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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended: DECEMBER 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
Commission file number: 0-25602
TECH SQUARED INC.
(Name of Small Business issuer in its Charter)
MINNESOTA 41-1591872
(State of Incorporation) (I.R.S. Employer Identification No.)
5198 WEST 76TH STREET
EDINA, MINNESOTA 55439
(Address of principal executive offices)
The Issuer's telephone number, including area code: (612) 832-5622
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
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No .
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of Registrant's knowledge, in the definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The Company's revenues for the year ended December 31, 1996 were
$37,387,000
As of March 15, 1997, 10,374,870 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 average of the closing bid and asked
price of the Common Stock at that date on the OTC Bulletin Board quotation
system), excluding outstanding shares beneficially owned by affiliates, was
approximately $1,994,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its Annual Meeting of Shareholders (the
"1997 Proxy Statement"), such 1997 Proxy Statement to be filed within 120
days of December 31, 1996.
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PART I.
ITEM 1. BUSINESS
(a) BUSINESS DEVELOPMENT
INTRODUCTION
Tech Squared Inc. ("Tech Squared") was incorporated under the laws of
the State of Minnesota in 1988 and currently has three wholly-owned
subsidiaries, Tabor Resources Corporation, a Minnesota corporation ("Tabor"),
MacUSA, Inc., a Minnesota corporation ("MacUSA") and PLI Corporation, a
Nevada corporation ("PLI"). Throughout this document the "Company" is used
to refer to Tech Squared Inc. and the subsidiaries discussed above.
Tech Squared has undergone several name changes since its inception.
Royal Energy, Inc., the original predecessor of Tech Squared Inc., was
organized in December 1988. In May 1992 Royal Energy, Inc. changed its name
to En/Drill America Inc. In December 1994, in connection with the merger
between Ionian Capital, Ltd. with and into En/Drill America Inc., En/Drill
America Inc. changed its name to The Jaguar Group Ltd. In May 1995, after
the merger of MacUSA, Inc. with a subsidiary of The Jaguar Group Ltd, The
Jaguar Group Ltd. changed its name to Tech Squared Inc.
COMPANY HISTORY
In December 1994, the Jaguar Group Ltd. ("Jaguar") acquired Ionian
Capital, Ltd., a Minnesota corporation ("Ionian"), in a stock-for-stock
merger. Under the terms of the Ionian merger, each share of Jaguar common
stock then outstanding was split into one-tenth of a share of Jaguar's common
stock and Jaguar's shareholders received a stock purchase warrant to acquire
one share of common stock for each 10 shares of Jaguar common stock then held
at an exercise price of $3.00 per share for a period of three years. Each
shareholder of Ionian was issued one share of common stock in Jaguar for each
share of Ionian common stock then outstanding. Immediately after the Ionian
merger Ionian's existence terminated, and the pre-merger shareholders of
Jaguar owned 59% of Jaguar, the surviving company.
In April 1995, Jaguar sold all of the common stock of its Winnek
subsidiary to William D. Long who was, at that time, a director and an
officer of Jaguar. Under the terms of the agreement, James Kramer, who was
then a director of Jaguar and is a current director of the Company, received,
in trust, 40,000 shares of Jaguar common stock and all of the stock purchase
warrants that had been issued to Mr. Long pursuant to the Ionian merger. The
agreement calls for Mr. Kramer to make sales of such common stock and
warrants and to use the proceeds to satisfy and redeem the Company's
outstanding preferred stock. Any sales of such stock and warrants at less
than $3.00 per share require the approval of Mr. Long. The agreement
terminates on May 1, 1997, when all cash, shares or warrants remaining in
trust are to be returned to Mr. Long.
Pursuant to an Agreement and Plan of Merger effective as of May 9, 1995
(the "Merger Agreement"), a wholly-owned subsidiary of the immediate
predecessor of the Company , merged with and into MacUSA (the "Merger").
Pursuant to the Merger Agreement, Jaguar issued to the shareholders of MacUSA
24.7 shares of common stock, no par value, for each of the 284,685 shares of
MacUSA common stock outstanding, for an aggregate of 7,031,720 shares or
approximately 82% of the shares outstanding immediately following the Merger.
The Merger was accounted for as a "reverse acquisition" under the purchase
method of accounting, pursuant to which MacUSA was deemed to have acquired
Jaguar, though Jaguar continued as a surviving legal entity. Prior to the
merger, Joel A. Ronning, the founder and CEO of MacUSA, held over 95% of the
outstanding common stock of MacUSA. Immediately following the Merger, Mr.
Ronning owned 76.4% of Jaguar's outstanding common stock. Following the
Merger, on July 10, 1995 the shareholders of the Company approved the change
in the Company name from The Jaguar Group Ltd., to Tech Squared Inc.
In April 1995, prior to the completion of the Merger, the Company's
registration statement on Form 10-SB (the "Registration Statement") became
effective without certain comments from the Staff of the Securities and
Exchange Commission (the "Staff") being addressed. Although there were
subsequent communications with and further comments from the Staff following
the completion of the Merger, the Staff has never formally communicated to
the Company that its comments have been satisfactorily addressed.
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In December 1995, the Company, through its wholly-owned subsidiary
MacUSA, was granted, by Joel Ronning, the majority shareholder and CEO of the
Company, an option (the "Digital River Option") to acquire 60% of the
outstanding common stock (the "Digital River Shares") of Digital River, Inc.,
a Minnesota corporation ("Digital River"). The option is not transferable
and is exercisable at any time through December 31, 2000 for total
consideration of $1. During the term of the option, Mr. Ronning 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
Mr. Ronning 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 a Stock
Purchase Agreement dated August 30, 1994 (the "Stock Purchase Agreement"),
between Mr. Ronning, Fujitsu Limited, a company organized under the laws of
Japan ("Fujitsu"), Digital River, and MacUSA (collectively, the "Parties")
and to the provisions of certain related agreements, primarily, a Memorandum
of Understanding, an Investors Rights Agreement, a Voting Rights Agreement
and a Personal Guaranty and Stock Pledge Agreement among certain of the
Parties (collectively, the "Digital River Agreements"). Pursuant to the
terms of the Memorandum of Understanding, as a condition to the transfer of
the Digital River Shares to MacUSA, MacUSA is required to become a party to
the Digital River Agreements. By its terms, the Digital River Option is
subject to the terms and conditions of the Digital River Agreements and
terminates automatically if any of its terms, including the transfer of the
Digital River Shares pursuant to exercise thereof, violate a term or
provision of any of the Digital River Agreements.
MATERIAL TRANSACTIONS
In March 1996, and as amended in April 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 of the Virginia City Mining
District in southwest Montana (the "Property") in exchange for 525,000 shares
of Hanover Gold Company, Inc. ("Hanover") common stock (the "Hanover
Shares"). Under Terms of 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 completed the registration of the
Hanover Shares.
Hanover is a public company traded on the NASDAQ Small Cap Market under
the symbol "HVGO." Based on the high and low price during 1996 , the market
value of the Hanover Shares ranged between $1,509,000 and $492,000. Based on
the closing bid price on March 19, 1997, the market value of the Hanover
Shares was $640,000. The trading market for the Hanover Shares is volatile
and may be limited, and there can be no assurance that such shares will have
a market value equal to or in excess of the value depicted herein or reported
by the NASDAQ Small Cap Market. The Company may have to bear the economic
risk of the entire investment for an indefinite period of time. The Company
intends to continue soliciting offers for sale of the remaining Tabor mining
assets.
(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 and for users of IBM
compatible personal computers. The Company's sales and marketing efforts are
currently targeted at desktop publishing ("DTP"), graphic arts and pre-press
industries through its catalog, "DTP Direct," and to computer dealers and
value-added resellers through its distribution business. The Company offers
popular brand name hardware, software and peripherals from leading vendors
such as Adobe, Apple, Daystar, GCC, Hewlett-Packard, IBM, Iomega, Kodak,
Quantum, Quark, Seagate, Sony, SyQuest, Umax Technologies, and Umax Computer
Corporation
The Company markets its products through targeted mailings of its DTP
Direct catalog which is currently produced six times per year. The
Company's catalogs include detailed descriptions and full-color photographs
of the products sold by the Company. In 1996, the Company mailed
approximately 3.5 million catalogs. The Company also markets its products to
its DTP Direct customers and dealers through its sales force using outbound
telemarketing, to attract and retain its small to mid-sized business
customers.
In 1995 and 1996 sales of Apple Macintosh-Registered Trademark-
compatible products represented a substantial majority of the Company's net
sales. 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
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in sales of Macintosh computers or a decrease in the supply of or demand for
software and peripherals for such computers could have an adverse impact on
the Company's business.
DIRECT MARKETING
The Company's direct marketing operations are carried out primarily
through its DTP Direct catalog. DTP Direct markets a broad assortment of DTP
and graphics products through a catalog which is currently published six
times per year. The Company published its first DTP Direct catalog in April
1993. From this first catalog which generated approximately $200,000 in
revenues per month, the catalog has grown to generate in excess of $1.9
million per month in 1996. DTP Direct is, in part, a successor to the
Company's prior direct mail operations. The Company had conducted direct
mail sales since its inception with advertisements placed in several industry
trade magazines. DTP Direct competes on the basis of price, delivery and
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.
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.
DISTRIBUTION BUSINESS
The Company's dealer division sells computer hardware and software
products, wholesale to computer retailers, value-added resellers ("VARS"),
mail order resellers and to electronics mass merchants (the "Distribution
Business").
The Company's Distribution Business focuses on the Desktop Publishing
market and in developing a high level of 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
broadcast system used to update dealers on current pricing and special
offers.
Historically, storage devices have been the highest percent of dollar
sales of any 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. Sales of CPU's now
constitute the majority of the Company's Distribution Business. The Company
has its own private brand of storage device products marketed under the
"NuDesignTM" 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.
PURCHASING
The Company purchases from approximately 700 vendors, which include
direct purchases from manufacturers and from distributors. In 1996,
approximately 20% of the Company's total purchases came from distributors
compared to approximately 14% in 1995. 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.
Sales of products purchased from Syquest Technology Inc. ("Syquest"),
accounted for 10% and 18% of total sales in 1996 and 1995, respectively.
Since their first quarter ended February 2, 1996, Syquest has continued to
report significant net losses, and has experienced significant financial
difficulties. Sales of products purchased from Umax Computer Corporation
("UCC") accounted for 12% of total sales in 1996, and 22% of total sales in
the second half of 1996. The Company believes it could diversify its product
supply sources. There can be no assurance that Syquest, UCC or any other
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.
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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
A substantial number of companies, both large and small, compete in the
retail and wholesale computer industry. The industry is characterized by
rapid technological advances in both hardware and software, short product
life cycles, and continuing downward pressure on product prices and margins.
The Company's DTP Direct catalog competes with consumer electronic and
computer retail stores, including superstores, and other direct marketers of
software and computer related products. 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 PrePress
Direct.
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 Ingram Micro, Merisel 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 manufactures 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 1996 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.
The Company previously marketed video cards, monitors, and scanners under
the Mirror name as well. Mirror branded products are sold primarily through
direct channels with emphasis on sales through the DTP Direct catalog.
NUDESIGN. Products marketed under the "NuDesign" name include printers
and storage devices. NuDesign products were sold primarily to the Company's
mass merchant customers. In late 1995, the Company significantly reduced its
sales and marketing activities targeted at its mass merchant customers in
favor of greater focus on direct marketing activities. Sales to these mass
merchant customers were negligible in 1996.
NUDESIGN PRO. In 1995, the Company introduced a line of hot swapable
storage systems using the NuDesign PRO brand name. These products are
targeted and sold primarily through the Company's DTP Direct catalog and
through its Distribution Business.
PLI. In February 1995, the Company, through its wholly-owned subsidiary
PLI Corporation, began fulfillment operations for Peripheral Land, Inc.
pursuant to an Order Fulfillment Agreement and a Technical Support and
Warranty Agreement. In May 1995, the Company licensed the right to market
under the Peripheral Land, Inc. brand name and purchased certain tangible
assets from Peripheral Land, Inc. In connection with these agreements, the
Company encountered certain disputes with Peripheral Land, Inc., including
certain claimed events of default. In late 1995, the Company stopped
marketing, selling and supporting products under the Peripheral Land, Inc.
brand name. In 1996, the Company settled all outstanding disputes with
Peripheral Land, Inc. and all agreements with Peripheral Land, Inc. were
canceled. Sales of PLI products in 1996 were negligible.
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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. Provisions are made
currently for estimated product returns expected to occur under the Company's
return policy.
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 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.
DIGITAL RIVER, INC.
Digital River is developing and is operating a proprietary system which
allows the secure sale and delivery of software, fonts and images ("Software
Products") on-line, via the Internet. Through contractual relationships with
software developers, Digital River is building an electronic inventory of
software products. Digital River will provide its electronic inventory for
on-line sale and delivery to Internet end users through software developer
home pages, software retailer home pages, and through high traffic Internet
sites operated by non-traditional software retailers. Digital River's first
on-line software sale and delivery occurred in August, 1996. As of March 26,
1997 Digital River had contractual relationships with 145 software
developers, 65 of which are marketing on-line through Digital River, with the
others being in various stages of connectivity to Digital River's
distribution systems.
Digital River's on-line distribution system provides advantages to
software developers including; increased margins due to cost savings
resulting from elimination of floppy disks, manuals, packaging, shipping and
handling, and product returns and obsolescence; upgrades completed on-line;
immediate availability of new versions, bug fixes, etc.; and virtually
unlimited "shelf space" in Digital River's electronic inventory. Digital
River's on-line distribution also allows developers access to potential
sales of software from three different sources; the developer's home page; a
traditional software retailer's home page; or from a non-traditional software
retailer's home page.
Digital River's strategy is to become a leading on-line distributor of
software products. The key elements to this strategy include, building a
large electronic inventory of software products by signing on-line
distribution agreements with many software developers, providing access to
this electronic inventory to a large number of software retailers, providing
on-line software sales opportunities to non-traditional software retailers
with high traffic internet sites, and extending the encryption and secure
transaction technology to the delivery of software products via large
capacity media.
As of March 13, 1997 Digital River had 15 full-time employees, with 7
in sales and marketing, and 6 in product development. Since September,
1996 Mr. Ronning, the Chairman and CEO of Tech Squared, has devoted the
majority of his efforts on behalf of the Company to Digital River.
Competition for Digital River will come from other companies who have or
will develop businesses based on digital distribution over the internet, from
traditional distributors, and from independent software
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vendors who sell direct to end users. It is likely that many of Digital
River's competitors and potential competitors will have significantly greater
financial, technical, sales and marketing resources, greater name
recognition, more extensive customer bases, and significantly larger
strategic relationships in the industry than Digital River. Accordingly it
is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share.
Digital River has only a limited operating history and as such will be
subject to significant risks, expenses, and problems typically encountered by
early-stage companies, particularly those in new and rapidly evolving markets
such as the Internet. These risks include but are not limited to a lack of
acceptance of services by target customers, development of equal or superior
products or services by competitors, the failure of electronic commerce to be
broadly adopted, the inability of Digital River to develop and enhance
competitive products and services or to successfully commercialize any such
products or services, and the inability to identify, attract, retain and
motivate qualified personnel.
Digital River anticipates that the proceeds from its convertible
debenture offering and private placement offering of its common stock, see
"ITEM 6 Management's Discussion and Analysis or Plan of Operation - Liquidity
and Capital Resources", will be sufficient to fund its operations through
December 31, 1997. There can be no assurance that any additional capital
required to develop the Digital River business will be available, or if
available, on terms acceptable to Digital River.
PATENTS AND TRADEMARKS
The Company has obtained a registered and protectable mark on the name
"Tech SquaredR" from the U.S. Patent and Trademark Office. The Company also
uses and claims rights to the names "MirrorTM", "NU DesignTM", "NU Design
ProTM"and "DTP DirectSM" 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 mark.
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.
Digital River has applied for or is in the process of applying for
twelve patents dealing with its core technologies. There can be no assurance
that any of these patents will be issued or, that if issued, Digital River
will be able to successfully defend them or that they will have value.
NON-OPERATING ASSETS
In connection with the Merger in 1995, the Company acquired 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 200,000 shares of Cam Designs, Inc.
(CAM Designs") common stock (the "Cam Designs Shares"), which is "restricted
stock" pursuant to Rule 144 promulgated under the Securities Act. The
Company intends to reduce and eventually eliminate its interest in Cam
Designs. Cam Designs Inc., a Delaware corporation, is the parent company of
MGA Holdings Ltd., a United Kingdom corporation which designs, engineers,
prototypes and tools for the automobile and aerospace industries. Cam
Designs' common stock is quoted on the NASDAQ National Market System under
the symbol "CMDA." Based on the high and low price during 1996 , the market
value of the Cam Designs Shares ranged between $2,100,000 and $900,000. Based
on the closing bid price on March 19, 1997, the Company's Cam Designs
holdings had a market value of $875,000. The trading market for the Cam
Designs Shares may be limited and there can be no assurance that such shares
will have a market value equal to or in excess of the value stated herein.
The Company may have to bear the economic risk of the entire investment for
an indefinite period of time.
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 total land area either owned or leased by the Company exceeds
3,700
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acres. The Company does not intend to further develop these mining
properties because it believes the cost and risks involved would be
significant.
In March 1996, and as amended in April 1996, the Company entered into an
Asset Purchase Agreement for the sale of substantially all of its mining
properties in exchange for 525,000 shares of Hanover Gold Company, Inc.
("Hanover") common stock (the "Hanover Shares"). Under terms of this
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 receipt of a consent of the Company.
In October 1996, Hanover completed the registration of the Hanover
Shares and filed suit against the Company. See "ITEM 3 Legal Proceedings-
Hanover Gold Litigation". The ultimate outcome of the lawsuit 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. Hanover is a public company
traded on the NASDAQ Small Cap Market under the symbol "HVGO." Based on the
high and low bid price during 1996 , the market value of the Hanover Shares
ranged between $1,509,000 and $492,000. Based on the closing bid price on
March 19, 1997, the market value of the Hanover Shares was $640,000. The
trading market for the Hanover Shares is volatile and may be limited, and
there can be no assurance that such stock will have a market value equal to
or in excess of the value depicted herein or quoted on the NASDAQ Small Cap
Market. The Company may have to bear the economic risk of the entire
investment for an indefinite period of time. The Company intends to continue
soliciting offers for sale of the remaining Tabor mining assets.
EMPLOYEES
The Company employs approximately 73 people, all of whom are located at
the Company's headquarters in Edina, Minnesota. There are approximately 40
employees in sales, marketing, technical support and customer service, and
the remaining employees are in operations and corporate administration.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate headquarters are located at 5198 West 76th
Street, Edina, Minnesota 55439. 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 $15,000.
Management believes that the space is adequate to accommodate anticipated
growth through 1997.
Digital River currently occupies approximately 3,400 square feet of
office space at the Company's corporate headquarters. The Company bills
Digital River for the leased space through an administrative charge.
