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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, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT.
Commission File Number: 0-25602
TECH SQUARED INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1591872
(State or other jurisdiction of (IRS Employer Identification No.)
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 July 26, 1999, 12,149,200
shares of Common Stock, no par value, of the Company were outstanding.
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TECH SQUARED INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited) for the three
months and six months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited) for the six
months ended June 30, 1999 and 1998 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
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS
TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,009,501 $4,436,276
Restricted cash 263,814 229,466
Available-for-sale securities 22,000 -
Accounts receivable, net of allowance
for doubtful receivables of $348,000
and $365,000 respectively 2,622,513 3,387,907
Inventories 1,476,327 1,783,905
Prepaids and other current assets 575,023 416,666
---------------- ---------------
TOTAL CURRENT ASSETS 6,969,178 10,254,220
Property and equipment, net 467,971 499,874
Mining assets - 190,000
Investment in Digital River 99,750,000 106,500,000
---------------- ---------------
$107,187,149 $117,444,094
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $129,489 $7,395
Current maturities of long term debt - 15,000
Accounts payable 2,746,239 5,008,449
Accrued compensation and benefits 162,365 205,156
Accrued expenses 726,264 1,404,776
Dividends payable to officer/shareholder - 200,000
---------------- ---------------
TOTAL CURRENT LIABILITIES 3,764,357 6,840,776
Dividends payable to officer/shareholder - 83,857
Deferred income taxes 37,304,000 39,815,000
Redeemable preferred stock, 12% cumulative
convertible, $1 par value; 1,000,000
shares authorized; 160,000
shares issued and outstanding 262,609 247,744
STOCKHOLDERS' EQUITY:
Common stock: no par value; 25,000,000 shares
authorized12,138,950 and 11,039,179 issued and
outstanding - -
Additional paid-in capital 4,440,663 3,990,200
Stock subscription receivable (134,000) (284,000)
Retained earnings 1,932,348 2,894,345
Unrealized gain on available-for-sale securities 59,617,172 63,856,172
---------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 65,856,183 70,456,717
---------------- ---------------
$107,187,149 $117,444,094
================ ===============
</TABLE>
See accompanying notes to financial statements.
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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,
1999 1998 1999 1998
--------------------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net Sales $10,516,133 $9,502,285 $21,619,544 $18,095,013
Cost of sales 9,241,717 8,309,159 18,968,295 15,815,384
--------------- ---------------- ---------------- ---------------
GROSS PROFIT 1,274,416 1,193,126 2,651,249 2,279,629
Selling and marketing expenses 649,733 763,645 1,401,956 1,283,994
General and administrative expenses 1,259,722 544,565 2,087,039 1,047,080
--------------- ---------------- ---------------- ---------------
Total Operating Expenses 1,909,455 1,308,210 3,488,995 2,331,074
--------------- ---------------- ---------------- ---------------
LOSS FROM OPERATIONS (635,039) (115,084) (837,746) (51,445)
Interest income/(expense), net 13,119 (18,374) 34,513 (41,506)
Investment income - - 2,048 4,611
Loss on mining assets (145,947) - (145,947) -
Equity in losses of Digital River - (909,553) - (1,459,178)
--------------- ---------------- ---------------- ---------------
NET LOSS ($767,867) ($1,043,011) ($947,132) ($1,547,518)
=============== ================ ================ ===============
Net loss per common share, basic and diluted ($0.06) ($0.09) ($0.08) ($0.14)
=============== ================ ================ ===============
Weighted average shares outstanding, basic and diluted 12,118,862 11,001,020 11,973,285 10,776,464
=============== ================ ================ ===============
</TABLE>
See accompanying notes to financial statements.
