstanding pursuant to the Plan as of December 31, 1998.
A summary of the Company's various stock option plans at year-end, with
changes during the year then ended, is as follows (see Notes 10 and 12):
1998 1997 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------- ----------- -------- ----------- --------
Outstanding, beginning of year........ 5,661,484 $0.89 6,201,958 $1.18 6,974,468 $1.27
Granted............................. 1,561,500 1.54 1,354,000 0.75 1,602,500 0.75
Exercised........................... (1,228,038) 0.78 -- -- -- --
Forfeited/canceled.................. (1,541,972) 1.08 (1,894,474) 1.72 (2,375,010) 0.75
----------- ----- ----------- ----- ----------- -----
Outstanding, end of year.............. 4,452,974 $1.06 5,661,484 $ .89 6,201,958 $1.18
=========== ===== =========== ===== =========== =====
Exercisable, end of year.............. 2,784,838 $0.83 2,002,366 $ .99 3,066,958 $1.51
=========== ===== =========== ===== =========== =====
Weighted average fair value of
employee options granted............ $1.54 $ .50 $ .22
===== ===== =====
The Company accounts for these plans under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss and net loss
per share would have been increased to the following pro forma amounts:
1998 1997 1996
----------- ------------ ----------
Net loss:
As reported.......................... $ (535,678) $ (1,012,590) $ (616,395)
Pro forma............................ (2,425,937) (1,453,394) (884,399)
Basic and diluted loss per share:
As reported.......................... $ (.05) $ (.10) $ (.06)
Pro forma............................ (.22) (.14) (.09)
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
5. STOCK OPTIONS AND WARRANTS: (CONTINUED)
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for employee option grants: risk-free interest rate from 4.22%
to 5.50% in 1998, 6.11% in 1997 and 6% in 1996; no expected dividend yield;
expected lives of five years; and expected volatility of 162% to 195% in 1998,
and 206% in 1997. No volatility was used for 1996 as trading was limited.
6. STOCKHOLDERS' EQUITY:
The Company's redeemable preferred stock carries a 12% cumulative dividend
payable quarterly, is convertible into common stock at any time for $12.50 per
share, carries a preference on liquidation or dissolution of the Company, and
has equal voting rights with the Company's outstanding common stock. The Company
is obligated to pay $1.00 per share plus accrued but unpaid dividends upon
redemption of the redeemable preferred stock. As of December 31, 1998, the
redemption value of the preferred stock ($160,000) plus accrued but unpaid
dividends ($88,000) totaled $247,744. The preferred shares are callable by the
Company at any time with 60 days' written notice, and all outstanding shares
must be redeemed by 2002. The Company has no obligation to redeem the preferred
stock prior to 2002. In 1996, the Company redeemed 25,000 shares of preferred
stock for total consideration of $22,500.
The dividend payable to officer/shareholder is evidenced primarily by a note
payable to the Company's majority stockholder and Chairman. The Company paid
approximately $200,000 of this dividend during 1998 and approximately $200,000
in 1997. The note is noninterest-bearing, due on demand and subordinated to the
revolving line of credit. Pursuant to the debt subordination agreement, the
Company can only make payments up to $200,000 in a calendar year.
STOCK SUBSCRIPTION RECEIVABLE
The Company advanced $469,500 to an employee which was used to purchase
shares of common stock. The balance is due in full by September 2000. During
1998, the employee repaid $185,500 of the loan, and 142,000 shares of common
stock are held by the Company as collateral on the note at December 31, 1998.
WARRANTS
In 1995, the Company granted a warrant to purchase 150,000 shares of stock
for $1.00 per share as compensation for investment banking services and a
warrant to purchase 50,000 shares for $1.00 per share as partial settlement of a
note payable. Both warrants were exercised in 1998.
In connection with a 1995 merger, the Company acquired the Jaguar Group,
Ltd. options and warrants outstanding. These options and warrants allow the
holders to purchase 1,114,354 shares of stock at prices between $2.00 and $15.00
per share. At December 31, 1997, 1,098,076 of these shares expired and were
forfeited. The remaining 16,278 options and warrants will expire at various
dates from May 1999 through July 2000.
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company has been named as a defendant in lawsuits in the normal course
of business. Management believes that the ultimate resolution of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
EMPLOYEE RETIREMENT SAVINGS PLAN
The Company maintains an employee retirement savings plan (the Plan) which
qualifies under Section 401(k) of the Internal Revenue Code. The Plan is
designed to provide eligible employees with an incentive to make regular
contributions into a long-term investment and savings program. The Company
contributed $3,000 in 1998 and $0 in 1997 and 1996.
OPERATING LEASES
The Company leases all of its warehouse and office space and certain
equipment under operating lease agreements. The Company recorded operating lease
rental expense totaling $209,000, $193,000 and $184,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Future minimum lease payments of
$110,000, including estimated common area maintenance, are due by December 31,
1999.
