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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended: DECEMBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
Commission file number: 0-25602
TECH SQUARED INC.
(Exact name of registrant as specified 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)
Registrant'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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of MARCH 9, 1998, 10,956,679 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
$19,174,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K 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 "1998
Proxy Statement"), such 1998 Proxy Statement to be filed within 120 days of
December 31, 1997.
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PART I.
ITEM 1. BUSINESS
(a) BUSINESS DEVELOPMENT
GENERAL
Tech Squared Inc. ("Tech Squared") was incorporated under the laws of the
State of Minnesota in 1988 and currently has three wholly-owned subsidiaries,
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 collectively refer
to Tech Squared Inc. and the subsidiaries discussed above.
The Company's primary business focus is on marketing & selling to the
businesses in the desktop publishing industry through direct catalog mailings
(approximately 75% of total revenues in 1997) and to value added reseller's
(VAR's) and other dealers. The Company's sales have been primarily of Apple
Macintosh-Registered Trademark- and, to a lesser degree, Microsoft Windows
95/Windows NT/Windows/MS-DOS ("Wintel") compatible products such as (1)
microcomputer hardware and peripherals, including desktop computers, printers
and printing related devices, video monitors, electronic media, storage devices
and memory and (2) software programs primarily related to those utilized in the
graphic arts industry from such name brands as Adobe and Quark. Computer sales
were approximately 19% and 16% of total sales of its direct catalog ("DTP
Direct") sales in 1997 and 1996, respectively. DTP Direct's sales of Apple
computers accounted for 98% and 99% of the total computer system sales in 1997
and 1996, respectively.
MATERIAL TRANSACTIONS
DIGITAL RIVER OPTION
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 4,800,000 (post-split) shares (the "Digital
River Shares") of Digital River, Inc., a Minnesota corporation ("Digital
River"), which represents ownership of approximately 26% of Digital River as of
March 9, 1998. 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 the Fujitsu
Modification Agreement dated December 11, 1997 (the "Modification Agreement"),
between Mr. Ronning, Fujitsu Limited, a company organized under the laws of
Japan ("Fujitsu"), Digital River Inc., and MacUSA (collectively, the "Parties").
Pursuant to the terms of the Modification Agreement, the Parties agreed to
terminate previous agreements entered into in connection with an investment by
Fujitsu in Digital River and entered into the Modification Agreement. Under the
terms of the Modification Agreement MacUSA remains a party to the agreement to
the extent that Mr. Ronning may transfer all shares of Digital River Inc. he
owns, along with any and all rights related thereto pursuant to the agreement or
otherwise to MacUSA, Inc., or Tech Squared Inc.
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(b) BUSINESS OF ISSUER
Tech Squared is a national direct marketer and distributor of microcomputer
hardware and software products primarily for users of Apple Macintosh-Registered
Trademark- personal computers as well as for users of IBM compatible personal
computers. The Company's sales and marketing efforts are currently targeted 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, Epson, GCC,
Hewlett-Packard, IBM, Iomega, Kodak, Minolta, Mitsubishi, NEC, Quantum, Quark,
Seagate, Sony, SyQuest, Umax Technologies, Umax Computer Corporation and U.S.
Robotics. In late 1997 the Company began to offer to its' customers custom
configured PC's.
The Company markets its products through targeted mailings of its DTP
Direct catalog, which is currently produced six times per year and typically
mailed weekly during each two-month cycle. The Company's catalogs include
detailed descriptions and full-color photographs of the products sold by the
Company. In 1997, the Company mailed approximately 3.2 million catalogs,
compared to approximately 3.5 million in 1996. 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 1996 and 1997, sales of Apple Macintosh-Registered Trademark- compatible
products continued to represent 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 in sales of Apple Macintosh computers or a
decrease in the supply of or demand for software and peripherals for such
computers could have a material adverse impact on the Company's business.
During 1997 the Company continued to expand its Wintel offerings including the
addition of PC lines from Hewlett-Packard, IBM and a Build-to-Order PC program.
In addition, the Company has increased the variety of its Wintel offerings in
other categories where appropriate. The Company plans to continue its efforts
to expand its Wintel offerings in 1998. Notwithstanding the Company's efforts
to expand these offerings, the Company is still substantially dependent on sales
of Apple related products and there is no assurance that the Company will
successfully transition enough sales to Wintel related products to offset any
decline in the demand for Apple related products.
DIRECT MARKETING
The Company's direct marketing operations are carried out primarily through
its DTP Direct catalog. DTP Direct markets a broad assortment of DTP and
graphics products through a catalog that is currently published six times per
year. The Company published its first DTP Direct catalog in April 1993, which
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 and are updated
continuously in an attempt to maximize the response rate from each catalog
delivered.
The Company has developed and plans to launch a new catalog in the second
quarter of 1998. The Net Direct catalog will be directed at the development of
intranet/internet websites
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offering the necessary hardware and software that "webmasters" require to
prepare websites for corporate and personal use. Although the Company
believes the target market for the Net Direct catalog is substantially larger
than the DTP Direct catalog market and that it could provide a significant
opportunity for overall revenue growth, there are significant risks
associated with its launch including; a completely new target audience, lack
of any historical direct marketing data to base mailing decisions,
competitive forces and new product lines, just to name a few. As a result,
the Company believes the launch of the Net Direct catalog will have a
negative impact on profitability of the Company in 1998.
DISTRIBUTION
The Company's dealer division sells computer hardware and software
products, wholesale to computer retailers, value-added resellers ("VARS"), and
other resellers (collectively, the "Distribution Business").
The Company's Distribution Business focuses primarily on the Desktop
Publishing market and in developing 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 largest category of peripheral
device sold by the Company's Distribution Business. Beginning in late 1995 the
Company began broadening the products sold to its dealers and increasing its
customer base. Sales of Apple based computer systems now constitute the
majority of the Company's Distribution Business, approximately 32% in 1997
compared to approximately 19% in 1996. Because of the Company's potential
conflict between its DTP Direct catalog business and its distribution business,
the Company stopped selling Apple computer systems through its distribution
business in the fourth quarter of 1997. As a result and because of Apple's
announced intention to curtail or stop licensing (see "ITEM 1. Purchasing") its
Mac OS to clone manufacturers, the Company's distribution business will likely
see a significant reduction in computer systems sales in 1998. The Company has
its own private brand of storage device products marketed under the
"NuDesign-TM-" name. These products have historically been sold primarily to
the Company's mass merchant retail customers. In late 1995, the Company
significantly reduced its sales and marketing activities targeted towards these
mass merchant customers because of the high cost of doing business with them and
because of increasing downward pressure on gross margins. Sales to these mass
merchant customers in 1996 were nominal and in 1997 were nonexistent.
PURCHASING
The Company purchases from approximately 700 vendors, which includes direct
purchases from manufacturers and from distributors. In 1997, approximately 27%
of the Company's total purchases were from distributors compared to
approximately 20% in 1996 and 14% in 1995. The increase is mainly due to two
significant manufacturers, Apple and Seagate, who stopped selling to the Company
directly and whose products were instead purchased mostly through distributors.
The Company does not maintain any long-term purchase or supply contracts with
any of its vendors instead purchasing primarily on a purchase order basis. In
order to meet customer's needs for product the Company has begun to focus on
drop shipments sent directly to the customers from participating distributors
and vendors. This allows the Company to reduce freight expense as well as
compete with larger competitors as to product availability and diversification.
Sales of products purchased from Umax Computer Corporation ("UCC")
accounted for approximately 13% and 12% of total sales in 1997 and 1996,
respectively. During 1997, Apple Computer announced its intention to stop
licensing the Mac OS operating system to clone manufacturers. The Company
anticipates that UCC will therefore stop producing Apple clones
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sometime during 1998, and appropriately began shifting its CPU sales mix more
heavily to Apple during the second half of 1997. No other vendor or supplier
accounted for more than 10% of total purchases individually in 1997. In
1996, sales of products purchased from SyQuest accounted for approximately
10% of total sales. There can be no assurance that 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, the Company's inability to locate other suppliers, or to
successfully transition from selling clones to Apple products, could have a
material adverse effect on the Company.
The Company's suppliers make funds available to the Company to promote and
increase sales of their products. The Company typically receives price
protection should a vendor subsequently lower its price.
COMPETITION
DIRECT MARKETING
A substantial number of companies both large and small, compete in the
retail and wholesale computer industry. Rapid technological advances in
hardware and software, short product life cycles, and continuing downward
pressure on product prices and margins characterize the industry
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 and to a lesser degree, direct marketing
efforts to sell microcomputer hardware, software and peripherals through the
Internet. Additionally, the Company competes with other direct marketing
companies. Some of the catalogs within this channel include: CDW, Creative
Computers' MacMall, MacConnection, MacWAREHOUSE, MicroWAREHOUSE, Multiple Zones,
PC Connection and CompUSA Direct.
DISTRIBUTION BUSINESS
Competition for the Company's Distribution Business comes primarily from
the largest distributors whose general scale of operations supports competitive
pricing for desktop publishing products without need for specialization. These
major distributors and competition include but are not limited to Gates/Arrow,
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 manufacturers 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 1997 is as follows:
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MIRROR. The Company acquired the rights to the Mirror product line in 1994.
The Company currently markets storage devices under the "Mirror" name. Mirror
branded products are sold primarily through direct channels with emphasis on
sales through the DTP Direct catalog.
NUDESIGN. The Company markets external storage devices under the
"NuDesign" name. 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 and non-existent in 1997.
NUDESIGN PRO. In 1995, the Company introduced a line of hot swappable
storage systems using the NuDesign PRO brand name. These products are targeted
and sold primarily through the Company's DTP Direct catalog and through its
Distribution Business.
RETURN POLICY
Certain products identified as such in the Company's DTP Direct catalog,
including tape drives, hard drives, optical drives, and CD-ROM drives may be
returned within 30 days from the date shipped by the Company for a full refund
of the purchase price excluding original shipping charges. Returned product
must be in like new condition, in original packing, complete with all warranty
cards, manuals, cables and other materials as originally shipped, and must not
be modified or damaged. After 30 days from shipment, it is the Company's policy
to not give credit or refunds. The Company attempts to return all products back
to the manufacturer or distributor from which the product was purchased. If the
Company is unsuccessful in returning the product to the respective manufacturer
or distributor it will attempt to discard the equipment accordingly. Provisions
are made currently for estimated product returns expected to occur under the
Company's return policy and for which it may not be able to return to the
manufacturer or distributor.
DIGITAL RIVER, INC.
Digital River has developed 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 with in excess of 110,000 products in its inventory as of
March 9, 1998. 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 9, 1998 Digital River
had contractual relationships with approximately 1,109 software developers
compared to 145 at March 26, 1997. Of these, 869 are marketing on-line through
Digital River as of March 9, 1998, compared to 65 as of March 26, 1997, the
others are 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 media, 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 goal is to be and be recognized as the world's largest
source of inventory transactions and fulfillment of software products on the
Internet. The key elements to this strategy include, building a large
electronic inventory of software products by signing on-line
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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 9, 1998 Digital River had 53 full-time employees and 10
part-time/consultants. 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 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, reliance on current central commerce
server technology for the distribution of digital software, risk of
technological change and evolving industry standards, dependence on the internet
infrastructure, risks associated with security, system disruptions and computer
infrastructure, management's ability to handle a rapidly changing and evolving
business/industry, future changes in government legislation regarding the
internet and business conducted through it's channels, 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 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, 1998. There can be no assurance that
any additional capital required for developing Digital River's business would 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 Squared-Registered Trademark-" from the U.S. Patent and Trademark Office.
The Company also uses and claims rights to the names "Mirror-TM-", "NU
Design-TM-", "NU Design Pro-TM-"and "DTP Direct-TM-" to identify its products
and services. Except with respect to "Tech Squared", the Company has not filed
trademark registration applications or obtained registered and protectable marks
on any of the foregoing names. There can be no assurance that any application,
if filed, will result in the receipt of a registered and protectable 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.
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Digital River has twelve patents pending, dealing with various
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
The Company owns certain assets that are not related to its core
operations, or to its future operating plans. A brief summary of these assets
is as follows:
CAM DESIGNS, INC. The Company owns shares of Cam Designs, Inc., ("CAM
Designs") common stock (the "Cam Designs Shares"). In 1997 the Company sold a
portion of the Cam Design Shares resulting in realized gains of approximately
$27,000 and intends on continuing to reduce its interest in Cam Designs. Cam
Designs, 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 under the symbol "CMDA." 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 acres. The
Company does not intend to further develop these mining properties because it
believes the cost and risks involved would be significant. See "ITEM 3. Legal
Proceedings - Hanover Gold Litigation".
EMPLOYEES
The Company employs approximately 70 people, all of whom are located at the
Company's headquarters in Edina, Minnesota. There are approximately 37
employees in sales, marketing, technical support and customer service, and the
remaining employees are in operations and corporate administration.
RISK FACTORS
RELIANCE ON APPLE/TRANSITION TO WINTEL
DTP Direct's sales of Apple computers accounted for 98% and 99% of the
total computer system sales in 1997 and 1996, respectively. The Company
plans to continue its efforts to expand its Wintel offerings in 1998.
Notwithstanding the Company's efforts to expand these offerings, the Company
is still substantially dependent on sales of Apple related products and there
is no assurance that the Company will successfully transition enough sales to
Wintel related products to offset any decline in the demand for Apple related
products. Also, while the Company believes it could diversify its product
offerings if its customers desired alternatives, a decline in sales of Apple
Macintosh computers or a decrease in the supply of or demand for software and
peripherals for such computers could have a material adverse impact on the
Company's business.
COMPETITION
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
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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.
SUPPLIERS
During 1997, Apple Computer announced its intention to stop licensing the
Mac OS operating system to clone manufacturers. The Company anticipates that
UCC will therefore stop producing Apple clones sometime during 1998.
Notwithstanding the anticipated reduction in UCC sales, there can be no
assurance that UCC (13% and 12% of total company sales in 1997 and 1996,
respectively) 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, the Company's inability to
locate other suppliers, or to successfully transition from selling clones to
Apple products, could have a material adverse effect on the Company.
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.
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 its operations through 1998.
Digital River currently occupies approximately 6,400 square feet of office
space and approximately 7,000 square feet of warehouse space at the Company's
corporate headquarters. The Company bills Digital River for the leased space
through an administrative charge. Total billings by the Company to Digital
River for administrative charges were approximately $131,000 and $82,000 in 1997
and 1996, respectively. The billings represent charges for office and warehouse
space as well as charges for mutually shared resources, namely phone services,
general liability insurance and janitorial services.
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
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lode claims, and an unpatented placer claim and a state lease in and around
the Alder Gulch, near Virginia City, Montana City. 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")
subject to adjustment based on a $2.00 per share guaranteed market value. 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 filed a counter-claim, which included claims of fraud and violation of
Securities Laws.
In April 1997 Hanover filed a Notice of Motion and Motion for Partial
Summary Judgment, which the Company answered on April 13, 1997. On September
23, 1997 Hanover withdrew the motion for partial summary judgment.
In March 1998 Hanover and the Company both filed Motions to dismiss the
case.
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 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, 1997.
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Company's common stock is quoted on the local over-the-counter
market and is quoted on the OTC Bulletin Board quotation system under the
Symbol "TSQD". The following table sets forth, for each of the calendar
periods indicated, the quarterly high and low bid the table represent prices
between dealers, and do not include adjustments for retail mark-ups,
markdowns or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
YEAR HIGH LOW
---- ---- -----
<S> <C> <C>
1997 Fourth quarter $3.88 $0.57
Third quarter 0.85 0.36
Second quarter 0.43 0.19
First quarter 0.69 0.30
1996: Fourth quarter 0.50 0.25
Third quarter 0.75 0.25
Second quarter 1.13 0.34
First quarter 2.19 0.38
</TABLE>
HOLDERS
As of March 3, 1998, there were approximately 298 holders of record of
common stock. The Company believes the actual number of beneficial owners is
significantly greater than the 298 reported above.
DIVIDENDS
Tech Squared Inc. has never declared cash dividends on its common stock and
management intends to retain any earnings for use in its operations and does not
anticipate declaring any cash dividends in the foreseeable future. The Company
has 160,000 shares of preferred stock outstanding. The holders of these
preferred shares may be entitled to a 12% cumulative dividend that has not been
paid since December 1994. The total dividend owing as of December 31, 1997 is
approximately $57,000.
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, approximately $201,000 in
1996 and approximately $201,000 in 1997. 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 First Bank National
Association ("First Bank"), pursuant to the terms of a Subordination Agreement
dated June 27, 1997 between the Company, Mr. Ronning and First Bank. Pursuant
to the Subordination Agreement, the Company can only make payments on this
dividend to Mr. Ronning during the term of the agreement not to exceed $200,000
in the aggregate in any one calendar year. The Company is not allowed to make
any prepayment of the dividend or amend the payment schedule or make any other
dividend payments without the written consent of First Bank.
11
<PAGE>
SALES OF UNREGISTERED SECURITIES
During the three-month period ended December 31, 1997 the Company did not
sell any of its securities in transactions not registered under the Securities
Act of 1933.
In November 1997 Digital River commenced a private placement offering to
raise additional funds through the sale of common stock. As of March 9, 1998,
Digital River has raised approximately $10,100,000 (net of estimated expenses)
in this private placement offering resulting in the issuance of approximately
5,371,000 new shares of its common stock. The issuance of the common stock in
relation to this private placement reduces the Company's ownership percentage
from approximately 35% at December 31, 1997 to approximately 26% at March 9,
1998.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED:
--------------------------
(IN THOUSANDS) 1997 (1) 1996 1995
---------- ------- -------
<S> <C> <C> <C>
Net Sales $36,995 $37,387 $42,136
Gross Profit 4,467 3,911 3,285
Income/(loss) from operations 402 (849) (1,511)
Net income/(loss) applicable to
common shares (1,032) (651) (1,652)
Net income/(loss) excluding 344 (203) (1,566)
Digital River (2)
Total assets 7,600 8,620 9,739
Long term debt & long term portion
of dividend payable to 298 298 393
officer / shareholder
Redeemable preferred stock 12%
cumulative Convertible 217 198 185
Stockholders equity 2,190 1,214 2,238
</TABLE>
(1) Beginning January 1, 1997, the Company began to account for its
investment in Digital River using the equity method of accounting (see
Item 7. Management's Discussion and Analysis of Financial Condition).
