<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
SCHEDULE 13E-3/A
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934)
(AMENDMENT NO. 3)
TECH SQUARED INC.
- --------------------------------------------------------------------------------
(Name of the Issuer)
Tech Squared Inc. Digital River, Inc.
MacUSA, Inc. Joel A. Ronning
- --------------------------------------------------------------------------------
(Name(s) of Person(s)Filing Statement)
COMMON STOCK, NO PAR VALUE
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(Title of Class of Securities)
878302108
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(CUSIP Number of Class of Securities)
Tech Squared Inc. Digital River, Inc.
Attention: Charles E. Reese, Jr. Attention: Robert E. Strawman
6690 Shady Oak Road 9625 W. 76th Street, Suite 150
Eden Prairie, Minnesota 55344 Eden Prairie, Minnesota 55344
(612) 832-5622 (612) 830-9042
MacUSA, Inc. Joel A. Ronning
Attention: Charles E. Reese, Jr. 9625 W. 76th Street, Suite 150
6690 Shady Oak Road Eden Prairie, Minnesota 55344
Eden Prairie, Minnesota 55344 (612) 830-9042
(612) 832-5622
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(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Persons(s) Filing Statement)
---------
COPIES TO:
Louis A. Goodman, Esq. Michael W. Schley, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Larkin, Hoffman, Daly & Lindgren, Ltd.
One Beacon Street 7900 Xerxes Avenue South, Suite 1500
Boston, Massachusetts 02108 Bloomington, Minnesota 55431
(617) 573-4800 (612) 896-3800
Michael J. Sullivan
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, California 94111
(415) 693-2000
This statement is filed in connection with (check the appropriate box):
a. /X/ The filing of solicitation materials or an information statement subject
to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the Securities
Exchange Act of 1934.
b. / / The filing of a registration statement under the Securities Act of 1933.
c. / / A tender offer.
d. / / None of the above.
<PAGE>
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies. /X/
Calculation of Filing Fee
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Transaction
Valuation Amount of Filing Fee
$59,278,500* $11,856**
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*Transaction Valuation has been calculated by using the sum
of (1) the estimated consideration of $3,125,000 to be
received by Tech Squared from the sale of its
operating assets and (2) the total value of the 2,650,000 shares of Digital
River, Inc. ("Digital River") common stock, based on a price per share of $21.19
determined in accordance with Rule 0-11(a)(4), to be received by Tech Squared
in the transaction described herein and in the Preliminary Proxy
Statement-Prospectus on Schedule 14A incorporated herein by reference.
**1/50th of 1% of Transaction Value, calculated in accordance with Rule 0-11.
/X/ Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form
or schedule and the date of its filing.
Amount previously paid: $11,856 Filing party: Tech Squared Inc.
--------- ------------------
Form or registration no.: Preliminary 14A Dated filed: August 10, 1999
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2
<PAGE>
INTRODUCTION
This Amendment No. 3 is being filed for the sole purpose of
amending Exhibit D to the Rule 13e-3 Transaction Statement on Schedule 13E-3
(this "Schedule 13E-3") which was originally filed with the Securities and
Exchange Commission (the "Commission") on August 10, 1999, and amended on
October 14, 1999 and October 29, 1999. This Schedule 13E-3 is being filed by
Tech Squared Inc., a Minnesota corporation ("Tech Squared"), Digital River,
Inc., a Delaware corporation ("Digital River"), MacUSA, Inc., a Minnesota
Corporation ("MacUSA"), Joel A. Ronning pursuant to Section 13(e) of the
Securities and Exchange Act of 1934, as amended, and Rule 13e-3 thereunder,
in connection with the voluntary dissolution of Tech Squared pursuant to the
Plan of Liquidation and Dissolution and the transactions contemplated thereby.
This Schedule 13E-3 is being filed in connection with the
Preliminary Proxy Statement-Prospectus, as amended from time to time (the
"Preliminary Proxy Statement-Prospectus"), as originally filed by Tech
Squared with the Commission on August 10, 1999, and amended on October 14,
1999 and October 29, 1999. The Preliminary Proxy Statement Prospectus relates
to a special meeting of Tech Squared shareholders at which Tech Squared
shareholders will consider and vote upon the voluntary dissolution of Tech
Squared pursuant to the Plan of Liquidation and Dissolution. The Preliminary
Proxy Statement-Prospectus is also the prospectus of Digital River related to
the issuance of Digital River shares to Tech Squared and the distribution of
such shares by Tech Squared to its shareholders pursuant to the Plan of
Liquidation and Dissolution. The Preliminary Proxy Statement-Prospectus is
subject to completion or amendment.