GOVERNMENT REGULATION
The Company presently collects Minnesota sales tax on sales made within the
state of Minnesota. Various states have attempted to impose on direct marketers
the burden of collecting use 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 use tax collection obligations on an out-of-state
mail order company whose only contact with the state was the distribution of
catalogs and other advertising materials through the mail and subsequent
delivery of purchased goods by parcel post and interstate common carriers. If
legislation is passed to overturn the United States Supreme Court's decision,
the imposition of a use tax collection obligation on the Company in states to
which it ships products would result in additional administrative expenses to
the Company, could result in price increases to the customer and could have a
material adverse effect on the Company.
8. RELATED-PARTY TRANSACTIONS:
In December 1995, the Company entered into a consulting agreement with
Jaguar Ventures, Limited, an entity owned by one of the Company's board members
and by two significant stockholders who were principals of Jaguar Group, Ltd.
Pursuant to the agreement, the Company agreed to issue warrants to acquire
300,000 shares of the Company's common stock at $1.75 per share with certain
registration rights, and paid $50,000 in cash. In September 1996, the Company
repriced these warrants to $1.01 per share. In September 1997, the Company
agreed to extend the term by one year to December 1999, subject to certain
restrictions.
The Company has agreed to indemnify its majority stockholder and Chairman
for any tax liability resulting from any challenges to the Company's
S corporation tax returns from 1994 through the date of the Company's conversion
to a C corporation in 1995.
Ex. 1-36
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about each of the
Company's directors and executive officers:
NAMES OF DIRECTORS, OFFICERS AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---------------------------- -------- ---------------------------------- --------------
▇▇▇▇ ▇. ▇▇▇▇▇▇▇........................... 42 Chairman of the Board 1995
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇. .................... 45 President, Chief Executive Officer 1996
and Chief Operating Officer
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇......................... 43 Chief Financial Officer N/A
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇........................ 53 Director ▇▇▇▇
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇.......................... 33 Director 1998
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ has been Chairman of the Company's Board of Directors since
May 1995. From May 1995 to July 1998, ▇▇. ▇▇▇▇▇▇▇ served as the Chief Executive
Officer of the Company. From May 1995 to September 1996, ▇▇. ▇▇▇▇▇▇▇ also served
as the Company's President. From July 1996 to July 1998, ▇▇. ▇▇▇▇▇▇▇ also served
as the Company's Chief Financial Officer. ▇▇. ▇▇▇▇▇▇▇ is the founder of
MacUSA, Inc. ("MacUSA"), a wholly-owned subsidiary of the Company, and has
served as a member of the MacUSA Board of Directors since April 1990. From
April 1990 to July 1998, ▇▇. ▇▇▇▇▇▇▇ also served as the Chief Executive Officer
of MacUSA, Inc. ▇▇. ▇▇▇▇▇▇▇ is also the Chief Executive Officer and a director
of Digital River, Inc., a Minneapolis, Minnesota-based company specializing in
electronic software distribution, in which the Company holds a 15.3% beneficial
ownership interest as of April 23, 1999. ▇▇. ▇▇▇▇▇▇▇ also serves as a director
of the Software Publishers Association and JASC, Inc.
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇. has served as a director of the Company since
June 1996, has served as President and Chief Operating Officer of the Company
since September 1996 and has served as Chief Executive Officer of the Company
since February 1999. ▇▇. ▇▇▇▇▇ is also a member of the Board of Directors of
Digital River, Inc., a publicly-held Minneapolis, Minnesota-based company
specializing in electronic software distribution. ▇▇. ▇▇▇▇▇ is also a member of
the Board of directors of MacUSA, Inc., a wholly-owned subsidiary of the
Company. From April 1995 to August 1996, he was Vice President of Sales and
Marketing of The ▇▇▇▇▇ Group, a custom software and internet site developer
based in Minnetonka, Minnesota. ▇▇. ▇▇▇▇▇ served as Vice President of Sales from
July 1987 to April 1995 for LaserMaster Technologies, Inc., an Eden Prairie,
Minnesota based developer, manufacturer and marketer of digital color printers
and chemical-free filmsetters.
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ has served as Chief Financial Officer and Secretary of the
Company since November 1998. From March 1996 to October 1998, ▇▇. ▇▇▇▇▇▇ served
as a Vice President and Chief Financial Officer of ▇▇▇▇▇▇▇▇ Consulting
(Enterprise Group), a management company based in Minneapolis, Minnesota. From
February 1988 to March 1996, ▇▇. ▇▇▇▇▇▇ served as a Vice President and Chief
Financial Officer of Addco Holding Company, a manufacturing and distribution
company based in St. ▇▇▇▇, Minnesota.
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ has served as a director of the Company since July 1996.
Since December 7, 1998, ▇▇. ▇▇▇▇▇▇▇ has been a director of MacUSA, a
wholly-owned subsidiary of the Company. Since October 1985, he has been the
President of Runbeck & Associates, P.A., an accounting firm located in Brooklyn
Center, Minnesota. ▇▇. ▇▇▇▇▇▇▇ is a member of the Board of Directors of Ontrack
Data International, Inc., a provider of data recovery services based in Eden
Prairie, Minnesota.
