<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 1)
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule
14a-12 240.14a-12
</TABLE>
<TABLE>
<S> <C>
TECH SQUARED INC.
- ------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- ------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, If Other Than the
Registrant)
</TABLE>
Payment of Filing Fee (Check the appropriate box):
<TABLE>
<S>
/ /
/X/
/X/
/ /
<S>
/ / No Fee Required
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1)
Title of each class of securities to which transaction
applies:
COMMON STOCK, PAR VALUE $0.01, OF DIGITAL RIVER, INC.
("DIGITAL RIVER COMMON STOCK")
----------------------------------------------------------
(2)
Aggregate number of securities to which transaction
applies:
2,650,000 SHARES OF DIGITAL RIVER COMMON STOCK
----------------------------------------------------------
(3)
Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
THE FILING FEE OF $11,856 WAS CALCULATED PURSUANT TO
RULE 0-11(c)(2) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED (THE "EXCHANGE ACT"), BY MULTIPLYING 1/50TH OF
1% OF THE SUM OF (1) THE VALUE OF THE DIGITAL RIVER COMMON
STOCK TO BE RECEIVED BY TECH SQUARED INC. IN THE
TRANSACTION AND (2) THE ESTIMATED CONSIDERATION TO BE
RECEIVED FROM THE SALE OF TECH SQUARED'S OPERATING ASSETS.
THE VALUE OF THE DIGITAL RIVER COMMON STOCK WAS DETERMINED
TO BE $21.19 IN ACCORDANCE WITH RULE 0-11(a)(4) OF THE
EXCHANGE ACT BASED ON THE AVERAGE HIGH AND LOW PRICES OF
DIGITAL RIVER COMMON STOCK REPORTED IN THE CONSOLIDATED
REPORTING SYSTEM ON AUGUST 5, 1999.
----------------------------------------------------------
(4)
Proposed maximum aggregate value of transaction:
$59,278,500
----------------------------------------------------------
(5)
Total fee paid: $11,856 (PAID BY TECH SQUARED VIA WIRE
TRANSFER TO THE SEC'S ACCOUNT AT MELLON BANK IN
PITTSBURGH, PENNSYLVANIA.)
----------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the form or schedule and the date of its filing.
(1)
Amount Previously Paid:
----------------------------------------------------------
(2)
Form, Schedule or Registration Statement No.:
----------------------------------------------------------
(3)
Filing Party:
----------------------------------------------------------
(4)
Date Filed:
----------------------------------------------------------
</TABLE>
<PAGE>
PRELIMINARY PROXY STATEMENT-PROSPECTUS--SUBJECT TO COMPLETION
[TECH SQUARED INC. LOGO] [date]
SPECIAL MEETING OF THE SHAREHOLDERS OF TECH SQUARED INC.
YOUR VOTE IS VERY IMPORTANT
Dear Shareholder,
You are cordially invited to attend a special meeting of shareholders of
Tech Squared Inc. to be held at [address], on [date], at [ ] a.m., local time.
At the special meeting, you will be asked to approve the voluntary
dissolution of Tech Squared pursuant to the Plan of Liquidation and Dissolution
approved by your board of directors. The voluntary dissolution will be
accomplished by the following transactions:
(1) the sale or other disposition of the operating assets of the company,
including our catalog and distribution businesses, on terms to be approved by
the board of directors,
(2) the transfer to Digital River, Inc. of the 3,000,000 shares of Digital River
common stock currently held by our wholly owned subsidiary, MacUSA, Inc., and
$1.2 million in cash in exchange for 2,650,000 newly issued shares of Digital
River common stock,
(3) the transfer to a liquidating trust of cash and a portion of the Digital
River common stock received in the exchange to pay actual and potential
liabilities of Tech Squared,
(4) the distribution of the remaining shares of Digital River common stock
received in the exchange to you and
(5) the dissolution of Tech Squared under Minnesota law.
Digital River's common stock is listed on the Nasdaq National Market under
the symbol "DRIV."
The voluntary dissolution of Tech Squared cannot be completed unless it is
approved by the holders of a majority of Tech Squared common stock entitled to
vote at the special meeting. Only shareholders who hold their shares of Tech
Squared common stock at the close of business on [record date] will be entitled
to vote at the special meeting.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE
VOLUNTARY DISSOLUTION OF THE COMPANY PURSUANT TO THE PLAN OF LIQUIDATION AND
DISSOLUTION IS FAIR TO YOU AND IN YOUR BEST INTERESTS. THE BOARD OF DIRECTORS
HAS APPROVED THE VOLUNTARY DISSOLUTION OF THE COMPANY AND RECOMMENDS THAT THE
SHAREHOLDERS VOTE IN FAVOR OF THE PROPOSAL TO DISSOLVE THE COMPANY PURSUANT TO
THE PLAN OF LIQUIDATION AND DISSOLUTION ATTACHED AS ANNEX A TO THIS PROXY
STATEMENT-PROSPECTUS.
This proxy statement-prospectus provides you with detailed information
concerning the voluntary dissolution of Tech Squared and the transactions
contemplated thereby. This document also serves as the prospectus of Digital
River related to the issuance of shares of Digital River common stock and the
distribution of such shares by Tech Squared to its shareholders pursuant to the
Plan of Liquidation and Dissolution. Please give all of the information
contained in this proxy statement-prospectus your careful attention. IN
PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE SECTION ENTITLED
"RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROXY STATEMENT-PROSPECTUS.
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION. THE COMMISSION HAS
NOT PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
Please use this opportunity to take part in the affairs of Tech Squared by
voting on the approval of the voluntary dissolution pursuant to the Plan of
Liquidation and Dissolution. Whether or not you plan to attend the meeting,
please complete, sign, date and return the accompanying proxy in the enclosed
self-addressed stamped envelope. Returning your proxy does NOT deprive you of
your right to attend the meeting and to vote your shares in person, should you
choose to do so. YOUR VOTE IS VERY IMPORTANT.
We appreciate your interest in Tech Squared and your consideration of this
matter.
Charles E. Reese, Jr.
Director, Chief Executive
Officer and President
This proxy statement-prospectus is dated [ ] and was first mailed to
shareholders on or about [ ].
Tech Squared Inc.
6690 Shady Oak Road
Eden Prairie, Minnesota 55344
(612) 832-5622
<PAGE>
TECH SQUARED INC.
---------------------
NOTICE OF SPECIAL MEETING OF TECH SQUARED SHAREHOLDERS
------------------------
[DATE]
AT [ ] A.M.
To Tech Squared Shareholders:
Notice is hereby given that a special meeting of shareholders of Tech
Squared Inc. will be held on [Date] at [ ] a.m. local time at [address],
for the following purposes:
1. To approve the voluntary dissolution of Tech Squared in accordance with
the following resolution adopted by the board of directors of Tech
Squared:
"RESOLVED, that Tech Squared Inc. be voluntarily dissolved pursuant
to the Plan of Liquidation and Dissolution approved by the board of
directors and attached as Annex A to the proxy statement-prospectus
dated as of [ ]."
2. To transact such other business as may properly come before the special
meeting.
These items of business are described in the attached proxy
statement-prospectus. Only holders of record of Tech Squared common stock at the
close of business on [Date], the record date, are entitled to vote on the
matters listed in this Notice of Special Meeting of Tech Squared Shareholders.
You may vote in person at the Tech Squared special meeting even if you have
returned a proxy.
By Order of the Board of Directors
of Tech Squared Inc.
Charles E. Reese, Jr.
Chief Executive Officer
Eden Prairie, Minnesota
[ ], 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING,
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY
IN THE ENCLOSED SELF-ADDRESSED STAMPED ENVELOPE.
<PAGE>
<TABLE>
<S> <C>
TECH SQUARED INC. DIGITAL RIVER, INC.
PROXY STATEMENT PROSPECTUS
</TABLE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of the Proxy Statement-Prospectus................... 1
The Companies............................................. 2
Summary of the Transaction and Special Factors............ 3
Digital River Selected Historical Financial Data.......... 11
Tech Squared Selected Historical Financial Data........... 12
Comparative Per Share Data................................ 13
Comparative Per Share Market Price Data................... 13
Risk Factors................................................ 14
Risks Relating to the Transaction......................... 14
Tech Squared might not be able to receive reasonable
value from the sale of its operating assets............ 14
The total value you receive upon liquidation is subject
to many variables and risks, many of which will not be
known at the time of the vote.......................... 14
The distribution to you of Digital River common stock in
the liquidation of Tech Squared may not be treated as a
tax-free reorganization under the Internal Revenue
Code................................................... 14
The merger of MacUSA with and into Tech Squared may not
be treated as a tax-free liquidation under the Internal
Revenue Code........................................... 15
If the liquidating trust does not have sufficient assets
to pay all liabilities of Tech Squared, creditors may
seek recovery from shareholders, but in no event can
they recover more than you receive in the
liquidation............................................ 15
Your beneficial interests in the liquidating trust will
not be transferrable................................... 16
The trustee might not distribute funds sufficient to pay
your tax liability arising from sales of assets by the
liquidating trust...................................... 16
Risks Relating to the Investment in Digital River......... 16
Because of Digital River's limited operating history, it
may not be successful in addressing risks associated
with a new business.................................... 16
Digital River may not be profitable in future periods
because of its expansion plans......................... 16
Digital River's operating results are subject to
significant fluctuations which would likely affect the
trading price of its common stock...................... 17
Digital River's dependence on certain clients and its
lengthy sales cycles could negatively affect its
business............................................... 17
Digital River's success depends on growth in end-user
acceptance of ESD which is highly uncertain............ 18
A slowdown in the growth of electronic commerce and the
failure of the Internet to remain a commercial
marketplace could hurt Digital River's business........ 18
Digital River is entirely dependent upon the software
publishers that supply it with software, and the
availability of such software is unpredictable......... 18
If Digital River is unable to expand its relationships
with online retailers, Digital River will likely be
unable to continue to grow its business and establish
meaningful market share................................ 19
Digital River's vulnerability to lack of capacity,
system failure and system development risks could hurt
its business........................................... 19
Digital River is subject to electronic commerce security
risks and a security break could hurt its business..... 20
Digital River faces intense competition and could make
pricing, service or marketing decisions or acquisitions
that could harm its business........................... 20
Digital River is subject to rapid technological change
which could render Digital River's technology and
systems obsolete....................................... 21
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
If Digital River is unable to add additional key
personnel and to install management information and
control systems efficiently, its business could be
harmed................................................. 21
If Digital River is unable to successfully implement its
development and acquisition strategy, its business
could be harmed........................................ 22
Any loss of Digital River's personnel or inability to
add new personnel could harm Digital River's
business............................................... 22
Digital River has limited protection of its intellectual
property, and any failure to protect its intellectual
property could hurt Digital River's business........... 22
Digital River could be liable for software products
content................................................ 23
Digital River's inability to obtain additional funding
for future capital needs could harm its business....... 23
Government regulation and legal uncertainties could add
additional costs and risks to doing business on the
Internet and could harm Digital River's business....... 24
There are risks associated with international sales that
could harm Digital River's business.................... 24
Digital River's failure to collect sales and other taxes
could harm its business................................ 25
Digital River's stock ownership is concentrated in
certain existing shareholders which could make certain
transactions more difficult or impossible to
complete............................................... 25
Digital River's stock price has been and could be highly
volatile............................................... 25
The Special Meeting of Tech Squared Shareholders............ 27
Date, Time and Place of the Special Meeting............... 27
Purpose of the Special Meeting............................ 27
Shareholder Record Date for the Special Meeting........... 27
Vote of Tech Squared Shareholders Required for Approval of
the Voluntary Dissolution............................... 27
Proxies................................................... 27
The Voluntary Dissolution and the Plan of Liquidation and
Dissolution............................................... 29
General................................................... 29
Background of the Transaction............................. 30
Tech Squared's Reasons for the Transaction................ 32
Digital River's Reasons for the Transaction............... 35
Digital River's Determination that the Transaction is Fair
to Tech Squared's Shareholders.......................... 35
Recommendation of Tech Squared's Board of Directors....... 36
Opinion of Tech Squared's Financial Advisor............... 36
Interests of Certain Persons in the Transaction........... 43
Opinion of Digital River's Financial Advisor.............. 44
Material United States Federal Income Tax Consequences of
the Transaction......................................... 49
Tax Implications to Tech Squared's Shareholders......... 49
Tax Implications to Tech Squared and MacUSA............. 51
Proposed Legislation.................................... 52
Accounting Treatment of the Transaction................... 52
Sale of Operating Assets................................ 52
The Exchange............................................ 52
The Liquidation......................................... 53
Regulatory Filings and Approvals Required to Complete the
Voluntary Dissolution................................... 53
Restrictions on Sales of Shares by Affiliates of Digital
River................................................... 53
Listing on the Nasdaq National Market of the Common Stock
to be Issued by Digital River........................... 53
Dissenters' Appraisal Rights.............................. 54
Delisting and Deregistration of Tech Squared Common Stock
After the Transaction................................... 54
The Sale of Operating Assets.............................. 54
The Acquisition Agreement................................. 54
The Exchange............................................ 55
No Assumption of Liabilities............................ 55
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Representations and Warranties.......................... 55
Covenants and Agreements................................ 56
Conditions to Completion of the Exchange................ 57
Indemnification......................................... 57
Termination of the Acquisition Agreement................ 58
Amendment; Waiver....................................... 58
The Liquidating Trust Agreement........................... 59
The Liquidating Trust................................... 59
Beneficiaries........................................... 59
The Trustee............................................. 59
Duration................................................ 59
Distributions........................................... 59
Reports................................................. 60
Duties, Rights and Powers of the Trustee................ 60
Amendment............................................... 60
The Voting Agreements..................................... 60
Comparative Per Share Market Price Data..................... 61
Comparison of Rights of Holders of Tech Squared Common Stock
and Digital River Common Stock............................ 62
Capitalization and Voting Rights.......................... 62
Size and Classification of the Board of Directors......... 62
Removal of Directors...................................... 62
Vacancies................................................. 62
Shareholder Action........................................ 63
Fair Price Provision...................................... 63
Amendments to Certificates of Incorporation............... 64
Amendments to By-laws..................................... 64
Shareholder Rights Plan................................... 64
Nomination Procedures and Shareholder Proposals........... 64
Special Shareholder Meetings.............................. 65
Indemnification of Directors and Officers................. 65
Limitation of Personal Liability of Directors............. 66
Intercompany Agreements and Agreements With Affiliates...... 66
Share Ownership by Principal Shareholders, Management and
Directors of Tech Squared................................. 68
Certain Legal Matters....................................... 69
Experts..................................................... 70
Expenses.................................................... 70
Where You Can Find More Information......................... 70
Statements Regarding Forward-Looking Information............ 72
Annex A--Plan of Liquidation and Distribution of Tech
Squared Inc............................................... A-1
Annex B--Acquisition Agreement.............................. B-1
Annex C--Form of Tech Squared Inc. Liquidating Trust
Agreement................................................. C-1
Annex D--Voting Agreement................................... D-1
Annex E--Opinion of SG Cowen Securities Corporation......... E-1
Annex F--Opinion of Arthur Andersen LLP..................... F-1
Annex G--Opinion of Broadview International LLC............. G-1
Annex H--Letter of Intent with Virtual Technology
Corporation............................................... H-1
Exhibit 1--Tech Squared Annual Report on Form 10-K, as
amended on October [ ], 1999, for the fiscal year ended
December 31, 1998......................................... Ex. 1-1
Exhibit 2--Tech Squared Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999.................. Ex. 2-1
</TABLE>
iii
<PAGE>
TECH SQUARED INC. DIGITAL RIVER, INC.
SUMMARY OF THE PROXY STATEMENT-PROSPECTUS
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO
YOU. YOU SHOULD CAREFULLY READ THIS ENTIRE DOCUMENT AND THE OTHER DOCUMENTS WE
REFER TO FOR A MORE COMPLETE UNDERSTANDING OF THE VOLUNTARY DISSOLUTION AND THE
TRANSACTIONS CONTEMPLATED THEREBY. IN PARTICULAR, YOU SHOULD READ THE DOCUMENTS
ATTACHED TO THIS PROXY STATEMENT-PROSPECTUS, INCLUDING THE PLAN OF LIQUIDATION
AND DISSOLUTION, THE ACQUISITION AGREEMENT, AS AMENDED, THE LIQUIDATING TRUST
AGREEMENT AND THE VOTING AGREEMENTS, WHICH ARE ATTACHED AS ANNEXES A, B, C AND
D, RESPECTIVELY. WE HAVE INCLUDED WITH THIS MAILING TECH SQUARED'S ANNUAL REPORT
ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, AS AMENDED ON
OCTOBER [ ], 1999, AND THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 1999 AS EXHIBITS 1 AND 2, RESPECTIVELY. WE ALSO HAVE INCORPORATED BY
REFERENCE INTO THIS PROXY STATEMENT-PROSPECTUS IMPORTANT BUSINESS AND FINANCIAL
INFORMATION ABOUT DIGITAL RIVER. YOU MAY OBTAIN THE INFORMATION INCORPORATED BY
REFERENCE INTO THIS PROXY STATEMENT-PROSPECTUS WITHOUT CHARGE BY FOLLOWING THE
INSTRUCTIONS IN THE SECTION ENTITLED "WHERE YOU CAN FIND MORE INFORMATION" ON
PAGE 70 OF THIS PROXY STATEMENT-PROSPECTUS.
1
<PAGE>
THE COMPANIES
TECH SQUARED INC.
6690 Shady Oak Road
Eden Prairie, Minnesota 55344
(612) 832-5622
Tech Squared is a national direct marketer and distributor of microcomputer
hardware and software products for users of Apple Macintosh personal computers
as well as for users of IBM compatible personal computers.
Tech Squared's primary business focus is on marketing and selling to
businesses in the desktop publishing industry and to value-added resellers and
other dealers. Tech Squared markets its products to the desktop publishing and
related industries through targeted mailings of its DTP Direct catalog. Tech
Squared markets its products to developers of internal corporate intranet and
external Internet sites and managers of local area networks and wide area
networks through its Net Direct catalog. The company's distribution business
focuses on sales of hardware and software products to computer retailers,
value-added resellers and other resellers through outbound telemarketing
activities. A fax and e-mail broadcast system is used to update dealers on
current pricing and special offers. Tech Squared employs approximately 65
people.
MacUSA, a wholly owned subsidiary of Tech Squared, currently owns 3,000,000
shares of Digital River, Inc. common stock, which it received through the recent
exercise of its option to purchase the shares for an aggregate price of ninety
three cents. As of August 31, 1999, this investment in Digital River represented
91.6% of Tech Squared's consolidated assets.
Tech Squared common stock is traded on the OTC Bulletin Board under the
symbol "TSQD."
DIGITAL RIVER, INC.
9265 West 76(th) Street, Suite 150
Eden Prairie, Minnesota 55344
(612) 253-1234
Digital River is a leading provider of comprehensive electronic commerce
outsourcing solutions to software publishers and online retailers. Digital River
has developed a technology platform that allows it to provide a suite of
electronic commerce services to its software publisher and online retailer
clients, including electronic software delivery.
Digital River also provides data mining and merchandising services to assist
its clients in increasing Internet traffic to, and sales through, their Web
stores. Digital River provides an outsourcing solution that allows its clients
to promote their own brands while leveraging Digital River's investment in
infrastructure and technology. Digital River employs approximately 200 people.
Digital River common stock is traded on the Nasdaq National Market under the
symbol "DRIV."
2
<PAGE>
SUMMARY OF THE TRANSACTION AND SPECIAL FACTORS
PLAN OF LIQUIDATION AND DISSOLUTION
(SEE PAGE 29)
The voluntary dissolution will take place in accordance with the Plan of
Liquidation and Dissolution, attached as Annex A, and will involve the
completion of the following transactions in the order set forth below:
- - the sale or other disposition of our operating assets, including our catalog
and distribution businesses, on terms to be negotiated and approved by the
board of directors;
- - the transfer to Digital River of the 3,000,000 shares of Digital River common
stock currently held by our wholly owned subsidiary, MacUSA, and $1.2 million
in cash in exchange for 2,650,000 newly issued shares of Digital River common
stock;
- - the establishment of a liquidating trust to provide for the payment of the
actual and potential liabilities of Tech Squared; and
- - the liquidation of Tech Squared.
Tech Squared will transfer to the liquidating trust an amount of assets
which, in the judgment of your board of directors, will be sufficient to satisfy
the requirements of Minnesota law and sufficient to pay or adequately provide
for the payment of any known, actual or contingent liabilities of Tech Squared.
As of the date of this proxy statement-prospectus, Tech Squared's board of
directors intends to contribute assets worth approximately $6.2 million to the
liquidating trust for the payment of liabilities and to limit Digital River's
right to terminate the Acquisition Agreement discussed herein. This amount is
subject to change and may not be known until after the date of the special
meeting. The assets to be contributed to the trust will be primarily a portion
of the Digital River common stock received in the exchange.
You will have a beneficial interest in the liquidating trust in the same
proportion as your ownership of Tech Squared common stock.
After the liquidating trust is established, Tech Squared will be liquidated
and the assets remaining after the contribution to the liquidating trust will be
distributed to you as soon as practicable following the winding up of Tech
Squared's affairs. The assets will consist of the Digital River common stock
received in the exchange. The Digital River stock will be distributed on a pro
rata basis and fractional shares will be rounded to the nearest whole share.
Tech Squared will then be dissolved in accordance with Minnesota law. Your
shares of Tech Squared common stock will be cancelled as part of the voluntary
dissolution.
The trustee of the liquidating trust must make distributions of the assets
of the trust to the holders of beneficial interests of the trust, at least
annually and also after any event that results in a significant reduction in
Tech Squared's liabilities, unless it determines that any such distribution
would be inconsistent with the purposes of the trust. After the trustee is
satisfied that all of Tech Squared's liabilities have been paid by the
liquidating trust, the trust will be terminated and its remaining assets, if
any, will be distributed to you in proportion to your beneficial interest in the
trust.
The sale of operating assets, the exchange with Digital River, and the
liquidation and dissolution of Tech Squared are sometimes referred to in this
proxy statement-prospectus, together, as the "Transaction."
A shareholder of Tech Squared has commenced litigation seeking to prevent
the transaction with Digital River. Such litigation is described more fully in
"Certain Legal Matters." The sale or other disposition of our operating assets
is not contingent upon completion of the transaction with Digital River.
The number of shares of Digital River common stock that Tech Squared will
receive in the exchange with Digital River is fixed. The number of shares that
you will initially receive in the liquidation of Tech Squared is not fixed. You
will receive your proportionate share of 2,650,000 shares, the amount received
by Tech Squared, minus the number of shares that are contributed to the
liquidating trust.
The number of shares contributed to the liquidating trust will depend on the
amount of available cash, including proceeds received from
3
<PAGE>
the sale of the company's operating assets, the estimated amount of the
company's liabilities and the market price of Digital River common stock.
MOST OF THESE FACTORS WILL NOT BE QUANTIFIED AT THE TIME OF THE SHAREHOLDER
VOTE; THEREFORE, YOU WILL NOT KNOW HOW MUCH YOU WILL RECEIVE AS A RESULT OF THE
LIQUIDATION WHEN YOU VOTE ON THE PROPOSAL TO APPROVE THE VOLUNTARY DISSOLUTION
OF THE COMPANY PURSUANT TO THE PLAN OF LIQUIDATION AND DISSOLUTION.
An illustration of the number of shares of Digital River stock that could be
contributed to the liquidating trust and the number of shares available for
distribution to Tech Squared shareholders shortly after the dissolution of Tech
Squared is set forth below. It is based on the following assumptions:
- - assets having a total value of $6.2 million will be contributed to the
liquidating trust;
- - cash available for distribution to the liquidating trust will be $1 million;
and
- - a price of Digital River stock of $20.25, which was the closing price on
September 22, 1999.
Based on the above, 256,790 shares of Digital River stock would be
contributed to the liquidating trust and 2,393,210 shares would be distributed
to Tech Squared shareholders. If these assumptions remained unchanged except
that the price of Digital River common stock was $25 or $30, the number of
shares distributed to shareholders would be 2,442,000 or 2,476,667 respectively.
Assuming that all outstanding options of Tech Squared are exercised, there
would be 14,582,824 outstanding shares of Tech Squared stock at the time of the
dissolution. This would mean that Tech Squared shareholders would receive 0.164
shares of Digital River stock for each share of Tech Squared stock.
The actual number of Digital River shares which will be contributed to the
liquidating trust and the number of Digital River shares available for
distribution to shareholders will probably be different than in the foregoing
illustration, and the difference could be material.
The board of directors of Tech Squared considered the fact that the number
of shares of Digital River common stock that you will receive will not be a
fixed amount. If the number of shares you receive is lower than the number you
would have received based on the facts and assumptions as of July 11, 1999, the
date on which the Transaction was approved by the board of directors, it will be
primarily because the value of the net assets of Tech Squared at the time of
liquidation will be lower than the currently assumed value. The board of
directors believes that this should not affect the desirability of the
Transaction or its fairness to you.
SALE OF OPERATING ASSETS
(SEE PAGE 54)
Tech Squared and its wholly owned subsidiary, MacUSA, will first sell or
otherwise dispose of their operating assets. The sale or other disposition will
be on terms to be negotiated and approved by the board of directors. After the
sale, MacUSA will merge with and into Tech Squared.
A non-binding letter of intent has been signed by Tech Squared and Virtual
Technology Corporation which contemplates the sale of the operating assets for
$1 million plus their net book value. As of August 31, 1999, the net book value
of the operating assets was $2,001,368.
The complete non-binding letter of intent between Tech Squared and Virtual
Technology is attached as Annex H. We urge you to read it in its entirety.
The sale of the operating assets will occur as soon as practicable after the
shareholders' meeting. If a transaction is consummated with Virtual Technology
Corporation, it is anticipated that the closing will occur within five days
after the shareholders' meeting.
Closing of the sale or other disposition of the operating assets of Tech
Squared is not contingent upon completion of the transaction with Digital River.