Prior to 1997 Digital River was consolidated with the Company's results.
(2) Reflects operating results of the Company excluding Digital River.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain statements contained in this annual report are forward-looking
statements within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934 that involve a number of risks and uncertainties. Such
forward-looking information may be indicated by words such as will, may be,
expects or anticipates. In addition to the factors discussed in this annual
report, among the other factors that could cause actual results to differ
materially are the following: business conditions and growth in the personal
computer industry and the general economy; significant changes in the consumers
demand for computers and requirements related to relative platforms such as
Apple vs. Wintel, competitive factors such as rival computer and peripheral
product sellers and price pressures; availability of vendor products at
reasonable prices; inventory risks due to shifts in market demand; and other
risks presented from time to time in reports filed by the Company with the
Securities and Exchange Commission, including this Form 10-K.
The Company sells computer and peripheral products, targeted primarily at
the graphic arts market, which currently includes primarily Macintosh related
products.
12
<PAGE>
Prior to 1997, the consolidated financial statements included the accounts
of Tech Squared Inc. and its wholly owned subsidiaries (the "Company"), and
Digital River, Inc. ("Digital River"), which the Company controlled through its
bargain purchase option. As a result of private placements of Digital River
common stock in 1997, the Company's ownership percentage of Digital River was
reduced from 60% at December 31, 1996 to approximately 35% at December 31, 1997.
In November 1997 Digital River commenced a private placement offering to raise
additional funds through the sale of common stock. The issuance of common stock
pursuant to this private placement reduced the Company's ownership percentage to
approximately 26% at March 6, 1998. During 1997 the Company recorded a gain on
sale of stock by Digital River through its' stockholders equity of approximately
$2,234,000.
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.
The following is a summary of the balance sheet and operating results for
Tech Squared Inc., excluding Digital River, and the operating results of Tech
Squared Inc. including Digital River for the year ended December 31, 1997, 1996
and 1995, respectively.
<TABLE>
<CAPTION>
TECH SQUARED INC.,
INCLUDING DIGITAL RIVER
----------------------------
IN THOUSANDS (EXCEPT PER SHARE) 1997 1996 1995
------- ------ --------
<S> <C> <C> <C>
Net loss $(1,013) $ (616) $(1,652)
Net loss per share applicable to
common share $(0.10) $(0.06) $ (0.19)
</TABLE>
Summarized condensed consolidated financial information for Tech Squared,
Inc. excluding Digital River is as follows (In 000's, except per share
information):
BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Current assets $5,465 $6,171 $7,867
Total assets 6,761 7,490 9,109
Current liabilities 4,895 5,945 6,666
Stockholders' equity 1,351 1,254 1,866
</TABLE>
OPERATING INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net sales $36,995 $37,276 $42,136
Operating expenses 4,065 4,047 4,630
Net income/(loss) 344 (203) (1,566)
Per share $0.03 $(0.02) $(0.15)
</TABLE>
(a) RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales for 1997 totaled $36,995,000 compared to $37,387,000 for 1996.
The decline in sales is mainly attributable to a 13.5% decline in the Company's
distribution sales due to a significant decline in sales of hard drives, optical
drives, scanners and media. The decline in sales to the Company's distribution
customers was partially offset by an increase in DTP Direct catalog sales of
$1,205,000, or 5.2% compared to 1996 levels. Sales from the DTP Direct
13
<PAGE>
catalog increased primarily due to an increase in Mac systems sales, printers
and graphics software. The Company also experienced a 20% reduction in
product returns in 1997 compared to 1996 primarily due to increased focus and
attention Company-wide to product returns and awareness.
Fluctuations in the Company's net sales from period to period can be
expected due to a number of factors, including the timing of new product
introductions by the Company's major vendors and their competitors, seasonal
cycles commonly seen in computer-related industries, and changes in product mix
and product pricing. As a result, the operating results for any particular
period are not necessarily indicative of the results of any future period.
GROSS PROFIT
Gross profit for 1997 was $4,467,000 or 12.1% of net sales compared to
$3,911,000 or 10.5% of net sales in 1996. Gross profit as a percentage of sales
increased in 1997 due to a reduction in inventory obsolescence and to an
increase in DTP Direct catalog sales, which generally have a higher margin, as a
percentage of total sales. DTP Direct catalog sales gross margins increased
from 17.2% in 1996 to 18.1% in 1997.
The Company expects ongoing competitive pressure on gross margins in 1998
and beyond.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $1,883,000 or 5.1% of net sales in
1997 compared to $2,016,000 or 5.4% of net sales in 1996 excluding Digital River
selling and marketing expense of $68,000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for 1997 were $2,182,000 compared to
$2,447,000 for 1996. Excluding Digital River general and administrative costs,
the 1996 general and administrative expenses were $2,031,000. The increase in
1997 is primarily due to an increase in payroll and related costs including the
addition of a new President and COO in late 1996.
GAIN ON SALE OF SECURITIES
Gain on sale of securities for 1997 was approximately $27,000. There was
no gain on sale of securities in 1996.
INTEREST EXPENSE, NET
Net interest expense for 1997 was approximately $85,000 compared to
approximately $43,000 in 1996. The increase in interest expense is primarily
due to an increase in the average outstanding balance on the Company's line of
credit.
INCOME TAXES
The Company recorded no income tax provision in 1997 or in 1996 due to the
availability of net operating loss carryforwards from prior years to offset any
tax expense.
14
<PAGE>
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.
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%.
SELLING AND MARKETING EXPENSES
Selling and marketing expense 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
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
15
<PAGE>
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 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, 1997,
consisted of liquid funds, a revolving line of credit agreement with First Bank
National Association ("First Bank"), and vendor trade credit lines.
As of December 31, 1997 the Company had working capital of $570,000. This
working capital has been reduced by the current portion of a dividend declared
but not yet paid to the Company's majority shareholder and CEO, in the amount of
approximately $200,000 which is subordinated to the Company's indebtedness under
a line of credit with First Bank pursuant to the terms of Financing and Security
Agreements dated June 27, 1997. Pursuant to a related Subordination Agreement
with First Bank, the Company is only allowed to make payments on this dividend
not to exceed $200,000 in the aggregate in any one calendar year provided that
before and after each payment the Company is in compliance with the Financing
Agreement.
The Company's working capital includes $467,000 relating to its investment
in Cam Design, Inc. ("Cam Design"). Of the Company's shares of Cam Design stock,
38,000 shares remained in escrow as of December 31, 1997, pursuant to a
settlement agreement as security for future payments. The trading market for the
Cam Design 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.
The Company has a Revolving Line of Credit Agreement with First Bank
through June 1999. Borrowings under the $2,500,000 line of credit with First
Bank are payable on demand, limited by eligible percentages of accounts
receivable and inventory and bear interest at the prime rate plus 1.75%.
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. As of December 31, 1997 the Company had unused availability under the
discretionary revolving line of credit of approximately $1,534,000 and
outstanding borrowings of $766,000.
The Company has a flooring program with a financing company covering up to
$475,000 in inventory purchases. As of March 1998, the flooring program is
secured by a standby letter of credit in the amount of $400,000 issued pursuant
to the Company's line of credit with First Bank.
16
<PAGE>
The Company uses the flooring program to take advantage of better programs
with its major distributors.
As of December 31, 1997, Inventory levels remained stable at approximately
$1.9 million compared to 1996. Capital expenditures totaled $168,000 in 1997
compared to $244,000 in 1996. Excluding Digital River capital expenditures in
1996 total capital expenditures were $139,000. The increase in capital
expenditures in 1997 is primarily due to computer system upgrades and
modifications.
The Company's computer systems and those of third parties with whom it does
business with will be affected by issues and problems related to changes
required in the year 2000 ("Yr 2K"). The Company is currently in the process of
evaluating its information system requirements for Yr2K issues and compliance.
The Company does not anticipate that the cost to modify its systems or the
upgrading of its current system to be Yr2K compliant will be material to its
financial condition or results of operations at this time. The Company does not
anticipate any material disruption in its operations as a result of any failure
by the Company to be in compliance. Although these costs currently are not
expected to be significant, failure to achieve timely completion of required
modifications or conversions or failure of the third parties with whom the
Company has relationships (e.g., vendors, clients, credit card processors) to be
Yr2K compliant could have a material adverse affect on the financial condition
and operations of the Company. Maintenance and modification costs incurred by
the Company specifically related to being Yr2K compliant will be expensed as
incurred and costs of new software (whether purchased or internally developed)
will be capitalized and amortized over the useful life of the applicable
software.
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 1998. However, maintaining an adequate level of working
capital through the end of 1998 and thereafter depends in part on the success of
the Company's sales and marketing efforts, the Company's ability to control
operating expenses, and the Company's ability to maintain its relationships with
its bank and its suppliers. Furthermore, funding of the Company's operations in
future periods may require additional investments in the Company in the form of
equity or debt. There can be no assurance that the Company will achieve desired
levels of sales or profitability, or those future capital infusions will be
available on terms acceptable to the Company, if at all.
ITEM 8. FINANCIAL STATEMENTS
The balance sheets of the Company as of December 31, 1997 and 1996,
and the related statements of operations, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1997 are
included in this report on pages F-1 to F-18. The index to the financial
statements appears on page F-1. The financial statements were audited by
Arthur Andersen LLP, whose related independent auditors' report appears on
page F-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
17
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
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, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 6, 1998
F-2
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 300 $ 898,558
Restricted cash 143,623 -
Available-for-sale securities 467,438 940,000
Trade accounts receivable, less allowance
for doubtful accounts of $180,000 and $306,000 2,727,883 2,879,200
Inventories 1,890,480 1,906,546
Prepaids and other current assets 234,936 288,342
Debt issuance costs - 147,413
---------- ----------
Total current assets 5,464,660 7,060,059
Property and Equipment, net 346,419 476,283
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 839,202 -
---------- ----------
$7,600,069 $8,619,618
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $2,816,959 $4,416,419
Revolving line of credit 765,728 279,697
Current maturities of long-term debt 80,000 1,108,750
Accrued compensation and benefits 239,748 187,650
Other accrued expenses 791,743 425,516
Dividend payable to officer/shareholder 200,721 491,977
---------- ----------
Total current liabilities 4,894,899 6,910,009
Dividend Payable to Officer/Shareholder 283,136 200,000
Long-Term Debt, less current maturities 15,000 97,970
Redeemable Preferred Stock, 12% cumulative convertible, $1 par, 1,000,000 shares
authorized; 160,000 shares issued and outstanding 216,700 197,500
---------- ----------
Commitments and Contingencies (Note 10)
Stockholders' Equity:
Common stock, no par value, 25,000,000 shares authorized; 10,375,037 and 10,374,870
shares issued and outstanding, respectively - -
Additional paid-in capital 3,189,436 3,189,103
Accumulated deficit (912,539) (2,114,964)
Unrealized gain (loss) on available-for-sale securities (86,563) 140,000
---------- ----------
Total stockholders' equity 2,190,334 1,214,139
---------- ----------
$7,600,069 $8,619,618
---------- ----------
---------- ----------
</TABLE>
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
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $36,995,277 $37,386,715 $42,136,421
Cost of sales 32,527,878 33,475,525 38,851,836
----------- ----------- -----------
Gross profit 4,467,399 3,911,190 3,284,585
----------- ----------- -----------
Selling and marketing expenses 1,882,729 2,083,961 2,198,616
General and administrative expenses 2,182,458 2,446,500 2,467,502
Research and development expenses - 229,690 129,653
----------- ----------- -----------
Total operating expenses 4,065,187 4,760,151 4,795,771
----------- ----------- -----------
Income (loss) from operations 402,212 (848,961) (1,511,186)
Gain on sale of securities 26,646 - -
Interest expense, net (85,078) (43,068) (197,986)
Loss from unconsolidated subsidiary--
Digital River (1,356,370) - -
----------- ----------- -----------
Loss before minority interest in losses of
Digital River (1,012,590) (892,029) (1,709,172)
Minority interest in losses of Digital River - 275,634 57,424
----------- ----------- -----------
Net loss (1,012,590) (616,395) (1,651,748)
Preferred stock dividends 19,200 35,000 -
----------- ----------- -----------
Net loss applicable to common shares $(1,031,790) $ (651,395) $(1,651,748)
----------- ----------- -----------
----------- ----------- -----------
Net loss per common share, basic and diluted $ (.10) $ (.06) $ (.19)
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding, basic and
diluted 10,374,870 10,374,870 8,721,220
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) 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)
Preferred stock dividends - - (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
Net loss - - (1,012,590) - (1,012,590)
Gain on sale of stock by Digital River - - 2,234,215 - 2,234,215
Preferred stock dividends - - (19,200) - (19,200)
Warrants exercised 167 333 - 333
Change in unrealized gain (loss) on available-for-sale
securities - - - (226,563) (226,563)
---------- ---------- ---------- ------------ -----------
Balance, December 31, 1997 10,375,037 $3,189,436 $ (912,539) $ (86,563) $2,190,334
---------- ---------- ---------- ------------ -----------
---------- ---------- ---------- ------------ -----------
</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
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Operating Activities:
Net loss $(1,012,590) $ (616,395) $(1,651,748)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities-
Depreciation and amortization 191,737 244,599 249,710
Equity in losses of Digital River 1,356,370 - -
Gain on sale of available-for-sale securities (26,646) - -
Minority interest in Digital River - (275,634) (57,424)
Change in operating assets and liabilities:
Trade accounts receivable 151,317 (573,104) 1,128,914
Inventories 16,066 1,612,822 265,225
Prepaids and other current assets 110,787 173,297 (258,547)
Accounts payable (1,457,016) (511,199) 552,924
Accrued compensation and benefits 52,098 44,804 19,908
Other accrued expenses 280,090 (32,865) 336,709
----------- ---------- ----------
Net cash provided by (used in) operating activities (337,787) 66,325 585,671
----------- ---------- ----------
Investing Activities:
Restricted cash (143,623) - -
Purchase of property and equipment (168,016) (244,047) (56,119)
Patents and organization costs - (27,964) (40,534)
Proceeds from sale of available-for-sale securities 272,646 - -
Decrease in cash due to deconsolidation of Digital River (799,721) - -
Change in officer/stockholder receivable - 4,288 (9,800)
----------- ---------- ----------
Net cash used in investing activities (838,714) (267,723) (106,453)
----------- ---------- ----------
Financing Activities:
Net borrowings (payments) on revolving line of credit 486,363 (377,277) (1,755,000)
Issuance of common stock - - 1,984,781
Stock repurchase - (37,500) (200,000)
Dividends paid (208,120) (200,730) (261,513)
Proceeds from issuance of Digital River long-term debt, net - 848,093 -
----------- ---------- ----------
Net cash provided by (used in) financing activities 278,243 232,586 (231,732)
----------- ---------- ----------
Increase (decrease) in cash and cash equivalents (898,258) 31,188 247,486
Cash and cash equivalents, beginning of year 898,558 867,370 619,884
----------- ---------- ----------
Cash and cash equivalents, end of year $ 300 $ 898,558 $ 867,370
----------- ---------- ----------
----------- ---------- ----------
Supplemental cash flow information:
Cash paid for interest $ 93,970 $ 50,375 $ 245,478
Noncash Financing Activities:
Net assets acquired through Jaguar merger - - 1,462,246
Dividends not paid 19,200 35,000 892,707
Noncash repurchase of shares - 178,485 -
Increase (decrease) in various accounts upon deconsolidation of Digital River:
Prepaids and other current assets (8,934) - -
Property and equipment (106,617) - -
Debt issuance costs (147,413) - -
Patents and organization costs (133,488) - -
Convertible debentures (998,750) - -
Accounts payable (142,445) - -
Other accrued liabilities (93,621) - -
</TABLE>
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, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS AND OPERATIONS
Prior to January 1, 1997, the consolidated financial statements included the
accounts of Tech Squared Inc. and its wholly owned subsidiaries (the Company),
and Digital River, Inc. (Digital River), an on-line distributor of software
products via the Internet, which the Company effectively controlled through its
bargain purchase option. During 1997, Digital River converted all of its
outstanding debentures and issued additional common stock pursuant to private
placements which reduced the Company's effective control from 60% at December
31, 1996 to approximately 35% at December 31, 1997. As a result of the reduction
in the Company's ownership percentage, the financial results of Digital River
are no longer consolidated with those of the Company. Beginning January 1, 1997,
the Company accounted for its investment in Digital River using the equity
method of accounting.
The Company is a national direct marketer and distributor of microcomputer
hardware and software products primarily for users of Apple
Macintosh-Registered Trademark-personal computers and IBM-compatible personal
computers. The Company's sales and marketing efforts are currently targeted
at desktop publishing, graphic arts and prepress industries through "DTP
Direct," its catalog, and at 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 MacUSA common share outstanding, for a
total of 7,031,720 equivalent shares, approximately 82% of the postmerger shares
outstanding. The Merger was accounted for as a reverse acquisition under the
purchase method of accounting 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 the inclusion of its historical
results was not considered meaningful. Following the Merger, Jaguar changed its
name to Tech Squared Inc.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with maturities of
three months or less to be cash equivalents. Cash equivalents are carried at
cost which approximates market value.
RESTRICTED CASH
Restricted cash represents amounts held in escrow by certain financial service
providers.
INVENTORIES
Inventories, consisting primarily of products held for resale, are stated at the
lower of cost or market, as determined by the first-in, first-out inventory
method.
F-7
<PAGE>
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.