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TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
June 30, June 30,
1999 1998
---------------- ---------------
<S> <C> <C>
Operating Activities:
Net Loss ($947,132) ($1,547,518)
Non-cash items included in loss:
Depreciation and amortization 106,751 92,318
Equity in losses of Digital River - 1,459,178
Gain on sale of available-for-sale securities (2,048) (4,611)
Loss on mining assets 145,947 -
Changes in operating assets and liabilities:
Accounts receivable, net 765,394 (135,624)
Inventories 307,578 (58,147)
Prepaid and other current assets (136,304) (69,670)
Accounts payable (2,262,210) 1,241,160
Accrued compensation and benefits (42,791) (66,629)
Other accrued expenses (693,512) (291,165)
---------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,758,327) 619,292
---------------- ---------------
Investing Activities:
Change in restricted cash (34,348) (58,746)
Purchases of property and equipment (74,848) (133,344)
Proceeds from sale of available-for-sale securities 2,048 287,411
---------------- ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (107,148) 95,321
---------------- ---------------
Financing Activities:
Issuance of common stock, net 600,463 (23,330)
Net borrowings (payments) on revolving line of credit 122,094 (491,283)
Dividends paid (283,857) (200,000)
---------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 438,700 (714,613)
---------------- ---------------
NET DECREASE IN CASH (2,426,775) 0
Cash at beginning of period 4,436,276 300
---------------- ---------------
Cash at end of period $2,009,501 $300
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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TECH SQUARED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
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 periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. 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 1998 annual report on Form 10-K, as
amended.
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's wholly-owned subsidiary, MacUSA, was granted, by
Joel Ronning, the majority shareholder and Chairman of the Board of Directors of
the Company, an option, exercisable through December 31, 2000 (the "Digital
River Option") to acquire 3,200,000 (post-split) shares (the "Digital River
Shares") of Digital River, Inc., a Minnesota corporation ("Digital River") which
was then privately held. At that time, such shares represented approximately 60%
of the outstanding common stock of Digital River.
Digital River conducted its initial public offering in August 1998. Prior to
such offering, the Company's ownership percentage of Digital River had been
reduced to approximately 23% and was being accounted for using the equity method
of accounting. Upon completion of such offering, the Company's ownership
percentage was reduced to approximately 19% at which time the Company began
accounting for its investment in Digital River as an available-for-sale security
in accordance with Statement of Financial Accounting Standards (SFAS) No. 115.
Digital River's shares are traded on the NASDAQ stock market under the symbol
"DRIV."
In December 1998, the Company participated in Digital River's secondary offering
by exercising and selling 200,000 shares subject to the Digital River Option
realizing net proceeds of $4,430,000.
In July 1999, the Company completed a cashless exercise of the Digital River
option by surrendering its right to one share of Digital River common stock in
exchange for 2,999,999 shares of Digital River common stock. Subsequently, the
Company purchased one share of Digital River stock to bring its investment in
Digital River to 3,000,000 shares, which represents ownership of approximately
15% of Digital River as of June 30, 1999.
NOTE 4 - COMPREHENSIVE INCOME/(LOSS)
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
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income. Other comprehensive income/(loss) for the three and six month period
ending June 30, 1999 was approximately ($12,717,000) and ($4,239,000),
respectively compared to ($110,000) and ($93,000) for the same periods of
1998. Other comprehensive income/(loss) was solely comprised of changes in
the market value of the available-for-sale securities.
NOTE 5 - SUBSEQUENT EVENTS
In July 1999, the Company executed a definitive agreement with Digital River for
the sale of the assets of the Company consisting primarily of 3,000,000 shares
of Digital River common stock and cash in a tax-free reorganization. Pursuant to
the Agreement, the Company will receive 2,650,000 shares of Digital River common
stock for which the Company will exchange 3,000,000 shares of Digital River
common stock which it currently holds and $1.2 million in cash. The Company
intends to adopt a plan of liquidation which will provide that the Company will
distribute the shares of Digital River common stock received in the exchange to
the Company's shareholders after payment of the Company's liabilities and the
establishment of a liquidating trust to pay any potential future liabilities of
the Company. The Company expects to contribute $6.2 million to such trust. The
Agreement requires that all of the operations of the Company, including its
catalog and distribution businesses, are to be sold or liquidated prior to
closing of the transaction contemplated by such Agreement.
In August 1999, the Company announced that it had signed a letter of intent with
Virtual Technology Corporation to sell substantially all of the Company's
operating assets, including the Company's DTP Direct, Net Direct and
distribution operations, together with various trade and internet domain names.
The completion of the transaction is dependent upon satisfactory due diligence,
negotiation and execution of a definitive agreement and the Company's
shareholders' approval of the plan of liquidation.