4
<PAGE>
THE ACQUISITION AGREEMENT
(SEE PAGE 54)
MacUSA owns 3,000,000 shares of Digital River common stock which will be
transferred to Tech Squared as a result of the merger of MacUSA with and into
Tech Squared. Tech Squared will then transfer the 3,000,000 shares of Digital
River common stock and $1.2 million in cash to Digital River in exchange for
2,650,000 newly issued shares of Digital River common stock. This transaction is
sometimes referred to in this proxy statement-prospectus as the "Exchange."
Digital River will not assume any of the liabilities of Tech Squared. The
Exchange will take place according to the terms of the Acquisition Agreement
attached as Annex B. You are urged to read the Acquisition Agreement in its
entirety.
The following conditions must be satisfied or waived before the Exchange can
be completed:
- - the voluntary dissolution must be approved by Tech Squared shareholders;
- - the sale or other disposition of the operating assets of Tech Squared and
MacUSA must be completed;
- - the representations and warranties of the parties to the Acquisition Agreement
must be true and correct;
- - Tech Squared and Digital River must have received an opinion from Arthur
Andersen LLP and Digital River must have received an opinion from Cooley
Godward LLP to the effect that the Exchange and the liquidation of Tech
Squared should constitute a tax-free reorganization under the Internal Revenue
Code;
- - the reasonable determination by Digital River that it will not become
responsible for any liabilities of Tech Squared;
- - the shares of Digital River common stock to be issued to Tech Squared must
have been approved for listing on the Nasdaq National Market; and
- - no injunction or order preventing the completion of the Exchange may be in
effect.
THE LIQUIDATING TRUST AGREEMENT
(SEE PAGE 59)
The Liquidating Trust Agreement establishes a trust whose sole purpose is to
provide for the payment of actual and potential liabilities of Tech Squared.
Known actual liabilities include those related to ceasing operations such as
lease obligations, employee termination expenses and expenses incurred in the
normal course of business which remain unpaid at closing. Known potential
liabilities are primarily related to the pending lawsuit by Tech Squared's
former chief executive officer and the pending shareholder derivative lawsuit.
Such lawsuits are described in "Certain Legal Matters" at page 69 of this proxy
statement-prospectus.
As noted above, pursuant to the Plan of Liquidation and Dissolution, Tech
Squared shareholders will receive beneficial interests in the trust upon the
liquidation of Tech Squared. The initial Trustee will be Norwest Bank Minnesota,
National Assocation. You will not be able to transfer your beneficial interests
in the liquidating trust except by will or by operation of law.
IF THE ASSETS IN THE LIQUIDATING TRUST ARE NOT SUFFICIENT TO PAY ALL OF TECH
SQUARED'S LIABILITIES, CREDITORS MAY BRING A CLAIM AGAINST THE FORMER
SHAREHOLDERS OF TECH SQUARED IN PROPORTION TO THE DISTRIBUTION THEY RECEIVED IN
THE LIQUIDATION OF TECH SQUARED. HOWEVER, IN NO EVENT WILL ANY SHAREHOLDER'S
LIABILITY TO CREDITORS EXCEED THE AMOUNT WHICH THE SHAREHOLDER ACTUALLY RECEIVED
IN CONNECTION WITH THE PLAN OF LIQUIDATION AND DISSOLUTION.
The Liquidating Trust Agreement is attached as Annex C. You are urged to
read it in its entirety.
REASONS FOR THE TRANSACTION
(SEE PAGE 32)
TECH SQUARED'S REASONS FOR THE TRANSACTION
Tech Squared's, MacUSA's and Joel Ronning's reasons for the Transaction
include:
- - the continued losses generated by Tech Squared's operating businesses and the
costs
5
<PAGE>
and uncertain prospects relating to the recently established Net Direct
business;
- - constraints on Tech Squared's ability to realize, or to allow its shareholders
to realize, the value of the shares of Digital River common stock beneficially
owned by it;
- - the market price of the company's investment in Digital River common stock
compared to the market valuation of Tech Squared;
- - the value of the Digital River common stock beneficially owned by Tech Squared
in comparison to the value of the company's operating assets, and the
implications of registration under the Investment Company Act of 1940 and
other issues and expenses associated with becoming a registered investment
company;
- - the income tax consequences of various alternatives available to the company;
- - the fairness opinion of SG Cowen; and
- - the benefits to Tech Squared shareholders of a direct rather than an indirect
interest in Digital River common stock.
The above-described business reasons compelled Tech Squared to consider
strategic alternatives for its business, including its investment in Digital
River. Absent these business considerations, Tech Squared has no desire to sell
its shares of Digital River common stock.
Tech Squared compared the Transaction to a dividend or other distribution of
its existing shares of Digital River common stock to its shareholders. Although
this would allow the shareholders to continue their investment in Digital River,
the distribution would create tax liability for both Tech Squared and the
shareholders. Before such distribution, it would be necessary for Tech Squared
to sell approximately 40 percent of its holdings of Digital River to fund the
payment of income taxes. In addition, the distribution would be a taxable event
for shareholders. Therefore, such an alternative is not as beneficial to
shareholders as the Exchange followed by the liquidation and dissolution of the
company pursuant to the Plan of Liquidation and Dissolution.
DIGITAL RIVER'S REASONS FOR THE TRANSACTION
Digital River's reasons for the Transaction include:
- - the enhancement of Digital River's shareholder value through the reduction in
the number of shares of Digital River common stock outstanding;
- - the receipt of $1.2 million in cash from Tech Squared;
- - the orderly distribution of the block of shares of Digital River common stock
held by Tech Squared; and
- - the reduction in the concentration of Digital River's stock ownership.
Digital River also considered the following factors in reaching the
determination that the Transaction is fair to the Tech Squared shareholders:
- - the strong likelihood that the Tech Squared shareholders would receive a
premium over the recent market price of Tech Squared common stock;
- - the benefits to Tech Squared shareholders of a direct rather than an indirect
interest in Digital River common stock;
- - the reasonable likelihood that the Tech Squared shareholders will avoid double
taxation due to the proposed structure of the Transaction; and
- - the market price of Tech Squared's investment in Digital River common stock
compared to the market valuation of Tech Squared.
SHAREHOLDER APPROVAL
(SEE PAGE 27)
The holders of a majority of the outstanding shares of Tech Squared common
stock must approve the voluntary dissolution pursuant to the Plan of Liquidation
and Dissolution.
Joel A. Ronning and Charles E. Reese, Jr., who as of the record date owned
6,819,168 shares representing approximately 50.00% of the outstanding Tech
Squared common stock, have entered into voting agreements with Digital River
pursuant to which they have agreed to
6
<PAGE>
vote all shares of Tech Squared common stock owned by them in favor of approval
of the voluntary dissolution. The above percentage does not include 249,996
shares subject to options exercisable within 60 days of the date hereof. See
page 68 for details of these options. The Voting Agreements are discussed on
page 60 of this proxy statement-prospectus.
All of the current directors and executive officers of Tech Squared,
including Messrs. Ronning and Reese, as of the record date, owned 6,821,168
shares representing approximately 50.02% of the outstanding Tech Squared common
stock. These individuals intend to vote all shares owned by them in favor of
approval of the voluntary dissolution. This percentage does not include 391,663
shares subject to options exercisable within 60 days of the date hereof.
Assuming compliance with the Voting Agreements, a majority vote of
unaffiliated shareholders is not required to approve the voluntary dissolution.
After approval of the voluntary dissolution, Tech Squared's board of directors
plans to sell or otherwise dispose of all of the company's operating assets,
complete the exchange with Digital River, establish the liquidating trust and
liquidate and dissolve the company. Digital River shareholders are not required
to approve any of the transactions contemplated by the voluntary dissolution and
will not vote.
You are entitled to cast one vote for each share of Tech Squared common
stock you owned as of [ ], 1999, the record date.
RECOMMENDATION OF TECH SQUARED'S BOARD OF DIRECTORS
(SEE PAGE 36)
After careful consideration, your board of directors has determined the
voluntary dissolution to be fair to all Tech Squared shareholders, including
unaffiliated shareholders, and in their best interests. The Transaction treats
all shareholders equally. The material factors underlying the board of
director's belief that the Transaction and the consideration to be received by
the shareholders is fair to all shareholders, including unaffiliated
shareholders, are summarized above and discussed in detail under the headings
"Tech Squared's Reasons for the Transaction" and "Opinion of Tech Squared's
Financial Advisor" of this proxy statement-prospectus.
Two directors, Messrs. Ronning and Reese, abstained from the vote which
approved the voluntary dissolution of Tech Squared pursuant to the Plan of
Liquidation and Dissolution because of their relationship with Digital River,
including their beneficial ownership of Digital River common stock. The
remaining two directors, one of whom is an employee of Tech Squared, unanimously
approved the voluntary dissolution and recommend that the shareholders vote in
favor of the proposal.
TECH SQUARED'S FINANCIAL ADVISOR AND ITS OPINION
(SEE PAGE 36)
SG Cowen was selected by the board of directors to be Tech Squared's
financial advisor. The board of directors selected SG Cowen because it is a
nationally recognized investment banking firm and because, as part of its
investment banking business, SG Cowen is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
SG Cowen delivered an opinion to Tech Squared's board of directors that,
subject to the qualifications described in its opinion, the consideration to be
received by the Tech Squared shareholders in the liquidation of Tech Squared is
fair, from a financial point of view, to the Tech Squared shareholders. The
amount of consideration to be received was determined through negotiations
between Tech Squared and Digital River and not pursuant to recommendations of SG
Cowen.
The board of directors did not believe that it was necessary to retain an
advisor to act solely on behalf of unaffiliated shareholders for the purpose of
negotiating a transaction or preparing a fairness opinion.
7
<PAGE>
The complete opinion of SG Cowen is attached as Annex E. We urge you to read
it in its entirety.
DIGITAL RIVER'S FINANCIAL ADVISOR AND ITS OPINION
(SEE PAGE 44)
Digital River retained Broadview International LLC to serve as a financial
advisor to the board of directors of Digital River with respect to the fairness,
to the Digital River shareholders, of the consideration to be received by
Digital River in the Transaction. In rendering its opinion as to the fairness of
the Transaction to Digital River shareholders, Broadview considered the
following factors:
Digital River's opportunity to repurchase shares of Digital River common
stock at a discount, thus enhancing shareholder value; the structure of the
Transaction limits Digital River's exposure to Tech Squared's known and unknown
liabilities; and the agreement by certain members of Tech Squared's management
to restrictions on their ability to immediately transfer their shares of Digital
River common stock.
The complete opinion of Broadview International LLC is attached as Annex G.
We urge you to read it in its entirety.
PROCEDURE FOR CASTING YOUR VOTE
(SEE PAGE 27)
Please mail your signed proxy card in the enclosed return envelope as soon
as possible so that your shares of Tech Squared common stock may be represented
at the special meeting. If you do not include instructions on how to vote your
properly executed proxy, your shares will be voted FOR approval of the voluntary
dissolution.
PROCEDURE FOR CASTING YOUR VOTE IF YOUR SHARES ARE HELD BY YOUR BROKER IN STREET
NAME
(SEE PAGE 27)
Your broker will vote your shares only if you provide instructions on how to
vote by following the information provided to you by your broker. IF YOU DO NOT
PROVIDE YOUR BROKER WITH VOTING INSTRUCTIONS, YOUR SHARES WILL NOT BE VOTED AT
THE TECH SQUARED SPECIAL MEETING AND IT WILL HAVE THE SAME EFFECT AS VOTING
AGAINST APPROVAL OF THE VOLUNTARY DISSOLUTION.
PROCEDURE FOR CHANGING YOUR VOTE
(SEE PAGE 27)
If you want to change your vote, just send the Secretary of Tech Squared a
later-dated, signed proxy card before the special meeting or attend the special
meeting and vote in person. You may also revoke your proxy by sending written
notice to the Secretary of Tech Squared before the special meeting.
SOME TECH SQUARED SHAREHOLDERS HAVE ENTERED INTO VOTING AGREEMENTS
(SEE PAGE 60)
Tech Squared shareholders Joel A. Ronning and Charles E. Reese, Jr. have
entered into voting agreements with Digital River. The Voting Agreements require
these Tech Squared shareholders to vote all shares of Tech Squared common stock
beneficially owned by them in favor of approval of the voluntary dissolution.
These Tech Squared shareholders were not paid additional consideration in
connection with the Voting Agreements.
The Tech Squared shareholders who entered into the Voting Agreements
collectively held approximately 50.00% of the outstanding Tech Squared common
stock as of the record date. This percentage does not include shares subject to
options which these shareholders may be deemed to beneficially own.
The Voting Agreements are attached as Annex D. You are urged to read the
Voting Agreements in their entirety.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
(SEE PAGE 43)
When considering the recommendation of Tech Squared's board of directors,
you should be aware that certain Tech Squared officers and directors have
interests in the Transaction that are different from, or in addition to, yours.
In particular, Joel A. Ronning and Charles E. Reese, Jr. presently hold, or
have held, positions as officers and/or directors of both Tech Squared and
Digital River. Perry W.
8
<PAGE>
Steiner, a former director of Tech Squared, is a current officer and director of
Digital River. Mr. Ronning, Mr. Reese and Mr. Steiner are also beneficial owners
of shares of both Tech Squared and Digital River common stock.
As of the record date, current officers and directors of Tech Squared and
their affiliates beneficially owned approximately 51.41% of the outstanding
shares of Tech Squared common stock (including shares subject to options which
these persons may be deemed to beneficially own).
In addition, if the sale of the operating assets outlined in the letter of
intent with Virtual Technology Corporation is completed, it is possible that Mr.
Reese may enter into an employment agreement with Virtual Technology
Corporation.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION
(SEE PAGE 49)
No ruling has been or will be sought from the Internal Revenue Service on
the U.S. federal income tax consequences of the Exchange and the liquidation of
Tech Squared. Completion of the Exchange and the liquidation is conditioned upon
(i) Tech Squared's and Digital River's receipt of an opinion from Arthur
Andersen LLP reaffirming, as of the closing date, the opinion of Arthur Andersen
described in this proxy statement-prospectus under the heading "Material United
States Federal Income Tax Consequences" to the effect that the Exchange and
liquidation should constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Internal Revenue Code and (ii) Digital River's receipt of an
opinion from Cooley Godward LLP to the effect that the Exchange and the
liquidation should constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Code.
Subject to the assumptions and qualifications described in this proxy
statement-prospectus under the heading "Material U.S. Federal Income Tax
Consequences," in the opinion of Arthur Andersen LLP:
(i) Tech Squared's shareholders should not recognize gain or loss for
U.S. federal income tax purposes upon the receipt of Digital River common
stock in connection with the liquidation of Tech Squared, although gain (but
not loss) or dividend income may be recognized to the extent that a Tech
Squared shareholder is deemed to receive property other than shares of
Digital River common stock as a consequence of receiving an interest in the
liquidating trust;
(ii) the tax basis of the Digital River common stock received by Tech
Squared's shareholders in the liquidation should be the same as the tax
basis of the shareholder's shares of Tech Squared common stock which will be
cancelled;
(iii) the holding period, for capital gain purposes, of the Digital River
common stock received in the liquidation should include the holding period
for the shares of Tech Squared common stock, provided that such shares of
Tech Squared common stock were not held for sale to customers as of the
effective date of the Exchange; and
(iv) neither Tech Squared nor MacUSA should recognize gain or loss for
U.S. federal income tax purposes as a result of the Exchange or liquidation.
See "Material United States Federal Income Tax Consequences" on page 49 for
a more detailed discussion of the U.S. federal income tax consequences of the
Exchange and the liquidation.
The complete opinion of Arthur Andersen LLP is attached as Annex F. We urge
you to read it in its entirety.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE EXCHANGE
AND THE LIQUIDATION TO SHAREHOLDERS WILL DEPEND ON THE INDIVIDUAL CIRCUMSTANCES
OF EACH SHAREHOLDER. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS FOR A FULL
UNDERSTANDING OF THE TAX CONSEQUENCES TO THEM OF THE EXCHANGE AND THE
LIQUIDATION.
9
<PAGE>
ACCOUNTING TREATMENT OF THE EXCHANGE
(SEE PAGE 52)
The Exchange will result in a decrease in the net worth of Tech Squared. The
decrease is equal to:
- - the value of 350,000 shares of Digital River common stock, which is the number
of currently held shares to be delivered by Tech Squared to Digital River
minus the number of newly issued shares to be received by Tech Squared in the
Exchange and minus related deferred taxes; plus
- - the $1.2 million in cash to be paid to Digital River minus related deferred
taxes.
Based upon the market value of the Digital River common stock ($20.25 per
share) as of September 22, 1999, or market values of $15, $20 or $25 per share,
the reduction in net worth of Tech Squared would amount to approximately
$8.3 million ($5.6 million net of deferred taxes), $6.5 million ($4.5 million
net), $8.2 million ($5.6 million net), or $10.0 million ($6.7 million net),
respectively.
This decrease will be offset by the remaining deferred taxes related to the
appreciation in value of the Digital River common stock previously recorded in
Tech Squared's financial statements.
Digital River will treat the exchange of shares as a treasury stock
transaction. It will record the $1.2 million of cash, minus transaction
expenses, as a contribution to capital. The Exchange will not have an effect on
Digital River's results of operations.
RESTRICTIONS ON THE ABILITY TO SELL DIGITAL RIVER STOCK
(SEE PAGE 53)
All shares of Digital River common stock received by you in the liquidation
will be freely transferable unless you are considered an "affiliate" of Digital
River under the Securities Act. Shares of Digital River common stock held by
affiliates may only be sold pursuant to a registration statement or an exemption
under the Securities Act.
DISSENTERS' APPRAISAL RIGHTS
(SEE PAGE 54)
Under Minnesota law, you are not entitled to dissenters' appraisal rights in
connection with the voluntary dissolution of Tech Squared.
WHERE YOU CAN FIND MORE INFORMATION
(SEE PAGE 70)
If you have any questions about the voluntary dissolution, please call
Charles E. Reese or Jeffrey Martin of Tech Squared at (612) 832-5622.
FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT-PROSPECTUS
(SEE PAGE 72)
Certain documents incorporated by reference into, and distributed together
with, this proxy statement-prospectus contain forward-looking statements with
respect to Tech Squared's and Digital River's financial condition, results of
operations and business and on the expected impact of the Exchange on Digital
River's financial performance. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions
identify forward-looking statements. These forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially from the results contemplated by
the forward-looking statements. In evaluating the voluntary dissolution, you
should carefully consider the discussion of risks and uncertainties in the
section entitled "Risk Factors" beginning on page 14 of this proxy
statement-prospectus.
10
<PAGE>
DIGITAL RIVER SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data of Digital
River for the periods indicated. The financial data for the period from its
inception on February 9, 1994 through December 31, 1994 and the four fiscal
years ended December 31, 1998 have been derived from the audited consolidated
financial statements of Digital River for such periods. The financial data for
the six months ended June 30, 1999 and June 30, 1998 are unaudited, but in the
opinion of Digital River reflect all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of such data. The data for
the six months ended June 30, 1999 and June 30, 1998 are not indicative of
results of operations for the entire fiscal year. The data should be read in
conjunction with the consolidated financial statements, related notes and other
financial information of Digital River incorporated by reference in this proxy
statement-prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
AS OF OR FOR THE (FEBRUARY 9,
SIX MONTHS ENDED AS OF OR FOR THE 1994) TO
JUNE 30 FISCAL YEAR ENDED DECEMBER 31 DECEMBER 31
------------------- ----------------------------------------- -------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- -------------
(IN THOUSANDS, EXCEPT LOSS PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES.................................. $ 27,521 $ 5,746 $ 20,911 $ 2,472 $ 111 $ -- $ --
NET LOSS................................... (12,022) (5,352) (13,798) (3,485) (689) (143) (8)
PER SHARE DATA:
NET EARNINGS (LOSS)...................... (0.60) (0.47) (1.01) (0.46) (0.13) (0.03) (0.00)
CASH DIVIDENDS DECLARED PER COMMON
SHARE.................................. -- -- -- -- -- -- --
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING............................ 19,900 11,279 13,691 7,514 5,333 5,333 5,333
TOTAL ASSETS............................... $ 90,828 $12,697 $ 80,328 $ 3,405 $1,202 $ 635 $ 783
LONG-TERM OBLIGATIONS...................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
11
<PAGE>
TECH SQUARED SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data for the
periods indicated. The financial data for the five fiscal years ended
December 31, 1998 have been derived from the audited consolidated financial
statements of Tech Squared for such periods. The financial data for the six
months ended June 30, 1999 and June 30, 1998 are unaudited, but in the opinion
of Tech Squared reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of such data. The data for the six
months ended June 30, 1999 and June 30, 1998 are not indicative of results of
operations for the entire fiscal year. The data should be read in conjunction
with the consolidated financial statements, related notes and other financial
information of Tech Squared delivered with this proxy statement-prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS ENDED AS OF OR FOR THE
JUNE 30 FISCAL YEAR ENDED DECEMBER 31
------------------- ----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES..................................... $ 21,620 $18,095 $ 38,800 $36,995 $37,387 $42,136 $46,645
NET EARNINGS (LOSS)........................... (947) (1,548) (536) (1,013) (616) (1,652) 424
PER SHARE DATA:
NET EARNINGS (LOSS)......................... (0.08) (0.14) (0.05) (0.10) (0.06) (0.19) 0.06
CASH DIVIDENDS DECLARED PER COMMON SHARE.... -- -- -- -- -- 0.13 0.03
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING................................. 11,973 10,776 11,051 10,375 10,375 8,721 7,032
TOTAL ASSETS.................................. $107,187 $ 9,158 $117,444 $ 7,600 $ 8,620 $ 9,739 $ 8,971
LONG-TERM OBLIGATIONS......................... $ 248 $ 300 $ 332 $ 515 $ 495 $ 578 $ --
RATIO OF EARNINGS TO FIXED CHARGES(1)......... (2) (2) 35.7x 5.4x (2) (2) 7.1x
</TABLE>
- ------------------------------
(1) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes by fixed charges. Fixed charges for this purpose
include interest expense, preferred stock dividends, and one-third of the
payments on the company's primary operating lease (the portion deemed to be
representative of the interest factor).
(2) Earnings for the six months ended June 30, 1999 and 1998 were inadequate to
cover fixed charges by $1,007,581 and $173,273, respectively. Earnings for
the years ended December 31, 1996 and 1995 were inadequate to cover fixed
charges by $1,044,167 and $1,966,158, respectively.
12
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data for Digital
River common stock and Tech Squared common stock for the periods indicated. The
financial data for the five fiscal years ended December 31, 1998 have been
derived from the respective audited consolidated statements of Digital River and
Tech Squared for such periods. The respective financial data of Digital River
and Tech Squared for the six months ended June 30, 1999 and June 30, 1998,
should be read in conjunction with the respective consolidated financial
statements, related notes and other financial information of Digital River and
Tech Squared appearing elsewhere herein, incorporated by reference into or
delivered with this proxy statement-prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS ENDED AS OF OR FOR THE
JUNE 30 FISCAL YEAR ENDED DECEMBER 31
---------------------- ----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL--DIGITAL RIVER:
NET LOSS PER SHARE............ $(0.60) $(0.47) $(1.01) $(0.46) $(0.13) $(0.03) $(0.00)*
BOOK VALUE PER SHARE.......... 4.02 0.81 3.81 0.25 0.01 0.12 0.14
DIVIDENDS DECLARED PER COMMON
SHARE....................... -- -- -- -- -- -- --
HISTORICAL--TECH SQUARED:
NET EARNINGS (LOSS) PER
SHARE....................... (0.08) (0.14) (0.05) (0.10) (0.06) (0.19) 0.06
BOOK VALUE PER SHARE.......... 5.43 0.22 6.07 0.21 0.12 0.22 0.28
DIVIDENDS DECLARED PER COMMON
SHARE....................... -- -- -- -- -- 0.13 0.03
</TABLE>
- ------------------------
* Net loss for Digital River in 1994 covers the period from its inception on
February 9, 1994 through December 31, 1994.
COMPARATIVE PER SHARE MARKET PRICE DATA
Tech Squared common stock is traded on the OTC Bulletin Board under the
symbol "TSQD." Digital River common stock is traded on the Nasdaq National
Market under the symbol "DRIV."
The following table sets forth the high and low sale prices per share of
Tech Squared common stock and Digital River common stock as reported on the OTC
Bulletin Board and the Nasdaq National Market, respectively, on (1) July 9,
1999, the business day preceding public announcement that Tech Squared and
Digital River had entered into the Acquisition Agreement and (2) October [ ],
1999, the last full trading day for which prices were available at the time of
printing of this proxy statement-prospectus.
<TABLE>
<CAPTION>
TECH SQUARED DIGITAL RIVER
COMMON STOCK COMMON STOCK
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
<S> <C> <C> <C> <C>
July 9, 1999.................................. $4.06 $3.94 $36.13 $34.50
October [ ], 1999............................ $ $ $ $
</TABLE>
Because the market prices of Tech Squared and Digital River common stock may
increase or decrease before the vote on the voluntary dissolution at the special
meeting, you are urged to obtain current market quotations.
13
<PAGE>
RISK FACTORS
A VOTE IN FAVOR OF THE VOLUNTARY DISSOLUTION INVOLVES RISKS SPECIFIC TO THE
SALE OF OPERATING ASSETS, THE EXCHANGE, AND THE LIQUIDATION AND DISSOLUTION. IN
ADDITION, A VOTE IN FAVOR OF THE VOLUNTARY DISSOLUTION MEANS THAT YOU WILL
RECEIVE SHARES OF THE COMMON STOCK OF DIGITAL RIVER. AN INVESTMENT IN DIGITAL
RIVER INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION
DELIVERED WITH, CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT-PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS.
RISKS RELATING TO THE TRANSACTION
TECH SQUARED MIGHT NOT BE ABLE TO RECEIVE REASONABLE VALUE FROM THE SALE OF
ITS OPERATING ASSETS
The value that you ultimately realize as a result of the distribution of
Digital River common stock to you in the liquidation of Tech Squared is
dependent in part on the proceeds received from the sale or other disposition of
our operating assets. It may be difficult to obtain a favorable return when
selling the operating assets in connection with the liquidation and dissolution
of Tech Squared.