Ex. 1-37
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ has served as a director of the Company since
December 1998. Since July 1998, ▇▇. ▇▇▇▇▇▇▇ has been President of Digital
River, Inc., a publicly-held, Minneapolis, Minnesota-based company specializing
in electronic software distribution, and has served as a director of Digital
River, Inc., since April 1998. From January 1997 to July 1998, ▇▇. ▇▇▇▇▇▇▇
served as Vice President of ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & Co., Inc., an investment
banking firm, and as Vice President of ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ Ventures, Inc., the
general partner of ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ Ventures, L.P., a venture capital fund.
From June 1993 to December 1996, ▇▇. ▇▇▇▇▇▇▇ was a principal of TCW Capital, a
group of leveraged buyout funds managed by Trust Company of the West.
SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934--BENEFICIAL OWNERSHIP AND
COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires executive officers and directors of the Company, and persons who
beneficially own more than 10 percent of the Company's outstanding shares of
Common Stock or Preferred Stock, to file initial reports of ownership and
reports of changes in ownership of securities of the Company with the Securities
and Exchange Commission. Officers, directors and persons owning more than 10
percent of the Company's outstanding Common Stock or Preferred Stock are
required by Securities and Exchange Commission regulation to furnish the Company
with copies of all Section 16(a) forms filed. Based solely on a review of the
copies of such reports and amendments thereto furnished to or obtained by the
Company or written representations that no other reports were required, the
Company believes that during the fiscal year ended December 31, 1998, the
Company's directors, officers and beneficial owners of more than 10 percent of
the Company's shares of Common Stock or Preferred Stock complied with all
applicable filing requirements except ▇▇▇▇ ▇. ▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
each filed late one Statement of Changes in Beneficial Ownership and ▇▇▇▇▇ ▇.
▇▇▇▇▇▇▇ filed late one Initial Statement of Beneficial Ownership.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain cash and non-cash compensation
awarded to or earned during the Company's fiscal years ended December 31, 1996,
1997 and 1998 by the Chief Executive Officer and each executive officer of the
Company who earned or was awarded total compensation in excess of $100,000 in
the fiscal year ended December 31, 1998.
LONG TERM
ANNUAL COMPENSATION($) COMPENSATION(#)
----------------------------------- ------------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION UNDERLYING OPTIONS COMPENSATION($)
----------------- -------- -------- -------- ------------- ------------------ ----------------
▇▇▇▇ ▇. ▇▇▇▇▇▇▇(1)(2).............. 1998 16 201,512 4,100(3) 1,000,000 19,600(4)
Chairman of the Board 1997 16 -- 13,250(3) -- 19,600(4)
1996 298 -- 13,250(3) -- 9,800(4)
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇. ............. 1998 135,000 -- -- -- --
President and Chief 1997 132,014 -- -- 1,000,000 --
Operating Officer
▇▇▇▇▇▇▇ ▇. Apple(5)................ 1998 126,250 2,219 -- -- --
------------------------------
(1) Prior to July 1998, ▇▇. ▇▇▇▇▇▇▇ was also Chief Executive Officer and Chief
Financial Officer of the Company. The Company currently accrues and pays
▇▇. ▇▇▇▇▇▇▇ a nominal monthly amount relating primarily to his health
insurance and other employee benefits.
(2) Does not include compensation paid to ▇▇. ▇▇▇▇▇▇▇ by Digital River, Inc.
(3) Compensation relates to an automobile owned by the Company and used by
▇▇. ▇▇▇▇▇▇▇.
Ex. 1-38
(4) Represents compensation resulting from a loan to ▇▇. ▇▇▇▇▇▇▇ on which
interest was payable at an annual rate of 5%, 0% and 0% for 1996, 1997 and
1998, respectively, which is below the market rate, assumed for purposes of
determining compensation, to be 10%. Such loan was repaid in full in
December 1998. See "CERTAIN TRANSACTIONS."
(5) Mr. Apple was Chief Executive Officer of the Company from July 1998 to
February 1999. Mr. Apple was employed by the Company in other capacities
prior to his election as Chief Executive Officer. The compensation shown
includes compensation received in all capacities.
OPTION GRANTS DURING THE FISCAL YEAR ENDED DECEMBER 31, 1998
The following table sets forth information with respect to each option
granted to the executive officers named in the Summary Compensation Table during
the fiscal year ended December 31, 1998:
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
PERCENTAGE OF TOTAL APPRECIATION FOR
OPTIONS GRANTED TO OPTION TERM(1)
OPTIONS EMPLOYEES EXERCISE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
---- --------- ------------------- -------- ---------- --------- ---------
(#) (%) ($) ($) ($)
▇▇▇▇ ▇. ▇▇▇▇▇▇▇(2)........... 1,000,000 64 1.50 9/1/2004 340,096 771,561
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇............. -- -- -- -- -- --
▇▇▇▇▇▇▇ ▇. Apple............. -- -- -- -- -- --
------------------------
(1) The compounding assumes all options are exercised at the end of their
six-year term. These amounts represent certain assumed rates of
appreciation, required to be set forth pursuant to Securities and Exchange
Commission rules. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock, overall stock
market conditions, and continued employment of the option holder through the
vesting period. The amounts reflected in this table may not necessarily be
achieved.