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Furniture and equipment $1,224,304 $1,176,501
Leasehold improvements 140,929 135,551
---------- ----------
1,365,233 1,312,052
Less- Accumulated depreciation and amortization (1,018,814) (835,769)
---------- ----------
$ 346,419 $ 476,283
---------- ----------
---------- ----------
</TABLE>
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.
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 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.
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
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," during 1997. All prior earnings per share amounts are
presented in accordance with the new standard. Basic loss per common share is
computed by dividing net loss applicable to common shares by the weighted
average number of shares of common stock outstanding during the year. The
computation of diluted earnings per common share, formerly referred to as fully
diluted earnings per share, is similar to the computation of basic loss per
common share, except that the denominator is increased for the assumed
conversion of convertible securities and the exercise of dilutive options using
the treasury stock method. The shares used in computing basic and diluted
earnings per share were the same for the three years ended December 31, 1997.
Options and warrants totaling 5,661,484, 6,201,958 and
F-8
<PAGE>
6,974,468 were excluded from dilutive earnings per share in 1997, 1996 and
1995, respectively, as their effect is 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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During June 1997, the Financial Accounting Standards Board released SFAS No.
130, "Reporting Comprehensive Income," effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 established standards for reporting and
display in the financial statements of total net income and the components of
all other nonowner changes in equity, referred to as comprehensive income. The
Company will adopt SFAS No. 130 in 1998 and is currently analyzing the impact it
will have on the disclosures in the financial statements.
During June 1997, the Financial Accounting Standards Board released SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
requires disclosure of business and geographic segments in the consolidated
financial statements of the Company. The Company will adopt SFAS No. 131 in 1998
and is currently analyzing the impact it will have on the disclosures in its
financial statements.
2. INVESTMENTS:
In connection with the Merger 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 shares of Cam Designs, Inc. (Cam Designs) common stock (the Cam
Designs Shares). During 1997, the Company sold shares resulting in realized
gains on sale of common stock of $27,500 less commissions and fees and intends
on continuing to reduce its interest in Cam designs. Cam Designs, 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." As part of a settlement
agreement, the Company is required to hold shares of Cam Design stock with an
escrow agent. The number of escrow shares will be adjusted downward and released
from escrow as payments, set forth in the agreement, are made. 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. The cost and fair market value of
the Cam Design common stock was $556,000 and $467,000 as of December 31, 1997
and $800,000 and $940,000 as of December 31, 1996.
F-9
<PAGE>
MINING ASSETS
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 in exchange for 525,000 shares of Hanover Gold Company, Inc.
(Hanover) common stock subject to adjustment, based upon a $2.00 per share
guaranteed market value (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 with the Securities and Exchange Commission 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 the escrow arrangement and release title to its Montana Gold mining
properties in exchange for the 400,000 Hanover Shares held in escrow, along with
certain other damages. The Company has filed a counter-claim which included
claims of fraud and violation of securities laws.
In April 1997, Hanover filed a Notice of Motion and Motion for Partial Summary
Judgement, which the Company answered on April 13, 1997. On September 23, 1997,
Hanover withdrew the motion for partial summary judgement. In March 1998, the
Company and Hanover both filed motions to dismiss the case.
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 balance sheet. 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
4,800,000 shares of Digital River common stock from the Company's majority
stockholder and CEO, representing at the time a 60% ownership in Digital River.
The option is not transferable and is exercisable at any time through December
31, 2000 for a total exercise price of $1. During 1997, Digital River issued
5,862,856 additional shares of common stock at $0.75 to $2.00 per share pursuant
to various private placements. As a result of the private placement agreements,
Digital River raised approximately $6.6 million during 1997. The issuance of
additional shares pursuant to the private placement agreements reduced the
Company's ownership percentage in Digital River to approximately 35% at December
31, 1997. In November 1997, Digital River commenced a private placement offering
to raise additional funds through the sale of common stock. In March 1998,
Digital River announced that it had raised approximately $10.1 million related
to the private placement offering commenced in November 1997, of which $1.3
million was received prior to December 31, 1997, through issuance of
approximately 5.4 million shares
F-10
<PAGE>
of its common stock, 772,000 shares of which were issued prior to December
31, 1997. The issuance of the common stock in relation to this private
placement reduces the Company's ownership percentage to approximately 26% at
March 6, 1998. The Company has recorded a gain totaling $2,234,215, which is
recorded as a credit to accumulated deficit in the accompanying consolidated
statements of stockholders' equity. No taxes have been provided on this gain
because the Company has reduced its valuation allowance for the corresponding
income tax on this transaction.
Digital River has developed and is operating a proprietary system which allows
the secure sale and delivery of software, fonts and images online, via the
Internet.
Summarized condensed financial information of Digital River as of and for the
years ended December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Balance sheet information:
Cash $2,126 $ 800
Total assets 3,616 1,202
Current liabilities 1,076 1,258
Stockholders' equity (deficit) 2,540 (58)
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
Operating information:
Net sales $2,472 $111 $ -
Costs and expenses 5,746 801 144
Net loss (3,274) (690) (144)
</TABLE>
Digital River currently occupies approximately 6,400 square feet of office
space and approximately 7,000 square feet of warehouse space at the Company's
corporate headquarters and shares certain administrative services. The
Company bills Digital River for leased space through an administrative charge
covering office and warehouse space as well as charges for mutually shared
resources, including certain phone services, janitorial services, security,
reception and MIS. Total billings by the Company to Digital River for
administrative charges were approximately $131,000 and $82,000, in 1997 and
1996, respectively.
During 1997, the Company began performing fulfillment services for Digital River
on physical shipments of products, for which Digital River pays the Company a
fulfillment fee. In 1997, the Company billed Digital River $7,600 for these
services.
Beginning in July 1997, Digital River began contracting the services of the
Company's Executive Director of Finance. Under this arrangement Digital River
reimburses the Company approximately 87% of his salary.
F-11
<PAGE>
4. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT:
The Company has a revolving credit agreement with a bank which expires in June
1999. Borrowings under the $2,500,000 line are payable on demand, limited by
eligible percentages of accounts receivable and inventory, as defined, and bear
interest at the prime rate plus 1.75%. Borrowings under the agreement are
secured by substantially all the Company's assets, and are personally guaranteed
up to $500,000 by the Company's Chairman and CEO. Borrowings on the line
averaged $642,000, $638,000 and $3,550,000 at an average interest rate of
10.25%, 10.25% and 9.9% in 1997, 1996 and 1995, respectively.
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Digital River--18% convertible debentures due December 31, 1997,
convertible at the lesser of 75% of the subsequent per share $ - $ 998,000
offering price or $.75 per share
Note payable, payable $20,000 per quarter with interest
at 7.5% 95,000 205,000
Other - 3,720
-------- ----------
95,000 1,206,720
Less- Current portion (80,000) (1,108,750)
-------- ----------
$15,000 $ 97,970
-------- ----------
-------- ----------
</TABLE>
The Company has a flooring program with a financing company covering up to
$475,000 in inventory purchases. As of March 1998, the flooring program is
secured by a standby letter of credit in the amount of $400,000 issued pursuant
to the Company's line of credit with the bank.
5. ADVERTISING COSTS:
Advertising costs related to mailed direct response advertising are deferred and
charged to expense over the period during which the related sales are expected
to occur. The cost of nondirect response advertising is charged to expense the
first time the advertising takes place. The Company uses an accelerated
amortization schedule for its "DTP Direct" catalog whereby approximately 90% of
the costs are amortized in the first four months and fully amortized by the
sixth month. Direct response related advertising expense was $371,000, $491,000
and $601,000 in 1997, 1996 and 1995, respectively.
6. INCOME TAXES:
As of December 31, 1997, the Company had net operating loss carryforwards of
approximately $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 1998 to 2007. The Company
recorded a full valuation allowance in 1997 and 1996 due to the uncertainty
associated with the Company's ability to realize the benefits related to net
operating losses generated.
F-12
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ------
<S> <C> <C>
U.S. statutory rate (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit (3.2) (3.2) (3.2)
Digital River net losses 49.7 20.0 3.0
Increase (decrease) in valuation allowance (12.5) 17.2 34.2
----- ----- ------
Effective income tax rate - % - % - %
----- ----- ------
----- ----- ------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Inventories $ 159,000 $ 254,000
Accrued expenses and reserves 184,000 317,000
Premerger net operating loss carryforwards and
credits 826,000 840,000
Investments 684,000 684,000
Net operating loss carryforwards 173,000 156,000
---------- ----------
2,026,000 2,251,000
Deferred tax valuation allowance (977,000) (1,886,000)
---------- ----------
Total deferred tax assets 1,049,000 365,000
---------- ----------
Deferred tax liabilities:
Advertising (12,000) (15,000)
Investments (206,000) (350,000)
Gain on sale of stock by Digital River (831,000) -
---------- ----------
Total deferred tax liabilities (1,049,000) (365,000)
---------- ----------
Net deferred taxes $ - $ -
---------- ----------
---------- ----------
</TABLE>
7. 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 1997 or 1996.
8. STOCK OPTIONS AND WARRANTS:
MacUSA PLAN
In 1995, the Company's stockholders approved the MacUSA 1995 Stock Option Plan
(the MacUSA Plan), reserving and granting options for 2,870,016 shares of the
Company's common
F-13
<PAGE>
stock. Options granted under the MacUSA Plan have been granted at the current
market price on the date of grant. Such options generally vest six years from
the date of grant and may vest earlier in the event certain targeted net
income is achieved. The Company's majority stockholder and CEO received
2,669,996 of these options. In conjunction with the hiring of certain
employees, the Company approved a plan in 1997 to grant options in Tech
Squared Inc. 1995 Stock Option Plan (the 1995 Plan) to these employees
through a "give-back" of 1,350,000 option shares in the MacUSA Plan owned by
its Chairman and CEO. These "give-back" shares will be canceled upon the
exercise of these options by the employees and in no event are exercisable
while the options are outstanding.
TECH SQUARED, INC. 1995 STOCK OPTION PLAN
In December 1995, the Company's board of directors approved the 1995 Plan and
reserved 2,500,000 shares for future grant. In July 1997, the Company's board of
directors approved an increase to the maximum number of shares available for
grant under the 1995 Plan to 4,000,000 shares subject to shareholder approval.
Options granted under the 1995 Plan are granted at not less than the current
market price on the date of grant, cannot remain outstanding for over ten years
and generally become exercisable over a period of four years. Options granted
under the 1995 Plan totaled 1,354,000, 1,295,000 and 2,040,000 in 1997, 1996 and
1995, respectively.
1995 NON-EMPLOYEE DIRECTOR OPTION PLAN
Also in December 1995, the Company's board of directors approved the Tech
Squared Inc. 1995 Non-Employee Director Option Plan (the Plan), reserving
350,000 shares of stock for future grant. The Plan allows each director to be
granted options for up to 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. Of previously granted shares, 50,000
remain outstanding pursuant to the Plan as of December 31, 1997.
OTHER
In 1995, the Company granted a warrant to purchase 150,000 shares of stock for
$1.00 per share as compensation for investment banking services and a warrant to
purchase 50,000 shares for $1.00 per share as partial settlement of a note
payable. Both warrants 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. At
December 31, 1997, 1,098,076 of these shares expired and were forfeited. The
remaining 16,278 options and warrants will expire at various dates from May 1999
through July 2000.
F-14
<PAGE>
A summary of the Company's various stock option plans at year-end, with changes
during the year then ended, is as follows (see Notes 10 and 12):
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year 6,201,958 $1.18 6,974,468 $1.27 24,700 $ .84
Granted 1,354,000 0.75 1,602,500 0.75 6,485,414 1.13
Forfeited/canceled (1,894,474) 1.72 (2,375,010) 0.75 (650,000) 1.01
Options and warrants
assumed in
the Merger - - - - 1,114,354 2.26
---------- ---------- ---------- ------- ---------- -------
Outstanding, end of year 5,661,484 $ .89 6,201,958 $1.18 6,974,468 $1.27
---------- ---------- ---------- ------- ---------- -------
---------- ---------- ---------- ------- ---------- -------
Exercisable, end
of year 2,002,366 $ .99 3,066,958 $1.51 2,584,468 $1.85
---------- ---------- ---------- ------- ---------- -------
---------- ---------- ---------- ------- ---------- -------
Weighted average fair
value of employee
options granted $ .50 $ .22 $ .24
--------- ------- -------
--------- ------- -------
</TABLE>
The Company accounts for these plans under Accounting Principles Board Opinion
No. 25, under which no compensation cost has been recognized. Had compensation
cost for these plans been determined consistent with SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net loss and net loss per share
would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -------------
<S> <C> <C> <C>
Net loss:
As reported $(1,012,590) $(616,395) $(1,651,748)
Pro forma (1,453,394) (884,399) (1,939,748)
Basic and diluted loss per share:
As reported $ (.10) $ (.06) $ (.19)
Pro forma (.14) (.09) (.22)
</TABLE>
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
F-15
<PAGE>
option grants in 1997, 1996 and 1995, respectively: risk-free interest rate
of 6.11%, 6% and 6%; no expected dividend yield; expected lives of five
years; and expected volatility of 206% for 1997. No volatility was used for
1996 and 1995 as trading was limited.
9. STOCKHOLDERS' EQUITY:
The Company's redeemable preferred stock carries a 12% cumulative dividend
payable quarterly, is convertible into common stock at any time for $12.50 per
share, carries a preference on liquidation or dissolution of the Company, and
has equal voting rights with the Company's outstanding common stock. The
preferred shares are callable by the Company at any time with 60 days' written
notice, and all outstanding shares must be redeemed by 2002. The Company has no
obligation to redeem the preferred stock prior to 2002. In 1996, the Company
redeemed 25,000 shares of preferred stock for total consideration of $22,500.
The dividend payable to officer/shareholder is evidenced primarily by a note
payable to the Company's majority stockholder and CEO. The Company paid
approximately $200,000 of this dividend during 1997 and approximately $200,000
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 up to $200,000 in a calendar year.
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 to August and September 1997.
The Company also issued 61,000 shares of its common stock to the sales agent in
connection with this offering as additional compensation. None of the warrants
issued in conjunction with the stock offering remain outstanding as of December
31, 1997.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company has been named as a defendant in lawsuits in the normal course of
business. Management believes that the ultimate resolution of these matters will
not have a material adverse effect on the Company's financial position or
results of operations.
F-16
<PAGE>
OPERATING LEASES
The Company leases all of its warehouse and office space and certain equipment
under operating lease agreements. The Company recorded operating lease rental
expense totaling $193,000, $184,000, and $174,000 for the years ended December
31, 1997, 1996 and 1995, respectively. Future minimum lease payments, including
estimated common area maintenance, are as follows for the years ending December
31:
<TABLE>
<CAPTION>
<S> <C>
1998 $215,000
1999 110,000
--------
$325,000
--------
--------
</TABLE>
GOVERNMENT REGULATION
The Company presently collects Minnesota sales tax on sales made within the
State of Minnesota. Various states have attempted to impose on direct marketers,
the burden of collecting use taxes on the sale of products shipped to state
residents. The United States Supreme Court affirmed its position that it is
unlawful for a state to impose use tax collection obligations on an out-of-state
mail order company whose only contact with the state was the distribution of
catalogs and other advertising materials through the mail and subsequent
delivery of purchased goods by parcel post and interstate common carriers. If
legislation is passed to overturn the United States Supreme Court's decision,
the imposition of a use tax collection obligation on the Company in states to
which it ships products would result in additional administrative expenses to
the Company, could result in price increases to the customer, and could have a
material adverse effect on the Company.
11. RELATED-PARTY TRANSACTIONS:
In December 1995, the Company entered into a consulting agreement with Jaguar
Ventures, Limited, an entity owned by one of the Company's board members and by
two significant stockholders who were principals of Jaguar. Pursuant to the
agreement, the Company agreed to issue warrants to acquire 300,000 shares of the
Company's common stock at $1.75 per share with certain registration rights, and
paid $50,000 in cash. In September 1996, the Company repriced these warrants to
$1.01 per share. In September 1997, the Company agreed to extend the term by one
year to December 1999, subject to certain restrictions.
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 majority stockholder and CEO, 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 December 31, 1996. As consideration for the Company's majority
stockholder and CEO's personal guarantee of up to $500,000 of the amounts
outstanding pursuant to the Company's revolving line of credit, the existing
Promissory Note dated January 2, 1995 has been amended so that effective January
1, 1997, the note will no
F-17
<PAGE>
longer bear any interest, until such time as the personal guarantee is
terminated in full when the note will return to its original terms.
In July 1995, the Company's majority stockholder and CEO reduced his salary, and
in October 1995, discontinued his salary altogether. 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-18
<PAGE>
PART III
ITEM 10. 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 1998 Proxy Statement, such proxy statement to be filed within 120
days of December 31, 1997, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "COMPENSATION AND OTHER BENEFITS"
in the Company's 1998 Proxy Statement, such proxy statement to be filed
within 120 days of December 31, 1997, is incorporated herein by reference.
ITEM 12. 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 1998 Proxy Statement, such
proxy statement to be filed within 120 days of December 31, 1997, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "CERTAIN TRANSACTIONS" in the
Company's 1998 Proxy Statement, such proxy statement to be filed within 120
days of December 31, 1997, is incorporated herein by reference.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
Item
No. Description
- ----- ------------
<S> <C>
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)
10.2 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)
18
<PAGE>
<S> <C>
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)
10.17 * 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)
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)
10.24 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)
10.31 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)
19
<PAGE>
<S> <C>
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)
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.
(incorporated as Exhibit No. 10. 39 in (8) below)
10.40* Incentive Stock Option Agreement with Chuck Reese relating to
649,000 shares of Common Stock, dated September 19, 1996
(incorporated as Exhibit No. 10.40 in (8) below)
10.44 Financing Agreement between Tech Squared Inc., and First Bank NA
dated June 27, 1997. (incorporated as Exhibit No. 10.44 in (9)
below).
10.45 Security Agreement between Tech Squared Inc., and First Bank NA
dated June 27, 1997. (incorporated as Exhibit No. 10.45 in (9)
below).