As discussed elsewhere in this proxy statement-prospectus, Tech Squared has
entered into a letter of intent with Virtual Technology Corporation for the sale
of its operating assets for $1 million plus their net book value. As of August
31, 1999, the net book value of the operating assets was $2,001,368. The board
of directors of Tech Squared believes that this estimated amount represents a
reasonable consideration for the operating assets. However, the letter of intent
with Virtual Technology Corporation is non-binding and there is no obligation
for either party to proceed with this proposed transaction.
THE TOTAL VALUE YOU RECEIVE UPON LIQUIDATION IS SUBJECT TO MANY VARIABLES
AND RISKS, MANY OF WHICH WILL NOT BE KNOWN AT THE TIME OF THE VOTE
You will initially receive shares of Digital River common stock upon
liquidation of Tech Squared. You will also receive distributions from the
liquidating trust at least annually, unless the trustee determines that any such
distribution would be inconsistent with the purposes of the trust. Later, if
there are assets remaining in the liquidating trust, after the trustee is
satisfied that all liabilities of Tech Squared are paid, the beneficial owners
of the trust will receive cash and/or additional shares of Digital River common
stock in connection with the liquidation of the trust. The value of what you
receive will be a product of various factors and risks including:
- the proceeds received from the sale or other disposition of our operating
assets;
- the amount of Tech Squared's actual and potential liabilities, such as any
payments made in connection with any legal proceeding, including the legal
proceedings referred to on page 69 of this proxy statement-prospectus; and
- the value of Digital River common stock at the time it is first
distributed to you, at such times that it is sold by the liquidating trust
to raise funds to pay Tech Squared's liabilities, and at the time that it
may be distributed to the beneficial owners of the liquidating trust.
Historically, the stock price of Digital River common stock has been subject to
significant volatility. The risks associated with an investment in Digital River
are discussed below, beginning on page 16 of this proxy statement-prospectus.
THE DISTRIBUTION TO YOU OF DIGITAL RIVER COMMON STOCK IN THE LIQUIDATION OF
TECH SQUARED MAY NOT BE TREATED AS A TAX-FREE REORGANIZATION UNDER THE
INTERNAL REVENUE CODE
Neither Tech Squared nor Digital River has obtained a private letter ruling
from the Internal Revenue Service as to the tax treatment of the transaction.
Arthur Andersen LLP, which is the
14
<PAGE>
independent auditor for both Tech Squared and Digital River, has given an
opinion to Tech Squared to the effect that the receipt of shares of Digital
River common stock by Tech Squared as part of the exchange of stock and cash
with Digital River should not be a taxable event for Tech Squared, and that the
receipt of Digital River common stock by you in the liquidation of Tech Squared
should not be a taxable event to either you or Tech Squared. Arthur Andersen
LLP's opinion is based on current law, on information provided to them by
management of Tech Squared and Digital River and on various assumptions. Their
opinion is not binding on the Internal Revenue Service, and the Internal Revenue
Service could determine that the relevant transactions do not qualify as a
tax-free reorganization. Moreover, there are proposals before Congress to change
the tax laws in a way that would make transactions such as those in our Plan of
Liquidation and Dissolution taxable to corporations, and it is possible that any
change in the law could be applicable to the transactions in our Plan of
Liquidation and Dissolution.
If the exchange of stock and cash with Digital River and the liquidation of
Tech Squared is not treated as a tax-free reorganization, Tech Squared will be
subject to tax as a result of the Exchange and you will be subject to tax as a
result of the distribution of Digital River common stock to you upon liquidation
of Tech Squared. Also, as a transferee of assets in liquidation of Tech Squared,
you may be liable for a pro rata share of Tech Squared's income tax liability
from either the Exchange or distribution of Digital River shares. However, the
maximum liability of any shareholder would be the value of Digital River common
stock and assets the shareholder received in connection with the Plan of
Liquidation and Dissolution. In addition, if the Exchange and the liquidation is
not treated as a tax-free reorganization, shareholder value may not be maximized
by the transactions provided for in our Plan of Liquidation and Dissolution.
THE MERGER OF MACUSA WITH AND INTO TECH SQUARED MAY NOT BE TREATED AS A
TAX-FREE LIQUIDATION UNDER THE INTERNAL REVENUE CODE
Tech Squared has not obtained a private letter ruling from the Internal
Revenue Service as to the tax treatment of the liquidation of MacUSA. Arthur
Andersen LLP has given an opinion to Tech Squared to the effect that
distribution of Digital River common stock to Tech Squared in the liquidation of
MacUSA should not be a taxable event to either MacUSA or Tech Squared. Arthur
Andersen LLP's opinion is based on current law, on information provided to them
by management of Tech Squared and Digital River and on various assumptions.
Their opinion is not binding on the Internal Revenue Service, and the Internal
Revenue Service could determine that the distribution is not a tax-free
liquidation.
If MacUSA's transfer of shares of Digital River to Tech Squared is not
treated as a tax-free liquidation, the income taxes payable by MacUSA would be
approximately equal to 40 percent of the market value of such shares on the day
MacUSA merged with and into Tech Squared. As a transferee of assets in
liquidation of Tech Squared, you may be liable for a pro rata share of Tech
Squared's income tax liability resulting from the liquidation. However, the
maximum liability of any shareholder would be the value of Digital River common
stock and assets the shareholder received in connection with the Plan of
Liquidation and Dissolution.
IF THE LIQUIDATING TRUST DOES NOT HAVE SUFFICIENT ASSETS TO PAY ALL
LIABILITIES OF TECH SQUARED, CREDITORS MAY SEEK RECOVERY FROM SHAREHOLDERS,
BUT IN NO EVENT CAN THEY RECOVER MORE THAN YOU RECEIVE IN THE LIQUIDATION
If there are not sufficient assets in the liquidating trust to pay all of
the liabilities of Tech Squared, including potential liabilities, a creditor may
seek payment from the former Tech Squared shareholders in proportion to their
shareholdings. However, the maximum liability of any shareholder would be the
value of the Digital River common stock and assets the shareholder received in
connection with the Plan of Liquidation and Dissolution.
15
<PAGE>
YOUR BENEFICIAL INTERESTS IN THE LIQUIDATING TRUST WILL NOT BE TRANSFERRABLE
You will not be able to transfer the beneficial interests that you receive
in the liquidating trust, except by will or otherwise by operation of law.
THE TRUSTEE MIGHT NOT DISTRIBUTE FUNDS SUFFICIENT TO PAY YOUR TAX LIABILITY
ARISING FROM SALES OF ASSETS BY THE LIQUIDATING TRUST
As discussed more fully under the heading "Material United States Federal
Income Tax Consequences of the Transaction," for tax purposes, the holders of
the beneficial interests in the trust are treated as if they owned the assets of
the trust. If the trustee of the liquidating trust sells assets of the trust to
pay liabilities, you may have taxable income. It is possible that the trustee
might not distribute assets at times or in amounts sufficient to satisfy any
such tax liability.
RISKS RELATING TO THE INVESTMENT IN DIGITAL RIVER
BECAUSE OF DIGITAL RIVER'S LIMITED OPERATING HISTORY, IT MAY NOT BE
SUCCESSFUL IN ADDRESSING RISKS ASSOCIATED WITH A NEW BUSINESS
Digital River has a very limited operating history. Digital River was
incorporated in February 1994 and was considered a development-stage company
through August 1996. Digital River conducted its first online sale through a
client's Web store in August 1996, and is still in the early stages of
development. Digital River's business and prospects must be considered in light
of the risks encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as electronic
commerce. Some of these risks relate to Digital River's ability to:
- maintain or develop relationships with software publishers and online
retailers;
- execute its business and marketing strategy;
- continue to develop and upgrade its technology and transaction-processing
systems;
- provide superior customer service and order fulfillment;
- respond to competitive developments; and
- retain and motivate qualified personnel.
Digital River may not be successful in addressing these risks. Digital
River's expense levels are based largely on its planned operations and its
estimates of future sales. It is difficult, however, for Digital River to
accurately forecast future sales, because its business is still new and its
market is still developing. Digital River may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Accordingly,
if Digital River has lower revenues than expected for any given fiscal quarter,
such shortfall would affect that quarter's financial results. Any significant
shortfall in sales would immediately and adversely affect its financial
condition and operating results. Due to its rapidly evolving business and its
limited operating history, Digital River believes that period-to-period
comparisons of its operating results are not necessarily meaningful and
investors should not rely upon its historical results as an indication of future
performance.
DIGITAL RIVER MAY NOT BE PROFITABLE IN FUTURE PERIODS BECAUSE OF ITS
EXPANSION PLANS
Digital River has incurred significant losses since it was formed. As of
June 30, 1999, Digital River had an accumulated deficit of approximately $30.1
million. Digital River intends to continue to expend significant financial and
management resources on the development of additional services, sales and
marketing, improved technology and expanded operations. As a result, Digital
River expects operating losses and negative cash flows to continue for the
foreseeable future. In addition, Digital River
16
<PAGE>
anticipates its operating losses to increase significantly from current levels.
Digital River's sales may not increase or even continue at their current level,
and Digital River may not be profitable or generate cash from operations in
future periods.
DIGITAL RIVER'S OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
WHICH WOULD LIKELY AFFECT THE TRADING PRICE OF ITS COMMON STOCK
Digital River's quarterly and annual operating results are likely to
fluctuate significantly in the future due to a variety of factors, many of which
are outside of its control. Some of these factors include:
- its ability to retain existing software publishers and online retailers as
clients and to attract new clients;
- the introduction of new Web sites, Web stores, services or products by
Digital River or by others;
- price competition and margin erosion;
- the development of the online market for the purchase of software
products;
- its ability to continue to upgrade and develop its systems and
infrastructure to meet emerging market needs and remain competitive in its
service offerings;
- termination of any account that represents a significant portion of its
sales;
- technical difficulties or system downtime;
- its ability to attract new personnel;
- its ability to increase sales from online retailers;
- the failure of Internet bandwidth to increase over time or any increase in
the cost of Internet bandwidth; and
- U.S. and foreign regulations relating to its business.
Digital River also may offer favorable economic terms to certain software
publishers and online retailers in order to attract or retain their business,
which would reduce its gross margins. In addition, Digital River may experience
a decline in sales in the month of December due to a potential reduction in the
number of hours business end-users spend online over the holidays. Due to these
factors, Digital River's annual or quarterly operating results may not meet the
expectations of securities analysts and investors. If this happens, the trading
price of its common stock would likely significantly decline.
DIGITAL RIVER'S DEPENDENCE ON CERTAIN CLIENTS AND ITS LENGTHY SALES CYCLES
COULD NEGATIVELY AFFECT ITS BUSINESS
Sales initiated through the Web stores of three software publisher clients
collectively accounted for approximately 29% of Digital River's sales in 1997
and 25% of its sales in 1998. Digital River expects that a small percentage of
its clients will continue to account for a substantial portion of its sales for
the foreseeable future. Contracts with these clients are generally short term in
nature. If any one of these contracts is not renewed or otherwise ends, Digital
River's sales, and, in turn, its revenues could be materially adversely
affected.
Digital River markets its services directly to software publishers and
online retailers. These relationships are typically complex and take time to
establish. Due to operating procedures in many large organizations, a
significant amount of time may pass between selection of products by key
decision makers and the signing of a contract. As a result, the period between
the initial sales call and the signing of a contract with a large software
publisher or online retailer typically ranges from six to twelve months, and may
be longer. Therefore, the timing of sales from these software publisher and
online retailer clients is difficult to predict. Delays in signing contracts
with significant software
17
<PAGE>
publisher or online retailer clients could materially adversely affect Digital
River's quarterly financial results.
DIGITAL RIVER'S SUCCESS DEPENDS ON GROWTH IN END-USER ACCEPTANCE OF ESD
WHICH IS HIGHLY UNCERTAIN
Digital River's success will depend in large part on growth in end-user
acceptance of electronic software delivery, or ESD, as a method of distributing
software products. ESD is a relatively new method of distributing software
products and the growth and market acceptance of ESD is highly uncertain and
subject to a number of risks. Factors that will influence market acceptance of
ESD include:
- the availability of sufficient bandwidth to enable purchasers to rapidly
download software products;
- the cost of time-based Internet access;
- the number of software products that are available for purchase through
ESD as compared to those available through physical delivery; and
- the level of end-user comfort with the process of downloading software via
the Internet, including the ease of use and lack of concern about
security.
If ESD does not achieve widespread market acceptance, Digital River's
business may not grow and may decrease. Even if ESD achieves widespread
acceptance, Digital River cannot be certain that it will overcome the
substantial existing and future technical challenges associated with
electronically delivering software reliably and consistently on a long-term
basis.
A SLOWDOWN IN THE GROWTH OF ELECTRONIC COMMERCE AND THE FAILURE OF THE
INTERNET TO REMAIN A COMMERCIAL MARKETPLACE COULD HURT DIGITAL RIVER'S
BUSINESS
Sales of software products using the Internet do not currently represent a
significant portion of overall software sales. Digital River depends on the
growing use and acceptance of the Internet as an effective medium of commerce by
end-users. Rapid growth in the use of and interest in the Internet and other
online services is a recent development. No one can be certain that acceptance
and use of the Internet and other online services will continue to develop or
that a sufficiently broad base of consumers will adopt, and continue to use, the
Internet and other online services as a medium of commerce. Digital River relies
on purchasers of software who have historically used traditional means of
commerce to purchase software products. If Digital River is to be successful,
these software purchasers must accept and use the Internet as a means of
purchasing software and exchanging information and Digital River cannot predict
the rate at which purchasers will do so.
The Internet may fail as a commercial marketplace for a number of reasons,
including potentially inadequate development of the necessary network
infrastructure or delayed development of technologies and performance
improvements. If the number of Internet users or their use of Internet resources
continues to grow, it may overwhelm the existing Internet infrastructure. Delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity or increased governmental regulation could
also have a similar effect. In addition, growth in Internet usage, which is not
matched by comparable growth in the infrastructure supporting Internet usage,
could result in slower response times or adversely affect usage of the Internet.
DIGITAL RIVER IS ENTIRELY DEPENDENT UPON THE SOFTWARE PUBLISHERS THAT SUPPLY
IT WITH SOFTWARE, AND THE AVAILABILITY OF SUCH SOFTWARE IS UNPREDICTABLE
Digital River's contracts with its software publisher clients are generally
one year in duration, with an automatic renewal provision for additional
one-year periods, unless Digital River is provided with a written notice at
least 90 days before the end of the contract. As is common in the industry,
Digital River has no long-term or exclusive contracts or arrangements with any
software publishers that guarantee the availability of software products.
Digital River cannot be certain that the software
18
<PAGE>
publishers that currently supply software to it will continue to do so or that
Digital River will be able to establish relationships with new software
publishers. If Digital River cannot develop and maintain satisfactory
relationships with software publishers on acceptable commercial terms or is
unable to obtain sufficient quantities of software, or if the quality of service
provided by software publishers falls below a satisfactory standard or if
software returned to Digital River exceeds its clients' expectations, Digital
River's business may suffer.
IF DIGITAL RIVER IS UNABLE TO EXPAND ITS RELATIONSHIPS WITH ONLINE
RETAILERS, DIGITAL RIVER WILL LIKELY BE UNABLE TO CONTINUE TO GROW ITS
BUSINESS AND ESTABLISH MEANINGFUL MARKET SHARE
Digital River's strategy is dependent upon increasing its sales of software
products through online retailers. Digital River has historically generated
substantially all of its sales from the sale of software to end-users that were
initiated through the Web stores of its software publisher clients. In 1997 and
1998 less than 6% of its sales were generated through the Web stores of its
online retailer clients. Digital River does not know if it will be successful in
establishing relationships with additional online retailers or if its current
relationships will continue. If Digital River is unable to expand its
relationships with online retailers, Digital River will likely be unable to
continue to grow its business and establish meaningful market share.
DIGITAL RIVER'S VULNERABILITY TO LACK OF CAPACITY, SYSTEM FAILURE AND SYSTEM
DEVELOPMENT RISKS COULD HURT ITS BUSINESS
Digital River provides commerce, marketing and delivery services to software
publishers, online retailers and end-users through its proprietary commerce
network server, or CNS, transaction-processing and client management systems.
The systems also maintain an electronic inventory of products and gather
consumer marketing information. The satisfactory performance, reliability and
availability of the CNS and the underlying network infrastructure are critical
to Digital River's operations, its level of customer service, and its reputation
and ability to attract and retain clients. Digital River's systems and
operations are vulnerable to damage or interruption from fire, flood and other
natural disasters, power loss, telecommunications failure, break-ins and similar
events.
Digital River presently has no offsite back-up facilities and does not carry
sufficient business interruption insurance to fully compensate it for losses
that may occur. Despite the use of network security devices, Digital River's
servers are vulnerable to computer viruses, physical or electronic break-ins and
similar disruptions, which could lead to interruptions, delays, loss of data or
the inability to accept and fulfill end-user orders. Any systems interruption
that impairs Digital River's ability to accept and fill customer orders reduces
the attractiveness of its product and service offerings to software publishers,
online retailers and end-users, which could have an adverse affect on its
revenues.
Digital River has experienced periodic interruptions, affecting all or a
portion of its systems, which it believes will continue to occur from time to
time. Digital River periodically enhances and expands its technology and
transaction-processing systems, network infrastructure and other technologies to
accommodate increases in the volume of traffic on the CNS. Digital River may not
be successful in its efforts to improve and increase the capacity of its network
infrastructure. Digital River may not be able to anticipate increases, if any,
in the use of the CNS or to expand and upgrade its systems and infrastructure to
accommodate such increases. Digital River's inability to add software and
hardware or to develop and upgrade existing technology, transaction-processing
systems or network infrastructure to handle increased traffic on the CNS may
cause unanticipated system disruptions, slower response times and poor customer
service, including problems filling customer orders, any of which could reduce
Digital River's attractiveness to potential customers. In addition, additional
network capacity may not be available from third-party suppliers. Digital
River's network and its suppliers' networks may be unable to maintain an
acceptable data transmission capability, especially if demands on the CNS
increase. Digital River's failure to maintain an acceptable data transmission
capability could significantly reduce demand for its services.
19
<PAGE>
DIGITAL RIVER IS SUBJECT TO ELECTRONIC COMMERCE SECURITY RISKS AND A
SECURITY BREAK COULD HURT ITS BUSINESS
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Digital
River relies on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary for secure
transmission of confidential information, such as customer credit card numbers.
A party who is able to circumvent Digital River's security measures could
misappropriate proprietary information or interrupt its operations. Any such
compromise or elimination of Digital River's security could hinder Digital
River's ability to conduct its business over the Internet.
Digital River may be required to expend significant capital and other
resources to protect against such security breaches or to address problems
caused by such breaches. Concerns over the security of the Internet and other
online transactions and the privacy of users may also inhibit the growth of the
Internet and other online services generally, and the Web in particular,
especially as a means of conducting commercial transactions. To the extent that
activities of Digital River or third-party contractors involve the storage and
transmission of proprietary information, such as credit card numbers, security
breaches could damage Digital River's reputation and expose it to a risk of loss
or litigation. Digital River may incur significant costs to protect against the
threat of security breaches or to alleviate problems caused by these breaches.
DIGITAL RIVER FACES INTENSE COMPETITION AND COULD MAKE PRICING, SERVICE OR
MARKETING DECISIONS OR ACQUISITIONS THAT COULD HARM ITS BUSINESS
The electronic commerce market is new, rapidly evolving and extremely
competitive. Digital River expects competition to intensify in the future,
particularly in the area of electronic sale and distribution of software
products. Digital River currently competes directly with other providers of
electronic commerce solutions, including CyberSource Corp., Preview Systems,
ReleaseNow.com Corporation and ShopNow.com, Inc. Digital River competes
indirectly with software companies that offer tools and services for electronic
commerce, including companies that provide a broad range of Internet and server
solutions such as Microsoft Corp. and Netscape Communications Corp. Digital
River also competes indirectly with a large number of companies that provide
tools and services enabling one or more of the transaction processing functions
of electronic commerce, such as transaction control, data security, customer
interaction and database marketing.
In addition, Digital River competes with companies that use their own
systems to sell and distribute software products via the Internet, including
Amazon.com, Inc., Beyond.com Corporation, Ingram Micro Inc. and Tech Data
Corporation. Digital River also competes with companies such as the AltaVista
division of Compaq Computer Corp., America Online, Inc., Excite@Home, Infoseek
Corporation, Lycos, Inc. and Yahoo! Inc., which specialize in electronic
commerce or derive a substantial portion of their revenues from electronic
commerce. These companies also may offer, or provide means for others to offer,
software products.
The online retailers and the other companies listed above may compete
directly with Digital River by adopting a similar business model. Moreover,
while some of these companies are also clients or potential clients of Digital
River, they may compete with Digital River's electronic commerce outsourcing
solution if they develop electronic commerce systems or acquire such systems
from other software vendors or service providers.
Many of Digital River's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than Digital
River. In addition, larger, well-established and well-financed entities may
acquire, invest in or form joint ventures with online competitors as the use of
the Internet and other online services increases. In addition, new technologies
and the expansion of existing technologies, such as price comparison programs
that select specific titles from a variety of Internet Web sites, may direct
20
<PAGE>
end-users to online retailers that compete with Digital River, which would
increase competitive pressures on Digital River. Increased competition may
result in reduced operating margins, a loss of market share or price reductions.
Digital River may not be able to compete successfully against current and future
competitors, and any inability to do so could decrease its revenues, contribute
to Digital River not achieving profitability and hurt its reputation.
DIGITAL RIVER IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE WHICH COULD RENDER
DIGITAL RIVER'S TECHNOLOGY AND SYSTEMS OBSOLETE
To remain competitive, Digital River must continue to enhance and improve
the responsiveness, functionality and features of the CNS and the underlying
network infrastructure. The Internet and the electronic commerce industry are
characterized by rapid technological change, changes in user requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render Digital River's technology and systems obsolete. Digital River's
success will depend, in part, on its ability to both license and internally
develop leading technologies to enhance its existing services, develop new
services and technology that address the increasingly sophisticated and varied
needs of its clients, and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis. The
development of the CNS technology and other proprietary technology involves
significant technical and business risks. Digital River may fail to use new
technologies effectively or adapt its proprietary technology and systems to
customer requirements or emerging industry standards. If Digital River is unable
to adapt to changing market conditions, client requirements or emerging industry
standards, it may be unable to successfully compete with its competitors.
IF DIGITAL RIVER IS UNABLE TO ADD ADDITIONAL KEY PERSONNEL AND TO INSTALL
MANAGEMENT INFORMATION AND CONTROL SYSTEMS EFFICIENTLY, ITS BUSINESS COULD
BE HARMED
Digital River has rapidly and significantly expanded its operations and
anticipates that further significant expansion will be required to address
potential growth in its client base and market opportunities. From January 1,
1997 to June 30, 1999, Digital River increased its number of employees from 11
to 200. This expansion is placing a significant strain on Digital River's
managerial, operational and financial resources. Most of Digital River's
existing senior management personnel joined Digital River within the last 24
months, including Digital River's president, who joined Digital River in July
1998, Digital River's vice president of marketing, who joined Digital River in
August 1998, Digital River's vice president of sales, who joined Digital River
in February 1999 and Digital River's chief financial officer, who joined Digital
River in April 1998. Joel A. Ronning, Digital River's chief executive officer,
also serves as the chairman of the board of Tech Squared, and as a director of
JASC, Inc., a significant client of Digital River. Digital River's new employees
include a number of key managerial, technical and operations personnel who have
not yet been fully integrated. Digital River expects to add additional key
personnel in the near future, including direct sales and marketing personnel. To
manage the expected growth of its operations and personnel, Digital River will
be required to:
- improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
- install new management information systems; and
- train, motivate and manage its employees.
Digital River may not be able to install management information and control
systems in an efficient and timely manner, and its current or planned personnel,
systems, procedures and controls may not be adequate to support its future
operations. In addition, Digital River may not be able to hire, train, retain,
motivate and manage required personnel or to successfully identify, manage and
21
<PAGE>
exploit existing and potential market opportunities. If Digital River is unable
to manage growth effectively, it may have to direct resources away from the
continued growth of its business and implementation of its business strategy.
IF DIGITAL RIVER IS UNABLE TO SUCCESSFULLY IMPLEMENT ITS DEVELOPMENT AND
ACQUISITION STRATEGY, ITS BUSINESS COULD BE HARMED
To extend Digital River's e-commerce outsourcing capabilities, it has
developed, and intends to continue developing, its CommerceBridge line of
business. Digital River has also acquired, and intends to continue acquiring,
shareware services outsourcing companies. These business initiatives require a
significant expenditure of management time, and sales, marketing and product
development funds. They may cause a disruption in Digital River's ongoing
business, distract management and make it difficult to maintain standards,
controls and procedures. If Digital River makes acquisitions outside of its core
business, assimilating the acquired technology, services or products into its
operations could be difficult. If Digital River is unable to successfully
implement its new business initiatives, Digital River will not generate a
profitable return on its investment and Digital River will not be able to gain
meaningful market share. If a significant number of clients of companies
acquired by Digital River cease doing business with it, Digital River may not be
able to achieve its sales and revenue targets.
ANY LOSS OF DIGITAL RIVER'S PERSONNEL OR INABILITY TO ADD NEW PERSONNEL
COULD HARM DIGITAL RIVER'S BUSINESS
Digital River's future success significantly depends on the continued
services and performance of its senior management, particularly Joel A. Ronning,
its chief executive officer, and Kelly J. Wical, its chief technology officer.
Digital River's performance also depends on its ability to retain and motivate
its other executive officers and key employees. The loss of the services of any
of Digital River's executive officers or other key employees could cause
significant disruption in Digital River's business. Digital River only has
long-term employment agreements with Mr. Ronning and Perry W. Steiner, its
President. Digital River only maintains a "key person" life insurance policy on
Mr. Ronning. Digital River's future success also depends on its ability to
identify, attract, hire, train, retain and motivate other highly skilled
technical, managerial, operations, merchandising, sales and marketing and
customer service personnel. Competition for such personnel is intense, and
Digital River may not successfully attract, assimilate or retain sufficiently
qualified personnel. The failure to retain and attract the necessary personnel
could impede its future success.
