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US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended: SEPTEMBER 30, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT.
Commission File Number: 0-25602
TECH SQUARED INC.
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1591872
(State or other jurisdiction (I.R.S. Employer
or organization) Identification No.)
5198 WEST 76TH STREET
EDINA, MINNESOTA 55439
(Address of principal executive offices)
(612) 832-5622
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes __X__ No ____.
As of November 1, 1996, 10,374,870 shares of Common Stock, no par value,
of the Company were outstanding.
Transitional Small Business Disclosure Format (Check One):
Yes ____; No __X__
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TECH SQUARED, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Statements of Financial Position at September 30, 1996
(unaudited) and December 31, 1995 3
Consolidated Statements of Operations (unaudited) for the three
months and nine months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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ITEM 1. FINANCIAL STATEMENTS
TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, December 31,
1996 1995
------------- -------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $352,918 $867,370
Available-for-sale securities 1,284,375 1,200,000
Accounts receivable, net of allowance
for doubtful receivables of $398,000
and $381,000 respectively 2,808,214 2,306,096
Inventories 2,390,455 3,519,368
Prepaids and other current assets 570,543 461,227
--------- ---------
TOTAL CURRENT ASSETS 7,406,505 8,354,061
Available-for-sale securities 747,448 -
Property and equipment, net 453,358 444,603
Receivable from officer/stockholder 199,267 205,800
Mining assets - 600,000
Patents and organization costs, net 139,049 134,790
--------- ---------
$8,945,627 $9,739,254
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $767,377 $595,000
Accounts payable 4,433,074 4,927,618
Accrued compensation and benefits 187,086 142,846
Accrued expenses 552,632 509,375
Dividend payable 727,104 500,000
---------- ----------
TOTAL CURRENT LIABILITIES 6,667,273 6,674,839
Dividend payable - 392,707
Minority interest 119,668 248,211
Redeemable preferred stock, 12%
cumulative convertible, $1 par
value; 1,000,000 shares authorized;
160,000 and 185,000 shares issued 162,500 185,000
and outstanding, respectively
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock: no par value; 25,000,000
shares authorized 10,374,870 issued
and outstanding - -
Additional paid-in capital 3,771,964 3,702,066
Retained earnings (deficit) (1,860,153) (1,463,569)
Unrealized gain on available-for-sale
securities 84,375 -
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,996,186 2,238,497
---------- ----------
$8,945,627 $9,739,254
---------- ----------
---------- ----------
Note: The consolidated statement of financial position at December 31, 1995
has been derived from the audited financial statements at that date.
See accompanying notes to consolidated financial statements.
3
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TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Month Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales $9,254,257 $8,842,135 $26,513,926 $33,919,025
Cost of sales 8,229,814 9,148,733 23,588,335 31,637,988
------------- ------------- ----------- ------------
GROSS PROFIT 1,024,443 (306,598) 2,925,591 2,281,037
Selling & marketing expenses 497,406 522,373 1,711,492 1,689,646
General & administrative expenses 579,607 699,171 1,582,945 1,981,720
Research & development expenses 54,821 39,254 142,369 94,564
------------- ------------- ----------- ------------
Total Operating Expenses 1,131,834 1,260,798 3,436,806 3,765,930
------------- ------------- ----------- ------------
OPERATING PROFIT (LOSS) (107,391) (1,567,396) (511,215) (1,484,893)
Interest expense, net (18,841) (61,959) (22,925) (190,078)
Dividend Income 3,600 9,000
------------- ------------- ----------- -------------
PROFIT (LOSS) BEFORE MINORITY
INTEREST IN LOSSES (122,632) (1,629,355) (525,140) (1,674,971)
Minority interest in losses 81,003 16,158 128,544 43,054
------------- -------------- ----------- ------------
NET INCOME (LOSS) BEFORE
INCOME TAXES ($41,629) ($1,613,197) ($396,596) ($1,631,917)
Tax benefit of change to
taxable status - - - $192,500
Income tax benefit - - - $22,460
------------- -------------- ----------- ------------
NET INCOME (LOSS) ($41,629) ($1,613,197) ($396,596) ($1,416,957)
Pro forma income tax provision - - - ($31,911)
------------- -------------- ----------- ------------
PRO FORMA NET INCOME (LOSS) ($41,629) ($1,613,197) ($396,596) ($1,448,868)
------------- -------------- ----------- ------------
------------- -------------- ----------- ------------
Pro forma net income (loss) per
common share ($0.01) ($0.17) ($0.04) ($0.17)
------------- -------------- ----------- ------------
------------- -------------- ----------- ------------
Weighted average shares
outstanding 10,374,870 9,620,925 10,374,870 8,290,833
------------- -------------- ----------- ------------
------------- -------------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (loss) ($396,596) ($1,416,957)
Non-cash items included in loss:
Depreciation and amortization 160,726 185,533
Minority interest in Digital River (128,544) (43,054)
Changes In Operating Assets And Liabilities:
Accounts receivable, net (502,118) 409,195
Inventories 1,128,913 1,277,058
Income taxes - (214,960)
Prepaid and other current assets (109,316) (329,022)
Accounts payable (538,219) (1,392,094)
Other current liabilities 87,497 82,085
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (297,657) (1,442,216)
Cash Flows From Investing Activities:
Purchases of property and equipment (166,008) (50,336)
Increase in patents and organization costs (7,731) (30,166)
Change in officer/stockholder receivable 6,533 -
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (167,206) (80,502)
Cash Flows From Financing Activities:
Dividends paid (165,603) (560)
Preferred stock redemption (37,500) -
Net borrowings (payments) on line of credit 172,377 (355,000)
Payment for stock repurchase - (173,485)
Issuance of common stock (18,863) 2,087,885
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (49,589) 1,558,840
----------- -----------
NET INCREASE(DECREASE) IN CASH (514,452) 36,122
Cash At Beginning Of Period 867,370 818,507
----------- -----------
CASH AT END OF PERIOD $352,918 $854,629
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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TECH SQUARED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine month periods ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. The accompanying consolidated financial statements and
notes should be read in conjunction with the audited financial statements and
notes thereto included in the Company's 1995 annual report on Form 10-KSB.