(2) In April 1995, MacUSA granted to ▇▇. ▇▇▇▇▇▇▇, pursuant to the MacUSA, Inc.
1995 Stock Option Plan (the "MacUSA Plan"), options to purchase 1,099,990
shares, 1,370,010 shares and 199,996 shares of Common Stock, respectively,
at an exercise price of $1.01 per share. The ability to exercise some of
such options was delayed until 2001, subject to acceleration if the Company
met certain profitability goals or under certain other circumstances.
Effective as of January 12, 1998, the Company granted to ▇▇. ▇▇▇▇▇▇▇, in
connection with his cancellation of 2,470,000 of such options, options to
purchase 1,000,000 shares of Common Stock at an exercise price of $1.50 per
share, exercisable for six years commencing on September 1, 1998.
Ex. 1-39
AGGREGATE OPTIONS EXERCISED IN THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND
OPTION VALUES AT DECEMBER 31, 1998
The following table sets forth certain information regarding options to
purchase shares of Common Stock exercised during the Company's fiscal year ended
December 31, 1998, and the number and value of options to purchase shares of
Common Stock held as of December 31, 1998, by the executive officers named in
the Summary Compensation Table:
VALUE OF UNEXERCISED
IN-THE-MONEY
NUMBER OF NUMBER OF OPTIONS OPTIONS AT
SHARES AT DECEMBER 31, 1998 DECEMBER 31, 1998(2)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
(#) ($) (#) (#) ($) ($)
▇▇▇▇ ▇. ▇▇▇▇▇▇▇........... -- -- 1,199,996 0 1,897,992 0
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇.......... -- -- 675,000 375,000 1,518,750 843,750
▇▇▇▇▇▇▇ ▇. Apple.......... 50,000 112,500 175,000 775,000 393,750 1,743,750
------------------------
(1) Value Realized is the difference between the closing price per share on the
date of exercise, and the option price per share, multiplied by the number
of shares acquired upon exercise of the option.
(2) Value of Unexercised In-the-Money Options is the difference between the
closing price per share of $3.00 at December 31, 1998, and the exercise
price per share multiplied by the number of shares subject to options.
DIRECTOR COMPENSATION
Upon initial election to the Board of Directors, each non-employee director
automatically receives an option to purchase 50,000 shares of Common Stock under
the Tech Squared Inc. 1995 Non-Employee Director Option Plan (the "Director
Plan"). The Director Plan was amended in December 1998 to allow the Board of
Directors to vary the number of Shares issuable upon exercise of the option
granted to each new director and to vary other terms of such options. Options
granted under the Director Plan, unless otherwise detained by the Board of
Directors, have an exercise price equal to the fair market value of one share of
Common Stock on the date of grant. Unless otherwise determined by the Board of
Directors, the options become exercisable in three equal installments on each of
the date of initial election to the Board of Directors and the first two
anniversaries of the date of such election. Options vest and become exercisable
only if the director is a member of the Board of the Directors on the vesting
date. Options granted under the Director Plan expire seven years from the date
of grant. Upon his election as a director of the Company in June 1996,
▇▇. ▇▇▇▇▇ was granted an option to purchase 50,000 shares under the Director
Plan. All of such options have vested. Upon his election as a director of the
Company in July 1996, ▇▇. ▇▇▇▇▇▇▇ was granted an option to purchase 50,000
shares under the Director Plan, all of such options have vested. Additionally,
in December 1998, ▇▇. ▇▇▇▇▇▇▇ was granted an option to purchase an additional
50,000 shares under the Director Plan at an exercise price of $2.25 per share.
Such options vested immediately upon grant. Upon his election as a director of
the Company in December 1998, ▇▇. ▇▇▇▇▇▇▇ was granted an option to purchase
60,000 shares under the Director Plan at an exercise price of $2.25 per share.
Such option vested immediately upon grant.
The Company generally reimburses non-employee directors for out-of-pocket
expenses incurred to attend the Board of Directors meetings. The Company does
not pay director fees to members of the Board of Directors who are full-time
employees of the Company and does not reimburse such persons for out-of-pocket
expenses in connection with attending Board of Director meetings.
Ex. 1-40
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
INTRODUCTION. During the fiscal year ended December 31, 1998, the Board of
Directors was responsible for matters relating to the compensation of the
Company's executive officers named in the Summary Compensation Table, namely
▇▇▇▇ ▇. ▇▇▇▇▇▇▇, the Company's Chairman of the Board, ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇., the
Company's President, Chief Executive Officer and Chief Operating Officer, and
▇▇▇▇▇▇▇ ▇. Apple who served as Chief Executive Officer, from July 1998, to
February 1999.
