<PAGE>
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended: MARCH 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT.
Commission File Number: 0-25602
TECH SQUARED INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1591872
(State or other jurisdiction of incorporation) (IRS Employer
Identification No.)
5198 WEST 76TH STREET
EDINA, MINNESOTA 55439
(Address of principal executive offices)
(612) 832-5622
(Registrant's telephone number)
Indicate whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
As of the close of business on May 1, 1998, 10,956,679 shares of
Common Stock, no par value, of the Company were outstanding.
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<PAGE>
TECH SQUARED INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Operations (unaudited) for the three
months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows (unaudited) for the three
months ended March 31, 1998 and 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31, December 31,
1998 1997
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $300 $300
Restricted cash 220,440 143,623
Available-for-sale securities 245,775 467,438
Accounts receivable, net of allowance
for doubtful receivables of $158,000
and $180,000 respectively 2,650,781 2,727,883
Inventories 1,993,514 1,890,480
Prepaids and other current assets 479,808 234,936
----------- ------------
TOTAL CURRENT ASSETS 5,590,618 5,464,660
Property and equipment, net 348,868 346,419
Receivable from officer/stockholder 201,512 201,512
Mining assets 748,276 748,276
Investment in Digital River 2,632,579 839,202
----------- ------------
$9,521,853 $7,600,069
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $416,803 $765,728
Current maturities of long term debt 75,000 80,000
Accounts payable 3,550,944 2,816,959
Accrued compensation and benefits 148,237 239,748
Accrued expenses 612,434 791,743
Dividends payable to officer/shareholder 200,721 200,721
----------- ------------
TOTAL CURRENT LIABILITIES 5,004,139 4,894,899
Dividends payable to officer/shareholder 283,136 283,136
Long term debt, less current maturities - 15,000
Deferred income taxes 865,400 -
Redeemable preferred stock, 12% cumulative convertible,
$1 par value; 1,000,000 shares authorized; 160,000
shares issued and outstanding 216,700 216,700
STOCKHOLDERS' EQUITY:
Common stock: no par value; 25,000,000 shares authorized
10,956,679 and 10,374,870 issued and outstanding - -
Additional paid-in capital 3,117,356 3,189,436
Retained earnings (deficit) 60,547 (912,539)
Unrealized gain on available-for-sale securities (25,425) (86,563)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 3,152,478 2,190,334
----------- ------------
$9,521,853 $7,600,069
----------- ------------
----------- ------------
</TABLE>
Note: The consolidated statement of financial position at December 31, 1997
has been derived from the audited financial statements at that date.
See accompanying notes to financial statements.
3
<PAGE>
TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
1998 1997
---------- -----------
<S> <C> <C>
Net Sales $8,592,728 $9,963,858
Cost of sales 7,506,225 8,873,097
---------- -----------
GROSS PROFIT 1,086,503 1,090,761
Selling and marketing expenses 520,349 476,492
General and administrative expenses 502,515 552,444
---------- -----------
Total Operating Expenses 1,022,864 1,028,936
---------- -----------
INCOME (LOSS) FROM OPERATIONS 63,639 61,825
Interest expense, net (23,132) (26,575)
Investment income 4,611 -
Equity in losses of Digital River (549,625) (285,795)
---------- -----------
NET LOSS ($504,507) ($250,545)
---------- -----------
---------- -----------
Net loss per common share, basic and diluted ($0.05) ($0.02)
---------- -----------
---------- -----------
Weighted average shares outstanding, basic and
diluted 10,549,413 10,374,870
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss ($504,507) ($250,545)
Non-cash items included in loss:
Depreciation and amortization 48,243 52,322
Equity in losses of Digital River 549,625 285,795
Gain on sale of available-for-sale securities (4,611) -
Changes In Operating Assets And Liabilities:
Accounts receivable, net 77,102 529,752
Inventories (103,034) (487,297)
Prepaid and other current assets (244,872) 92,304
Accounts payable 733,985 109,240
Accrued compensation and benefits (91,511) 12,549
Other accrued expenses (199,309) (101,048)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 261,111 243,072
Cash Flows From Investing Activities:
Restricted cash (76,817) -
Purchases of property and equipment (50,700) (28,947)
Proceeds from sale of available-for-sale securities 287,411 -
Decrease in cash due to deconsolidation of Digital River - (799,721)
----------- -----------
NET CASH USED IN (PROVIDED BY) INVESTING ACTIVITIES 159,894 (828,668)
Cash Flows From Financing Activities:
Stock options exercised, net of payroll tax withholdings (72,080) -
Net change in revolving line of credit (348,925) (60,129)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (421,005) (60,129)
----------- -----------
NET DECREASE IN CASH - (645,725)
Cash At Beginning Of Period 300 898,558
----------- -----------
Cash At End Of Period $300 $252,833
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TECH SQUARED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. The accompanying consolidated financial
statements and notes should be read in conjunction with the audited financial
statements and notes thereto included in the Company's 1997 annual report on
Form 10-K.
NOTE 2 - INVENTORIES
The Company's inventories consist primarily of goods held for resale and are
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.