All information set forth below should be read in connection with
the information contained or incorporated by reference in this Schedule 13e-3
as previously amended. Such information is in addition to, and does replace
or otherwise amend, the existing information set forth or incorporated by
reference in this Schedule 13e-3 as previously amended. Capitalized terms
used but not defined in this Schedule 13E-3 shall have the meanings given to
them in the Preliminary Proxy Statement-Prospectus.
3
<PAGE>
SIGNATURES
After due inquiry and to the best of my knowledge and belief,
I certify that the information set forth in this statement is true, complete and
correct.
Dated: November 5, 1999 TECH SQUARED INC.
/s/ Jeffrey F. Martin
------------------------------------
Name: Jeffrey F. Martin
Title: Chief Financial Officer
DIGITAL RIVER, INC.
/s/ Joel A. Ronning
------------------------------------
Name: Joel A. Ronning
Title: Chief Executive Officer
MACUSA, INC.
/s/ Charles E. Reese, Jr.
------------------------------------
Name: Charles E. Reese, Jr.
Title: Chief Executive Officer
/s/ Joel A. Ronning
------------------------------------
Name: Joel A. Ronning
Title: Individually
Signature Page to Schedule 13e-3
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
A . . . . Excerpt from Digital River's Annual Report on Form 10-K filed on
March 3, 1999, for the fiscal year ended December 31, 1998*
B . . . . Excerpt from Digital River's Definitive Proxy Statement on Schedule
14A, filed on March 23, 1999*
C . . . . Materials used in the Fairness Opinion Presentation made by SG Cowen
Securities Corporation to the Board of Directors of Tech Squared on
July 11, 1999*
D . . . . Materials used in the Presentation made by Broadview International
LLC to the Board of Directors of Digital River on July 9, 1999
E . . . . Proxy Statement-Prospectus, as amended from time to time (incorporated
by reference to the Proxy Statement-Prospectus, as amended, filed by
Tech Suqared Inc. on October 29, 1999)*
* Previously filed.
<PAGE>
Exhibit D
CONFIDENTIAL
- --------------------------------------------------------------------------------
NEW YORK
SILICON VALLEY
BOSTON
LONDON
TOKYO
DEFENDER / TEMPEST
Transaction Analysis
Prepared For
Defender Board Of Directors
October 13, 1999
BROADVIEW INT'L LLC
MEMBER NASD
MEMBER SIPC
D-1
<PAGE>
DEAL TERMS
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STRUCTURE - Both parties agree to effect a Type C
Reorganization: DR will issues shares in
exchange for all of the assets of TS. These
assets consist primarily of an option for
3,000,000 shares of DR stock and net cash
following the sale of its existing
businesses. All liabilities, known and
unknown, will remain the responsibility of
the TS shareholders and will be assigned to a
liquidating trust to be administered by TS.
Currently, it is estimated that approximately
8% of the gross shares received by TS
shareholders in the transaction will be put
into this trust to cover outstanding
liabilities of TS estimated at $7.2 million.
CONSIDERATION - Both parties agree that DR will issue
2,650,000 shares in exchange for TS assets
equating to an 11.7% discount to the number
of shares issuable upon exercise of the
option. An additional downward adjustment
will be made for any additional net cash
balance.
CONTINGENCIES - Both parties would propose that the closing
of the transaction be contingent upon a
definitive resolution that pending tax
legislation will not adversely affect the
tax-free status of the Transaction.
LOCK-UP - In order to facilitate efficient trading of
DR, TS senior management agrees to lock-up
one-third of their stock for 90 days,
one-third for 180 days and one third for 270
days. TS senior management claims to control
approximately 60% of the fully-diluted shares
of TS.
REGULATORY ISSUES - Arthur Andersen recommends that both parties
announce on Sunday, July 11, or earlier, to
maximize the potential for the Transaction to
be included under the current downstream
merger legislation.
POOLING ISSUE - Both Parties agree to provide a fiduciary out
for DR if an unsolicited transaction arises
where pooling accounting treatment is deemed
necessary.
D-2
<PAGE>
TRANSACTION BENEFITS
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TAX-FREE - Effects tax free repurchase of the option to
REPURCHASE buy 3.0 MM shares of DR at a discount of
OF SHARES AT 11.7%. Based on DR's closing price as of
A DISCOUNT 7/7/99 ($33.25), the transaction represents a
savings of $11.6 MM less expenses and fees of
$1.5MM, netting a total savings of $10.1 MM.