The Company owns rights in certain non-operating mining properties
primarily in two locations. The total land area either owned or leased by
the Company's Tabor subsidiary included in excess of 3,700 acres. Tabor owns
120 unpatented lode mining claims, 10 patented lode claims, an unpatented
placer claim and a state lease in and around the Alder Gulch, near Virginia
City, Montana. Tabor 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. Certain of these
non-operating rights were sold in March 1996. 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 March 1996, and as amended in April 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 of the Virginia City Mining
District in southwest Montana (the "Property") in exchange for 525,000 shares
of Hanover Gold Company, Inc. ("Hanover") common stock (the "Hanover
Shares"). Under Terms of the Agreement, the Property and 400,000 of the
Hanover Shares were to be held in escrow pending
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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. On October 4, 1996 Hanover filed suit against 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 Hanover Shares held in
escrow, along with certain other damages. The Company has filed a response
which included claims of fraud and violation of Securities Rules. There have
been no developments in the matter since the response was filed on November
20, 1996. 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.
DISSENTER PROCEEDING
A former holder of 10,000 shares of common stock of MacUSA (on a
pre-Merger basis)(the "Dissenter"), formally dissented from the Merger
pursuant to the provisions of the Minnesota Business Corporate Act, as
amended. The Company made payment to the Dissenter of approximately $170,000
for the fair value of his shares. The Dissenter has objected, stating that
the amount paid by the Company is insufficient and claims that the fair value
of his MacUSA shares at the time of the Merger was approximately $615,000.
In December 1995, the Company filed a petition in Minnesota state court
seeking a determination that the value paid to the Dissenter by the Company
was adequate.
In January, 1997 the Company and the Dissenter agreed in principal to
settle all claims outstanding for an additional $205,000. The $205,000 is
payable $50,000 upon execution of a settlement agreement, and $20,000 per
quarter bearing interest at 8% annually. The settlement is subject to
execution of a definitive agreement. Because management believes it is
probable that a definitive agreement will be reached the $205,000 liability
was recorded in the Consolidated Financial Statements as of December 31, 1996.
OTHER
In December 1995, the Company received a letter from a Company
shareholder (the "shareholder") claiming to represent certain other
shareholders of the Company who were Jaguar shareholders prior to the Merger
(the "Pre-Merger Shareholders"). The Shareholder threatened to bring a class
action lawsuit on behalf of the Pre-Merger Shareholders seeking remedies
based upon allegations that certain misstatements and/or omissions of certain
disclosures made by MacUSA induced the Pre-Merger Shareholders to enter into
the Merger. Subsequently, the Company has received a letter from the
Shareholder retracting these claims on behalf of himself and a number of the
other Pre-Merger Shareholders. The Company believes such allegations are
without merit.
In November 1995, counsel for certain investors (the "Investors") who
purchased shares of common stock and warrants to purchase common stock in a
private placement pursuant to Regulation S promulgated under the Securities
Act of 1933, as amended (the "Placement"), indicated that their clients were
concerned about alleged misstatements in and/or omissions of certain
disclosures made in connection with the Placement. Such counsel stated the
belief that their clients could assert colorable claims against the Company,
but added that their client had not instructed them to pursue litigation in
the matter. Notwithstanding the foregoing sentence, the Company believes
these allegations are without merit.
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, 1996.
9
<PAGE>
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Company's common stock is traded 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 OTC Bulletin Board. The prices in the
table represent prices between dealers, and do not include adjustments for
retail mark-ups, mark-downs or commissions and may not represent actual
transactions. The prices indicated for periods prior to the Ionian merger
are shown on a post-split basis. See "ITEM 1- Description of Business."
YEAR HIGH LOW
---- ---- ---
1996: First quarter 2 3/16 3/8
Second quarter 1 1/8 11/32
Third quarter 3/4 1/4
Fourth quarter 1/2 1/4
1995: First quarter 3 7/16 2 1/2
Second quarter 5 5/8 3 1/8
Third quarter 2 3/16 1 9/16
Fourth quarter 2 21/32 1 7/8
HOLDERS
As of March 24, 1997, there were approximately 354 holders of record of
common stock. The Company believes the actual number of beneficial owners is
greater than the 354 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 are entitled to a 12% cumulative dividend which has
not been paid since December 1994. The total dividend owing as of December
31, 1996 is approximately $35,000.
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 and approximately
$201,000 in 1996. The remainder of the dividend payable is evidenced
primarily by a note payable to Mr. Ronning the majority shareholder of the
Company and its CEO and Chairman. The note is non-interest bearing, due on
demand and is subordinated to indebtedness owed to Norwest Bank Minnesota,
National Association ("Norwest"), pursuant to the terms of a Debt
Subordination Agreement dated January 3, 1996 between the Company, Mr.
Ronning and Norwest. Pursuant to the Debt Subordination Agreement, the
Company can only make payments on this dividend in 1997 to the extent of its
net income. The Company is not allowed to make any other dividend payments
without the written consent of Norwest.
SALES OF UNREGISTERED SECURITIES
During the three month period ended December 31, 1996 the Company did
not sell any of its securities in transactions not registered under the
Securities Act of 1933.
In December 1996 and January, 1997, Digital River initiated and
completed an offering to non U.S. residents of its 18% Convertible Debentures
pursuant to Regulation S. In connection with the offering, Digital River
paid an introducers commission of 5% of the gross proceeds and granted a
warrant for 5% of the shares into which the debentures are ultimately
convertible. The Convertible Debentures are convertible into shares of
Digital River stock at the lesser of $6.00 per share or 75% of the offering
price of a subsequent private placement offering. The total gross proceeds
from the offering were approximately $1,142,000.
10
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
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 a wholly owned subsidiary of
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 year ended December 31, 1996 the Company incurred a consolidated
net loss of ($616,000) or ($0.06) per share compared to a consolidated net
loss of ($1,652,000) or ($0.19) per share in 1995. Excluding the
Company's share of the Digital River losses which amounted to ($414,000) and
($86,000) in 1996 and 1995 , respectively, the Company incurred net losses of
($202,000) and ($1,566,000) in 1996 and 1995, respectively.
Summarized condensed consolidated financial information for Tech
Squared, Inc. excluding Digital River is as follows (In 000's):
BALANCE SHEET INFORMATION
DECEMBER 31,
1996 1995
---------- ----------
Current assets $ 6,171 $ 7,867
Total assets 7,490 9,109
Current liabilities 5,945 6,666
Stockholders' equity 1,254 1,866
OPERATING INFORMATION
YEAR ENDED
DECEMBER 31,
1996 1995
---------- ----------
Net sales $ 37,276 $ 42,136
Operating expenses 4,047 4,630
Net income (loss) (202,000) (1,566,000)
At December 31, 1996 the Company had cash of $899,000 of which
$800,000 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 approximately $2.9 million as of December 31, 1996. The
line of credit expires April 30, 1997. The Company is currently negotiating
with the lender for an extension of the agreement.
11
<PAGE>
(a) RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES
Net sales for 1996 totaled $37,387,000 compared to $42,136,000 for
1995. The decline in year-to-date sales of $4.7 million or 11.3% is
primarily due to the Company's decision In the fourth quarter of 1995 to
reduce efforts to generate sales into the mass merchant channel and to stop
shipping product under the PLI brand name acquired in the second quarter of
1995. The reduction in sales in 1996 compared to 1995 from these two
changes was approximately $6.7 million. Sales to the Company's distribution
customers also declined $1.8 million in 1996 compared to 1995 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 partially offset
by an increase in sales to the Company's DTP Direct catalog customers of
approximately 18.5% over 1995 levels.
Digital River recorded its first sale in August of 1996. Total net
sales for Digital River in 1996 were $111,000.
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 1996 was $3,911,000 or 10.5% of net sales compared to
$3,285,000 or 7.8% of net sales in 1995. Gross profit as a percentage of
net sales increased in 1996 due to the increase in sales to the Company's DTP
Direct catalog customers, and due to the significant reduction in sales to
the mass merchant channel and under the PLI brand name which historically
carried lower gross margins than the Company's direct sales. Gross profit
was reduced in 1995 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. Gross profit for 1995 excluding these adjustments was
10.2%.
The Company expects ongoing competitive pressure on gross margins in
1997 and beyond.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $2,084,000 or 5.6% of sales in
1996 compared to $2,199,000 or 5.2% of sales during 1995.
Selling and marketing expenses in 1996 include $68,000 of expenses
incurred by Digital River compared to $3,000 in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for 1996 were $2,447,000 compared
to $2,468,000 for 1995. Excluding general and administrative costs incurred
by Digital River, general and administrative expenses were $2,031,000 and
$2,434,000 in 1996 and 1995, respectively. The decrease excluding Digital
River is primarily due to a reduction in payroll and related expenses, and
due to an administrative charge to Digital River totaling $82,000.
Digital River recorded general and administrative expenses of $415,000
in 1996 compared to $33,000 in 1995. The increase is primarily due to an
increase in personnel costs, legal costs, travel costs, and an inter company
charge of $82,000 for administrative services provided by Tech Squared Inc.
to Digital River.
RESEARCH AND DEVELOPMENT EXPENSES
12
<PAGE>
Research and development expenses were incurred solely by Digital
River. Research and development expenses were $230,000 and $130,000 in 1996
and 1995, respectively. The increase reflects the increase in personnel and
in costs associated with ongoing development activities by Digital River .
MINORITY INTEREST IN LOSS
The minority interest in loss of $276,000 in 1996 and $57,000 in 1995
represents that portion of the loss from Digital River attributable to its
minority shareholders.
NET INTEREST EXPENSE
Net interest expense for 1996 was $43,000 compared to $198,000 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.
INCOME TAXES
In 1996 and 1995 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.
(B) LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at December 31, 1996 ,
consisted of liquid funds, a revolving line of credit agreement with Norwest
Bank Minnesota, NA ("Norwest"), and vendor trade credit lines.
As of December 31, 1996 the Company had working capital of $150,000.
This working capital has been reduced by a dividend declared but not yet
paid to the Company's majority shareholder and CEO, in the amount of
$492,000 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 make payments on this dividend
to the extent of its net income. No dividends were declared in 1996.
The Company's consolidated working capital has also been reduced by
$998,000 of Convertible Debentures issued in December 1996 by Digital River.
The Company anticipates that these debentures will convert into Digital River
common stock in connection with the private placement of up to 500,000 shares
of its common stock commenced by Digital River in February, 1997.
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. The line of credit expires on April 30,
1997. The Company is currently negotiating with Norwest for an extension of
the agreement.
Inventories decreased from $3,519,000, as of December 31, 1995 to
$1,907,000 as of December 31,1996. This decrease resulted primarily from
reduction of inventories related to a significant purchase in October 1995.
Capital expenditures totaled $244,000 in 1996 compared to $56,000 in 1995.
The increase is primarily due to capital expenditures by Digital River of
$105,000.
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 1997. However, maintaining an adequate level
of working capital through the end of 1997 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
13
<PAGE>
that the Company will achieve desired levels of sales or profitability, or
that future capital infusions will be available on terms acceptable to the
Company, it at all.
In December, 1996 and January, 1997 Digital River completed an offering
of convertible debentures, resulting in net proceeds to Digital River of
approximately $1,100,000. In February, 1997 Digital River initiated a
private placement of up to 500,000 shares of Digital River common stock at
$9.00 per share. As of March 24, 1997 Digital River has received offering
proceeds totaling $1,250,000 for approximately 139,000 shares of its common
stock in this private placement. In connection with this private placement,
Digital River anticipates that the outstanding 18% Convertible debentures
will be converted into shares of Digital River common stock at $6.00 per
share up to a total of approximately 190,000 shares of common stock. As of
March 24, 1997, assuming the conversion of the convertible debentures, the
Company's option to acquire Digital River common stock ownership represents
approximately a 45% equity interest in Digital River.
ITEM 7. FINANCIAL STATEMENTS
The balance sheets of the Company as of December 31, 1996 and 1995, and
the related statements of operations, shareholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1996 are included
in this report on pages F-1 to F-17 The index to the financial statements
appears on page F-1. The audited financial statements were audited by Arthur
Andersen LLP, whose related independent auditor's report appears on page F-2.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PREVIOUS INDEPENDENT ACCOUNTANTS
On December 28, 1995, the Board of Directors of the Company decided to
change its independent accountants for the fiscal year beginning January 1,
1995. On this date, the Board of Directors of the Company dismissed Sartain
Fischbein & Co. as independent accountants of the Company, such dismissal was
effective immediately. Glenn Elliott & Associates, Inc. had acted as the
Company's independent accountants for the fiscal year ended May 31, 1993 (on
May 30, 1995, the Company changed its fiscal year end from May 31 to December
31), prior to the Company becoming a reporting company under the Securities
Exchange Act of 1934. (Sartain Fischbein & Co. and Glenn Elliott &
Associates, Inc. are collectively referred to herein as the "Tech Squared
Former Accountants"). On December 28, 1995, the Board of Directors of MacUSA
also decided to change independent accountants for the fiscal year beginning
January 1, 1995 and dismissed Price Waterhouse LLP (the "MacUSA Former
Accountants"), such dismissal was effective immediately. (Sartain Fischbein
& Co., Glenn Elliott & Associates, Inc. and Price Waterhouse LLP are
collectively referred to herein as the "Former Accountants").
The reports of the Tech Squared Former Accountants on the Registrant's
financial statements for the fiscal years ended May 31, 1993 and May 31,
1994, contained no adverse opinion or disclaimer of opinion. Except for the
modifications of: (a) the Sartain Fischbein & Co. opinion dated September 20,
1994 on the Registrant's financial statements for the fiscal year ended May
31, 1994 relating to the uncertain nature of the Company's ability to recover
certain investments in mining claims and exploration costs and to the
uncertainty of the Registrant's ability to continue as a going concern and
(b) the Glenn Elliott & Associates, Inc. opinion dated November 9, 1993 on
the Registrant's financial statements for the fiscal year ended May 31, 1993
relating to the uncertainty of the Registrant's ability to continue as a
going concern, the opinions of the Tech Squared Former Accountants were not
qualified or modified as to uncertainty, audit scope or accounting principle.
The reports of the MacUSA Former Accountants on the MacUSA financial
statements for the years ended December 31, 1993 and December 31, 1994
contained no adverse opinion or disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting principle.
The Board of Directors of each of the Registrant and MacUSA approved the
change in independent accountants. Neither the Registrant nor MacUSA has an
audit committee.
The Company believes, and has been advised by each of the Former
Accountants during the preparation and filing of its Report on Form 8-K to
report the change in accountants, that, in
14
<PAGE>
connection with the audits for the two most recent fiscal years, there have
been no disagreements with the Former Accountants on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of the
Former Accountants, would have caused them to make reference thereto in their
report on the financial statements for such years. During the two most
recent fiscal years, there have been no reportable events (as defined in
Regulation S-B Item 304(a)(1)(iv)(B)).
NEW INDEPENDENT ACCOUNTANTS
On December 28, 1995, the Board of Directors of the Company approved the
engagement of Arthur Andersen LLP as its new independent accountants for the
fiscal year ended December 31, 1995. During the two years preceding December
28, 1995, the Company had not consulted with Arthur Andersen LLP on items
which concerned the subject matter of a disagreement or reportable event with
any of the Former Accountants (as described in Regulation S-B Item 304(a)(2)).
15
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
------
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
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, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. 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, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 17, 1997
F-2
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
Unaudited
Pro Forma
1996 1996 1995
---------- ---------- ----------
(Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 898,558 $ 898,558 $ 867,370
Short-term investments 940,000 940,000 1,200,000
Trade accounts receivable, less
allowance for doubtful accounts
of $306,000, $306,000 and $381,000 2,879,200 2,879,200 2,306,096
Inventories 1,906,546 1,906,546 3,519,368
Prepaids and other current assets 288,342 288,342 461,227
Debt issuance costs - 147,413 -
---------- ---------- ----------
Total current assets 6,912,646 7,060,059 8,354,061
PROPERTY AND EQUIPMENT, NET 476,283 476,283 444,603
RECEIVABLE FROM OFFICER/STOCKHOLDER 201,512 201,512 205,800
MINING ASSETS 748,276 748,276 600,000
PATENTS AND ORGANIZATION COSTS, NET 133,488 133,488 134,790
---------- ---------- ----------
$8,472,205 $8,619,618 $9,739,254
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 279,697 $ 279,697 $ 595,000
Current maturities of long-term debt 110,750 1,108,750 -
Accounts payable 4,416,419 4,416,419 4,927,618
Accrued compensation and benefits 187,650 187,650 142,846
Other accrued expenses 451,275 425,516 509,375
Dividend payable to officer/shareholde 491,977 491,977 500,000
---------- ---------- ----------
Total current liabilities 5,937,768 6,910,009 6,674,839
DIVIDEND PAYABLE TO OFFICER/SHAREHOLDER 200,000 200,000 392,707
LONG-TERM DEBT, LESS CURRENT MATURITIES 97,970 97,970 -
MINORITY INTEREST 385,231 - 248,211
REDEEMABLE PREFERRED STOCK, 12%
CUMULATIVE CONVERTIBLE, $1
PAR, 1,000,000 SHARES
AUTHORIZED 160,000,
160,000 AND 185,000 SHARES
ISSUED AND OUTSTANDING 197,500 197,500 185,000
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
(NOTES 4 AND 11)
STOCKHOLDERS' EQUITY:
Common stock, no par value,
25,000,000 shares authorized;
10,374,870, 10,374,870 and
10,374,870 shares issued and
outstanding - - -
Additional paid-in capital 3,628,700 3,189,103 3,302,066
Accumulated deficit (2,114,964) (2,114,964) (1,463,569)
Unrealized gain on
available-for-sale securities 140,000 140,000 400,000
---------- ---------- ----------
Total stockholders' equity 1,653,736 1,214,139 2,238,497
---------- ---------- ----------
$8,472,205 $8,619,618 $9,739,254
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31
1996 1995
----------- -----------
NET SALES $37,386,715 $42,136,421
COST OF SALES 33,475,525 38,851,836
----------- -----------
Gross profit 3,911,190 3,284,585
----------- -----------
SELLING AND MARKETING EXPENSES 2,083,961 2,198,616
GENERAL AND ADMINISTRATIVE EXPENSES 2,446,500 2,467,502
RESEARCH AND DEVELOPMENT EXPENSES 229,690 129,653
----------- -----------
Total operating expenses 4,760,151 4,795,771
----------- -----------
LOSS FROM OPERATIONS (848,961) (1,511,186)
INTEREST EXPENSE, NET 43,068 197,986
----------- -----------
Loss before minority interest in losses
of subsidiary (892,029) (1,709,172)
MINORITY INTEREST IN LOSSES OF SUBSIDIARY 275,634 57,424
----------- -----------
Net loss (616,395) (1,651,748)
PREFERRED STOCK DIVIDENDS 35,000 -
----------- -----------
Net loss applicable to common shares $ (651,395) $(1,651,748)
----------- -----------
----------- -----------
Net loss per common share $ (.06) $ (.19)
----------- -----------
----------- -----------
Weighted average common shares outstanding 10,374,870 8,721,220
----------- -----------
----------- -----------
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
TECH SQUARED INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31
Unrealized
Gain on
Additional Retained Available-
Common Paid-In Earnings for-Sale
Shares Capital (Deficit) Securities Total
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 7,031,720 $ 640,039 $ 1,342,399 $ - $1,982,438
Issuance of shares to effect Jaguar merger 1,754,727 877,246 - - 877,246
Shares issued in stock offering 1,835,424 1,984,781 - - 1,984,781
Shares repurchased (247,001) (200,000) - - (200,000)
Dividends declared - - (1,154,220) - (1,154,220)
Net loss - - (1,651,748) - (1,651,748)
Change in unrealized gain on available-for-sale securities - - - 400,000 400,000
---------- ---------- ----------- ---------- ----------
BALANCE, DECEMBER 31, 1995 10,374,870 3,302,066 (1,463,569) 400,000 2,238,497
Net loss - - (616,395) - (616,395)
Payment for shares to effect Jaguar merger - (193,485) - - (193,485)
Dividends declared on preferred stock - - (35,000) - (35,000)
Final allocation of purchase price to effect Jaguar merger - 80,522 - - 80,522
Change in unrealized gain on available-for-sale securities - - - (260,000) (260,000)
---------- ---------- ----------- ---------- ----------
BALANCE, DECEMBER 31, 1996 10,374,870 $3,189,103 $(2,114,964) $ 140,000 $1,214,139
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
1996 1995
----------- -----------
OPERATING ACTIVITIES:
Net loss $(616,395) $(1,651,748)
Noncash items included in net loss-
Depreciation and amortization 244,599 249,710
Minority interest in Digital River (248,211) (57,424)
Change in operating assets and liabilities:
Trade receivable (573,104) 1,128,914
Inventories 1,612,822 265,225
Prepaids and other current assets 173,297 (258,547)
Accounts payable (511,199) 552,924
Accrued compensation and benefits 44,804 19,908
Other accrued expenses (60,288) 336,709
----------- -----------
Net cash provided by operating activities 66,325 585,671
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (244,047) (56,119)
Patents and organization costs (27,964) (40,534)
Change in officer/stockholder receivable 4,288 (9,800)
----------- -----------
Net cash used by investing activities (267,723) (106,453)
----------- -----------
FINANCING ACTIVITIES:
Net payments on revolving line of credit (315,303) (1,755,000)
Issuance of common stock - 1,984,781
Stock repurchase (37,500) (200,000)
Dividends paid (200,730) (261,513)
Proceeds from issuance of Digital River
long-term debt, net 848,093 -
Other (61,974) -
----------- -----------
Net cash provided (used) by
financing activities 232,586 (231,732)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 31,188 247,486
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 867,370 619,884
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 898,558 $ 867,370
----------- -----------
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 50,375 $ 245,478
NONCASH FINANCING ACTIVITIES:
Net assets acquired through Jaguar merger $ - $1,462,246
Dividends declared but not paid 35,000 892,707
Noncash repurchase of shares 178,485 -
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS AND OPERATIONS
The consolidated financial statements include the accounts of Tech Squared
Inc. (a Minnesota corporation) and its wholly owned subsidiaries
(collectively, the Company) and Digital River, Inc. (Digital River), which
the Company controls through its bargain purchase option to acquire 60% of
the outstanding common stock for $1.