DIGITAL RIVER HAS LIMITED PROTECTION OF ITS INTELLECTUAL PROPERTY, AND ANY
FAILURE TO PROTECT ITS INTELLECTUAL PROPERTY COULD HURT DIGITAL RIVER'S
BUSINESS
Trademarks, patents, copyrights, trade secrets and other intellectual
property are critical to Digital River's success, and Digital River relies on
trademark, trade secret protection and confidentiality and/or license agreements
with its employees, clients, partners and others to protect its proprietary
rights. Digital River seeks to protect its proprietary rights by, among other
methods, filing United States and foreign patent applications related to its
proprietary technology, inventions and improvements that are important to the
development of its business. Proprietary rights relating to Digital River's
technologies will be protected from unauthorized use by third parties only to
the extent that they are covered by valid and enforceable patents or copyrights
or are effectively maintained as trade secrets. While Digital River currently
has twelve patent applications pending in the United States, none has been
issued. Pending patent applications may not result in patents being issued.
Digital River has filed certain petitions to correct certain fee deficiencies
for its pending patent applications but these petitions may not be granted. In
addition, the laws of some foreign countries do not protect Digital River's
intellectual property rights to the same extent as do the laws of the United
States. The patent position of high technology companies involves complex legal
and factual questions and, therefore, Digital River
22
<PAGE>
cannot predict their validity and enforceability with certainty. Even if issued,
Digital River's patent applications may be challenged, invalidated, held
unenforceable or circumvented. Further, rights granted under future patents may
not provide proprietary protection or competitive advantages to Digital River
against competitors with similar technology. Others may independently develop
similar technologies or duplicate technologies developed by Digital River.
Digital River has one registered trademark for "Digital River." Effective
trademark and trade secret protection may not be available in every country in
which Digital River's products and services are made available online. The steps
Digital River has taken to protect its proprietary rights may not be adequate,
and third parties may infringe or misappropriate its trade secrets, trademarks,
trade dress and similar proprietary rights. In addition, others may
independently develop substantially equivalent intellectual property. In
addition, litigation may be necessary in the future to enforce Digital River's
intellectual property rights, to protect its trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of management and technical resources.
From time to time Digital River may receive notice of claims of infringement
of other parties' proprietary rights. Any future assertions or prosecutions of
such claims could substantially increase Digital River's operating expenses.
Defending any such claim, whether such claims are valid or not, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause product shipment delays or require Digital River to
develop non-infringing technology or enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to Digital River, or at all. If a third party succeeds in any
infringement action against Digital River and Digital River fails or is unable
to develop non-infringing technology or license the infringed or similar
technology on a timely basis, its ability to provide services to its clients
could be materially adversely affected.
DIGITAL RIVER COULD BE LIABLE FOR SOFTWARE PRODUCTS CONTENT
Claims may be made against Digital River for negligence, copyright or
trademark infringement or other theories based on the nature and content of
software products that are delivered electronically and subsequently distributed
to others. Although Digital River carries general liability insurance, Digital
River's insurance may not cover potential claims of this type or may not be
adequate to cover all costs incurred in defense of potential claims or to
indemnify Digital River for all liability that may be imposed. Any costs or
imposition of liability that is not covered by insurance or which is in excess
of insurance coverage could result in the diversion of Digital River's financial
resources and the attention of management personnel.
DIGITAL RIVER'S INABILITY TO OBTAIN ADDITIONAL FUNDING FOR FUTURE CAPITAL
NEEDS COULD HARM ITS BUSINESS
Digital River requires substantial working capital to fund its business.
Digital River has had significant operating losses and negative cash flow from
operations since inception and expects to continue to do so for the foreseeable
future. Digital River's capital requirements depend on several factors,
including the rate of market acceptance of its products, the ability to expand
its client base and the growth of sales and marketing. If capital requirements
vary materially from those currently planned, Digital River may require
additional financing sooner than anticipated. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the
stockholders of Digital River will be reduced, stockholders may experience
additional dilution, or such equity securities may have rights, preferences or
privileges senior to those of the holders of Digital River's common stock.
Additional financing may not be available when needed on terms favorable to
Digital River or at all. If adequate funds are not available or are not
available on acceptable terms, Digital River may be unable to develop or enhance
its services, take advantage of future opportunities or respond to competitive
pressures.
23
<PAGE>
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS AND
RISKS TO DOING BUSINESS ON THE INTERNET AND COULD HARM DIGITAL RIVER'S
BUSINESS
Digital River is not currently subject to direct regulation by any domestic
or foreign governmental agency, other than regulations applicable to businesses
generally, export control laws and laws or regulations directly applicable to
electronic commerce. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet covering issues such as:
- user privacy;
- pricing;
- content;
- copyrights;
- distribution; and
- characteristics and quality of products and services.
Furthermore, the growth and development of the market for electronic
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of additional laws or regulations may decrease the growth of the
Internet or other online services, which could, in turn, decrease the demand for
Digital River's products and services and increase its cost of doing business.
The applicability to the Internet of existing laws governing issues such as
property ownership, copyrights, encryption and other intellectual property
issues, taxation, libel, export or import matters, obscenity and personal
privacy is uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and related technologies. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes to such laws intended to address these issues, including
some recently proposed changes, could create uncertainty in the Internet
marketplace. Such uncertainty could reduce demand for Digital River's services
or increase the cost of doing business due to increased costs of litigation or
increased service delivery costs.
In addition, because Digital River's services are available over the
Internet in multiple states and foreign countries, such jurisdictions may claim
that Digital River is required to qualify to do business as a foreign
corporation in each such state or foreign country. Digital River is qualified to
do business only in Minnesota and Washington. Failure to qualify as a foreign
corporation in a jurisdiction where Digital River is required to do so could
subject Digital River to taxes and penalties and could result in Digital River's
inability to enforce contracts in such jurisdictions. New legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to Digital River's business, or the application of
existing laws and regulations to the Internet and other electronic services
could result in significant increases in business expenses.
THERE ARE RISKS ASSOCIATED WITH INTERNATIONAL SALES THAT COULD HARM DIGITAL
RIVER'S BUSINESS
Although Digital River sells software products to end-users outside the
United States, Digital River might not succeed in expanding its international
presence. Conducting business outside of the United States is subject to certain
risks, including:
- changes in regulatory requirements and tariffs;
- reduced protection of intellectual property rights;
- difficulties in distribution;
24
<PAGE>
- the burden of complying with a variety of foreign laws; and
- political or economic constraints on international trade or instability.
In addition, some software exports from the United States are subject to
export restrictions as a result of the encryption technology in such software
and Digital River may become liable to the extent it violates such restrictions.
Digital River might not successfully market, sell and distribute its products in
local markets and Digital River cannot be certain that one or more of such
factors will not materially adversely affect its future international
operations.
DIGITAL RIVER'S FAILURE TO COLLECT SALES AND OTHER TAXES COULD HARM ITS
BUSINESS
Digital River does not currently collect sales, use or other similar taxes
with respect to ESD or shipments of software products into states other than
Minnesota. However, one or more local, state or foreign jurisdictions may seek
to impose sales or use tax collection obligations on out of state companies,
such as Digital River, that engage in electronic commerce. In addition, any new
operation in states outside Minnesota could subject shipments into such states
to state sales or use taxes under current or future laws. A successful assertion
by one or more states or any foreign country that Digital River should collect
sales, use or other taxes on the sale of merchandise could materially adversely
affect its revenues.
DIGITAL RIVER'S STOCK OWNERSHIP IS CONCENTRATED IN CERTAIN EXISTING
SHAREHOLDERS WHICH COULD MAKE CERTAIN TRANSACTIONS MORE DIFFICULT OR
IMPOSSIBLE TO COMPLETE
As of July 15, 1999, Digital River's executive officers, directors and
principal stockholders and their affiliates beneficially own approximately
9,354,972 or 37.57% of its outstanding shares of common stock. This amount
includes the 3,000,000 shares currently held by Tech Squared's wholly owned
subsidiary, MacUSA, which Mr. Ronning may be deemed to beneficially own as a
result of his status as a controlling person of Tech Squared. As a result, they
may have the ability to effectively control Digital River and direct its affairs
and business, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may also have the effect
of delaying, deferring or preventing a change in control of Digital River, and
make some transactions more difficult or impossible without the support of such
shareholders, including proxy contests, mergers involving Digital River, tender
offers, open-market purchase programs or other purchases of common stock that
could give Digital River's shareholders the opportunity to realize a premium
over the then-prevailing market price for shares of common stock.
DIGITAL RIVER'S STOCK PRICE HAS BEEN AND COULD BE HIGHLY VOLATILE
The trading price of Digital River's common stock has been and is likely to
continue to be highly volatile and could be subject to wide fluctuations in
response to factors such as:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services offered by Digital River or its competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet and online commerce industries;
- changes in the economic performance and/or market valuations of other
Internet, online service or retail companies;
- announcements by the company of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
25
<PAGE>
- additions or departures of key personnel;
- sales of common stock; and
- other events or factors, many of which are beyond Digital River's control.
In addition, the stock market in general, and the Nasdaq National Market and
the market for Internet-related and technology companies in particular, has
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of such companies. The trading
prices of many technology companies' stocks are at or near historical highs and
these trading prices and multiples are substantially above historical levels.
These trading prices and multiples may not be sustained. These broad market and
industry factors may materially adversely affect the market price of Digital
River's common stock, regardless of Digital River's actual operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class-action litigation has often been
instituted against such companies. Such litigation, if instituted, could result
in substantial costs and a diversion of management's attention and resources.
26
<PAGE>
THE SPECIAL MEETING OF TECH SQUARED SHAREHOLDERS
THIS PROXY STATEMENT-PROSPECTUS IS BEING FURNISHED TO YOU IN CONNECTION WITH
THE SOLICITATION OF PROXIES BY TECH SQUARED'S BOARD OF DIRECTORS IN CONNECTION
WITH OUR PROPOSED VOLUNTARY DISSOLUTION.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting of the shareholders of Tech Squared is scheduled to be
held as follows:
[Date]
[ ] a.m., local time
[Address]
PURPOSE OF THE SPECIAL MEETING
The special meeting is being held so that the shareholders of Tech Squared
may consider and vote upon a proposal to approve the voluntary dissolution of
Tech Squared. The voluntary dissolution will be accomplished under the terms of
the Plan of Liquidation and Dissolution attached as Annex A.
The board of directors of Tech Squared has determined that the voluntary
dissolution is fair to and in the best interest of Tech Squared's shareholders.
The board of directors has approved the voluntary dissolution pursuant to the
Plan of Liquidation and Dissolution and recommends that the shareholders vote in
favor of this proposal.
SHAREHOLDER RECORD DATE FOR THE SPECIAL MEETING
Tech Squared's board of directors has fixed the close of business on [ ],
1999, as the record date for determination of Tech Squared shareholders entitled
to notice of and entitled to vote at the special meeting. On the record date,
there were [ ] shares of Tech Squared common stock outstanding, held by
approximately [ ] holders of record.
VOTE OF TECH SQUARED SHAREHOLDERS REQUIRED FOR APPROVAL OF THE VOLUNTARY
DISSOLUTION
A majority of the outstanding shares of Tech Squared common stock entitled
to vote at the special meeting must be represented, either in person or by
proxy, to constitute a quorum at the special meeting. The affirmative vote of
the holders of at least a majority of Tech Squared's common stock outstanding
and entitled to vote at the special meeting is required to approve the voluntary
dissolution. You are entitled to one vote for each share of Tech Squared common
stock held by you on the record date on the proposal to be presented to
shareholders at the special meeting.
As of the record date for the special meeting, current directors and
executive officers of Tech Squared and their affiliates beneficially owned
approximately 7,212,831 shares of Tech Squared common stock, which represented
approximately 51.41% of all outstanding shares of Tech Squared common stock
entitled to vote at the special meeting.
Two Tech Squared shareholders are parties to voting agreements with Digital
River under which they have agreed to vote their shares of Tech Squared common
stock in favor of the approval of the voluntary dissolution. As of the record
date, these shareholders held approximately 6,819,168 shares of Tech Squared
common stock (excluding options to acquire common stock), which represented
approximately 50.00% of all outstanding shares of Tech Squared common stock
entitled to vote at the special meeting.
PROXIES
All shares of Tech Squared common stock represented by properly executed
proxies received before or at the special meeting will, unless the proxies are
revoked, be voted in accordance with the
27
<PAGE>
instructions indicated thereon. If no instructions are indicated on a properly
executed proxy, the shares will be voted FOR approval of the voluntary
dissolution. You are urged to mark the box on the proxy to indicate how to vote
your shares.
If a properly executed proxy is returned and the shareholder has abstained
from voting on the proposal, the Tech Squared common stock represented by the
proxy will be considered present at the special meeting for purposes of
determining a quorum and for purposes of calculating the vote but will not be
considered to have been voted in favor of approval of the proposal. If an
executed proxy is returned by a broker holding shares of Tech Squared common
stock in street name which indicates that the broker does not have authority to
vote on approval of the voluntary dissolution, the shares will be considered
present at the meeting for purposes of determining the presence of a quorum and
of calculating the vote, but will not be considered to have been voted in favor
of approval of the voluntary dissolution. YOUR BROKER WILL VOTE YOUR SHARES ONLY
IF YOU PROVIDE INSTRUCTIONS ON HOW TO VOTE BY FOLLOWING THE INFORMATION PROVIDED
TO YOU BY YOUR BROKER.
Because approval of the voluntary dissolution requires the affirmative vote
of at least a majority of Tech Squared's common stock outstanding as of the
record date, failures to vote and broker non-votes will have the same effect as
a vote against approval of the voluntary dissolution.
Tech Squared does not expect that any matter other than approval of the
voluntary dissolution pursuant to the Plan of Liquidation and Dissolution will
be brought before the special meeting. If, however, other matters are properly
presented, the persons named as proxies will vote in accordance with their
judgement with respect to those matters, unless authority to do so is withheld
in the proxy.
You may revoke your proxy at any time before it is voted by:
- notifying in writing the Secretary of Tech Squared at 6690 Shady Oak Road,
Eden Prairie, Minnesota 55344;
- granting a subsequent proxy; or
- appearing in person and voting at the special meeting. Attendance at the
special meeting will not, in and of itself, constitute revocation of a
proxy.
Tech Squared will pay all expenses incurred in connection with the printing
and mailing of this proxy statement-prospectus. Digital River will pay the
filing fees related to the registration statement of which this proxy
statement-prospectus forms a part. Tech Squared has retained Georgeson
Shareholder Communications Inc. at an estimated cost of $7,500 plus
reimbursement of expenses, to assist in the solicitation of proxies. Tech
Squared and Georgeson Shareholder Communications Inc. will also request banks,
brokers and other intermediaries holding shares beneficially owned by others to
send this proxy statement-prospectus to, and obtain proxies from, the beneficial
owners and will reimburse the holders for their reasonable expenses in so doing.
28
<PAGE>
THE VOLUNTARY DISSOLUTION AND THE PLAN OF
LIQUIDATION AND DISSOLUTION
THIS SECTION OF THE PROXY STATEMENT-PROSPECTUS DESCRIBES MATERIAL ASPECTS OF
THE PROPOSED VOLUNTARY DISSOLUTION AND THE PLAN OF LIQUIDATION AND DISSOLUTION,
INCLUDING THE SALE OF OUR OPERATING ASSETS, THE EXCHANGE AND THE LIQUIDATION AND
DISSOLUTION. WHILE WE BELIEVE THAT THE DESCRIPTION COVERS THE MATERIAL TERMS OF
THE VOLUNTARY DISSOLUTION AND THE TRANSACTIONS, THIS SUMMARY MAY NOT CONTAIN ALL
OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THIS
ENTIRE DOCUMENT AND THE OTHER DOCUMENTS WE REFER TO FOR A MORE COMPLETE
UNDERSTANDING OF THE VOLUNTARY DISSOLUTION AND THE PLAN OF LIQUIDATION AND
DISSOLUTION.
GENERAL
At the special meeting, shareholders will vote on the proposal to dissolve
Tech Squared. The dissolution will be a voluntary dissolution pursuant to
section 302A.721 of the Minnesota Business Corporation Act. It will be
accomplished in accordance with the Plan of Liquidation and Dissolution which
was approved by the board of directors and is attached as Annex A. The Plan of
Liquidation and Dissolution is sometimes referred to in this proxy
statement-prospectus as the "Plan." The exchange with Digital River for newly
issued shares of Digital River common stock and the liquidation of Tech Squared
pursuant to the Plan is intended to qualify as a tax-free reorganization under
section 368(a)(1)(C) of the Internal Revenue Code.
The Plan provides for the completion of the following transactions in the
order set forth below:
- the sale or other disposition of the operating assets of Tech Squared and
its wholly owned subsidiary, MacUSA, on terms to be negotiated and
approved by the board of directors of Tech Squared (Tech Squared has
entered into a non-binding letter of intent with Virtual Technology
described on page 54);
- the merger of MacUSA with and into Tech Squared, and the resulting
transfer of 3,000,000 shares of Digital River common stock from MacUSA to
Tech Squared;
- the transfer of the 3,000,000 shares of Digital River common stock and
$1.2 million in cash by Tech Squared to Digital River in exchange for
2,650,000 shares of newly issued Digital River common stock under the
terms of the Acquisition Agreement, attached as Annex B;
- the transfer to a liquidating trust of cash and enough shares of the newly
issued Digital River common stock received in the Exchange to meet actual
and potential liabilities of Tech Squared under the terms of the
Liquidating Trust Agreement attached as Annex C;
- the pro rata distribution of the remaining shares of Digital River common
stock held by Tech Squared and the beneficial interests in the liquidating
trust to its shareholders as soon as practicable following the winding up
of Tech Squared's affairs;
- the dissolution of Tech Squared under Minnesota law;
- the distribution to holders of beneficial interests of the liquidating
trust of assets of the trust at least annually, unless the trustee
determines that any such distribution would be inconsistent with the
purposes of the trust; and
- after payment of all of the obligations and liabilities of Tech Squared
from the assets of the liquidating trust, the termination of the
liquidating trust and the distribution of any of its remaining assets to
the holders of the beneficial interests in the liquidating trust.
If the assets of the liquidating trust are not sufficient to pay all the
liabilities of Tech Squared, unpaid creditors may seek recovery from the former
shareholders of Tech Squared in proportion to the distribution they received in
the liquidation of Tech Squared. However, the maximum liability of any
shareholder would be the value of the Digital River common stock and assets the
shareholder received in connection with the Plan of Liquidation and Dissolution.
29
<PAGE>
It is expected that the source of the $1.2 million to be transferred to
Digital River in the Exchange will be proceeds from the sale of the company's
operating assets.
BACKGROUND OF THE TRANSACTION
In March 1999, the board of directors of Tech Squared, concerned about the
continued financial losses of Tech Squared's operating businesses, including the
prospects and costs associated with its new Net Direct Catalog business,
directed management to investigate strategic alternatives for Tech Squared
including alliances, joint ventures, mergers, and the sale of the company's
operating assets. Although management made several initial informal inquiries of
unrelated companies regarding alliances, joint ventures and mergers, such
inquiries were not successful, with potential acquirers/partners indicating
concerns over Tech Squared's operating losses and negative operating cash flow
and uncertainty over the effect of Tech Squared's ownership of Digital River
common stock on future operations, cash flow and financing efforts. The Tech
Squared board of directors also considered contributing Tech Squared's operating
businesses to a subsidiary and distributing the shares of the subsidiary to Tech
Squared's shareholders. However, concerns over the ability of such a subsidiary
to finance its operations, in light of operating losses, led Tech Squared's
board to conclude that this alternative was not feasible.
The board was also concerned about the imbalance between the value of Tech
Squared's operating assets and its investment in Digital River common stock.
Since the time that Digital River stock became publicly traded in August 1998,
there has been a growing imbalance between the value of Tech Squared's operating
assets and the escalating value of Tech Squared's investment in Digital River
common stock. For example, Tech Squared's market capitalization on March 15,
1999 was $52 million whereas the market value of its investment in Digital River
common stock was $107 million. This meant that an investment in Tech Squared was
becoming merely an indirect investment in Digital River rather than an
investment in an operating company. In addition, this caused the board of
directors of Tech Squared to address the consequences of being required to
register as an Investment Company under the Investment Company Act of 1940.
Registration under the Investment Company Act would impose on Tech Squared
various burdens that would have a material impact on the operation of Tech
Squared. These burdens include: (i) the expenses associated with registration as
an investment company, (ii) requiring that not more than 60% of Tech Squared's
board of directors be interested persons, (iii) prohibiting certain transactions
between Tech Squared and its affiliates and (iv) requiring that Tech Squared
meet certain capital requirements which may limit Tech Squared's ability to
engage in borrowing and issue certain types of securities.
The board also became concerned that the market value of Tech Squared was
considerably less than the market value of its investment in Digital River
common stock. The board was concerned that this difference reflected the
market's view that Tech Squared's operating business had a negative value and
detracted from the value of the Digital River shares it held. The board was also
concerned that this difference reflected the market's recognition that any
realization of the increase in value of such Digital River shares could result
in a significant tax expense to Tech Squared, reducing the amount of funds
available to be distributed to shareholders and, perhaps, causing Tech Squared
to incur a tax liability which it would be unable to pay unless it sold a
portion of such Digital River shares. Although this imbalance did not affect
Tech Squared's ability to conduct its operating businesses, the board's concern
grew as the value of the Digital River shares increased and some of Tech
Squared's shareholders increasingly urged the board to distribute the Digital
River shares or otherwise find a way to allow such shareholders to realize the
increase in market value of Digital River. Many of such shareholders indicated
that they had purchased shares of Tech Squared prior to Digital River conducting
its initial public offering as a means of, indirectly, investing in Digital
River. Throughout this period of time, management was directed to continuously
explore new alternatives to address these issues.
In April 1999, Bayview Capital Group was retained by the company to
determine the feasibility of selling the operating assets of Tech Squared.
Bayview, prior to its engagement, had met with Tech
30
<PAGE>
Squared on several occasions for informal discussions, regarding possible
alternative courses of action and manners of realizing the value of the Digital
River shares.
Joel A. Ronning is chief executive officer of Digital River and chairman of
the board of directors of Tech Squared. He and his two senior management teams
analyzed and considered various potential transactions involving the two
companies. By early May 1999, Digital River decided that it was not in its best
interest to acquire the operating businesses of Tech Squared. However, Digital
River determined that it was willing to consider a plan that did not include
these operating businesses if it resulted in business advantages for Digital
River. Digital River communicated its lack of interest in the operating
businesses to management of Tech Squared in mid-May.
Subsequently, at a meeting of the Tech Squared board of directors on
May 17, 1999, the board discussed a plan similar to that set forth in the Plan
of Liquidation and Dissolution that addressed the business issues discussed
above. At the meeting, representatives of Arthur Andersen LLP presented their
comments regarding the possible accounting and tax consequences of the plan.
Informal discussions between the companies continued throughout the remainder of
May and June.
On June 17, 1999, the board of directors of Tech Squared established a
special committee of Richard Runbeck and Charles E. Reese, Jr. to explore
strategic alternatives for Tech Squared, including a possible transaction with
Digital River. Although Mr. Reese remained a director of Digital River, he did
not attend or participate in any meetings of Digital River's board of directors
after April 27th and he formally recused himself from any meetings after
June 25th. Shortly after formation of the Tech Squared special committee, SG
Cowen Securities Corporation was retained to assist the special committee.
On June 28, 1999, the board of directors of Digital River established a
special committee of Thomas Madison, Christopher Sharples and J. Paul Thorin to
consider strategic alternatives involving Digital River and Tech Squared. The
Digital River special committee had its first meeting later that day to consider
these strategic alternatives.
Near the end of June, Mr. Reese became increasingly concerned over
continuing to serve on the Tech Squared special committee while remaining a
director of Digital River, even though not active in such capacity. His concerns
included the appearance of conflict of interest and potential ineligibility from
laws which would limit his potential for personal liability. Mr. Reese resigned
from the Tech Squared special committee on June 28th and was replaced by Tech
Squared's chief financial officer, Jeffrey Martin. At the time of Mr. Reese's
resignation from the special committee, significant issues remained unresolved
regarding the number of shares of Digital River to be issued by Digital River
and the consideration to be given by Tech Squared other than shares of Digital
River.
The Tech Squared special committee reviewed and considered the matters and
alternatives outlined above. In particular, it examined the alternative of a
taxable transaction and the possibility of the sale of Tech Squared to another
party. Several parties were contacted relating to the possible sale of Tech
Squared, but none evidenced any interest in substantive discussions. All parties
were concerned about potential changes to the tax laws relating to
reorganizations of the type being considered by Tech Squared. There was a
concern that a change could be made effective as early as July 12, 1999;
therefore, Tech Squared wanted to sign an agreement implementing the finally
determined course of action prior to that date. Based in part on the advice of
SG Cowen, it was determined that it was highly unlikely that a transaction with
a buyer other than Digital River could be completed prior to July 12, 1999 which
would produce a higher value to Tech Squared shareholders than a transaction
with Digital River in the form described in the Plan of Liquidation and
Dissolution. By the end of June, the Tech Squared special committee concluded
that a transaction of the type initially discussed in the May 17, 1999 meeting
probably would be the best alternative. A preliminary proposal was made on the
committee's behalf by representatives of SG Cowen to the Digital River special
committee on June 29, 1999. A written response was received the following day.
Between June 29, 1999 and July 2, 1999 there were numerous discussions
between members of the Tech Squared special committee, the Digital River special
committee and their respective advisors. The
31
<PAGE>
discussions focused in large part on the number of shares of newly issued
Digital River stock to be transferred to Tech Squared and the amount of cash
that would be transferred to Digital River in addition to the Digital River
shares owned by Tech Squared. The final amounts were determined through rigorous
negotiations.
On July 1, 1999, Digital River retained Broadview International LLC to
assist in the evaluation of a transaction with Tech Squared. The Digital River
special committee held a meeting on July 1 at which it received reports from the
company's accounting advisors and discussed the progress of the negotiations
with Tech Squared.