10.46 Guaranty between Joel A. Ronning and First Bank NA dated June 27,
1997. (incorporated as Exhibit No. 10.46 in (9) below).
10.47 Subordination Agreement between Tech Squared Inc., Joel A. Ronning
and First Bank NA dated June 27, 1997. (incorporated as Exhibit
10.47 in (9) below).
10.48* Letter Agreement between Tech Squared Inc. and Rick Apple, Senior
VP of Marketing, dated April 29, 1997. (incorporated as Exhibit
10.48 in (9) below).
10.49 Settlement Agreement between Tech Squared Inc. f/k/a Jaguar Group,
Limited, successor in interest through merger to MacUSA, Inc. and
John P. Earling dated May 30, 1997. (incorporated as Exhibit 10.49
in (9) below).
10.50 Escrow Agreement between Tech Squared Inc., f/k/a Jaguar Group
Limited, successor in interest through merger to MacUSA, Inc. and
John P. Earling, and First Trust National Association, Minneapolis,
MN dated May 30, 1997. (incorporated as Exhibit 10.50 in (9)
below).
10.51 Amendment #1 to Tech Squared Inc. 1995 Stock Option Plan (Effective
July 25, 1997). (incorporated as Exhibit 10.51 in (10) below).
10.52 Agreement among Tech Squared Inc., Joel Ronning and a holder of
options to purchase shares of the Company's Common Stock. (redacted
version-confidential treatment requested)
20
<PAGE>
<S> <C>
10.53 Fujitsu Modification Agreement between Digital River Inc., Fujitsu
Limited and Other Parties dated December 11, 1997.
10.54 First Amendment to Financing Agreement between Tech Squared Inc.
and First Bank National Association dated February 19, 1998.
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 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.
(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.
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the period ended September 31, 1996.
(8) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the period ended December 31, 1996.
(9) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997.
(10) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1997.
</TABLE>
(b) REPORTS ON FORM 8-K
None.
21
<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 27, 1998 By: /s/ Joel A. Ronning
Joel A. Ronning
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Company and in the capacities
and on the dates indicated.
Signature and Title Date Executed
------------------- --------------
/s/ Joel A. Ronning March 27,1998
-------------------
Joel A. Ronning
Chief Executive Officer, Chief
Financial Officer, Secretary
and Director (principal
executive accounting and
financial officer)
/s/ Chuck Reese March 27, 1998
----------------------
Chuck Reese, Director
/s/ Richard Runbeck March 27, 1998
--------------------------
Richard Runbeck, Director
22
<PAGE>
TECH SQUARED INC.
EXHIBIT INDEX TO FORM 10-K
For Year Ended December 31, 1997
<TABLE>
<CAPTION>
Item No. Item
- -------- -----
<S> <C>
10.52 Agreement among Tech Squared Inc., Joel Ronning and a holder of
options to purchase shares of the Company's Common Stock.
(redacted version-confidential treatment requested)
10.53 Fujitsu Modification Agreement between Digital River Inc., Fujitsu
Limited and Other Parties dated December 11, 1997.
10.54 First Amendment to Financing Agreement between Tech Squared Inc.
and First Bank National Association dated February 19, 1998.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
</TABLE>
23
<PAGE>
AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the
[CONFIDENTIAL TREATMENT REQUESTED], 1998, by and between:
[CONFIDENTIAL TREATMENT REQUESTED]
and
Tech Squared Inc.
5198 West 76th Street
Edina, Minnesota 55439
(the "Company").
R E C I T A L S :
WHEREAS, [CONFIDENTIAL TREATMENT REQUESTED], an employee of the Company
since [CONFIDENTIAL TREATMENT REQUESTED], holds stock options exercisable,
once vested, through [CONFIDENTIAL TREATMENT REQUESTED] to purchase up to
[CONFIDENTIAL TREATMENT REQUESTED] shares of the Company's common stock (the
"Common Stock") at an exercise price of $0.75 per share (the "Options");
WHEREAS, [CONFIDENTIAL TREATMENT REQUESTED] of the Options vested on each
of [CONFIDENTIAL TREATMENT REQUESTED], 1996 and 1997 (such [CONFIDENTIAL
TREATMENT REQUESTED] Options, and future Options as they become vested from
time to time, being referred to hereafter as the "Vested Options") and,
assuming [CONFIDENTIAL TREATMENT REQUESTED] continues in the employ of the
Company, [CONFIDENTIAL TREATMENT REQUESTED] and [CONFIDENTIAL TREATMENT
REQUESTED] of the Options will vest, respectively, on [CONFIDENTIAL TREATMENT
REQUESTED], 1998 and 1999 (such [CONFIDENTIAL TREATMENT REQUESTED] Options, or
such lesser number as may from time to time remain unvested, being referred to
hereafter as the Unvested Options");
WHEREAS, [CONFIDENTIAL TREATMENT REQUESTED] and the Company disagree on
the interpretation of [CONFIDENTIAL TREATMENT REQUESTED]'s rights to exercise
his Vested Options through various methods, among other matters; and
WHEREAS, the parties desire to enter into this Agreement to clarify the
interpretation of [CONFIDENTIAL TREATMENT REQUESTED]'s Option exercise rights
and otherwise to settle all other matters with respect to such Options and the
parties' relationship; THEREFORE, IT IS AGREED AS FOLLOWS:
<PAGE>
1. 1995 STOCK OPTION PLAN. The parties agree that the Options were granted
pursuant to and remain subject to the terms of the 1995 Stock Option Plan of
the Company (the "Plan"). To the extent there is any conflict between the Plan
and this Agreement, this Agreement shall control.
2. METHODS FOR EXERCISE OF OPTIONS. The parties have disagreed regarding the
manners of exercise permitted and hereby agree (solely for purposes of settling
the disagreement with [CONFIDENTIAL TREATMENT REQUESTED], and not as to any
other employee of the Company) that the following are the exclusive methods by
which [CONFIDENTIAL TREATMENT REQUESTED] may exercise his Options from time to
time in his discretion:
a. CASH. [CONFIDENTIAL TREATMENT REQUESTED] has the right to exercise
all or a portion of his Vested Options at any time prior to their expiration
upon payment to the Company of the exercise price in cash or by personal check,
cashier's or certified check or wire transfer.
b. BROKER EXERCISE NOTICE. [CONFIDENTIAL TREATMENT REQUESTED] has the
right to exercise all or a portion of his Vested Options at any time prior to
their expiration through a procedure acceptable to [CONFIDENTIAL TREATMENT
REQUESTED]'s stock broker or brokers (referred to hereafter as a "Broker
Exercise Notice") pursuant to which [CONFIDENTIAL TREATMENT REQUESTED] either
(i) instructs his stock broker or brokers to sell shares, not yet owned by
[CONFIDENTIAL TREATMENT REQUESTED], with the proceeds therefrom to be used, in
whole or in part, to exercise for cash the Vested Options and with all or a
portion of the shares issued upon such exercise to be delivered to
[CONFIDENTIAL TREATMENT REQUESTED]'s stock broker or brokers to satisfy
[CONFIDENTIAL TREATMENT REQUESTED]'s sale obligation or (ii) borrows cash from
his stock broker or brokers to exercise for cash the Vested Options, with the
proceeds from the sale of all or a portion of the shares received upon such
exercise to be used, in whole or in part, to repay such loan.
c. [CONFIDENTIAL TREATMENT REQUESTED],
d. PROMISSORY NOTE. [CONFIDENTIAL TREATMENT REQUESTED] has the right to
exercise all or a portion of his Vested Options by tendering to the Company a
non-recourse promissory note of [CONFIDENTIAL TREATMENT REQUESTED] for the cash
exercise price (the "Note") substantially in the form appended hereto as
Appendix A. The Note shall be secured by a number of shares of Common Stock
issuable upon [CONFIDENTIAL TREATMENT REQUESTED]'s Option exercise computed by
dividing the principal sum of the Note by $2.00, which shares shall be held as
security by the Company pursuant to a Pledge Agreement substantially in the
form of Appendix B hereto.
e. PROCEDURE. [CONFIDENTIAL TREATMENT REQUESTED] may use one or more of the
above methods of exercise simultaneously or at any time. If [CONFIDENTIAL
TREATMENT REQUESTED] intends to exercise Vested Options, [CONFIDENTIAL
TREATMENT
-2-
<PAGE>
REQUESTED] shall deliver a written notice to the Company (the
"Exercise Notice") specifying (i) the total number of Vested Options that
[CONFIDENTIAL TREATMENT REQUESTED] intends to exercise pursuant to his exercise
right at such time, (ii) the method or methods as described above by which he
intends to make such exercise and (iii) a place, and a date not less than three
(3) nor more than twenty (20) business days from the date of such notice, for
the closing of such purchase (the "Closing"). At any such Closing, (i)
[CONFIDENTIAL TREATMENT REQUESTED] will deliver, as appropriate for each method
described in subsections (a), (b), (c) and (d) above, respectively, the cash
exercise price (in an approved form as described above), a letter from
[CONFIDENTIAL TREATMENT REQUESTED]'s stock broker or brokers indicating such
broker's or brokers' agreement to proceed with a sale pursuant to a Broker
Exercise Notice, [CONFIDENTIAL TREATMENT REQUESTED] and/or an executed Note and
an appropriate Pledge Agreement with respect to the shares of Common Stock to
be the security therefor, (ii) the Company will deliver to [CONFIDENTIAL
TREATMENT REQUESTED] (or directly to [CONFIDENTIAL TREATMENT REQUESTED]'s stock
broker or brokers, if so instructed) a certificate or certificates (free of any
restrictive legend or stop transfer order if such shares are issued after the
effective date of the Registration Statement referred to below) for the number
of whole shares of Common Stock issuable upon such exercise ([CONFIDENTIAL
TREATMENT REQUESTED]), together with cash in lieu of any fraction of a share
(the amount of which shall be computed by determining the Fair Market Value
thereof as provided above on the date of delivery of the Exercise Notice) and
(iii) the Company will deliver to [CONFIDENTIAL TREATMENT REQUESTED] a written
statement confirming the number of Options, if any, that remain unexercised.
f. WITHHOLDING TAXES. At the Closing, [CONFIDENTIAL TREATMENT REQUESTED] may
elect to pay to the Company the minimum required federal and/or state
withholding taxes due by virtue of the issuance of the shares upon exercise of
Options by one or a combination of (i) making cash payment therefor to the
Company, (ii) tendering to the Company for cancellation shares of Common Stock
then owned by [CONFIDENTIAL TREATMENT REQUESTED] or (iii) [CONFIDENTIAL
TREATMENT REQUESTED]. Shares tendered or waived as provided by this
subsection (f) shall be valued based upon [CONFIDENTIAL TREATMENT REQUESTED]
and the maximum aggregate amount of withholding taxes which may be paid to the
Company by tender or waiver of Shares shall be $[CONFIDENTIAL TREATMENT
REQUESTED].
3. RESTRICTION ON RESALE OF SHARES.
a. In consideration of this Agreement, [CONFIDENTIAL TREATMENT REQUESTED]
agrees that, on or before [CONFIDENTIAL TREATMENT REQUESTED], 1998, he will
sell the shares of Common Stock issuable upon exercise of the [CONFIDENTIAL
TREATMENT REQUESTED] Vested Options as of the date hereof only in accordance
with the following schedule:
-3-
<PAGE>
(i) [CONFIDENTIAL TREATMENT REQUESTED] may sell up to [CONFIDENTIAL
TREATMENT REQUESTED] shares at any time commencing on [CONFIDENTIAL
TREATMENT REQUESTED], 1998 (or if sooner, the effective date of the
Registration Statement referred to in Section 5 below);
(ii) [CONFIDENTIAL TREATMENT REQUESTED] may sell up to an additional
[CONFIDENTIAL TREATMENT REQUESTED] shares at any time commencing on
[CONFIDENTIAL TREATMENT REQUESTED], 1998; provided, however, that
[CONFIDENTIAL TREATMENT REQUESTED] may sell all or a portion of such
shares during [CONFIDENTIAL TREATMENT REQUESTED] 1998 if the sales price
is at least $2.00 per share; and
(iii) [CONFIDENTIAL TREATMENT REQUESTED] may sell up to an additional
[CONFIDENTIAL TREATMENT REQUESTED]shares at any time commencing on
[CONFIDENTIAL TREATMENT REQUESTED], 1998; provided, however, that
[CONFIDENTIAL TREATMENT REQUESTED] may sell all or a portion of such
shares during [CONFIDENTIAL TREATMENT REQUESTED] 1998 if the sales price
is at least $2.00 per share or during [CONFIDENTIAL TREATMENT REQUESTED]
1998 if the sales price is at least $1.50 per share.
In addition, [CONFIDENTIAL TREATMENT REQUESTED] agrees that, on or before
[CONFIDENTIAL TREATMENT REQUESTED], 1998, he will not sell any of the shares of
Common Stock issuable upon exercise of the [CONFIDENTIAL TREATMENT REQUESTED]
Options referred to in Section 4 below.
b. Nothing in this Agreement is intended to allow [CONFIDENTIAL TREATMENT
REQUESTED], at any time that he is in possession of "material non-public
information" to sell shares.
4. VESTING OF OPTIONS. In consideration of this Agreement, the Company
agrees that (i) no termination of [CONFIDENTIAL TREATMENT REQUESTED]'s
employment for any reason after the date hereof will affect [CONFIDENTIAL
TREATMENT REQUESTED]'s right to exercise Vested Options for ninety (90) days
after the date of such termination (but in no case later than the original
expiration date of the Options) and (ii) 142,000 of the Unvested Options (which
but for this Agreement would not vest until [CONFIDENTIAL TREATMENT REQUESTED],
1998) shall vest on the date of this Agreement and thereafter shall be Vested
Options. To the extent permitted by law, such Unvested Options, if they were
Incentive Stock Options prior to this Agreement, shall retain their character
as Incentive Stock Options but [CONFIDENTIAL TREATMENT REQUESTED] acknowledges
that the change in vesting of such options, pursuant to this Agreement, may
disqualify such options as Incentive Stock Options.
-4-
<PAGE>
5. REGISTRATION OF SHARES UNDERLYING ALL OPTIONS. In consideration of this
Agreement, on or before [CONFIDENTIAL TREATMENT REQUESTED], 1998, the Company
agrees, at its sole expense, (i) to file a registration statement with the
Securities and Exchange Commission (the "Commission") on Form S-8 covering the
original issuance of shares of Common Stock to [CONFIDENTIAL TREATMENT
REQUESTED] upon his exercise of Options from time to time after the effective
date of such registration statement (referred to hereafter as the "Registration
Statement") and (ii) to register, qualify or exempt the original issuance of
all such shares under the blue sky laws of Minnesota. The Company at its
expense shall from time to time supply [CONFIDENTIAL TREATMENT REQUESTED] with
reasonable quantities of the Registration Statement. The Company shall
promptly notify [CONFIDENTIAL TREATMENT REQUESTED] of any stop order or other
proceeding threatened or taken by the Commission or any blue sky authority with
respect to the Registration Statement and/or any applicable blue sky
registrations, qualifications or exemptions and shall, at its own expense,
within 60 days of being notified of the issuance of any such stop order or
similar order by a blue sky authority, cause the lifting of any such stop order
or the termination of any such proceeding. Subject to the foregoing sentence,
the Company agrees, at its sole expense, to maintain (except during the 60 day
period(s) referred to in the previous sentence) the effectiveness of the
Registration Statement and Minnesota registrations (including by all
appropriate or necessary supplements or post-effective amendments to the
Registration Statement) at all times during which any Options are outstanding.
6. SECURITIES LAW INDEMNIFICATION.
a. The Company will indemnify and hold [CONFIDENTIAL TREATMENT REQUESTED]
harmless against any losses, claims, damages, liabilities, or expenses to which
he may become subject under the Act or any applicable state securities laws,
common law or any other law or any order, rule or regulation of any court or
regulatory authority, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) arise out of or are based upon (i) an
untrue statement or alleged untrue statement of a material fact contained in or
incorporated into the Registration Statement or any amendment or supplement
thereto or in any blue sky filing or (ii) an omission or alleged omission to
state in or incorporate into the Registration Statement or any amendment or
supplement thereto or in any blue sky filing a material fact required to be
stated or incorporated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, and
will reimburse [CONFIDENTIAL TREATMENT REQUESTED] for any legal or other
expenses reasonably incurred by him in connection with the investigating or
defending against any such loss, claim, damage, liability or action; 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 Registration Statement or any such amendment or supplement in
reliance upon and in conformity with written information provided to the
Company by [CONFIDENTIAL TREATMENT REQUESTED] for the preparation of the
Registration Statement.
b. [CONFIDENTIAL TREATMENT REQUESTED] will indemnify and hold the Company
harmless against any losses, claims, damages, liabilities or expenses to which
the Company may
-5-
<PAGE>
become subject under the Act or any applicable state securities laws, common
law or any other law or any order, rule or regulation of any court or
regulatory authority, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) arise out of or are based upon (i)
an untrue statement or alleged untrue statement of a material fact contained
in or incorporated into the Registration Statement or any amendment or
supplement thereto or in any blue sky filing or (ii) an omission or alleged
omission to state in or incorporate into the Registration Statement or any
amendment or supplement thereto or in any blue sky filing a material fact
required to be stated or incorporated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and will reimburse the Company for any legal or other
expenses reasonably incurred by it in connection with the investigating or
defending against any such loss, claim, damage, liability, or action provided
however that [CONFIDENTIAL TREATMENT REQUESTED] shall be liable in any such
case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement
or any such amendment or supplement is made or omitted in reliance upon and
in conformity with written information provided to the Company by
[CONFIDENTIAL TREATMENT REQUESTED], other than solely in his capacity as an
employee of the Company, for the preparation of the Registration Statement.
c. Promptly after receipt by any party of notice of the commencement of any
action, such party shall, if a claim in respect thereof is to be made against
the other party under this Section 6, notify the other party in writing of the
commencement thereof; but the omission so to notify the other party shall not
relieve such other party from any liability that it may have to the notifying
party otherwise than under this Section 6. In case such action shall be
brought against [CONFIDENTIAL TREATMENT REQUESTED], and he shall notify the
Company of the commencement thereof, the Company shall be entitled to
participate in and to assume the defense thereof, with counsel who shall be
reasonably satisfactory to [CONFIDENTIAL TREATMENT REQUESTED]; and after notice
from the Company to [CONFIDENTIAL TREATMENT REQUESTED] of the Company's
election so to assume the defense thereof, the Company will not be liable to
[CONFIDENTIAL TREATMENT REQUESTED] under this Section 6 for any legal or other
expenses subsequently incurred by [CONFIDENTIAL TREATMENT REQUESTED] in
connection with the defense thereof.
d. The obligations of the Company and [CONFIDENTIAL TREATMENT REQUESTED]
under this Section 6 shall be in addition to any liability which the Company or
[CONFIDENTIAL TREATMENT REQUESTED] may otherwise have and shall extend, upon
the same terms and conditions, to each person, if any, who controls the Company
or [CONFIDENTIAL TREATMENT REQUESTED] within the meaning of the Act.