The Company is a national direct marketer and distributor of microcomputer
hardware and software products primarily for users of Apple Macintosh
personal computers and for users of IBM-compatible personal computers. The
Company's sales and marketing efforts are currently targeted at desktop
publishing (DTP), graphic arts and prepress industries through its catalog,
"DTP Direct," and to computer dealers and value-added resellers through its
distribution business.
On May 9, 1995, MacUSA merged with the Jaguar Group, Ltd. (Jaguar) (the
Merger). In connection with the merger, Jaguar issued to MacUSA's
stockholders 24.7 shares of no par common stock for each of the MacUSA common
shares outstanding, for a total of 7,031,720 equivalent shares, or
approximately 82% of the postmerger shares outstanding. 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 accompanying consolidated financial statements
do not reflect the historical operating results of Jaguar prior to the merger
because its historical results were not considered meaningful. Following the
merger, Jaguar changed its name to Tech Squared Inc.
Digital River was formed in 1994 and is developing and operating a
proprietary system which allows the secure sale and delivery of software,
fonts and images online, via the Internet. Through contractual relationships
with software developers, Digital River is building an electronic inventory
of software products. Digital River will provide its electronic inventory
for online sale and delivery to Internet end-users through software developer
home pages, software retailer home pages and through high-traffic Internet
sites operated by nontraditional software retailers. Digital River's first
online software sale and delivery occurred in August 1996.
PRO FORMA BALANCE SHEET
The pro forma balance sheet information is presented as if the Digital River
18% convertible debentures were converted net of debt issuance costs as of
December 31, 1996 into approximately 166,000 shares of Digital River common
stock. After such conversion, the company controls approximately 51% of
Digital River (see Note 3).
F-7
<PAGE>
INVENTORIES
Inventories, consisting primarily of products held for resale, are stated at
the lower of cost or market. Cost is determined using the first-in, first-out
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.
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.
Digital River recognizes revenue upon the successful transfer of
third-party software to the customer. Sales are reported at the gross amount
of the sale, and the amount payable to the software vendor is reported as cost
of sales.
INCOME TAXES
Prior to the merger in 1995, the Company was an S corporation under the
Internal Revenue Code. As such, income taxes were paid by the individual
stockholders, and no provision for federal or state income taxes was recorded.
The S corporation was terminated as a result of the merger, and the surviving
entity continued as a C corporation. The conversion of the Company to a C
corporation had no net tax impact since net deferred tax assets as of the
conversion date were fully reserved for due to uncertainty as to their
realizability.
Effective with the merger, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires recognition of deferred income tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements. Under this method, 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
Net loss per common share is computed using the weighted average number of
common shares outstanding after consideration of the required distributions to
preferred stockholders and the dilutive effect of stock options and warrants.
The effects of stock options and warrants have been excluded because their
effect would be antidilutive.
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
F-8
<PAGE>
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation. These reclassifications had no impact
on previously reported results of operations or total stockholders' equity.
2. INVESTMENTS:
In connection with the reverse acquisition of Jaguar in 1995, the Company
acquired the following assets that are not related to its current operations or
to its future operating plans.
CAM DESIGNS, INC.
The Company owns 200,000 shares of Cam Designs, Inc. common stock (the Cam
Designs Shares) which is restricted stock pursuant to Rule 144 promulgated
under the Securities Act of 1933. The Company intends to reduce and eventually
eliminate its interest in Cam Designs shares. Cam Designs, Inc., a Delaware
corporation, is the parent company of MGA Holdings, Ltd., a United Kingdom
corporation which designs and engineers prototypes and tools for the automobile
and aerospace industries. Cam Designs' common stock is publicly traded on the
Nasdaq National Market under the symbol "CMDA." The trading market for the Cam
Designs shares may be limited and or volatile, and there can be no assurance
that such shares will have a market value equal to or in excess of the value
recorded by the Company or reported by the Nasdaq National Market. The Company
may have to bear the economic risk of the entire investment for an indefinite
period of time. The cost and fair value of the Cam Designs shares were
$800,000 and $940,000 as of December 31, 1996 and $800,000 and $1,200,000 as of
December 31, 1995.
MINING ASSETS
In April 1996, the Company entered into an asset purchase agreement for the
sale of substantially all of its mining properties in exchange for 525,000
shares of Hanover Gold Company, Inc. (Hanover) common stock (the Hanover
Shares). Under terms of 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 completed the registration of the Hanover Shares and
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 the 400,000 of the Hanover Shares held in escrow.
The Company has filed a response which included claims of fraud and violation
of the Securities Act of 1933. There has been no action or discussion of the
matter since this response was filed on November 20, 1996. 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.
Hanover is a public company traded on the Nasdaq SmallCap Market under the
symbol "HVGO." The trading market for the Hanover Shares is volatile and may
be limited, and there
F-9
<PAGE>
can be no assurance that such stock will have a market value equal to or in
excess of the value recorded by the Company or reported by the Nasdaq SmallCap
Market. The Company may have to bear the economic risk of the entire
investment for an indefinite period of time. The Company intends to continue
soliciting offers for sale of the remaining mining assets.
OTHER INVESTMENTS
In 1995, in connection with the merger, the Company also received a 20%
interest in a start-up venture with no current operations. Business
development activities at this entity have essentially been discontinued.
Accordingly, management did not allocate any value to this venture. During
1996, the Company transferred its ownership interest in this venture for
nominal consideration to a company controlled by an individual who is a
stockholder of the Company.
3. DIGITAL RIVER, INC.:
In December 1995 the Company obtained a bargain purchase option to acquire a
60% ownership in Digital River from the Company's majority stockholder and
chief executive officer (CEO). The option is exercisable at any time through
December 31, 2000 for a total exercise price of $1. The CEO has agreed to vote
the Digital River shares at the direction of the Company's board of directors.
As consideration for the option, the Company has agreed to reimburse the CEO
for any tax liability incurred in connection with the transfer of the option or
shares.
Because the Company provides management, support and effectively controls 60%
of Digital River, its operating results have been consolidated with those of
the Company. As both the Company and Digital River were controlled by the
Company's majority stockholder, Digital River's operations have been combined
from the date of Digital River's inception. The remaining 40% of Digital River
is presented as minority interest in the accompanying consolidated financial
statements. Included in cash and cash equivalents in the accompanying
consolidated balance sheet is $800,000 which is available only to fund the
operations of Digital River.
F-10
<PAGE>
Summarized condensed financial information of Digital River is as follows:
December 31
---------------------
1996 1995
---------- --------
BALANCE SHEET INFORMATION
Cash $ 800,000 $487,000
Total assets 1,202,000 635,000
Current liabilities 1,258,000 9,000
Stockholders' equity (deficit) (58,000) 627,000
Year Ended
December 31
---------------------
1996 1995
---------- --------
OPERATING INFORMATION
Net sales $ 111,000 $ -
Operating expenses 713,000 165,000
Net loss (690,000) (144,000)
The working capital requirements of Digital River will exceed the available
cash resources currently in Digital River. In February 1997, Digital River
initiated a private placement of up to 500,000 shares of Digital River common
stock at $9.00 per share. As of March 17, 1997, Digital River has received
cash totaling $1,250,000 for approximately 139,000 shares (12%) of its common
stock. In connection with completion of this private placement, Digital River
anticipates that the outstanding 18% convertible debentures will be converted
into shares of Digital River common stock at $6.00 per share.
4. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT:
The Company has a revolving credit agreement with a bank which expires on April
30, 1997. The agreement provides for advances of up to $4,000,000. Borrowings
under the line are payable on demand, limited by eligible percentages of
accounts receivable, inventory and certain investments, and bear interest at
the prime rate plus 2%. Borrowings on the line averaged $638,000 and
$3,550,000 at an average interest rate of 10.3% and 9.9%, in 1996 and 1995,
respectively.
The agreement requires the Company to maintain certain covenants including a
minimum net worth, current ratio, debt to equity ratio, and certain operating
results. As of December 31, 1996, the Company was in violation of the
minimum net worth covenant. The Company is currently negotiating with the
lender for an extension of the agreement. Borrowings under the agreement are
collateralized by substantially all the Company's assets and are personally
guaranteed up to $500,000 by the Company's CEO.
F-11
<PAGE>
Long-term debt consisted of the following at December 31, 1996:
Digital River-18% convertible debentures due
December 31, 1997, convertible at the lesser of 75% of
the subsequent per-share offering price or $6.00
per share $ 998,000
Estimated settlement of lawsuit with dissenting
shareholder, payable $50,000 on signing and $20,000 per
quarter with interest at 8% 205,000
Other 3,720
----------
1,206,720
Less- Current portion (1,108,750)
----------
$ 97,970
----------
----------
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31:
1996 1995
---------- ----------
Furniture and equipment $1,176,501 $ 938,597
Leasehold improvements 135,551 126,437
---------- ----------
1,312,052 1,065,034
Less- Accumulated depreciation and amortization (835,769) (620,431)
---------- ----------
$ 476,283 $ 444,603
---------- ----------
---------- ----------
6. ADVERTISING COSTS:
In 1995 the Company adopted the American Institute of Certified Public
Accountants' Statement of Position 93-7, "Reporting on Advertising Costs" (SOP
93-7). In accordance with SOP 93-7, 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 80% of the costs are amortized in the first four
months. Costs are fully amortized by the seventh month. The impact of
adopting SOP 93-7 was to decrease the net loss for 1995 by $129,000.
Advertising expense was $118,000 and $241,000 in 1996 and 1995, respectively.
7. INCOME TAXES:
As of December 31, 1996, the Company had net operating loss carryforwards of
$2.0 million. Certain restrictions caused by the change in ownership could
limit annual utilization of the net operating loss carryforwards. The losses
expire in various years from 1997 to 2007. The
F-12
<PAGE>
Company recorded no income tax benefit in 1996 and 1995 due to the uncertainty
associated with the Company's ability to realize the benefits related to net
operating losses generated.
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:
1996 1995
------- -------
U.S. statutory rate (34.0)% (34.0)%
State taxes, net of federal benefit (3.2) (3.2)
Digital River net losses 20.0 3.0
Increase in valuation allowance 17.2 34.2
------- -------
Effective income tax rate - % - %
------- -------
------- -------
Significant components of the Company's deferred tax assets and liabilities are
as follows as of December 31, 1996 and 1995:
1996 1995
---------- ----------
Deferred tax assets:
Inventories $ 254,000 $ 271,000
Accrued liabilities 73,000 90,000
Receivables 244,000 174,000
Premerger net operating loss
carryforwards 788,000 788,000
Tax credit carryforwards 12,000 12,000
Investments 833,000 833,000
Net operating loss carryforwards 555,000 64,000
---------- ----------
2,759,000 2,232,000
Deferred tax valuation allowance (2,394,000) (1,737,000)
---------- ----------
Total deferred tax assets 365,000 495,000
---------- ----------
Deferred tax liabilities:
Advertising (15,000) (48,000)
Investments (350,000) (447,000)
---------- ----------
Total deferred tax liabilities (365,000) (495,000)
---------- ----------
Net deferred taxes $ - $ -
---------- ----------
---------- ----------
8. 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
did not make any contributions to the Plan in 1996 or 1995.
F-13
<PAGE>
9. STOCK OPTIONS AND WARRANTS:
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 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. These options were converted into Company options.
The Company's majority stockholder and CEO received 2,669,996 of these options.
In December 1995, the Company's board of directors approved the Tech Squared
Inc. 1995 Stock Option Plan, reserving 2,500,000 shares for future grant.
Options granted under the plan will be granted at the current market price on
the date of grant, cannot remain outstanding for over seven years and generally
become exercisable over a period of four years. Options granted under the plan
totaled 1,295,000 and 2,040,000 in 1996 and 1995.
Also in December 1995, the Company's board of directors approved the Tech
Squared Inc. 1995 Non-Employee Director Option Plan, reserving 350,000 shares
of stock for future grant. The Plan allows each director to be granted options
for up to 50,000 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. Options granted under the plan totaled 100,000 and
150,000 during 1996 and 1995, respectively.
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 are exercisable through 1998.
In connection with the Merger, the Company acquired the Jaguar 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. These
options and warrants expire at various dates through July 2000.
F-14
<PAGE>
A summary of options and warrants, including those granted pursuant to the
above plans, is as follows (see Notes 10 and 12):
1996 1995
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ------ --------- ------
Outstanding, beginning of year 6,974,468 $1.27 24,700 $0.89
Granted 1,602,500 0.75 6,485,414 1.13
Forfeited/canceled (2,375,010) 0.75 (650,000) 1.01
Options and warrants assumed
in merger - 1,114,354 2.26
---------- ------ --------- ------
Outstanding, end of year 6,201,958 $1.18 6,974,468 1.27
---------- ------ --------- ------
---------- ------ --------- ------
Exercisable, end of year 3,066,958 $1.51 2,584,468 $1.85
---------- ------ --------- ------
---------- ------ --------- ------
Weighted average fair value of employee
options granted $ .22 $ .24
------ ------
------ ------
The Company accounts for these plans under APB 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:
1996 1995
---------- ------------
Net loss:
As reported $(651,395) $(1,651,748)
Pro forma (884,399) (1,939,748)
Net loss per share:
As reported $ (.06) $ (.19)
Pro forma (.09) (.22)
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 of 6%; no
expected dividend yield; expected lives of five years; and no expected
volatility.
F-15
<PAGE>
10. STOCKHOLDERS' EQUITY:
The Company's redeemable preferred stock carries a 12% cumulative dividend
payable quarterly, is convertible into common stock at any time for $1.25 per
share, carries a preference on liquidation or dissolution of the Company, and
has equal voting rights with the Company's outstanding common stock. Beginning
in 1997 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.
Holders of the preferred stock cannot demand redemption prior to 2002. In 1996
the Company redeemed 25,000 shares of preferred stock for total consideration
of $22,500.
The dividend payable is evidenced primarily by a note payable to the Company's
majority stockholder and CEO. The Company paid approximately $261,000 of this
dividend during 1995 and approximately $201,000 in 1996. The note is
noninterest-bearing, due on demand and is subordinated to the revolving line of
credit. Pursuant to the debt subordination agreement, the Company can only
make payments on this dividend to the extent of its net income in 1997 and
beyond. The Company is not allowed to make any other payments without the
written consent of the bank.
During 1995, the Company initiated and completed a stock offering of 1,835,424
shares of common stock at a price of $1.40 per share. The Company realized net
proceeds of approximately $1,985,000 from the offering. In conjunction with
the offering, the Company issued warrants to purchase 327,711 shares of the
Company's common stock for $2.50 per share and warrants to purchase 197,687
shares of common stock for $1.40 per share, all exercisable for one year from
the date of issuance. In 1996, the Company repriced these warrants to $0.75
per share and extended the exercise period by one year. The Company also
issued 61,000 shares of its common stock to the sales agent in connection with
this offering as additional compensation.
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
A former holder of 10,000 shares of common stock of MacUSA on a premerger basis
(the Dissenter) formally dissented from the Merger pursuant to the provisions
of the Minnesota Business Corporate Act, as amended. The Company made payment
to the Dissenter of approximately $170,000 for the fair value of his shares.
The Dissenter objected, stating that the amount paid by the Company was
insufficient. In December 1995, the Company filed a petition in Minnesota
state court seeking a determination that the value paid to the Dissenter by the
Company was adequate.
In January 1997, the Company and the Dissenter agreed in principle to settle
all claims outstanding for $205,000. The $205,000 is payable $50,000 on
signing and $20,000 per quarter with interest at 8%. The settlement is subject
to execution of a definitive agreement. Because management believes it is
probable that a definitive agreement will be reached, the $205,000 liability
was recorded in the consolidated financial statements as of December 31, 1996.
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 $184,000 and $174,000 for the years ended December 31, 1996
and 1995, respectively. In May 1996, the Company executed a new lease on its
existing facilities. Future minimum lease
F-16
<PAGE>
payments, including estimated common area maintenance are as follows for the
year ending December 31:
1997 $189,000
1998 207,000
1999 105,000
12. 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 and principals of Jaguar. Pursuant to the
agreement, the Company issued 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 September 1996, the Company repriced these warrants to $1.01
per share.
In connection with the Merger, the Company's majority stockholder gifted 50,000
shares of the Company's common stock to a member of the Company's board of
directors and a former Jaguar board member. In connection with the Merger, the
Company also paid $45,000 to an entity in which this same board member is a
principal. The effects of these transactions have been reflected in the
acquisition consideration.
The note receivable from officer/stockholder represents a $196,000 note
receivable from the Company's CEO and majority stockholder, plus accrued
interest. The note bears interest at 5% per year, payable quarterly, and is
due on demand with 30 days' written notice. Interest on the note has been
received through May 31, 1996.
In July 1995 the Company's CEO and majority stockholder reduced his salary, and
in October 1995, discontinued his salary entirely. In August 1996, the
majority stockholder began devoting the majority of his time to Digital River,
and Digital River began paying him a salary.
The Company has agreed to indemnify its majority stockholder and CEO 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.
F-17
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information under the caption "ELECTION OF DIRECTORS" in the
Company's 1997 Proxy Statement, such proxy statement to be filed within 120
days of December 31, 1996, is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information under the caption "COMPENSATION AND OTHER BENEFITS" in
the Company's 1997 Proxy Statement, such proxy statement to be filed within
120 days of December 31, 1996, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS" in the Company's 1997 Proxy Statement, such proxy
statement to be filed within 120 days of December 31, 1996, is incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "CERTAIN TRANSACTIONS" in the
Company's 1997 Proxy Statement, such proxy statement to be filed within 120
days of December 31, 1996, is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Item No. Description
- -------- -----------
2.1 Articles of Merger of MacUSA and Jaguar Newco Inc. effective
May 9, 1995. (incorporated as Exhibit No. 2.1 in (3) below)
2.2 Agreement and Plan of Merger among The Jaguar Group Ltd.,
Jaguar Newco Inc. and MacUSA, Inc. dated May 1, 1995.
(incorporated as Exhibit No. 2.1 in (2) below)
3(i).1 Articles of Incorporation, as amended to date. (incorporated
as Exhibit No. 3.1 in (1) below)
3(i).2 Amendment to Articles of Incorporation to change name to Tech
Squared Inc. (incorporated as Exhibit No. 3.1 in (2) below)
3(ii).1 Bylaws, as amended. (incorporated as Exhibit No. 3.2 in (1)
below)
3.(ii).2 Amendment to Bylaws (incorporated as Exhibit No. 3.3 in (3)
below)
10.1 Office/Warehouse Lease between the Company and RREEF Management
Company, as amended. (incorporated as Exhibit No. 10.1 in (1)
below)
10.2 Credit and Security Agreement By and Between
MacUSA and Norwest, dated January 3, 1996. Omitted from this
Exhibit, as filed, are exhibits and schedules referenced in
such agreement. The Company will furnish supplementally a
copy of any such exhibits and schedules to the Commission upon
request. (incorporated as Exhibit No. 10.2 in (3) below)
16
<PAGE>
10.3 $4,000,000 Revolving Promissory Note, dated January 3, 1996.
(incorporated as Exhibit No. 10.3 in (3) below)
10.4 Debt Subordination Agreement, By and Between Mac USA, Joel A.
Ronning and Norwest Bank Minnesota, National Association,
dated January 3, 1996. (incorporated as Exhibit No. 10.4 in
(3) below)
10.5 Collateral Account Agreement between Mac USA and Norwest,
dated January 3, 1996. (incorporated as Exhibit No. 10.5 in
(3) below)
10.6 Agreement as to Lockbox Service Between MacUSA and Norwest,
dated January 3, 1996. (incorporated as Exhibit No. 10.6 in
(3) below)
10.7 * MacUSA, Inc. 1995 Stock Option Plan. (incorporated as Exhibit
No. 10.7 in (3) below)
10.8 * Stock Option Agreement with Joel A. Ronning relating to
1,099,990 shares of Common Stock, dated April 28, 1995.
(incorporated as Exhibit No. 10.8 in (3) below)
10.9 * Stock Option Agreement with Joel A. Ronning relating to
1,370,010 shares of Common Stock, dated April 28, 1995.
(incorporated as Exhibit No. 10.9 in (3) below)
10.10 * Stock Option Agreement with Joel A. Ronning relating to
199,996 shares of Common Stock, dated April 28, 1995.
(incorporated as Exhibit No. 10.10 in (3) below)
10.11 * Stock Option Agreement with David McCaffrey relating to
100,010 shares of Common Stock, dated April 28, 1995.
(incorporated as Exhibit No. 10.11 in (3) below)
10.12 * Stock Option Agreement with Draper Jaffray relating to 100,010
shares of Common Stock, dated April 28, 1995. (incorporated as
Exhibit No. 10.12 in (3) below)
10.13 * Non-Statutory Stock Option Agreement with David McCaffrey
relating to 100,000 shares of Common Stock, dated December 20,
1995. (incorporated as Exhibit No. 10.13 in (3) below)
10.14 * Tech Squared Inc. 1995 Option Plan. (incorporated as Exhibit
10.14 in (3) below)
10.15 * Form of Non-Statutory Stock Option Agreement for use with 1995
Stock Option Plan. (incorporated as Exhibit No. 10.15 in (3)
below)
10.16 * Form of Incentive Stock Option Agreement for use with 1995
Stock Option Plan. (incorporated as Exhibit No. 10.16 in (3)
below)
10.17 * Tech Squared Inc. 1995 Non-Employee Director Option Plan.
(incorporated as Exhibit No. 10.17 in (3) below)
10.18 * Form of Option Agreement for use with Tech Squared Inc. 1995
Non-Employee Director Option Plan. (incorporated as Exhibit
No. 10.18 in (3) below)
10.19 * Stock Option Agreement between Company and Joel A. Ronning
relating to Common Stock of Digital River, Inc., dated
December 28, 1995. (incorporated as Exhibit No. 10.19 in (3)
below)
17
<PAGE>
10.20 Mutual Release in full of All Claims and Rights between the
Company and Peripheral Land, Inc., dated March 21, 1996.
(incorporated as Exhibit No. 10.20 in (3) below)
10.21 Consulting Agreement with Jaguar Ventures, Ltd., dated
November 17, 1995. (incorporated as Exhibit No. 10.21 in (3)
below)
10.22 Consulting Agreement with James Kramer and Larry Kramer, dated
December 7, 1995. (incorporated as Exhibit No. 10.22 in (3)
below)
10.23 Agreement with M.H. Meyerson & Co., Inc. for the provision of
investment banking services to the Company, dated December 14,
1995. (incorporated as Exhibit No. 10.23 in (3) below)
10.24 Asset Purchase Agreement between Tabor Resources, Corporation
and Hanover Gold Company, Inc., dated March 25, 1996. Omitted
from this Exhibit, as filed, are exhibits and schedules
referenced in such Agreement. The Company will furnish
supplementally a copy of any such exhibits and schedules to
the Commission upon request. (incorporated as Exhibit No.
10.24 in (3) below)
10.25 * Tax Indemnification Agreement with Joel A. Ronning, effective
December 20, 1995. (incorporated as Exhibit No. 10.25 in (3)
below)
10.26 Agreement between Issuer and Sponsor with Austin Friars
Securities Limited, dated June 6, 1995. (incorporated as
Exhibit No. 10.26 in (3) below)
10.27 Amendment to Agreement between Issuer and Sponsor with Austin
Friars Securities Limited, dated August 10, 1995.
(incorporated as Exhibit No. 10.27 in (3) below)
10.28 Second Amendment to Agreement between Issuer and Sponsor with
Austin friars securities Limited, dated September 27, 1995.
(incorporated as Exhibit No. 10.28 in (3) below)
10.29 Agreement with William D. Long, dated April 27, 1995.
(incorporated as Exhibit No. 10.29 in (3) below)
10.30 Stock Purchase Agreement among Fujitsu, Digital River, Joel A.
Ronning and MacUSA, dated August 30, 1994. Omitted from this
Exhibit, as filed, are exhibits and schedules referenced in
such Agreement. The Company will furnish supplementally a
copy of any such exhibits and schedules to the Commission upon
request. (incorporated as Exhibit No. 10.30 in (3) below)
10.31 Amendment to Asset Purchase Agreement with Hanover Gold
Company dated April 19, 1996. (incorporated as Exhibit No.
10.1 in (5) below)
10.32 Tech Squared Inc. 1995 Stock Option Agreement, as amended.
(incorporated as Exhibit No. 10.2 in (5) below)
10.33 * Form of Non-Statutory Stock Option Agreement for use with 1995
Stock Option Plan. (incorporated as Exhibit No. 10.3 in (5)
below)
10.34 * Form of Incentive Stock Option Agreement for use with 1995
Stock Option Plan. (incorporated as Exhibit No. 10.4 in (5)
below)
10.35 Proposal for lease of space at 5198 West 76th Street Edina,
Minnesota with R.L. Johnson Company dated April 19, 1996, as
agreed and accepted by the Company. (incorporated as Exhibit
No. 10.5 in (5) below)
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10.36 Lease Agreement between Churchill Winston Limited Partnership
and Tech Squared Inc. dated May 1, 1996. (incorporated as
Exhibit No. 10.1 in (6) below)
10.37 First Amendment to Credit and Security Agreement between
MacUSA, Inc. and Norwest Bank Minnesota, N.A. dated November
5, 1996. (incorporated as Exhibit No. 10.2 in (7) below)
10.38 * Letter Agreement dated August 20, 1996 with Charles Reese
regarding employment as the Company's President and Chief
Operating Officer. (incorporated as Exhibit No. 10.3 in (7)
below)
10.39* Non-Statutory Stock Option Agreement with Chuck Reese relating
to 351,000 shares of Common Stock, dated September 19, 1996.
10.40* Incentive Stock Option Agreement with Chuck Reese relating to
649,000 shares of Common Stock, dated September 19, 1996
10.41 Digital River, Inc. Form of 18% Convertible Debenture.
10.42 Agency Agreement dated September 30, 1996 between Digital
River, Inc. and John G. Kinnard & Co.
10.43 Acknowledgment and Receipt, dated January 13, 1997, of
termination of Agency Agreement between Digital River, Inc.
and John G. Kinnard & Co.
16.1 Letter from Sartain Fischbein & Co. to the Securities and
Exchange Commission dated January 23, 1996. (incorporated as
Exhibit No. 16.1 in (4) below)
16.2 Letter from Glenn Elliott & Associates, Inc. to the Securities
and Exchange Commission dated January 23, 1996. (incorporated
as Exhibit No. 16.2 in (4) below)
16.3 Letter from Price Waterhouse LLP to the Securities and
Exchange Commission dated January 23, 1996. (incorporated as
Exhibit No. 16.3 in (4) below)
21.1 Subsidiaries of the Company. (incorporated as Exhibit No. 21.1
in (3) below)
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
* Indicates management contracts and compensatory plans or arrangements.
(1) Incorporated by reference to the Company's Report on Form 10-KSB for the
Transition Period from June 1, 1994 to December 31, 1994.
(2) Incorporated by reference to the Company's Current Report on Form 8-K
filed May, 1995.
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995.
(4) Incorporated by reference to Amendment No. 3 to the Company's Current
Report on Form 8-K filed February 6, 1996.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the period ended March 31, 1996.
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the period ended June 30, 1996.
19
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(7) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the period ended September 31, 1996.
(b) REPORTS ON FORM 8-K
None.
20
<PAGE>
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: March 26, 1997 By: /s/ Joel A. Ronning
----------------------------------
Joel A. Ronning
Chief Executive Officer, Chief
Financial Officer, and Secretary.
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
------------------- --------------
/s/ Joel A. Ronning March 26, 1997
----------------------------- --------------
Joel A. Ronning
Chief Executive Officer, Chief
Financial Officer, Secretary
and Director (principal
executive officer and principal
financial officer)
/s/ Chuck Reese March 26, 1997
----------------------------- --------------
Chuck Reese, Director
/s/ James D. Kramer March 26, 1997
----------------------------- --------------
James D. Kramer, Director
/s/ Richard Runbeck March 26, 1997
----------------------------- --------------
Richard Runbeck, Director
<PAGE>
TECH SQUARED INC.
EXHIBIT INDEX TO FORM 10-KSB
For Year Ended December 31, 1996
Item No. Item
- -------- ----
10.39 Non-Statutory Stock Option Agreement with Chuck Reese relating
to 351,000 shares of Common Stock, dated September 19, 1996.
10.40 Incentive Stock Option Agreement with Chuck Reese relating to
649,000 shares of Common Stock, dated September 19, 1996.
10.41 Digital River, Inc. Form of 18% Convertible Debenture.
10.42 Agency Agreement dated September 30, 1996 between Digital
River, Inc. and John G. Kinnard & Co.
10.43 Acknowledgment and Receipt dated January 13, 1997, between
Digital River, Inc. and John G. Kinnard & Co.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
<PAGE>
NON-STATUTORY STOCK OPTION AGREEMENT-#47
THIS AGREEMENT is entered into and effective as of this 19 day of
September, 1996(the "Date of Grant"), by and between Tech Squared Inc. (the
"Company") and Chuck Reese (the "Optionee").
A. The Company has adopted the Tech Squared Inc. 1995 Stock Option Plan
(the "Plan") authorizing the Board of Directors of the Company, or a
committee as provided for in the Plan (the Board or such a committee to be
referred to as the "Committee"), to grant non-statutory stock options to
employees and non-employee consultants and independent contractors of the
Company and its Subsidiaries (as defined in the Plan).
B. The Company desires to give the Optionee an inducement to acquire a
proprietary interest in the Company and an added incentive to advance the
interests of the Company by granting to the Optionee an option to purchase
shares of common stock of the Company pursuant to the Plan.
Accordingly, the parties agree as follows:
1. GRANT OF OPTION.
The Company hereby grants to the Optionee the right, privilege, and
option (the "Option") to purchase Three Hundred Fifty One Thousand (351,000)
shares (the "Option Shares") of the Company's common stock, no par value (the
"Common Stock"), according to the terms and subject to the conditions
hereinafter set forth and as set forth in the Plan. The Option is not
intended to be an "incentive stock option," as that term is used in Section
422 of the Internal Revenue Code of 1986, as amended (the "Code").
2. OPTION EXERCISE PRICE.
The per share price to be paid by Optionee in the event of an exercise
of the Option will be $0.75 (seventy-five cents).
3. DURATION OF OPTION AND TIME OF EXERCISE.
3.1 INITIAL PERIOD OF EXERCISABILITY. The Option will become
exercisable with respect to the Option Shares in 4 installments. The
following table sets forth the initial dates of exercisability of each
installment and the number of Option Shares as to which this Option will
become exercisable on such dates:
Initial Date of Number of Option Shares
Exercisability Available for Exercise
-------------- -----------------------
August 21, 1997 117,000
August 21, 1998 117,000
August 21, 1999 117,000
The foregoing rights to exercise this Option will be cumulative with respect
to the Option Shares becoming exercisable on each such date, but in no event
will this Option be exercisable after, and this Option will become void and
expire as to all unexercised Option Shares at, 5:00 p.m. (Minneapolis,
Minnesota time) on August 21, 2003 (the "Time of Termination").
1
<PAGE>
3.2 TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
(a) TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In the event
that the Optionee's employment or other service with the Company and all
Subsidiaries is terminated by reason of the Optionee's death, Disability (as
defined in the Plan) or Retirement (as defined in the Plan), this Option will
become immediately exercisable in full and will remain exercisable for a
period of one year after such termination (but in no event after the Time of
Termination).
(b) TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT.
In the event the Optionee's employment or other service with the Company and
all Subsidiaries is terminated for any reason other than death, Disability or
Retirement, or the Optionee is in the employ or service of a Subsidiary and
the Subsidiary ceases to be a Subsidiary of the Company (unless the Optionee
continues in the employ or service of the Company or another Subsidiary), all
rights of the Optionee under the Plan and this Agreement will immediately
terminate without notice of any kind, and this Option will no longer be
exercisable; provided, however, that if such termination is due to any reason
other than termination by the Company or any Subsidiary for "cause," all
outstanding Options then held by such Participant will remain exercisable to
the extent exercisable as of such termination for a period of three months
after such termination (but in no event after the expiration date of any such
Option).
3.3 CHANGE IN CONTROL.
(a) IMPACT OF CHANGE IN CONTROL. If any events constituting a Change
in Control (as defined in the Plan) of the Company occur, this Option will
become immediately exercisable in full and will remain exercisable until the
Time of Termination, regardless of whether the Optionee remains in the employ
or service of the Company or any Subsidiary. In addition, if a Change in
Control of the Company occurs, the Committee, in its sole discretion and
without the consent of the Optionee, may determine that the Optionee will
receive, with respect to some or all of the Option Shares, as of the
effective date of any such Change in Control of the Company, cash in an
amount equal to the excess of the Fair Market Value (as defined in the Plan)
of such Option Shares immediately prior to the effective date of such Change
in Control of the Company over the option exercise price per share of this
Option.
(b) LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything
in this Section 3.3 to the contrary, if, with respect to the Optionee,
acceleration of the vesting of this Option or the payment of cash in exchange
for all or part of the Option Shares as provided above (which acceleration or
payment could be deemed a "payment" within the meaning of Section 280G(b)(2)
of the Code), together with any other payments which the Optionee has the
right to receive from the Company or any corporation which is a member of an
"affiliated group" (as defined in Section 1504(a) of the Code without regard
to Section 1504(b) of the Code) of which the Company is a member, would
constitute a "parachute payment" (as defined in Section 280G(b)(2) of the
Code), the payments to the Optionee as set forth herein will be reduced to
the largest amount as will result in no portion of such "payments" being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that if the Optionee is subject to a separate agreement with the
Company or a Subsidiary that expressly addresses the potential application of
Sections 280G or 4999 of the Code (including, without limitation, that
"payments" under such agreement or otherwise will not be reduced or that the
Optionee will have the discretion to determine which "payments" will be
reduced), then the limitations of this Section 3.3(c) will not apply, and any
"payments" to the Optionee pursuant to this Section 3.3(c) or pursuant to
Section 9(c) or 9(d) of the Plan will be treated as "payments" arising under
such separate agreement.
3.4 ACCELERATION OF VESTING. If a Profitable Doubling of sales and
related acceleration of vesting occurs pursuant to section 3.4 of the
Incentive Stock Option Agreement #46 between Chuck Reese and Tech Squared,
then the options granted pursuant to this agreement shall also be subject to
accelerated vesting. The vesting of these options shall accelerate upon the
occurrence of a "profitable doubling again" in net sales of Tech Squared,
Inc. "Profitable Doubling Again" of net sales is defined as an increase by
100% in any calendar quarter of 1998 net sales for Tech Squared, Inc., as
compared to the same quarter of 1997 along with a net income. Should a
Profitable Doubling Again occur then the 117,000 shares scheduled to vest on
August 21, 1999 will vest at the end of the quarter in which the Profitable
Doubling Again occurs.
2
<PAGE>
4. MANNER OF OPTION EXERCISE.
4.1 NOTICE. This Option may be exercised by the Optionee in whole or
in part from time to time, subject to the conditions contained in the Plan
and in this Agreement, by delivery, in person, by facsimile or electronic
transmission or through the mail, to the Company at its principal executive
office in Edina, Minnesota (Attention: Chief Financial Officer), of a written
notice of exercise. Such notice will be in a form satisfactory to the
Committee, will identify the Option, will specify the number of Option Shares
with respect to which the Option is being exercised, and will be signed by
the person or persons so exercising the Option. Such notice will be
accompanied by payment in full of the total purchase price of the Option
Shares purchased. In the event that the Option is being exercised, as
provided by the Plan and Section 3.2 above, by any person or persons other
than the Optionee, the notice will be accompanied by appropriate proof of
right of such person or persons to exercise the Option. As soon as
practicable after the effective exercise of the Option, the Optionee will be
recorded on the stock transfer books of the Company as the owner of the
Option Shares purchased, and the Company will deliver to the Optionee one or
more duly issued stock certificates evidencing such ownership.
4.2 PAYMENT. At the time of exercise of this Option, the Optionee will pay
the total purchase price of the Option Shares to be purchased entirely in
cash (including a check, bank draft or money order, payable to the order of
the Company); provided, however, that the Committee, in its sole discretion,
may allow such payment to be made, in whole or in part, by tender of a
promissory note (on terms acceptable to the Committee in its sole discretion)
or a Broker Exercise Notice or Previously Acquired Shares (as such terms are
defined in the Plan), or by a combination of such methods. In the event the
Optionee is permitted to pay the total purchase price of this Option in whole
or in part with Previously Acquired Shares, the value of such shares will be
equal to their Fair Market Value on the date of exercise of this Option.
5. RIGHTS OF OPTIONEE; TRANSFERABILITY.
5.1 EMPLOYMENT OR SERVICE. Nothing in this Agreement will interfere
with or limit in any way the right of the Company or any Subsidiary to
terminate the employment or service of the Optionee at any time, nor confer
upon the Optionee any right to continue in the employ or service of the
Company or any Subsidiary at any particular position or rate of pay or for
any particular period of time.
5.2 RIGHTS AS A SHAREHOLDER. The Optionee will have no rights as a
shareholder unless and until all conditions to the effective exercise of this
Option (including, without limitation, the conditions set forth in Section 4
of this Agreement and Section 11 of the Plan) have been satisfied and the
Optionee has become the holder of record of such shares. No adjustment will
be made for dividends or distributions with respect to this Option as to
which there is a record date preceding the date the Optionee becomes the
holder of record of such shares, except as may otherwise be provided in the
Plan or determined by the Committee in its sole discretion.
5.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or
the laws of descent and distribution or as otherwise expressly permitted by
the Plan, no right or interest of the Optionee in this Option prior to
exercise may be assigned or transferred, or subjected to any lien, during the
lifetime of the Optionee, either voluntarily or involuntarily, directly or
indirectly, by operation of law or otherwise. The Optionee will, however, be
entitled to designate a beneficiary to receive this Option upon such
Optionee's death, and, in the event of the Optionee's death, exercise of this
Option (to the extent permitted pursuant to Section 3.2(a) of this Agreement)
may be made by the Optionee's legal representatives, heirs and legatees.
6. WITHHOLDING TAXES.
The Company is entitled to (a) withhold and deduct from future wages of
the Optionee (or from other amounts that may be due and owing to the Optionee
from the Company), or make other arrangements for the collection of, all
legally required amounts necessary to satisfy any federal, state or local
withholding and employment-related tax requirements attributable to the grant
or exercise of this Option or otherwise incurred with respect to this Option,
or (b) require the Optionee promptly to remit the amount of such withholding
to the Company before acting on the Optionee's notice of
3
<PAGE>
exercise of this Option. In the event that the Company is unable to withhold
such amounts, for whatever reason, the Optionee agrees to pay to the Company
an amount equal to the amount the Company would otherwise be required to
withhold under federal, state or local law.
7. ADJUSTMENTS.
In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, divestiture or extraordinary dividend
(including a spin-off), or any other change in the corporate structure or
shares of the Company, the Committee (or, if the Company is not the surviving
corporation in any such transaction, the board of directors of the surviving
corporation), in order to prevent dilution or enlargement of the rights of
the Optionee, will make appropriate adjustment (which determination will be
conclusive) as to the number, kind and exercise price of securities subject
to this Option.
8. CONFIDENTIAL INFORMATION.
8.1 USE AND NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. The Optionee
hereby agrees that the Confidential Information will not be used by the
Optionee in any way detrimental to the Company and that all such Confidential
Information shall be kept confidential by the Optionee. Notwithstanding the
foregoing, no obligation of confidentiality shall apply to Confidential
Information which the Optionee can show: (a) is now or hereafter becomes
publicly known in published form or available through no act or failure on
the part of the Optionee; (b) is known by the Optionee on a non-confidential
basis at the time of the receipt of such Confidential Information as
established by documentary evidence in its files; (c) is hereafter furnished
to the Optionee by a third party who has rightfully obtained such
Confidential Information without restriction on disclosure.
8.2 INJUNCTIVE RELIEF. It is further agreed that any money damages
would not be sufficient to remedy any breach of this Agreement and that the
Company shall be entitled to injunctive relief, specific performance or any
other appropriate equitable remedy for any such breach, in addition to all
other remedies available by law or in equity. In addition, the Company shall
be entitled to payment of legal fees and disbursements, court costs and other
expenses of protecting its rights hereunder.
8.3 CONFIDENTIAL INFORMATION.
(a) "Confidential Information", as used in this Article 6, means
information or material which is not generally available to
or used by others, or the utility or value of which is not
generally known or recognized as standard practice, whether
or not the underlying details are in the public domain,
including:
(i) information or material relating to the Company, and its
businesses as conducted or anticipated to be conducted, business
plans, operations, past, current or anticipated software, products
or services, customers or prospective customers, or research,
engineering, development, manufacturing, purchasing, accounting,
or marketing activities;
(ii) information relating to employee compensation,
including without limitation, salaries, bonuses or stock options.
(iii) trade secrets; and
(iv) any similar information of the type described above
which the Company obtained from another party and which the
Company treats as or designates as being proprietary, private or
confidential, whether or not owned or developed by the Company.
Notwithstanding the foregoing, "Confidential Information"
does not include any information which is properly published or
in the public domain; provided, however, that information which
is published by or with the aid of the
4
<PAGE>
Optionee outside the scope of employment or contrary to the
requirements of this Agreement will not be considered to have
been properly published, and therefore will not be in the public
domain for purposes of this Agreement.
(b) The Optionee will never, either during or after his
employment by the Company, use Confidential Information for any
purpose other than the business of the Company or publish or
disclose it to any person who is not also an employee of the
Company. When the Optionee's employment with the Company ends,
the Optionee will promptly deliver to the Company all records and
any compositions, articles, devices, apparatus and other items
that disclose, describe or embody Confidential Information,
including all copies, reproductions and specimens of the
Confidential Information in the Optionee's possession, regardless
of who prepared them, and will promptly deliver any other property
of the Company in the Optionee's possession, whether or not
Confidential Information.
9. NON-COMPETITION.
During the period of the Optionee's employment with the Company and for a
further period of One (1) year after termination of employment with the Company
for any reason, Optionee will not, directly or indirectly, within the United
States, either for his own benefit or for the benefit of any other person, firm
or corporation whatsoever, other than the Company, (i) directly engage in any
commercial activity that competes with the Company's business relating to the
sales of Macintosh storage devices or the direct sales of computer graphics
devices, (ii) in any way interfere or attempt to interfere with the Company's
relationships with any of its current or potential customers, or (iii) employ
or attempt to employ any of the Company's then employees on behalf of any other
entity competing with the Company. Optionee acknowledges that if he breaches
this covenant, the Company will be irreparably and immeasurably injured.
Therefore, Optionee agrees that in addition to any other remedies available to
the Company, the Company may apply to a court of competent jurisdiction for a
temporary and/or permanent injunction and that such court may grant such
injunction to restrain and prohibit such breach by Employee. Notwithstanding
the foregoing, it is understood that the restrictions contained in this Article
7 shall cease to be applicable to any activity of the Optionee from and after
such time as the Company (a) shall have ceased all business activities for a
period of sixty (60) days or (b) shall have made a decision through the Board
of Directors not to continue, or shall have ceased for a period of sixty (60)
days, the business activities with which such activity of Optionee would be
competitive.
10. REMEDY FOR BREACH OF AGREEMENT.
In addition to all other remedies available to the Company for breach of
the terms of this Agreement, upon the breach by the Optionee of any provision
of Section 8 or 9 hereof, the Company shall have the right to (i) cancel and
terminate this Option and all rights granted hereby or under the Plan, without
notice, effective as of the date of the breach, and this Option will no longer
be exercisable and (ii) within thirty (30) days receive payment from the
Optionee of that amount of money equal to the aggregate gross sale price of any
Option Shares sold by the Optionee less the exercise price paid for such Option
Shares.
11. LIMITATION OF LIABILITY.
Nothing in this Agreement will be construed to (a) limit in any way the
right of the Company to terminate the employment or service of the Optionee at
any time, or (b) be evidence of any agreement or understanding, express or
implied, that the Company will retain the Optionee in any particular position,
at any particular rate of compensation or for any particular period of time.
12. SUBJECT TO PLAN.
The Option and the Option Shares granted and issued pursuant to this
Agreement have been granted and issued under, and are subject to the terms of,
the Plan. The terms of the Plan are incorporated by reference in this
Agreement in their entirety, and the Optionee, by execution of this Agreement,
acknowledges having received a copy of the Plan. The provisions of this
Agreement will be interpreted as to be consistent with the Plan, and any
ambiguities in this Agreement will be
5
<PAGE>
interpreted by reference to the Plan. In the event that any provision of this
Agreement is inconsistent with the terms of the Plan, the terms of the Plan
will prevail.
13. MISCELLANEOUS.
13.1 BINDING EFFECT. This Agreement will be binding upon the heirs,
executors, administrators and successors of the parties to this Agreement.
13.2 GOVERNING LAW. This Agreement and all rights and obligations under
this Agreement will be construed in accordance with the Plan and governed by
the laws of the State of Minnesota, without regard to conflicts of laws
provisions. Any legal proceeding related to this Agreement will be brought in
an appropriate Minnesota court, and the parties to this Agreement consent to
the exclusive jurisdiction of the court for this purpose.
13.3 ENTIRE AGREEMENT. This Agreement and the Plan set forth the entire
agreement and understanding of the parties to this Agreement with respect to
the grant and exercise of this Option and the administration of the Plan and
supersede all prior agreements, arrangements, plans and understandings relating
to the grant and exercise of this Option and the administration of the Plan.
13.4 AMENDMENT AND WAIVER. Other than as provided in the Plan, this
Agreement may be amended, waived, modified or canceled only by a written
instrument executed by the parties to this Agreement or, in the case of a
waiver, by the party waiving compliance.
The parties to this Agreement have executed this Agreement effective the
day and year first above written.
TECH SQUARED INC.
By___________________________________
Its________________________________
By execution of this Agreement, OPTIONEE
the Optionee acknowledges having
received a copy of the Plan. _____________________________________
(Signature)
_____________________________________
_____________________________________
_____________________________________
_____________________________________
(Name and Address)
6
<PAGE>
INCENTIVE STOCK OPTION AGREEMENT- #46
THIS AGREEMENT is entered into and effective as of this 19 day of September,
1996 (the "Date of Grant"), by and between Tech Squared Inc. (the "Company")
and Chuck Reese (the "Optionee").
A. The Company has adopted the Tech Squared Inc. 1995 Stock Option Plan
(the "Plan") authorizing the Board of Directors of the Company, or a
committee as provided for in the Plan (the Board or such a committee to be
referred to as the "Committee"), to grant incentive stock options to
employees of the Company and its Subsidiaries (as defined in the Plan).
B. The Company desires to give the Optionee an inducement to acquire a
proprietary interest in the Company and an added incentive to advance the
interests of the Company by granting to the Optionee an option to purchase
shares of common stock of the Company pursuant to the Plan.
Accordingly, the parties agree as follows:
1. GRANT OF OPTION.
The Company hereby grants to the Optionee the right, privilege, and
option (the "Option") to purchase six hundred fourty nine thousand (649,000)
shares (the "Option Shares") of the Company's common stock, no par value (the
"Common Stock"), according to the terms and subject to the conditions
hereinafter set forth and as set forth in the Plan. The Option is intended
to be an "incentive stock option," as that term is used in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
2. OPTION EXERCISE PRICE.
The per share price to be paid by Optionee in the event of an exercise of
the Option will be $0.75.
3. DURATION OF OPTION AND TIME OF EXERCISE.
3.1 INITIAL PERIOD OF EXERCISABILITY. The Option will become
exercisable with respect to the Option Shares in four installments. The
following table sets forth the initial dates of exercisability of each
installment and the number of Option Shares as to which this Option will
become exercisable on such dates:
Initial Date of Number of Option Shares
Exercisability Available for Exercise
--------------- -----------------------
August 21, 1996 125,000
August 21, 1997 133,000
August 21, 1998 133,000
August 21, 1999 133,000
August 21, 2000 125,000
The foregoing rights to exercise this Option will be cumulative with respect
to the Option Shares becoming exercisable on each such date, but in no event
will this Option be exercisable after, and this Option will become void and
expire as to all unexercised Option Shares at, 5:00 p.m. (Minneapolis,
Minnesota time) on August 21, 2003 (the "Time of Termination").
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<PAGE>
3.2 TERMINATION OF EMPLOYMENT.
(a) TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In the event
that the Optionee's employment with the Company and all Subsidiaries is
terminated by reason of the Optionee's death, Disability (as defined in the
Plan) or Retirement (as defined in the Plan), this Option will become
immediately exercisable in full and will remain exercisable for a period of
one year after such termination (but in no event after the Time of
Termination).
(b) TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT.
In the event the Optionee's employment with the Company and all Subsidiaries
is terminated for any reason other than death, Disability or Retirement, or
the Optionee is in the employ of a Subsidiary and the Subsidiary ceases to be
a Subsidiary of the Company (unless the Optionee continues in the employ of
the Company or another Subsidiary), all rights of the Optionee under the Plan
and this Agreement will immediately terminate without notice of any kind, and
this Option will no longer be exercisable; provided, however, that if such
termination is due to any reason other than termination by the Company or any
Subsidiary for "cause," all outstanding Options then held by such Participant
will remain exercisable to the extent exercisable as of such termination for
a period of three months after such termination (but in no event after the
expiration date of any such Option).
3.3 CHANGE IN CONTROL.
(a) IMPACT OF CHANGE IN CONTROL. If any events constituting a Change
in Control (as defined in the Plan) of the Company occur, this Option will
become immediately exercisable in full and will remain exercisable until the
Time of Termination, regardless of whether the Optionee remains in the employ
of the Company or any Subsidiary. In addition, if a Change in Control of the
Company occurs, the Committee, in its sole discretion and without the consent
of the Optionee, may determine that the Optionee will receive, with respect
to some or all of the Option Shares, as of the effective date of any such
Change in Control of the Company, cash in an amount equal to the excess of
the Fair Market Value (as defined in the Plan) of such Option Shares
immediately prior to the effective date of such Change in Control of the
Company over the option exercise price per share of this Option.
(b) LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything
in this Section 3.3 to the contrary, if, with respect to the Optionee,
acceleration of the vesting of this Option or the payment of cash in exchange
for all or part of the Option Shares as provided above (which acceleration or
payment could be deemed a "payment" within the meaning of Section 280G(b)(2)
of the Code), together with any other payments which the Optionee has the
right to receive from the Company or any corporation which is a member of an
"affiliated group" (as defined in Section 1504(a) of the Code without regard
to Section 1504(b) of the Code) of which the Company is a member, would
constitute a "parachute payment" (as defined in Section 280G(b)(2) of the
Code), the payments to the Optionee as set forth herein will be reduced to
the largest amount as will result in no portion of such payments being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that if the Optionee is subject to a separate agreement with the
Company or a Subsidiary that expressly addresses the potential application of
Sections 280G or 4999 of the Code (including, without limitation, that
"payments" under such agreement or otherwise will not be reduced or that the
Optionee will have the discretion to determine which "payments" will be
reduced), then the limitations of this Section 3.3(c) will not apply, and any
"payments" to the Optionee pursuant to this Section 3.3(c) or pursuant to
Section 9(c) or 9(d) of the Plan will be treated as "payments" arising under
such separate agreement.
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<PAGE>
3.4 ACCELERATION OF VESTING.
(a) PROFITABLE DOUBLING. The vesting of these options shall accelerate
upon the occurrence of a "profitable doubling" in net sales of Tech Squared,
Inc. "Profitable Doubling" of net sales is defined as an increase by 100% in
either the 3rd or 4th quarter of 1997 net sales for Tech Squared, Inc., as
compared to the same quarter of 1996, along with a net income. Should a
Profitable Doubling occur then the 125,000 shares scheduled to vest on August
21, 2000 will vest at the end of the quarter in which the Profitable Doubling
occurs. Additionally, if this acceleration of vesting occurs, any options
which violate the requirements of IRS Section 422 shall become non-qualified.
(b) 1998 DOUBLING. As long as a Profitable Doubling as defined in
section 3.4(a) has not occurred, then the vesting of these options shall
accelerate upon the occurrence of a "1998 doubling" in net sales of Tech
Squared, Inc. "1998 doubling" of net sales is defined as an increase by 100%
in any quarter of 1998 net sales for Tech Squared, Inc., as compared to the
same quarter of 1997 along with a net income. Should a 1998 Doubling occur
then 125,000 of the shares scheduled to vest on August 21, 2000 will vest at
the end of the quarter in which the 1998 Doubling occurs. Additionally, if
this acceleration of vesting occurs, any options which violate the
requirements of IRS Section 422 shall become non-qualified.
4. MANNER OF OPTION EXERCISE.
4.1 NOTICE. This Option may be exercised by the Optionee in whole or in
part from time to time, subject to the conditions contained in the Plan and
in this Agreement, by delivery, in person, by facsimile or electronic
transmission or through the mail, to the Company at its principal executive
office in Minneapolis, Minnesota (Attention: Chief Financial Officer), of a
written notice of exercise. Such notice will be in a form satisfactory to
the Committee, will identify the Option, will specify the number of Option
Shares with respect to which the Option is being exercised, and will be
signed by the person or persons so exercising the Option. Such notice will
be accompanied by payment in full of the total purchase price of the Option
Shares purchased. In the event that the Option is being exercised, as
provided by the Plan and Section 3.2 above, by any person or persons other
than the Optionee, the notice will be accompanied by appropriate proof of
right of such person or persons to exercise the Option. As soon as
practicable after the effective exercise of the Option, the Optionee will be
recorded on the stock transfer books of the Company as the owner of the
Option Shares purchased, and the Company will deliver to the Optionee one or
more duly issued stock certificates evidencing such ownership.
4.2 PAYMENT. At the time of exercise of this Option, the Optionee will
pay the total purchase price of the Option Shares to be purchased entirely in
cash (including a check, bank draft or money order, payable to the order of
the Company); provided, however, that the Committee, in its sole discretion,
may allow such payment to be made, in whole or in part, by tender of a
promissory note (on terms acceptable to the Committee in its sole discretion)
or a Broker Exercise Notice or Previously Acquired Shares (as such terms are
defined in the Plan), or by a combination of such methods. In the event the
Optionee is permitted to pay the total purchase price of this Option in whole
or in part with Previously Acquired Shares, the value of such shares will be
equal to their Fair Market Value (as defined in the Plan) on the date of
exercise of this Option.
5. RIGHTS OF OPTIONEE; TRANSFERABILITY.
5.1 EMPLOYMENT. Nothing in this Agreement will interfere with or limit
in any way the right of the Company or any Subsidiary to terminate the
employment of the Optionee at any time, nor confer upon the Optionee any
right to continue in the employ of the Company or any Subsidiary at any
particular position or rate of pay or for any particular period of time.
5.2 RIGHTS AS A SHAREHOLDER. The Optionee will have no rights as a
shareholder unless and until all conditions to the effective exercise of this
Option (including, without
3
<PAGE>
limitation, the conditions set forth in Section 4 of this Agreement and
Section 11 of the Plan) have been satisfied and the Optionee has become the
holder of record of such shares. No adjustment will be made for dividends or
distributions with respect to this Option as to which there is a record date
preceding the date the Optionee becomes the holder of record of such shares,
except as may otherwise be provided in the Plan or determined by the
Committee in its sole discretion.