On July 2, 1999, the special committees concluded that the parties should
begin preparing a definitive agreement. Negotiations and drafting of a
definitive agreement continued until July 11 when the final issues were
resolved.
On July 6, 1999, the board of directors of Digital River met and received a
report from the special committee concerning negotiations between Digital River
and Tech Squared. Representatives of Broadview International LLC and Cooley
Godward LLP also made presentations to the board of directors.
On July 9, 1999, Mr. Reese resigned from the Digital River board of
directors.
On July 11, 1999, the special committee and the board of directors of Tech
Squared held a special meeting to discuss the proposed transaction. A principal
of Larkin, Hoffman, Daly & Lindgren, Ltd., counsel to the company, outlined the
terms of the proposed agreement and the directors' duties and responsibilities.
Representatives of SG Cowen presented an analysis of the financial aspects of
the proposed transaction including an analysis of its fairness from a financial
point of view. The special committee approved the Transaction. At the conclusion
of the meeting, the Tech Squared board of directors ratified the special
committee's approval of the Transaction, including approval of the Acquisition
Agreement, attached as Annex B to this proxy statement-prospectus. Mr. Ronning
and Mr. Reese did not participate in this vote of ratification. The special
committee and the board of directors directed management to proceed with the
necessary steps to obtain appropriate shareholder approvals and to prepare the
necessary agreements and documents to complete the Transaction.
On July 11, 1999, the special committee of the board of directors of Digital
River held a meeting to discuss the proposed transaction. Representatives of
Broadview International LLC presented an analysis of the financial aspects of
the Transaction and a representative of Arthur Andersen LLP reviewed the
accounting aspects of the Transaction. Representatives of Cooley Godward LLP,
special counsel to the board of directors, outlined the terms of the proposed
agreement. At the conclusion of the meeting, the special committee adopted a
resolution recommending that the Transaction be approved. Following this
meeting, the board of directors of Digital River held a special meeting to
discuss the proposed Transaction. Representatives of Broadview International
LLC, Arthur Andersen LLP and Cooley Godward LLP repeated their presentations to
the board of directors, and the special committee of the board presented its
recommendation that the Transaction be approved. At the conclusion of the
meeting, the Digital River board of directors approved the Acquisition Agreement
and directed management to prepare the necessary agreements and documents to
complete the Transaction.
On July 11, 1999, the two companies signed the Acquisition Agreement and
issued press releases announcing the Transaction.
TECH SQUARED'S REASONS FOR THE TRANSACTION
The following are all of the material factors for the conclusion by the
special committee of the Tech Squared board of directors, the board of directors
of Tech Squared, Joel A. Ronning and MacUSA (collectively, the "Tech Squared
Group") that the voluntary dissolution of Tech Squared
32
<PAGE>
pursuant to the Plan of Liquidation and Dissolution and the transactions set
forth in the Plan are fair to, and in the bests interests of, all the
shareholders, including unaffiliated shareholders:
1. For the following material reasons, the Tech Squared Group believed
that it was not in the best interests of all shareholders, including
unaffiliated shareholders, to continue Tech Squared's operating businesses
and hold a significant amount of Digital River stock:
- the continued losses generated by the operating assets and the costs
and uncertain prospects relating to the newly established Net Direct
business, including the lack of customer relationships, the lack of
historical direct marketing data upon which to base decisions and
strong competition;
- market and other constraints on Tech Squared's ability to realize the
value of the shares of Digital River common stock beneficially owned by
the company;
- the value of the Digital River common stock beneficially owned by Tech
Squared in comparison to the value of the operating assets, which
creates implications of registration under the Investment Company Act
of 1940 and other issues and expenses associated with becoming a
registered investment company (as of July 11, 1999, Digital River
common stock represented 96.9% of Tech Squared's total assets);
- the market value of Tech Squared's investment in Digital River common
stock compared to the market valuation of Tech Squared (as of July 11,
1999, the market value of Tech Squared's investment in Digital River
common stock was $106 million, as compared to Tech Squared's market
valuation of $48 million);
- the view of some investors that ownership of Tech Squared common stock
was primarily an indirect investment in Digital River, which has
limited Tech Squared's ability to invest in or to develop other
businesses out of concern for exposing its investment in Digital River
common stock to risks associated with such other businesses;
- the limitation on Tech Squared's ability, because the value of Digital
River common stock held by Tech Squared accounts for such a high
percentage of Tech Squared's market value, to recruit and reward
talented executives with a stock option program that reflects market
value of stock based solely on the success of the business they manage;
and
- the benefits to Tech Squared shareholders of a direct rather than an
indirect interest in Digital River common stock, including the
elimination of corporate overhead and other expenses associated with
maintaining Tech Squared's status as a public company.
2. Having concluded that it was not in the best interests of all
shareholders, including unaffiliated shareholders, to continue the operating
business and hold a significant amount of Digital River stock, the Tech
Squared Group determined that it was best to sell the operating assets,
which represented less than 10% of the value of Tech Squared's assets, and
to identify the best way to maximize shareholder value with respect to the
treatment of the Digital River stock owned by Tech Squared. The group was
concerned about potential changes in the tax law referenced above which
might become effective as early as July 13, 1999. It compared a taxable
transaction to a non-taxable transaction. As illustrated on pages 39 and 40,
the Tech Squared Group concluded that a tax-free reorganization with Digital
River would give Tech Squared stockholders the opportunity to directly hold
Digital River stock and to receive the highest dollar value possible.
3. The Tech Squared Group believes that the Tech Squared special
committee negotiated the best possible transaction with Digital River. For
this reason and the reasons set forth in the opinion of its financial
advisor SG Cowen, which is adopted by the Tech Squared Group and described
in detail in the section entitled "Opinion of Tech Squared's Financial
Advisor," the Tech Squared Group believes that the consideration which the
Tech Squared shareholders will receive as a result of the implementation of
the Plan of Liquidation and Dissolution is fair and in the best interests of
all shareholders, including unaffiliated shareholders.
33
<PAGE>
The Tech Squared Group believes that the dissolution of Tech Squared
pursuant to the Plan of Liquidation and Dissolution including the distribution
to be received by the Tech Squared shareholders is fair to unaffiliated
shareholders for the foregoing reasons despite the fact that (a) a majority vote
of unaffiliated shareholders is not required to approve the voluntary
dissolution, assuming compliance with the voting agreements described on
page 60; and (b) no representative was retained to act solely on behalf of
unaffiliated shareholders.
Net book value and going concern value were not considered to be material
factors to the fairness determination because of the nature of the Transaction.
Alternative liquidation values were considered as set forth in the fairness
opinion.
The Tech Squared board of directors and special committee also considered a
number of potentially negative factors in their deliberations including:
- the possibility that full value might not be received in connection with
the sale or other disposition of the operating businesses;
- the risk that the proposed transaction with Digital River would not be
treated as a tax-free reorganization;
- the fact that a ruling would not be sought from the Internal Revenue
Service and that the Arthur Andersen LLP and Cooley Godward LLP opinions
would state that the relevant parts of the Transaction "should" as
contrasted to "will" constitute a tax-free reorganization; and
- the possibility that, if Tech Squared proceeded more slowly, a more
favorable transaction might be presented.
The special committee and the board of directors recognize that, on the
surface, the exchange with Digital River may appear to be unbalanced because
Tech Squared is exchanging 3,000,000 shares of Digital River stock and
$1,200,000 in cash in exchange for 2,650,000 shares of newly-issued Digital
River stock. The exchange has risks and potential adverse consequences for
Digital River, and it was the best deal that Tech Squared was able to negotiate
with Digital River. Despite this surface appearance of an unbalanced exchange,
the special committee and the board of directors concluded that the exchange
should result in Tech Squared shareholders receiving significantly more value
than other alternatives. For example, Tech Squared compared this transaction
with a dividend or other distribution of the shares of Digital River stock to
its shareholders. Although this would allow the shareholders to continue their
investment in Digital River, the distribution would create significant income
tax liabilities for both Tech Squared and its shareholders. As discussed in
"Material United States Federal Income Tax Consequences Of The Transaction," in
the opinion of Arthur Andersen LLP, the transaction should be a reorganization
which is tax free to the extent shareholders of Tech Squared receive solely
voting shares of Digital River pursuant to the plan of reorganization as
described.
If Tech Squared sold its Digital River common stock in the open market or in
a private transaction, it would have to pay significant taxes on the proceeds of
the sale. See pages 39 and 40, which show the results to Tech Squared of a
taxable transaction. If Tech Squared distributed the Digital River common stock
it currently holds directly to its shareholders in connection with a
liquidation, the distribution would create tax liabilities for both Tech Squared
and its shareholders. The exchange of stock with Digital River and the
subsequent distribution to you should, in the opinion of Arthur Andersen LLP,
avoid these adverse tax consequences. Assuming that it does, it will produce
more value for Tech Squared shareholders than the taxable alternatives.
The foregoing discussion is not exhaustive of all factors considered by Tech
Squared's board of directors. In analyzing the proposed Transaction, the Tech
Squared board of directors did not view any single factor as determinative and
did not quantify or assign weight to any of the factors. Rather, the board of
directors made its determination based upon the total mix of information
available to it. In addition, individual members of the board of directors may
have given different weight to different factors.
34
<PAGE>
DIGITAL RIVER'S REASONS FOR THE TRANSACTION
The Digital River board of directors believes that the exchange of 2,650,000
shares of its newly issued common stock for 3,000,000 shares of its outstanding
common stock held by Tech Squared and $1.2 million in cash has a number of
benefits and potential benefits for Digital River shareholders. These include:
- the Exchange will enhance shareholder value through the reduction in the
number of shares of Digital River common stock outstanding;
- the Exchange provides for the receipt of $1.2 million in cash from Tech
Squared;
- the Exchange will ensure an orderly distribution of the shares of Digital
River common stock held by Tech Squared. The Voting Agreements provide
that the principal shareholders of Tech Squared will agree to restrictions
on transfer of the shares of Digital River common stock to be received by
them in the Exchange such that no shares may be sold prior to January 1,
2000, one-third of the shares received may be sold after January 1, 2000,
an additional one-third of the shares received may be sold after April 1,
2000 and any remaining shares may be sold after June 1, 2000; and
- the Exchange and the liquidation will reduce the concentration of Digital
River's stock ownership by distributing Tech Squared's ownership interest
in Digital River's common stock to all of the Tech Squared shareholders.
The Digital River board of directors also considered some potentially
negative factors in its deliberations concerning the Exchange, including the
following:
- the Exchange may prevent or make it more difficult for Digital River to
consummate a business combination transaction with pooling of interests
accounting treatment for a period of time; and
- the risk that the proposed transaction would not be treated as a tax-free
reorganization.
The foregoing discussion is not exhaustive of all factors considered by
Digital River's board of directors. In analyzing the proposed Exchange, the
Digital River board of directors did not view any single factor as determinative
and did not quantify or assign weight to any of the factors. Rather, the board
of directors made its determination based upon the total mix of information
available to it. In addition, individual members of the board of directors may
have given different weight to different factors.
DIGITAL RIVER'S DETERMINATION THAT THE TRANSACTION IS FAIR TO TECH SQUARED'S
SHAREHOLDERS
Digital River's Board of Directors considered the following factors in
making the determination that the proposed transaction is fair to Tech Squared's
shareholders including unaffiliated shareholders:
- the reasonable likelihood that the Tech Squared shareholders would receive
an appropriate premium over the market price of Tech Squared common stock
in connection with the receipt of Digital River common stock in the
liquidation of Tech Squared (the premium as of July 11, 1999 was 52%),;
the Digital River board of directors did not give significant
consideration to the volatility of Digital River's common stock price and
its impact on the premium;
- the benefits to Tech Squared shareholders of a direct rather than an
indirect interest in Digital River common stock, including the elimination
of corporate overhead and other expenses associated with maintaining Tech
Squared's status as a public company;
- the reasonable likelihood that the Tech Squared shareholders will avoid
double taxation due to the proposed structure of the transaction;
- the market price of Tech Squared's investment in Digital River common
stock compared to the market valuation of Tech Squared;
- market and other constraints on Tech Squared's ability to realize the
value of the shares of Digital River common stock beneficially owned by
Tech Squared; and
- the reasonable likelihood of finding a buyer or buyers who would be
willing to acquire Tech Squared or its assets at a more attractive price
than that reflected in the Exchange. Digital River
35
<PAGE>
was aware that Tech Squared had explored other alternatives to the
Exchange for some time and believed that the Tech Squared board had had
sufficient opportunity to identify superior offers to the Exchange, if any
existed.
Digital River believes that the proposed transaction is fair to Tech Squared
shareholders for the foregoing reasons despite the fact that (a) a majority vote
of unaffiliated shareholders is not required to approve the voluntary
dissolution, assuming compliance with the voting agreements described on
page 60; and (b) no representative was retained to act solely on behalf of
unaffiliated Tech Squared shareholders.
Net book value and going concern value were not considered to be material
factors to the fairness determination because of the nature of the Transaction.
Alternative liquidation values relating to taxable transactions were considered.
The Digital River board of directors and special committee also considered a
number of potentially negative factors in their deliberations including:
- the possibility that full value might not be received in connection with
the sale or other disposition of the operating businesses;
- the risk that the proposed transaction would not be treated as a tax-free
reorganization;
- the fact that a ruling would not be sought from the Internal Revenue
Service and that the Arthur Andersen LLP and Cooley Godward LLP opinions
would state that the relevant parts of the Transaction "should", as
contrasted to "will", constitute a tax-free reorganization; and
- the possibility that, if Tech Squared proceeded more slowly, a more
favorable transaction might be presented.
The Digital River board of directors did not view any single factor as
determinative and individual directors may have given different weight to
different factors. However, the Digital River board did assign significant
weight to the reasonable likelihood that the Tech Squared shareholders would
avoid double taxation due to the proposed structure of the transaction. This
avoidance of double taxation led to the expectation that the Tech Squared
shareholders would receive an appropriate premium over the market price of Tech
Squared common stock in connection with the receipt of Digital River common
stock in the liquidation of Tech Squared. The Digital River board believed that
the benefits that arise from the avoidance of double taxation would more than
outweigh the direct costs to Tech Squared of the Exchange, principally 3,000,000
shares of Digital River common stock and cash in the amount of $1,200,000.
RECOMMENDATION OF TECH SQUARED'S BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS DETERMINED THE
VOLUNTARY DISSOLUTION PURSUANT TO THE PLAN OF LIQUIDATION AND DISSOLUTION TO BE
FAIR TO ALL SHAREHOLDERS AND IN THEIR BEST INTEREST. TECH SQUARED'S BOARD OF
DIRECTORS HAS APPROVED THE VOLUNTARY DISSOLUTION AND RECOMMENDS THAT THE
SHAREHOLDERS APPROVE THIS PROPOSAL.
In considering the recommendation of the Tech Squared board of directors
with respect to the voluntary dissolution, you should be aware that certain
directors and officers of Tech Squared have certain interests in the Transaction
that are different from, or are in addition to, the interests of Tech Squared
shareholders generally. Please see the section under the heading "Interests of
Certain Persons in the Transaction" on page 43 of this proxy
statement-prospectus.
OPINION OF TECH SQUARED'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated June 18, 1999 (the "SG Cowen
Engagement Letter"), Tech Squared retained SG Cowen Securities Corporation ("SG
Cowen") to serve as financial advisor to the board of directors of Tech Squared
with respect to the fairness from a financial point of view of the consideration
to be received by Tech Squared shareholders in connection with the proposed
liquidation of Tech Squared.
On July 11, 1999, SG Cowen delivered certain of its written analyses and its
oral opinion, subsequently confirmed in writing, to the board of directors of
Tech Squared that, as of July 11, 1999,
36
<PAGE>
based upon and subject to the assumptions and considerations set forth therein,
the consideration to be received by the holders of Tech Squared stock in
connection with the proposed liquidation of Tech Squared is fair, from a
financial point of view, to such holders other than Joel Ronning, Perry Steiner
and Charles Reese.
THE FULL TEXT OF THE WRITTEN OPINION OF SG COWEN, DATED JULY 11, 1999, IS
ATTACHED AS ANNEX E AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF TECH
SQUARED COMMON STOCK ARE URGED TO READ THE OPINION IN ITS ENTIRETY FOR THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF
THE REVIEW BY SG COWEN. THE SUMMARY OF THE WRITTEN OPINION OF SG COWEN SET FORTH
HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THAT
OPINION. SG COWEN'S ANALYSES AND OPINION WERE PREPARED FOR AND ADDRESSED TO THE
SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS AND THE BOARD OF DIRECTORS OF TECH
SQUARED AND ARE DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW,
OF THE CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF TECH SQUARED COMMON STOCK
PURSUANT TO THE LIQUIDATION OF TECH SQUARED. THE OPINION DOES NOT CONSTITUTE AN
OPINION AS TO THE MERITS OF ALL THE ACTIONS CONTEMPLATED BY THE PLAN OF
LIQUIDATION AND DISSOLUTION OR A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW TO
VOTE ON THE PROPOSED VOLUNTARY DISSOLUTION OF TECH SQUARED.
THE AMOUNT TO BE RECEIVED BY TECH SQUARED FROM DIGITAL RIVER IN EXCHANGE FOR
THE STOCK AND CASH TRANSFERRED TO DIGITAL RIVER WAS DETERMINED THROUGH
NEGOTIATIONS BETWEEN TECH SQUARED AND DIGITAL RIVER AND NOT PURSUANT TO
RECOMMENDATIONS OF SG COWEN.
In arriving at its opinion, SG Cowen reviewed and considered such financial
and other matters as it deemed relevant, including, among other things:
- a draft of the Acquisition Agreement, dated as of July 11, 1999;
- certain publicly available information relating to Tech Squared and
Digital River, including the Annual Reports on Form 10-K of Tech Squared
and Digital River for each of the years ended 1997 and 1998, and each of
the Quarterly Reports on Form 10-Q of Tech Squared and Digital River filed
for the quarter ended March 31, 1999 and certain projected financial data;
- a brief review of certain internal financial analyses and financial
forecasts which showed projected losses for the operating businesses,
reports and other information concerning Tech Squared and Digital River
prepared by the respective management teams of Tech Squared and Digital
River;
- First Call consensus estimates of financial institutions and currently
available Wall Street analysts' reports for Digital River (the "First Call
and Analysts' Projections");
- discussions SG Cowen has had with certain members of the management of
both Tech Squared and Digital River concerning the historical and current
business operations, financial conditions and prospects of Tech Squared
and Digital River and such other matters that SG Cowen deemed relevant;
- the reported price and trading histories of the shares of the common stock
of Tech Squared and Digital River as compared to the reported price and
trading histories of certain publicly traded companies that SG Cowen
deemed relevant;
- financial information of Digital River as compared to financial
information of certain other companies that SG Cowen deemed relevant;
- discounts and premiums paid in other selected business combinations that
SG Cowen deemed relevant;
- certain financial terms of the transaction as compared to the financial
terms of selected other business combinations that SG Cowen deemed
relevant;
- the opinion of Arthur Andersen LLP relating to certain U.S. federal income
tax consequences of the Exchange and the liquidation of Tech Squared to
holders of Tech Squared common stock; and
- such other information, financial studies, analyses and investigations and
other such factors that SG Cowen deemed relevant for the purposes of their
opinion.
37
<PAGE>
In conducting its review and arriving at an opinion, SG Cowen has, with Tech
Squared's consent, assumed and relied upon, without independent investigation,
the accuracy and completeness of all financial and other information publicly
available or provided to SG Cowen by Tech Squared and Digital River. SG Cowen
has not undertaken any responsibility for the accuracy, completeness, or
reasonableness of, nor has SG Cowen independently verified such information. In
addition, SG Cowen has not conducted any physical inspection of the properties
or facilities of Tech Squared or Digital River. SG Cowen has relied upon the
assurance of management of Tech Squared that they are unaware of any facts
involving the Transaction, Tech Squared or Digital River that would make the
information provided to SG Cowen incomplete or misleading in any respect, and
that they have not omitted to provide SG Cowen with any material information
regarding Tech Squared or Digital River which would be necessary or useful to
the analysis of the Transaction. SG Cowen has, with Tech Squared's consent,
assumed that the financial forecasts examined were reasonably prepared by the
respective management of Tech Squared and Digital River and reflected the best
currently available estimates and good faith judgments of management as to the
future performance of Tech Squared and Digital River. Certain of SG Cowen's
analyses have utilized the First Call and Analysts' Projections, which SG Cowen
has assumed, with Tech Squared's consent, provides a reasonable basis for SG
Cowen's opinion. SG Cowen has not made or obtained any independent evaluations,
valuations or appraisals of the assets or liabilities of Tech Squared or Digital
River, nor has SG Cowen been furnished with such materials, and to SG Cowen's
knowledge, no such materials are available.
With respect to all legal matters relating to Tech Squared and Digital
River, SG Cowen has relied on the advice of legal counsel to Tech Squared.
Management of Tech Squared has informed SG Cowen, after consultation with Arthur
Andersen LLP, Tech Squared's auditors, that the Exchange and the liquidation of
Tech Squared should constitute a reorganization under Section 368(a)(1)(C) of
the Internal Revenue Code and that Tech Squared shareholders should not
generally recognize gain or loss for U.S. tax purposes upon receipt of Digital
River common stock in connection with the liquidation of Tech Squared. SG COWEN
HAS ASSUMED THAT THE EXCHANGE AND THE LIQUIDATION OF TECH SQUARED WILL BE A
REORGANIZATION UNDER SECTION 368(a)(1)(C) OF THE INTERNAL REVENUE CODE AND THAT
TECH SQUARED SHAREHOLDERS WILL NOT GENERALLY RECOGNIZE GAIN OR LOSS FOR U.S. TAX
PURPOSES UPON RECEIPT OF DIGITAL RIVER COMMON STOCK IN CONNECTION WITH THE
LIQUIDATION OF TECH SQUARED.
On July 11, 1999, the date of the opinion of SG Cowen, it was assumed by
Tech Squared management that $7.2 million would be contributed to the
liquidating trust. The assumed contribution to the liquidating trust would
consist of $900,000 in cash and 180,000 shares of Digital River stock whose
closing price on the business day preceding July 11, 1999 was $35.25. This would
result in a balance of 2,470,000 shares available for distribution to Tech
Squared shareholders.
SG COWEN HAS ASSUMED THAT THE SHAREHOLDERS OF TECH SQUARED WILL RECEIVE AT
LEAST 2,470,000 SHARES OF DIGITAL RIVER COMMON STOCK WHEN TECH SQUARED IS
LIQUIDATED. THIS AMOUNT IS HEREAFTER REFERRED TO AS THE "CONSIDERATION." VARIOUS
FACTORS INCLUDING CHANGES IN THE PRICE OF DIGITAL RIVER COMMON STOCK, THE AMOUNT
RECEIVED UPON THE SALE OF OPERATING ASSETS, AND THE ASSUMPTIONS RELATING TO THE
AMOUNT OF ASSETS THAT MUST BE CONTRIBUTED TO THE LIQUIDATING TRUST COULD RESULT
IN FEWER THAN 2,470,000 SHARES OF DIGITAL RIVER COMMON STOCK BEING RECEIVED BY
TECH SQUARED SHAREHOLDERS.
For purposes of rendering an opinion, SG Cowen has also assumed in all
respects material to the analyses that:
- the representations and warranties of each party contained in the
Acquisition Agreement are true and correct;
- each party will perform all of the covenants and agreements required to be
performed by it under the Acquisition Agreement and all conditions to the
consummation of the Transaction will be satisfied without waiver thereof;
38
<PAGE>
- the final form of the Acquisition Agreement will be substantially similar
to the last draft reviewed by SG Cowen;
- all governmental, regulatory and other consents and approvals contemplated
by the Acquisition Agreement will be obtained, and in the course of
obtaining any of those consents, no restrictions will be imposed or
waivers made that would have an adverse effect on the contemplated
benefits of the Transaction;
- all of Tech Squared's operating assets will be sold or disposed of for
fair value;
- a sufficient liquidating trust will be formed;
- the contribution to the liquidating trust of Tech Squared's cash and cash
equivalents together with an estimated 180,000 shares of common stock of
Digital River will be sufficient to satisfy all of Tech Squared's
liabilities; and
- the corporate operations will be liquidated and a distribution of Digital
River shares to the shareholders will occur.
SG Cowen's services to Tech Squared consisted of providing financial
advisory services and rendering an opinion from a financial point of view with
respect to the fairness of the Consideration. SG Cowen's opinion is necessarily
based upon economic and market conditions and other circumstances as they exist
and can be evaluated by SG Cowen as of the date of its opinion dated July 11,
1999. It should be understood that although subsequent developments may affect
the opinion of SG Cowen, SG Cowen does not have any obligation to update, revise
or reaffirm the July 11, 1999 opinion, and SG Cowen expressly disclaims any
responsibility to do so. SG Cowen's opinion does not constitute a recommendation
to any shareholder as to how such shareholder should vote on the proposed
voluntary dissolution of Tech Squared. SG Cowen's opinion does not imply any
conclusion as to the likely trading range for Digital River common stock
following consummation of the Transaction or otherwise, which may vary depending
on numerous factors that generally influence the price of securities. SG Cowen's
opinion is limited to the fairness, from a financial point of view, of the
Consideration. SG Cowen expresses no opinion with respect to the underlying
business reasons that may support the decision of the special committee and the
board of directors to approve, or Tech Squared's decision to consummate, the
Transaction. SG Cowen has not rendered any opinion on the sale of the operating
assets.
The following is a summary of all of the material financial analyses
performed by SG Cowen to arrive at its opinion. Some of the summaries of
financial analyses include information presented in tabular format. In order to
fully understand the financial analyses, the tables must be read together with
the text of each summary. The tables alone do not constitute a complete
description of the financial analyses, including the methodologies and
assumptions underlying the analyses, which, if read alone, could create a
misleading or incomplete view of the financial analyses. SG Cowen performed
certain procedures, including each of the financial analyses described below,
and reviewed with the management of Tech Squared the assumptions on which such
analyses were based and other factors, including the historical and projected
financial results of Tech Squared and Digital River.