CLEARS UP - Alleviates any confusion amongst industry
WALL STREET analysts in reference to ownership between DR
CONFUSION and TS.
REFOCUSES - Eliminates unnecessary distractions for
MANAGEMENT management and continues good faith between
the Board of Directors and the founder.
ENSURES - Assures that approximately 50% of the shares
ORDERLY issued will not be sold for an average of six
TRADING months.
D-3
<PAGE>
TRANSACTION RISKS
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POOLABILITY - Transaction hinders Defender poolability for
up to two years after the close of the
transaction. However, Arthur Anderson
believes that DR could regain poolability as
early as six to nine months from the closing
of the transaction.
REGULATORY - Transaction faces proposed adverse tax
CONCERN legislation against Type C Reorganizations.
It must be grandfathered under the current
law to close.
LIABILITY RISK - In the event that the liquidating trust does
not sufficiently cover TS liabilities, DR
runs the slight risk of inheriting those
liabilities as well as potential associated
lawsuits.
D-4
<PAGE>
BOARD OF DIRECTOR CONCERNS
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CLOSING ASSETS - HOW MUCH CASH WILL TS HAVE AT CLOSING?
- TS advisors indicate that current liabilities
will result in limited cash at the close of
the transaction. Current estimates indicate
approximately $800K in net cash will be
available to DR at closing.
OPTION LANGUAGE - DOES TS HAVE TO EXERCISE THE OPTION BEFORE
CLOSE?
- MacUSA must exercise its "option" to acquire
the shares from Joel Ronning.
MECHANICS OF - WHAT ARE THE MECHANICS OF LIQUIDATING TRUSTS?
LIQUIDATING
TRUST - Similar to an escrow account. DR has no role
in setting up, managing or liquidating the
trust.
- Shares will be deposited and a trustee shall
be appointed by TS shareholders to manage and
administer the trust. This may involve
selling the shares.
LOCK-UP OF >5% - THE LOCK-UP OF SHAREHOLDERS SHOULD INCLUDE
SHAREHOLDERS ALL SHAREHOLDERS HOLDING GREATER THAN 5% OF
TS SHARES.
- Only two current shareholders own more than
5%, Joel Ronning and Charles Reese. Both
shareholders have agreed to the lock-up.
D-5
<PAGE>
TEMPEST BALANCE SHEET(1) (MAY 1999)
- -------------------------------------------------------------------------------
($ in thousands)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalent $1,919
Restricted cash 274
Accounts receivable, net of allowance
for doubtful receivables of $382,000 and
$365,000 respectively 2,300
Inventories, net of reserve for obsolescence 1,558
Available for sale securities 40
Prepaids and other current assets 558
--------
TOTAL CURRENT ASSETS 6,648
Property and equipment, net 488
Mining Assets 0
Investment in Digital River 120,000
--------
$127,136
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $1
Current maturities of long-term debt 0
Accounts payable 2,225
Accrued compensation and benefits 183
Accrued expenses 791
Dividend payable --
-------
TOTAL CURRENT LIABILITIES 3,200
Dividends payable
Deferred income tax 44,837
Redeemable pref. Stock, 12% cumulative
convertible, $1 par value; 1,000,000 shares
authorized; 160,000 shares issued and
outstanding 248
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock; no par value; 25,000,000
shares authorized. 12,102,950 and 11,603,075
issues and outstanding --
Stock subscription receivable (134)
Additional paid-in capital 4,301
Retained earnings (deficit) 2,350
Unrealized gain on available-for-sale
securities 72,337
--------
TOTAL STOCKHOLDERS' EQUITY 78,854
--------
$127,139
--------
--------
</TABLE>
(1) Numbers provided by Tempest advisors and may not balance due to rounding.
D-6
<PAGE>
ANTICIPATED TS LIABILITIES
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($ in thousands)
LIABILITY RESERVE ANALYSIS
<TABLE>
<S> <C> <C>
Cash on hand $2,187
Disposition of other assets $2,200
------
Total Cash Available to settle liabilities $4,387
Current Liabilities
Tax on Dissenter Shares (1,000)
Retention Plan (925)
SG Cowen (550)
Arthur Anderson (300)
Legal Fees(2) (250)
Preferred Stock Redemption (165)
Bayview Capital (161)
Post Operations Sale (125)
Line of Credit Payback (100)
Liquidation Costs (25)
Total Liabilities (3,601)
------
Net Cash Available to DR $786
Other Liabilities to be reserved for in Liquidating Trust:
Apple Lawsuit(1) (5,793)
Apple Legal Defense (100)
Other (1,300)
------
Total (7,193)
</TABLE>
(1) Calculated using 775,000 shares at $5.75 per share including a 30% tax.
(2) Includes Advisor Legal Fees.
D-7
<PAGE>
CURRENT TEMPEST CAPITALIZATION TABLE
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($ in thousands)
<TABLE>
<CAPTION>
INSIDER # OF SHARES %
----------- --
<S> <C> <C>
Joel Ronning(1) 6,574 44%
Charles Reese(1) 963 6%
---------- -------
All Insiders 7,537 50%
OTHER SHAREHOLDERS
Matador Cptl Mgmt 510 3%
Nicholas-Applegate 282 2%
Stanley Tenenbaum 142 1%
Public Float 6,072 40%
---------- -------
All Other Shareholders 7,006 47%
Preferred Shares(2) 128 1%
Total Outstanding Options 427 3%
Treasury Stock(3) (70) (0%)
FULLY DIL. SHARES OUTSTANDING 15,028 100%
</TABLE>
(1) Includes options.
(2) Assumes .8 conversion rate on 160,000 shares.
(3) Assumes exercise proceeds of $5.90 per option which generates $.4MM, assumes
shares are brought back at $5.50 per share.
D-8
<PAGE>
POTENTIAL STOCK-FOR-STOCK TRANSACTION TIMETABLE
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Calendar] [Calendar] [Calendar] [Calendar]
JULY AUGUST SEPTEMBER OCTOBER
Week of: 5 12 19 26 2 9 16 23 30 6 13 20 27 4 11 18 25
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRANSACTION EVALUATION
(6/30-7/9)
Discussion of Price and Terms
Due Diligence (6/30-7/9)
DEFINITIVE AGREEMENT
Negotiate Agreement (6/30-7/9)
Execute Agreement (7/9)
HART SCOTT RODINO
File HSR (7/19)
Termination of Waiting Period (8/9)
REGISTRATION STATEMENT (S-4)
Prepare Filing (7/30-8/6)
SEC Review and Clearance (8/6-9/20)
BOARD/SHAREHOLDER VOTE
Review Fairness Opinion (7/9)
and Approve Transaction
Prepare Mailing (9/20-9/24)
Shareholder Review and Vote (9/27-10/29)
Closing (10/29)
</TABLE>
D-9
<PAGE>
DIGITAL RIVER, INC.
FAIRNESS OPINION DOCUMENTATION
JULY 11, 1999
BROADVIEW INT'L LLC
TOKYO SILICON VALLEY NEW YORK BOSTON LONDON
D-10
<PAGE>
[Broadview International LLC Letterhead]
CONFIDENTIAL
July 11, 1999
Board of Directors
Digital River, Inc.
9625 West 76(th) Street
Eden Prairie, MN 55344
Dear Members of the Board of Directors:
We understand that Digital River, Inc. ("Digital River" or "Buyer") and Tech
Squared Inc. ("Tech Squared" or "Seller") propose to enter into an Acquisition
Agreement (the "Agreement") pursuant to which Tech Squared will transfer to
Digital River 3,000,000 shares of Digital River Common Stock (the "Purchased
Assets") in exchange for 2,650,000 shares (less a number of shares in respect of
the Cash Purchase Amount (as defined in the Agreement)) of Digital River Common
Stock (the "Consideration"; such transaction being referred to as the "Asset
Purchase"). Digital River will not assume, or in any way be liable or
responsible for, any liabilities or obligations of Tech Squared whatsoever in
connection with the Asset Purchase. The Asset Purchase is intended to be a
tax-free reorganization within the meaning of Section 368(a)(1)(C) of the United
States Internal Revenue Code of 1986, as amended. The terms and conditions of
the Asset Purchase are more fully described in Agreement.
You have requested our opinion as to whether the Consideration is fair, from
a financial point of view, to Digital River shareholders.
Broadview International LLC ("Broadview") focuses on providing merger and
acquisition advisory services to information technology ("IT"), communications
and media companies. In this capacity, we are continually engaged in valuing
such businesses, and we maintain an extensive database of IT, communications and
media mergers and acquisitions for comparative purposes. We are currently acting
as financial advisor to Digital River's Special Committee of the Board of
Directors and will receive a fee from Digital River upon the successful
conclusion of the Asset Purchase.