COMPENSATION PROGRAM. The Company's current executive compensation program
involves a combination of base salary, performance-based bonuses and long-term
incentive awards. Base salaries are intended to attract and retain
highly-qualified executives. Bonuses to executive officers are intended to
reward short-term performance of the executive officer and the Company. Grants
of stock options by the Company are intended to encourage and reward executive
officers based upon the Company's long-term performance and to provide executive
officers with a financial interest in the success of the Company, which aligns
the executive officers' interests with the interests of the Company's
shareholders.
BASE SALARY. The philosophy of the Board of Directors is to set base
salaries for each of the executive officers of the Company at appropriate levels
for the relative positions of the officer and the duties of the position. The
Board of Directors has the authority to determine the salaries of the Company's
Chief Executive Officer and other executive officers, subject to the terms of
pre-existing employment agreements. The Board of Directors believes that there
should be little change from year to year in the base salary of the executive
officers other than increases due to: (i) growth of the Company's sales;
(ii) growth in responsibility of the position; or (iii) cost of living
increases. The Board of Directors believes that additional compensation above
base levels should be by bonus based on individual performance and the financial
performance of the Company.
PERFORMANCE-BASED BONUSES. Payment of bonuses to officers of the Company is
determined by the Board of Directors based upon the executive officer's
performance and the Company's financial results.
LONG-TERM INCENTIVE AWARDS. The Company's long-term incentive program
consists of stock option grants which encourage achievement of long-term goals
and objectives consistent with enhancing shareholder value. Awards of stock
options provide executives with increased motivation and incentive to exert
their best efforts on behalf of the Company by increasing their personal stake
in the Company's success through the opportunity to acquire a greater equity
interest in the Company and to benefit from appreciation in the value of the
Company's stock. All stock options granted to executive officers have an
exercise price of not less than the market value of the Company's Common Stock
on the date of grant, thereby ensuring that any value derived from such options
is dependent upon subsequent increases in share value which will be realized by
shareholders generally. Executives generally must be continually employed in
order for stock options to vest and become exercisable.
COMPENSATION OF THE CHAIRMAN OF THE BOARD. The Company has not entered into
an employment agreement with ▇▇. ▇▇▇▇▇▇▇. ▇▇. ▇▇▇▇▇▇▇ is currently being paid a
nominal monthly amount which is applied directly to his health insurance and
other employee benefits.
COMPLIANCE WITH SECTION 162(m) OF THE TAX CODE. Section 162(m) of the Tax
Code, generally disallows a tax deduction to public companies for compensation
over $1,000,000 to the chief executive officer and the four highest compensated
officers, with certain exceptions. The Company did not pay cash compensation to
any employee during the fiscal year ending December 31, 1998 in excess of the
deduction limit of Section 162(m), and does not anticipate doing so during the
fiscal year ending December 31, 1998.
Ex. 1-41
The foregoing Report will not be deemed incorporated by reference by any
statement incorporating by reference this Proxy Statement, or any portion
thereof, into any filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934 and shall not otherwise be deemed filed under
such Acts.
▇▇▇▇ ▇. ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Board Members
EMPLOYMENT AGREEMENTS
On August 20, 1996, the Company entered into an employment agreement with
▇▇. ▇▇▇▇▇, as President and Chief Operating Officer of the Company, at an annual
salary of $135,000, with a bonus plan based on the Company's quarterly profit
and growth in sales levels. The plan requires an increase in both profit and
growth in sales, with a cap of $5,000 bonus pay for profit increase and a
minimum of .5% net profits and 20% sales growth before any bonus is available.
In addition, ▇▇. ▇▇▇▇▇ was granted options to purchase a total of 1,000,000
shares the Company's Common Stock at $.75 per share, 625,000 of which have
vested as of December 31, 1998.
COMPARATIVE STOCK PERFORMANCE
The following graph compares the cumulative total shareholder return,
assuming $100 invested on May 12, 1995, as if such amount had been invested in
each of: (i) the Company's Common Stock; (ii) the stocks comprising the Nasdaq
Retail Trade Index; and (iii) the stocks included in the Nasdaq Stock Market
Index. The graph assumes the reinvestment of all dividends, if any. The prices
for the Company's Common Stock are closing bid prices as reported by the Nasdaq
OTC Bulletin Board.
▇▇▇▇▇ REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
TECH SQUARED, INC. NASDAQ RETAIL TRADE STOCKS NASDAQ STOCK MARKET (US COMPANIES)
5/12/95 100 100 100
12/29/95 67 109 124
12/31/96 17 130 152
12/31/97 130 153 186
12/31/98 160 186 262
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Common Stock and Preferred Stock of the Company as of the close of
business on April 23, 1999, unless otherwise indicated,
Ex. 1-42
by each director, by each executive officer named in the Summary Compensation
Table and by all directors and executive officers (regardless of compensation
level) of the Company as a group.
SHARES OF
SHARES OF COMMON PREFERRED STOCK
STOCK BENEFICIALLY BENEFICIALLY TOTAL VOTING SHARES
OWNED(1) OWNED(1) BENEFICIALLY OWNED(2)
---------------------- --------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF
NAME OF BENEFICIAL OWNER AMOUNT CLASS AMOUNT CLASS AMOUNT TOTAL
------------------------------------------- --------- ---------- -------- ---------- ---------- ----------
▇▇▇▇ ▇. ▇▇▇▇▇▇▇(3)......................... 6,574,022 49.4% -- -- 6,574,022 48.8%
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇.(4)................... 625,000 4.9% -- -- 625,000 4.8%
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇(5)...................... 100,000 * -- -- 100,000 *
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇(6)........................ 60,000 * -- -- 60,000 *
▇▇▇▇ Apple(7).............................. 225,000 1.8% -- -- 225,000 1.8%
All Directors and Executive Officers as a
Group (5 persons)(8)..................... 7,584,022 53.7% -- -- 7,584,022 52.4%
------------------------
* Less than 1% of the outstanding shares.
(1) Unless otherwise noted, all of the shares are held by individuals possessing
sole voting and dispositive power with respect to the shares owned. Shares
not outstanding, but deemed beneficially owned by virtue of the right of a
person or member of a group to acquire them within 60 days, are treated as
outstanding only when determining the amount and percentage owned by such
person or group.
(2) Each share of Preferred Stock of the Company has the right to vote on all
matters voted upon by the holders of Common Stock. Accordingly, the
Preferred Stock and Common Stock have been considered to be one voting class
to show Total Voting Shares Beneficially Owned. The percentage of
outstanding shares is calculated based upon 12,102,950 shares of Common
Stock and 160,000 shares of Preferred Stock outstanding as of the close of
business on April 23, 1999.
(3) Includes 1,199,996 shares that ▇▇. ▇▇▇▇▇▇▇ has the right to acquire pursuant
to the exercise of stock options within 60 days of April 23, 1999.
(4) Includes 625,000 shares that ▇▇. ▇▇▇▇▇ has the right to acquire pursuant to
the exercise of stock options within 60 days of April 23, 1999.
(5) Includes 100,000 shares that ▇▇. ▇▇▇▇▇▇▇ has the right to acquire pursuant
to the exercise of stock options within 60 days of April 23, 1999.
(6) Includes 60,000 shares that ▇▇. ▇▇▇▇▇▇▇ has the right to acquire pursuant to
the exercise of stock options within 60 days of April 23, 1999.
(7) According to the best information available to Tech Squared, ▇▇▇▇▇▇▇ ▇.
Apple, former chief executive officer of the Company, owns directly 225,000
shares. Mr. Apple has filed a lawsuit against the Company and others in
which he claims he has the right to exercise options covering an additional
775,000 shares. The Company denies this claim. The number of shares and
percent of class listed on the accompanying table does not include the
contested 775,000 shares.
(8) Includes 1,800,996 shares that all directors and executive officers as a
group have the right to acquire pursuant to the exercise of stock options
within 60 days of April 23, 1999.
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding the beneficial
ownership of Common Stock and Preferred Stock of the Company as of the close of
business on April 23, 1999, unless otherwise indicated,
Ex. 1-43
by each person known by the Company to be the owner of more than five percent of
the Company's outstanding Common Stock or Preferred Stock.
SHARES OF
SHARES OF COMMON PREFERRED STOCK TOTAL VOTING
STOCK BENEFICIALLY BENEFICIALLY SHARES BENEFICIALLY
OWNED(1) OWNED(1) OWNED(2)
--------------------- --------------------- ---------------------
NAME AND ADDRESS PERCENT OF PERCENT OF PERCENT OF
OF BENEFICIAL OWNER AMOUNT CLASS AMOUNT CLASS AMOUNT TOTAL
------------------------------------------------ -------- ---------- -------- ---------- -------- ----------
▇▇▇▇▇▇ ▇▇▇▇▇▇ .................................. -- -- 60,000 37.5% 60,000 *
▇.▇. ▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ................................. -- -- 50,000 31.3% 50,000 *
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇.
▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ............................... -- -- 20,000 12.5% 20,000 *
▇.▇. ▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇, as Trustee for
▇▇▇▇▇▇ ▇. ▇▇▇▇ and ▇▇▇▇▇▇▇ ▇. ▇▇▇▇............ -- -- 20,000 12.5% 20,000 *
Zelmay Long .................................... -- -- 10,000 6.3% 10,000 *
▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇.
▇▇▇▇▇, ▇▇ ▇▇▇▇▇
------------------------
* Less than 1% of the outstanding shares.
(1) Unless otherwise noted, all of the shares are held by individuals possessing
sole voting and dispositive power with respect to the shares shown. Shares
not outstanding, but deemed beneficially owned by virtue of the right of a
person or member of a group to acquire them within 60 days, are treated as
outstanding only when determining the amount and percentage owned by such
person or group.