TAXABLE TRANSACTION ANALYSIS
The proposed transaction involves a tax-free reorganization under Section
368(a)(1)(C) of the Internal Revenue Code. SG Cowen also reviewed taxable
transactions. If the 3,000,000 shares of Digital River stock were sold on the
open market and the proceeds distributed to Tech Squared shareholders or if the
shares were distributed directly to shareholders, Tech Squared would pay a
corporate level tax on the transaction. In the taxable transactions that were
reviewed, the implied Tech Squared per share value would be $3.91 compared to
$5.98 in a tax-free reorganization. The table below shows the values for the
taxable transactions at the company level and does not take into account the
taxes payable by the shareholders as a result of the transaction.
39
<PAGE>
VALUE IF SHARES DISTRIBUTED
IN TAXABLE TRANSACTION
(000,000S OMITTED, EXCEPT FOR PER SHARE DATA)
<TABLE>
<S> <C>
Implied Market Value of 3 million Digital River Shares...... $ 106
40% Tax on Sale of Shares................................... $ (42)
Excess Liabilities.......................................... $ (7)
Digital River Value Available to Tech Squared
Shareholders.............................................. $ 57
Number of Tech Squared Shares............................... 14.55
Implied Tech Squared per Share Value........................ $3.91
</TABLE>
PREMIUMS PAID ANALYSIS
SG Cowen computed the implied per share value of Tech Squared stock as a
result of the Transaction and the premium of the implied value to the current
market value of Tech Squared stock. The implied per share value of Tech Squared
stock is $5.98, which represented a premium to market value as of July 11, 1999
of 52%. The computation of the relevant values is shown on the table set forth
below.
VALUE OF PROPOSED TRANSACTION
(000S OMITTED, EXCEPT FOR PER SHARE DATA)
<TABLE>
<S> <C>
New Digital River Shares Issued............................. 2,650
Shares in Reserve........................................... 180
Net Digital River Shares.................................... 2,470
Market Price of Digital River Shares........................ $ 35.25
Implied Market Value........................................ $87,067
Number of Tech Squared Shares............................... 14,548
Implied Tech Squared per Share Value........................ $ 5.98
Premium to Market Value..................................... 52%
</TABLE>
SG Cowen then reviewed the premium of the offer price over the trading price
one trading day and four weeks prior to the announcement date of 325 acquisition
transactions in the technology industry announced between April 16, 1990 and
July 11, 1999 (based on data provided by Securities Data Company). The
transactions included 175 repurchases of equity minority stakes, 12 remaining
interest (or "squeeze out") transactions (transactions in which a majority
shareholder purchased the remaining equity interest in the subject company) and
138 completed merger transactions.
The following table presents the premium of the offer prices over the
trading prices one day and four weeks prior to the announcement date for the
repurchase of equity minority stakes, "squeeze out" transactions, completed
merger transactions, and the premium implied for Tech Squared.
PREMIUMS PAID ANALYSIS
<TABLE>
<CAPTION>
1 DAY 4 WEEK
MEDIAN MEDIAN
-------- --------
<S> <C> <C>
PROPOSED TRANSACTION........................................ 52% 50%
Minority Interest Premium................................... 5% 11%
Squeeze Out Premium......................................... 8% 23%
Merger Premium.............................................. 37% 52%
</TABLE>
40
<PAGE>
RELATED TRANSACTION ANALYSIS
SG Cowen reviewed the financial terms, to the extent publicly available, of
a transaction involving a tax-free reorganization pursuant to Section
368(a)(1)(C), which was announced on April 19, 1994. In the transaction, Petrie
Stores shareholders exchanged 39.9 million shares of Toys "R" Us for 36.5
million newly issued Toys "R" Us shares. The 3.3 million share difference
represented a discount of approximately 8%. Under the terms of the transaction,
Petrie Stores sold its retail operations for cash and formed a liquidating trust
representing approximately 24% of the overall transaction value to satisfy
contingent liabilities. Under the terms of the Transaction with Digital River,
Tech Squared shareholders will receive 2.65 million shares of Digital River in
exchange for the 3.00 million shares plus $1.2 million in cash, or a 12%
discount. However, as of July 11, 1999, only 6% of the transaction proceeds, or
180,000 shares, are expected to be contributed to the liquidating trust.
The Petrie Stores/Toys "R" Us transaction was selected because it was a
model used by management in structuring the Tech Squared/Digital River
transaction and because it also involved a tax-free reorganization pursuant to
Section 368(a)(1)(C) and a discount or difference between the shares delivered
by the entity to be liquidated and the shares received in the exchange by that
party. Although the Petrie Stores/Toys "R" Us transaction was used for
comparison purposes, the Petrie Stores/Toys "R" Us transaction is not directly
comparable to this Transaction. Petrie Stores is not directly comparable to Tech
Squared, and Toys "R" Us is not directly comparable to Digital River.
Accordingly, an analysis of the results of such a comparison is not purely
mathematical but instead involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the companies involved and other factors that could affect
the value of such a transaction to which the Tech Squared/Digital River
transaction is being compared. SG Cowen did not identify other similar
transactions which it then chose to disregard in its analysis.
OPTION VALUATION ANALYSIS
Tech Squared's interest in Digital River was held in the form of an option.
As a result, SG Cowen analyzed the value of the option to determine if it
differed from the value of the underlying common stock. Several methodologies
were examined, but the primary analysis methodology was the Black-Scholes model.
The Black-Scholes valuation model yielded results that did not differ
meaningfully from the value of the stock. Sensitivity analysis was completed
with respect to the interest rate, option life and volatility, resulting in a
minimal change in option value.
ANALYSIS OF CERTAIN PUBLICLY TRADED COMPANIES
To provide contextual data and comparative market information, SG Cowen
compared selected historical operating and financial data and ratios for Digital
River to the corresponding financial data and ratios of certain other companies
(the "Selected Companies") which SG Cowen deemed somewhat comparable to Digital
River as companies involved in the electronic commerce industry. The Selected
Companies included:
- Amazon.com, Inc.
- Beyond.com Corporation
- BroadVision, Inc.
- DoubleClick, Inc.
- Ticketmaster Online-City Search, Inc.
- USinternetworking, Inc.
- Vignette Corporation
41
<PAGE>
Such data and ratios include the Adjusted Market Value, as defined in
footnote 2 to the following table, the trading multiple of Adjusted Market Value
to calendar year 2000 revenue estimates, last twelve months revenue, revenue
estimates, and revenue growth rates for calendar years 1998-2000. The analysis
indicated that, for the Selected Companies:
- the median of Adjusted Market Values as a multiple of Year 2000 estimated
revenues was 15.2 times; and
- the median growth rate for calendar years 1998-99 and 1999-2000 was 239%
and 52%, respectively.
COMPARABLE COMPANY ANALYSIS
($ IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OPERATING STATISTICS(1)
ADJ. ---------------------------------------------------------------
MKT. CY99E/ CY00E/
VALUE/ ADJ. CY98 CY99E
CY00E MARKET REVENUE REVENUE CY98 LTM CY99E CY00E
REV VALUE(2) GR. RATE GR. RATE REV REV REV REV
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amazon.com.................... 6.2x $20,538 272% 47% $610 $816 $2,268 $3,330
Beyond.com.................... 3.8x $ 1,038 239% 122% $ 37 $ 50 $ 124 $ 275
BroadVision................... 16.1x $ 1,937 58% 50% $ 51 $ 59 $ 80 $ 120
DoubleClick................... 15.2x $ 3,809 100% 56% $ 80 $ 89 $ 161 $ 250
Ticketmaster.................. 21.0x $ 2,253 76% 52% $ 40 $ 53 $ 71 $ 108
USinternetworking............. 14.1x $ 1,499 628% 255% $ 4 $ 9 $ 30 $ 107
Vignette...................... 15.2x $ 1,865 407% 50% $ 16 $ 23 $ 82 $ 123
- ---------------------------------------------------------------------------------------------------------------------
Median.................... 15.2x $ 1,937 239% 52% $ 40 $ 53 $ 82 $ 123
- ---------------------------------------------------------------------------------------------------------------------
Digital River................. 6.2x $ 625 192% 64% $ 21 $ 30 $ 61 $ 100
</TABLE>
- ------------------------
NOTES
(1) Estimates normalized for calendar year end. All estimates are from SG Cowen,
First Call, Investext, or Street.
(2) Adjusted market value defined as equity market value plus total debt less
cash and cash equivalents.
Although the Selected Companies were used for comparison purposes, none of
the companies are directly comparable to Digital River. Accordingly, an analysis
of the results of such a comparison is not purely mathematical but instead
involves complex considerations and judgments concerning differences in
historical and projected financial and operating characteristics of the Selected
Companies and other factors that could affect the public trading value of the
Selected Companies or Digital River to which they are being compared.
STOCK TRADING HISTORY
SG Cowen reviewed the historical market prices and trading volumes of Tech
Squared stock and Digital River stock from January 9, 1999 to July 9, 1999, the
last trading day prior to announcement of the Transaction. SG Cowen noted that
over the indicated periods the high and low prices for shares of Tech Squared
stock were $6.47 and $2.88, respectively, and the high and low prices of Digital
River stock were $56.75 and $20.69, respectively, and that the average daily
trading volumes of the Tech Squared's and Digital River's shares traded were
approximately 12,999 and 83,561, respectively.
The summary set forth above does not purport to be a complete description of
all the analyses performed by SG Cowen. The preparation of a fairness opinion
involves various determinations as to
42
<PAGE>
the most appropriate and relevant methods of financial analyses and the
application of these methods to the particular circumstances. Therefore, such an
opinion is not readily susceptible to partial analysis or summary description.
SG Cowen did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, notwithstanding the
separate factors summarized above, SG Cowen believes, and has advised the Tech
Squared special committee and the board of directors, that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the process underlying its opinion. In performing
its analyses, SG Cowen made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond the control of Tech Squared and Digital River. These analyses
performed by SG Cowen are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. In addition, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which businesses or
securities may actually be sold. Accordingly, such analyses and estimates are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of the parties or their respective advisors. As mentioned
above, the analyses supplied by SG Cowen and its opinion were among several
factors taken into consideration by the special committee and the board of
directors in making their decisions to enter into the Agreement and should not
be considered as determinative of such decision.
SG Cowen was selected by the board as its financial advisor, and to render
an opinion to the special committee and the board of directors, because SG Cowen
is a nationally recognized investment banking firm and because, as part of its
investment banking business, SG Cowen is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
SG Cowen is providing financial services for Tech Squared for which it will
receive customary fees.
Pursuant to the engagement letter dated June 18, 1999, Tech Squared has
agreed to pay certain fees to SG Cowen for its financial advisory services
provided in connection with the Transaction. A non-refundable fee of $50,000 was
paid upon execution of the engagement letter. An additional fee of $100,000 was
payable on the date SG Cowen informed Tech Squared it was prepared to render the
Opinion to the board of directors of Tech Squared. If a transaction is
consummated with Digital River, an additional fee of $400,000 is payable at the
closing of the transaction. Additionally, Tech Squared has agreed to reimburse
SG Cowen for its out-of-pocket expenses, including attorneys' fees, and has
agreed to indemnify SG Cowen against certain liabilities, including liabilities
under the federal securities laws. The terms of the fee arrangement with SG
Cowen, which are customary in transactions of this nature, were negotiated at
arm's length between Tech Squared and SG Cowen, and the special committee and
the board of directors were aware of such arrangement, including the fact that a
significant portion of the aggregate fee payable to SG Cowen is contingent upon
consummation of the Transaction.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
When considering the recommendation of Tech Squared's board of directors,
you should be aware that certain Tech Squared and Digital River officers and
directors have interests in the transaction that are different from, or are in
addition to, yours.
Mr. Joel A. Ronning is chairman of Tech Squared's board of directors and
served as the company's chief executive officer, chief financial officer and
secretary from May of 1995 until July 1998. Mr. Ronning is the founder of
MacUSA, Inc., a wholly owned subsidiary of Tech Squared, and has served as the
chief executive officer and a director of MacUSA since April 1990. Mr. Ronning
43
<PAGE>
beneficially owns 6,231,164 shares of Tech Squared common stock which represents
approximately 45.02% of Tech Squared's outstanding common stock.
Mr. Ronning is also the founder of Digital River. He currently is a director
of Digital River, serves as the chairman of the board and its chief executive
officer and has an employment contract with the company. Mr. Ronning
beneficially owns 3,150,175 shares of Digital River common stock. He also has
unvested options to purchase 325,000 additional shares of Digital River common
stock.
Additional information concerning Mr. Ronning's relationships with Tech
Squared and Digital River is set forth in the section of this proxy
statement-prospectus under the heading "Intercompany Agreements and Agreements
with Affiliates."
Mr. Charles E. Reese, Jr. joined Tech Squared as president, chief operating
officer and a director in 1996. He became chief executive officer of Tech
Squared in 1999. Mr. Reese beneficially owns 838,000 shares of Tech Squared's
common stock which represents approximately 6.12% of Tech Squared's outstanding
common stock. Mr. Reese's employment agreement with the company was recently
amended. In connection with the revision of his employment agreement, Mr. Reese
waived the "change of control" provisions in Tech Squared's 1995 Stock Option
Plan relating to the accelerated vesting of 125,000 options. Under the terms of
his revised employment agreement, Tech Squared was obligated to continue
Mr. Reese's employment until at least August 20, 1999 when his options covering
250,000 shares of Tech Squared common stock vested. Mr. Reese's revised
employment agreement also provides for six months' severance pay upon
termination of his employment. It is not expected that Mr. Reese will be hired
by Digital River after completion of the Transaction. Mr. Reese may be hired by
Virtual Technology Corporation after sale of Tech Squared's operating business
if the sale of such business to Virtual Technology Corporation is completed.
Mr. Reese also served as a director of Digital River from July 1996 until
July 9, 1999. Mr. Reese beneficially owns 12,500 shares of Digital River common
stock.
Jeffrey Martin, the chief financial officer of Tech Squared, beneficially
owns 43,667 shares of Tech Squared common stock. Mr. Martin also beneficially
owns 300 shares of Digital River common stock.
Mr. Perry W. Steiner joined Digital River as president and a director in
July 1998. He is the beneficial owner of 257,500 shares of Digital River common
stock and 18,841 shares of Tech Squared common stock. Mr. Steiner served as a
director of Tech Squared from December 15, 1998 until June 28, 1999.
Although such persons may have interests in the transaction that are
different from, or are in addition to, yours, all shareholders of Tech Squared
will receive the same pro rata distribution, including shares of Digital River
and interests in the liquidating trust.
Mr. Reese and Mr. Ronning have entered into voting agreements under which
their ability to sell the shares of Digital River to be distributed to them will
be limited. Such voting agreements are described more fully in "The Voting
Agreements." Additionally, the ability of Mr. Ronning and Mr. Steiner (and
possibly others) to sell such shares will be limited due to their status as
affiliates of Digital River after closing of the Transaction. Such limitations
are set forth more fully in "Restrictions on Sales of Shares by Affiliates of
Digital River."
OPINION OF DIGITAL RIVER'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated July 1, 1999, Digital River retained
Broadview International LLC to serve as financial advisor to the board of
directors of Digital River with respect to the fairness, to the Digital River
shareholders, from a financial point of view, of the consideration to be
received by Digital River in connection with the proposed Exchange.
44
<PAGE>
On July 11, 1999, Broadview delivered certain of its written analyses and
its oral opinion, subsequently confirmed in writing, to the board of directors
of Digital River that, as of July 11, 1999, based upon and subject to the
assumptions and considerations set forth therein, the consideration to be
received by Digital River in connection with the proposed Exchange is fair, from
a financial point of view, to the Digital River shareholders.
THE FULL TEXT OF THE WRITTEN OPINION OF BROADVIEW, DATED JULY 11, 1999, IS
ATTACHED AS ANNEX G AND IS INCORPORATED HEREIN BY REFERENCE. YOU ARE URGED TO
READ THE OPINION IN ITS ENTIRETY FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED,
OTHER MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY BROADVIEW. THE SUMMARY OF
THE WRITTEN OPINION OF BROADVIEW SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF THAT OPINION. BROADVIEW'S ANALYSES AND OPINION
WERE PREPARED FOR AND ADDRESSED TO THE SPECIAL COMMITTEE OF THE DIGITAL RIVER
BOARD OF DIRECTORS AND THE BOARD OF DIRECTORS OF DIGITAL RIVER AND ARE DIRECTED
ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, TO THE DIGITAL RIVER
SHAREHOLDERS, OF THE CONSIDERATION TO BE RECEIVED BY DIGITAL RIVER IN CONNECTION
WITH THE EXCHANGE. THE OPINION DOES NOT CONSTITUTE AN OPINION AS TO THE MERITS
OF ALL THE ACTIONS CONTEMPLATED BY THE PLAN OF LIQUIDATION AND DISSOLUTION.
THE AMOUNT OF DIGITAL RIVER STOCK AND CASH TO BE TRANSFERRED TO DIGITAL
RIVER FROM TECH SQUARED AND THE AMOUNT OF DIGITAL RIVER STOCK TO BE ISSUED TO
TECH SQUARED WERE DETERMINED THROUGH NEGOTIATIONS BETWEEN TECH SQUARED AND
DIGITAL RIVER AND NOT PURSUANT TO RECOMMENDATIONS OF BROADVIEW.
In arriving at its opinion, Broadview reviewed and considered such financial
and other matters as it deemed relevant, including, among other things:
- a draft of the Acquisition Agreement, dated as of July 11, 1999;
- certain publicly available information relating to Tech Squared and
Digital River, including the Annual Reports on Form 10-K of Tech Squared
and Digital River for the year ended December 31, 1998, and each of the
Quarterly Reports on Form 10-Q of Tech Squared and Digital River filed for
the quarter ended March 31, 1999;
- the reported closing prices and trading activity for Tech Squared and
Digital River common stock;
- available information, both public and private, concerning other
comparable mergers and acquisitions;
- discussions Broadview had with certain members of the management of
Digital River concerning its rationale for the proposed transaction;
- recent equity analyst reports covering Digital River;
- discussions Broadview had with Digital River, Tech Squared and their
respective financial advisors and Digital River's legal advisor;
- the fact that Joel A. Ronning owns stock in, and sits on the Board of
Directors of, both Digital River and Tech Squared; and
- such other financial studies, analyses and investigations that Broadview
deemed appropriate for the purposes of their opinion.
In rendering its opinion, Broadview has 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 Acquisition Agreement) that was publicly available or furnished
to it by Tech Squared, Digital River or their respective advisors. Broadview has
not made nor obtained an independent appraisal or valuation of any of Tech
Squared's assets. For purposes of its opinion, Broadview has assumed that
neither Digital River nor Tech Squared is currently involved in
45
<PAGE>
any material transaction other than the proposed transaction and those
activities undertaken in the ordinary course of conducting their respective
businesses. Broadview's opinion is based upon market, economic, financial and
other conditions as they exist and can be evaluated as of the date of its
opinion, and any change in such conditions may impact its opinion. Broadview
expresses no opinion as to the price at which Digital River common stock will
trade at any time.
The following is a summary explanation of the various sources of information
and valuation methodologies employed by Broadview in valuing the proposed
transaction with Tech Squared in conjunction with rendering its fairness
opinion. Broadview employed analyses based on: (1) the economic value of the
proposed transaction, (2) transaction comparables, and (3) transaction premiums
paid to determine the fairness of the proposed transaction. This summary
includes all financial analyses used by Broadview which are deemed to be
material, but does not purport to be a complete description of analyses
performed by Broadview in arriving at its opinion. Broadview did not explicitly
assign any relative weights to the various factors or analyses considered.
ECONOMIC VALUATION
Through the proposed transaction, Digital River will reduce its number of
common shares outstanding by approximately 350,000 shares. Based on Digital
River's most recent Quarterly Report on Form 10-Q, this represents approximately
1.7% 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 1.7%. At the
July 9, 1999 Digital River closing share price of $35.25 per share, this
represents a theoretical increase in value of $0.60 per share, or
$12.09 million in aggregate. Digital River will also incur certain expenses as a
result of the proposed 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 proposed 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 $0.53 per share or $10.7 million in the aggregate, as of July 9,
1999.
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 versus 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 (the day it began
trading) through July 9, 1999; and
(2) Daily relative closing prices for Digital River versus the S&P 500 from
August 14, 1998 through July 9, 1999.
46
<PAGE>
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 assumed by 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 million 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 average of the Petrie Transaction discount and the median implied
discount in the GulfMark Transaction is 7.4%. 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.
No transaction utilized as a comparable in the transaction comparables
analysis is identical to the Tech Squared/Digital River Transaction.
Mathematical analysis, such as determining the average, median, or range, is not
in itself a meaningful method of using comparable transaction data.
TRANSACTION PREMIUMS PAID ANALYSIS
Premiums paid above the seller's equity market capitalization ("EMC")
indicate the additional value, when compared to public shareholders that
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 last reported closing price prior to
announcement. Broadview determined that because a majority of Tech Squared's
value is linked to the operations of Digital River, the most comparable
transactions would be transactions in which digital media companies were
acquired. Broadview reviewed seven 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 information technology, 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.;
47
<PAGE>
(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.; and
(7) CDnow, Inc. by N2K Inc.
These comparables exhibit the following medians and ranges for the
applicable premiums (discounts):
<TABLE>
<CAPTION>
MEDIAN
MULTIPLE RANGE OF MULTIPLES
-------- ---------------------
<S> <C> <C> <C> <C>
Premium Paid to Seller's EMC .................. 73.3% (26.6%) to 203.6%
20 Trading Days Prior to Announcement
Premium Paid to Seller's EMC .................. 19.3% 2.2% to 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
VALUE IMPLIED VALUE
-------- -------------------
<S> <C> <C> <C> <C>
Premium Paid to Seller's EMC ...................... $6.17 $2.62 to $10.82
20 Trading Days Prior to Announcement
Premium Paid to Seller's EMC ...................... $4.70 $4.02 to $ 6.20
1 Trading Day Prior to Announcement
</TABLE>
The summary set forth above does not purport to be a complete description of
all the analyses performed by Broadview. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstances. Therefore, such an opinion is not readily susceptible to partial
analysis or summary description. Broadview did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, notwithstanding the separate factors summarized above, Broadview
believes, and has advised the Digital River special committee and the board of
directors, that its analyses must be considered as a whole and that selecting
portions of its analyses and the factors considered by it, without considering
all analyses and factors, could create an incomplete view of the process
underlying its opinion. In performing its analyses, Broadview made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters, many of which are beyond the control of Tech
Squared and Digital River. These analyses performed by Broadview are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses or securities may
actually be sold. Accordingly, such analyses and estimates are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or their respective advisors.
As mentioned above, the analyses supplied by Broadview and its opinion were
among several factors taken into consideration by the Digital River special
committee and the board of directors in making their decisions to enter into the
Acquisition Agreement and should not be considered as determinative of such
decision.
48
<PAGE>
Broadview was selected by the Digital River board as its financial advisor,
and to render an opinion to the special committee and the board of directors,
because Broadview is a nationally recognized investment banking firm focusing on
providing merger and acquisition advisory services to information technology,
communications and media companies. Broadview is continually engaged in the
valuation of such businesses and it maintains an extensive database of
information technology, communications and media mergers and acquisitions for
comparative purposes. Broadview is currently acting as financial advisor to
Digital River's special committee of the board of directors and will receive
customary fees from Digital River.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION
The following summarizes the opinion of Arthur Andersen LLP, subject to the
qualifications set forth below and contained herein, as to the material U.S.
federal income tax consequences to MacUSA, Tech Squared and the holders of Tech
Squared common stock of the liquidation of MacUSA, the Exchange and the
liquidation of Tech Squared. This discussion is based upon laws, regulations,
rulings and decisions in effect on the date hereof, all of which are subject to
change, retroactively or prospectively, and to possibly differing
interpretations. The discussion set forth below may not apply to certain
categories of shareholders subject to special treatment under the Internal
Revenue Code of 1986, as amended (the "Code"), including, but not limited to,
financial institutions, tax-exempt organizations, broker-dealers, insurance
companies, regulated insurance companies, holders who are not United States
persons (as defined in Section 7701(a)(30) of the Code), and holders who
acquired the Tech Squared common stock pursuant to the exercise of employee
stock options or otherwise as compensation. In addition, the discussion does not
address state, local or foreign tax consequences.
SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE TRANSACTIONS DESCRIBED IN THIS PROXY
STATEMENT-PROSPECTUS, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES OF SUCH TRANSACTIONS IN THEIR PARTICULAR CIRCUMSTANCES.
Tech Squared has not requested a ruling from the Internal Revenue Service
(the "IRS") with regard to any of the U.S. federal income tax consequences of
the liquidation of MacUSA, the Exchange or the liquidation of Tech Squared.
Based upon representation letters from each of Digital River and Tech Squared
and subject to the qualifications set forth herein, in the opinion of Arthur
Andersen LLP (i) the liquidation of MacUSA should constitute a tax-free
liquidation of MacUSA under Sections 332 and 337 of the Code, and (ii) the
Exchange and the liquidation of Tech Squared should constitute a reorganization
within the meaning of Section 368(a)(1)(C) of the Code (the "Reorganization").
The opinion of Arthur Andersen LLP (the "Tax Opinion") is included as Annex F to
this proxy statement-prospectus. There are numerous requirements that must be
satisfied in order for the Exchange and the liquidation to be accorded tax-free
treatment under the Code. Due to the inherently factual and subjective nature of
certain of these requirements, Arthur Andersen LLP is unable to render an
unqualified opinion as to the tax-free nature of the Exchange and the
liquidation. The Tax Opinion is subject to certain assumptions and
qualifications, including but not limited to the truth and accuracy of certain
factual representations made by Digital River and Tech Squared. The Tax Opinion
is not binding on the IRS and does not preclude the IRS from adopting a contrary
position. The following discussion assumes that the Exchange and the liquidation
will qualify as a reorganization.
TAX IMPLICATIONS TO TECH SQUARED'S SHAREHOLDERS
In the opinion of Arthur Andersen LLP, the U.S. federal income tax
consequences of the Reorganization to Tech Squared's shareholders should be as
follows. First, Tech Squared shareholders should not recognize gain or loss for
U.S. federal income tax purposes upon the receipt of Digital River common stock
in the liquidation of Tech Squared. Second, the holding period of the Digital
River stock received by the Tech Squared shareholders should include the holding
period of the Tech Squared shares cancelled upon liquidation of Tech Squared,
provided the shares are not held for sale to
49
<PAGE>
customers at the time of the Reorganization. Third, the tax basis of the Digital
River stock received should generally be the same as the tax basis of the Tech
Squared stock deemed exchanged therefor. However, the tax basis of the Digital
River stock should be (i) reduced by the amount of any property other than
Digital River stock received and (ii) increased by any gain recognized upon
receiving property other than Digital River stock. Fourth, Tech Squared
shareholders should generally recognize gain (but not loss) or dividend income
upon the receipt of property other than Digital River stock in the
Reorganization. If cash is received for fractional shares by a Tech Squared
shareholder, the shareholder should generally recognize gain or loss in an
amount equal to the cash received less a portion of the tax basis allocable to
the fractional share redeemed, unless the cash received is essentially
equivalent to a dividend.
Some amount of cash held by Tech Squared and some amount of Digital River
common stock received by Tech Squared in the Exchange may be placed into the
liquidating trust to provide for any liabilities, including any contingent
liabilities, of Tech Squared. The beneficial interests in the liquidating trust
will be distributed to the shareholders of Tech Squared pursuant to the Plan of
Liquidation and Dissolution. For U.S. federal income tax purposes, a share of
the assets of the liquidating trust (both stock and cash) should be deemed to
have been distributed to each Tech Squared shareholder in proportion to their
interests in the liquidating trust and thereafter contributed by such
shareholder to the liquidating trust.
Arthur Andersen LLP has not expressed any opinion on the tax consequences of
owning an interest in the liquidating trust. Tech Squared shareholders should
seek advice from their tax counsel to determine the tax consequences of owning
an interest in the liquidating trust. The following information is solely
provided as a general description of rules that typically apply to persons
holding an interest in a liquidating trust.
In general, a liquidating trust is not itself subject to U.S. federal income
tax; rather, each holder of a beneficial interest in the liquidating trust will
be treated as owning a pro rata share of the assets of the liquidating trust and
is required to take into account his proportionate share of each of the
liquidating trust's items of income or deduction. Because the Exchange and the
liquidation of Tech Squared should constitute a reorganization within the
meaning of Section 368(a)(1)(C) of the Code, as described above, Tech Squared
shareholders should not recognize any gain or loss to the extent that the assets
deemed distributed to them, and contributed to the liquidating trust, consist
solely of Digital River common stock. If a Tech Squared shareholder, however,
realizes gain in the liquidation (i.e., if the total value of all the
consideration received by such shareholder in the liquidation, including Digital
River common stock, exceeds his adjusted basis in his Tech Squared common
stock), he must recognize such gain to the extent that his pro rata share of the
assets of the liquidating trust, net of any fixed liabilities of Tech Squared
that are assumed by the liquidating trust, consists of property other than
Digital River common stock.
The tax basis of the Digital River common stock received by Tech Squared
shareholders in the liquidation, including any Digital River common stock that
is deemed to be received by Tech Squared shareholders as a result of receiving a
beneficial interest in the liquidating trust, will be equal to the basis of any
shares of Tech Squared surrendered in exchange therefor, decreased by the amount
of any property other than Digital River common stock deemed received as a
result of the receipt of a beneficial interest in the liquidating trust, and
increased by the amount of any gain that is recognized as a result of the
receipt of such other property. The tax basis of the shares of Tech Squared
common stock surrendered in the Exchange will be allocated between the Digital
River common stock actually received and the Digital River common stock deemed
received and contributed to the liquidating trust.
If the liquidating trust disposes of any of its Digital River common stock,
other than in a distribution to Tech Squared shareholders, each Tech Squared
shareholder will recognize gain or loss equal to the difference between his pro
rata share of the amount realized by the liquidating trust on
50
<PAGE>
the disposition of such shares, and the shareholder's tax basis in such shares.
The trustee is not required to make any distributions to fund any tax liability
of the Tech Squared shareholders related to any such gain. If the liquidating
trust makes any payments in satisfaction of liabilities of Tech Squared that
were contingent as of the inception of the liquidating trust, a holder of a
beneficial interest in the liquidating trust will generally be entitled to
increase his basis (or claim a capital loss) in the Digital River common stock
acquired in the liquidation (including such holder's pro rata share of any
Digital River common stock held in the liquidating trust) by an amount equal to
such holder's pro rata share of such payment. Moreover, if the liquidating trust
earns any income, such as interest or dividends, such income will be taxable to
a holder of a beneficial interest in the liquidating trust in accordance with
his method of accounting in the year in which received by the trust without
regard to whether any distribution was made.
Although there are severe restrictions on the ability of a Tech Squared
shareholder to dispose of his beneficial interest in the liquidating trust, upon
any such disposition a shareholder will generally recognize gain or loss equal
to the difference between the amount realized by the holder on such disposition
and the holder's basis in the beneficial interest. Such basis will initially be
equal to the sum of (i) the Tech Squared shareholder's basis in his pro rata
share of the Digital River common stock held in the liquidating trust (which, as
described above, will be determined with reference to the shareholder's basis in
the Tech Squared common stock prior to the liquidation), and (ii) his pro rata
share of any other property held in the liquidating trust as of that date. The
basis in a beneficial interest will be increased by the amount of any taxable
income allocated to a holder of a beneficial interest, and decreased by the
basis of any Digital River common stock distributed to a holder of a beneficial
interest. The Tech Squared shareholder's holding period in the interest in the
liquidating trust will be determined with reference to the assets of the
liquidating trust. The holding period with respect to the Digital River common
stock will include the holding period of the Tech Squared common stock held by
such shareholders (provided that such Tech Squared common stock was not held for
sale to customers), while the holding period for any other property held in the
liquidating trust will begin on the date that such property was acquired by the
liquidating trust.
The liquidating trust will provide to the holders of its beneficial
interests initially, and thereafter on an annual basis, such information as is
necessary for the holder of the beneficial interest to report its income and
gain to the IRS, both with respect to the liquidation and thereafter.
TAX IMPLICATIONS TO TECH SQUARED AND MACUSA
In the opinion of Arthur Andersen LLP, the U.S. federal income tax
consequences of the liquidation of MacUSA, the Exchange, and the liquidation of
Tech Squared to Tech Squared and MacUSA should be as follows. First, MacUSA
should not recognize gain or loss with respect to the liquidation. Second, Tech
Squared should not recognize gain or loss with respect to (i) the receipt of
Digital River common stock, or (ii) the distribution of the Digital River common
stock to Tech Squared shareholders in the Reorganization.
IF THE EXCHANGE AND THE LIQUIDATION WERE NOT TO QUALIFY AS A REORGANIZATION
WITHIN THE MEANING OF SECTION 368(a)(1)(C) OF THE CODE, TECH SQUARED
SHAREHOLDERS WOULD GENERALLY RECOGNIZE GAIN OR LOSS FOR U.S. FEDERAL INCOME TAX
PURPOSES UPON THE RECEIPT OF DIGITAL RIVER COMMON STOCK IN EXCHANGE FOR SHARES
OF TECH SQUARED COMMON STOCK. EACH TECH SQUARED SHAREHOLDER'S GAIN OR LOSS WOULD
GENERALLY BE DETERMINED BY COMPARING SUCH SHAREHOLDER'S TAX BASIS IN HIS TECH
SQUARED STOCK TO THE VALUE OF ALL PROPERTY RECEIVED IN THE LIQUIDATION INCLUDING
INTERESTS IN THE LIQUIDATING TRUST. TECH SQUARED WOULD ALSO RECOGNIZE GAIN OR
LOSS ON THE DISTRIBUTION OF DIGITAL RIVER STOCK AND ANY OTHER PROPERTY
DISTRIBUTED TO TECH SQUARED SHAREHOLDERS IN THE LIQUIDATION BASED ON THE
DIFFERENCE BETWEEN THE FAIR MARKET VALUE OF THE PROPERTY DISTRIBUTED AND TECH
SQUARED'S TAX BASIS OF THE PROPERTY. IF MACUSA'S TRANSFER OF SHARES OF DIGITAL
RIVER TO TECH SQUARED IS NOT TREATED AS A TAX-FREE LIQUIDATION, TECH SQUARED (AS
SUCCESSOR TO MACUSA) WILL LIKELY BE SUBJECT TO TAX ON THE VALUE OF DIGITAL RIVER
COMMON
51
<PAGE>
STOCK AT THE TIME OF THE LIQUIDATION. AS A TRANSFEREE OF ASSETS IN LIQUIDATION
OF TECH SQUARED, YOU MAY BE LIABLE FOR A PRO RATA SHARE OF TECH SQUARED'S TAX
LIABILITY FROM THE LIQUIDATION OF MACUSA, THE EXCHANGE AND THE DISTRIBUTION OF
DIGITAL RIVER SHARES. HOWEVER, THE MAXIMUM LIABILITY OF ANY SHAREHOLDER WOULD BE
THE VALUE OF DIGITAL RIVER COMMON STOCK AND ASSETS RECEIVED IN CONNECTION WITH
THE PLAN OF LIQUIDATION AND DISSOLUTION.
PROPOSED LEGISLATION
The Clinton Administration's Fiscal Year 2000 Budget contains a legislative
proposal that, if enacted into law, would require the recognition of gain, but
not loss, by a corporation in transactions such as the Exchange and liquidation
that we have proposed in connection with the voluntary dissolution. The
proposal, if enacted into law as proposed, would likely apply to transactions
that are consummated on or after the date of enactment, but no assurance can be
given that any enacted legislation will not be applied retroactively such that
the Exchange and the liquidation contemplated by the voluntary dissolution would
be subject to this provision. Neither the House of Representatives nor the
Senate has proposed legislation that includes the Clinton Administration's
proposal to impose a corporate tax on transactions such as the Exchange and
liquidation. Shareholders should consult their tax advisors concerning the
likelihood of enactment and the effect, if any, of the proposed legislation on
the Exchange and the liquidation.
THE FOREGOING DISCUSSION IS NOT INTENDED TO BE A COMPLETE ANALYSIS OR
DESCRIPTION OF ALL POTENTIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OR
ANY OTHER CONSEQUENCES OF THE EXCHANGE AND THE LIQUIDATION OF TECH SQUARED. IN
ADDITION, THIS DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES WHICH MAY VARY WITH
OR ARE CONTINGENT ON, YOUR INDIVIDUAL CIRCUMSTANCES. MOREOVER, THIS DISCUSSION
DOES NOT ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX
CONSEQUENCES OF THE EXCHANGE AND THE LIQUIDATION. ACCORDINGLY, YOU ARE STRONGLY
URGED TO CONSULT WITH YOUR TAX ADVISOR TO DETERMINE THE PARTICULAR UNITED STATES
FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES TO YOU OF THE
EXCHANGE AND THE LIQUIDATION.
Tech Squared's receipt of the tax opinion of Arthur Anderson LLP described
above is a condition to closing of the Transaction with Digital River that can
be waived by Tech Squared. If the opinion is not delivered because, in the
opinion of Arthur Andersen LLP, there is a material change in the tax
consequences relating to the transactions, and if this closing condition is
waived by Tech Squared, the closing of the transaction with Digital River
pursuant to the Plan of Liquidation and Dissolution will not proceed without a
new solicitation of shareholders and a new vote on the Plan. The sale of the
operating business of Tech Squared is not conditioned upon, nor related to, such
opinion; and, in such event, could proceed without a new shareholder vote.
ACCOUNTING TREATMENT OF THE TRANSACTION
SALE OF OPERATING ASSETS
Tech Squared will recognize a gain or loss on the sale or other disposition
of its operating assets based upon the difference between the consideration
received for the operating assets, including the company's Net Direct catalog
business, DTP catalog business and Distribution Sales business, and the book
value of the operating assets, including liabilities recognized at the time of
the sale. Under generally accepted accounting principals, this amount is not
recorded until the sale occurs or a loss is probable and estimable.
THE EXCHANGE
The Exchange will result in a decrease in the net worth of Tech Squared
equal to the value of the excess of the number of shares of Digital River common
stock transferred by Tech Squared to Digital River over the number of shares of
such stock issued by Digital River to Tech Squared (such excess
52
<PAGE>
being 350,000 shares of Digital River common stock) plus $1.2 million in cash
minus related deferred income taxes. Based upon the market value of the Digital
River common stock ($20.25 per share) as of September 22, 1999, or market values
of $15, $20 or $25 per share, the reduction in net worth of Tech Squared would
amount to approximately $8.3 million ($5.6 million net of deferred taxes), $6.5
million ($4.5 million net), $8.2 million ($5.6 million net), or $10.0 million
($6.7 million net), respectively.
This decrease will be offset by the remaining deferred taxes related to the
appreciation in value of the Digital River common stock previously recorded in
Tech Squared's financial statements.
The exchange of newly issued shares of Digital River common stock for shares
held by Tech Squared will be treated by Digital River as a treasury stock
transaction. Digital River will record the $1.2 million of cash acquired from
Tech Squared in the Exchange on its balance sheet as cash and cash equivalents
with a corresponding credit to additional paid in capital, net of direct
expenses incurred by Digital River. The Exchange will not have an effect on the
results of operations of Digital River.
THE LIQUIDATION
The complete liquidation and dissolution of Tech Squared, through the
establishment of the liquidating trust and the distribution to Tech Squared
shareholders of the Digital River common stock received by Tech Squared in the
Exchange and pro rata interests in the liquidating trust, will be recorded as a
liquidating distribution and will result in a reduction in the equity of Tech
Squared to zero.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE VOLUNTARY DISSOLUTION
Neither Tech Squared nor Digital River is aware of any material governmental
or regulatory approval required for completion of the voluntary dissolution and
the transactions contemplated thereby, other than compliance with the applicable
corporate law of Minnesota.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF DIGITAL RIVER
The shares of Digital River common stock to be issued in connection with the
Exchange will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares of Digital River common
stock issued to any person who is deemed to be an "affiliate" of Digital River
at the time of the special meeting. Persons who may be deemed to be affiliates
include individuals or entities that control, are controlled by, or are under
common control of Digital River and may include some of Digital River's officers
and directors, as well as its principal shareholders. Affiliates may not sell
their shares of Digital River common stock acquired in the liquidation of Tech
Squared except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares (however, Digital River is not required to file any
such registration statement);
- an exemption under paragraph (d) of Rule 145 under the Securities Act; or
- any other applicable exemption under the Securities Act.
Digital River's registration statement on Form S-4, of which this proxy
statement-prospectus forms a part, does not cover the resale of shares of
Digital River common stock to be received by affiliates in the liquidation.
LISTING ON THE NASDAQ NATIONAL MARKET OF THE COMMON STOCK TO BE ISSUED BY
DIGITAL RIVER
Digital River will use reasonable efforts to cause the shares of Digital
River common stock to be issued in connection with the Exchange as described in
the Plan of Liquidation and Dissolution, to be
53
<PAGE>
approved for listing on the Nasdaq National Market, subject to official notice
of issuance, before the completion of the Exchange.
DISSENTERS' APPRAISAL RIGHTS
Under Minnesota law, including but not limited to Sections 302A.725 and
302A.471(1)(b) of the Minnesota Business Corporation Act, you are not entitled
to exercise dissenter's appraisal rights as a result of the voluntary
dissolution or the transactions contemplated thereby or to demand payment for
your shares of Tech Squared common stock.
DELISTING AND DEREGISTRATION OF TECH SQUARED COMMON STOCK AFTER THE TRANSACTION
If the transaction is completed, Tech Squared common stock will be delisted
from the OTC Bulletin Board and will be deregistered under the Securities
Exchange Act of 1934.
THE SALE OF OPERATING ASSETS
Upon approval by the Tech Squared shareholders of the voluntary dissolution,
Tech Squared and MacUSA will sell or otherwise dispose of all of their operating
assets on terms and conditions to be determined by the board of directors. The
sale or other disposition of the operating assets will include the sale of the
assets used in connection with the company's catalog and distribution
businesses.
After the sale of the operating assets, MacUSA will be merged with and into
Tech Squared. The proceeds from the sale of the operating assets, after payment
of Tech Squared's outstanding liabilities, and after payments to be made to
Digital River under the terms of the Acquisition Agreement, will be contributed
to the liquidating trust.
Tech Squared has entered into a non-binding letter of intent dated July 30,
1999 with Virtual Technology Corporation relating to the sale of all of its
operating assets. The basic terms of the transaction involve the sale of all of
Tech Squared's operating assets and certain liabilities relating to those assets
for a purchase price of one million dollars plus the net book value of the
assets. As of August 30, 1999, the net book value of the assets was $2,128,318.
The letter of intent does not obligate Virtual Technology to proceed with the
sale. The sale is contingent upon completion of due diligence to the
satisfaction of Virtual Technology, the execution of a definitive sale
agreement, and shareholder approval of the dissolution of Tech Squared, or in
the alternative, the sale of assets to Virtual Technology.
The letter of intent envisioned that a definitive agreement would be
completed by September 30, 1999. Tech Squared had agreed not to solicit other
offers for the assets prior to that time. Although a definitive agreement was
not executed by that date, negotiations are continuing and Tech Squared is not
actively seeking another buyer.
A shareholder of Tech Squared has commenced litigation seeking to prevent
the transaction with Digital River. Such litigation is described more fully in
"Certain Legal Matters." The sale or other disposition of Tech Squared's
operating assets, including completion of the proposed transaction with Virtual
Technology Corporation, is not contingent upon completion of the transaction
with Digital River.
The full text of the letter of intent is attached as Annex H and is
incorporated herein by reference.
THE ACQUISITION AGREEMENT
PLEASE NOTE THAT THE FOLLOWING DESCRIPTION OF THE ACQUISITION AGREEMENT IS A
SUMMARY ONLY. YOU SHOULD READ THE FOLLOWING SUMMARY AND THE ACQUISITION
AGREEMENT, ATTACHED AS ANNEX B, FOR A FULL UNDERSTANDING OF THE
54
<PAGE>
ACQUISITION AGREEMENT. THE ACQUISITION AGREEMENT IS INCORPORATED BY REFERENCE
INTO THIS PROXY STATEMENT-PROSPECTUS.
THE EXCHANGE
The Exchange will be effected according to the terms of the Acquisition
Agreement. The 3,000,000 shares of Digital River common stock currently held by
Tech Squared's wholly owned subsidiary, MacUSA, will be transferred to Tech
Squared in connection with the merger of MacUSA with and into Tech Squared. Tech
Squared will then transfer the 3,000,000 shares of Digital River common stock
and $1.2 million in cash to Digital River in exchange for 2,650,000 newly issued
shares of Digital River common stock.
NO ASSUMPTION OF LIABILITIES
The Acquisition Agreement provides that Digital River is not assuming and
will not in any way be liable or responsible for any liabilities or obligations
of Tech Squared.
REPRESENTATIONS AND WARRANTIES
Each of Tech Squared and Digital River has made a number of representations
and warranties in the Acquisition Agreement regarding aspects of their
respective businesses, financial condition, structure and other facts pertinent
to the Exchange.
The representations given by Tech Squared cover the following topics, among
others, as they relate to Tech Squared and its subsidiaries:
- Tech Squared's corporate organization and good standing;
- the authorization, execution, delivery, performance and enforceability of
the Acquisition Agreement and related matters;
- the absence of conflicts with its articles of incorporation, by-laws, or
any agreements to which Tech Squared is a party;
- the receipt of required consents or approvals, if any;
- compliance with applicable laws, including environmental laws;
- the recommendation of Tech Squared's board of directors;
- Tech Squared's title to its shares of Digital River common stock;
- Tech Squared's filings and reports with the Securities and Exchange
Commission;
- Tech Squared's financial statements;
- Tech Squared's liabilities;
- litigation involving Tech Squared; and
- Tech Squared's taxes.
The representations given by Digital River cover the following topics, among
others, as they relate to Digital River and its subsidiaries:
- Digital River's corporate organization and good standing;
- the authorization, execution, delivery, performance and enforceability of
the Acquisition Agreement and related matters;
55
<PAGE>
- the absence of conflicts with its certificate of incorporation, by-laws or
any agreements to which Digital River is a party;
- compliance with applicable laws;
- the receipt of required consents or approvals, if any; and
- the validity of the shares of Digital River common stock to be issued in
the Exchange and presently held by Tech Squared.
The representations and warranties in the Acquisition Agreement are
complicated and not easily summarized. You are urged to carefully read the
sections of the Acquisition Agreement entitled "Representations and Warranties
of the Seller" and "Representations and Warranties of the Buyer."
COVENANTS AND AGREEMENTS
Tech Squared and Digital River also entered into certain covenants and
agreements in connection with the Acquisition Agreement.
Tech Squared agreed that, from the date of the Acquisition Agreement through
the closing date of the Exchange, unless Digital River consents in writing or as
otherwise expressly contemplated by the Acquisition Agreement, it would not take
any action which would:
- make any representation or warranty contained in the Acquisition Agreement
materially incorrect;
- materially impair Tech Squared's ability to satisfy any conditions
contained in the Acquisition Agreement;
- decrease the number of shares of Digital River common stock held by Tech
Squared as of the date of the Acquisition Agreement; or
- prevent the completion of the Exchange.
Tech Squared also agreed that, prior to the closing date of the Exchange, it
would:
- use commercially reasonable efforts to sell all of its operating assets
and those of its wholly owned subsidiary, MacUSA;
- pay its liabilities that become due;
- establish a liquidating trust to provide for actual or potential
liabilities that subsequently arise; and
- within one year of the closing date of the Exchange, liquidate and
distribute the remaining shares of Digital River common stock received in
the Exchange, which were not contributed to the liquidating trust, to its
shareholders.
Tech Squared further agreed that, between the date of the Acquisition
Agreement and the closing date of the Exchange, it would not:
- transfer or encumber any of the shares of Digital River common stock it
presently owns;
- solicit any person other than Digital River for the transfer of the
Digital River common stock it presently owns; or
- purchase any additional shares of Digital River common stock.
The covenants and agreements contained in the Acquisition Agreement are
complicated and not easily summarized. You are urged to carefully read the
section of the Acquisition Agreement entitled "Covenants and Agreements."
56
<PAGE>
CONDITIONS TO COMPLETION OF THE EXCHANGE
Tech Squared's and Digital River's respective obligations to complete the
Exchange are subject to the satisfaction or waiver of each of the following
conditions:
- Tech Squared's shareholders must approve the voluntary dissolution;
- no injunction or order preventing the completion of the Exchange may be in
effect;
- the Registration Statement with respect to the shares of Digital River
common stock to be issued in the Exchange must be effective;
- the Digital River common stock to be issued in the Exchange must be
approved for listing on the Nasdaq National Market; and
- any consents or approvals required to complete the Exchange must be
received.
Tech Squared's obligations to complete the Exchange are subject to the
satisfaction or waiver of each of the following additional conditions:
- Digital River must perform in all material respects its obligations under
the Acquisition Agreement;
- Digital River's representations and warranties contained in the
Acquisition Agreement must be true and correct in all material respects as
of the closing date of the Exchange; and
- Tech Squared must receive the written opinion of Arthur Andersen LLP to
the effect that the Exchange and the liquidation should qualify as a
reorganization within the meaning of Section 368(a)(1)(C) of the Code.
Digital River's obligations to complete the Exchange are subject to the
satisfaction or waiver of each of the following additional conditions:
- Tech Squared must perform in all material respects its obligations under
the Acquisition Agreement;
- Tech Squared's representations and warranties contained in the Acquisition
Agreement must be true and correct in all material respects as of the
closing date of the Exchange;
- Digital River must receive the written opinions of Arthur Andersen LLP and
Cooley Godward LLP to the effect that the Exchange and the liquidation
should qualify as a reorganization within the meaning of Section
368(a)(1)(C) of the Code;
- Tech Squared must establish the liquidating trust for payment of its
liabilities; and
- Digital River must reasonably determine that it will not become
responsible for any of Tech Squared's liabilities.
INDEMNIFICATION
The Acquisition Agreement provides that Tech Squared will indemnify Digital
River (including its current and future affiliates and any of their successors)
from any losses incurred in connection with:
- any breach of any covenant or obligation of Tech Squared contained in the
Acquisition Agreement;
- any liability of Tech Squared or its officers;
- any liability to which Digital River may become subject and that arises
from or relates to:
-- any product produced or sold or any services performed by or on
behalf of Tech Squared;
-- the presence or use of any hazardous substance at any property of
Tech Squared at any time prior to the Exchange closing date;
57
<PAGE>
-- the operation by Tech Squared of its business; or
-- any failure to comply with any bulk transfer law or similar legal
requirement; and
- any proceeding relating directly or indirectly to any breach, alleged
breach, liability or matter of the type referred to above (including any
proceeding commenced by Digital River for the purpose of enforcing any of
its indemnification rights).
TERMINATION OF THE ACQUISITION AGREEMENT
The Acquisition Agreement may be terminated by written notice at any time
prior to the closing date of the Exchange, whether before or after approval of
the voluntary dissolution by Tech Squared shareholders, as follows:
- by mutual consent of Tech Squared and Digital River;
- by Tech Squared or Digital River, if there is any order of a court or
governmental authority prohibiting the completion of the Exchange which is
final and nonappealable;
- by Tech Squared or Digital River, if the Exchange is not completed before
April 15, 2000, except that the right to terminate the Acquisition
Agreement is not available to any party whose failure to fulfill any
obligation under the Acquisition Agreement has been a cause of the failure
to complete the Exchange on or before April 15, 2000;
- by Tech Squared or Digital River, if the voluntary dissolution fails to
receive the requisite vote for approval by the Tech Squared shareholders
at the Tech Squared special meeting;
- by Digital River, if it has reasonably determined that completion of the
Exchange could result in liability to Digital River, provided however,
that if assets equal to at least $6.2 million have been contributed to the
liquidating trust, Digital River may only make this determination based
upon claims or potential liabilities not disclosed at the time of signing
of the Acquisition Agreement or material adverse developments relating to
previously disclosed claims or liabilities;
- by Digital River, if Tech Squared's board of directors fails to recommend
approval of the voluntary dissolution by the shareholders of Tech Squared
or withdraws or modifies, or publicly announces an intention to withdraw
or modify, in any adverse manner, its approval or recommendation of the
voluntary dissolution;
- by Tech Squared, if Digital River fails to perform its obligations under
the Acquisition Agreement and such failure remains uncured;
- by Digital River, if Tech Squared fails to perform its obligations under
the Acquisition Agreement and such failure remains uncured;
- by Digital River, if its board of directors determines in good faith that
termination of the Acquisition Agreement would be in the best interests of
Digital River and its shareholders, provided that Digital River may not
exercise this right unless it determines in good faith to enter into a
transaction that its board of directors determines in good faith to be in
the best interests of Digital River and its shareholders; or
- by Tech Squared, if its board of directors determines in good faith on the
advice of counsel that termination is necessary in order for the board to
comply with its fiduciary obligations under applicable law, provided that
Tech Squared may not exercise this right unless it determines in good
faith to enter into a transaction that its board of directors determines,
based upon advice of counsel, that Tech Squared is required to enter into
in accordance with the board's fiduciary obligations.