The Consolidated financial statements include the accounts of Tech Squared
Inc., its wholly owned subsidiaries, and Digital River, Inc. ( "Digital
River"), which the Company controls through its bargain purchase option to
acquire 60% of the outstanding common stock. Digital River has developed
and is operating a proprietary system which allows the secure sale and
delivery of software, fonts and images on-line, via the internet. Digital
River's first on-line software sale and delivery occurred in August, 1996.
Certain amounts in the financial statements of prior periods have been
reclassified to conform to the presentation used for the three and nine month
periods ended September 30, 1996.
NOTE 2 - INVENTORIES
The Company's inventories consist primarily of goods held for resale and are
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.
NOTE 3 - AVAILABLE-FOR-SALE SECURITIES
The trading markets for the Company's available-for-sale securities are highly
volatile and may be limited, and there can be no assurance that the ultimate
dollar value realized for these investments will be equal to or in excess of the
value at which they are currently recorded .
In October 1996 Hanover Gold Company, Inc. ("Hanover") completed the
registration of the Company's 525,000 shares of Hanover common stock.
Additionally, Hanover filed suit against the Company for breach of contract and
injunctive relief to force the Company to break escrow and release title to its
Montana Gold mining properties in exchange for 400,000 shares of Hanover common
stock held in escrow. Although the Company has not yet filed its answer to the
Complaint, the Company has notified Hanover of some of its counterclaims. The
ultimate outcome of the lawsuits cannot be determined at this time, however, it
could significantly impact the carrying value and nature of the mining assets
currently recorded in the Company's Consolidated Statement of Financial
Position.
NOTE 4 - LEASE
In May 1996 the Company executed a new lease on its existing facilities. The
new agreement has a 38 month term and includes certain contraction and
expansion provisions. Future minimum lease payments, including estimated common
area maintenance are as follows:
Year ending December 31,
1997 $189,000
1998 207,000
1999 105,000
6
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NOTE 5 - REVOLVING LINE OF CREDIT
In November, 1996 the Company entered into an amendment to its existing line of
credit with Norwest. The amendment includes an extension of the term from
December 31, 1996 to April 30, 1997, an increase in the interest rate by 1%, a
minimum quarterly interest expense of $10,000, a fee of $8,000, and certain
other modifications including waiving the defaults, and re-setting the covenants
for the remainder of the term.
Borrowings under the $4,000,000 line of credit with Norwest, as amended, are
payable on demand, limited by eligible percentages of accounts receivable,
inventory and certain investments, and bear interest at the prime rate plus
2%. The agreement requires the Company to maintain certain covenants
including a minimum net worth, current ratio, debt to equity ratio, and
certain operating results. Borrowings under the agreement are secured by
substantially all the Company's assets, and are personally guaranteed up to
$500,000 by the Company's CEO.
NOTE 6 - DIGITAL RIVER
Digital River, Inc. ( "Digital River"), which the Company controls through its
bargain purchase option to acquire 60% of the outstanding common stock, has
developed and is operating a proprietary system which allows the secure sale and
delivery of software, fonts and images on-line, via the internet. Digital
River's first on-line software sale and delivery occurred in August, 1996.
The working capital requirements of Digital River will exceed the available cash
resources currently in Digital River. To address its need for additional
financing Digital River has signed a letter of intent for a private placement of
its common stock with a minimum of $2.0 million and a maximum of $4.0 million in
gross proceeds. If the offering is successfully completed the proceeds will be
used to fund product development and expand Digital River's sales and marketing
activities, including additions to its management team. There is no assurance
that this offering or any other additional financing will be successfully
completed, or if completed that it will be completed at terms favorable to
existing shareholders of Digital River, or to the Company.
Summarized condensed financial information of Digital River is as follows (in
000's):
BALANCE SHEET INFORMATION
Sept. 30, Dec. 31,
1996 1995
---- ----
Cash $ 171 $ 487
Total assets 409 635
Current liabilities 110 9
Stockholders' equity 299 627
OPERATING INFORMATION
Three Months Ended
September 30,
------------------
1996 1995
---- ----
Net sales $ 30 $ -
Operating expenses 222 45
Net loss (203) (40)
7
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TECH SQUARED, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein 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 indicated by words such as will, may be, expects or
anticipates. In addition to the factors discussed herein, 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; 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 risks presented from time to time in reports filed by the Company
with the Securities and Exchange Commission, including but not limited to the
annual report on Form 10-KSB for the year ended December 31, 1995.