In rendering our opinion, we have, among other things:
1. reviewed the terms of the Agreement and the associated schedules thereto
in the form of the draft dated July 9, 1999 furnished to us by Cooley Godward
LLP on July 9, 1999 (which, for the purposes of this opinion, we have assumed,
with your permission, to be identical in all material respects to the agreement
to be executed);
2. reviewed Tech Squared's Annual Report on Form 10-K for its fiscal year
ended December 31, 1998, including the audited financial statements included
therein, and Tech Squared's Quarterly Report on Form 10-Q for the three months
ended March 31, 1999, including the unaudited financial statements included
therein;
3. reviewed the reported closing prices and trading activity for Tech
Squared Common Stock;
4. analyzed available information, both public and private, concerning
other mergers and acquisitions we believe to be comparable in whole or in part
to the Asset Purchase;
5. reviewed Digital River's Annual Report on Form 10-K for its fiscal year
ended December 31, 1998, including the audited financial statements included
therein, and Digital River's Quarterly Report
D-11
<PAGE>
Board of Directors
Digital River, Inc.
July 11, 1999
Page 4
on Form 10-Q for the three months ended March 31, 1999, including the unaudited
financial statements included therein;
6. discussed with Digital River management its view of the rationale for
the Asset Purchase;
7. reviewed the reported closing prices and trading activity for Digital
River Common Stock;
8. reviewed recent equity analyst reports covering Digital River;
9. participated in negotiations and discussions related to the Asset
Purchase among Digital River, Tech Squared and their respective financial and
legal advisors;
10. considered the fact that Joel A. Ronning owns stock in, and sits on the
Board of Directors of, both Digital River and Tech Squared; and
11. conducted other financial studies, analyses and investigations as we
deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied, without independent verification,
on the accuracy and completeness of all the financial and other information
(including without limitation the representations and warranties contained in
the Agreement) that was publicly available or furnished to us by Tech Squared,
Digital River or their respective advisors. We have neither made nor obtained an
independent appraisal or valuation of any of Tech Squared's assets.
Based upon and subject to the foregoing, we are of the opinion that the
Consideration is fair, from a financial point of view, to Digital River
shareholders.
For purposes of this opinion, we have assumed that neither Digital River nor
Tech Squared is currently involved in any material transaction other than the
Asset Purchase, the Disposition (as defined in the Agreement) and those
activities undertaken in the ordinary course of conducting their respective
businesses. Our opinion is necessarily based upon market, economic, financial
and other conditions as they exist and can be evaluated as of the date of this
opinion, and any change in such conditions may impact this opinion. We express
no opinion as to the price at which Digital River Common Stock will trade at any
time.
This opinion speaks only as of the date hereof and may be relied upon only
by the Board of Directors of Digital River and no other person. This opinion may
not be published or referred to, in whole or in part, without our prior written
permission, which shall not be unreasonably withheld.
Sincerely,
/s/ Broadview International LLC
--------------------------------------
Broadview International LLC
D-12
<PAGE>
CONFIDENTIAL
DIGITAL RIVER, INC. FAIRNESS OPINION
VALUATION CONSIDERATIONS
In reviewing the proposed transaction with Tech Squared Inc. ("Tech Squared"
or "Seller"), along with the current activity within the Information Technology
("IT"), Communications and Media industries we have identified the following
factors with, among others, may have a material impact on valuation.
FACTORS POSITIVELY AFFECTING THE VALUE OF THE PROPOSED TRANSACTION
OPPORTUNITY TO REPURCHASE SHARES AT A DISCOUNT--Digital River has the
opportunity to redeem 3,000,000 shares of Digital River Common Stock by issuing
2,650,000 shares (adjusted per the Agreement) of Digital River Common Stock.
This repurchase will decrease Digital River's number of common shares
outstanding by approximately 1.8%. Reducing the number of shares outstanding
will enable continuing shareholders to realize a greater portion of the
potential future financial benefits created by Digital River, therefore
increasing the value of each share.
TRANSACTION STRUCTURE LIMITS EXPOSURE TO LIABILITIES--The use of a Section
386(a)(1)(C) reorganization allows Digital River to acquire only the assets of
Tech Squared, while maintaining tax-free status. All Tech Squared liabilities,
known and unknown, will remain the responsibility of its shareholders and will
be assigned to a liquidating trust to be administered by Tech Squared. Tech
Squared's contingent liabilities include wrongful termination lawsuit filed
against Tech Squared by Richard Apple, the former CEO of Tech Squared, potential
environmental litigation linked to a former mining subsidiary of Tech Squared
and redeemable preferred shares. Digital River's legal counsel advises there is
a slight risk that unforeseen liabilities exceed the amount allocated to the
liquidating trust and in that event, Digital River could be implicated in
subsequent legal suits.