AMENDMENT; WAIVER
The Acquisition Agreement may only be amended by a written instrument signed
on behalf of Tech Squared and Digital River.
58
<PAGE>
At any time prior to the closing date of the Exchange, Tech Squared or
Digital River, by action of its board of directors and in a written instrument,
may:
- extend the time allowed for the performance of any obligation under the
Acquisition Agreement; or
- waive compliance with any obligation of the other party, or with any
conditions to its own obligations, under the Acquisition Agreement.
THE LIQUIDATING TRUST AGREEMENT
THE FOLLOWING DESCRIPTION OF THE LIQUIDATING TRUST AGREEMENT IS A SUMMARY ONLY.
YOU SHOULD READ THE FOLLOWING SUMMARY AND THE LIQUIDATING TRUST AGREEMENT
ATTACHED AS ANNEX C FOR A FULL UNDERSTANDING OF THE LIQUIDATING TRUST AGREEMENT.
THE LIQUIDATING TRUST AGREEMENT IS INCORPORATED BY REFERENCE INTO THIS PROXY
STATEMENT-PROSPECTUS.
THE LIQUIDATING TRUST
Tech Squared will transfer assets to the liquidating trust which are, in the
judgment of Tech Squared's board of directors, sufficient to pay actual and
potential liabilities of Tech Squared. The trust then will assume all of the
liabilities of Tech Squared and pay them in an orderly and proper manner.
BENEFICIARIES
The shareholders of Tech Squared, as of a record date to be established by
the board of directors, will hold the beneficial interests in the trust. The
beneficial interests in the trust will not be transferable, except by will or
otherwise by operation of law.
Meetings of beneficiaries may be called by the trustee or by beneficiaries
having an aggregate beneficial interest of at least one-fourth of the total
beneficial interests.
THE TRUSTEE
The Liquidating Trust Agreement provides for one trustee, which shall be a
corporation incorporated under the laws of a state of the United States and
authorized to act as a fiduciary under the laws of the State of Minnesota. The
initial trustee will be Norwest Bank Minnesota, National Association. The
trustee may resign upon notice and may be removed by a vote of beneficiaries
having an aggregate of at least two-thirds of the beneficial interests in the
trust. Successor trustees are elected by a majority vote of the holders of
beneficial interests.
DURATION
The trust will terminate upon the earliest to occur of a termination
required under Minnesota law, the distribution of all remaining assets to the
trust beneficiaries or three years from the date it is created. However, the
trustee may extend the three-year period if it determines that the extension is
required to satisfy all of the Tech Squared liabilities and it receives an
opinion from a qualified advisor that such extension will not cause the trust to
be treated as other than a liquidating trust under applicable Treasury
regulations.
DISTRIBUTIONS
The trustee may make interim distributions of assets of the trust to the
beneficiaries at times deemed appropriate by the trustee, but it must make
distributions at least annually unless it determines that any such distribution
would be inconsistent with the purposes of the trust. When the trustee
59
<PAGE>
determines that all of the trust's liabilities have been satisfied, it will make
a final distribution of any remaining assets to any beneficiaries.
REPORTS
The trustee will provide annual reports to the beneficiaries which will
contain information required to determine the amount of income attributable to
the trust that the beneficiary is required to include in its federal income tax
return. See the heading "Material United States Federal Income Tax Consequences
of the Transaction" of this proxy statement-prospectus for a description of the
applicable provisions of the Internal Revenue Code.
DUTIES, RIGHTS AND POWERS OF THE TRUSTEE
The Liquidating Trust Agreement gives the trustee powers to effectively
manage the assets and pay the liabilities of the trust. However, the trustee is
not required to diversify the assets or sell the shares of Digital River common
stock contributed to the trust, except to the extent necessary to pay or provide
for the payment of liabilities.
Subject to certain qualifications, such as acts in bad faith or reckless
disregard of its duties, the trustee will be indemnified out of the assets of
the trust for any losses incurred by it in connection with its duties as
trustee. The Liquidating Trust Agreement also provides for the indemnification,
out of trust assets, of Tech Squared and its employees and agents for losses
resulting from the exercise or failure to exercise any rights under the
Liquidating Trust Agreement.
AMENDMENT
Subject to certain limitations, the Liquidating Trust Agreement can be
amended upon the vote of holders of beneficial interests representing at least
two-thirds of the outstanding beneficial interests.
THE VOTING AGREEMENTS
THE FOLLOWING DESCRIPTION OF THE VOTING AGREEMENTS IS A SUMMARY ONLY. YOU SHOULD
READ THE FOLLOWING SUMMARY AND THE VOTING AGREEMENTS ATTACHED AS ANNEX D FOR A
FULL UNDERSTANDING OF THE VOTING AGREEMENTS. THE VOTING AGREEMENTS ARE
INCORPORATED BY REFERENCE INTO THIS PROXY STATEMENT-PROSPECTUS.
Digital River required Tech Squared shareholders Joel A. Ronning and Charles
E. Reese, Jr. to enter into voting agreements. The Voting Agreements require
these Tech Squared shareholders to vote all of the shares of Tech Squared common
stock beneficially owned by them in favor of the voluntary dissolution. The
Voting Agreements also contain a "lock-up" agreement which restricts the ability
of these Tech Squared shareholders to sell certain amounts of the shares of
Digital River common stock that they receive in the liquidation of Tech Squared.
In accordance with these restrictions, no shares may be sold prior to
January 1, 2000, one-third of the shares received may be sold after January 1,
2000, an additional one-third of the shares received may be sold after April 1,
2000, and any remaining shares may be sold after June 1, 2000.
As of [ ], 1999, the Tech Squared shareholders who entered into the
Voting Agreements collectively held approximately 6,819,168 shares of Tech
Squared common stock which represented approximately 50.00% of the outstanding
Tech Squared common stock. None of the shareholders who are parties to the
Voting Agreements was paid additional consideration in connection with the
Voting Agreements.
Each Tech Squared shareholder who is a party to the Voting Agreements agreed
not to sell the Tech Squared common stock and options owned beneficially or of
record by that person until the termination of the Voting Agreements, unless the
person to whom the Tech Squared stock or options are to be sold agrees to be
bound by the Voting Agreements.
60
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE DATA
Tech Squared common stock is traded on the OTC Bulletin Board under the
symbol "TSQD." Digital River common stock is traded on the Nasdaq National
Market under the symbol "DRIV."
The following table sets forth, for the calendar quarters indicated, the
high and low sale prices per share of Tech Squared and Digital River common
stock as reported on the OTC Bulletin Board and Nasdaq National Market,
respectively.
<TABLE>
<CAPTION>
TECH SQUARED
COMMON STOCK
---------------------------------------------------
HIGH LOW
------------------------ ------------------------
<S> <C> <C>
1996:
First Quarter.......................................... $ 1.78 $ 0.38
Second Quarter......................................... $ 1.13 $ 0.41
Third Quarter.......................................... $ 0.88 $ 0.25
Fourth Quarter......................................... $ 0.63 $ 0.17
1997:
First Quarter.......................................... $ 0.75 $ 0.27
Second Quarter......................................... $ 0.47 $ 0.16
Third Quarter.......................................... $ 0.84 $ 0.34
Fourth Quarter......................................... $ 3.88 $ 0.56
1998:
First Quarter.......................................... $ 2.38 $ 1.19
Second Quarter......................................... $ 4.00 $ 1.40
Third Quarter.......................................... $ 7.63 $ 1.00
Fourth Quarter......................................... $ 3.78 $ 0.47
1999:
First Quarter.......................................... $ 6.50 $ 3.00
Second Quarter......................................... $ 4.69 $ 2.66
Third Quarter.......................................... $ 3.97 $ 2.56
Fourth Quarter (through October [ ], 1999)............ $ [ ] $ [ ]
<CAPTION>
DIGITAL RIVER
COMMON STOCK
---------------------------------------------------
HIGH LOW
------------------------ ------------------------
<S> <C> <C>
1996:
First Quarter.......................................... N/A N/A
Second Quarter......................................... N/A N/A
Third Quarter.......................................... N/A N/A
Fourth Quarter......................................... N/A N/A
1997:
First Quarter.......................................... N/A N/A
Second Quarter......................................... N/A N/A
Third Quarter.......................................... N/A N/A
Fourth Quarter......................................... N/A N/A
1998:
First Quarter.......................................... N/A N/A
Second Quarter......................................... N/A N/A
Third Quarter.......................................... $ 13.25 $ 5.00
Fourth Quarter......................................... $ 44.00 $ 5.63
1999:
First Quarter.......................................... $ 61.38 $ 27.44
Second Quarter......................................... $ 51.38 $ 19.56
Third Quarter.......................................... $ 36.13 $ 18.25
Fourth Quarter (through October [ ], 1999)............ $ [ ] $ [ ]
</TABLE>
61
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF TECH SQUARED COMMON STOCK AND DIGITAL RIVER
COMMON STOCK
THIS SECTION OF THE PROXY STATEMENT-PROSPECTUS DESCRIBES CERTAIN DIFFERENCES
BETWEEN THE RIGHTS OF HOLDERS OF TECH SQUARED COMMON STOCK AND DIGITAL RIVER
COMMON STOCK. WHILE WE BELIEVE THAT THE DESCRIPTION COVERS THE MATERIAL
DIFFERENCES BETWEEN THE TWO, THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION
THAT IS IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THIS ENTIRE DOCUMENT AND THE
OTHER DOCUMENTS WE REFER TO FOR A MORE COMPLETE UNDERSTANDING OF THE DIFFERENCES
BETWEEN BEING A SHAREHOLDER OF TECH SQUARED AND BEING A SHAREHOLDER OF DIGITAL
RIVER.
As a shareholder of Tech Squared, your rights are currently governed by the
Minnesota Business Corporation Act, Tech Squared's articles of incorporation and
Tech Squared's by-laws. The rights of Digital River shareholders are currently
governed by the Delaware General Corporation Law, Digital River's certificate of
incorporation and Digital River's by-laws. After completion of the transaction,
you will become a shareholder of Digital River and your rights will be governed
by the Delaware General Corporation Law, Digital River's certificate of
incorporation and Digital River's by-laws.
CAPITALIZATION AND VOTING RIGHTS
Both Tech Squared and Digital River have one class of common stock issued
and outstanding. Holders of Tech Squared common stock and holders of Digital
River common stock are each entitled to one vote for each share held. Neither
holders of Tech Squared common stock nor holders of Digital River common stock
are allowed to cumulate votes for the election of directors.
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
Tech Squared directors are elected for a term of one year and until their
successors are elected and qualified. Tech Squared's board is not divided into
classes. Tech Squared's board of directors currently consists of four directors.
The number of directors on Tech Squared's board is determined, from time to
time, by the shareholders of Tech Squared or the board of directors of Tech
Squared and may not exceed 11.
Digital River's board of directors is divided into three classes, as
permitted by Delaware law, with one class being elected annually. Digital River
directors are elected for a term of three years and until their successors are
elected and qualified. Digital River's board of directors currently consists of
eight directors. The number of directors on Digital River's board is determined
by a resolution adopted by a majority vote of the board of directors.
REMOVAL OF DIRECTORS
Tech Squared directors may be removed with or without cause by a vote of the
shareholders holding a majority of the shares entitled to vote at an election of
directors except, as otherwise provided by law, where shareholders have the
right to cumulate their votes.
Digital River directors may be removed for cause by the affirmative vote of
the holders of at least a majority of the shares entitled to vote at an election
of directors. Digital River directors may be removed without cause by the
affirmative vote of the holders of two-thirds of all the then-outstanding voting
stock.
VACANCIES
Tech Squared's by-laws provide that vacancies on the board of directors
resulting from an increase in the number of directors authorized under the
by-laws may be filled by a majority vote of the directors serving at the time of
such increase. All other vacancies on the board of directors shall be filled by
a majority of the remaining directors even though less than a quorum.
62
<PAGE>
Digital River's certificate of incorporation and by-laws provide that any
vacancies on the board of directors, unless the board determines that the
vacancies shall be filled by the shareholders, shall be filled by the
affirmative vote of a majority of the directors then in office, even if less
than a quorum.
SHAREHOLDER ACTION
Tech Squared shareholders may take action at annual or special meetings of
shareholders, or by unanimous written consent of all Tech Squared shareholders
entitled to vote.
Digital River shareholders may take action at annual or special meetings of
shareholders, but may not take action by written consent.
FAIR PRICE PROVISION
Minnesota law contains a fair price provision which prohibits an offeror
from acquiring shares of a publicly held Minnesota corporation within two years
following the offeror's last purchase of shares pursuant to a takeover offer,
unless the shareholders have a reasonable opportunity to dispose of the shares
to the offeror upon terms substantially equivalent to those provided in the
earlier takeover offer. The fair price provision does not apply if the board's
disinterested directors approve the proposed acquisition of shares before the
offeror purchases any shares in the takeover offer. In addition, the fair price
provision does not apply to:
- repurchase offers by the corporation, unless made in response to a hostile
takeover bid;
- tender offers which, if consummated, including the offeror's other share
acquisitions within the preceding twelve months, would not result in the
acquisition of more than 2% of a class of stock; and
- offers for shares of certain regulated entities, including insurance
companies, financial institutions and public service utilities.
Tech Squared is governed by the fair price provision.
Delaware law contains a provision which restricts some types of transactions
and business combinations between a corporation and a 15% stockholder. A 15%
stockholder is generally considered under this provision to be a person owning
15% or more of the corporation's outstanding voting stock. Delaware law
restricts these transactions for a period of three years from the date the
stockholder acquired 15% or more of the corporation's outstanding voting stock.
With some exceptions, unless the transaction is approved by the board of
directors and the holders of at least two-thirds of the outstanding voting
stock, Delaware law prohibits significant business transactions such as:
- a merger with, disposition of significant assets to or receipt of
disproportionate financial benefits by the 15% stockholder;
- any other transaction that would increase the 15% stockholder's
proportionate ownership of any class or series of capital stock.
The shares held by the 15% stockholder are not counted as outstanding when
calculating the two-thirds of the outstanding voting stock needed for approval.
The prohibition against these transactions does not apply if:
- prior to the time that any stockholder became a 15% stockholder, the board
of directors approved either the business combination or the transaction
in which such stockholder acquired 15% or more of the outstanding voting
stock; or
63
<PAGE>
- the 15% stockholder owns at least 85% of the outstanding voting stock of
the corporation as a result of the transaction in which such stockholder
acquired 15% or more of the outstanding voting stock.
Shares held by persons who are both directors and officers or by some types
of employee stock plans are not counted as outstanding when making this
calculation.
Digital River is governed by this provision of Delaware law.
AMENDMENTS TO CERTIFICATES OF INCORPORATION
Tech Squared's articles of incorporation may be amended in accordance with
Minnesota law, which provides that an amendment to a corporation's articles of
incorporation may be approved by a majority of the voting power of the shares
entitled to vote on the proposed amendment.
Digital River's certificate of incorporation provides that the affirmative
vote of the holders of at least two-thirds of the voting power of all of the
then-outstanding shares of the voting stock, voting together as a single class,
is required to alter, amend or repeal the sections of its certificate of
incorporation relating to the election and removal of directors, the limitation
of the personal liability of directors and amendments to the certificate of
incorporation. All other parts of Digital River's certificate of incorporation
may be amended in accordance with Delaware law, which provides that an amendment
to a corporation's certificate of incorporation may be approved by a majority of
the outstanding shares entitled to vote on the proposed amendment.
AMENDMENTS TO BY-LAWS
Under Minnesota law, shareholders entitled to vote have the power to amend
the corporation's by-laws at any time. In addition, the board of directors has
the power to amend certain sections of the by-laws pertaining to directors.
Tech Squared's by-laws vest power to amend its by-laws in the board of
directors, subject to the power of the shareholders to change or repeal the
company's by-laws.
Under Delaware law, shareholders entitled to vote have the power to adopt,
amend or repeal by-laws. A corporation may, in its certificate of incorporation,
confer such power upon the board of directors. The shareholders always have the
power to adopt, amend or repeal by-laws, even though the board may also be
delegated such power.
Digital River's certificate of incorporation provides that its by-laws may
be adopted, amended or repealed (1) by the affirmative vote of at least
two-thirds of the voting power of all of the then-outstanding shares of the
voting stock, or (2) by Digital River's board of directors.
SHAREHOLDER RIGHTS PLAN
Neither Tech Squared nor Digital River has a shareholder rights plan.
NOMINATION PROCEDURES AND SHAREHOLDER PROPOSALS
Minnesota law provides that any business appropriate for action by the
shareholders may be transacted at a regular meeting of the shareholders. Tech
Squared's by-laws do not elaborate.
Digital River's by-laws provide that a shareholder who wishes to nominate
directors for election at a shareholder meeting or who wants to bring business
before a shareholder meeting must have given timely notice thereof in writing to
the secretary of the corporation. In order to be timely, the notice must be
received at the corporation's executive offices not less than 60 nor more than
90 days prior to the first anniversary of the preceding year's annual meeting.
64
<PAGE>
Shareholder nominations and proposals will not be brought before any Digital
River shareholder meeting unless the nomination or proposal was made in
accordance with the specific requirements set forth in the by-laws. The chairman
of the Digital River shareholder meeting will have the power to determine
whether the business or nomination set forth by the shareholder was properly
brought before the shareholder meeting. If the chairman determines that the
business or nomination was not properly brought before the shareholder meeting,
the chairman may declare that the business or nomination will be disregarded.
SPECIAL SHAREHOLDER MEETINGS
Tech Squared's by-laws provide that a special meeting may be called by the
president, the treasurer and any two directors or by one or more shareholders
holding 10% or more of the shares entitled to vote on matters to be presented at
the meeting. Minnesota law further provides that if an annual meeting of
shareholders has not been held during the immediately preceding 15 months, one
or more shareholders holding three percent or more of the voting power of all
shares entitled to vote may demand an annual meeting by written notice of demand
given to the chief executive officer or chief financial officer of the company.
Digital River's by-laws provide that special meetings of the shareholders
may be called by the chairman of the board of directors, the chief executive
officer, or the board of directors pursuant to a resolution approved by a
majority of the board of directors. Delaware law further provides that if an
annual meeting is not held within 30 days of the date designated for the
meeting, or is not held for a period of 13 months after the last annual meeting,
the Delaware Court of Chancery may summarily order a meeting to be held if
requested by any shareholder or director.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Minnesota law provides that, unless the articles of incorporation or by-laws
otherwise provide, directors and officers will be indemnified against judgments,
penalties, fines, settlements and expenses (including attorneys' fees) incurred
in connection with legal proceedings to which they are made, or threatened to be
made, a party by reason of their present or former status as a director or
officer, if:
- they have not been indemnified by another organization;
- they acted in good faith;
- they received no improper personal benefit;
- in the case of any criminal proceeding, they had no reasonable cause to
believe their conduct was unlawful; and
- they reasonably believed their conduct to be in the corporation's best
interests.
Tech Squared's by-laws provide indemnification to directors and officers to the
full extent permitted by Minnesota law.
Delaware law permits a corporation to indemnify any director, officer,
employee or agent made or threatened to be made a party to any threatened,
pending or completed proceeding if the person acted in good faith and in a
manner such person reasonably believed to be in the best interests of the
corporation, and, with respect to any criminal proceeding, had no reasonable
cause to believe that his or her conduct was unlawful.
Digital River's certificate of incorporation and by-laws contain provisions
which require Digital River to indemnify directors and officers to the full
extent permitted by Delaware law.
Digital River's by-laws also provide, in accordance with Delaware law, that
the corporation will advance expenses incurred by its directors or officers in
defending a civil or criminal action, suit or
65
<PAGE>
proceeding because that person is a director or officer. However, such payment
will be made only if the corporation receives an undertaking by or on behalf of
that director or officer to repay all amounts advanced if it is ultimately
determined that he or she is not entitled to be indemnified by the corporation.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
Both Minnesota and Delaware law permit a corporation to include a provision
in its certificate of incorporation eliminating or limiting the personal
liability of a director to the corporation or its shareholders for damages for a
breach of the director's fiduciary duty, subject to certain limitations. Both
Tech Squared's articles of incorporation and Digital River's certificate of
incorporation include such a provision to the maximum extent permitted by law.
INTERCOMPANY AGREEMENTS AND AGREEMENTS WITH AFFILIATES
The following summary identifies material transactions between Tech Squared
or its affiliate, and Digital River or its affiliates.
DIGITAL RIVER LEASE AND FULFILLMENT SERVICES
From 1997 until April 1999 Digital River occupied warehouse space at Tech
Squared's corporate headquarters. Similarly, from 1996 until August 1998,
Digital River's executive offices were located in Tech Squared's facilities.
Tech Squared billed Digital River for the leased space and certain related
costs, such as direct labor costs, phone services, general liability insurance
and janitorial services. Total charges by Tech Squared to Digital River for
these expenses were approximately $9,425 for the first six months of 1999 and
$207,000, $160,000 and $82,000 for 1998, 1997 and 1996, respectively.
During 1997, Tech Squared began performing fulfillment services for Digital
River on shipments of products, for which Digital River paid Tech Squared a
fulfillment fee. Tech Squared billed Digital River approximately $239,300 for
these services for the first six months of 1999 and $246,000 and $8,000 for 1998
and 1997, respectively. Tech Squared stopped providing these fulfillment
services for Digital River in April 1999.
DIVIDEND TO MR. RONNING; REIMBURSEMENT OF TAXES
In 1995, immediately prior to the merger of a wholly owned subsidiary of the
Jaguar Group, Ltd. with and into MacUSA, MacUSA declared a dividend of
$1,188,000 payable to the former shareholders of MacUSA in connection with the
conversion of MacUSA from a Subchapter S corporation to a Subchapter C
corporation. The portion of the dividend payable to Mr. Ronning (in excess of
95%) was evidenced by a note issued by MacUSA. The note did not bear interest,
was due on demand and was subordinated to indebtedness owed by Tech Squared to
Tech Squared's primary lenders. Pursuant to subordination agreements between
Tech Squared, Mr. Ronning and Tech Squared's primary lenders, Tech Squared was
limited in the amount of dividend payments it could make to Mr. Ronning in any
calendar year, and could only make such payments if Tech Squared was then in
compliance with the lending arrangements with Tech Squared's primary lender both
before and after making such dividend payments. Mr. Ronning was paid $260,000 in
1995 and approximately $200,000 in each of 1996, 1997 and 1998. The balance of
the note was paid in February 1999. In March 1996, Tech Squared also agreed to
reimburse Mr. Ronning for any personal tax he was required to pay as a result of
the non-interest bearing status of the note.
TAX INDEMNIFICATION AGREEMENT WITH MR. RONNING
In December 1995, Tech Squared entered into a tax indemnification agreement
with Mr. Ronning. Under the terms of the tax indemnification agreement, Tech
Squared agreed to indemnify Mr. Ronning
66
<PAGE>
for the amount of any penalties or interest resulting from any redetermination
of Mr. Ronning's share of taxable income attributable to MacUSA and the amount
of any additional taxes due from Mr. Ronning, to the extent such tax adjustment
resulted in a decrease in the taxable income of MacUSA while MacUSA was a
Subchapter S corporation.
Tech Squared has also agreed to pay any taxes incurred by Mr. Ronning as a
result of the exercise of the option held by MacUSA to purchase the 3,000,000
shares of Digital River common stock to be transferred to Digital River in the
Exchange.
STOCK OPTION
In December 1995, Mr. Ronning granted MacUSA an option, exercisable through
December 31, 2000, to acquire 3,200,000 shares (adjusted for splits) of Digital
River, which was then privately held. The aggregate exercise price for the
option was $1.00. At that time, such shares represented approximately 60% of the
outstanding common stock of Digital River. During the term of the option,
Mr. Ronning agreed to vote the Digital River shares at the direction of MacUSA's
board of directors. As additional consideration, MacUSA agreed to reimburse
Mr. Ronning for any taxes incurred by Mr. Ronning as a result of the exercise of
the option.
Digital River conducted its initial public offering in August 1998. Prior to
the offering, MacUSA's ownership percentage of Digital River had been reduced to
approximately 23% as a result of Digital River conducting various private
placements. Upon completion of such offering, although MacUSA did not sell any
shares in such offering, MacUSA's ownership percentage was reduced to
approximately 19%.
In December 1998, MacUSA participated in Digital River's secondary public
offering of common stock by exercising the option as to 200,000 shares for seven
cents and selling those shares, realizing net proceeds of $4,430,000. MacUSA
exercised the option as to the remaining 3,000,000 shares, on a cashless basis,
immediately prior to entering into the Acquisition Agreement with Digital River
and now holds approximately 15% of Digital River's outstanding shares.
The shares of Digital River transferable to MacUSA under the option were
subject to the provisions of the Fujitsu Modification Agreement dated December
11, 1997, between Mr. Ronning, MacUSA, Digital River, and Fujitsu Limited, a
company organized under the laws of Japan and a significant investor in Digital
River. Under such agreement, Mr. Ronning was bound to vote for Fujitsu's nominee
for director of Digital River unless Fujitsu's ownership of Digital River fell
below ten percent (10%) of Digital River's outstanding shares. