<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended: MARCH 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT.
Commission File Number: 0-25602
TECH SQUARED INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1591872
(State or other jurisdiction (I.R.S. Employer Identification No.)
or organization)
5198 WEST 76TH STREET
EDINA, MINNESOTA 55439
(Address of principal executive offices)
(612) 832-5622
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No .
--- ---
As of April 30, 1997, 10,374,870 shares of Common Stock, no par value,
of the Company were outstanding.
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TECH SQUARED INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Operations (unaudited) for the three
months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows (unaudited) for the three
months ended March 31, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
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ITEM 1. FINANCIAL STATEMENTS
TECH SQUARED INC. AND SUBSIDIARIES
BALANCE SHEETS
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $252,833 $898,558
Available-for-sale securities 800,000 940,000
Accounts receivable, net of allowance
for doubtful receivables of
$355,000 and $306,000 respectively 2,349,448 2,879,200
Inventories 2,393,843 1,906,546
Prepaids and other current assets 253,419 435,755
----------- ------------
TOTAL CURRENT ASSETS 6,049,543 7,060,059
Property and equipment, net 346,291 476,283
Receivable from officer/stockholder 201,512 201,512
Mining assets 748,276 748,276
Patents and organization costs, net -- 133,488
Investment in Digital River 746,972 --
----------- ------------
$8,092,594 $8,619,618
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $219,568 $279,697
Current maturities of long term debt 130,000 1,108,750
Accounts payable 4,383,215 4,416,419
Accrued compensation and benefits 200,199 187,650
Accrued expenses 300,605 425,516
Dividend payable to officer/shareholder 491,977 491,977
----------- ------------
TOTAL CURRENT LIABILITIES 5,725,564 6,910,009
Dividends payable to officer/shareholder 200,000 200,000
Long term debt, less current maturities 75,000 97,970
Redeemable preferred stock, 12% cumulative
convertible, $1 par value; 1,000,000 shares
authorized; 160,000 shares issued and outstanding 197,500 197,500
STOCKHOLDERS' EQUITY:
Common stock: no par value; 25,000,000 shares
authorized 10,374,870 issued and outstanding
Additional paid-in capital 2,723,223 3,189,103
Retained earnings (deficit) (828,693) (2,114,964)
Unrealized gain on available-for-sale securities -- 140,000
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 1,894,530 1,214,139
----------- ------------
$8,092,594 $8,619,618
----------- ------------
----------- ------------
Note: The balance sheet as of December 31, 1996 has been derived from the
audited financial statements at that date.
See accompanying notes to financial statements.
3
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TECH SQUARED INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
----------------------------
March 31, December 31,
1997 1996
----------- ------------
Net Sales $9,963,858 $8,627,956
Cost of sales 8,873,097 7,615,109
----------- ------------
GROSS PROFIT 1,090,761 1,012,847
Selling and marketing expenses 476,492 633,006
General and administrative expenses 552,444 496,348
Research and development expenses -- 40,600
----------- ------------
Total Operating Expenses 1,028,936 1,169,954
----------- ------------
INCOME (LOSS) FROM OPERATIONS 61,825 (157,107)
Interest expense, net (26,575) (2,960)
Equity in losses of Digital River (285,795) --
----------- ------------
INCOME (LOSS) BEFORE MINORITY INTEREST IN
LOSSES OF DIGITAL RIVER (250,545) (160,067)
Minority interest in losses -- 16,087
----------- ------------
NET INCOME (LOSS) ($250,545) ($143,980)
----------- ------------
----------- ------------
Net loss per common share ($0.02) ($0.01)
----------- ------------
----------- ------------
Weighted average shares outstanding 10,374,870 10,374,870
----------- ------------
----------- ------------
See accompanying notes to consolidated financial statements.
4
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TECH SQUARED INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
----------------------------
March 31, December 31,
1997 1996
----------- ------------
Cash Flows From Operating Activities:
Net loss ($250,545) ($143,980)
Non-cash items included in loss:
Depreciation and amortization 52,322 62,320
Equity in loss of Digital River 285,795 --
Minority interest in Digital River -- (16,087)
Changes in operating assets and liabilities:
Accounts receivable, net 529,752 (100,712)
Inventories (487,297) 1,595,371
Prepaids and other current assets 92,304 454,749
Accounts payable 109,240 (1,749,260)
Accrued compensation and benefits 12,549 --
Other accrued expenses (101,048) 10,973
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 243,072 113,374
----------- ------------
Cash Flows From Investing Activities:
Purchases of property and equipment (28,947) (20,431)
Decrease in cash due to deconsolidation
of Digital River (799,721) --
Increase in patents and organization costs -- --
Change in officer/stockholder receivable -- (2,573)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (828,668) (23,004)
----------- ------------
Cash Flows From Financing Activities:
Dividends paid -- (25,000)
Net change in revolving line of credit (60,129) (413,878)
Expenses incurred on issuance of common stock -- (15,263)
----------- ------------
NET CASH USED IN FINANCING ACTIVITIES (60,129) (454,141)
----------- ------------
NET DECREASE IN CASH (645,725) (363,771)
Cash At Beginning Of Period 898,558 867,370
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CASH AT END OF PERIOD $252,833 $503,599
----------- ------------
----------- ------------
See accompanying notes to financial statements.
5
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TECH SQUARED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1997 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1997. The accompanying
consolidated financial statements and notes should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's 1996 annual report on Form 10-KSB.
In periods prior to the quarter ended March 31, 1997 the Consolidated
financial statements include the accounts of Tech Squared Inc. and its wholly
owned subsidiaries (the "Company"), and Digital River, Inc. ("Digital
River"), which the Company controlled through its bargain purchase option.
In March 1997, Digital River converted all of its outstanding debentures and
issued additional common stock pursuant to a private placement agreement
which reduced Tech Squared's ownership from 60% at December 31, 1996 to 45%
at March 31, 1997. As a result of the reduction in Tech Squared's ownership
percentage, the financial results of Digital River, are no longer
consolidated with those of the Company . The Company now accounts for its
investment in Digital River using the equity method of accounting (see Item
2. Management's Discussion and Analysis of Financial Condition).
NOTE 2 - INVENTORIES
The Company's inventories consist primarily of goods held for resale and are
stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
NOTE 3 - DIGITAL RIVER
In December 1995 the Company obtained a bargain purchase option to acquire
600,000 shares of Digital River common stock from the Company's majority
stockholder and chief executive officer, representing at the time 60%
ownership of Digital River. The option is exerciseable at any time through
December 31, 2000 for a total exercise price of $1.00. 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.
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
per share. In March 1997, Digital River received initial proceeds from the
private placement totaling approximately $1,383,000 for approximately 154,000
shares of its common stock, and converted all of its outstanding Convertible
Debentures into approximately 191,000 shares of its common stock at $6 per
share. The impact of the issuance of the additional 345,000 shares resulted
in a reduction in the Company's ownership control in Digital River from 60%
at December 31,1996, to approximately 45% at March 31, 1997. As a result,
beginning in the quarter ended March 31, 1997 the Company is accounting for
its investment in Digital River using the equity method of accounting.
6
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Summarized unaudited condensed financial information of Digital River is as
follows: (000's)
BALANCE SHEET INFORMATION
- -------------------------
March 31, December 31,
1997 1996
----------- ------------
Current assets $1,657 $ 809
Total assets 2,088 1,202
Current liabilities 421 1,258
Stockholders' equity (deficit) 1,662 (58)
OPERATING INFORMATION
- ---------------------
QUARTER ENDED
MARCH 31,
1997 1996
----------- ------------
Net sales $179 $ --
Operating expenses 683 44
Net loss ($492) ($40)
NOTE 4 - SFAS 128
During March, 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share", which requires the disclosure of basic earnings per share and
diluted earnings per share. The Company expects to adopt SFAS 128 at the end
of fiscal 1997 and anticipates it will not have a material impact on
previously reported earnings per share.
7
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TECH SQUARED INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein are forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934
that involve a number of risks and uncertainties. Such forward-looking
information may be indicated by words such as will, may be, expects or
anticipates. In addition to the factors discussed herein, among the other
factors that could cause actual results to differ materially are the
following: business conditions and growth in the personal computer industry
and the general economy; competitive factors such as rival computer and
peripheral product sellers and price pressures; availability of vendor
products at reasonable prices; inventory risks due to shifts in market
demand; and risks presented from time to time in reports filed by the Company
with the Securities and Exchange Commission, including but not limited to the
annual report on Form 10-KSB for the year ended December 31, 1996.
The Company sells computer and peripheral products targeted at the graphic
arts market, which currently includes primarily Macintosh related products.
The Company markets through direct marketing channels, and to value added
resellers.
For the three months ended March 31, 1997 the Company recorded a
consolidated net loss of ($251,000) or ($0.02) per share compared to a
consolidated net loss of ($144,000) or ($0.01) per share in the first quarter
of 1996. These consolidated losses include the Company's share of the
Digital River losses which amounted to ($286,000) and ($24,000) in the first
quarter of 1997 and 1996, respectively. Excluding the Company's share of the
Digital River losses the Company recorded a net income of $35,000 in the
first quarter of 1997 compared to a net loss of ($120,000) in the first
quarter of 1996.
RESULTS OF OPERATIONS
NET SALES
Net sales for the Company's first quarter ended March 31, 1997 totaled
$9,964,000 compared to $8,628,000 for the corresponding period of 1996. The
increase in sales of 15.5% is due mainly to an increase in sales to the
Company's DTP Direct catalog customers of approximately 25%. The increase in
DTP direct sales is primarily attributable to an increase in the volume of
orders shipped.
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 experienced 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 the quarter ended March 31 was $1,091,000 or 11.0% of net
sales compared to $1,013,000 or 11.7 % of net sales for the comparable
period of 1996. Although gross profit percentages decreased in both the DTP
Direct catalog and the distribution businesses, the decreases were mitigated
by the relative increase in DTP Direct catalog sales as a percentage of
overall sales. Additionally, gross margins were negatively impacted by a
lower level of vendor rebates in the first quarter of 1997 compared to the
same period in 1996. The Company expects ongoing competitive pressure on
gross margins in 1997.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $476,000 during the quarter ended
March 31, 1997 compared to $633,000 during the corresponding period of 1996.
As a percentage of sales, selling and marketing expenses decreased from 7.3%
of net sales for the first quarter of 1996 compared to
8
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4.8% of net sales for the same period in 1997. This decrease is due mainly
to the reduction in net marketing costs related to the development,
production and distribution of catalogs, although catalogs mailed increased
approximately 20% in the same period.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the first quarter ended March 31,
1997 were $552,000 compared to $496,000 for the comparable period of 1996.
The increase is primarily due to an increase in payroll and related costs
including the addition of a new President and COO along with certain other
changes.
NET INTEREST EXPENSE
Net interest expense for the first quarter ended March 31, 1997 was $27,000
compared to $3,000 for the same period in 1996. The increase is due to an
increase in the average outstanding balance on the Company's line of credit
as well as an increase in the interest rate.
INCOME TAXES
In the first quarter 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at March 31, 1997 , consisted of
liquid funds, a revolving line of credit agreement with Norwest Bank
Minnesota, NA ("Norwest"), and vendor trade credit lines
As of March 31, 1997 the Company had working capital of $249,000. This
includes the remaining balance of a dividend declared in April 1995, but not
yet paid in the amount of $492,000 of which approximately $35,000 was paid in
April 1997. The dividend 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 and as amended. 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 in 1997.
Borrowings under the line of credit with Norwest are payable on demand, and
limited by eligible percentages of accounts receivable, inventory and
certain investments. As of March 31, 1997 the Company had availability under
the line of credit totaling $1.6 million. 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 March 31, 1997
the Company was in violation of its minimum net worth covenant. 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 chairman and
CEO.
In April 1997, the Company entered into a three month extension of its
current line of credit with Norwest to July 31, 1997. Under terms of the
amendment, the Company and Norwest agreed to reduce the maximum outstanding
borrowings to $1.5 million, certain increases in the interest rate, and
certain other extension-related fees. After the amendment on April 30, 1997
the Company had outstanding borrowings under the line of credit totaling
$943,000 and availability of $537,000.
The Company's working capital includes $800,000 relating to its investment in
Cam Design, Inc. ("Cam Design"). All of the shares of Cam Design became
freely tradable in the second quarter of 1997 and, accordingly, all shares
were valued at the closing market price at March 31, 1997. The trading
market for the Cam Designs shares may be limited and there can be no
assurance that the Company will be able to realize 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.
Inventories increased from $1,924,000, as of December 31, 1996 to $2,394,000
as of March 31,1997. Capital expenditures totaled $29,000 in the three month
period of 1997 compared to
9
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$20,000 in the comparable period of 1996.
The Company believes that funds generated from management of receivable and
inventory levels, advances under its line of credit, further expansion of
lines with trade creditors, the cash on hand and 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 a suitable banking
relationship. Furthermore, funding of the Company's operations in future
periods may require additional investments in the Company in the form of
equity or debt. There can be no assurance that the Company will achieve
desired levels of sales or profitability or that future capital infusions
will be available.
10
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
completion of a registration statement covering the resale of the
Hanover Shares and consent by the Company.
In October, 1996 Hanover filed a registration statement covering the
Hanover Shares and filed suit against the Company in the United States
District Court Eastern District of Washington. The complaint 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.
In April, 1997 Hanover filed a Notice of Motion and Motion for Partial
Summary Judgment, which the Company answered on April 13, 1997. The
Motion is currently scheduled to be heard on June 4, 1997.
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.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
11
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECH SQUARED INC.
May 14, 1997 /s/ Joel Ronning
----------------------------------------------------
Joel Ronning, Chief Executive Officer
and Chief Financial Officer (principal executive
officer and principal financial and officer)
12
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EXHIBIT INDEX
EXHIBIT INDEX DESCRIPTION PAGE NUMBER.
- ------------- ----------- -----------
27.1 Financial Data Schedule 14
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 253
<SECURITIES> 800
<RECEIVABLES> 2,349<F1>
<ALLOWANCES> 0
<INVENTORY> 2,394
<CURRENT-ASSETS> 6,050
<PP&E> 346<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,093
<CURRENT-LIABILITIES> 5,726
<BONDS> 0
198
0
<COMMON> 0
<OTHER-SE> 1,895
<TOTAL-LIABILITY-AND-EQUITY> 8,093
<SALES> 9,964
<TOTAL-REVENUES> 9,964
<CGS> 8,873
<TOTAL-COSTS> 8,873
<OTHER-EXPENSES> 1,029
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> (251)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (251)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
<FN>
<F1>Amounts reported for Accounts Receivable and Property Plant & Equip are net
amount.
</FN>
</TABLE>