7. AGREEMENT OF JOEL RONNING. As an inducement for [CONFIDENTIAL TREATMENT
REQUESTED] to enter into this Agreement, Joel Ronning ("Ronning"), by his
signature below, agrees that Ronning will not dispose of by sale, gift (except
to donees who agree to be bound by this restriction), assignment or any other
manner any shares of Common Stock of the Company (or any interest therein) as
to which Ronning is the beneficial owner (within the meaning of the
-6-
<PAGE>
Securities Exchange Act of 1934, as amended) neither (a) during such time as
the Registration Statement is subject to any stop order or other proceeding
threatened or taken by the Commission or any blue sky authority, as referred
to in Section 5 above, nor (b) until the later of (i) the expiration of forty
(40) days after the effective date of the Registration Statement referred to
in Section 5 above, and (ii) [CONFIDENTIAL TREATMENT REQUESTED], 1998.
8. ADJUSTMENT FOR CERTAIN EVENTS. If the Company shall at any time hereafter
(i) subdivide or combine its outstanding shares of Common Stock, (ii) declare a
dividend payable in Common Stock, (iii) effect a capital reorganization or any
reclassification of the shares of Common Stock of the Company, (iv) consolidate
with or merge into or with another corporation or (v) sell all or substantially
all of its assets to another corporation, then, as a part of such subdivision,
combination, dividend declaration, reorganization, reclassification,
consolidation, merger or sale, as the case may be, appropriate adjustment shall
be made in the application of the provisions set forth in Sections 2(d), 3 and
4 above with respect to the rights and interest thereafter of [CONFIDENTIAL
TREATMENT REQUESTED].
9. COVENANTS OF THE COMPANY.
a. Until [CONFIDENTIAL TREATMENT REQUESTED], 1998, without the prior written
consent of [CONFIDENTIAL TREATMENT REQUESTED], the Company covenants and agrees
that it will not dispose of by sale, gift, assignment or any other manner its
option to acquire securities of its subsidiary, Digital River, Inc. (or any
securities issuable thereupon if exercised prior to [CONFIDENTIAL TREATMENT
REQUESTED], 1998). On or after [CONFIDENTIAL TREATMENT REQUESTED], 1998, and
until the earlier of (i) such time as [CONFIDENTIAL TREATMENT REQUESTED] has
sold all of the shares of Common Stock issuable to him upon exercise of his
Vested Options from time to time, and (ii) [CONFIDENTIAL TREATMENT REQUESTED],
1998, the Company covenants and agrees that it will take no such action without
first giving [CONFIDENTIAL TREATMENT REQUESTED] at least ten (10) days prior
written notice thereof.
b. On the date of execution of this Agreement, the Company shall pay
[CONFIDENTIAL TREATMENT REQUESTED] a cash bonus for 1997 in the gross amount of
$[CONFIDENTIAL TREATMENT REQUESTED].
10. BREACH; REMEDIES. Time is of the essence in this Agreement. It shall
constitute a breach of this Agreement if the Company and/or Ronning fails
timely to perform each and every obligation hereunder including, without
limitation, (i) the timely delivery at Closing of certificates (as required,
free of any restrictive legend or stop transfer order) representing shares of
Common Stock being acquired by [CONFIDENTIAL TREATMENT REQUESTED] upon exercise
of Options (except to the extent that such certificates are held as security),
(ii) the timely filing and continued conformance with the Company's
obligations, as set forth herein, to maintain the effectiveness of the
Registration Statement and the obtaining of Minnesota registration,
(iv) Ronning's abstention, as provided herein, from disposition of Common Stock
beneficially
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<PAGE>
owned by him and (v) the Company's abstention from improper
disposition of the Digital River, Inc. option. In addition to damages, a
breaching party shall be liable to the non-breaching party for costs, including
attorneys' fees.
11. MUTUAL RELEASE. In further consideration of this Agreement, the Company
and Ronning on the one hand, and [CONFIDENTIAL TREATMENT REQUESTED] on the
other hand, fully and completely release, waive and forever discharge and
promise not to sue the other with respect to any and all manner of claims,
demands, actions, causes of action, administrative claims, promises,
agreements, contracts, rights, liability, damages, claims for attorneys' fees,
costs and disbursements, including but not limited to all claims arising in
tort or contract or under any federal, state or local laws, statutes,
ordinances, regulations or orders or any other claims of any kind or nature,
whether relating to association or employment with the Company or otherwise,
arising in law or equity, and whether known, suspected or unknown, contingent
or noncontingent and however originating or existing. The Company, Ronning and
[CONFIDENTIAL TREATMENT REQUESTED] expressly waive and release all rights of
whatever nature whatsoever arising under the Constitution of the United States,
the Constitution of the State of Minnesota, Minnesota laws, and all city
ordinances, policies, contracts, promises, and any other source whatsoever.
The Company and Ronning on the one hand, and [CONFIDENTIAL TREATMENT REQUESTED]
on the other hand, also agree and promise not to institute any civil action or
other legal proceedings of any nature whatsoever to the extent allowed by law
against the other and agree to pay all costs and expenses, including attorneys'
fees, of defending against any such suit brought by the other. The foregoing
releases and covenants not to sue shall not prevent the parties from enforcing
the provisions of this Agreement at law or in equity. Solely for purposes of
this Section 11, the term "Company" shall include not only the Company but also
Mac USA, and the agents officers employees of the Company and Mac USA.
12. EXCLUSIVE AGREEMENT. This Agreement is the exclusive agreement between
the parties and contains (except to the extent that the provisions of the Plan
are referenced) all the terms of the Agreement between the parties.
13. NON-RELIANCE. Neither party has relied upon any representations or
promises made by the other party or by the agents or attorneys of the other
party.
14. AMENDMENT. The provisions of the Agreement may be not be amended except
by a written agreement executed by all parties hereto.
15. MODIFICATION AND SEVERABILITY. In the event that a court of competent
jurisdiction shall determine that any provision hereof is unenforceable, the
court may modify such provision to the extent it deems appropriate or may
excise the offending provision and enforce the remaining terms of this
Agreement.
16. BINDING EFFECT. This Agreement shall be binding upon, and shall inure to
the benefit of, the parties hereto and their respective heirs, representatives,
successors and assigns.
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<PAGE>
17. DRAFTING. The provisions of this Agreement shall not be construed against
the party responsible for the drafting hereof.
18. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Minnesota, exclusive of its conflict
of laws rules.
IN WITNESS WHEREOF, the undersigned have hereunto affixed their
signatures.
-----------------------------------
[CONFIDENTIAL TREATMENT REQUESTED]
Tech Squared Inc.
By
---------------------------------------
Joel Ronning, Chief Executive Officer
---------------------------------------------
Joel Ronning (personally, but only as to Sections 7
and 11 hereof)
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<PAGE>
NON-RECOURSE SECURED
PROMISSORY NOTE
$________ Minneapolis, Minnesota
___________, ____
FOR VALUE RECEIVED, the undersigned ("Maker") promises to pay to the order
of Tech Squared, Inc., a Minnesota corporation, at 5198 West 76th Street,
Edina, Minnesota 55439 (the "Company"), or at such other place as may be
designated from time to time by the holder hereof, in lawful money of the
United States of America, the principal sum of [CONFIDENTIAL TREATMENT
REQUESTED], (the "Principal Balance"). On [CONFIDENTIAL TREATMENT REQUESTED]
(which is the date 19 months from the date hereof), the entire Principal
Balance shall be payable in full. No interest shall accrue.
Maker may prepay this Note in whole or in part without premium or penalty.
No prepayment, other than prepayment in full, shall suspend any required
payment under this Note.
This Note is secured by a pledge of [CONFIDENTIAL TREATMENT REQUESTED]
shares of the Company's stock, as set forth in a pledge agreement of even date
herewith (the "Pledge Agreement").
Except with respect to the obligations of the Maker set forth in the
Pledge Agreement, the Maker is issuing this Note without recourse. Maker shall
have no obligation to pay cash pursuant to this Note or the Pledge Agreement
unless Maker elects to obtain release of collateral pursuant to the Pledge
Agreement.
This Note shall be governed by the laws of the State of Minnesota.
Presentment or other demand for payment, notice of dishonor, and protest
are expressly waived.
Dated: _________, ____ By:
-----------------------------------
[CONFIDENTIAL TREATMENT REQUESTED]
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<PAGE>
PLEDGE AGREEMENT
THIS AGREEMENT, is made and entered into this ______ day of ____________,
____, by [CONFIDENTIAL TREATMENT REQUESTED], an individual residing in
Minnesota ("Pledgor"), in favor of TECH SQUARED, INC., a Minnesota Corporation
("Pledgee").
RECITAL
Pledgor has purchased [CONFIDENTIAL TREATMENT REQUESTED] shares of the
common stock of the Corporation (the "Shares") in exchange for the promise to
pay Pledgee the amount of [CONFIDENTIAL TREATMENT REQUESTED] Dollars
($[CONFIDENTIAL TREATMENT REQUESTED]), evidenced by a non-recourse promissory
note in such amount of even date herewith (the "Note").
NOW, THEREFORE, solely in order to secure payment and performance of the
Note, and any replacement notes or extensions or renewals thereof
(collectively, the "Obligations"), and in consideration of the foregoing
recital and the mutual covenants of the parties hereinafter set forth, the
parties agree as follows:
1.) As collateral for full payment and performance of the Obligations,
Pledgor hereby pledges [CONFIDENTIAL TREATMENT REQUESTED] shares of the
Pledgor's Common Stock (the "Pledged Shares"), and acknowledges that the
Pledged Shares are currently in the possession of Pledgee accompanied by
stock powers duly executed in blank by Pledgor, and Pledgor hereby assigns,
transfers, hypothecates, and sets over to Pledgee all of Pledgor's right,
title, and interest in and to the Pledged Shares (and in and to the
certificates or instruments evidencing the Pledged Shares), which Pledged
Shares shall be held by Pledgee, upon the terms and conditions set forth in
this Agreement.
2.) Pledgor agrees at any time, and from time to time, to execute such
other instruments and to perform such other acts as Pledgee may reasonably
request to establish, maintain and perfect the security interest in the
Pledged Shares conveyed by this Agreement.
3.) Pledgor represents and warrants that:
(a) Pledgor has absolute title to the Pledged Shares, free and clear of
all security interests, liens and encumbrances, except the security
interest granted hereunder, and will defend the Pledged Shares against
all claims or demands of all persons other than the Pledgee;
(b) Pledgor will not sell or otherwise dispose of any Pledged Shares or
any interest therein without the prior written consent of Pledgee; and
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<PAGE>
(c) Pledgor will keep the Pledged Shares free and clear of all security
interests, liens, and encumbrances, except the security interest granted
hereunder.
4.) In the event that during the term of this Agreement any share
dividend, reclassification, readjustment or other change is declared or made
in the capital structure of the Company, all new, substituted and additional
shares or other securities issued by reason of original issuance of the
Pledged Shares shall be subject to the terms of this Agreement in the same
manner as, and as a part of, the Pledged Shares.
5.) Each of the following occurrences shall constitute an event of default
under this Agreement (hereinafter referred to as an "Event of Default"):
(a) Pledgor shall fail to pay any or all of the Obligations when due, or
shall fail to observe or perform any covenant or agreement herein,
provided, however, that if such failure is capable of cure, Pledgor
shall have ten (10) days to cure such failure;
(b) Any representations by Pledgor set forth herein shall prove materially
false or misleading; or
(c) Pledgor shall become insolvent.
6.) Unless and until an Event of Default shall have occurred under the
Note or hereunder, Pledgor shall be entitled to vote any and all Pledged
Shares and to give consents, waivers, or ratifications in respect thereof,
provided that no vote shall be cast or any consent, waiver, or ratification
given or any action taken which would violate or be inconsistent with any of
the terms of this Agreement, or which would have the effect of impairing the
position or interest of Pledgee. All such rights of Pledgor to vote and to
give consents, waivers, and ratifications shall cease upon the occurrence of
an Event of Default under the Note or hereunder.
7.) Upon the occurrence of an Event of Default under the Note or
hereunder, Pledgee shall be entitled to exercise all of the rights, powers,
and remedies (whether vested in it pursuant to this Agreement or the Note)
for the protection and enforcement of its rights in respect of the Pledged
Shares, and Pledgee shall be entitled, without limitation, to exercise the
following rights, which Pledgor hereby agrees to be commercially reasonable:
(a) To transfer all or any part of the Pledged Shares into Pledgee's name
or the name of its nominee or nominees;
(b) To vote all or any part of the Pledged Shares (whether or not
transferred into the name of Pledgee) and to give all consents, waivers,
and ratifications in respect of the Pledged Shares and exercise all rights
of actual ownership of the Pledged Shares (Pledgor hereby irrevocably
constitutes and appoints Pledgee the proxy and attorney-in-fact of
Pledgor, with full power of substitution to do so); and
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<PAGE>
(c) At any time, or from time to time, to sell, assign, and deliver, or
grant options to purchase, all or any part of the Pledged Shares, or any
interest therein, at any public or private sale to a purchaser(s) who will
agree to take the Pledged Shares for investment and not with a view to
distribution and who will comply with all restrictive legends on any
certificate(s) representing the Pledged Shares and any and all other
restrictions contained in the Corporation's Articles of Incorporation and
Bylaws without demand or performance, advertisement, or notice of
intention to sell or of the time or place of sale or adjournment thereof
or to redeem or otherwise (all of which are hereby waived by Pledgor), for
cash, on credit, or for other property, for immediate or future delivery
without any assumption of credit risk, and for such price or prices and on
such terms as Pledgee in its absolute discretion may determine, provided
that at least ten (10) days' written notice of the time and place of any
such sale shall be given to Pledgor. Pledgor hereby waives and releases
to the fullest extent permitted by law any right or equity of redemption
with respect to the Pledged Shares, whether before or after sale
hereunder, and all rights, if any, of marshalling the Pledged Shares and
any other security for the Obligations or otherwise. At any such sale,
unless prohibited by applicable law, Pledgee or any other may bid for and
purchase all or any part of the Pledged Shares being sold, free from any
right or equity of redemption. Pledgee shall not be liable for failure to
collect or realize upon any or all of the Pledged Shares or for any delay
in so doing nor shall Pledgee be under any obligation to take any action
whatsoever with regard thereto.
8.) Each right, power, and remedy of Pledgee provided for in this
Agreement or the Note, or now or hereafter existing at law or in equity or by
statute shall be cumulative and concurrent and shall be in addition to every
other such right, power, or remedy. The exercise or beginning of the
exercise by Pledgee of one or more of the rights and powers or remedies
provided for in this Agreement, or the Note, or now or hereafter existing at
law or in equity or by statute or otherwise shall not preclude the
simultaneous or later exercise by Pledgee of all such other rights, powers,
or remedies, and no failure or delay on the part of Pledgee to exercise any
such right, power, or remedy shall operate as a waiver thereof.
9.) All monies collected by Pledgee upon any sale or other disposition
of the Pledged Shares, together with all other monies received by Pledgee
hereunder, shall be applied first to the payment of all costs and expenses
incurred by Pledgee in connection with such sale, the delivery of the Pledged
Shares and the collection of any such monies (including, without limitation,
attorneys' fees, and expenses), and the balance of such monies shall be held
by Pledgee and applied by it to satisfy the Obligations.
10.) If and whenever Pledgor shall have paid any portion of the Note,
Pledgor shall, upon five-days written request, be entitled to release from
the terms of this Agreement of that number of Pledged Shares determined by
dividing the amount of the Note which has been paid by the original amount of
the Note and multiplying the result thereof by the original number of Pledged
Shares. Upon each such partial release, Pledgee shall duly assign, transfer,
and deliver to Pledgor (without recourse and without any representation or
warranty) such of the Pledged
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<PAGE>
Shares as determined under the prior sentence as may be in the possession of
Pledgee and not previously sold or otherwise applied or released pursuant to
this Agreement. When all of the Obligations have been paid or performed in
full, this Agreement shall terminate, and Pledgee, at the request and expense
of Pledgor, shall execute and deliver to Pledgor a proper instrument or
instruments acknowledging the satisfaction and termination of this Agreement,
and shall duly assign, transfer, and deliver to Pledgor (without recourse and
without any representation or warranty) such of the Pledged Shares as may be
in the possession of Pledgee and not previously sold or otherwise applied or
released pursuant to this Agreement.
11.) Any notices required under this Agreement shall be sufficient if
in writing and sent by certified mail, return receipt requested, to the other
party at the address as set forth below:
PLEDGOR: [CONFIDENTIAL TREATMENT REQUESTED]
PLEDGEE: Tech Squared, Inc.