5.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or
the laws of descent and distribution or as otherwise expressly permitted by
the Plan, no right or interest of the Optionee in this Option prior to
exercise may be assigned or transferred, or subjected to any lien, during the
lifetime of the Optionee, either voluntarily or involuntarily, directly or
indirectly, by operation of law or otherwise. The Optionee will, however, be
entitled to designate a beneficiary to receive this Option upon such
Optionee's death, and, in the event of the Optionee's death, exercise of this
Option (to the extent permitted pursuant to Section 3.2(a) of this Agreement)
may be made by the Optionee's legal representatives, heirs and legatees.
6. WITHHOLDING TAXES.
The Company is entitled to (a) withhold and deduct from future wages of
the Optionee (or from other amounts that may be due and owing to the Optionee
from the Company), or make other arrangements for the collection of, all
legally required amounts necessary to satisfy any federal, state or local
withholding and employment-related tax requirements attributable to the grant
or exercise of, or a disqualifying disposition with respect to, this Option
or otherwise incurred with respect to this Option, or (b) require the
Optionee promptly to remit the amount of such withholding to the Company
before acting on the Optionee's notice of exercise of this Option. In the
event that the Company is unable to withhold such amounts, for whatever
reason, the Optionee agrees to pay to the Company an amount equal to the
amount the Company would otherwise be required to withhold under federal,
state or local law.
7. ADJUSTMENTS.
In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, divestiture or extraordinary dividend
(including a spin-off), or any other change in the corporate structure or
shares of the Company, the Committee (or, if the Company is not the surviving
corporation in any such transaction, the board of directors of the surviving
corporation), in order to prevent dilution or enlargement of the rights of
the Optionee, will make appropriate adjustment (which determination will be
conclusive) as to the number, kind and exercise price of securities subject
to this Option.
8. CONFIDENTIAL INFORMATION.
8.1 USE AND NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. The Optionee
hereby agrees that the Confidential Information will not be used by the
Optionee in any way detrimental to the Company and that all such Confidential
Information shall be kept confidential by the Optionee. Notwithstanding the
foregoing, no obligation of confidentiality shall apply to Confidential
Information which the Optionee can show: (a) is now or hereafter becomes
publicly known in published form or available through no act or failure on
the part of the Optionee; (b) is known by the Optionee on a non-confidential
basis at the time of the receipt of such Confidential Information as
established by documentary evidence in its files; (c) is hereafter furnished
to the Optionee by a third party who has rightfully obtained such
Confidential Information without restriction on disclosure.
4
<PAGE>
8.2 INJUNCTIVE RELIEF. It is further agreed that any money damages
would not be sufficient to remedy any breach of this Agreement and that the
Company shall be entitled to injunctive relief, specific performance or any
other appropriate equitable remedy for any such breach, in addition to all
other remedies available by law or in equity. In addition, the Company shall
be entitled to payment of legal fees and disbursements, court costs and other
expenses of protecting its rights hereunder.
8.3 CONFIDENTIAL INFORMATION.
(a) "Confidential Information", as used in this Article 6, means
information or material which is not generally available to or used
by others, or the utility or value of which is not generally known
or recognized as standard practice, whether or not the underlying
details are in the public domain, including:
(i) information or material relating to the Company, and
its businesses as conducted or anticipated to be conducted,
business plans, operations, past, current or anticipated
software, products or services, customers or prospective
customers, or research, engineering, development, manufacturing,
purchasing, accounting, or marketing activities;
(ii) information relating to employee compensation,
including without limitation, salaries, bonuses or stock options.
(iii) trade secrets; and
(iv) any similar information of the type described above
which the Company obtained from another party and which the
Company treats as or designates as being proprietary, private or
confidential, whether or not owned or developed by the Company.
Notwithstanding the foregoing, "Confidential Information"
does not include any information which is properly published or
in the public domain; provided, however, that information which
is published by or with the aid of the Optionee outside the scope
of employment or contrary to the requirements of this Agreement
will not be considered to have been properly published, and
therefore will not be in the public domain for purposes of this
Agreement.
(b) The Optionee will never, either during or after his
employment by the Company, use Confidential Information for any
purpose other than the business of the Company or publish or
disclose it to any person who is not also an employee of the
Company. When the Optionee's employment with the Company ends,
the Optionee will promptly deliver to the Company all records
and any compositions, articles, devices, apparatus and other
items that disclose, describe or embody Confidential Information,
including all copies, reproductions and specimens of the
Confidential Information in the Optionee's possession, regardless
of who prepared them, and will promptly deliver any other
property of the Company in the Optionee's possession, whether or
not Confidential Information.
9. NON-COMPETITION.
During the period of the Optionee's employment with the Company and for
a further period of One (1) year(s) after termination of employment with the
Company for any reason, Optionee will not, directly or indirectly, within the
United States, either for his own benefit or for the benefit of any other
person, firm or corporation whatsoever, other than the Company, (i) directly
engage in any commercial activity that competes with the Company's business
relating to
5
<PAGE>
the sales of Macintosh storage devices or the direct sales of computer
graphics devices, (ii) in any way interfere or attempt to interfere with the
Company's relationships with any of its current or potential customers, or
(iii) employ or attempt to employ any of the Company's then employees on
behalf of any other entity competing with the Company. Optionee acknowledges
that if he breaches this covenant, the Company will be irreparably and
immeasurably injured. Therefore, Optionee agrees that in addition to any
other remedies available to the Company, the Company may apply to a court of
competent jurisdiction for a temporary and/or permanent injunction and that
such court may grant such injunction to restrain and prohibit such breach by
Employee. Notwithstanding the foregoing, it is understood that the
restrictions contained in this Article 7 shall cease to be applicable to any
activity of the Optionee from and after such time as the Company (a) shall
have ceased all business activities for a period of sixty (60) days or (b)
shall have made a decision through the Board of Directors not to continue, or
shall have ceased for a period of sixty (60) days, the business activities
with which such activity of Optionee would be competitive.
10. REMEDY FOR BREACH OF AGREEMENT.
In addition to all other remedies available to the Company for breach of
the terms of this Agreement, upon the breach by the Optionee of any provision
of Section 8 or 9 hereof, the Company shall have the right to (i) cancel and
terminate this Option and all rights granted hereby or under the Plan,
without notice, effective as of the date of the breach, and this Option will
no longer be exercisable and (ii) within thirty (30) days receive payment
from the Optionee of that amount of money equal to the aggregate gross sale
price of any Option Shares sold by the Optionee less the exercise price paid
for such Option Shares.
11. LIMITATION OF LIABILITY.
Nothing in this Agreement will be construed to (a) limit in any way the
right of the Company to terminate the employment or service of the Optionee
at any time, or (b) be evidence of any agreement or understanding, express or
implied, that the Company will retain the Optionee in any particular
position, at any particular rate of compensation or for any particular period
of time.
12. SUBJECT TO PLAN.
The Option and the Option Shares granted and issued pursuant to this
Agreement have been granted and issued under, and are subject to the terms
of, the Plan. The terms of the Plan are incorporated by reference in this
Agreement in their entirety, and the Optionee, by execution of this
Agreement, acknowledges having received a copy of the Plan. The provisions
of this Agreement will be interpreted as to be consistent with the Plan, and
any ambiguities in this Agreement will be interpreted by reference to the
Plan. In the event that any provision of this Agreement is inconsistent with
the terms of the Plan, the terms of the Plan will prevail.
6
<PAGE>
13. MISCELLANEOUS.
13.1 BINDING EFFECT. This Agreement will be binding upon the heirs,
executors, administrators and successors of the parties to this Agreement.
13.2 GOVERNING LAW. This Agreement and all rights and obligations
under this Agreement will be construed in accordance with the Plan and
governed by the laws of the State of Minnesota, without regard to conflicts
of laws provisions. Any legal proceeding related to this Agreement will be
brought in an appropriate Minnesota court, and the parties to this Agreement
consent to the exclusive jurisdiction of the court for this purpose.
13.3 ENTIRE AGREEMENT. This Agreement and the Plan set forth the
entire agreement and understanding of the parties to this Agreement with
respect to the grant and exercise of this Option and the administration of
the Plan and supersede all prior agreements, arrangements, plans and
understandings relating to the grant and exercise of this Option and the
administration of the Plan.
13.4 AMENDMENT AND WAIVER. Other than as provided in the Plan, this
Agreement may be amended, waived, modified or canceled only by a written
instrument executed by the parties to this Agreement or, in the case of a
waiver, by the party waiving compliance.
The parties to this Agreement have executed this Agreement effective the
day and year first above written.
TECH SQUARED INC.
By:___________________________
Joel Ronning
Its: CEO
By execution of this Agreement, OPTIONEE
the Optionee acknowledges having
received a copy of the Plan. ______________________________
(Signature)
______________________________
______________________________
______________________________
(Name and Address)
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<PAGE>
EXHIBIT C
DIGITAL RIVER INC
CONVERTIBLE LOAN NOTE
<PAGE>
DIGITAL RIVER, INC.
18% CONVERTIBLE DEBENTURE
DUE DECEMBER 1997
$_________________ December 1996
Minneapolis, Minnesota, USA
Digital River, Inc., a Minnesota corporation ("the Company"), for value
received, hereby promises to pay to the order of or
any permitted assignee thereof ("the Holder") the principal sum of
Dollars ($ ) on December 1997, or such later date as shall be the
anniversary of the date hereof with interest on the unpaid balance of such
principal amount accrued from the day following the date hereof at an annual
rate of eighteen per cent (18%) calculated on the basis of a 365-day year,
such interest payable on the due date of this debenture unless this debenture
is converted as provided for below.
This Debenture is subject to the following terms and conditions:
1. SERIES
This Debenture is one of a series of convertible debentures issued or
to be issued by the Company in connection with a private placement of
up to $1,000,000.00 principal amount of convertible debentures. The
debentures in such series shall collectively be referred to herein as
the "Debentures".
2. CONVERSION
This Debenture is convertible at the option of the Holder during the
period from the date a private placement of shares completes as set
forth below through the date of repayment into shares of Common Stock
of the Company at a per share conversion price equal to the lesser of
seventy-five per cent (75%) of the per share offering price at which
the Company next offers its Common Stock pursuant to a planned private
placement or six dollars ($6.00) per share. Said private offering to
be completed within twelve (12) months from the date hereof. In the
event the Company does not complete a private offering of its stock
with twelve (12) months, the exercise price shall be six dollars
($6.00) per share. The number of shares into which this Debenture is
convertible and the conversion price shall be appropriately adjusted to
reflect stock dividends, stock splits, and other events as hereinafter
provided. The conversion price in effect from time to time is herein
called the "Conversion Price".
This Debenture shall be automatically converted in its entirety upon
the successful closing of the anticipated private stock offering. Said
conversion shall be at the
<PAGE>
2
Conversion Price. The Company undertakes to use its reasonable
endeavors to effect such a private stock offering within twelve (12)
months of the hereof.
The Company shall not be required to issue any fraction of a share of
Common Stock or scrip representing a fraction of a share of Common
Stock on any conversion pursuant to the terms of this Debenture. Upon
the surrender to the Company of this Debenture for conversion, the
Holder shall be entitled to receive the number of full shares of Common
Stock equal to the quotient (exclusive of fractions) obtained by
dividing the principal amount of this Debenture so surrendered by the
Conversion Price, and an amount in cash, as an adjustment in lieu of
any fraction of a share resulting from such division, equal to such
fraction multiplied by the Conversion Price of one share.
To convert this Debenture to shares of Common Stock, this Debenture
shall be surrendered to the Company at its principal office or at such
other agency as the Company may authorise for such purpose, endorsed or
accompanied by a written instrument of surrender in a form satisfactory
to the Company, duly executed by the Holder or his or her attorney or
other signatory duly authorised in writing.
The Company shall issue and deliver, in exchange for that portion of
this Debenture so surrendered for conversion, as soon as practicable
after such surrender, certificates representing the number of shares of
Common Stock into which such Debenture shall be convertible, issued in
the name of the Holder or in such name or names as the Holder may
direct. The conversion right in respect of this Debenture shall be
deemed to be exercised upon the receipt by the Company of the Debenture
so surrendered, duly endorsed or accompanied by a written instrument as
above provided. However, in the event of an automatic conversion,
failure to deliver the Debenture shall not create any obligation to the
Company other that to deliver the shares of Common Stock into which the
Debenture is converted. The Holder of this debenture shall be deemed
to have become a shareholder of record as of the date upon which this
Debenture shall have been been so received, provided the requirements
hereof are complied with. Thereupon, this Debenture shall be deemed to
be satisfied and discharged and no longer outstanding for any purpose.
The receipt of this Debenture so surrendered shall constitute full
payment for the shares issued in conversion thereof.
The number of shares of Common Stock into which this Debenture is
convertible and the Conversion Price shall be subject to adjustment
from time to time as follows:
(a) In the event the Company declares a dividend upon its Common
Stock payable otherwise than in cash out of earnings or surplus,
including a dividend payable in Common Stock or securities
convertible into Common Stock, or in any rights or options to
purchase Common Stock or securities convertible into Common
Stock, the Holder shall, upon conversion of this Debenture, be
entitled to receive Common Stock at the Conversion Price then in
effect, and, in addition and without payment therefor, the cash,
stock, or other securities and other property which such Holder
would have received by way of dividends or distributions
(otherwise than out of earnings or surplus) as if continuously
since the record date
<PAGE>
3
for any such dividend or distribution the Holder (i) had been
the record Holder of the number of shares of Common Stock then
received, and (ii) had retained all prior dividends or
distributiosn in stock or securities paid as dividends or
distributions and originating directly or indirectly from such
Common Stock.
(b) In case the Company shall during the time this Debenture is
outstanding subdivide its outstanding Common Stock into a
greater number of shares, or shall combine outstanding shares of
Common Stock into a smaller number of shares, the Conversion
Price shall be proportionately adjusted to reflect the the
respective reduction or increases in value of each such share of
Common Stock.
(c) If any capital reorganisation or reclassification of the capital
stock of the Company, or consolidation or merger of the Company
with another corporation, or the sale of all or substantially all
of its assets to another corporation shall be effected in such
a way that holders of the Company's Common Stock shall be
entitled to receive stock, other securities or assets with
respect to or in exchange for such Common Stock, then, as a
condition of such reorganisation, reclassification,
consolidation, merger, or sale, the Holder shall have the right
to acquire upon the basis and upon the terms and conditions
specified in this Debenture and in lieu of the shares of Common
Stock that could be acquired immediately theretofore, such
shares of stock, other securities, or assets as would have been
issued or delivered to the Holder if the Holder had converted
this Debenture prior to such reorganisation, reclassification,
consolidation, merger, or sale. The Company shall not effect
any such consolidation, merger, or sale unless prior to the
consummation thereof, the successor corporation (if other than
the Company) resulting from such consolidation or merger of the
corporation purchasing such assets shall assume, by written
instrument executed and mailed to the Holder at the last address
of the Holder appearing on the books of the Company, the obligation
to deliver to the Holder such shares of stock, other securities,
or assets as, in accordance with the foregoing provisions, the
Holder may be entitled to acquire.
(d) If the Company takes any other action, or if any other event
occurs which does not come within the scope of the provisions of
subparagraphs 1(a) through 1(c) hereof, but which should result
in an adjustment in the Conversion Price in order to fairly
protect the acquisition rights of the Holder, an appropriate
adjustment to the Conversion Price shall be made by the Company.
No adjustment in the Conversion Price shall be made on account
of an increase in the number of outstanding shares of Common
Stock resulting from (i) the issuance of shares pursuant to
employee stock option plans; (ii) the exercise of any of the
Company's outstanding Warrants; (iii) the conversion of any
outstanding Convertible Preferred Stock or Convertible
Debentures; or (iv) the sale or exchange by the Company for fair
value (as determined in good faith by the Company's Board of
Directors) of options, warrants, additional convertible
Debentures, or rights to acquire securities of the Company.
<PAGE>
4
(e) Upon an adjustment of the Conversion Price, the Company shall
give, within a reasonable time, written notice thereof, by first
class mail, postage prepaid, addressed to the Holder, which
notice shall state the Conversion Price resulting from such
adjustment and the increase or decrease, if any, in the number
of shares that may be acquired at such price upon the exercise
of this Debenture, setting forth in reasonable detail the method
of calculation and the facts upon which such calculation is
based. No failure to mail such notice or any defect therein or
in the mailing thereof shall affect the validity thereof except
as to the Holder to whom the Company failed to mail such notice,
or except as to the Holder whose notice was defective. The
affidavit of an officer of the Company that such notice has been
mailed shall, in the absence of fraud, be prima facie evidence
of the facts stated therein.
(f) As used in this Section 1, the term the Company's "Common Stock"
shall mean and include the Company's presently authorised shares
of Common Stock and shall also include any capital stock of any
class of the Company hereafter authorised which shall not be
limited to a fixed sum or percentage or par value in respect of
the rights of the holders thereof to participate in dividends or
in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Company.
3. SECURITY
The obligations of the Company represented by this Debenture shall be
unsecured.
4. PREPAYMENT
(a) This Debenture may not be redeemed or prepaid, except (i) by
mutual agreement between the Company and the Holder, (ii) in
accordance with Section 6, or (iii) in accordance with paragraph
(b) below.
(b) The Company shall, unless it has already been converted or
repaid, redeem this Debenture on the first anniversary of the
date hereof by payment to the Holder of the principal amount set
out above (the "Principal"), all interest payable thereon and,
if the Company has failed to comply with the provisions of
Section 1, a premium of 15 per cent (15%) of the Principal.
5. CORPORATE OBLIGATIONS
With the exception of a written communication to Holder, proven to
constitute a knowing misrepresentation of a material fact, no recourse
under or upon any obligation, covenant or agreement contained in this
Debenture or for any claim based hereon or otherwise in respect
thereof, shall be had against any promoter, subscriber to shares,
incorporator, shareholder, officer or director, as such, past, present,
or future, of the Company or any successor corporation either directly
or through the Company or any successor corporation or through any
trustee, receiver, or any other person, whether by virtue of any
<PAGE>
5
constitution or statute, of, and in and all such rights and claims
against, every such promoter, subscriber, incorporator, shareholder,
officer or director, as such, are hereby expressly waiver and released
by the acceptance of this Debenture and as a part of the consideration
for the issuance hereof.
6. DEFAULT
The term "Event of Default" as used herein shall mean any one or more
of the following events:-
(a) Failure of the Company to pay any accrued interest within
forty-five (45) days of the date on which such interest payment
is due and payable;
(b) Failure of the Company to pay the principal amount of this
Debenture within forty-five (45) days of the date on which such
principal payment is due and payable;
(c) Failure of the Company to observe or perform any other of the
covenants or agreements of the Company in this Debenture for a
period of forty-five (45) days; and/or
(d) The Company makes an assignment for the benefit of creditors, or
admits in writing its inability to pay its debts as they become
due, or files a voluntary petition in bankruptcy, or a decree or
other order by a court of competent jurisdiction shall have been
entered adjudging the Company bankrupt or insolvent under the
provisions of the United States Bankruptcy Code or applicable
insolvency law or statute providing for the modification or
adjustment of the rights of creditors, and such degree or order
shall have continued undischarged or unstayed for a period of
sixty (60) days.
If an Event of Default shall have occurred, the principal amount hereof
may be declared by the Holder, and upon such declaration, shall become
due and payable, without presentment of other notice or demand,
together with all accrued but unpaid interest through the date of the
Company's full payment hereof. Upon an Event of Default, the Company
agrees to pay all costs of collection, including reasonable attorneys'
fees.
7. RESERVATION OF COMMON STOCK
The Company covenants that it will at all times reserve and keep
available out of its authorised but unissued Common Stock, solely for
the purpose of delivery upon conversion of this Debenture as herein
provided, such number of shares of Common Stock as shall then be
deliverable upon the conversion of this Debenture.
<PAGE>
6
8. CONSENT OF HOLDERS REQUIRED
Prior to the repayment on conversion of the Debentures, the Company
will not, without the prior written consent of Debenture holders
representing sixty-five percent (65%) of the Debentures in issue:
(a) repay the Debentures in advance of the due date of payment
otherwise than in accordance with the provisions of Section 6 or
paragraph 4(b); or
(b) create or suffer any material change in its business as the same
is carried out at the date hereof or as contemplated by this
document.
In the event of the failure by the Company to obtain the consents
referred to above, or in the event of Mr Ronning ceasing, for whatever
reason, to be an executive officer of the Company, the Debentures
shall be repaid forthwith with accrued interest and a fifteen percent
(15%) penalty.
9. COMPANY'S WARRANTY
The Company hereby warrants the correctness of all statements of fact
made in the Private Placement Memorandum and exhibits thereto issued by
the Company dated 4 December 1996 under which this Debenture was issued.
10. REPLACEMENT
Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of this Debenture, and at the option
of the Company, in the case of any such loss, theft or destruction,
upon delivery of a bond or indemnity satisfactory to the Company, or in
the case of any such mutilation, upon surrender and cancellation of
such Debenture, the Company shall issue a new Debenture of like tenor as
if the lost, stolen, destroyed or mutilated Debenture was then
surrendered for exchange in lieu of such lost, stolen, destroyed, or
mutilated Debenture.
11. CONSTRUCTION OF AGREEMENT
This Debenture shall be construed in accordance with the laws of the
State of Minnesota. This Debenture may not be waived, changed,
discharged, or terminated orally, nor shall any delay or failure on the
part of the Holder of this Debenture in exercising any right hereunder
affect such right or be deemed a waiver of any default on the part of
the Company. Wherever possible, each provision of this Debenture shall
be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Debenture is prohibited or
invalid under applicable law, such provision shall be ineffective only
to the extent of such prohibition or invalidity without invalidating
the remainder of such provisions or the remaining provisions of this
Debenture.
<PAGE>
7
12. NO VOTING RIGHTS
This Debenture shall not entitle the Holder to any voting right or
other rights as a shareholder of the Company.
13. NOTICES
All notices, requests, consents and other communications required or
permitted hereunder shall be in writing and shall be delivered, or
mailed first class, postage prepaid (i) if to the Holder of this
Debenture at the address set forth in Holders Subscription Agreement or
at such other address as Holder may specify by written notice to the
Company, or (ii) if to the Company, at 5198 West 76th Street, Edina,
Minnesota, 55439, Attention: Joel Ronning, CEO, or at such other
address as the Company may specify by written notice to the Holder, and
such notices and other communications shall for all purposes of this
Debenture be treated as being effective or having ben given if
delivered personally, or if sent by mail, when received.
14. HEADINGS
The headings of articles, sections and paragraphs in this Debenture are
inserted for convenience only and shall not affect the remaining or
interpretation of all or an part of this Debenture.
15. FACSIMILE SIGNATURES
Until such time as this Debenture, duly executed by the Company
officers, has been delivered to Holder, a facsimile copy with the
signatures of Company officers thereon delivered to the Holder shall be
binding on the Company and constitute proof of funds advanced.
IN WITNESS WHEREOF the Company has caused this Debenture to be signed,
delivered and attested to by its duly authorised officers.
DIGITAL RIVER, INC.
By:
--------------------------
Its:
-------------------------
ATTEST:
- ----------------------------
(Secretary)
<PAGE>
$2,000,000 Minimum
$4,000,000 Maximum
DIGITAL RIVER, INC.
Convertible Non-Yield Bearing Preferred Stock
AGENCY AGREEMENT
September 30, 1996
John G. Kinnard and Company,
Incorporated
Kinnard Financial Center
920 Second Avenue South
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
The undersigned, Digital River, Inc., a Minnesota corporation (the
"Company"), confirms its agreement with you, John G. Kinnard and Company,
Incorporated (the "Agent"), subject to the terms and conditions stated
herein, to act as its exclusive agent with respect to the offer and sale of
up to $4,000,000 of Securities (defined below), as follows:
1. DESCRIPTION OF OFFERING. The Company proposes to issue and sell to
"accredited" investors (as defined in Regulation D of Securities Act of 1933
(the "Act")) through the Agent, on a "best efforts" basis, up to $4,000,000
of Securities. As used herein, "Securities" shall refer to the duly
authorized, non-assessable, shares of Convertible Non-Yield Bearing Preferred
Stock of the Company. The Securities will have a liquidation preference in
form and substance acceptable to the Agent and will automatically convert on
a one-to-one basis into Common Stock. Such conversion shall occur at the
time that the Company completes a registered public offering under the Act.
In connection with a proposed offering of not less that $2,000,000 and not
more than 4,000,000 in Securities pursuant to Regulation D under the Act (the
"Offering"), the Company has prepared a Confidential Private Placement
Memorandum, dated September 26, 1996 (the "Memorandum"). The Memorandum,
including the documents incorporated by reference therein, as delivered in
connection with the Offering, together with any amendments or supplements
thereto, are referred to collectively herein as the "Offering Materials."
Copies of the Offering Materials have been delivered to the Agent for use in
connection with this Offering.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to, and agrees with, the Agent
that:
(i) On the date hereof, and as of each Closing Date (as later
defined), none of the Offering Materials includes or will include any untrue
statement of a material fact or omits or will omit to state any material fact
required to be stated therein, in light of the circumstances under which they
were made, not misleading; provided, however, the Company makes no
representation or warranty as to information contained in or omitted in
reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of the Agent expressly for use in the preparation of
the Memorandum.
(ii) No order or communication suspending or preventing, or
threatening to suspend or prevent, the offer and sale of the Securities or
the use of any of the Offering Materials has been issued and no proceeding or
examination that may lead to such order or communication has been instituted
or threatened by the Securities and Exchange Commission (the "Commission") or
any other governmental authority.
(iii) The Company has been duly organized, is validity existing as a
corporation in good standing under the laws of its state of incorporation,
has the corporate power and authority to own or lease its properties and
conduct its business as described in the Offering Materials. The Company is
duly qualified to transact business in all jurisdictions in which the conduct
of its business or its ownership or leasing of its properties require such
qualification and the failure so qualify would have a material adverse effect
on the business or financial condition of the Company.
(iv) The outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable.
Prior to each Closing Date, a sufficient number of shares of Common Stock of
the Company to be issued upon the sale of the Securities will have been duly
authorized and reserved for issuance and, when issued upon the sale of the
Securities, will be validly issued, fully paid and nonassessable. The
Company's Articles of Incorporation, By-laws or any agreement or other
instrument to which the Company is a party or by which the Company is bound
do not contain any preemptive rights or other rights to subscribe for or to
purchase any shares of capital stock of the Company, except such rights as
the holders thereof shall have waived prior to each Closing Date. The
offering or the sale of the Securities as contemplated by the Offering
Materials does not give rise to any such rights, except those which will have
been validly waived or satisfied prior to each Closing Date. Except as
described in the Offering Materials and except for stock options, warrants or
convertible securities which as of the date hereof cover a total of 63,500
shares of Common Stock, there are no outstanding options, warrants,
agreements, contracts or other rights to purchase or acquire from the Company
any shares of its capital stock. The Company's authorized and outstanding
capital stock as of the first Closing Date will consist of 100,000,000 shares
of capital stock of which
2
<PAGE>
320,000 shares will be designated Convertible Non-Yield Bearing Preferred
Stock. The Securities and the capital stock of the Company conforms, and the
shares issued upon conversion of the Securities, will conform, to the
descriptions thereof contained in the Offering Materials.
(v) The historical financial statements, together with the related
notes thereto, incorporated in the Offering Materials, present fairly the
financial position, results of operations and changes in financial position
of the Company on the basis stated therein at the indicated dates and for the
indicated periods. Such historical financial statements have been prepared
in accordance with generally accepted accounting principles consistently
applied throughout the periods involved (except as otherwise stated therein),
and all adjustments necessary for a fair presentation of results for such
periods have been made (except as otherwise stated therein).
(vi) Except as referred to in the Offering Materials, there is no
action or proceeding pending or, to the knowledge of the Company, threatened
against the Company before any court or administrative or regulatory agency
which, if determined adversely to the Company would, individually or in the
aggregate, result in a material adverse change in the business or financial
condition, results of operations or stockholders' equity of the Company.
(vii) The Company has good and marketable title to all properties and
assets reflected as owned in the balance sheet dated August 31, 1996, in each
case free and clear of all liens, encumbrances and defects, except as such
are described in the Offering Materials or do not substantially affect the
value of such properties and assets and do not materially interfere with the
use made of such properties and assets by the Company and such as have been
sold in the ordinary course of the Company's business since August 31, 1996;
and any real property and buildings held under lease by the Company are held
by it under valid, subsisting and enforceable leases with such exceptions as
are not material and do not materially interfere with the use made of such
property and buildings by the Company.
(viii) Since the respective dates as of which information is given in
the Offering Materials except that the Company has continued to incur losses
and except as otherwise described in or contemplated by the Offering
Materials (A) there has not been any material adverse change in or affecting
the condition, financial or otherwise, of the Company or the business
affairs, management, financial position, stockholders' equity, or results of
operations of the Company, whether or not occurring in the ordinary course of
business, (B) there has not been any material transaction not in the ordinary
course of business entered into by the Company, (C) the Company has not
incurred any material liabilities or obligations which are not in the
ordinary course of business, (D) the Company has not sustained any material
loss or interference with their businesses or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance,
(E) there has not been any declaration or payment of any dividends or
distribution of any kind with
3
<PAGE>
respect to the capital stock of the Company, any change in the capital stock
of the Company other than pursuant to the exercise of outstanding options and
warrants, or any material increase in the short-term or long-term debt
(including capitalized lease obligations) of the Company, or (F) there has
not been any issuance of warrants, options, convertible securities or other
rights to purchase or acquire capital stock of the Company (other than the
issuance of shares of Common Stock or options pursuant to the Company's stock
option plans).
(ix) The Company is not in violation of, or in default under, its
Articles of Incorporation or By-laws, or any statute, or any rule,
regulation, order, judgment, decree or authorization of any governmental or
administrative agency, court or other body having jurisdiction over the
Company or any of its properties, or any indenture, mortgage, deed of trust,
loan agreement, lease, franchise, license or other agreement or instrument to
which the Company is a party or by which it is bound or to which any property
or assets of the Company are subject, which violation or default would have a
material adverse effect on the business, financial condition, results of
operations or stockholders' equity of the Company.
(x) The issuance and sale of the Securities by the Company and the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein by the Company in accordance with the
terms hereof will not violate any provision of the Articles of Incorporation
or By-laws of the Company or any statute, or any rule, regulation, order,
judgment, decree or authorization of any court or governmental or
administrative agency or body having jurisdiction over the Company or any of
its properties, and will not conflict with, result in a breach or violation
of, or constitute, either by itself or upon notice or passage of time or
both, a default under any indenture, mortgage, deed of trust, loan agreement,
lease, franchise, license or other agreement or instrument to which the
Company is a party or by which the Company is bound or to which any property
or assets of the Company are subject. Except for such approvals or consents
as have been obtained, no approval, consent, order, authorization,
designation, declaration or filing by or with any court or governmental
agency or body, including Fujitsu Limited, or other entity, is required for
the execution and delivery by the Company of this Agreement and the
consummation of the transactions herein contemplated in the manner herein
contemplated, except those (not including those involving Fujitsu Limited)
which would not have a material adverse effect on the Company if not obtained.
(xi) The Company holds and is operating in compliance with all
licenses, approvals, certificates and permits from governmental and
regulatory authorities, foreign and domestic, which are necessary to the
conduct of its business as now conducted as described in the Offering
Materials, except where the failure to hold such licenses, approvals,
certificates or permits or failure so to be in compliance would not have a
material adverse effect on the business, financial condition, results of
operations or stockholders' equity of the Company.
4
<PAGE>
(xii) The Company has the corporate power and authority to enter into
this Agreement and to authorize, issue and sell the Securities, as
contemplated in this Agreement. Prior to the Final Closing Date (as later
defined), this Agreement will have been duly and validly authorized, executed
and delivered by the Company, and will be the valid and binding obligations
of the Company, enforceable in accordance with its terms, except to the
extent the rights to indemnity and contribution provided for in this
Agreement may be limited by applicable federal securities laws, and except to
the extent enforceability of this Agreement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws of
general application affecting creditors' rights generally, and by general
principles of equity.
(xiii) Runbeck & Associates, P.A., which has audited certain of the
financial statements incorporated in the Offering Materials, are independent
public accountants within the meaning of Rule 2-01 of Regulation S-X
promulgated under the Act.
(xiv) The Company has not distributed and will not distribute any
private placement memoranda or other offering material in connection with the
offering and sale of the Securities, other than the Offering Materials.
Except as previously disclosed to the Agent, the Company has not sold or
offered for sale (directly or indirectly) the Securities other than through
the Agent and has not participated in any form of general solicitation or
general advertising for the Securities, including but not limited to any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television, radio or
other electronic media, or conducted or participated in any seminar or
meeting whose attendees have been invited by any general solicitation or
general advertising.
(xv) The Company owns, licenses or has contractual rights with
respect to all patents, patent applications, trademarks, service marks,
trade names, trademark registrations, service mark registrations, copyrights,
licenses, inventions, trade secrets, know how and other similar rights
necessary for the conduct of its business as currently conducted and as
described in the Offering Materials, except where the failure so to own or
license the foregoing would not have a material adverse effect on the
Company. The Company has no knowledge of any infringement or misappropriation
by any third parties, or conflict with, any of the Company's intellectual
property rights, nor has the Company received any notice of any infringement,
misappropriation or violation by the Company of any intellectual property
rights of any third parties. Except as disclosed in the Offering Materials,
not claim by any third party contesting the validity of any of the Company's
intellectual property rights has been made, is currently outstanding or, to
the knowledge of the Company, is threatened.
(xvi) Other than as contemplated by this Agreement, the Company has
not incurred any liability for any finder's or broker's fee or agent's
commission in
5
<PAGE>
connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby.
(xvii) Assuming compliance by the Agent with the terms of this
Agreement, the offer and sale of the Securities will not be required to
be registered under the Act.
(xviii) The Agent's Warrant (as defined below) and prior to each
Closing Date the shares of Common Stock to be issued upon exercise of
the Agent's Warrant (the "Warrant Shares") have been duly authorized.
The Agent's Warrant, when issued and delivered, will constitute valid
and binding obligations of the Company in accordance with their terms,
except as enforceability may be limited by the application of
bankruptcy, insolvency, moratorium or similar laws affecting the rights
of creditors generally and by judicial limitations on the right of
specific performance. The Warrant Shares, when issued in accordance the
terms of the Agent's Warrant, will be fully paid and nonassessable, and
subject to no preemptive rights or similar rights on the part of any
person or entity. Prior to each Closing Date, a sufficient number of
shares of Common Stock has been reserved for issuance by the Company
upon exercise of the Agent's Warrant.
(xix) The Company has filed all necessary federal and state income
and franchise tax returns and paid all taxes shown as due thereon. The
Company has no knowledge of any tax deficiency which might be asserted
against it which would materially and adversely affect the Company's
business or properties.
(b) Any certificate signed by any officer of the Company and delivered
to the Agent or counsel to the Agent shall be deemed to be a representation
and warranty of the Company to the Agent as to the matters covered thereby.
3. REPRESENTATIONS AND WARRANTIES OF THE AGENT.
The Agent represents that:
(a) It is not disqualified from acting as a selling agent hereunder
under Regulation D.
(b) It is a corporation duly organized, validly existing and in good
standing under the laws of the State of Minnesota with full corporate power
and authority to carry on its business.
(c) It is licensed as a broker-dealer, authorized to conduct offerings
of the sort contemplated hereby by the Commission, the Minnesota Department
of Commerce Securities Division and the Blue Sky authorities of each other
state in which the Company and Agent have agreed to offer the Securities and
is a member in good standing of the
6
<PAGE>
National Association of Securities Dealers, Inc., and, to the Agent's best
knowledge, no proceedings are pending or threatened to revoke or limit any
such status.
(d) This Agreement has been duly authorized, executed and delivered by
the Agent and is a legal, valid and binding agreement of the Agent
enforceable in accordance with its terms.
(e) It will:
(i) solicit offers only from accredited investors; and
(ii) not offer the Securities for sale to, or sell to, any offeree
who resides in a state the Blue Sky laws of which require offerees to
meet specified qualifications unless such offeree meets such
qualification.
(f) The Agent will make offers to sell to, or solicit offers from,
persons only in those states where the Company has qualified or registered
the offering for sale or determined that an exemption from such qualification
or registration is available under the applicable Blue Sky laws.
4. BEST EFFORTS PRIVATE OFFERING OF THE SECURITIES.
(a) On the basis of the representations, warranties and agreements
herein contained, and subject to the terms and conditions herein set forth,
the Company appoints the Agent as its exclusive agent to effect sales of the
Securities on a "best efforts" basis for the account and risk of the Company,
and the Agent agrees to use its best efforts as such agent to procure
purchasers for such Securities during a period commencing with the date of
this Agreement and ending with the Termination Date (as hereinafter defined)
of this Agreement. The Agent may use the services of other brokers or dealers
in connection with the offer and sale of the Securities and pay any portion
of the Agent's Commission (as hereinafter defined) to such brokers or dealers
who are members of the National Association of Securities Dealers, Inc. and
who agree to abide by the provisions of Section 3 hereof.
(b) The Company will pay the Agent, as compensation for its services
hereunder, a cash commission of 10% of the offering price of the Securities
which the Agent shall sell prior to the Termination Date (the "Agent's
Commission"). This amount shall be paid to the Agent at each Closing Date.
(c) Upon the closing of the minimum number of shares in the Offering,
the Agent will be granted the right to act as the exclusive selling agent or
underwriter for any public or private offering of any equity or debt
securities of the Company. Such right will expire upon the closing of a
registered public offering of the Company's Common Stock which raises net
proceeds of at least $5,000,000.
7
<PAGE>
5. AGENT'S WARRANT. On each Closing Date, the Company will sell to the
Agent a warrant to purchase a number of shares of the Company's Common Stock
equal to ten percent (10%) of the aggregate number of shares of the
Securities sold pursuant to the Offering (that is, warrants to purchase
10,000 shares of Common Stock per 100,000 shares of Convertible Non-Yield
Bearing Preferred Stock sold in the Offering) (the "Agent's Warrant") for
$.001 for each share of Common Stock issuable upon exercise of Agent's
Warrant. The Agent's Warrant shall become exercisable one year from the date
of issuance and shall terminate seven (7) years after issuance. The exercise
price shall be equal to 100% of the per share price at which the Securities
are sold. The Agent's Warrant shall be in a form substantially similar to
Exhibit A attached hereto.
6. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Agent that:
(a) The Company will deliver to the Agent or such person as it shall
designate, such quantity of the Offering Materials (as the same may be from
time to time supplemented or amended) as the Agent may reasonably request,
and the Company agrees that no copies of the Memorandum shall be distributed
by it to any other potential purchaser of the Securities.
(b) The Company will immediately advise the Agent by telephone,
confirming such advice in writing, of any order or communication suspending
or preventing, or threatening to suspend or prevent, the offer and sale of
the Securities, or of any proceedings or examinations that may lead to such
an order or communication, whether by or of the Commission or any other
regulatory authority, as soon as the Company is advised thereof.
(c) From the date hereof until the expiration of the Offering Period,
if any event affecting the Company or of which the Company shall be advised
in writing by the Agent shall occur which, as a result, in the Agent's
opinion would cause the Offering Materials, as then amended or supplemented,
to include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of
the circumstances when made, not misleading, or if for any other reason it
shall be necessary at any time to amend or supplement the Offering Materials
to comply with any law, the Company promptly will prepare an appropriate
amendment or supplement to the Offering Materials so that the Offering
Materials, as so amended or supplemented, will not include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances when it
is so delivered, not misleading, or so that the Offering Materials will
comply with any law. The Company will forthwith, at its own expense, prepare
and furnish to the Agent a reasonable number of copies of a supplement to or
amendment of the Memorandum or the other Offering Materials so that the
Memorandum, as so supplemented or amended, will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they are made, not misleading, or so that the Memorandum will comply
with law.
8
<PAGE>
(d) The Company will not offer or sell the Securities other than
through the Agent or participate in any form of general solicitation or
general advertising for the Securities, including but not limited to any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media broadcast over television or radio or
other electronic media, or conducted or participated in any seminar or
meeting whose attendees have been invited by any general solicitation or
general advertising.
(e) The Company will, for a period of five (5) years following the date
hereof or until the Company completes a registered public offering of its
Common Stock, deliver to the Agent, simultaneously with delivery to the
Company's shareholders, reports, unaudited quarterly and audited yearly
financial statements prepared in accordance with generally accepted
accounting principles and other materials to be provided to shareholders of
the Company.
7. COSTS AND EXPENSES. Whether or not the sale of the Securities
contemplated hereby is consummated:
(a) The Company will pay or cause to be paid (directly or by
reimbursement) all reasonable costs, expenses and fees of the Company in
connection with the offering and the transactions herein contemplated,
including, but not limited to the costs of preparing the Securities; all
expenses and taxes incident to the issuance and delivery of the Securities;
fees and expenses of legal counsel and independent accountants for the
Company; the costs and expenses incident to the preparation and distribution
of the Offering Materials, and all amendments of and supplements to the
Memorandum and other Offering Materials; and all costs, expenses and fees
incident to the Company's performance of its obligations under this Agreement
which are not specifically provided for in this Section 7. In addition, the
Company will pay all reasonable costs, expenses and fees incident to all
informational "road show" meetings held in connection with the offering,
provided that such expenses are substantially in accordance with the budget
pre-approved by the Company.
(b) The Company will reimburse the Agent, up to the maximum amount of
$40,000, for reasonable out-of-pocket expenses incurred by the Agent in
connection with its services rendered hereunder, including travel expenses
and the fees and expenses of Briggs and Morgan, Professional Association,
counsel to the Agent. The Company will promptly reimburse the Agent for the
fees and expenses referred to in this Section upon receipt from the Agent of
an invoice related thereto.
8. CONDITIONS TO OBLIGATIONS OF THE AGENT. The Agent's obligation to
act as Agent in connection with the offer and sale of the Securities, the
delivery to the Company of the purchase price for the Securities and the
issuance and delivery of the Securities to the purchasers thereof against
payment therefor, shall be subject to the condition that all representations
and warranties of the Company shall be true and correct at and as of each
Closing Date with the same effect as though made on such date, to the
condition that the Company shall have performed by such date all of its
covenants and obligations hereunder, and to the following conditions:
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<PAGE>
(a) No order or communication suspending or threatening to prevent the
offer and sale of the Securities shall have been issued, and no proceedings
or examinations that may lead to such an order or communication shall be
pending or threatened, by the Commission or by any other regulatory authority.
(b) The Agent shall have received on the Final Closing Date the opinion
of Dorsey & Whitney LLP, counsel for the Company, dated the Final Closing
Date, addressed to the Agent, to the effect that:
(i) The Company is validly existing as a corporation in good
standing under the laws of its state of incorporation, with corporate
power and authority to own or lease its properties and conduct its
business as described in the Offering Materials.
(ii) Upon exercise of the Agent's Warrant, the Warrant Shares
issuable upon such exercise will be validly issued, fully paid and
nonassessable. To the knowledge of such counsel, no preemptive or other
similar subscription rights of stockholders of the Company, exist with
respect to any of the shares issuable upon exercise of the Agent's
Warrant which have not been validly exercised or waived prior to the
sale of the Securities offered pursuant to the Offering Materials. The
capital stock of the Company conforms in all material respects to the
description thereof contained in the Offering Materials. A sufficient
number of shares of Common Stock has been reserved for issuance upon
exercise of the Agent's Warrant.
(iii) The Company has the corporate power and authority to execute,
deliver and perform this Agreement and to authorize, issue and sell the
Securities as contemplated in this Agreement. The execution and delivery
of this Agreement and the consummation of the transactions herein
contemplated do not and will not conflict with or result in a violation
of or default under the Articles of Incorporation of the Company,
By-laws of the Company, or any agreements with Fujitsu Limited.
(iv) This Agreement, the Securities and the Agent's Warrant have
been duly authorized, executed and delivered by the Company and are the
valid and binding obligations of the Company, enforceable in accordance
with their terms, except as enforceability may be limited by the
application of bankruptcy, insolvency, moratorium or other laws of
general application affecting the rights of creditors generally and by
judicial limitations on the right of specific performance, and other
equitable remedies, and except as the enforceability of indemnification
or contribution provisions hereof may be limited by federal or state
securities laws.
(v) The execution, delivery and performance of this Agreement and
the consummation of the transactions described herein will not result in
a violation of, or a default under, the terms or provisions of (i) any
material bond, debenture, note, contract, lease, license, indenture,
mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument of which such counsel has knowledge, to which
the Company is a party or by which the Company or any of its properties
are
10
<PAGE>
bound, or (ii) any material law, order, rule, regulation, writ,
injunction or decree known to such counsel of any government,
governmental agency or court having jurisdiction over the Company or any
of its properties (except as to compliance with Regulation D under the
Act as to which such counsel needs express no statement).
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that, although such counsel cannot
guarantee the accuracy, completeness or fairness of any of the statements
contained in the Offering Materials, in connection with such counsel's
representation of the Company in the preparation of the foregoing document or
this transaction, nothing has come to the attention of such counsel which
causes them to believe that the foregoing document (except as to the
financial statements, summary financial data and other financial and
statistical information included in the Offering Materials, as to which such
counsel need express no statement) contains as of the date when made an
untrue statement of a material fact or omits to state a material fact
required to be state therein or necessary to make the statements therein as
of the date when made, in light of the circumstances in which they were made,
not misleading.
In expressing the foregoing opinion, as to matters of fact relevant to
conclusions of law, counsel may rely, to the extent that they deem proper,
upon certificates of public officials and of the officers of the Company,
provided that copies of such officers' certificates are attached to the
opinion.
(c) The Agent shall have received on the Final Closing Date a letter
from Merchant, Gould, Smith, Edell, Welter & Schmidt, Professional
Association, patent, trademark and copyright counsel for the Company, dated
the Final Closing Date, addressed to the Agent, regarding the section of the
Company's Business Plan, dated September 26, 1996, entitled "Patents
Pending," in form and substance acceptable to counsel for the Agent.
(d) Subsequent to the execution and delivery of this Agreement and
prior to each Closing Date, there shall not have been any change or any
development involving a prospective change, in or affecting the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company, otherwise than as set forth or contemplated in the
Offering Materials, the effect of which, in the Agent's judgment, is material
and adverse to the Company and makes it impracticable or indadvisable to
proceed with the offering or the delivery of the Securities being delivered
at each Closing Date.
(e) The Agent shall have received on each Closing Date, a certificate
or certificates of the chief executive officer and the chief financial
officer of the Company to the effect that, as of such Closing Date, each of
them severally represents (in the case of the Chief Financial Officer, to the
best of his knowledge) that the representations and warranties of the Company
set forth in Section 2 of this Agreement are true and correct at and as of
such Closing Date and the Company has performed all of its obligations under
this Agreement to be performed at or prior to such Closing Date.
11
<PAGE>
(f) The Company shall have furnished to the Agent such further
certificates and documents as the Agent may reasonably have requested.
(g) The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects reasonably satisfactory to the Agent and to Briggs and
Morgan, Professional Association, counsel for the Agent.
(h) If any of the conditions hereinabove provided for in this Section 8
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Agent hereunder may be terminated by the
Agent by notifying the Company of such termination in writing or by telegram at
or prior to the relevant Closing Date.
9. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless the Agent, each
officer and director thereof, and each person, if any, who controls the Agent
within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Agent or such persons may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Offering Materials including any amendments or supplements thereto, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein not misleading in light of the circumstances under which
they were made, and will reimburse the Agent and each such officer, director,
or controlling person in connection with investigating or defending any such
action or claim as such expenses are incurred: provided, however, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement, or omission or alleged omission, made in the
Offering Materials including any amendments or supplements thereto, in reliance
upon and in conformity with written information furnished to the Company by the
Agent specifically for use therein.
(b) The Agent agrees to indemnify and hold harmless the Company, each of
its directors and officers, and each person, if any, who controls the Company
within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Offering Materials or any amendments or
supplements thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, and will reimburse the Company and
each such director, officer, or controlling person in connection with
investigating or defending any such action or claim as such expenses are
12
<PAGE>
incurred; provided, however, that the Agent shall be liable in any such case
to the extent, but only to the extent, that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Offering Materials including any amendments or supplements thereto in
reliance upon and in conformity with written information furnished to the
Company by or through the Agent and described in Section 9(f) hereof.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity or
contribution may be sought pursuant to this Section 9, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 9(a) or (b) or contribution provided
for in Section 9(d) shall be available to any party who shall fail to give
notice as provided in this Section 9(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party otherwise than
on account of the provisions of Section 9(a), (b) or (d). In case any such
proceeding shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such indemnified
party and shall pay as incurred the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified party
shall have the right to retain its own counsel at its own expense.
Notwithstanding the foregoing, the indemnifying party shall pay as incurred
the reasonable fees and expenses of the counsel retained by the indemnified
party in the event (i) the indemnifying party and the indemnified party shall
have mutually agreed to the retention of such counsel or (ii) the named
parties to any such proceeding (including any impleaded parties) include both
the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm for all such indemnified parties. Such firm shall be
designated in writing by the Agent and shall be reasonably satisfactory to
the Company in the case of parties indemnified pursuant to Section 9(a) and
shall be designated in writing by the Company and shall be reasonably
satisfactory to the Agent in the case of parties indemnified pursuant to
Section 9(b). The indemnifying party shall not be liable for any settlement
of any proceeding effected without its written consent but if settled with
such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 9 is unavailable
or insufficient to hold harmless an indemnified party under Section 9(a) or (b)
in respect of any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred
13
<PAGE>
to therein, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Agent on the other from the offering of the
Securities. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company on the one hand and the Agent on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Agent on the other
shall be deemed to be in the same proportion as the total net proceeds from the
offering (net of the Agent's commission, but before deducting expenses)
received by the Company bears to the total commissions received by the Agent.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Agent on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Agent agree
that it would not be just and equitable if contributions pursuant to this
Section 9(d) were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 9(d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions or
proceedings in respect thereto) referred to above in this Section 9(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 9(d), the Agent shall
not be required to contribute any amount in excess of the commissions
applicable to the Securities sold in the offering contemplated hereby; and no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
(e) The obligations of the Company under this Section 9 shall be in
addition to any liability which the Company may otherwise have, and the
obligations of the Agent under this Section 9 shall be in addition to any
liability which the Agent may otherwise have.
(f) For all purposes under this Section 9 and this Agreement (including,
without limitation, Section 9(b) hereof), the Company understands and agrees
with the Agent that it has not furnished any written information to the Company
specifically for use in preparation of the Offering Materials, or any amendment
or supplement thereto, except as set forth in the Memorandum under "Terms of
the Offering -- the Agent."
10. CLOSING AND DELIVERY OF SECURITIES. On each Closing Date, the
Company will deliver to the investors or Agent certificates representing the
number of shares of Securities
14
<PAGE>
sold to investors pursuant to this Offering as reflected in executed
Subscription Agreements against payment therefor. Closings will be held as
agreed to by the Company and the Agent with the last Closing Date (the "Final
Closing Date") being held within seven days of the Termination Date (as
hereinafter defined). However, the Final Closing Date may be accelerated or
extended by agreement between the Company and the Agent. The time and date of
each closing is herein referred to as the "Closing Date."
11. EFFECTIVE DATE OF THE AGREEMENT AND TERMINATION.
(a) This Agreement is effective as of the date first written above.
(b) This Agreement shall terminate one hundred and twenty days (120)
days following the date of this Agreement, subject to a sixty-day extension by
agreement between the Company and the Agent (the "Termination Date"). In
addition, this Agreement may be terminated on or any time prior to the
Termination Date by agreement of the parties, or by the Agent upon written or
telegraphic notice to the Company if: (i) the market value of securities in
general or political, financial or economic conditions shall have so
materially changed as in the Agent's judgment to render it impractical or
inadvisable to proceed with the best efforts offering of the Securities; (ii)
there shall be a material outbreak of hostilities or material escalation and
deterioration in the political and military situation between the United
States and any foreign power or a formal declaration of war by the United
States of America shall have occurred; (iii) trading in Securities on the New
York Stock Exchange or the American Stock Exchange shall have been suspended
or minimum or maximum prices shall have been established in either exchange
by action of such exchange, the Commission or other governmental or
regulatory authority; or (iv) any other restrictions (including, without
limitation, any banking moratorium) on transactions in securities materially
affecting the free market for securities or the payment for such securities
shall have been established by either exchange, by the Commission, by any
other federal or state agency, by action of the Congress or by Executive
Order. Any such termination shall be without liability of any party to any
other party except that the provisions of sections 7, 9 and 15 hereof shall
at times be effective and binding.
12. NOTICES. All communications hereunder shall be in writing and,
except as otherwise provided herein, will be mailed, delivered or telegraphed
and confirmed as follows: if to the Agent, to John G. Kinnard and Company,
Incorporated, Kinnard Financial Center, 920 Second Avenue South, Minneapolis,
Minnesota, 55402, Attention: Joseph A. Radecki; if to the Company, to Digital
River, Inc., 5198 West 76th Street, Edina, Minnesota 55439, Attention: Joel
Ronning.
13. SUCCESSORS. This Agreement has been and is made solely for the
benefit of and shall be binding upon the Agent and the Company and their
respective successors and the officers, directors and controlling persons
referred to herein, and their respective personal representatives and no
other person will have any right or obligation hereunder. The term
"successors" shall not include any purchaser of the Securities merely because
of such purchase.
15
<PAGE>
14. BOARD REPRESENTATION. Following the first Closing Date, Joel
Ronning will exercise his right to appoint an additional member to the
Company's Board of Directors after consultation with the Agent. The Agent's
right to consult with Mr. Ronning regarding representation on the Board of
Directors will continue until the closing of a registered public offering of
Common Stock by the Company.
15. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless
of (a) any termination of this Agreement, (b) any investigation made by or on
behalf of the Agent or controlling person thereof, or by or on behalf of the
Company or its directors or officers and (c) delivery of and payment for the
Securities under this Agreement. Each provision of this Agreement shall be
interpreted in such a manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable under any applicable law or rule in any jurisdiction, such
provision will be ineffective only to the extent of such invalidity,
illegality or unenforceability in such jurisdiction or any provision hereof
in any other jurisdiction. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement shall
be governed by, and construed in accordance with, the laws of the State of
Minnesota.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement amount the Company and the Agent
in accordance with its terms.
Very truly yours,
DIGITAL RIVER, INC.
By /s/ Joel A. Ronning
--------------------------
Joel A. Ronning
Its President
-------------------------
16
<PAGE>
The foregoing Agency Agreement is
hereby confirmed and accepted as of
the date first above written.
JOHN G. KINNARD AND COMPANY,
INCORPORATED
By /s/ Joseph A. Radecki
------------------------------
Joseph A. Radecki
Its Vice President
--------------------------
17
<PAGE>
EXHIBIT 10.43
ACKNOWLEDGEMENT AND RECEIPT
This letter, dated as of January 13, 1997, specifically acknowledges
and confirms (i) that the proposed private placement (the "Private
Placement") of Convertible Non-Yield Bearing Preferred Stock ("Preferred
Stock") of Digital River, Inc ("Digital River") by John G. Kinnard and
Company, Incorporated ("JGK") pursuant to an Agency Agreement between Digital
River and JGK dated September 30, 1996 has been withdrawn and said Agency
Agreement has been terminated, except with respect to Sections 7, 9 and 15
thereof, (ii) that Digital River, without the assistance of JGK, has
conducted its own private placement of securities other than the Preferred
Stock, to investors unknown to JGK, and through efforts independent of the
efforts of JGK, (iii) that JGK did not serve as Digital River's financial
advisor or agent with respect to the private placement described in clause
(ii) above, and claims no compensation therefor; (iv) that, in consideration
of the release by JGK of claims to compensation in connection with the
Private Placement, JGK has received from Digital River the sum of Forty-Nine
Thousand Four Hundred Twenty-Five Dollars and Eighty-Eight Cents
($49,425.88), such amount representing payment by Digital River of the
out-of-pocket expenses incurred by JGK, including informational road-show
expenses of Twenty-One Thousand Nine Hundred Seventy-Seven Dollars and
Ninety-Seven Cents ($21,977.97) and other accountable expenses totalling
Twenty-Seven Thousand Four Hundred Forty-Seven Dollars and Ninety-One Cents
($27,447.91), including fees and expenses of counsel to JGK, of which Ten
Thousand Dollars and No Cents ($10,000.00) was paid to JGK on or about August
29, 1996, and (v) that none of the funds described in clause (iv) above
represents compensation to JGK in connection with the withdrawn Private
Placement or in connection with the offering of securities described in
clause (ii) above.
The below signatories hereby certify that the information set forth in
this Acknowledgement and Receipt is true and correct.
DIGITAL RIVER, INC. JOHN G. KINNARD AND
COMPANY, INCORPORATED
/s/ Joel A. Ronning /s/ Joseph A. Radecki
- --------------------- -----------------------
Joel A. Ronning Joseph A. Radecki
Its President Its Vice President
Dated: 3-13-97 Dated: 15 Jan., 1997
----------------- --------------------
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-KSB into the Company's previously filed
Registration Statement File No. 33-91974.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 31, 1997
<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> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 899
<SECURITIES> 940
<RECEIVABLES> 2,879<F1>
<ALLOWANCES> 0
<INVENTORY> 1,907
<CURRENT-ASSETS> 7,060
<PP&E> 476<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,620
<CURRENT-LIABILITIES> 6,910
<BONDS> 0
198
0
<COMMON> 0
<OTHER-SE> 1,214
<TOTAL-LIABILITY-AND-EQUITY> 8,620
<SALES> 37,387
<TOTAL-REVENUES> 37,387
<CGS> 33,476
<TOTAL-COSTS> 33,476
<OTHER-EXPENSES> 4,760
<LOSS-PROVISION> 340
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> (616)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (616)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
<FN>
<F1>Amounts reported for Accounts Receivable and Property, Plant and Equipment
are net amounts.
</FN>
</TABLE>