RESTRICTIONS ON IMMEDIATE SALE OF STOCK--If Digital River were not to
execute this transaction, Tech Squared would likely liquidate approximately 40%
of its holdings in order to pay the tax liability incurred upon distribution of
the stock to shareholders. An abnormally large sale of Digital River Common
Stock may have a negative effect on the trading price. As a result of the
Transaction, Tech Squared management, which controls approximately 50% of the
diluted shares of Tech Squared, will be restricted from immediately liquidating
their positions in Digital River. Management will be able to sell one third of
their holding 90 days after the close of the Transactions, another third after
180 days and the remaining third after 270 days. By restricting the sale of one
half of the shares and staggering the time periods at which those shares can be
sold, Digital River limits the risk that large blocks of Digital River shares
are immediately sold on the market.
ENABLE MANAGEMENT TO FOCUS ON MANAGING DIGITAL RIVER--Joel A. Ronning, CEO
and Founder of Digital River, owns 44% of Tech Squared. This transaction would
bring closure to his investment, realign his financial incentives more clearly
in Digital River and remove this potential distraction. During the short term,
closing the Transaction will consume incremental management resources.
FACTORS NEGATIVELY AFFECTING THE VALUE OF THE PROPOSED TRANSACTION
RESTRICTS FUTURE POOLING TRANSACTION--The Transaction hinders Digital River
from using the pooling method of accounting in any future M&A transaction for up
to two years following the date of the close. However, Digital River's
accounting advisor has indicated that the Company may be eligible for pooling
treatment as early as six to nine months following closing. While this
restriction will not
D-13
<PAGE>
CONFIDENTIAL
disqualify Digital River from merging with another company, the pooling method
of accounting is generally the preferred method for an M&A transaction.
Therefore, a potential acquirer may be less willing to acquire Digital River as
a result of the Transaction. Additionally, the SEC has announced that it plans
to disallow the pooling method of accounting for transactions executed after
January 1, 2001. The six to nine month window during which Digital River will be
unable to be a party to a pooling transaction constitutes a significant portion
of the remaining time when pooling would be available.
POSSIBLE TAX LAW CHANGES--On July 12, 1999, based on its previously
announced agenda, the U.S. Congress will convene and is expected to discuss
downstream mergers and potentially draft a bill which changes the tax laws
applicable to this transaction, thereby disallowing the tax-free status of this
particular type of merger. If the tax laws were to change and provisions to
treat this transaction under the current law were not explicitly included in the
bill, the Transaction would be terminated and Digital River would be responsible
for fees incurred by Digital River. A bill changing the tax laws could also
possibly be enacted to retroactively include transactions that closed before
enactment. Even after closing, Digital River bears some risk of being burdened
with the tax liabilities created by a new and currently undefined tax law.
UNCLEAR TAX TREATMENT--Regardless of the actions taken by the U.S. Congress,
the Internal Revenue Service will not issue a private letter ruling that this
particular type of transaction would get tax-free treatment. Both Digital
River's tax and legal advisors are in the process of delivering opinions that
the Transaction qualifies under the current law as tax-free, but tax-free tax
status cannot be guaranteed.
DIGITAL RIVER, INC. FAIRNESS OPINION
SUMMARY EXPLANATION OF
VALUATION METHODOLOGY
The following is a summary explanation of the various sources of information
and valuation methodologies employed by Broadview Int'l LLC ("Broadview") in
valuing the proposed transaction with Tech Squared Inc. ("Tech Squared" or the
"Seller") in conjunction with rendering its fairness opinion regarding the
Transaction with Digital River, Inc. ("Digital River"). Broadview employed
analyses based on: (1) the economic value of the Transaction, (2) transaction
comparables, and (3) transaction premiums paid to determine the fairness of the
Transaction.
ECONOMIC VALUATION--Through the proposed transaction, Digital River will
reduce the number of common shares outstanding by approximately 372,298 shares.