5198 West 76th Street
Edina, Minnesota 55439
12.) This Agreement shall be binding upon the successors and assigns of
Pledgor and shall inure to the benefit of and be enforceable by Pledgee and
its successors and assigns. This Agreement may be changed, waived,
discharged, or terminated only by an instrument in writing signed by the
party against whom enforcement of such change, waiver, discharge, or
termination is sought. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Minnesota. In the
event that any provision of this Agreement shall prove to be invalid or
unenforceable, such provision shall be deemed to be severable from the other
provisions of this Agreement which shall remain binding on all parties hereto.
IN WITNESS WHEREOF, Pledgor has caused this Agreement to be executed as of
the date first above written.
PLEDGOR:
----------------------------------
[CONFIDENTIAL TREATMENT REQUESTED]
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<PAGE>
FUJITSU MODIFICATION AGREEMENT
THIS AGREEMENT (the "AGREEMENT") is made effective as of the 11th day of
December 1997 among Digital River, Inc., a Minnesota corporation
("DR-MINNESOTA"), Digital River, Inc., a Delaware corporation
("DR-DELAWARE"), Fujitsu Limited, a corporation organized under the laws of
Japan("FUJITSU") and the undersigned parties who are parties to some or all
of the documents described herein (collectively "OTHER PARTIES").
WITNESSETH
WHEREAS, DR-Minnesota is being reincorporated in Delaware as DR-Delaware
and survives temporarily as a wholly-owned subsidiary of DR-Delaware for
technical reasons. It is intended that, as between DR-Minnesota and DR-
Delaware, DR-Delaware is the entity that may undertake an initial public
offering of its common stock at some future date. As used hereafter, "DR"
shall mean DR-Minnesota or DR-Delaware, as applicable and appropriate to carry
out the intent of this Agreement;
WHEREAS, DR, Fujitsu and the Other Parties have entered into various
agreements in the past in connection with an investment by Fujitsu in DR and
now desire to terminate such agreements, except as specifically provided
herein;
WHEREAS, DR and Fujitsu desire to enter into a new agreement which will
set forth the terms of the ongoing relationship between DR and Fujitsu and,
except as explicitly provided herein, supercede the Prior Agreements (as
defined below); and
WHEREAS, the Other Parties desire to be released from the obligations
contained in and release their rights under the Prior Agreements between DR,
Fujitsu and the respective Other Parties.
NOW THEREFORE, in consideration of the foregoing and the covenants and
agreements hereinafter set forth, the parties agree as follows:
1. TERMINATION OF AGREEMENTS. Except as explicitly provided in
Section 5 of this Agreement, the following agreements (the "PRIOR
AGREEMENTS") are hereby: (i) terminated as of the effective date of this
Agreement, (ii) superceded in their entirety hereby, and (iii) the
parties are hereby released from all obligations under the Prior
Agreements.
a. Stock Purchase Agreement dated August 30, 1994 between DR, Fujitsu,
Joel Ronning and MacUSA, Inc.;
b. Investors' Rights Agreement dated August 30, 1994 between DR, Fujitsu
and Joel Ronning;
c. Personal Guaranty and Stock Pledge Agreement dated August 30, 1994
for the benefit of DR and Fujitsu from Joel Ronning;
<PAGE>
d. Employment and Non-Competition Agreement dated August 30, 1994
between DR and Joel Ronning;
e. Voting Agreement dated August 30, 1994 between DR, Fujitsu and
Joel Ronning;
f. Memorandum of Understanding dated August 30, 1994 between DR,
Fujitsu, Joel Ronning and MacUSA, Inc.;
g. Non-Competition Agreement dated August 30, 1994 between DR, Joel
Ronning and MacUSA, Inc.; and
h. That certain letter agreement between DR and Fujitsu dated as of
October 17, 1997.
i. Any and all amendments or other modifications to any of the foregoing
agreements listed in a-h above, except for any modification set forth in
this Agreement.
2. ISSUANCE OF DR COMMON STOCK. As consideration for Fujitsu entering
into this agreement, DR, concurrent with the execution of this
Agreement, will issue to Fujitsu an additional total of 90,000 shares of
DR Common Stock (on a post-split basis). Following completion of the
transaction contemplated hereby, Fujitsu shall own beneficially and of
record 3,290,000 shares of DR Common Stock (on a post-split basis).
3. DIRECTOR DESIGNEE. Until such time as Fujitsu owns less than ten
percent (10%) of the outstanding Common Stock of DR, Fujitsu shall be
entitled to designate one representative on the Board of Directors of
DR. In furtherance of such right:
a. Fujitsu shall be entitled to nominate one individual to the Board of
Directors of DR (the "Fujitsu Nominee"), which nominee shall be presented
to the shareholders of DR at the annual shareholder meeting as a
management nominee endorsed by the Board.
b. While the parties to this Agreement understand that there can be no
guarantee of the election of the Fujitsu Nominee by the shareholders of
DR, the Other Parties hereby agree to use their best efforts to secure
the presentation of the Fujitsu Nominee as a management nominee endorsed
by the Board for election by the shareholders of DR and to secure the
election of the Fujitsu Nominee to the Board.
c. In addition, the Other Parties hereby agree that they will vote any
and all shares of DR Common Stock held by them of record or beneficially
in favor of the Fujitsu Nominee.
2
<PAGE>
d. If and when DR's Board of Directors deems it appropriate, it will
consider naming a second Fujitsu designee to the Board.
e. In the event that the Fujitsu Nominee is not elected to the Board of
Directors of DR and Fujitsu (together with its affiliates, successors,
and assigns) holds at least ten percent (10%) of the outstanding shares
of Common Stock of DR, Fujitsu shall (i) be entitled to notice of all
meetings of the Board of Directors and to receive a copy of all materials
disseminated to the members of the Board of Directors, have the right to
send one representative to each meeting of the Board of Directors as an
observer; such observer shall have the right to participate fully in all
aspects of the Board meeting but shall not have a right to vote and (ii)
be entitled to receive the following information:
i. ANNUAL REPORTS. As soon as practicable in any event within 120
days after the end of each fiscal year of the DR, a consolidated
Balance Sheet as of the end of such fiscal year, a consolidated
Statement of Income and a consolidated Statement of Cash Flows of the
DR and its subsidiaries for such year, setting forth in each case in
comparative form the figures from the DR's previous fiscal year (if
any), all prepared in accordance with generally accepted accounting
principles and practices and audited by nationally recognized
independent certified public accountants (such obligation may be
satisfied by delivery to the Investor of a Form 10-K or Form 10-KSB as
filed with the Securities and Exchange Commission);
ii. QUARTERLY REPORTS. As soon as practicable, and in any case within
forty-five (45) days of the end of each fiscal quarter of the DR
(except the last quarter of the DR's fiscal year), quarterly unaudited
financial statements, including an unaudited Balance Sheet, and an
unaudited Statement of Income and an unaudited Statement of Cash
Flows, and commencing six (6) months after the Effective Date a
comparison to the DR's operating plan and budget and statements of the
Chief Financial officer of the DR explaining any significant
differences in the statements from the DR's operating plan and budget
for the period and stating that such statements fairly present the
consolidated financial position and consolidated financial results of
the DR for the fiscal quarter covered (such obligation may be
satisfied by delivery to the Investor of a Form 10-Q for Form 10-QSB
as filed with the Securities and Exchange Commission);
iii. MONTHLY REPORTS. As soon as practicable, and in any case within
forty-five days of the end of each calendar month (except that last
month of the DR's fiscal year), monthly unaudited financial
statements, including an unaudited Balance Sheet and an unaudited
Statement of Income and an unaudited Statement of Cash Flows, together
with a comparison to the DR's
3
<PAGE>
operating plan and budget and statements of the Chief Financial
Officer of the DR explaining any significant differences in the
statements from the DR's operating plan and budget for the month
covered and stating that such statements fairly present the
consolidated financial position and consolidated financial results of
the DR for the month covered; and
iv. ANNUAL BUDGET. As soon as practicable and in any event no later
than sixty (60) days after the close of each fiscal year of the DR, an
annual operating plan and budget, prepared on a monthly basis, for the
next immediate fiscal year. The DR shall also furnish to such
Investor, within a reasonable time of its preparation, amendments to
the annual budget, if any.
f. TERMINATION OF CERTAIN RIGHTS. The DR's obligations under Section
3.e. above will terminate upon (i) the closing of the DR's initial public
offering of Common Stock pursuant to an effective registration statement
filed under the U.S. Securities Act of 1933, as amended (the "SECURITIES
ACT") in which the gross proceeds raised for the DR's account (calculated
before deduction of underwriters' discounts and commissions) exceeds
$5,000,000 and the per share price exceeds $2.00; or (ii) the DR becoming
subject to the reporting requirements of the Exchange Act of 1934, whichever
is sooner.
g. RULE 144A INFORMATION. The DR agrees to provide Investor, upon
request, with such written information as may be required in order to permit
such Investor to resell any shares of the DR's stock pursuant to Rule 144A
promulgated under the Securities Act, provided that no interim audit is
required to do so.
4. REGISTRATION RIGHTS.
a. DEFINITIONS. For purposes of this Section 4:
i. REGISTRATION. The terms "REGISTER," "REGISTERED," and
"REGISTRATION" refer to a registration effected by preparing and filing
a registration statement in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement.
ii. REGISTRABLE SECURITIES. The term "REGISTRABLE SECURITIES"
means: (1) all the shares of Common Stock of DR owned by Fujitsu or
Fujitsu's assignee(s), and by Joel Ronning or his assignee(s); and (2)
any shares of Common Stock of DR issued as (or issuable upon the
conversion of exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of, all such shares of Common Stock
described in clause (1) of this subsection (ii); EXCLUDING, however,
any Registrable Securities sold to the public or sold pursuant to Rule
144 promulgated under the Securities Act.
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<PAGE>
iii. HOLDER. For purposes of this Section 4, the term "HOLDER"
means any person owning of record Registrable Securities that have not
been sold to the public or pursuant to Rule 144 promulgated under the
Securities Act or any assignee or record of such Registrable Securities
to whom rights under this Section 4 have been duly assigned in
accordance with this Agreement.
iv. FORM S-3. The term "FORM S-3" means such form under the
Securities Act as is in effect on the date hereof or any successor
registration form under the Securities Act subsequently adopted by the
SEC which permits inclusion or incorporation of substantial information
by reference to other documents filed by DR with the SEC.
v. SEC. The term "SEC" or "COMMISSION" means the U.S.
Securities and Exchange Commission.
b. PIGGYBACK REGISTRATIONS. DR shall notify all Holders of Registrable
Securities in writing at least thirty (30) days prior to filing any
registration statement under the Securities Act for purposes of effecting a
public offering of securities of DR (including, but not limited to,
registration statements relating to offerings of securities of DR other than
DR's initial public offering, whether on behalf of DR or selling shareholders,
but EXCLUDING registration statements relating to any registration under
Section 4.c. of this Agreement or to any employee benefit plan or a corporate
reorganization) and will afford each such Holder an opportunity to include in
such registration statement all or any part of the Registrable Securities then
held by such Holder. Each Holder desiring to include in any such registration
statement all or any part of the Registrable Securities held by such Holder
shall, within twenty (20) days after receipt of the above-described notice from
DR, so notify DR in writing, and in such notice shall inform DR of the number
of Registrable Securities such Holder wishes to include in such registration
statement. If a Holder decides not to include all of its Registrable
Securities in any registration statement thereafter filed by DR, such Holder
shall nevertheless continue to have the right to include any Registrable
Securities in any subsequent registration statement or registration statements
as may be filed by DR with respect to offerings of its securities, all upon the
terms and conditions set forth herein.
i. UNDERWRITING. If a registration statement under which DR
gives notice under this Section 4.b. is for an underwritten offering,
then DR shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder's Registrable Securities to be
included in a registration pursuant to this Section 4.b. shall be
conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to
distribute their Registrable Securities through such underwriting shall
enter
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<PAGE>
into an underwriting agreement in customary form with the
managing underwriter or underwriter(s) selected for such underwriting.
Notwithstanding any other provision of this Agreement, if the managing
underwriter determine(s) in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the
managing underwriter(s) may exclude shares (including Registrable
Securities) from the registration and the underwriting, and the number
of shares that may be included in the registration and the underwriting
shall be allocated, FIRST, to DR; and SECOND, to each of the Holders
requesting inclusion of their Registrable Securities in such
registration statement on a pro rata basis based on the total number of
Registrable Securities then held by each such Holder; PROVIDED,
HOWEVER, that the right of the underwriters to exclude shares
(including Registrable Securities) from the registration and
underwriting as described above shall be restricted so that all shares
that are not Registrable Securities and are held or controlled by
individuals who are employees or directors of DR (or any subsidiary of
DR) shall first be excluded from such registration and underwriting
before any Registrable Securities are so excluded. If any Holder
disapproves of the terms of any such underwriting, such Holder may
elect to withdraw therefrom by written notice to DR and the
underwriter, provided that such notice shall not be effective until ten
(10) business days after delivered to DR except that, if the
registration statement has been declared effective prior to the 10th
day, such withdrawal shall be of no effect. Any Registrable Securities
excluded or withdrawn from such underwriting shall be excluded and
withdrawn from the registration.
ii. EXPENSES. All expenses incurred in connection with a
registration pursuant to this Section 4.b. (excluding underwriters' and
brokers' discounts and commissions), including, without limitation all
federal and "blue sky" registration and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for DR and
reasonable fees and disbursements of one counsel for the selling
Holders shall be borne by DR to the extent permitted under federal and
applicable state laws.
c. FORM S-3 REGISTRATION. In case DR shall receive from any Holder a
written request or requests that DR effect a registration on Form S-3 and any
related qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holder or Holders, then DR will:
i. NOTICE. Promptly give written notice of the purposed
registration and the Holder's or Holders' request therefor, and any
related qualification or compliance, to all other Holders or
Registrable Securities; and
ii. REGISTRATION. Use its diligent best efforts to effect
such registration as soon as possible and all such qualifications and
compliances as may be so
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requested and as would permit or facilitate the sale and distribution
of all or such portion of such Holder's or Holders' Registrable
Securities as are specified in such request, together with all or such
portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given
within twenty (20) days after receipt of such written notice from DR;
PROVIDED, HOWEVER, that DR shall not be obligated to effect any such
registration, qualification or compliance pursuant to this Section 4.c.:
(1) if Form S-3 is not available for such offering by the Holders;
(2) if the Holders, together with the holders of any other
securities of DR entitled to inclusion in such registration, propose to sell
Registrable Securities and such other securities (if any) at an aggregate price
to the public of less than $500,000;
(3) if DR shall furnish to the Holders a certificate signed by the
President or Chief Executive Officer of DR stating that in the good faith
judgment of the Board of Directors of DR, it would be seriously detrimental to
DR and its shareholders for such Form S-3 Registration to be effected at such
time, in which event DR shall have the right to defer the filing of the Form S-
3 registration statement no more than once during any twelve-month period for a
period of not more than one hundred twenty (120) days after receipt of the
request of the Holder or Holders under this Section 4.c.
(4) if DR has within the twelve (12) month period preceding the date
of such request, already effected one (1) registration on Form S-3 for the
Holders pursuant to this Section 4.c.;
(5) in any particular jurisdiction in which DR would be required to
qualify to do business or to execute a general consent to service of process in
effecting such registration, qualification or compliance; or
(6) for a period of up to ninety (90) days if the Chief Executive
Officer of DR certifies in writing to the Holders that DR currently
contemplates a public offering of its securities within the next ninety (90)
days.
iii. EXPENSES. Subject to the foregoing, DR shall file a Form
S-3 registration statement covering the Registrable Securities and
other securities so requested to be registered pursuant to this Section
4.c. as soon as practicable after receipt of the request or requests of
the Holders for such registration. DR shall pay all expenses incurred
in connection with each registration requested pursuant to this Section
4.c. (excluding underwriters' or brokers' discounts and commissions),
including without limitation all filing, registration and
qualification, printers' and accounting fees and the reasonable
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<PAGE>
fees and disbursements of one counsel for the selling Holder or Holders
and counsel for DR.
d. OBLIGATIONS OF DR. Whenever required to effect the registration of
any Registrable Securities under this Agreement, DR shall, as expeditiously as
reasonably possible:
i. Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to
cause such registration statement to become effective, and, upon the
request of the Holders of a majority of the Registrable Securities
registered thereunder, keep such registration statement effective for
up to ninety (90) days or until all such Registrable Securities have
been distributed, whichever is shorter.
ii. Within such ninety (90) day period, prepare and file with the
SEC such amendments and supplements to such registration statement and
the prospectus used in connection with such registration statement as
may be necessary to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such
registration Statement.
iii. Furnish to the Holders such number of copies of a prospects,
including a preliminary prospectus, in conformity with the requirements
of the Securities Act, and such other documents as they may reasonably
request in order to facilitate the disposition of the Registrable
Securities owned by them that are included in such registration.
iv. Use its best efforts to register and qualify the Securities
covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by
the Holders, provided that DR shall not be required in connection
therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
v. In the event of are underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter(s) of such offering.