(2) Each share of Preferred Stock of the Company has the right to vote on all
matters voted upon by the holders of Common Stock. Accordingly, the
Preferred Stock and Common Stock have been considered to be one voting class
to show Total Voting Shares Beneficially Owned. The percentage of
outstanding shares is calculated based upon 12,102,950 shares of Common
Stock and 160,000 shares of Preferred Stock outstanding as of the close of
business on April 23, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOAN TO ▇▇. ▇▇▇▇▇▇▇. In 1993, MacUSA loaned $200,000 to ▇▇. ▇▇▇▇▇▇▇. In
consideration of ▇▇. ▇▇▇▇▇▇▇'▇ guarantee of a portion of the Company's bank
debt, the interest rate on the note was reduced to 0%, effective as of
January 1, 1997. Such agreement also provided that when the guaranty was
terminated, the interest rate would return to the original amount of 5%. The
note, including the accrued and unpaid interest, was paid in full in
December 1998.
DIVIDEND TO ▇▇. ▇▇▇▇▇▇▇; REIMBURSEMENT OF TAXES. In 1995, MacUSA declared a
dividend of $1,188,000 payable to the former shareholders of MacUSA in
connection with the conversion of MacUSA from a Subchapter S corporation to a
Subchapter C corporation. The Company paid approximately $200,731 of this
dividend during 1996, approximately $200,731 during 1997, and $200,000 during
1998 of which ▇▇. ▇▇▇▇▇▇▇ received $200,000 in 1996, $200,000 in 1997 and
$199,268 in 1998. The remainder of the dividend payable to ▇▇. ▇▇▇▇▇▇▇ was
evidenced by a note payable to ▇▇. ▇▇▇▇▇▇▇ (the "Note") in the principal amount,
as of December 31, 1998, of $283,857. The Note did not bear interest, was due on
demand and, under the terms of a Debt Subordination Agreement dated June 27,
1997 between the Company, ▇▇. ▇▇▇▇▇▇▇ and First Bank Minnesota, National
Association, now US Bank, National
Ex. 1-44
Association ("US Bank"), was subordinated to indebtedness owed by the Company to
US Bank pursuant to the terms of the Financing and Security Agreement with
US Bank dated June 27, 1997. The Company was limited to making dividend payments
of not more than $200,000 to ▇▇. ▇▇▇▇▇▇▇ in the aggregate in any calendar year,
provided that the Company was in compliance with the Financing Agreement with
US Bank before and after making such dividend payments. Apart from the
foregoing, the Company was not allowed to make dividend payments without the
prior written consent of US Bank. In March 1996, the Company agreed to reimburse
▇▇. ▇▇▇▇▇▇▇ for any personal tax he was required to pay as a result of the
non-interest bearing status of the Note. The balance of such note was paid in
February 1999.
PERSONAL GUARANTY BY ▇▇. ▇▇▇▇▇▇▇. Borrowings under the Revolving Line of
Credit Agreement with US Bank were personally guaranteed by ▇▇. ▇▇▇▇▇▇▇ up to a
maximum of $500,000. Such guarantee was released in December 1998.
GRANT FROM ▇▇. ▇▇▇▇▇▇▇ OF AN OPTION TO ACQUIRE A SUBSTANTIAL INTEREST IN
DIGITAL RIVER, INC. In December 1995, MacUSA was granted an option by
▇▇. ▇▇▇▇▇▇▇ to acquire 3,200,000 shares (after adjustment for an August 1998
2-for-3 reverse split) of common stock (the "Digital River Shares") owned by
▇▇. ▇▇▇▇▇▇▇. The option (the "Digital River Option") provided that it was
exercisable at any time through December 31, 2000 for total consideration of one
dollar.
The Digital River Shares are subject to the provisions of the Fujitsu
Modification Agreement dated December 11, 1997 (the "Fujitsu Agreement") between
▇▇. ▇▇▇▇▇▇▇, Fujitsu Limited, a company organized under the laws of Japan
("Fujitsu"), Digital River, and MacUSA (collectively, the "Parties"). Pursuant
to the terms of the Modification Agreement, the Parties agreed to terminate
previous agreements entered into in connection with an investment by Fujitsu in
Digital River. Under the terms of the Modification Agreement, MacUSA remains a
party to the agreement to the extent that ▇▇. ▇▇▇▇▇▇▇ may transfer all shares of
Digital River he owns, along with any and all rights related thereto pursuant to
the agreement or otherwise to MacUSA or the Company. Digital River is engaged in
the business of electronic software distribution. ▇▇. ▇▇▇▇▇▇▇ is the President
and a director of Digital River.