The Company sells computer and peripheral products, mainly in the Macintosh
market, through direct marketing channels, and to value added resellers.
On May 9, 1995, MacUSA merged with the Jaguar Group, Ltd. (Jaguar). The
merger was accounted for as a "reverse acquisition" under the purchase method
in which MacUSA was deemed to have acquired Jaguar, though Jaguar continued
as the surviving legal entity. The consolidated financial statements do not
reflect the historical operating results of Jaguar prior to the merger
because its historical results are not considered meaningful. Following the
merger, Jaguar changed its name to Tech Squared Inc.
The Consolidated financial statements include the accounts of Tech Squared
Inc., its wholly owned subsidiaries, and Digital River, Inc. ( "Digital
River"), which the Company controls through its bargain purchase option to
acquire 60% of the outstanding common stock. Digital River has developed
and is operating a proprietary system which allows the secure sale and
delivery of software, fonts and images on-line, via the internet. Digital
River's first on-line software sale and delivery occurred in August, 1996.
For the three months ended September 30, 1996 the Company recorded a net loss
of ($54,000) or ($0.01) per share compared to a net loss of ($1,613,000) or
($0.17) per share in the third quarter of 1995. For the nine months ended
September 30, 1996 the Company recorded a net loss of ($409,000) or ($0.04)
per share, compared to a pro forma net loss of ($1,449,000) or ($0.17)
per share for the comparable period of 1995. Excluding the Company's share
of the Digital River loss which amounted to ($122,000) the Company recorded
a net income of $80,000 in the third quarter of 1996. This is the first
profitable quarter for the Company's core operations, excluding Digital
River, since the Quarter ended June 30, 1995.
Summarized condensed financial information for Tech Squared, Inc. excluding
Digital River is as follows (In 000's):
BALANCE SHEET INFORMATION
Sept. 30, Dec. 31,
1996 1995
--------- --------
Current assets $ 7,243 $ 7,867
Total assets 8,567 9,109
Current liabilities 6,587 6,666
Stockholders' equity 1,832 1,866
OPERATING INFORMATION
Three Months Ended
September 30,
------------------
1996 1995
---- ----
Net sales $ 9,224 $8,842
Operating expenses 910 1,215
Net income (loss) 80 (1,589)
8
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At September 30, 1996 the Company had cash of $353,000 of which $171,000
was in Digital River and available only to fund the operations of Digital
River. Availability under the Company's discretionary revolving line of
credit totaled $1.7 million as of September 30, 1996.
RESULTS OF OPERATIONS
NET SALES
Net sales for the Company's third quarter ended September 30, 1996 totaled
$9,254,000 compared to $8,842,000 for the corresponding period of 1995. The
increase in sales of 4.7 % is due to an increase in sales to the Company's
DTP Direct catalog customers of approximately 21% and an increase in sales to
the Company's distribution customers of approximately 18%, offset by
significant reductions in sales to the Company's mass merchant and PLI
customers of approximately $1.2 million.
Net sales for the first nine months of 1996 totaled $26,514,000 compared to
$33,919,000 for the same period in 1995. The decline in year-to-date sales is
primarily due to the Company's decision In the fourth quarter of 1995 to
de-emphasize sales into the mass merchant channel and to stop shipping
product under the PLI brand name acquired in the second quarter of 1995.
Sales from these two areas in the nine months ended September 30, 1995 were
approximately $6.5 million. Sales to the Company's distribution customers
also declined $2.5 million in the nine month period due to significant
declines in sales of storage devices including hard drives, optical drives,
and removable storage drives. The decline in sales from the Company's
distribution, mass merchant, and PLI customers was somewhat offset by an
increase in sales to the Company's DTP Direct catalog customers of
approximately 11% compared to the nine months ended September 30, 1995.
Digital River recorded net sales in the third quarter of 1996 totaling
approximately $30,000. Prior to the third quarter, Digital River had not
recorded any revenue.
GROSS PROFIT
Gross profit for the quarter ended September 30, 1996 was $1,024,000 or 11.1%
of net sales compared to $(307,000) or (3.5)% of net sales for the comparable
period of 1995. Gross profit for the nine month period ended September 30,
1996 was $2,926,000 or 11.0% of net sales compared to $2,281,000 or 6.7% of
net sales for the same period in 1995. Gross profit as a percentage of net
sales increased in 1996 due to the significant reduction in sales to the mass
merchant channel and under the PLI brand name which have historically carried
lower gross margins than the Company's direct sales. Gross margin in the
third quarter of 1995 was negatively impacted by an adjustment of
($1,008,000) relating to the reduction of certain inventories to their lower
of cost or market values, and certain other adjustments.
The Company expects ongoing competitive pressure on gross margins in 1996 and
beyond.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $497,000 or 5.4% of sales during the
quarter ended September 30, 1996 compared to $522,000 or 5.9% of sales during
the corresponding period of 1995. For the nine month period ending September
30, 1996 selling and marketing expenses were $1,711,000 compared to
$1,690,000 for the same period in 1995. As a percentage of sales, selling and
marketing expenses for the first nine months of 1996 increased to 6.5% of net
sales from 5.0% of net sales for the same nine month period in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the third quarter ended September 30,
1996 were $580,000 compared to $699,000 for the comparable period of 1995.
For the nine month period ended September 30, 1996 general and administrative
expenses were $1,583,000 compared to $1,982,000 for the same period in 1995.
The decrease is primarily due to the voluntary salary elimination by the CEO
of the Company from October 1995 to June 1996, and an overall reduction in
9
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variable expenses associated with sales. The reduction in general overhead
was offset in part by an increase in costs associated with being a public
company.
Digital River recorded general and administrative expenses of $143,000 in the
third quarter of 1996 compared to $4,000 in the third quarter of 1995. The
increase is primarily due to an increase in personnel costs, legal costs,
travel costs, and due to an inter company charge of $30,000 for
administrative services provided by Tech Squared to Digital River prior to
September 30, 1996.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are all incurred by Digital River.
Research and development expenses were $55,000 and $142,000 in the third
quarter and nine months ended September 30, 1996 compared to $39,000 and
$95,000 in the same periods of 1995. The increase reflects the increase in
personnel and in costs associated with ongoing development activities by
Digital River.
NET INTEREST EXPENSE
Net interest expense for the third quarter ended September 30, 1996 was
$19,000 compared to $62,000 for the same period in 1995. Interest expense
for the nine month period ended September 30, 1996 was $23,000 compared to
$190,000 for the same period in 1995. The decrease in interest expense is
due to a significant decrease in the average outstanding balance on the
Company's line of credit.
DIVIDEND INCOME
The Company recorded $3,600 and $9,000 of dividend income in the third
quarter and nine months ended September 30 1996, respectively, from its
investment in CAM Designs Inc.
INCOME TAXES
In the third quarter and nine months ended September 30, 1996 the Company
recorded no income tax provision due to the Company's inability to currently
record net operating loss benefit carry forwards for financial reporting
purposes. In the nine months ended September 30, 1995 the company recorded
an income tax benefit of $215,000 including $193,000 due to the change in
taxable status from an S Corporation as a result of the merger with Jaguar.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at September 30, 1996 ,
consisted of liquid funds, a revolving line of credit agreement with Norwest
Bank Minnesota, NA ("Norwest"), and vendor trade credit lines.
As of September 30, 1996 the Company had working capital of $739,000. This
working capital has been reduced by a dividend declared but not yet paid in
the amount of $727,000 which is subordinated to the Company's indebtedness
under a line of credit with Norwest pursuant to the terms of a Credit and
Security Agreement dated January 3, 1996. Pursuant to a related debt
subordination agreement with Norwest, the Company is only allowed to pay
$200,000 in 1996 of which $166,000 has been paid through September 30, 1996,
and certain other amounts in the event of additional cash influxes into the
Company.
In November, 1996 the Company entered into an amendment to its existing line
of credit with Norwest. The amendment includes an extension of the term from
December 31, 1996 to April 30, 1997, an increase in the interest rate by 1%,
a minimum quarterly interest expense of $10,000, a fee of $8,000, and certain
other modifications including waiving the defaults, and re-setting the
covenants for the remainder of the term.
Borrowings under the $4,000,000 line of credit with Norwest, as amended, are
payable on demand, limited by eligible percentages of accounts receivable,
inventory and certain investments, and bear interest at the prime rate plus
2%. The agreement requires the Company to maintain certain covenants
including a minimum net worth, current ratio, debt to equity ratio, and
certain operating
10
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results. Borrowings under the agreement are secured by substantially all the
Company's assets, and are personally guaranteed up to $500,000 by the
Company's CEO.
Inventories decreased from $3,519,000, as of December 31, 1995 to $2,390,000
as of September 30,1996. This decrease resulted primarily from reduction of
inventories related to a significant purchase in October 1995 and from
improved inventory management. Capital expenditures totaled $166,000 in the
nine months ended September 30, 1996 compared to $50,000 for the comparable
period of 1995. The increase is primarily due to capital expenditures by
Digital River of $77,000.
The Company believes that funds generated from management of receivable and
inventory levels, advances under its discretionary line of credit, further
expansion of lines with trade creditors, the cash on hand and potential
proceeds from the sale of its investments, will be sufficient to fund its
operations through the end of 1996. However, maintaining an adequate level
of working capital through the end of 1996 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 that
future capital infusions will be available.
The working capital requirements of Digital River will exceed the available
cash resources currently in Digital River. The Company is addressing the
need for additional capital by raising additional funds in the form of either
equity or debt. Digital River has signed a letter of intent for a private
placement of its common stock with a minimum of $2.0 million and a maximum of
$4.0 million in gross proceeds. If the offering is successfully completed
the proceeds will be used to fund product development and expand Digital
River's sales and marketing activities, including additions to its management
team. There is no assurance that this offering or any other additional
financing will be successfully completed, or if completed that it will be
completed at terms favorable to existing shareholders of Digital River, or to
the Company.
11
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On October 4, 1996 Hanover Gold Company, Inc. ("Hanover") filed suit
against Tabor Resources Corporation ("Tabor"), a wholly owned subsidiary of
the Company in the United States District Court Eastern District of
Washington. The complaint seeks to force the Company to break escrow and
release title to its Montana Gold mining properties in exchange for 400,000
shares of Hanover common stock held in escrow, along with certain other
damages. Although the Company has not yet filed its answer to the Complaint,
the Company has notified Hanover of some of its counterclaims. The ultimate
outcome of the lawsuits cannot be determined at this time, however, it could
significantly impact the carrying value and nature of the mining assets
currently recorded in the Company's Consolidated Statement of Financial
Position.
Reference is made to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1995 and Forms 10-QSB for the quarters ended
March 31, 1996 and June 30, 1996 on file with the Securities and Exchange
Commission. Except as provided above, during the quarter ended September 30,
1996, the Company was not party to any newly instituted legal proceedings and
there have been no material developments during such period to existing legal
proceedings.
ITEM 5. OTHER INFORMATION
On August 29, 1996 Chuck Reese joined the Company as President and
Chief Operating Officer. Joel Ronning, the founder of MacUSA remains the
Chief Executive Officer and Chairman of the Board. Mr. Ronning is also the
President and CEO of Digital River, where he is currently devoting the
majority of his time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 First Amendment to Credit and Security Agreement between
MacUSA, Inc. and Norwest Bank Minnesota, NA dated
November 5, 1996.
10.2 Letter Agreement dated August 20, 1996 to Mr. Charles Reese
regarding employment as the Company's President and COO.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
12
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECH SQUARED, INC.
November 11, 1996 /s/ Joel Ronning
-----------------------------
Joel Ronning
Chief Executive Officer (as principal
executive and operating officer and
principal financial and accounting
officer)
13
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EXHIBIT INDEX
Exhibit Index Description Page Number
- ------------- ----------- -----------
10.1 First Amendment to Credit and Security Agreement
between MacUSA, Inc. and Norwest Bank
Minnesota, NA dated November 5, 1996. 15
10.2 Letter Agreement dated August 20, 1996 to
Mr. Charles Reese regarding employment as the
Company's President and COO. 25
27.1 Financial Data Schedule 28
14
<PAGE>
FIRST AMENDMENT TO
CREDIT AND SECURITY AGREEMENT
This First Amendment, dated as of November 5, 1996, is made by and
between MacUSA, Inc., a Minnesota corporation (the "Borrower"), and Norwest
Bank Minnesota, National Association, a national banking association (the
"Lender").
Recitals
The Borrower and the Lender have entered into a Credit and Security
Agreement dated as of January 3, 1996 (the "Credit Agreement"). Capitalized
terms used in these recitals have the meanings given to them in the Credit
Agreement unless otherwise specified.
The loan advances under the Credit Agreement are evidenced by the
Borrower's Revolving Note dated as of January 3, 1996, in the maximum
principal amount of $4,000,000 and payable to the order of the Lender (the
"Revolving Note").
The Borrower has requested that certain amendments be made to the Credit
Agreement. The Lender is willing to grant the Borrower's request subject to
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. DEFINED TERMS. Capitalized terms used in this First Amendment which
are defined in the Credit Agreement shall have the same meanings as defined
therein, unless otherwise defined herein. In addition, Section 1.1 of the
Credit Agreement is amended by adding or amending, as the case may be, the
following definitions:
"'Borrowing Base' means, at any time and subject to change from time to
time in the Lender's sole discretion, the lesser of:
(a) the Maximum Line; or
(b) the sum of:
(i) 75% of Eligible Accounts, PLUS
(ii) the lesser of (A) 20% of Eligible Inventory or (B) $500,000,
PLUS
(iii) the lesser of $600,000 or 50% of the market value of the CAM
Stock."
-1-
<PAGE>
"'First Amendment' means that certain First Amendment to Credit and
Security Agreement dated as of October __, 1996."
"'Floating Rate' means an annual rate equal to the sum of the Base Rate
plus two percent (2.0%), which annual rate shall change when and as the Base
Rate changes."
2. MINIMUM INTEREST CHARGE. Section 2.3 of the Credit Agreement is
hereby amended by adding the following new subsection (e):
"(e) MINIMUM INTEREST CHARGE. Notwithstanding the interest payable
pursuant to Section 2.3(a), the Borrower shall pay to the Lender interest of
not less than $10,000 per calendar quarter (the "Minimum Interest Charge")
during the term of this Agreement, and the Borrower shall pay any deficiency
between the Minimum Interest Charge and the amount of interest otherwise
calculated under Section 2.3(a) on the last day of each calendar quarter and
the Termination Date or earlier prepayment by the Borrower or demand for
payment by the Lender.
3. TERMINATION DATE. That part of Section 2.6 of the Credit Agreement
which reads as follows:
"Unless terminated by the Lender at any time or by the Borrower pursuant to
Section 2.7, the Credit Facility shall remain in effect until December 31,
1996. December 31, 1996 is herein referred to as the 'Termination Date'."
is hereby amended to read as follows:
"Unless terminated by the Lender at any time or by the Borrower pursuant to
Section 2.7, the Credit Facility shall remain in effect until April 30, 1997.
April 30, 1997 is herein referred to as the 'Termination Date'."
4. COMPLIANCE CERTIFICATE. Notwithstanding Sections 6.1(a), (b) and
(d) of the Credit Agreement, the compliance certificate and certificate
concerning projections, required to be provided by the Parent to the Lender,
shall hereafter be signed by both the Parent and Borrower.
5. MINIMUM BOOK NET WORTH PLUS SUBORDINATED DEBT. Section 6.14 of the
Credit Agreement is amended in its entirety and replaced with the following
new Section 6.14:
"Section 6.14 MINIMUM BOOK NET WORTH PLUS SUBORDINATED DEBT. The Borrower
shall cause the Parent to maintain, during each period described below, the
sum of its consolidated Book Net Worth plus the Subordinated Debt, determined
as at
-2-
<PAGE>
the end of each month, at an amount not less than the amount set forth
opposite such period:
Month Ending Minimum Worth plus
------------ SubDebt
------------------
January 31, 1996 $ 2,302,000
February 29, 1996 $ 2,223,000
March 31, 1996 $ 2,228,000
April 30, 1996 $ 2,217,000
May 31, 1996 $ 2,228,000
June 30, 1996 $ 2,288,000
July 31, 1996 $ 2,292,000
August 31, 1996 $ 2,300,000
September 30, 1996 $ 2,250,000
October 31, 1996 $ 2,250,000
November 30, 1996 $ 2,300,000
December 31, 1996 $ 2,300,000
January 31, 1997 $ 2,300,000
February 28, 1997 $ 2,300,000
March 31, 1997 $ 2,300,000
6. MAXIMUM DEBT TO BOOK NET WORTH PLUS SUBORDINATED DEBT RATIO. Section
6.15 of the Credit Agreement is amended in its entirety and replaced with the
following new Section 6.15:
"Section 6.15 MAXIMUM DEBT TO BOOK NET WORTH PLUS SUBORDINATED DEBT RATIO.
The Borrower shall cause the Parent to maintain the ratio of its consolidated
Debt to the sum of its consolidated Book Net Worth plus the Subordinated Debt,
determined as at the end of each month, at not more than 3.30 to 1.00."
7. MINIMUM NET INCOME. Section 6.16 of the Credit Agreement is amended in
its entirety and replaced with the following new Section 6.16:
"Section 6.16 MINIMUM NET INCOME. The Borrower shall not permit the
Parent to allow its consolidated Net Income for each month-end set forth
below to be less than the amount indicated:
-3-
<PAGE>
Month Ending Minimum Consolidated
------------ Net Income
--------------------
August 31, 1996 ($400,000)
September 30, 1996 ($450,000)
October 31, 1996 ($450,000)
November 30, 1996 ($400,000)
December 31, 1996 ($400,000)
January 31, 1997 ($10,000)
February 28, 1997 $0
March 31, 1997 $0
8. MINIMUM MONTHLY NET INCOME. A new section is added to the Credit
Agreement immediately after Section 6.16 and shall read as follows:
"Section 6.17 MINIMUM MONTHLY NET INCOME. The Borrower shall not permit the
Parent to allow consolidated net income for any given month, calculated in
accordance with GAAP, to be less than ($75,000)."
9. DIVIDENDS. That part of Section 7.5 of the Credit Agreement which reads
as follows:
"The Parent and Borrower will not declare or pay any dividends (other than
dividends payable solely in stock of the Parent) . . ."
is hereby amended to read as follows:
"During fiscal year 1996, the Borrower will not, nor will the Borrower
permit the Parent to, declare or pay any dividends (other than dividends
payable solely in stock of the Parent) . . ."
In addition, the following language is added at the end of Section 7.5:
"During fiscal year 1997, the Borrower will not, nor will the Borrower
permit the Parent to, declare or pay any dividends in excess of Net Income."
10. CAPITAL EXPENDITURES. Section 7.10 of the Credit Agreement is
amended in its entirety and replaced with the following new Section 7.10:
"Section 7.10 CAPITAL EXPENDITURES. The Borrower will not, nor will the
Borrower permit the Parent to, incur Capital Expenditures or contract to
incur Capital
-4-
<PAGE>
Expenditures of more than $300,000 in the aggregate during the 1996 fiscal
year, and $100,000 in the aggregate during the period from January 1, 1997
through April 30, 1997. In addition, the Borrower will not, nor will the
Borrower permit the Parent to, incur or contract to incur Capital
Expenditures of more than $100,000 in any one transaction.
11. WAIVER OF DEFAULTS. The Borrower is in default of the following
provisions of the Agreement (collectively, the "Defaults"):
(a) Section 6.16 MINIMUM NET INCOME. The Borrower is in default of the
minimum Net Income covenant for the months ending as set forth below:
Month Actual Net Income Minimum Net Income
----- ----------------- ------------------
April 30, 1996 ($225,131) ($120,000)
May 31, 1996 ($265,347) ($110,000)
June 30, 1996 ($283,657) ($70,000)
July 31, 1996 ($275,275) ($50,000)
In addition, to the extent that the Borrower made any payments on the
Subordinated Debt after these Defaults had occurred, such payments constitute
an Event of Default under the Credit Agreement. Upon the terms and subject to
the conditions set forth in this First Amendment, the Bank hereby waives the
Defaults. This waiver shall be effective only in this specific instance and
for the specific purpose for which it is given, and this waiver shall not
entitle the Borrower to any other or further waiver in any similar or other
circumstances.
