<PAGE>
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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: JUNE 30, 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 (IRS Employer Identification No.)
of incorporation)
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 August 1, 1998, 11,039,179 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 June 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Operations (unaudited) for the three
months and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (unaudited) for the six
months ended June 30, 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 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 14
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 1998 1997
---------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $300 $300
Restricted cash 202,369 143,623
Available-for-sale securities 135,600 467,438
Accounts receivable, net of allowance
for doubtful receivables of $198,000
and $180,000 respectively 2,863,507 2,727,883
Inventories 1,948,627 1,890,480
Prepaids and other current assets 304,606 234,936
---------- ----------
TOTAL CURRENT ASSETS 5,455,009 5,464,660
Property and equipment, net 387,429 346,419
Receivable from officer/stockholder 201,512 201,512
Mining assets 748,276 748,276
Investment in Digital River 2,365,420 839,202
---------- ----------
$9,157,646 $7,600,069
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $274,445 $765,728
Current maturities of long term debt 55,000 80,000
Accounts payable 4,058,119 2,816,959
Accrued compensation and benefits 173,119 239,748
Accrued expenses 540,578 791,743
Dividends payable to officer/shareholder 200,721 200,721
---------- ----------
TOTAL CURRENT LIABILITIES 5,301,982 4,894,899
Dividends payable to officer/shareholder 83,136 283,136
Long term debt, less current maturities - 15,000
Deferred income taxes 1,104,300 -
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
11,039,179 and 10,374,870 issued and outstanding - -
Additional paid-in capital 3,166,106 3,189,436
Retained earnings (deficit) (578,978) (912,539)
Unrealized loss on available-for-sale securities (135,600) (86,563)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,451,528 2,190,334
---------- ----------
$9,157,646 $7,600,069
---------- ----------
---------- ----------
</TABLE>
Note: The consolidated statement of financial position at December 31, 1997 has
been 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 Six Months Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------------------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $9,502,285 $8,484,181 $18,095,013 $18,448,039
Cost of sales 8,309,159 7,422,079 15,815,384 16,295,646
----------- ---------- ----------- ----------
GROSS PROFIT 1,193,126 1,062,102 2,279,629 2,152,393
Selling and marketing expenses 763,645 466,898 1,283,994 943,390
General and administrative expenses 544,565 559,519 1,047,080 1,111,963
----------- ---------- ----------- ----------
Total Operating Expenses 1,308,210 1,026,417 2,331,074 2,055,353
----------- ---------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS (115,084) 35,685 (51,445) 97,040
Interest expense, net (18,374) (26,595) (41,506) (53,170)
Investment income - 34,638 4,611 34,638
Equity in losses of Digital River (909,553) (295,335) (1,459,178) (581,130)
----------- ---------- ----------- ----------
NET LOSS ($1,043,011) ($251,607) ($1,547,518) ($502,622)
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Net loss per common share, basic and diluted ($0.09) ($0.02) ($0.14) ($0.05)
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Weighted average shares outstanding, basic and 11,001,020 10,374,870 10,776,464 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>
Six Months Ended
------------------------------
June 30, June 30,
1998 1997
----------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss ($1,547,518) ($502,622)
Non-cash items included in loss:
Depreciation and amortization 92,318 109,289
Equity in losses of Digital River 1,459,178 581,130
Gain on sale of available-for-sale securities (4,611) (26,438)
Changes In Operating Assets And Liabilities:
Accounts receivable, net (135,624) 355,208
Inventories (58,147) 400,041
Prepaid and other current assets (69,670) 54,025
Accounts payable 1,241,160 (991,262)
Accrued compensation and benefits (66,629) (25,417)
Other accrued expenses (291,165) 153,431
----------- ---------
Net cash provided by operating activities 619,292 107,385
----------- ---------
Cash Flows From Investing Activities:
Change in restricted cash (58,746) -
Purchases of property and equipment (133,344) (86,601)
Proceeds from sale of available-for-sale securities 287,411 -
Decrease in cash due to deconsolidation of digital - (799,721)
----------- ---------
Net Cash Used In (Provided By) Investing 95,321 (886,322)
----------- ---------
Cash Flows From Financing Activities:
Net change in revolving line of credit (491,283) 226,436
Stock options exercised, net of payroll tax (23,330) -
Dividends paid (200,000) (35,380)
----------- ---------
Net cash used in financing activities (714,613) 191,056
----------- ---------
Net decrease in cash 0 (587,881)
Cash at beginning of period 300 898,558
----------- ---------
Cash at end of period $300 $310,677
----------- ---------
----------- ---------
Supplemental Cash Flow Information:
Cash paid for interest $41,987 $53,170
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TECH SQUARED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 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 and six
month period ended June 30, 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 an option to acquire 3,200,000 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 exercisable 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 six month period ended June 30,1998, Digital River completed
various private placements of its common stock which resulted in net proceeds
of approximately $12,936,000 and issuance of 3,472,000 new shares of its
common stock and 1,500,000 new shares of Series A preferred stock which are
convertible into 1,000,000 shares of common stock, thereby reducing the
Company's effective ownership of Digital River to approximately 23% as of
July 1998. For the three and six month period ended June 30, 1998 the Company
recorded gain on issuance of stock by Digital River of approximately $403,000
and $1,864,000 respectively, net of deferred income taxes, which was recorded
through stockholder's equity.
6
<PAGE>
Summarized unaudited condensed financial information of Digital River is as
follows: (In 000's)
<TABLE>
<CAPTION>
BALANCE SHEET INFORMATION
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Current assets $10,266 $ 2,126
Total assets 12,697 3,316
Current liabilities 2,414 1,076
Stockholders' equity $10,283 $ 2,540
</TABLE>
<TABLE>
<CAPTION>
OPERATING INFORMATION
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE, 30 JUNE 30,
1998 1997 1998 1997
------- ------ ------- ------
<S> <C> <C> <C> <C>
Sales $ 3,477 $ 282 $ 5,747 $ 461
Cost of product sold and
operating expenses 7,397 978 11,249 1,661
Interest income, net 108 12 150 24
Net loss ($ 3,812) ($ 684) ($ 5,352) ($1,176)
</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 three and six month period ending
June 30, 1998 was approximately ($110,000) and ($93,000), respectively
compared to $111,000 and ($29,000) for the same periods of 1997. Other
comprehensive income was solely comprised of changes in the market value of
the available-for-sale securities.
NOTE 5 - Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Statement 133 is effective for fiscal years beginning after June
15, 1999. The Company believes that the adoption of Statement 133 will have
no material impact on its financial condition or results of operations.
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 through its DTP Direct catalog sells computer and peripheral
products targeted at the graphic arts market, which currently includes
primarily Macintosh related products. In May 1998, the Company launched a
new catalog, Net Direct, which is directed at developers of intranet/Internet
sites. The Company markets through direct marketing channels and to value
added resellers.