NOTE 6 - SALE OF MINING ASSETS
In May 1999, the Company sold all of the common stock of the Company's
wholly-owned subsidiary, Tabor Resources, Ltd. ("Tabor") to Conjecture Silver
Mines, In. ("Conjecture"). Tabor held all of the Company's mining assets. Under
the terms of the agreement, in exchange for the common stock of Tabor, the
company received 16,000 shares of the capital stock of LSI Communications, Inc.
("LSI") from Conjecture. Unless the Company is able, within 90 days from
acquiring the shares of LSI, to sell the shares of LSI for at least $50,000,
Conjecture is required to pay the Company the difference between the amount the
Company is able to obtain from the sale of LSI capital stock and $50,000.
7
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TECH SQUARED INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein are forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934
that involve a number of risks and uncertainties. Such forward-looking
information may be indicated by words such as will, may be, expects or
anticipates. In addition to the factors discussed herein, among the other
factors that could cause actual results to differ materially are the following:
business conditions and growth in the personal computer industry and the general
economy; competitive factors such as rival computer and peripheral product
sellers and price pressures; availability of vendor products at reasonable
prices; inventory risks due to shifts in market demand; and risks presented from
time to time in reports filed by the Company with the Securities and Exchange
Commission, including but not limited to the annual report on Form 10-K as
amended for the year ended December 31, 1998.
The Company sells microcomputer hardware and software products, primarily Apple
Macintosh-R- related products and, to a lesser degree, Microsoft Windows
95/Windows NT/MS-DOS ("Wintel") compatible products. The Company's current
target markets are (i) desktop publishing ("DTP"), graphic arts and pre-press
industries through its DTP Direct catalog, (ii) computer dealers and value added
resellers through its distribution business, and (iii) developers of internal
corporate intranet and external Internet sites and managers of local area
networks ("LAN") and wide area networks ("WAN") through its Net Direct catalog.
In February 1999, the board of directors of Tech Squared authorized the officers
of the Company to make investigations and, if appropriate, enter into
preliminary negotiations regarding possible changes in the Company's business
including, but not limited to, strategic alliances, joint ventures, mergers,
sale of the Company's operating business and other alternatives. In April 1999,
the Company retained Bayview Capital Group, Inc. of Wayzata, Minnesota to act as
its exclusive advisor to locate one or more potential purchasers of certain
operating assets and businesses of the Company, specifically the DTP Catalog
Operations, Net Direct Catalog Operations and Distribution Sales Operations. In
August 1999, the Company announced it had signed a letter of intent with Virtual
Technology Corporation to sell substantially all of the Company's operating
assets including the Company's DTP Direct, Net Direct and distribution
operations together with various trade and internet domain names. The completion
of the transaction is dependent upon satisfactory due diligence, negotiation and
execution of a definitive agreement and the Company's shareholders' approval of
the Company's plan of liquidation.
In May 1999, the Company sold all of the common stock of the Company's
wholly-owned subsidiary, Tabor Resources, Ltd. ("Tabor") to Conjecture Silver
Mines, In. ("Conjecture"). Tabor held all of the Company's mining assets. Under
the terms of the agreement, in exchange for the common stock of Tabor, the
company received 16,000 shares of the capital stock of LSI Communications, Inc.
("LSI") from Conjecture. Unless the Company is able, within 90 days from
acquiring the shares of LSI, to sell the shares of LSI for at least $50,000,
Conjecture is required to pay the Company the difference between the amount the
Company is able to obtain from the sale of LSI capital stock and $50,000.
In July 1999, the Company executed a definitive agreement with Digital River for
the sale of the assets of the Company consisting primarily of 3,000,000 shares
of Digital River common stock and cash in a tax-free reorganization. Pursuant to
the Agreement, the Company will receive 2,650,000 shares of Digital River common
stock for which the Company will exchange 3,000,000 shares of Digital River
common stock which it currently holds and $1.2 million in cash. The Company
intends to adopt a plan of liquidation which will provide that the Company will
distribute the shares of Digital River common stock received in the exchange to
the Company's shareholders after payment of the Company's liabilities and the
establishment of a liquidating trust to pay any potential future liabilities of
the Company. The Company expects to contribute $6.2 million to such trust. The
Agreement requires that all of the operations of the Company, including its
catalog and distribution businesses, are to be sold or liquidated prior to
closing of the transaction contemplated by such Agreement.
8
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For the three months ended June 30, 1999 the Company recorded a consolidated
net loss of ($768,000) or ($0.06) per share compared to a consolidated net
loss of ($1,043,000) or ($0.09) per share in the second quarter of 1998. The
consolidated losses from 1998 include the Company's share of losses of
Digital River, which amounted to $910,000 in the second quarter of 1998. For
the six months ended June 30, 1999 the Company recorded a consolidated net
loss of ($947,000) or ($0.08) per share compared to a consolidated net loss
of ($1,548,000) or ($0.14) per share for the same period of 1998. The
consolidated losses for the first six months of 1998 included the Company's
share of losses of Digital River, which amounted to $1,459,000. Digital
River's issuance of additional shares in 1998 resulted in the Company
accounting for its investment in Digital River as "available-for-sale"
securities starting August 12, 1998.
RESULTS OF OPERATIONS
NET SALES
Net sales for the Company's second quarter ended June 30, 1999 totaled
$10,516,000 compared to $9,502,000 for the corresponding period of 1998, an
increase of 10.7%. Sales to DTP Direct catalog customers increased 5.8% and
the addition of the Net Direct catalog produced $810,000 in sales while sales
through the Company's distribution business decreased 1.7% in the second
quarter. The fastest growing product categories, based on the percentage
increase in dollar sales over the second quarter of 1998, were digital
cameras, networking equipment, magnetic drives, printers and computer
systems. Net sales for the first six months of 1999 totaled $21,620,000
compared to $18,095,000 for the same period of 1998, an increase of 19.5%.
The increase in sales during the first six months of 1999 compared to the
same period of 1998 was mainly due to an 18.4% increase to DTP Direct catalog
customers, primarily due to an increase in the number of outbound sales reps,
and the addition of the Net Direct catalog which produced $1,471,000 in sales
during that period.
Fluctuations in the Company's net sales from period to period can be expected
due to a number of factors, including the timing of new product introductions
by the Company's major vendors and their competitors, seasonal cycles
commonly experienced in computer-related industries, and changes in product
mix and product pricing. As a result, the operating results for any
particular period are not necessarily indicative of the results of any future
period.
GROSS PROFIT
Gross profit for the quarter ended June 30, 1999, was $1,274,000 or 12.1% of
net sales compared to $1,193,000 or 12.6 % of net sales for the comparable
period of 1998. Gross profit for the six-month period ended June 30, 1999 was
$2,651,000 or 12.3% compared to $2,280,000 or 12.6% of net sales for the same
period in 1998. The decrease in gross profit percentage in both the three and
six month periods ended June 30, 1999, is primarily the result of continuing
downward pressure on product prices to the Company's DTP Direct catalog
customers and on margins. 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 $650,000 or 6.2% of sales during the
quarter ended June 30, 1999, compared to $764,000 or 8.0% of sales during the
corresponding period of 1998. For the six month period ended June 30, 1999,
selling and marketing expenses were $1,402,000 or 6.5% of sales versus
$1,284,000 or 7.1% of sales for the same period in 1998. The decrease was
mainly attributable to a decrease in net marketing costs associated with the
May 1998 launch of Net Direct, which is directed at developers of internal
corporate intranet and external Internet sites and managers of LAN's and
WAN's. 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
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Company believes the launch of the Net Direct catalog will have a negative
impact on the profitability of the Company in 1999, and possibly beyond.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter ended June 30, 1999 were
$1,260,000 compared to $545,000 for the comparable period of 1998. For the
six month period ended June 30, 1999, general and administrative expenses
were $2,087,000 compared to $1,047,000 for the related period of 1998. The
increases for the three and six month periods ended June 30, 1999 over the
same periods of 1998 is attributable to several factors including payroll and
employee-related expenses, transaction processing fees, and legal and
consulting fees. Additionally, the discontinuance of subletting office space
to Digital River also contributed to the increase in general and
administrative expenses for the first six months of 1999.
INVESTMENT INCOME
Investment income for the six-month period ended June 30, 1999 was $2,000
compared to $5,000 for the related period in 1998.