12. NO OTHER CHANGES. Except as explicitly amended by this First
Amendment, all of the terms and conditions of the Credit Agreement shall
remain in full force and effect and shall apply to any advance or letter of
credit thereunder.
13. AMENDMENT, DEFAULT WAIVER AND EXTENSION FEES. The Borrower agrees to
pay the Lender a fully earned, non-refundable fee in the amount of $5,000 in
consideration of the execution by the Lender of this Amendment; $2,500 of
such fee shall be due and payable to the Lender on the date of this First
Amendment and the remaining $2,500 shall be due and payable to the Lender on
November 1, 1996. In addition, the Borrower agrees to pay the Lender a fully
earned, non-refundable fee in the amount of $3,000 in consideration for
extending the Credit Facility, payable no later than January 2, 1997.
14. CONDITIONS PRECEDENT. This First Amendment and the waiver set forth
in paragraph 10 shall be effective when the Lender shall have received an
executed original
-5-
<PAGE>
hereof, together with each of the following, each in substance and form
acceptable to the Lender in its sole discretion:
(a) A Certificate of the Secretary of the Borrower certifying as to
(1) the resolutions of the board of directors of the Borrower approving the
execution and delivery of this First Amendment, (2) the fact that the
Articles of Incorporation and Bylaws of the Borrower, which were certified
and delivered to the Lender pursuant to the Certificate of Authority of the
Borrower's Secretary dated as of January 3, 1996 (the "Certificate of
Authority") in connection with the execution and delivery of the Credit
Agreement continue in full force and effect and have not been amended or
otherwise modified except as set forth in the Certificate to be delivered,
and (3) certifying that the officers and agents of the Borrower who have
been certified to the Lender, pursuant to the Certificate of Authority, as
being authorized to sign and to act on behalf of the Borrower continue to
be so authorized or setting forth the sample signatures of each of the
officers and agents of the Borrower authorized to execute and deliver this
First Amendment and all other documents, agreements and certificates on
behalf of the Borrower.
(b) Payment of the fees described in paragraph 12.
(c) Such other matters as the Lender may require.
15. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute
this First Amendment and to perform all of its obligations hereunder,
and this First Amendment has been duly executed and delivered by the
Borrower and constitutes the legal, valid and binding obligation of the
Borrower, enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
First Amendment has been duly authorized by all necessary corporate
action and does not (i) require any authorization, consent or approval
by any governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the
articles of incorporation or by-laws of the Borrower, or (iii) result in
a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound or
affected.
-6-
<PAGE>
(c) All of the representations and warranties contained in Article
V of the Credit Agreement are correct on and as of the date hereof as
though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
16. REFERENCES. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended
hereby; and any and all references in any other Loan Document to the Credit
Agreement shall be deemed to refer to the Credit Agreement as amended hereby.
17. NO OTHER WAIVER. Except as set forth in paragraph 10 hereof,
the execution of this First Amendment and acceptance of any documents related
hereto shall not be deemed to be a waiver of any Default or Event of Default
under the Credit Agreement or breach, default or event of default under any
Security Document or other document held by the Lender, whether or not known
to the Lender and whether or not existing on the date of this First Amendment.
18. RELEASE. The Borrower hereby absolutely and unconditionally
releases and forever discharges the Lender, and any and all parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or
under any state or federal law or otherwise, which the Borrower has had, now
has or has made claim to have against any such person for or by reason of any
act, omission, matter, cause or thing whatsoever arising from the beginning
of time to and including the date of this First Amendment, whether such
claims, demands and causes of action are matured or unmatured.
19. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement
under the Credit Agreement to pay or reimburse the Lender on demand for all
costs and expenses incurred by the Lender in connection with the Credit
Agreement, the Security Documents and all other documents contemplated
thereby, including without limitation all reasonable fees and disbursements
of legal counsel. Without limiting the generality of the foregoing, the
Borrower specifically agrees to pay all fees and disbursements of counsel to
the Lender for the services performed by such counsel in connection with the
preparation of this First Amendment and the documents and instruments
incidental hereto. The Borrower hereby agrees that the Lender may, at any
time or from time to time in its sole discretion and without further
authorization by the Borrower, make a loan to the Borrower under the Credit
Agreement, or apply the proceeds of any loan, for the purpose of paying any
such fees, disbursements, costs and expenses and the fee required under
paragraph 12 hereof.
-7-
<PAGE>
20. MISCELLANEOUS. This First Amendment may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original and all of which counterparts, taken together, shall
constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed as of the date first written above.
NORWEST BANK MINNESOTA, MACUSA, INC.