Each Holder participating in such underwriting shall also enter into
and perform its obligations under such an agreement.
vi. Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto
is required to be delivered under the Securities Act of the happening
of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement
of a material fact or
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omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light
of the circumstances then existing.
vii. Furnish, at the request of any Holder requesting registration
of Registrable Securities, on the date that such Registrable Securities
are delivered to underwriters for sale, if such securities are being
sold though underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with
respect to such securities becomes effective, (i) an opinion, dated as
of such date, of the counsel representing DR for the purposes of such
registration, in form and substance as is customarily given to
underwriters in an underwritten public offering and reasonably
satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities and (ii) a "comfort"
letter dated as of such date, from the independent certified public
accountants of DR, in form and substance as is customarily given by
independent certified public accountants to underwriters in an
underwritten public offering and reasonably satisfactory to a majority
in interest of the Holders requesting registration addressed to the
underwriters, if any, and to the Holders requesting registration of
Registrable Securities.
e. FURNISH INFORMATION. It shall be a condition precedent to the
obligations of DR to take any action pursuant to Sections 4.b., 4.c or 4.d that
the selling Holders shall furnish to DR such information regarding themselves,
the Registrable Securities held by them and the intended method of disposition
of such securities as shall be required or reasonably requested to timely
effect the registration of their Registrable Securities.
f. INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 4.b., 4.c. or 4.d.:
i. BY DR. To the extent permitted by law, DR will indemnify
and hold harmless each Holder, the partners, officers and directors of
each Holder, any underwriter (as defined in the Securities Act) for
such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Securities
Exchange Act of 1934, as amended (the "1934 ACT"), against any losses,
claims, damages, or liabilities (joint or several) to which they may
become subject under the Securities Act, the 1934 Act or other federal
or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any of
the following statements, omissions or violations (collectively a
"VIOLATION"):
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(1) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto;
(2) 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; or
(3) any violation or alleged violation by DR of the Securities Act,
the 1934 Act, any federal or state securities law or any rule or regulation
promulgated under the Securities Act, the 1934 Act or any federal or state
securities law in connection with the offering covered by such registration
statement;
and DR will reimburse each such Holder, partner, officer or director,
underwriter or controlling person for any legal or other expenses
reasonably incurred by them, as incurred, in connection with investigating
or defending any such loss, claim, damage, liability or action; PROVIDED,
HOWEVER, that the indemnity agreement contained in this subsection 4.f.(i)
shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the
consent of DR (which consent shall not be unreasonably withheld), nor
shall DR be liable in any case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written information
furnished expressly for use in connection with such registration by such
Holder, partner, officer, director, underwriter or controlling person of
such Holder.
i. BY SELLING HOLDERS. To the extent permitted by law, each
selling Holder will indemnify and hold harmless DR, each of its
directors, each of its officers who have signed the registration
statement, each person, if any, who controls DR within the meaning of
the Securities Act, any underwriter and any other Holder selling
securities under such registration statement or any of such other
Holder's partners, directors or officers or any person who controls
such Holder within the meaning of the Securities Act or the 1934 Act,
against any losses, claims, damages or liabilities (joint or several)
to which DR or any such director, officer, controlling person,
underwriter or other such Holder, partner or director, officer or
controlling person of such other Holder may become subject under the
Securities Act, the 1934 Act or other federal or state law, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation in each case to
the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by
such Holder expressly for use in connection with such registration; and
each such Holder will reimburse any legal or other expenses reasonably
incurred by DR or any such director, officer, controlling person,
underwriter or other Holder, partner, officer, director or controlling
person of such other Holder in connection with
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<PAGE>
the investigating or defending any such loss, claim, damage, liability
or action; PROVIDED, HOWEVER, that the indemnity agreement contained
in this subsection 4.f.(ii) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if
such settlement is effected without the consent of the Holder, which
consent shall not be unreasonably withheld; and PROVIDED FURTHER,
that the total amounts payable in indemnity by a Holder under this
Section 4.f.(ii) in respect of any Violation shall not exceed the
net proceeds received by such Holder in the registered offering out
of which such Violation arises.
iii. NOTICE. Promptly after receipt by an indemnified party
under this Section 4.f. of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party
under this Section 4.f., deliver to the indemnifying party a written
notice of the commencement thereof and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party similarly
noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified
party shall have the right to retain its own counsel, with the fees and
expenses to be paid by the indemnifying party, if representation of
such indemnified party by the counsel retained by the indemnifying
party would be inappropriate due to actual or potential conflict of
interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of
the commencement of any such action, if prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 4.f., but the
omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified
party otherwise than under this Section 4.f.
iv. DEFECT ELIMINATED IN FINAL PROSPECTUS. The foregoing
indemnity agreements of DR and Holders are subject to the condition
that, insofar as they relate to any Violation made in a preliminary
prospectus but eliminated or remedied in the amended prospectus on file
with the SEC at the time the registration statement in question becomes
effective or the amended prospectus filed with the SEC pursuant to SEC
Rule 424(b) (the "FINAL PROSPECTUS"), such indemnity agreement shall
not inure to the benefit of any person if a copy of the Final
Prospectus was furnished to the indemnified party and was not furnished
to the person asserting the loss, liability, claim or damage at or
prior to the time such action is required by the Securities Act.
v. CONTRIBUTION. In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in
which either (i) any
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Holder exercising rights under this Agreement, or any controlling
person of any such Holder, makes a claim for indemnification
pursuant to this Section 4.f. but it is judicially determined
(by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not
be enforced in such case notwithstanding the fact that this Section
4.f. provides for indemnification in such case, or (ii) contribution
under the Securities Act may be required on the part of any such
selling Holder or any such controlling person in circumstances for
which indemnification is provided under this Section 4.f.; then, and in
each such case, DR and such Holder will contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that such Holder
is responsible for the portion represented by the percentage that the
public offering price of its Registrable Securities offered by and sold
under the registration statement bears to the public offering price of
all securities offered by and sold under such registration statement
and DR and other selling Holders are responsible for the remaining
portion; PROVIDED, HOWEVER, that, in any such case, (A) no such Holder
will be required to contribute any amount in excess of the public
offering price of all such Registrable Securities offered and sold by
such Holder pursuant to such registration statement; and (B) no person
or entity guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
iv. SURVIVAL. The obligations of DR and Holders under this Section 4.f.
shall survive the completion of any offering of Registrable Securities
in a registration statement and otherwise.
g. "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that it or
he shall not, to the extent requested by DR or an underwriter of securities
of DR, sell or otherwise transfer or dispose of any Registrable Securities or
other shares of stock of DR then owned by such Holder (other than to donees
who agree to be similarly bound) for up to one hundred eighty (180) days
following the effective date of a registration statement of DR filed under
the Securities Act; PROVIDED, HOWEVER, that:
i. such agreement shall be applicable only to the first such
registration statement of DR which covers securities to be sold on its
behalf to the public in an underwritten offering but not to Registrable
Securities sold pursuant to such registration statement; and
ii. all executive officers and directors and employees of DR
then holding Common Stock of DR enter into similar agreements.
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<PAGE>
In order to enforce the foregoing covenant, DR shall have the right to place
restrictive legends on the certificates representing the shares subject to this
Section and to impose stop transfer instructions with respect to the
Registrable Securities and such other shares of stock of each Holder and
Ronning (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
h. RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit
the sale of the Registrable Securities to the public without registration,
after such time as a public market exists for the Common Stock of DR, DR agrees
to:
i. make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all
times after the effective date of the first registration under the
Securities Act filed by DR for an offering of its securities to the
general public;
ii. use its best efforts to file with the Commission in a timely manner
all reports and other documents required of DR under the Securities Act
and the 1934 Act (at any time after it has become subject to such
reporting requirements); and
iii. so long as a Holder owns any Registrable Securities, to
furnish to the Holder forthwith upon request a written statement by DR
as to its compliance with the reporting requirements of said Rule 144
(at any time after 90 days after the effective date of the first
registration statement filed by DR for an offering of its securities to
the general public), and of the Securities Act and the 1934 Act (at any
time after it has become subject to the reporting requirements of the
1934 Act), a copy of the most recent annual or quarterly report of DR,
and such other reports and documents of DR as a Holder may reasonably
request in availing itself of any rule or regulation of the Commission
allowing a Holder to sell any such securities without registration (at
any time after DR has become subject to the reporting requirements of
the 1934 Act).
DR shall have no further obligations pursuant to Section 4.h. when, in the
opinion of counsel to DR, all shares held by all Holders may be sold by such
Holders under Rule 144(k) under the Securities Act.
i. TERMINATION OF DR'S OBLIGATIONS. DR shall have no obligations
pursuant to Sections 4.b. and 4.c. with respect to: (i) any request or
requests for registration made by any Holder on a date more than five
(5) years after the closing date of DR's initial public offering; or
(ii) any Registrable Securities proposed to be sold by a Holder in a
registration pursuant to Section 4.b. or 4.c. if, in the opinion of
counsel to DR, all such Registrable Securities proposed to be sold by a
Holder may be sold in a three-
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month period without registration under the Securities Act pursuant
to Rule 144 under the Securities Act.
j. LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the
date of this Agreement, DR shall not, without the prior written consent of the
Holders, enter into any agreement with any holder or prospective holder of any
securities of DR which would give such prospective shareholder registration
rights superior to those granted to the Holders hereunder or which would allow
such holder or prospective holder to include such securities in any
registration filed under Section 4.2 hereof, unless under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the inclusion of its securities will
not reduce the amount of the Registrable Securities of the Holders which is
included; provided, however, that DR may, without consent of the Holders, grant
senior registration rights to the managing underwriter of DR's initial public
offering in connection with the issuance of a warrant to such underwriter
provided that such registration rights are in compliance with the requirements
of the National Association of Securities Dealers.
5. TECHNOLOGY LICENSING AGREEMENT. The technology licensing agreement
dated August 30, 1994 previously executed between DR and Fujitsu shall
remain in full force and effect and all parties agree to be subject to
the rights and obligations flowing from the technology license agreement
as amended below ("TECHNOLOGY LICENSE AGREEMENT"). The Technology
License Agreement is hereby amended as follows:
a. Fujitsu specifically acknowledges that the provisions of section 3.1
have been fully satisfied and no obligations remain.
b. The following sentence is added to Section 1.2: "The term "DR
Technology" is intended to include only the technology referred to by
the parties as the "Dolphin" technology and described in the patent
applications listed in Exhibit A.
c. Fujitsu and DR agree that the Technology is not employed in the
current business conducted by DR relating to digital distribution of
software via the Internet.
d. Section 3.3(b) is deleted.
e. Section 8 is deleted.
The parties agree that the Technology License Agreement shall survive any
termination or expiration of this Agreement.
6. NON-COMPETITION AGREEMENT. Promptly following the execution of this
Agreement, DR and Joel Ronning will execute and deliver a
non-competition agreement in the form approved by DR's Board.
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7. TERM AND TERMINATION. This Agreement will continue from its
effective date until terminated as follows:
a. By a party, effective immediately, if Fujitsu or DR should
become the subject of any voluntary or involuntary bankruptcy,
receivership or other insolvency proceedings or make an assignment or
other arrangement for the benefit of its creditors, or if Fujitsu or DR
should be nationalized or have any of its material assets expropriated;
or
b. The right of Fujitsu to have its Fujitsu Nominee elected to the
Board of DR granted under Section 3 hereof shall terminate as provided
in Section 3 or immediately upon the closing of an initial public
offering of the Common Stock of DR.
c. The registration rights granted under Section 4 hereof shall
terminate as provided in Section 4 or after a period of five (5) years
following the closing of an initial public offering of the Common Stock
of DR.
8. GOVERNING LAW. The validity, interpretation and performance of this
Agreement shall be governed by the laws of the State of Minnesota,
without regard to the choice of law principles thereunder.
9. DISPUTE RESOLUTION. Any controversy arising out of or relating to
this Agreement, any modification or extensions hereof, or any order,
sale or performance hereunder, including any claim for damages,
rescission, or both, shall be settled by binding arbitration with one
(1) arbitrator in Hennepin County, Minnesota, in accordance with the
Commercial Rules then pertaining of the American Arbitration
Association. Judgment on the award may be entered in any Court of
competent jurisdiction. The parties consent that any process or notice
of motion or other application to either of said courts, and any paper
in connection with arbitration, may be served by certified mail, return
receipt requested, by personal service or in such other manner as may be
permissible under the rules of the applicable court or arbitration
tribunal, provided a reasonable time for appearance is allowed. The
parties further agree that arbitration proceedings must be instituted
within eighteen (18) months after the claimed breach occurred, and that
the failure to institute arbitration proceedings within such period
shall constitute an absolute bar to the institution of any proceedings
and a waiver of all such claims. The prevailing party in any
arbitration or other legal proceedings shall be entitled, in addition to
any other rights or remedies it may have, to reimbursement for its
expenses incurred thereby and in any subsequent enforcement of a
judgment including court and arbitration costs, reasonable attorneys'
fees, and witness fees including those of expert witnesses.
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10. SPECIFIC PERFORMANCE. Each party's obligation under this Agreement
is unique. If any party should default in its obligations under this
Agreement, the parties each acknowledge that it would be extremely
impracticable to measure the resulting damages. Accordingly, the
nondefaulting party, in addition to any other available rights or
remedies, may sue in equity for specific performance, and the parties
each expressly waive the defense that a remedy in damages will be
adequate. In particular, the parties agree that Fujitsu shall be
entitled to specific performance with respect to its rights under
Section 3 (Election of Fujitsu Nominee to DR Board) and Section 4
(Registration Rights).
11. ASSIGNMENT.
a. Fujitsu may freely assign its rights and obligations under this
Agreement and all shares of DR Common Stock Fujitsu owns to wholly-owned
affiliates of Fujitsu; provided, however, that such assignment and transfer
shall only be permitted to the extent that applicable United States laws,
including, without limitation, applicable state and federal securities laws,
permit.
b. DR may freely assign its rights and obligations under this
Agreement in connection with a merger or acquisition of DR or
substantially all of its assets. DR may otherwise assign its rights and
obligations hereunder only with the prior written consent of Fujitsu and
the Other Parties, but only to the extent that such Other Parties own or
are transferees, beneficially or of record, of shares of Common Stock of
DR currently owned by Joel Ronning.
c. Joel Ronning may transfer all shares of DR Common Stock he owns,
along with any and all rights related thereto pursuant to this Agreement
or otherwise, to MacUSA, Inc., Tech Squared Inc. or any of their
wholly-owned subsidiaries; provided, however, that such assignment and
transfer shall only be permitted: (i) to the extent that applicable
United States laws, including, without limitation, applicable state and
federal securities laws, permit and (ii) such transferee is bound in
writing by Ronning's obligations as a shareholder for the election of
the Fujitsu Nominee under Section 3 hereof.
d. Any assignment or transfer pursuant to this Section 8 shall only
be valid if the assignor/transferor party provides the other parties to
this Agreement with prior written notice of such assignment or transfer.
12. WAIVER.
a. The failure of any party to exercise promptly any right granted
hereunder or to require strict performance of any obligation of such
other parties hereunder
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shall not be deemed to be a waiver of such right or the right
to demand subsequent performance of any and all such obligations
by the non-performing party.
b. Notwithstanding the foregoing, the parties hereby expressly
waive any failure by DR to obtain any consent required under the Prior
Agreements or any other breach thereof.
13. SEVERABILITY. All provisions of this Agreement shall be deemed
severable. The enforceability, illegality or invalidity of any
provision herein or portion thereof shall not affect the enforceability,
legality or validity of any other, further or additional provision
hereof, all of which shall remain valid, binding and enforceable in
accordance with their terms. Should any provision, term or condition of
this Agreement be held unenforceable, illegal or invalid as being too
broad with respect to duration, scope or subject matter, such provision,
term or condition shall be deemed and construed to be reduced to the
maximum duration, scope or subject matter allowable under applicable law.
14. NOTICE. All notices under this Agreement shall be in writing and
shall be given by Federal Express, DHL, other internationally recognized
courier, or facsimile addressed to the respective parties at their
addresses set forth on the signature page below, or to such other
address of which a party may advise the others in writing. Notices will
be deemed given when sent.
15. ENTIRE AGREEMENT. Except as explicitly referenced herein with
respect to the Technology License Agreement and the Distribution
Agreement between DR and Fujitsu Software Corporation, this Agreement
embodies the whole agreement of the parties with respect to the subject
matter hereof. There are no promises, terms, conditions or obligations
other than those contained herein. No modification of this Agreement or
any of its terms shall be effective unless in writing and executed by
the duly authorized representatives of the parties.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement effective as of
the day and year first above written.
DIGITAL RIVER, INC. FUJITSU LIMITED
(a Delaware corporation)
By /s/ Joel Ronning By /s/
------------------------------ -----------------------------
Its President Its Associate General Mgr
------------------------------ -----------------------------
5198 West 76th Street -----------------------------
Edina, MN 55434 -----------------------------
DIGITAL RIVER, INC. MACUSA, INC.
(a Minnesota corporation)
By /s/ [ILLEGIBLE] By /s/ Joel Ronning
------------------------------ -----------------------------
Its Secretary Its President
------------------------------ -----------------------------
5198 West 76th Street 5198 West 76th Street
Edina, MN 55434 Edina, MN 55434
JOEL RONNING
/s/ Joel Ronning
- ----------------------------
6300 Smithtown Road
Victoria, MN 55331
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FIRST AMENDMENT TO FINANCING AGREEMENT
THIS FIRST AMENDMENT TO FINANCING AGREEMENT (this "Amendment"),
made and entered into as of Februrary 19, 1998, is by and between is by and
between TECH SQUARED INC., a Minnesota corporation (the "Borrower"), and
FIRST BANK NATIONAL ASSOCIATION, a National Banking Association (the
"Lender").
RECITALS
1. The Lender and the Borrower entered into a Financing Agreement
dated as of June 27, 1997 (the "Financing Agreement"); and
2. The Borrower desires to amend certain provisions of the
Agreement, and the Lender has agreed to make such amendments, subject to the
terms and conditions set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby covenant
and agree to be bound as follows:
SECTION 1. CAPITALIZED TERMS. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in the
Financing Agreement, unless the context shall otherwise require.
SECTION 2. AMENDMENTS. The Financing Agreement is hereby amended as
follows:
2.1 THE ADVANCES. Section 2.1 of the Financing Agreement is amended
in its entirety as follows:
Section 2.1 THE ADVANCES. On the terms and subject to the
conditions hereof, at the Borrower's request, the Lender, in its absolute and
sole discretion and without any commitment to do so, may make the following
Advances available to the Borrower:
2.1(a) up to seventy-five percent (75%) of the net amount of
Eligible Accounts which are listed in the Borrower's most current Borrowing
Base Certificate and which are deemed eligible for advances by the Lender, or
such greater or lesser percentage at the Lender's sole and absolute discretion
(the "Accounts Advances") not to exceed however the maximum amount of Two
Million Five Hundred Thousand and no/100 Dollars ($2,500,000);
2.1(b) up to thirty percent (30%) of the net amount of Eligible
Inventory of finished goods which is listed in the Borrower's most current
Borrowing Base Certificate and which is deemed eligible for advances by the
Lender, or such greater or lesser percentage at the Lender's sole and absolute
discretion, not to exceed a maximum amount of $500,000 (the "Inventory
Advances");
Notwithstanding the preceding clauses 2.1(a),and 2.1(b), the maximum aggregate
amount advanced from time to time shall not exceed $2,500,000.