Based on Digital River's most recent 10-Q, this represents approximately 1.8% of
the 20,151,288 shares of common stock outstanding. Reducing the number of shares
outstanding will enable continuing shareholders to realize a greater portion of
the potential future financial benefits created by Digital River, therefore
increasing the value of each share by approximately 1.8%. At the July 9, 1999
closing share price of $35.25 per share, this represents a theoretical increase
in value of $0.65 per share or $13.12 million in aggregate. Digital River will
also incur certain expenses as a result of the Transaction. After consulting
with Digital River's legal and accounting advisors, Broadview has estimated that
the investment banking, legal and consulting fees will be approximately
$750,000, $400,000 and $250,000, respectively. Additionally, Broadview estimates
that Digital River will incur $100,000 of internal expenses including the
opportunity cost of management time and attention needed to execute the
Transaction. The total cost of approximately $1.5 million equates to
approximately $0.07 per share. Therefore, Broadview calculates the theoretical
increase in value to shareholders to be approximately $0.58 per share or $11.6
million in the aggregate, as of July 9, 1999.
D-14
<PAGE>
CONFIDENTIAL
TECH SQUARED STOCK PERFORMANCE ANALYSIS--For comparative purposes, Broadview
examined the following:
1. Tech Squared Common Stock weekly historical volume and trading prices
from July 10, 1998 through July 9, 1999; and
2. Daily relative closing prices for Tech Squared vs. the S&P 500 from July
10, 1998 through July 9, 1999.
DIGITAL RIVER STOCK PERFORMANCE ANALYSIS--For comparative purposes,
Broadview examined the trading history of:
1. Digital River Common Stock from August 14, 1998 through July 9, 1999;
and
2. Daily relative closing prices for Digital River vs. the S&P 500 from
August 14, 12998 through July 9, 1999.
TRANSACTION COMPARABLES ANALYSIS--Broadview analyzed recent transactions
deemed comparable to the proposed transaction. Broadview identified two tax-free
transactions, in which the acquired company's primary asset was common stock of
the acquirer and contingent and unknown liabilities were assigned to a
liquidating trust or spun-off operating entity:
1. Toys 'R' Us, Inc. ("Toys 'R' Us") acquired Petrie Stores Corp.
("Petrie") on January 24, 1995; and
2. Energy Ventures, Inc. ("EVI") acquired GulfMark International, Inc.
("GulfMark") on May 1, 1997.
In the Petrie acquisition, Toys 'R' Us issued 42.1 million shares of common
stock in exchange for 39.9 millions shares of Toys 'R' Us common stock and
$165.0 million in cash. Adjusted for the shares issued in exchange for the cash
transferred in the transaction, Toys 'R' Us issued 3.3 million shares less than
it acquired through the merger. The implied discount at which Toys 'R' Us
redeemed its shares was 8.3%. In the GulfMark acquisition, EVI issued 2.2
million shares of common stock in exchange for 2.2 million shares of EVI common
stock and GulfMark's erosion control division that generated approximately $7.0
million of revenue in 1996. The implied discount equals the value EVI assigned
to the erosion control division. The value of the erosion control division was
estimated using analyses produced by EVI's and GulfMark's financial advisors and
filed in the respective S-4 filings. The range of values is $4.0 million to
$14.0 million, with a median implied value of $7.0 million. this range of values
implies a range of discounts from 3.7% to 12.8%, with a median implied discount
of 6.4%.
The comparable transactions imply a historical precedent of issuing shares
at a 7.4% discount. A 7.4% discount applied to the shares to be received by
Digital River would imply an issuance of 2.78 million shares in the Tech Squared
acquisition.