The following table is a summary of the operating results for Tech Squared
Inc. consolidated, Tech Squared Inc., excluding Digital River, and Tech
Squared Inc., excluding Digital River, for the three and six months ended
June 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE, 30 JUNE 30,
1998 1997 1998 1997
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
Net income/(loss) - Tech Squared ($ 1,215,000) ($ 252,000) ($ 1,719,000) ($503,000)
Consolidated
Per Share ($ 0.11) ($ 0.02) ($ 0.16) ($ 0.05)
Net income/(loss) - Tech Squared (excluding ($133,000) $44,000 ($ 88,000) $ 79,000
Digital River)
</TABLE>
RESULTS OF OPERATIONS
NET SALES
Net sales for the Company's second quarter ended June 30, 1998 totaled
$9,502,000 compared to $8,484,000 for the corresponding period of 1997, an
increase of 12.0%. Sales to DTP Direct catalog customers increased 11.5%
while sales through the Company's distribution business increased 7.3% in the
second quarter. The Company also launched its network-focused catalog, Net
Direct, during the second quarter. Sales to Net Direct catalog customers
contributed $159,000 to the second quarter sales. The fastest growing product
categories, based on the percentage increase in dollar sales over the second
quarter of 1997, were software, printers, magnetic drives and computer
systems. Computer system sales increased 9.1% from the same quarter a year
ago which was attributed to increases of 167% in Macintosh system sales and
1073% in PC/Wintel computer systems sales partially offset by a decrease in
Macintosh clone system sales of 43%. PC/Wintel computer system sales
comprised 10% of all computer system sales in the second quarter of 1998
compared to 1% in the same period of 1997. Net sales for the first six months
of 1998 totaled $18,095,000 compared to $18,448,000 for the same period of
1997.
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.
8
<PAGE>
GROSS PROFIT
Gross profit for the quarter ended June 30, 1998, was $1,193,000 or 12.6% of
net sales compared to $1,062,000 or 12.5 % of net sales for the comparable
period of 1997. Gross profit for the six-month period ended June 30, 1998 was
$2,280,000 or 12.6% compared to $2,152,000 or 11.7% of net sales for the same
period in 1997. The increase in gross profit percentage in the six-month
period ended June 30, 1998, is primarily the result of a reduction in
variable overhead expenses. 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.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $764,000 or 8.0% of sales during the
quarter ended June 30, 1998, compared to $467,000 or 5.5% of sales during the
corresponding period of 1997. For the six month period ended June 30, 1998,
selling and marketing expenses were $1,284,000 or 7.1% of sales versus
$943,000 or 5.1% of sales 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 sites. 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 on which 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 the profitability of the Company in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter ended June 30, 1998 were
$545,000 compared to $560,000 for the comparable period of 1997. For the six
month period ended June 30, 1998, general and administrative expenses were
$1,047,000 compared to $1,112,000 for the related period of 1997. The
decrease of 5.8% for the six-month period ended June 30, 1998 over the same
period of 1997 is attributable to several factors including the reduction in
the use of temporary labor and transaction processing fees. These savings
were partially offset by increases in legal and consulting services.
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 first six months of 1998. In July 1998,
Digital River moved its offices to Eden Prairie, Minnesota. 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 that they occupy.
INVESTMENT INCOME
The Company recorded no investment income for the second quarter of 1998
compared to $35,000 for the corresponding period in 1997. Investment income
for the six-month period ended June 30, 1998 was $5,000 compared to $35,000
for the related period in 1997.
NET INTEREST EXPENSE
Net interest expense for the quarter ending June 30, 1998 was $18,000
compared to $27,000 for the same period in 1997. Interest expense for the
six-month period ended June 30, 1998 was $42,000 compared to $53,000 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 June 30, 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. As of June 30, 1998,
the Company had unused availability under the line of credit of approximately
$1,264,000 and outstanding borrowings of $274,000.
The Company has a flooring program with a financing company covering up to
$625,000 in inventory purchases. In July 1998, the Company increased by
$150,000 its ability to utilize the advantages of using a flooring program
for the purchase of strategic inventory. The flooring program is secured by
a standby letter of credit in the amount of $550,000 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 June 30, 1998, the Company had working capital of $153,000. The
working capital has been reduced by approximately $200,000, which represents
the current portion of the remaining balance of a dividend declared in April
1995, but not yet paid. The dividend payable is subordinated to the
Revolving Line of Credit and the aggregate payout of the dividend cannot
exceed $200,000 in any calendar year. In April 1998, the Company paid
$200,000 related to the dividend payable to an officer/shareholder.
The working capital includes $136,000 relating to its investment in Cam
Design, Inc. ("Cam Design") which is valued at the closing market price on
June 30, 1998. Of the Company's total shares of Cam Design stock,
approximately 32% remained in escrow as of June 30, 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 slightly from $1,890,000, as of December 31, 1997, to
$1,949,000 as of June 30,1998. Capital expenditures totaled $83,000 in the
second quarter of 1998 compared to $58,000 in the second quarter of 1997.
The increase in capital expenditures in the second quarter of 1998 is
primarily due to office renovation and computer system upgrades and
enhancements.
The Company's computer systems and those of third parties with whom it does
business will be affected by issues and problems related to changes required
in the year 2000 ("Y2K"). The Company is currently in the process of
evaluating its information system requirements for Y2K issues and compliance.
The Company does not anticipate at this time that the cost to modify its
systems or the upgrading of its current system to be Y2K compliant will be
material to its financial condition or results of operations. The Company
does not anticipate any material disruption in its operations as a result of
any failure by the Company to be in compliance. 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 Y2K compliant could have a material affect on
the financial condition and operations of the Company. Maintenance and
modification costs incurred by the Company specifically related to being Y2K
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.
10
<PAGE>
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
11
<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 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 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. The Company is currently investigating the
possibility of attempting to force Hanover to perform the terms of the
original Agreement, while exploring the marketability of the Property. There
is no assurance that the Company will be successful in attempting to force,
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
10.60 Termination of Lease between Tech Squared Inc. and
Digital River, Inc. dated April 22, 1998
10.61 Digital River, Inc. Lockup Agreement between Digital
River and Joel Ronning dated July 14, 1998
12
<PAGE>
10.62 Digital River, Inc. Lockup Agreement between Digital
River and MacUSA dated July 14, 1998
10.63 Digital River, Inc. Lockup Agreement between Digital
River and Tech Squared Inc. dated June 5, 1998
10.64 Release of Technology between Tech Squared Inc. and
Joel Ronning, Digital River, Inc. executed August 6,
1998
10.65 Services Agreement between Tech Squared Inc. and
Digital River dated July 29, 1998
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
13
<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.
August 13, 1998 /s/ Richard Apple
----------------------------------------
Richard Apple, Chief Executive Officer
/s/ Jeff Abramovitz
----------------------------------------
Jeff Abramovitz, Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Index Description
- ------------- -----------
<S> <C>
10.60 Termination of Lease between Tech Squared Inc. and Digital
River, Inc. dated April 22, 1998
10.61 Digital River, Inc. Lockup Agreement between Digital River
and Joel Ronning dated July 14, 1998
10.62 Digital River, Inc. Lockup Agreement between Digital River
and MacUSA dated July 14, 1998
10.63 Digital River, Inc. Lockup Agreement between Digital River
and Tech Squared Inc. dated June 5, 1998
10.64 Release of Technology between Tech Squared Inc. and Joel
Ronning, Digital River, Inc. executed August 6, 1998
10.65 Services Agreement between Tech Squared Inc. and Digital
River dated July 29, 1998
27.1 Financial Data Schedule
</TABLE>
15
<PAGE>
April 30, 1998
Greg Smith
Digital River Inc.
5198 W. 76th Street
Edina, MN 55439
Re: Termination of Lease between Tech Squared Inc. and Digital River Inc.
Dated April 22, 1998
Dear Greg:
This is to confirm Digital River Inc.'s intention to terminate the sublease
agreement ("sublease") related to office and warehouse space at 5198 W. 76th
Street, Edina, MN 55439 between Tech Squared Inc. ("Tech") and Digital River
Inc. ("DR"). Whereas you have indicated your intention to vacate the office
and warehouse space at the above listed address under the following
assumptions and conditions:
It has been assumed that DR would occupy the office and warehouse space
throughout the rental agreement between Tech Squared Inc. and Duke Realty,
which currently expires June 1999. Under typical real estate terminations it
is likely the tenant would require at least a 6-month to one-year termination
notice. By DR's intention of vacating the space by the end of July 1997 Tech
is put into a difficult position to sublet the office space being vacated.
It is upper level office space with no direct access unless modifications are
made. Thus, Tech stands to lose over $100,000 of rental payments. In order
to minimize the financial impact to Tech and to conduct this transaction in
an equitable and mutually beneficial manner Tech proposes the following:
1. DR will pay rent at the current rate of thirteen thousand dollars
($13,000) per month through the month of departure. This does not include
the intercompany telephone charge allocated to DR each month which will
continue to be charged through the month of departure.
2. For the period of the first of the month following the month of
departure through December 31, 1998 or until a party is found by either Tech
or DR to sublease the vacated space, whichever is earlier, DR will be charged
four-thousand three hundred fifty-three dollars ($4,353) for office rent. In
the event that a party is found to occupy any of the vacated office space, DR
will be responsible for the entire month's rent if the tenant occupies the
space after the 15(th) of the month. If they take possession prior to the
15(th) DR will not be responsible for any of that month's rent. Under no
circumstances will a tenant be allowed to occupy the premises earlier than
the termination date as specified by a signed termination notification from
DR and received and signed by Tech.
3. Digital River will continue to pay warehouse rent as long as Digital
River product (including owned, consigned or otherwise transacted) remains in
the warehouse. The formula that has been used in the past will continue to
be used, i.e., # of Bins holding Digital River product / Total Bin Space *
Total Warehouse Square footage * 7.25 psf. Tech will calculate the warehouse
rent using the above formula on the first of each month to determine the
warehouse rent due from Digital River.
4. Digital River agrees that, pursuant to the Rent Agreement (the "Rent
Agreement") signed between Tech Squared Inc. and Digital River Inc. dated
July 1, 1997, Tech Squared Inc. will continue to amortize the deposit made
against intercompany charges at the rate of $924 per month through the month
of departure. Digital River also acknowledges that according to item #2 in
the Rent Agreement the unamortized portion of the deposit will not be
refundable to Digital River under any circumstances, regardless of whether
they continue to occupy the space.
<TABLE>
<CAPTION>
TECH SQUARED INC.: DIGITAL RIVER, INC.:
<S> <C>
By: /s/ Jeff Abramovitz Date: May 4,1998 By: /s/ Joel A. Ronning Date: May 4, 1998
------------------- ---------- ------------------- -----------
Its: Controller Its: President
---------- ---------
</TABLE>
<PAGE>
DIGITAL RIVER, INC.
LOCKUP AGREEMENT
July 14, 1998
BT Alex. Brown Incorporated
BancAmerica Robertson Stephens
Bear, Stearns & Co. Inc.
c/o BT Alex. Brown Incorporated
1 South Street
Baltimore, MD 21202
Ladies and Gentlemen:
The undersigned understands that BT Alex. Brown Incorporated,
BancAmerica Robertson Stephens and Bear, Stearns & Co. Inc, as
representatives (the "Representatives") of the several underwriters (the
"Underwriters"), propose to enter into an Underwriting Agreement (the
"Underwriting Agreement") among Digital River, Inc. (the "Company") and the
Underwriters, providing for the initial public offering (the "Initial Public
Offering") by the Underwriters, including the Representatives, of shares of
common stock (the "Common Stock") of the Company pursuant to a registration
statement to be filed with the Securities and Exchange Commission (the
"Commission").
In consideration of the agreement by the Underwriters to offer and sell
the Company's Common Stock pursuant to the Underwriting Agreement, and for
other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the undersigned agrees that, without the prior
written consent of BT Alex. Brown Incorporated, the undersigned will not,
directly or indirectly, offer, sell, pledge, contract to sell, grant any
option to purchase, grant a security interest in, hypothecate or otherwise
sell or dispose of any Common Stock of the Company or common stock of Tech
Squared, Inc. ("Tech Squared Stock") (including, without limitation, shares
of Common Stock or Tech Squared Stock that may be deemed to be beneficially
owned by the undersigned in accordance with the rules and regulations of the
Commission and shares of Common Stock or Tech Squared Stock that may be
issued upon the exercise of a stock option or warrant) or any securities
convertible into, derivative of or exercisable or exchangeable for or any
rights to purchase or acquire Common Stock or Tech Squared Stock, owned
directly by the undersigned or with respect to which the undersigned has the
power of disposition, in any such case whether now owned or hereafter
acquired (other than Common Stock purchased in the open market and not
otherwise in breach of this Lockup Agreement) (collectively, the "Shares")
during the period commencing on the date of this Lockup Agreement and ending
on the close of business on the one hundred eightieth (180th) day after the
date of the Prospectus (as such term is defined in the Underwriting
Agreement).
Notwithstanding the foregoing, (i) the undersigned may transfer any or
all of the Shares either during his lifetime or upon death, by gift, will or
intestacy, to his immediate family or to a trust the beneficiaries of which
are exclusively the undersigned and/or a member or members of his immediate
family; PROVIDED, HOWEVER, that in any such case it shall be a condition to
the transfer that the transferee execute an agreement stating that the
transferee is receiving and holding the Shares subject to the provisions of
this Lockup Agreement, and there shall be no further transfer of such Shares
except in accordance with this Lockup Agreement; (ii) if the undersigned has
received stock options under the Company's stock option plan, he may deliver
Common Stock of the Company to the Company as payment for the exercise of the
options as prescribed under the stock option plan; or (iii) the undersigned
may offer, sell, pledge, contract to sell, grant any option to purchase,
grant a security interest in, hypothecate or otherwise sell or dispose of up
to an aggregate of 400,000 shares of Tech Squared Stock on or after the day
following the ninetieth (90(th)) day after the date of the Prospectus (as such
term is defined in the Underwriting Agreement).
In addition, the undersigned agrees that the Company and/or Tech
Squared, Inc. will, with respect to any Shares for which the undersigned is
the record holder, cause the transfer agent for the Company and/or Tech
Squared, Inc. to note stop transfer instructions with respect to such Shares
on the transfer books and records of the Company and/or Tech Squared, Inc.
The undersigned understands that the Company and the Underwriters will
proceed toward the proposed Initial Public Offering in reliance upon this Lockup
Agreement. If the effective date of the Registration Statement
<PAGE>
(as such term is defined in the Underwriting Agreement) has not occurred on
or before November 30, 1998, then this Lockup Agreement shall be null and
void.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this Lockup Agreement. All authority
herein conferred or agreed to be conferred shall survive the death or incapacity
of the undersigned and any obligations of the undersigned shall be binding upon
the heirs, personal representatives, successors and assigns of the undersigned.
This Lockup Agreement supersedes in its entirety the Lockup Agreement
executed by the undersigned dated June 5, 1998.
Very truly yours,
/s/ Joel A. Ronning
-------------------------------------------------
Signature
Joel A. Ronning
-------------------------------------------------
Please Print Name
-------------------------------------------------
Please Print Title, if applicable
-------------------------------------------------
Additional Signature(s), if stock jointly held
The undersigned understands that the Company and the Underwriters will
proceed toward the proposed Initial Public Offering in reliance upon this Lockup
Agreement and agrees to impose stop transfer instructions with respect to such
Shares on the transfer books and records of Tech Squared, Inc. in the event of
any breach of this Lockup Agreement.
TECH SQUARED, INC.
July 14, 1998
/s/ Richard J. Apple
-------------------------------------------------
Signature
Richard J. Apple
-------------------------------------------------
Please Print Name
Chief Executive Officer
-------------------------------------------------
Please Print Title
<PAGE>
DIGITAL RIVER, INC.
LOCKUP AGREEMENT
July 14, 1998
BT Alex. Brown Incorporated
BancAmerica Robertson Stephens
Bear, Stearns & Co. Inc.
c/o BT Alex. Brown Incorporated
135 East Baltimore Street
Baltimore, MD 21202
Ladies and Gentlemen:
The undersigned understands that BT Alex. Brown Incorporated, BancAmerica
Robertson Stephens and Bear, Stearns & Co. Inc, as representatives (the
"Representatives") of the several underwriters (the "Underwriters"), propose to
enter into an Underwriting Agreement (the "Underwriting Agreement") among
Digital River, Inc. (the "Company") and the Underwriters, providing for the
initial public offering (the "Initial Public Offering") by the Underwriters,
including the Representatives, of shares of common stock (the "Common Stock") of
the Company pursuant to a registration statement to be filed with the
Securities and Exchange Commission (the "Commission").
In consideration of the agreement by the Underwriters to offer and sell the
Company's Common Stock pursuant to the Underwriting Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the undersigned agrees that, without the prior written consent of
BT Alex. Brown Incorporated, the undersigned will not, directly or indirectly,
offer, sell, pledge, contract to sell, grant any option to purchase, grant a
security interest in, hypothecate or otherwise sell or dispose of any Common
Stock of the Company (including, without limitation, shares of Common Stock that
may be deemed to be beneficially owned by the undersigned in accordance with the
rules and regulations of the Commission and shares of Common Stock that may be
issued upon the exercise of a stock option or warrant) or any securities
convertible into, derivative of or exercisable or exchangeable for or any rights
to purchase or acquire Common Stock of the Company, owned directly by the
undersigned or with respect to which the undersigned has the power of
disposition, in any such case whether now owned or hereafter acquired (other
than Common Stock purchased in the open market and not otherwise in breach of
this Lockup Agreement) (collectively, the "Shares") during the period commencing
on the date of this Lockup Agreement and ending on the close of business on the
one hundred eightieth (180th) day after the date of the Prospectus (as such term
is defined in the Underwriting Agreement).
Notwithstanding the foregoing, (i) if the undersigned is an individual, he
or she may transfer any or all of the Shares either during his or her lifetime
or upon death, by gift, will or intestacy, to his or her immediate family or to
a trust the beneficiaries of which are exclusively the undersigned and/or a
member or members of his or her immediate family; (ii) if the undersigned is a
corporation or a partnership, it may transfer any or all the Shares as a
distribution to partners or shareholders of the undersigned; PROVIDED, HOWEVER,
that in any such case it shall be a condition to the transfer that the
transferee execute an agreement stating that the transferee is receiving and
holding the Shares subject to the provisions of this Lockup Agreement, and there
shall be no further transfer of such Shares except in accordance with this
Lockup Agreement; or (iii) if the undersigned has received stock options under
the Company's stock option plan, he or she may deliver Shares to the Company as
payment for the exercise of the options as prescribed under the stock option
plan.
<PAGE>
In addition, the undersigned agrees that the Company will, with respect to
any Shares for which the undersigned is the record holder, cause the transfer
agent for the Company to note stop transfer instructions with respect to such
Shares on the transfer books and records of the Company.
The undersigned understands that the Company and the Underwriters will
proceed toward the proposed Initial Public Offering in reliance upon this Lockup
Agreement. If the effective date of the Registration Statement (as such term is
defined in the Underwriting Agreement) has not occurred on or before November
30, 1998, then this Lockup Agreement shall be null and void.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this Lockup Agreement. All authority
herein conferred or agreed to be conferred shall survive the death or incapacity
of the undersigned and any obligations of the undersigned shall be binding upon
the heirs, personal representatives, successors and assigns of the undersigned.
Very truly yours,
/s/ Richard J. Apple
-------------------------------------------------
Signature
Richard J. Apple
-------------------------------------------------
Please Print Name
CEO, MacUSA
-------------------------------------------------
Please Print Title, if applicable
-------------------------------------------------
Additional Signature(s), if stock jointly held
<PAGE>
DIGITAL RIVER, INC.
LOCKUP AGREEMENT
June 5, 1998
BT Alex. Brown Incorporated
BancAmerica Robertson Stephens
Bear, Stearns & Co. Inc.
c/o BT Alex. Brown Incorporated
135 East Baltimore Street
Baltimore, MD 21202
Ladies and Gentlemen:
The undersigned understands that BT Alex. Brown Incorporated, BancAmerica
Robertson Stephens and Bear, Stearns & Co. Inc, as representatives (the
"Representatives") of the several underwriters (the "Underwriters"), propose to
enter into an Underwriting Agreement (the "Underwriting Agreement") among
Digital River, Inc. (the "Company") and the Underwriters, providing for the
initial public offering (the "Initial Public Offering") by the Underwriters,
including the Representatives, of shares of common stock (the "Common Stock") of
the Company pursuant to a registration statement to be filed with the
Securities and Exchange Commission (the "Commission").