LOSSES ON MINING ASSETS
In May 1999, the Company sold the remaining mining assets for approximately
$146,000 less than the book value these assets.
NET INTEREST INCOME/(EXPENSE)
Net interest income for the quarter ending June 30, 1999 was $13,000 compared
to net interest expense of $18,000 for the same period in 1998. Net interest
income for the six-month period ended June 30, 1999 was $35,000 compared to
net interest expense of $42,000 for the same period in 1998. The reduction in
interest expense is primarily due to a decrease in the average outstanding
balance on the Company's line of credit, and the increase in interest income
is mainly attributed to an increase in cash in an interest bearing account.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at June 30, 1999, consisted of
liquid funds, a revolving line of credit agreement with US Bancorp National
Association ("US Bank"), and vendor trade credit lines.
The Company had a Revolving Line of Credit Agreement with US Bank which
expired by its terms in June 1999. The agreement has been orally extended
under the same terms and conditions until a new agreement is signed.
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%. As of June 30, 1999, the Company had unused
availability under the line of credit of approximately $1,183,000 and
outstanding borrowings of $129,000.
The Company has a flooring program with a financing company covering up to
$633,000 in inventory purchases. The flooring program is secured by a standby
letter of credit in the amount of $560,000 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, 1999, the Company had working capital of $3,205,000.
Inventories decreased from $1,784,000, as of December 31, 1998, to $1,476,000
as of June 30,1999. Inventory turns in the second quarter of 1999 were 16.1
compared to 13.2 from the same period in 1998. Capital expenditures totaled
$75,000 in the second quarter of 1999 compared to $83,000 in the second
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quarter of 1998.
The Company believes that funds generated from management of receivable and
inventory levels, advances under its line of credit, further expansion of
lines with trade creditors, the cash on hand and the potential proceeds from
the sale of its investments, will be sufficient to fund its operations
through the end of 1999. However, maintaining an adequate level of working
capital through the end of 1999 and thereafter depends in part on the success
of the Company's sales and marketing efforts, the Company's ability to
control operating expenses and the Company's ability to maintain its
relationships with its bank and its suppliers. Furthermore, funding of the
Company's operations in future periods may require additional investments in
the Company in the form of equity or debt. There can be no assurance that the
Company will achieve desired levels of sales or profitability or those future
capital infusions will be available on terms acceptable to the Company, if at
all.
YEAR 2000 COMPLIANCE
The Company's computer system and those of third parties with whom
it does business will be affected by issues and problems related to changes
required as a result of the year 2000 problem ("Y2K"). The Company's three
key systems and assets that may be directly impacted by the Y2K issue are its
financial and data system, its telephone system and its voice mail system.
The financial and data system requirements have been assessed and were
upgraded and modified to be Y2K compliant in April 1999. The telephone system
is believed to be Y2K compliant, and testing is scheduled for the third
quarter of 1999. The voice mail system is currently being analyzed to
determine the degree of upgrade needed. The upgrade to the voice mail system
will be rolled out and tested during the third quarter of 1999. The Company
incurred expenses to modify its systems and the upgrading of its current
system to be Y2K compliant totaling approximately $35,000 in 1998, and
approximately $30,000 through June 1999, and anticipates additional costs of
approximately $20,000 through the end of 1999. Maintenance and modification
costs incurred by the Company specifically related to 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.
While the Company has exercised its best efforts to identify and remedy any
potential Y2K exposures within its control, certain risks exist with vendors
and suppliers which, to a significant extent, are beyond the immediate
control of the Company. To date, the Company has not identified any vendors
or suppliers who will not be Y2K compliant; however, this analysis is still
in process. The Company plans to develop appropriate contingency plans if
non-compliant vendors are identified. 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. The Company, however, is unable to
assess disruption that may occur as a result of supplier's and customer's
non-compliance. Because the Company markets products manufactured by multiple
sources and typically sells the products as `packages', Y2K problems
affecting the Company's vendors may have a significant affect on the Company.
In addition, customers may delay purchase decisions because of the
uncertainty about Y2K issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
11
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Richard J. Apple, who served as Chief Executive Officer of the
Company from July 1998 until February 1999, has commenced a
lawsuit against the Company and certain of its officers and based
on claims that (i) Mr. Apple's stock options vested, prior to his
termination, pursuant to a claimed acceleration of vesting due to
a supposed "change of control;" (ii) the Company unlawfully
terminated Apple's employment; and (iii) the Company's directors
breached their fiduciary duty in several instances. Such
complaint seeks unspecified damages in excess of $50,000 and an
award of 775,000 registered shares of the Company's common stock.
The Company believes such claims are without merit and intends to
contest such lawsuit vigorously.
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
10.71 Agreement for sale and purchase of Tabor Resources,
Ltd. By Conjecture Silver Mines, Inc. dated May 20,
1999.
10.72 Acquisition Agreement between the Registrant and
Digital River, Inc. dated July 11, 1999. (incorporated
as Exhibit 10.1 in Company's Report on Form 8-K filed
July 12, 1999)
10.73 Voting Agreement between Digital River and Charles E.
Reese Jr. dated July 11, 1999. (incorporated as
Exhibit 10.2 in Company's Report on Form 8-K filed
July 12, 1999)
10.74 Voting Agreement between Digital River and Joel A.
Ronning dated July 11, 1999. (incorporated as
Exhibit 10.3 in Company's Report on Form 8-K filed
July 12, 1999)
10.75 Amended and Restated (Second) Stock Option Agreement
and Notice and Acceptance of Exercise dated July 11,
1999, between Joel A. Ronning and MacUSA, Inc. (a
wholly-owned subsidiary of the Registrant).
(incorporated as Exhibit 10.4 in Company's Report on
Form 8-K filed July 12, 1999)
27.1 Financial Data Schedule.
12
<PAGE>
(b) Reports on Form 8-K
On July 12, 1999, the Company filed a report on Form 8-K
reporting that the Company had entered into an agreement
related to the sale of substantially all of its assets,
after certain anticipated dispositions, to Digital River,
Inc., a Delaware corporation.
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, 1999
-------------------------------------------
Chuck Reese, Chief Executive Officer
-------------------------------------------
Jeffrey F. Martin , Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Index Description
- ------------- -----------
<S> <C>
10.71 Agreement for sale and purchase of Tabor Resources, Ltd. By Conjecture
Silver Mines, Inc. dated May 20, 1999.
10.72 Acquisition Agreement between the Registrant and Digital River, Inc.
dated July 11, 1999. (incorporated as Exhibit 10.1 in Company's Report
on Form 8-K filed July 12, 1999)
10.73 Voting Agreement between Digital River and Charles E. Reese Jr. dated
July 11, 1999. (incorporated as Exhibit 10.2 in Company's Report on
Form 8-K filed July 12, 1999)
10.74 Voting Agreement between Digital River and Joel A. Ronning dated
July 11, 1999. (incorporated as Exhibit 10.3 in Company's Report on
Form 8-K filed July 12, 1999)
10.75 Amended and Restated (Second) Stock Option Agreement
and Notice and Acceptance of Exercise dated July 11,
1999, between Joel A. Ronning and MacUSA, Inc. (a
wholly-owned subsidiary of the Registrant).
(incorporated as Exhibit 10.4 in Company's Report on
Form 8-K filed July 12, 1999)
27.1 Financial Data Schedule.
</TABLE>
15
<PAGE>
AGREEMENT FOR SALE AND PURCHASE
This agreement is made this 20th day of May, 1999 between Tech Squared,
Inc., a Minnesota corporation, Seller, and Conjecture Silver Mines, Inc., an
Idaho corporation, Buyer.
Seller is the owner of One Thousand (1,000) shares, being all of the
outstanding shares, of the capital stock of Tabor Resources, Ltd, (Tabor) a
Minnesota corporation.
Buyer desires to acquire, and Seller desires to sell, Seller's shares
of stock in Tabor pursuant to the terms of this agreement.
Now, therefore, in consideration of the mutual benefits to the parties
of the covenants set forth herein, the parties agree as follows:
1. Seller agrees to sell, transfer and convey to Buyer, and Buyer agrees to
purchase and receive from Seller One Thousand (1,000) shares, being all of the
outstanding shares, of the capital stock of Tabor.
2. The price to be paid to Seller by Buyer for the shares of Tabor is $50,000,
payable as follows: Buyer will, upon execution of this Agreement, transfer to
Seller 16,000 shares of the capital stock of LSI Communications, Inc. (LSI), a
Nevada corporation ("LSI Shares"). Buyer agrees that unless Seller is able,
within 90 days from acquiring the shares of LSI, to sell the shares for at least
$50,000, Buyer will pay Seller the difference between the amount Seller is able
to obtain from the sale of the LSI Shares and $50,000 ("shortfall"). Seller may
commence selling all or a portion of the LSI Shares at any time after the
closing of this agreement. Any shortfall will be paid by Buyer in a single cash
payment, due within 15 days after being notified by Seller of a shortfall in the
sale price of the shares. Seller can make such notice upon the earlier of the
time all the LSI Shares have been sold or within 90 days from acquiring the LSI
Shares. By his signature of this Agreement as Guarantor, Bill Campbell, one of
the shareholders of Buyer, guarantees Buyer's obligation stated in this
paragraph.
Buyer represents and warrants that there are no stock transfer restrictions on
the LSI Shares in LSI's books and records, that the LSI shares (I) are validly
authorized, validly issued, fully paid and nonassessable, (ii) have not been
issued and are not owned or held in violation of any preemptive right of stock
holders, (iii) are free and clear of all liens, security interests, pledges,
charges, encumbrances, stock holders agreements and voting trusts, (iv) are not
restricted securities as defined in Rule 144 adopted under the Securities Act of
1933 and will not be restricted upon closing, and (v) are freely transferable
upon closing.
Upon transfer to Seller of the LSI shares, Seller will transfer the Tabor shares
to Buyer.
3. The parties recognize and agree that the outstanding capital shares of Tabor,
hereby transferred from Seller to Buyer, represent ownership of all of the
assets and liabilities of Tabor, including mining property interests in Madison
County, and Lewis and Clark and Jefferson
<PAGE>
Counties, Montana. The mining property interests, particularly those in Lewis
and Clark and Jefferson Counties, represent a liability or potential
liability for clean-up or remediation costs and natural resource damages.
Aside from this representation, Seller makes no representations or warranties
as to the assets of Tabor and no representations or indemnity as to the
liabilities of Tabor. Seller warrants only that it has the full right to sell
and transfer the shares of Tabor held in its name. Buyer expressly assumes
any and all liabilities of Tabor. Buyer hereby agrees to indemnify Seller
against any claims hereafter asserted by third parties arising in any manner
out of actions, failures to act, or property ownership of Tabor, before or
after this sale and purchase.
4. Seller shall, on execution of this agreement, deliver to Buyer the
resignations of the officers, directors and agent for service of process, of
Tabor. Buyer agrees to elect new directors, appoint new officers and designate
an agent for service of process, and to make the required filings to place of
record the names of the new officers, directors and agent in the jurisdictions
in which Tabor is registered.
5. This agreement may be signed in counterpart.
Tech Squared, Inc.
By/s/ Chuck Reese
---------------------------
Chuck Reese, President
Conjecture Silver Mines, Inc.
By/s/ Bill Campbell
---------------------------
Bill Campbell, President
/s/ Bill Campbell
- -------------------------
Bill Campbell, Guarantor
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,273
<SECURITIES> 22
<RECEIVABLES> 2,623<F1>
<ALLOWANCES> 0
<INVENTORY> 1,476
<CURRENT-ASSETS> 6,969
<PP&E> 468<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 107,187
<CURRENT-LIABILITIES> 3,764
<BONDS> 0
263
0
<COMMON> 0
<OTHER-SE> 65,856
<TOTAL-LIABILITY-AND-EQUITY> 107,187
<SALES> 21,620
<TOTAL-REVENUES> 21,620
<CGS> 18,968
<TOTAL-COSTS> 18,968
<OTHER-EXPENSES> 3,489
<LOSS-PROVISION> 173
<INTEREST-EXPENSE> (35)
<INCOME-PRETAX> (947)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (947)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
<FN>
<F1>AMOUNTS REPORTED FOR ACCOUNTS RECEIVABLE AND PROPERTY PLANT & EQUIPMENT ARE
NET AMOUNTS.
</FN>
</TABLE>