In December 1998, the Company participated in Digital River's secondary
offering by exercising and selling 200,000 shares (post-split) of the Digital
River Option realizing net proceeds of $4,430,000. The Company continues to hold
an option to purchase 3,000,000 shares (post-split), which would represent
ownership of approximately 15% of Digital River as of April 23, 1999. The option
is not transferable and the balance is exercisable at any time through
December 31, 2000 for total consideration of $0.93 (ninety-three cents). During
the term of the option, ▇▇. ▇▇▇▇▇▇▇ has agreed to vote the Digital River Shares
at the direction of the Company's Board of Directors. As additional
consideration, the Company has agreed to reimburse ▇▇. ▇▇▇▇▇▇▇ for any tax
liability incurred in connection with the transfer of the Option or the shares
of Digital River stock issuable upon the exercise thereunder.
TAX INDEMNIFICATION AGREEMENT WITH ▇▇. ▇▇▇▇▇▇▇. In December 1995, the
Company entered into a Tax Indemnification Agreement with ▇▇. ▇▇▇▇▇▇▇ whereby
the Company agreed to indemnify ▇▇. ▇▇▇▇▇▇▇ for the amount of any penalties or
interest resulting from the redetermination of ▇▇. ▇▇▇▇▇▇▇'▇ share of taxable
income attributable to MacUSA and the amount of any additional taxes due from
▇▇. ▇▇▇▇▇▇▇, to the extent such tax adjustment results in a future decrease in
the taxable income of MacUSA. In 1995, ▇▇. ▇▇▇▇▇▇▇ owned approximately 95% of
MacUSA, which was a Subchapter S corporation within the meaning of Section 1361
of the Internal Revenue Code. MacUSA's Subchapter S status was terminated in
1995, and MacUSA is now a wholly-owned subsidiary of the Company.
DIGITAL RIVER LEASE AND FULFILLMENT SERVICES. During 1998 and until
April 1999, Digital River occupied up to approximately 7,000 square feet of
warehouse space at the Company's corporate headquarters. Prior to August 1998,
the offices of Digital River were also located in the Company's facilities. The
Company billed Digital River for the leased space and certain related costs such
as direct labor costs, phone services, general liability insurance and
janitorial services through an administrative charge. Total charges by the
Ex. 1-45
Company to Digital River for administrative expenses were approximately
$207,000, $160,000 and $82,000 in 1998, 1997 and 1996, respectively.
During 1997, the Company began performing fulfillment services for Digital
River on physical shipments of products, for which Digital River paid the
Company a fulfillment fee. The Company billed Digital River approximately
$246,000 and $8,000 for these services in 1998 and 1997, respectively. Such
fulfillment services by the Company were discontinued in April 1999.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Only exhibits filed with this Amendment to Form 10K are listed.
ITEM
NO. DESCRIPTION
--------------------- -------------------------------
23.1 Consent of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP.
(B) REPORTS ON FORM 8-K
None.
Ex. 1-46
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TECH SQUARED INC.
Date: October [ ], 1999 By:
-----------------------------------------
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇.
PRESIDENT, CHIEF EXECUTIVE OFFICER,
CHIEF OPERATION OFFICER
By:
-----------------------------------------
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
CHIEF FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
SIGNATURE AND TITLE DATE EXECUTED
------------------- -------------
------------------------------------------- October [ ], 1999
▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Director
------------------------------------------- October [ ], 1999
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇., Director
-------------------------------------------
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, ▇▇., Director
------------------------------------------- October [ ], 1999
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Director
Ex. ▇-▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ INC.
SPECIAL MEETING OF SHAREHOLDERS
[ ], 1999
The undersigned, having read the Notice of Special Meeting of
Shareholders and Proxy Statement-Prospectus dated [ ], 1999,
receipt of which is hereby acknowledged, does hereby appoint and
P constitute [ ] and [ ], and each or any of them, the
R attorneys and proxies of the undersigned, with full power of
O substitution to each, for and in the name of the undersigned to vote
X and act at the Special Meeting of Shareholders of Tech Squared Inc.
Y to be held at [ ], on [ ], 1999 at [ ] a.m. and at
any postponement or adjournment thereof, with respect to all shares
of Common Stock of the Company standing in the name of the undersigned
or with respect to which the undersigned is entitled to vote or act,
with all the powers that the undersigned would possess if personally
present and acting, as follows:
(IMPORTANT-TO BE SIGNED AND DATED ON REVERSE SIDE)
---------------------
SEE REVERSE SIDE
---------------------
-------------------------------------------------------------------------------
-----
X Please ▇▇▇▇ votes
----- as in this example.
This proxy, when properly executed, will be voted in the manner
directed below. If no direction is made, this proxy will be voted as the
Board of Directors recommends.
-------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1.
-------------------------------------------------------------------------------
1. To approve the voluntary dissolution of Tech Squared Inc. FOR AGAINST ABSTAIN
pursuant to the Plan of Liquidation and Dissolution. / / / / / /
2. To transact such other business as may properly come before
the meeting and any postponement or adjournment thereof.
DATE:_____________________________, 1999
------------------------------------------
------------------------------------------
SIGNATURE(S)
IMPORTANT: Please sign exactly as your name appears hereon.
When signing as attorney, executor, administrator, trustee,
guardian, etc., give title as such. If joint account, each
joint owner should sign.