NATIONAL ASSOCIATION
By /s/ Joel A. Ronning
By [illegible] ----------------------------
------------------------------ Joel A. Ronning
Its Vice President Its President
--------------------------
-9-
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS
The undersigned, each a guarantor of the indebtedness of MacUSA,
Inc. (the "Borrower") to Norwest Bank Minnesota, National Association (the
"Lender") pursuant to separate guaranties each dated as of January 3, 1996
(each, a "Guaranty"), hereby (i) acknowledges receipt of the foregoing First
Amendment; (ii) consents to the terms (including without limitation the
release set forth in paragraph 18 of the First Amendment) and execution
thereof; (iii) reaffirms his or its respective obligations to the Lender
pursuant to the terms of his or its respective Guaranty; and (iv)
acknowledges that the Lender may amend, restate, extend, renew or otherwise
modify the Credit Agreement and any indebtedness or agreement of the
Borrower or enter into any agreement or extend additional or other credit
accommodations, without notifying or obtaining the consent of the undersigned
and without impairing the liability of the undersigned under his or its
respective Guaranty for all of the Borrower's present and future indebtedness
to the Lender.
TECH SQUARED, INC. TABOR RESOURCES, INC.
By /s/ Joel A. Ronning By /s/ Joel A. Ronning
--------------------------- --------------------------
Joel A. Ronning Joel A. Ronning
Its President Its President
PERIPHERAL LAND, INC.
/s/ Joel A. Ronning
By /s/ Joel A. Ronning --------------------------
---------------------------
Joel A. Ronning
Its President
<PAGE>
[LOGO]
8/20/96
Mr. Charles Reese
Prior Lake, MN
Dear Mr. Reese
I am pleased to offer you the position of President and COO with Tech
Squared Inc. reporting directly to me.
The position will pay a base of $135,000 annualized salary, a bonus package
as will be mutually agreed to will be based on profitability and growth. You
will also have access to the companies stock option plan, the option package
for you will be a minimum of 1,000,000 options at 75 CENTS per share vesting
over a 4 year period with the ability to accelerate part of these options as
we have already discussed. As outlined the company offers a health and dental
insurance program with Blue Cross Blue Shield.
I look forward to a long and prosperous relationship.
Sincerely,
/s/ Joel A. Ronning
- -------------------------
Joel A. Ronning
President
Accepted
/s/ Mr. Charles Reese
- -------------------------
Mr. Charles Reese
<PAGE>
ATTACHMENT A
TECH SQUARED
CHARLES REESE BONUS PLAN
Quarterly Profit x 5% (with a cap of $5K to prevent "milking at the expense of
growth) + the result above X growth % (as defined by comparing the current
quarter sales, as reported, compared to the prior years quarters sales) with no
cap on this line.
If we take your 3rd quarter 97 example, and apply this formula, the result would
look like this:
Profit bonus
-----------
Quarterly Profit $129,000
x 5%
--------
$ 6,450
Cap applies, so payout for this portion would be $5K
Growth bonus
- ------------
Amount above $5,000
x growth % x 43.33% (Based on 3rd Qtr '97 sales of $12.9m vs $9m)
-------
$2,166
Total bonus
- -----------
Profit bonus $5,000
Growth bonus +2,166
------
Q3 '97 bonus $7,166
The plan assumes a minimum of .5% net profits and a minimum of 20% growth
before any bonus is available.
Two areas of strategy modification will impact the bonus plan, a merger and
acquisition model or a profit harvesting model. The plan should be changed if
there is an agreed to shift in either of these strategic directions.
If however there have been losses in the prior quarters (not including the
second and third quarter for 1996), then all losses have to be overcome in
the current quarter or future quarters in order for there to be a bonus based
on the bonus plan.
Any bonus for the third quarter of 1996 will be based on the operating
profits for the two months of August and September. The third quarter
operating profits would not be inclusive of any billings by Tech Squared made
to Digital River.
The intention here is that there is profitability AND growth, I will not
consider this a successful plan if we are only able to make 1% net per
quarter with no growth, this would put the company in a very vulnerable
position. -JR
<PAGE>
Vesting for C. Reese options within Tech Squared Stock Option Plan
Date of Issue # Shares Vesting schedule based on plan
- ------------- ---------------------
Upon employment 125,000 96
1st anniversary 250,000 97
2nd anniversary 250,000 98
3rd anniversary 250,000 99
4th anniversary 125,000 2000
--------
Total 1,000,000 (exclusive of director's options)
Option exercise price $0.75/share
Stock option acceleration plan;
Acceleration Program
- -------------------------
To bring the 4th year options (125,000 shares) into the current year, sales
must profitably double (defined as Tech 2 current quarter operating revenue /
year ago quarter) in either the 3rd or 4th quarter of 97.
To bring 1/2 of the 3rd year options (or all of 4th year - 125,000 shares either
way) into 2nd year, sales must profitably double (as defined above) on or before
4th quarter of 98.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AND THE CONSOLIDATED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 353
<SECURITIES> 1,284
<RECEIVABLES> 2,808<F1>
<ALLOWANCES> 0
<INVENTORY> 2,390
<CURRENT-ASSETS> 7,407
<PP&E> 453<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,946
<CURRENT-LIABILITIES> 6,667
<BONDS> 0
163
0
<COMMON> 0
<OTHER-SE> 1,996
<TOTAL-LIABILITY-AND-EQUITY> 8,946
<SALES> 26,514
<TOTAL-REVENUES> 26,514
<CGS> 23,588
<TOTAL-COSTS> 23,588
<OTHER-EXPENSES> 3,437
<LOSS-PROVISION> 105
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> (397)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (397)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
<FN>
<F1>Amounts reported for receivables & PP&E are net amounts
</FN>
</TABLE>