NOTE 3 - DIGITAL RIVER
In December 1995 the Company obtained a bargain purchase option to acquire
4,800,000 shares of Digital River common stock from the Company's majority
stockholder and chief executive officer, representing at the time a 60%
ownership of Digital River. The option is exerciseable at any time through
December 31, 2000 for a total exercise price of $1.00. Digital River has
developed and is operating a proprietary system which allows the secure sale
and delivery of software, fonts and images on-line, via the Internet. Digital
River's first on-line software sale and delivery occurred in August, 1996.
During the three month period ended March 31,1998, Digital River completed
various private placements of its common stock which resulted in net proceeds
of approximately $9,201,000 and issuance of 4,840,000 new shares of its common
stock, thereby reducing the Company's effective ownership of Digital River to
approximately 23% as of May 1998. For the three month period ended March 31,
1998 the Company recorded gain on issuance of stock by Digital River of
approximately $1,461,000, net of deferred income taxes of $865,400, which was
recorded through the Company's stockholder's equity.
6
<PAGE>
Summarized unaudited condensed financial information of Digital River is as
follows: (In 000's)
BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- -----------
<S> <C> <C>
Current assets $10,392 $2,126
Total assets 12,418 3,316
Current liabilities 2,028 1,076
Stockholders' equity $10,390 $2,540
</TABLE>
OPERATING INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
--------- -----------
<S> <C> <C>
Net sales $2,270 $179
Operating expenses 4,063 683
Net loss ($1,752) ($492)
</TABLE>
NOTE 4 - COMPREHENSIVE INCOME
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 has adopted SFAS No. 130 beginning in 1998. Other comprehensive income
for the first quarter of 1998 was approximately $17,000 compared to ($140,000)
for the first quarter of 1997. The comprehensive income comprised of an
increase in the market value of the available-for-sale securities on hand at
March 31, 1998.
7
<PAGE>
TECH SQUARED INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein are forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934
that involve a number of risks and uncertainties. Such forward-looking
information may be indicated by words such as will, may be, expects or
anticipates. In addition to the factors discussed herein, among the other
factors that could cause actual results to differ materially are the following:
business conditions and growth in the personal computer industry and the
general economy; competitive factors such as rival computer and peripheral
product sellers and price pressures; availability of vendor products at
reasonable prices; inventory risks due to shifts in market demand; and risks
presented from time to time in reports filed by the Company with the Securities
and Exchange Commission, including but not limited to the annual report on Form
10-K for the year ended December 31, 1997.
The Company sells computer and peripheral products targeted at the graphic arts
market, which currently includes primarily Macintosh related products. The
Company markets through direct marketing channels, and to value added
resellers.
For the three months ended March 31, 1998 the Company recorded a consolidated
net loss of ($505,000) or ($0.05) per share compared to a consolidated net loss
of ($251,000) or ($0.02) per share in the first quarter of 1997. These
consolidated losses include the Company's share of the Digital River losses
which amounted to ($550,000) and ($286,000) in the first quarter of 1998 and
1997, respectively. Excluding the Company's share of the Digital River losses
the Company recorded net income of $45,000 in the first quarter of 1998
compared to $35,000 in the first quarter of 1997.
RESULTS OF OPERATIONS
NET SALES
Net sales for the Company's first quarter ended March 31, 1998 totaled
$8,593,000, a decrease of 13.8%, compared to $9,964,000 for the corresponding
period of 1997. The decrease in sales includes a 19.2% decline in sales to the
Company's distribution customers, and an 11.0% decrease in sales to the
Company's DTP Direct catalog customers due to significant declines in sales of
systems and storage devices including hard drives and optical drives.
Fluctuations in the Company's net sales from period to period can be expected
due to a number of factors, including the timing of new product introductions
by the Company's major vendors and their competitors, seasonal cycles commonly
experienced in computer-related industries, and changes in product mix and
product pricing. As a result, the operating results for any particular period
are not necessarily indicative of the results of any future period.
GROSS PROFIT
Gross profit for the quarter ended March 31, 1998, was $1,087,000 or 12.6% of
net sales compared to $1,091,000 or 10.9 % of net sales for the comparable
period of 1997. The increase in gross profit percentage in the three month
period ended March 31, 1998, is primarily the result of a reduction in variable
overhead expenses. Additionally, gross profit percentage was positively
impacted by an increase in sales margins on both DTP Direct catalog sales and
distribution sales. The Company expects ongoing competitive pressure on gross
profit, and, consequently, changes in pricing and product configuration will be
necessary in order to remain competitive.
8
<PAGE>
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $520,000 during the quarter ended March
31, 1998, compared to $476,000 during the corresponding period of 1997. As a
percentage of sales, selling and marketing expenses increased to 6.1% in the
quarter ended March 31, 1998 from 4.8% for the same period in 1997. This
increase was mainly attributable to an increase in net marketing costs related
to the development, production and distribution of DTP Direct catalogs, and the
costs associated with the May 1998 launch of a new catalog, Net Direct, which
is directed at developers of intranet/Internet websites. Although the Company
believes the target market for the Net Direct catalog is substantially larger
than the DTP Direct catalog, and that the new catalog could provide significant
opportunity for revenue growth, there are significant risks associated with the
launch of a new catalog including; a completely new target audience, lack of
any historical direct marketing data to base mailing decisions, competitive
forces and new product lines. 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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter ended March 31, 1998 were
$503,000 compared to $552,000 for the comparable period of 1997. The decrease
of 9.0% is attributable to several factors including reductions of temporary
labor, credit card fees and bad debt expense. Additionally, an increase in the
amount of warehouse and office space sublet to Digital River also contributed
to the reduction in general and administrative expenses for the quarter. In
April 1998, Digital River announced its intention to move its offices later in
1998. Digital River has signed an agreement to pay the Company for office
space through December 31, 1998, as well as the portion of warehouse space
which they occupy.
INVESTMENT INCOME
The $5,000 of investment income for the quarter ended March 31, 1998, is the
realized gain from the sale of a portion of the Company's available-for-sale
securities.
NET INTEREST EXPENSE
Net interest expense for the first quarter of 1998 was $23,000 compared to
$27,000 for the same period in 1997. The decrease is primarily due to a
decrease in the average outstanding balance on the Company's line of credit.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at March 31, 1998, consisted of
liquid funds, a revolving line of credit agreement with US Bancorp National
Association ("US Bank"), and vendor trade credit lines.
The Company has a Revolving Line of Credit Agreement with US Bank through June
1999. Borrowings under the $2,500,000 agreement, 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 & CEO. As of March 31,
1998, the Company had unused availability under the line of credit of
approximately $1,268,000 and outstanding borrowings of $417,000.
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 US Bank. The Company uses the flooring
program to take advantage of certain programs with its major distributors.
As of March 31, 1998, the Company had working capital of $586,000 which
includes $246,000 relating to its investment in Cam Design, Inc. ("Cam Design")
which is valued at the closing market price on March 31, 1998. Of the
Company's total shares of Cam Design stock, 30,000 shares remained in escrow as
of March 31, 1998, to secure payment of a note payable. The trading market for
the Cam Designs shares may be limited and there can be no assurance that the
Company will be able to realize a market value equal to or in excess of the
value stated herein. The Company may have to bear the economic risk of the
entire investment for an indefinite period.
Inventories increased from $1,890,000, as of December 31, 1997, to $1,994,000
as of March 31,1998. Capital expenditures totaled $51,000 in the first quarter
of 1998 compared to $29,000 in the first quarter of 1997. The increase in
capital expenditures in the first quarter of 1998 is mainly attributed to
computer system upgrades. The Company has paid $200,000 related to the
dividend payable to officer/shareholder in April 1998.
The Company believes that funds generated from management of receivable and
inventory levels, advances under its line of credit, further expansion of lines
with trade creditors, the cash on hand and proceeds from the sale of its
investments, will be sufficient to fund its operations through the end of 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 and the Company's ability to control operating expenses.
Furthermore, funding of the Company's operations in future periods may require
additional investments in the Company in the form of equity or debt. There can
be no assurance that the Company will achieve desired levels of sales or
profitability or that future capital infusions will be available.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
HANOVER GOLD LITIGATION
In March 1996, and as amended in April 1996, the Company entered into an
Asset Purchase Agreement (the "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 registration
statement covering the resale of the Hanover Shares and consent by the Company.
In October 1996, Hanover filed a registration statement covering the
Hanover Shares and filed suit against the Company in the United States District
Court Eastern District of Washington. The complaint sought to force the
Company to break escrow and release title 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 April 1998, both parties agreed to the dismissal of all claims,
counterclaims and cross-claims without prejudice. The Hanover Shares held by
the court were returned to Hanover, and the mining claims and rights were
returned to the Company. In May 1998, the Company began the process of
attempting to force Hanover to perform the terms of the original Agreement.
Although the Company currently intends to enforce the Agreement, there is no
assurance that the Company will be successful, or if successful, that a market
for the Hanover shares will exist, or if not successful, that the Company will
be able to sell the Property elsewhere.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECH SQUARED INC.
May 13, 1998
/s/ Joel Ronning
--------------------------------------
Joel Ronning, Chief Executive Officer
and Chief Financial Officer (principal
executive officer and principal
financial officer)
12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Index Description
- -------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
13
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 221
<SECURITIES> 246
<RECEIVABLES> 2,651<F1>
<ALLOWANCES> 0
<INVENTORY> 1,994
<CURRENT-ASSETS> 5,591
<PP&E> 349<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,522
<CURRENT-LIABILITIES> 5,004
<BONDS> 0
217
0
<COMMON> 0
<OTHER-SE> 3,152
<TOTAL-LIABILITY-AND-EQUITY> 9,522
<SALES> 8,593
<TOTAL-REVENUES> 8,593
<CGS> 7,506
<TOTAL-COSTS> 7,506
<OTHER-EXPENSES> 1,023
<LOSS-PROVISION> 51
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> (505)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (505)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
<FN>
<F1>AMOUNTS REPORTED FOR ACCOUNTS RECEIVABLE AND
PROPERTY, PLANT AND EQUIPMENT ARE NET AMOUNTS.
</FN>
</TABLE>