<PAGE>
At the Borrower's request, Lender may in its sole and absolute discretion issue
letters of credit, not to exceed a maximum amount of $400,000 in the aggregate.
Any such issued letter of credit shall reduce the available amount of Accounts
Advances by the amount of any issued letter(s) of credit. Borrower agrees to
pay Lender any amounts paid by Lender on any such letters of credit. In
addition to the Letter of Credit Fee, Borrower also agrees to pay Lender's
customary charges for issuing such letters of credit and to reimburse Lender
for any cost and expenses it incurs in connection with any such guarantee.
Loans for additional sums requested by the Borrower may be made at the Lender's
sole discretion based upon the Lender's valuation of the Borrower's collateral
or other factors. The Borrower acknowledges and agrees that the Lender may
from time to time, for the Lender's convenience, segregate or apportion the
Borrower's collateral for purposes of determining the amounts and maximum
amounts of Advances which may be made hereunder. Nevertheless, the Lender's
security interest in all such collateral, and any other collateral rights,
interests and properties which may now or hereafter be available to the Lender,
shall secure and may be applied to the payment of any and all Advances and
other indebtedness secured by the Lender's security interest, in any order or
manner of application and without regard to the method by which the Lender
determines to make Advances hereunder.
2.2 LETTER OF CREDIT FEE. A new Section 2.9 of the Financing
Agreement is added to provide as follows:
Section 2.9 LETTER OF CREDIT FEE. The Borrower shall pay to the Lender
an annual fee in an amount equal to one percent (1%) of the maximum aggregate
amount of the letters of credit ($4,000) (the "Letter of Credit Fee").
Borrower has paid $2,000 of the first year's Letter of Credit Fee and the
remaining Letter of Credit fee shall be payable on February 19, 1998.
Subsequent Letter of Credit Fees shall be payable on each anniversary of the
date of this Agreement.
SECTION 3. EFFECTIVENESS OF AMENDMENTS. The amendments contained in
this Amendment shall become effective upon delivery by the Borrower of, and
compliance by the Borrower with, the following:
3.1 This Amendment, duly executed by the Borrower.
3.2 A copy of the resolutions of the Board of Directors of the
Borrower authorizing the execution, delivery and performance of this
Amendment certified as true and accurate by its Secretary or Assistant
Secretary, along with a certification by such Secretary or Assistant
Secretary (i)certifying that there has been no amendment to the Articles
of Incorporation or Bylaws of the Borrower since true and accurate copies
of the same were delivered to the Lender with a certificate of the
Secretary of the Borrower dated June 27, 1998, and (ii) identifying each
officer of the Borrower authorized to execute this Amendment and any other
instrument or agreement executed by the Borrower in connection with this
Amendment, and certifying as to specimens of such officer's signature and
such officer's incumbency in such offices as such officer holds.
3.3 A consent and reaffirmation by the Guarantor.
3.4 The Borrower shall have fully paid the first year's Letter of
Credit Fee.
2
<PAGE>
SECTION 4. REPRESENTATIONS; ACKNOWLEDGMENTS. The Borrower hereby
represents that on and as of the date hereof and after giving effect to this
Amendment (a)all of the representations and warranties contained in the
Financing Agreement, and in any and all other Loan Documents of the Borrower,
are true, correct and complete in all respects as of the date hereof as though
made on and as of such date, except for changes permitted by the terms of the
Financing Agreement, and (b) the Borrower is in compliance with all covenants
and agreements of the Borrower as set forth in the Financing Agreement and in
any and all other Loan Documents of the Borrower. The Borrower represents and
warrants that the Borrower has the power and legal right and authority to enter
into this Amendment and has duly authorized as appropriate the execution and
delivery of this Amendment and other agreements and documents executed and
delivered by the Borrower in connection herewith or therewith by proper
corporate action. The Borrower acknowledges and agrees that its obligations to
the Lender under the Financing Agreement exist and are owing without offset,
defense or counterclaim assertable by the Borrower against the Lender. The
Borrower further acknowledges and agrees that its obligations to the Lender
under the Financing Agreement, as amended, constitute "Obligations" within the
meaning of the Security Agreement and are secured by the Security Agreement, as
amended.
SECTION 5. AFFIRMATION, FURTHER REFERENCES. Except as expressly
modified under this Amendment, all of the terms, conditions, provisions,
agreements, requirements, promises, obligations, duties, covenants and
representations of the Borrower under the Financing Agreement, the Security
Agreement, and any and all other Loan Documents entered into with respect to
the obligations under the Financing Agreement are incorporated herein by
reference and are hereby ratified and affirmed in all respects by the Borrower.
All references in the Financing Agreement to "this Agreement," "herein,"
"hereof," and similar references, and all references in the other Loan
Documents to the "Agreement," shall be deemed to refer to the Agreement, as
amended by this Amendment.
SECTION 6. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This
Amendment, from and after the date hereof, embodies the entire agreement and
understanding between the parties hereto and supersedes and has merged into it
all prior oral and written agreements on the same subjects by and between the
parties hereto with the effect that this Amendment, shall control with respect
to the specific subjects hereof and thereof.
SECTION 7. SEVERABILITY. whenever possible, each provision of this
Amendment and any other statement, instrument or transaction contemplated
hereby or thereby or relating hereto or thereto shall be interpreted in such
manner as to be effective, valid and enforceable under the applicable law of
any jurisdiction, but, if any provision of this Amendment or any other
statement, instrument or transaction contemplated hereby or thereby or relating
hereto or thereto shall be held to be prohibited, invalid or unenforceable
under the applicable law, such provision shall be ineffective in such
jurisdiction only to the extent of such prohibition, invalidity or
unenforceability, without invalidating or rendering unenforceable the remainder
of such provision or the remaining provisions of this Amendment or any other
statement, instrument or transaction contemplated hereby or thereby or relating
hereto or thereto in such jurisdiction, or affecting the effectiveness,
validity or enforceability of such provision in any other jurisdiction.
SECTION 8. SUCCESSORS. This Amendment shall be binding upon the
Borrower and the Lender and their respective successors and assigns, and shall
inure to the benefit of the Borrower and the Lender and the successors and
assigns of the Lender.
SECTION 9. LEGAL EXPENSES. The Borrower agrees to reimburse the
Lender, upon execution of this Amendment, for all reasonable out-of-pocket
expenses (including attorneys'
3
<PAGE>
fees and legal expenses of Dorsey & Whitney, counsel for the Lender) incurred
in connection with the Financing Agreement, including in connection with the
negotiation, preparation and execution of this Amendment and all other
documents negotiated, prepared and executed in connection with this
Amendment, and in enforcing the obligations of the Borrower under the
Financing Agreement, as amended by this Amendment, which obligations of the
Borrower shall survive any termination of the Financing Agreement.
SECTION 10. HEADINGS. The headings of various sections of this
Amendment have been inserted for reference only and shall not be deemed to be a
part of this Amendment.
SECTION 11. COUNTERPARTS. This Amendment may be executed in several
counterparts as deemed necessary or convenient, each of which, when so
executed, shall be deemed an original, provided that all such counterparts
shall be regarded as one and the same document, and either party to this
Amendment may execute any such agreement by executing a counterpart of such
agreement.
SECTION 12. GOVERNING LAW. The Amendment Documents shall be
governed by the internal laws of the State of Minnesota, without giving effect
to conflict of law principles thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the date and year first above written.
TECH SQUARED INC.
By: /s/ Joel A. Ronning
-----------------------------------
Title: CEO Chairman
---------------------------------
FIRST BANK NATIONAL ASSOCIATION
By: /s/ [ILLEGIBLE]
-----------------------------------
Title: Officer
---------------------------------
4
<PAGE>
CERTIFICATE OF SECRETARY OF
TECH SQUARED INC.
I, _________________________ , hereby certify to FIRST BANK NATIONAL
ASSOCIATION that I am the Secretary of Tech Squared Inc., a Minnesota
corporation (the "Company") and that the following resolutions have been
duly adopted by the Board of Directors of the Company in a manner
authorized by the laws of the State of Minnesota:
"WHEREAS, the Company wishes to borrow money from FIRST BANK
NATIONAL ASSOCIATION (the "Lender"), and for that purpose intends to
enter into a First Amendment to Financing Agreement with the Lender.
RESOLVED, the Company shall enter into a First Amendment to
Financing Agreement with the Lender under which the Company may
obtain advances up to $2,500,000, or such greater or lesser amount in
the Lender's absolute and sole discretion and the President, Vice
President, Secretary or Treasurer of the Company is hereby authorized
at any time and from time to time to execute and deliver to the
Lender such First Amendment to Financing Agreement and any security
agreements, mortgages, subordination agreements, pledge agreements,
assignments of life insurance, reimbursement agreements, or
amendments to any of the foregoing as may be contemplated or required
pursuant to such First Amendment to Financing Agreement or otherwise,
all in such form as such officer may determine and approve (such
determination and approval to be established conclusively by such
officer's execution and delivery of such First Amendment to Financing
Agreement and any such related documents and instruments).
FURTHER RESOLVED, that the President, Vice President, Secretary
or Treasurer of the Company is hereby authorized at any time and from
time to time to sell, assign, transfer, mortgage, create security
interests in and pledge to the Lender the real property, goods,
instruments, documents, securities, chattel paper, accounts, contract
rights and other intangibles and any other property now owned or
hereafter acquired by the Company, either absolutely for such
consideration as such officer may determine to be appropriate or as
security for the payment or performance of any or all debts,
liabilities and obligations of every type and description now or at
any time hereafter owed to the Lender by the Company, on such terms
as such officer may approve, and to do such other acts or things in
connection therewith or pursuant thereto as such officer may
determine to be appropriate (such determination and approval to be
established conclusively by the instrument executed or action taken
by such officer).
FURTHER RESOLVED, it is hereby acknowledged that each and every
note, guaranty, security agreement and other instrument made pursuant
to the foregoing resolutions is and will be made and given for the
corporate purposes of this Company.
FURTHER RESOLVED, the Secretary or Assistant Secretary shall
certify to the Lender the names and signatures of the persons who
presently are duly elected, qualified and acting as the officers
authorized to act under the foregoing resolutions, and the Secretary
or Assistant Secretary shall from time to time hereafter, upon a
change in the facts so certified, immediately certify to the Lender
the names and signatures of the persons then authorized to sign or to
act; the Lender shall be fully protected in relying on such
certificates and on the obligation of the Secretary or an Assistant
Secretary immediately to certify to the Lender any change in any fact
certified, and the Lender shall be indemnified and saved harmless by
the Company from any and all claims, demands, expenses, costs and
damages resulting from or growing out of honoring or relying on the
signature or other authority
<PAGE>
(whether or not properly used) of any officer whose name and signature was
so certified, or refusing to honor any signature or authority not so
certified."
I further certify that the foregoing resolutions have not been amended or
revoked and are in full force and effect on the date hereof.
I further certify that the Board of Directors of the Company has, and at
the time of adoption of the foregoing resolutions had, full power and
lawful authority to adopt the foregoing resolutions and to confer the
powers therein granted upon the officers designated, and that such
officers have full power and authority to exercise the same.
I further certify that the Articles of Incorporation and bylaws delivered
to the Lender not been amended since June 27, 1997, and are in full force
and effect on the date hereof.
I further certify that the officers whose names appear below have been
duly elected to and now hold the offices in the Company set forth opposite
their respective names and that the signature appearing opposite the name
of each of such officer is authentic and official:
Name Title Signature
Joel Ronning Chairman, CEO /s/ Joel Ronning
- -------------------- ----------------- ---------------------
Chuck Reese President, COO /s/ Chuck Reese
- -------------------- ----------------- ---------------------
- -------------------- ----------------- ---------------------
I further certify that shareholder approval of the foregoing resolutions
is not required and said resolutions are effective and binding on the
Company without approval by its shareholders.
Dated March 20, 1998
------------------------
/s/ Joel Ronning
-----------------------------
Secretary, Tech Squared Inc.
/s/ Chuck Reese
- --------------------------------
Attest by a Director
<PAGE>
March ____, 1998
Republic Acceptance Corporation
2338 Central Avenue Northeast
Suite 200
Minneapolis, MN 55418
Re: Consent to Amendment to Financing Agreement dated as of
February 19, 1998 (the "Amendment") by and between Republic
Acceptance Corporation ("Lender") and TECH SQUARED INC.,
a Minnesota corporation ("Company") and Reaffirmation
of related Undertakings
Ladies and Gentlemen:
This will confirm that:
a) The undersigned hereby consents to the terms of the Amendment and to
the execution and delivery of the Amendment by the Company;
b) The obligations and indebtedness of the Company under the Financing
Agreement dated June 27, 1997 between Lender and the Company, as amended by the
Amendment (collectively, the "Financing Agreement"), constitute the obligations
and indebtedness of the Company within the meaning of, and are guaranteed
pursuant to, that Guaranty of the undersigned dated June 27, 1997 (the
"Guaranty"), and all of the terms, covenants and conditions of the Guaranty
remain in full force and effect.
/s/ Joel A. Ronning
----------------------------------
JOEL A. RONNING
<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-K into the Company's previously filed
Registration Statement Files No. 33-91974 and 33-46971.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET 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> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 144
<SECURITIES> 467
<RECEIVABLES> 2,728<F1>
<ALLOWANCES> 0
<INVENTORY> 1,890
<CURRENT-ASSETS> 5,465
<PP&E> 346<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,600
<CURRENT-LIABILITIES> 4,895
<BONDS> 0
217
0
<COMMON> 0
<OTHER-SE> 2,190
<TOTAL-LIABILITY-AND-EQUITY> 7,600
<SALES> 36,995
<TOTAL-REVENUES> 36,995
<CGS> 32,528
<TOTAL-COSTS> 32,528
<OTHER-EXPENSES> 4,065
<LOSS-PROVISION> 291
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> (1,013)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,013)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
<FN>
<F1>AMOUNTS REPORTED FOR ACCOUNTS RECEIVABLE AND PROPERTY, PLANT, AND EQUIPMENT ARE
NET AMOUNTS.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996
JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996
DEC-31-1996
<CASH> 867 504 489 353
899
<SECURITIES> 1,200 1,402 1,223 1,284
940
<RECEIVABLES> 2,306 2,407 2,631 2,808
2,879<F1>
<ALLOWANCES> 0 0 0 0
0
<INVENTORY> 3,519 1,924 1,981 2,390
1,907
<CURRENT-ASSETS> 8,354 6,440 6,553 7,407
7,060
<PP&E> 445 403 423 453
476<F1>
<DEPRECIATION> 0 0 0 0
0
<TOTAL-ASSETS> 9,739 7,926 8,054 8,946
8,620
<CURRENT-LIABILITIES> 6,675 4,731 5,699 6,667
6,910
<BONDS> 0 0 0 0
0
185 185 163 163
198
0 0 0 0
0
<COMMON> 0 0 0 0
0
<OTHER-SE> 2,238 2,385 1,991 1,996
1,214
<TOTAL-LIABILITY-AND-EQUITY> 9,739 7,926 8,054 8,946
8,620
<SALES> 42,136 8,628 17,260 26,514
37,387
<TOTAL-REVENUES> 42,136 8,628 17,260 26,514
37,387
<CGS> 38,852 7,615 15,359 23,588
33,476
<TOTAL-COSTS> 38,852 7,615 15,359 23,588
33,476
<OTHER-EXPENSES> 4,796 1,170 2,305 3,437
4,760
<LOSS-PROVISION> 285 30 60 105
340
<INTEREST-EXPENSE> 198 3 4 23
43
<INCOME-PRETAX> (1,652) (144) (355) (397)
(616)
<INCOME-TAX> 0 0 0 0
0
<INCOME-CONTINUING> 0 0 0 0
0
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> (1,652) (144) (355) (397)
(616)
<EPS-PRIMARY> (.19) (.01) (.03) (.04)
(.06)
<EPS-DILUTED> (.19) (.01) (.03) (.04)
(.06)
<FN>
<F1>AMOUNTS REPORTED FOR ACCOUNTS RECEIVABLE AND PROPERTY, PLANT, AND EQUIPMENT ARE
NET AMOUNTS.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 253 311 93
<SECURITIES> 800 701 502
<RECEIVABLES> 2,349 2,524 2,883<F1>
<ALLOWANCES> 0 0 0
<INVENTORY> 2,394 1,507 2,017
<CURRENT-ASSETS> 6,050 5,570 5,840
<PP&E> 346 347 319<F1>
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 8,093 7,882 7,898
<CURRENT-LIABILITIES> 5,726 5,082 5,365
<BONDS> 0 0 0
198 198 198
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 1,895 2,316 2,016
<TOTAL-LIABILITY-AND-EQUITY> 8,093 7,882 7,898
<SALES> 9,964 18,448 27,421
<TOTAL-REVENUES> 9,964 18,448 27,421
<CGS> 8,873 16,296 24,146
<TOTAL-COSTS> 8,873 16,296 24,146
<OTHER-EXPENSES> 1,029 2,055 3,046
<LOSS-PROVISION> 60 113 167
<INTEREST-EXPENSE> 27 53 79
<INCOME-PRETAX> (251) (503) (711)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (251) (503) (711)
<EPS-PRIMARY> (.02) (.05) (.07)
<EPS-DILUTED> (.02) (.05) (.07)
<FN>
<F1>AMOUNTS REPORTED FOR ACCOUNTS RECEIVABLE AND PROPERTY, PLANT, AND EQUIPMENT
ARE NET AMOUNTS.
</FN>
</TABLE>