In consideration of the agreement by the Underwriters to offer and sell
the Company's Common Stock pursuant to the Underwriting Agreement, and for
other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the undersigned agrees that, without the prior
written consent of BT Alex. Brown Incorporated, the undersigned will not,
directly or indirectly, offer, sell, pledge, contract to sell, grant any
option to purchase, grant a security interest in, hypothecate or otherwise
sell or dispose of any Common Stock of the Company (including, without
limitation, shares of Common Stock that may be deemed to be beneficially
owned by the undersigned in accordance with the rules and regulations of the
Commission and shares of Common Stock that may be issued upon the exercise of
a stock option or warrant) or any securities convertible into, derivative of
or exercisable or exchangeable for or any rights to purchase or acquire
Common Stock of the Company, owned directly by the undersigned or with
respect to which the undersigned has the power of disposition, in any such
case whether now owned or hereafter acquired (other than Common Stock
purchased in the open market and not otherwise in breach of this Lockup
Agreement) (collectively, the "Shares") during the period commencing on the
date of this Lockup Agreement and ending on the close of business on the one
hundred eightieth (180th) day after the date of the Prospectus (as such term
is defined in the Underwriting Agreement).
Notwithstanding the foregoing, (i) if the undersigned is an individual,
he or she may transfer any or all of the Shares either during his or her
lifetime or upon death, by gift, will or intestacy, to his or her immediate
family or to a trust the beneficiaries of which are exclusively the
undersigned and/or a member or members of his or her immediate family; (ii)
if the undersigned is a corporation or a partnership, it may transfer any or
all the Shares as a distribution to partners or shareholders of the
undersigned; PROVIDED, HOWEVER, that in any such case it shall be a condition
to the transfer that the transferee execute an agreement stating that the
transferee is receiving and holding the Shares subject to the provisions of
this Lockup Agreement, and there shall be no further transfer of such Shares
except in accordance with this Lockup Agreement; or (iii) if the undersigned
has received stock options under the Company's stock option plan, he or she
may deliver Shares to the Company as payment for the exercise of the options
as prescribed under the stock option plan.
<PAGE>
In addition, the undersigned agrees that the Company will, with respect
to any Shares for which the undersigned is the record holder, cause the
transfer agent for the Company to note stop transfer instructions with
respect to such Shares on the transfer books and records of the Company.
The undersigned understands that the Company and the Underwriters will
proceed toward the proposed Initial Public Offering in reliance upon this Lockup
Agreement. If the effective date of the Registration Statement (as such term is
defined in the Underwriting Agreement) has not occurred on or before November
30, 1998, then this Lockup Agreement shall be null and void.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this Lockup Agreement. All authority
herein conferred or agreed to be conferred shall survive the death or incapacity
of the undersigned and any obligations of the undersigned shall be binding upon
the heirs, personal representatives, successors and assigns of the undersigned.
Very truly yours,
/s/ Joel A. Ronning
-------------------------------------------------
Signature
Joel A. Ronning for Tech Squared
-------------------------------------------------
Please Print Name
Chairman
-------------------------------------------------
Please Print Title, if applicable
-------------------------------------------------
Additional Signature(s), if stock jointly held
<PAGE>
RELEASE
THIS RELEASE ("Release") is being executed and delivered as of August 6,
1998 BY TECH SQUARED, INC., a Minnesota Corporation and MACUSA, INC., a
Minnesota Corporation, each a "Releasor" in favor of, and for the benefit of,
JOEL A. RONNING, DIGITAL RIVER, INC., a Minnesota corporation and DIGITAL
RIVER, INC., a Delaware corporation (each a "Releasee" and collectively
referred to herein as "Releasees").
RECITALS
WHEREAS, Joel A. Ronning developed certain technology related to
encryption/decryption technology and electronic software distribution
technology (the "Technology") while employed at MacUSA, Inc. and Tech
Squared, Inc.;
WHEREAS, Mr. Ronning utilized the Technology in a new business endeavor;
and
WHEREAS, the Board of Directors of Tech Squared, Inc. and MacUSA, Inc.
believed that the business opportunity created as a result of development of
such Technology was inconsistent with the companies' core business focus.
NOW, THEREFORE, BE IT RESOLVED, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by Releasors,
Releasors hereby covenant and agree as follows:
1. RELEASE.
Each Releasor, for themselves and for each of their associated Parties
(as defined in Section 2), hereby generally, irrevocably, unconditionally and
completely releases and forever discharges each of the Released Claims (as
defined in Section 2).
2. DEFINITIONS.
(a) The term "Associated Parties," when used herein with respect
to any Releasor shall mean and include: (i) Releasor's predecessors,
successors, executors, administrators, heirs and estate; (ii) Releasor's
past, present and future assigns, agents and representatives; (iii) each
entity that any Releasor has the power to bind (by Releasor's acts or
signature) or over which any Releasor directly or indirectly exercises
control; and (iv) each entity of which any Releasor owns, directly or
indirectly, at least 50% of the outstanding equity, beneficial, proprietary,
ownership or voting interests.
(b) The term "Releasees" shall mean and include: (i) Joel Ronning;
(ii) Digital River, Inc., a Minnesota corporation; (iii) Digital River, Inc., a
Delaware corporation; (iv) each of the direct and indirect subsidiaries of
Digital River, Inc., a Minnesota corporation and Digital River, Inc., a Delaware
corporation; and (v) the successors and past, present and future assigns,
directors, officers, employees, agents, attorneys and representatives of the
respective entities identified or otherwise referred to in clauses "(i)" through
"(iv)" of this sentence, other than any Releasor.
<PAGE>
(c) The term "Claims" shall mean and include all past, present and
future disputes, claims, controversies, demands, rights, obligations,
liabilities, actions and causes of action of every kind and nature related to or
in connection with the Technology, including: (i) any unknown, unsuspected or
undisclosed claim; (ii) any claim or right that may be asserted or exercised by
any Releasor; (iii) any claim, right or cause of action based upon any breach of
any express, implied, oral or written contract or agreement; (iv) any tort
claim; and (v) any indemnification claim, for any Claim existing or arising at
any time on or prior to the date of this Release.
(d) The term "Released Claims" shall mean and include each and every
Claim that (i) any Releasor or any Associated Party of Releasors may have had in
the past, may now have or may have in the future against any of the Releasees,
and (ii) has arisen or arises out of, or relates to, any circumstance,
agreement, activity, action, omission, event or matter occurring or existing on
or prior to the date of this Release.
3. REPRESENTATIONS AND WARRANTIES. Each Releasor represents and
warrants that:
(a) such Releasor has not assigned, transferred, conveyed or
otherwise disposed of any Claim against the Releasee, or any direct or indirect
interest in any such Claim, in whole or in part;
(b) to the best of such Releasor's knowledge, no other person or
entity has any interest in any of the Released Claims;
(c) such Releasor is not aware of any claim or potential claim by any
person or entity against Releasor;
(d) to the best of such Releasor's knowledge, no Associated Party of
Releasor has or had any Claim against any of the Releasees;
(e) to the best of such Releasor's knowledge, no Associated Party of
Releasor will in the future have any Claim against any Releasee that arises from
or relates to any circumstance, agreement, activity, action, omission, event or
matter occurring or existing on or prior to the date of this Release;
(f) this Release has been duly and validly executed and delivered by
Releasors;
(g) this Release is a valid and binding obligation of Releasor and
Releasor's Associated Parties, and is enforceable against Releasor and its
Associated Parties in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or
other similar laws affecting creditors' rights, and subject to general equity
principles and to limitations on availability of equitable relief, including
specific performance;
(h) there is no action, suit, proceeding, dispute, litigation, claim,
complaint or investigation by or before any court, tribunal, governmental body,
governmental agency or arbitrator pending or, to the best of the knowledge of
Releasor, threatened against Releasor or
<PAGE>
Releasor's Associated Parties that challenges or would challenge the
execution and delivery of this Release or the taking of any of the actions
required to be taken by Releasor under this Release; and
(i) neither the execution and delivery of this Release nor the
performance hereof will: (i) result in any violation or breach of any agreement
or other instrument to which Releasor or any of Releasor's Associated Parties
are a party or by which Releasor or any of Releasor's Associated Parties is
bound; or (ii) result in a violation or any law, rule, regulation, treaty,
ruling, directive, order, arbitration award, judgment or decree to which
Releasor or any of Releasor's Associated Parties are subject.
4. INDEMNIFICATION. Without in any way limiting any of the rights or
remedies otherwise available to any Releasee, Releasor shall hold harmless
and indemnify each Releasee from and against, and shall compensate and
reimburse each Releasee for, any loss, damage, injury, decline in value, lost
opportunity, liability, exposure, claim, demand, settlement, judgment, award,
fine, penalty, tax, fee (including reasonable attorneys' fees) charge, cost
(including costs of investigation) or expense of any nature which are
suffered or incurred at any time by any Releasee, or to which any Releasee
otherwise becomes subject at any time, and that arises out of or by virtue
of, or relates to: (a) any failure on the part of Releasor to observe,
perform or abide by, or any other breach of, any restriction, covenant,
obligation, representation, warranty or other provision contained herein; (b)
the assertion or purported assertion of any of the Released Claims by
Releasor or any of Releasor's Associated Parties; or (c) any inaccuracy in or
breach of any representation or warranty set forth in this Release.
5. NOTICES. Any notice or other communication required or permitted
to be delivered to each Releasor under this Release shall be in writing and
shall be deemed properly delivered, given and received when delivered (by
hand, by registered mail, by courier or express delivery service or by
facsimile) to the address or facsimile telephone number set forth beneath the
name of such party below (or to such other address or facsimile telephone
number as such party shall have specified in a written notice given to the
other party hereto):
IF TO TECH SQUARED, INC.: Tech Squared, Inc.
Attention:
Facsimile:
IF TO MACUSA, INC.: MacUSA, Inc.
Attention:
Facsimile:
6. SEVERABILITY. If any provision of this Release or any part of any
such provision is held under any circumstances to be invalid or unenforceable in
any jurisdiction, then (a) such provision or part thereof shall, with respect to
such circumstances and in such jurisdiction, be deemed amended to conform to
applicable laws so as to be valid and enforceable to the fullest possible
extent, (b) the invalidity or unenforceability of such provision or part thereof
under such circumstances and in such jurisdiction shall not affect the validity
or enforceability of such provision or part thereof under any other
circumstances or in any other jurisdiction, and (c) the invalidity or
unenforceability of such provision or part thereof shall not affect the validity
or
<PAGE>
enforceability of the remainder of such provision or the validity or
enforceability of any other provision of this Release. Each provision of
this Release is separable from every other provision of this Release, and
each part of each provision of this Release is separable from every other
part of such provision.
7. GOVERNING LAW. This Release shall be construed in accordance with,
and governed in all respects by, the laws of the State of Minnesota (without
giving effect to principles of conflicts of laws).
8. WAIVER. No failure on the part of any Releasee to exercise any power,
right, privilege or remedy under this Release, and no delay on the part of any
Releasee in exercising any power, right, privilege or remedy under this Release,
shall operate as a waiver of such power, right, privilege or remedy; and no
single or partial exercise of any such power, right, privilege or remedy shall
preclude any other or further exercise thereof or of any other power, right,
privilege or remedy. No Releasee shall be deemed to have waived any claim
arising out of this Release, or any power, right, privilege or remedy under this
Release, unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of such party; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
9. FURTHER ASSURANCES. Releasors shall execute and/or cause to be
delivered to the Releasee such instruments and other documents and shall take
such other actions as Releasee may reasonably request to effectuate the intent
and purposes of this Release.
10. ENTIRE AGREEMENT. This Release sets forth the entire understanding of
the parties relating to the subject matter hereof and supersedes all prior
agreements and understandings between the parties relating to the subject matter
hereof.
11. ATTORNEYS' FEES AND EXPENSES. If any legal action or other legal
proceeding relating to the enforcement of any provision of this Release is
brought against Releasors, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
Releasor has executed this Release as of the date first above written.
/s/ Richard J. Apple, CEO
--------------------------
MACUSA, INC.
/s/ Richard J. Apple, CEO
--------------------------
TECH SQUARED, INC.
<PAGE>
SERVICES AGREEMENT
This Services Agreement is made as of the 29th day of July, 1998 between
DIGITAL RIVER, INC., a Delaware corporation ("DRI") and TECH SQUARED, INC., a
Minnesota corporation ("T2").
RECITALS
The parties desire that T2 provide certain services to DRI, and T2 is
willing to provide such services on the terms and conditions set forth herein.
NOW, THEREFORE, the parties agree as follows:
1. ADMINISTRATIVE SERVICES.
T2 currently makes available to DRI the services of its Director of
Finance, Stanley Y. Tenenbaum (the "Administrative Services"). In consideration
for such Administrative Services, DRI agrees to reimburse T2 an amount equal to
eighty percent (80%) of Mr. Tenenbaum's salary and benefits regularly paid by T2
in consideration for eighty percent (80%) of his salaried time spent providing
Administrative Services to DRI.
2. FULFILLMENT SERVICES.
During the term of this Services Agreement, T2 shall provide to DRI the
fulfillment services (the "Fulfillment Services") set forth in the proposal
attached hereto as SCHEDULE 1. In consideration for such services, DRI agrees to
reimburse T2 the amounts set forth in SCHEDULE 1. SCHEDULE 1 shall be subject to
adjustment by mutual agreement.
3. PERFORMANCE OF SERVICES.
A. T2 shall not be obligated to acquire new or additional assets or
hire new or additional employees to perform the Administrative Services and
Fulfillment Services described above (collectively, the "Services"). T2 may not
contract with one or more third parties for the performance of all or any part
of the Services.
B. Each party shall provide to the other party on a timely basis any
and all information which is necessary for T2 to provide the Services as set
forth herein. Neither party shall have any right to obtain any confidential or
proprietary information of the other party as the result of the Services
provided hereunder, and any such information so obtained shall be treated in
accordance with Section 7.
4. PERFORMANCE AND LIMITATION OF SERVICES.
A. T2 shall provide the Services at a comparable level to that
provided for its internal operations. In addition, T2 shall be required to
provide the Services only as reasonably appropriate and shall not be required to
provide a level of service which is materially higher than that currently
provided by T2 for its internal operations or as contemplated by T2's operating
budget.
<PAGE>
B. T2 shall not be required to perform any Services, to the extent
such Services would result in the breach of any license or other applicable
contract by which it is bound. If T2 believes it is unable to provide any
Services pursuant to the foregoing, T2 shall use reasonable efforts to obtain
the rights necessary to provide such Services, including obtaining any
appropriate consents from third parties. DRI shall be responsible for all
additional costs and expenses incurred by T2 in order to allow T2 to provide
such Services.
C. T2 shall not be required to provide any Services to the extent
the performance of such Services becomes impracticable as a result of a cause or
causes outside T2's reasonable control or to the extent the performance of such
Services would require it to violate any applicable laws, rules or regulations.
D. T2 MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED,
AND T2 SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE SERVICES PROVIDED
HEREUNDER.
5. PAYMENT.
T2 shall submit to DRI a monthly invoice for reimbursement for the
Services performed by T2 during the prior month under this Services
Agreement. The invoice shall be payable to T2 on or prior to the 10(th) day
following receipt of invoice.
6. TERM.
A. Unless terminated earlier as provided in this Section 6, this
Services Agreement shall terminate on December 31, 1998 (the "Termination
Date"). The Termination Date shall be automatically extended for successive one
year periods unless written notice of termination is given by the terminating
party to the other party at least thirty days in advance of the next Termination
Date.
B. This Services Agreement may be terminated upon thirty days'
notice by the mutual consent of the parties.
C. Either party may terminate this Services Agreement if the other
party is in material default under this Services Agreement and fails to correct
such default within thirty days after receiving written notice of such default.
7. INDEMNIFICATION.
A. DRI shall indemnify and hold harmless T2, its affiliates, and
their officers, directors, employees, and agents from and against all claims,
liabilities, obligations, suits, causes of action, or expenses (including
reasonable attorneys' fees) (collectively "Claims") claimed to have resulted,
directly or indirectly, from or in connection with the performance of the
Services; provided, however, that DRI shall not be required to indemnify or hold
harmless T2 to the extent the Claims are caused by the negligence or willful
misconduct of T2.
B. T2 shall indemnify and hold harmless DRI, its affiliates, and
their officers, directors, employees, and agents from and against all Claims
claimed to have resulted, directly or
<PAGE>
indirectly, from or in connection with the performance of the Services;
provided, however, that T2 shall not be required to indemnify or hold
harmless DRI to the extent the Claims are caused by the negligence or willful
misconduct of DRI.
C. Any indemnitee shall provide written notice to the indemnifying
party of any Claims with respect to which it seeks indemnification, and the
indemnifying party shall assume the defense of such Claims with counsel
reasonably satisfactory to the indemnitee. If such defense is assumed by the
indemnifying party with counsel so selected, the indemnifying party will not be
subject to any liability for any settlement of such claim made by an indemnified
party without the indemnifying party's consent (such consent not to be
unreasonably withheld or delayed). No indemnified party will be subject to any
liability for any settlement of such Claims made by the indemnifying party
without such party's consent (such consent not to be unreasonably withheld or
delayed), and such settlement shall include an unconditional release of all
indemnitees from all liability on such claims. If an indemnified party desires
to retain separate counsel, such indemnified party shall have the right to do
so, but the indemnifying party will not be obligated to pay the fees and
expenses of such separate counsel. The parties hereto agree to cooperate fully
with each other in connection with the defense, negotiation or settlement of any
legal proceeding, claim or demand and to engage in no action that would result
in or increase liability on the part of another party.
D. Claims reimbursable hereunder shall not include any losses or
expenses covered by the indemnitee's insurance.
E. The provisions of this Section 7 shall survive termination of the
Services Agreement.
8. CONFIDENTIALITY.
A. Except as expressly provided herein, DRI and T2 agree that, for
the term of this Agreement and for five years thereafter, the receiving party
shall keep completely confidential and shall not publish or otherwise disclose
and shall not use for any purpose any information or otherwise disclose and
shall not use for any purpose any information furnished to it by the other party
pursuant to this Services Agreement, except to the extent that it can be
established by the receiving party by competent proof that such information:
(i) was already known to the receiving party, other than under
an obligation of confidentiality, at the time of disclosure;
(ii) was generally available to the public or otherwise part of
the public domain at the time of its disclosure to the receiving party;
(iii) became generally available to the public or otherwise part
of the public domain after its disclosure and other than through any act or
omission of the receiving party in breach of this Services Agreement;
(iv) was subsequently lawfully disclosed to the receiving party
by a person other than the disclosing party; or
<PAGE>
(v) was developed by the receiving party without reference to
any information or materials disclosed by the disclosing party.
B. Notwithstanding the foregoing, a party hereto may nevertheless
disclose the other party's information to the extent such disclosure is
reasonably necessary in complying with applicable governmental regulations or
otherwise submitting information to tax or other governmental authorities,
provided that if a party is required to make any such disclosure of another
party's secret or confidential information it will give reasonable advance
notice to the other party and will use efforts consistent with prudent business
judgment to secure confidential treatment of such information prior to its
disclosure (whether through protective orders or confidentiality agreements or
otherwise).
9. MISCELLANEOUS.
A. NOTICES. All notices required or permitted to be given under
this Services Agreement shall be in writing and shall be sent by facsimile
transmission or mailed by registered or certified mail addressed to the party to
whom such notice is required or permitted to be given. All notices shall be
deemed to have been given when transmitted if given by facsimile and
confirmation of receipt is received or, if mailed, forty-eight hours after
mailed as evidenced by the postmark at the point of mailing.
All notices to T2 shall be addressed as follows:
Tech Squared, Inc.
5198 West 76(th) Street
Edina, MN 55439
Attention: President
Facsimile: (612) 837-8968
All notices to DRI shall be addressed as follows:
Digital River, Inc.
5198 West 76(th) Street
Edina, MN 55439
Attention: President
Facsimile: (612) 830-1154
Either party may, by written notice to the other, designate a new
address or number to which notices to the party giving the notice shall
thereafter be mailed or sent.
B. FORCE MAJEURE. T2 shall not be liable for any delay or failure
of performance to the extent such delay or failure is caused by circumstances
beyond its reasonable control and that by the exercise of due diligence it is
unable to prevent, provided that T2 uses its reasonable best efforts to overcome
the same.
C. LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE
LIABLE TO THE OTHER FOR INDIRECT, CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES,
INCLUDING BUT NOT LIMITED TO LOST PROFITS, ARISING
<PAGE>
FROM OR RELATING TO ANY BREACH OF THIS AGREEMENT, REGARDLESS OF ANY NOTICE OF
SUCH DAMAGES. NOTHING IN THIS SECTION 9(C) IS INTENDED TO LIMIT OR RESTRICT
THE INDEMNIFICATION RIGHTS OR OBLIGATION OF EITHER PARTY.
D. ENTIRE AGREEMENT. This Services Agreement constitutes the entire
understanding of the parties with respect to the matters provided for herein and
supersedes any previous agreements and understanding between the parties with
respect to the subject matter hereof and thereof. No amendment, modification or
alteration of the terms or provisions of this Services Agreement shall be
binding unless the same shall be in writing and duly executed by the party
against whom such amendment, modification or alteration is asserted.
E. MODIFICATIONS AND WAIVERS. Any of the terms or conditions of
this Services Agreement may be waived in writing at any time by the party which
is entitled to the benefits thereof. No waiver of any of the provisions of this
Services Agreement shall be deemed to or shall constitute a waiver of any other
provisions hereof (whether or not similar) or of the same provision in respect
of a subsequent event.