TRANSACTION PREMIUMS PAID ANALYSIS--Premiums paid above the seller's equity
market capitalization indicate the additional value, when compared to public
shareholders, strategic and financial acquirers are willing to pay for companies
in a particular market segment. In this analysis, the value of consideration
paid in transactions involving stock is computed using the buyer's last reported
closing price (on the appropriate exchange) prior to announcement. The seller's
equity market capitalization one trading day prior to announcement is calculated
using the seller's last reported closing price (on the appropriate exchange)
prior to announcement. The seller's equity market capitalization twenty trading
days prior to announcement is calculated using the seller's closing price (on
the appropriate exchange) on the first day of that period which: (1) consists of
twenty consecutive days during which the appropriate exchange conducts trading
activity, and (2) ends on the day of the
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<PAGE>
CONFIDENTIAL
last reported closing price prior to announcement. Broadview determined that
because a majority of Tech Squared's value is linked to the operations Digital
River, the most comparable transactions would be transactions in which digital
media companies were acquired. Broadview reviewed 7 comparable M&A transactions
involving North American digital media companies from January 1, 1998 to July 9,
1999. The underlying data is from Broadview's proprietary database of published
and confidential M&A transactions in the IT, Communications and Media
industries. In order of descending premium paid to seller's equity market
capitalization 20 trading days prior to the date announcement, the software
transactions used were the acquisition of:
1. GeoCities Inc. by Yahoo! Inc.;
2. Excite, Inc. by @Home Corp.;
3. Shopping.com by Compaq Computer Corp.;
4. MovieFone Inc. by America Online Inc.;
5. Market Guide Inc. by Multex.com, Inc.;
6. broadcast.com inc. by Yahoo! Inc.;
7. Cdnow, Inc. by N2K Inc.;
These comparables exhibit the following medians and ranges for the
applicable premiums (discounts):
<TABLE>
<CAPTION>
RANGE OF MULTIPLES
MEDIAN MULTIPLE
------------------- --------------------
<S> <C> <C> <C>
Premium Paid to Seller's EMC............................... 73.3% (26.6%) 203.6%
20 Trading Days Prior to
Announcement
Premium Paid to Seller's EMC............................... 19.3% 2.2% 57.4%
1 Trading Day Prior to
Announcement
</TABLE>
These comparables imply the following medians and ranges for per share
value:
<TABLE>
<CAPTION>
MEDIAN IMPLIED RANGE OF IMPLIED
VALUES VALUES
----------------- --------------------
<S> <C> <C> <C>
Premium Paid to Seller's EMC.............................. $ 6.17 $ 2.62 $ 10.82
20 Trading Days Prior to
Announcement
Premium Paid to Seller's EMC.............................. $ 4.70 $ 4.02 $ 6.20
1 Trading Day Prior to
Announcement
</TABLE>
SUMMARY OF VALUATION ANALYSES--Taken together, the information and analyses
employed by Broadview lead to Broadview's overall opinion that the Consideration
is fair from a financial point of view, to Digital River shareholders.
D-16
<PAGE>
CONFIDENTIAL
TRANSACTION DESCRIPTION AND CONSIDERATION VALUE
TRANSACTION DESCRIPTION
Digital River, Inc. ("Digital River" or "Buyer") and Tech Squared Inc.
("Tech Squared" or "Seller") propose to enter into an Acquisition Agreement (the
"Agreement") pursuant to which Tech Squared will transfer to Digital River
3,000,000 shares of Digital River Common Stock (the "Purchased Assets") in
exchange for 2,650,000 shares (less a number of shares in respect of the Cash
Purchase Amount (as defined in the Agreement)) of Digital River Common Stock
(the "Consideration"; such transaction being referred to as the "Asset
Purchase"). Digital River will not assume, or in any way be liable or
responsible for, any liabilities or obligations of Tech Squared whatsoever in
connection with the Asset Purchase.
The Asset Purchase is intended to be a tax-free reorganization within the
meaning of Section 368(a)(1)(C) of the United States Internal Revenue Code of
1986, as amended. The terms and conditions of the Asset Purchase are more fully
described in the Agreement.
CONSIDERATION VALUE
<TABLE>
<CAPTION>
<S> <C>
Digital River Common Stock to be Issued............................................................ 2,650,000
Digital River Shares to be Acquired from Tech Squared.............................................. 3,000,000
-------------
Net Shares Saved................................................................................... 350,000
Net Cash Available After Liquidation Of Current Liabilities(1)..................................... $ 786,000
Digital River Share Price As Of 7/9/99............................................................. $ 35.25
-------------
Net Shares Saved................................................................................... 22,298
Total Number Of Shares Available For Disposition................................................... 372,298
Digital River Common Shares Outstanding As Of 5/3/99(2)............................................ 20,151,288
% Of Total Shares To Be Gained From Acquisition.................................................... 1.8%
Monetary Value Of Gain............................................................................. $ 13,123,500
Monetary Value Of Gain Per Share................................................................... $ 0.65
Expenses Related To Acquisition.................................................................... $ 1,500,000
Expenses Related To Acquisition Per Share.......................................................... $ 0.07
Net Monetary Value Of Gain To Digital River Shareholders........................................... $ 11,623,500
Net Monetary Value Of Gain To Digital River Shareholders Per Share................................. $ 0.58
</TABLE>
- ------------------------
(1) Net Cash Available After Liquidation of Current Liabilities based on
estimates provided by Tech Squared advisors.
(2) Digital River Common Shares Outstanding are from Digital River's Form 10-Q
filed on 5/14/99.
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