F. SEVERABILITY. If any provisions hereof shall be held by any
court of competent jurisdiction to be illegal, void or unenforceable, such
provision shall be thereafter amended by the parties hereto such that it is
hereafter legal, valid and enforceable and gives effect to the intention of the
parties, but in any event the illegality or unenforceability of such provision
shall have no effect upon and shall not impair the enforceability of any other
provision of this Services Agreement.
G. GOVERNING LAW. This Services Agreement shall be construed in
accordance with and governed by the laws of the State of Minnesota applicable to
agreements made and performed in such jurisdiction.
H. ASSIGNMENT. Neither T2 nor DRI shall delegate duties of
performance or assign, in whole or in part, rights or obligations under this
Services Agreement without the prior written consent of the other party, except
that either may assign this Services Agreement without such consent to an entity
that acquires all or substantially all of the assets or business of such party,
whether by sale, merger or otherwise. The terms and conditions of this Services
Agreement shall be binding on and inure to the benefit of the permitted
successors and assigns of the parties.
I. COUNTERPARTS. This Services Agreement may be executed in one or
more counterparts, each of which shall for all purposes be deemed to be an
original and all of which shall constitute the same instrument.
J. HEADINGS. The headings of this Services Agreement are included
for convenience only and shall not be deemed to constitute part of this Services
Agreement or to affect the construction hereof.
<PAGE>
This Services Agreement is executed by the parties as of the date indicated
above.
TECH SQUARED, INC. DIGITAL RIVER, INC.
/s/ Richard J. Apple /s/ Joel A. Ronning
- ---------------------------- -----------------------------
Richard J. Apple Joel Ronning
Chief Executive Officer President and Chief
Executive Officer
<PAGE>
SCHEDULE 1
PROPOSAL BETWEEN DIGITAL RIVER, INC. AND
TECH SQUARED, INC. FOR PHYSICAL INVENTORY
FULFILLMENT REVENUE SPLIT
This Agreement is made as of September 19, 1997, between Digital River,
Inc. ("DR") and Tech Squared, Inc. ("T2").
1. PURPOSE
DR wishes to distribute physical inventory ("Inventory") to dealers and end
user customers (the "Customers") for itself and on behalf of its clients. T2
has agreed to assist DR in the management and distribution of the Inventory.
2. SERVICES
Services began in earnest August 1, 1997.
3. Term of Agreement
The agreement will be for a term initially ending December 31, 1998.
There will be a 90-day probation period to determine the appropriateness of
the initial revenue split as outlined below to ensure that both DR and T2 are
satisfied with the matching of revenue/fees with the related expense. The
agreement will be automatically renewed for successive one year terms unless
notice is given by either party 90 days prior to the anniversary date.
4. Responsibilities of DR
DR will enter into the T2 system all orders to be distributed by T2 and
collect all payments from the Customers. DR will indicate on the purchase
order from where the Inventory is to be taken; either from DR consigned
inventory, DR owned inventory, T2 owned inventory or a third party (i.e.
Ingram, etc.).
DR will order or request Inventory that is in the DR consigned inventory
or DR owned inventory based on its needs and with stock reports from T2.
<PAGE>
DR will provide inventory information (i.e., description, SKU #, weight,
etc.) for new Inventory items to T2 so that its system can be updated to
manage the Inventory.
5. Responsibilities of T2
T2 will establish on its FACTS system, the capability to manage DR
Inventory including setting up part numbers, segmenting the Inventory into
separate warehouses (i.e. DR consigned and DR owned) and creating a special
DR branch for reporting and reconciling purposes.
T2 will provide a FACTS system connection to DR to allow DR to enter
orders directly to the system.
T2 will provide space for storage of Inventory in its warehouse that is
segregated from T2 inventory.
T2 will secure the Inventory and be responsible for any loss or spoilage.
T2 will receive Inventory on DR's behalf, recording it to the proper
warehouse in the FACTS system and forwarding the appropriate paperwork to DR
for its accounting purposes.
T2 will, upon receipt of an order placed by DR, either ship the item per
the invoice or purchase the item and order it to be drop shipped. T2 will
purchase and use DR imprinted invoices and non-descript boxes or other
shipping material. T2 will properly update the FACTS system for Inventory
shipped.
T2 will accept returns of Inventory and update the FACTS system, issuing
credit memo where appropriate.
T2 will provide appropriate accounting and status reports to DR at least
monthly and by no later than four business days after the end of a month.
6. Payments from DR to T2 and T2 to DR
<PAGE>
Payments owing between DR and T2 will be paid monthly after the close of
accounting for the month but not later than the 10(th) workday of the
following month. Payments will be based on the following table:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
INVENTORY FROM:
-------------------------------------------------------------------
DIGITAL
ORDERED ORDER (T2/DR HARD GOODS HARD GOODS T2 DROP
FROM SPLIT) DR OWN DR CONSIGN T2 OWNED SHIP
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Digital 0%/100% Transaction Same as DR 50/50 split 50/50 split
River/3(rd) fee as Own of GM $ of GM $
Party agreed by
Hosts DR and T2
- -------------------------------------------------------------------------------
Tech 15%/15-30% 50/50 Split 50/50 split 100%/0% (T2 Same as
Squared of rev of GM $ of GM $ process T2 owned
Web Site credit
(DTP) card)
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
Summary of relationship:
- T2 pays DR for Hosting Site
- DR pays T2 for storage (per pallet space)
- T2 to calculate per order fulfillment cost (estimate is $3.35/order)
- Benefits of DR/T2 fulfillment relationship:
DR gets: Warehousing of goods used in other Vendor/Host relationships
Fulfillment services from T2
Inventory management; receiving/inventory/cycle counts
Access to T2 products and pricing
Access to T2 vendors (e.g., Ingram)
T2 gets: Web Site Host
Access to DR Products
Developed Commerce System and related technology
Incremental DR Revenue
Vendor spin
7. Termination
Either party can terminate this agreement pursuant to Section 3 or
immediately for gross negligence.
<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> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 203
<SECURITIES> 136
<RECEIVABLES> 2,864<F1>
<ALLOWANCES> 0
<INVENTORY> 1,949
<CURRENT-ASSETS> 305
<PP&E> 387<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,158
<CURRENT-LIABILITIES> 5,302
<BONDS> 0
217
0
<COMMON> 0
<OTHER-SE> 3,166
<TOTAL-LIABILITY-AND-EQUITY> 9,158
<SALES> 18,095
<TOTAL-REVENUES> 18,095
<CGS> 15,815
<TOTAL-COSTS> 15,815
<OTHER-EXPENSES> 2,331
<LOSS-PROVISION> 123
<INTEREST-EXPENSE> 42
<INCOME-PRETAX> (1,548)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,548)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
<FN>
<F1>AMOUNTS REPORTED FOR ACCOUNTS RECEIVABLE AND PROPERTY, PLANT & EQUIPMENT ARE
NET AMOUNTS.
</FN>
</TABLE>
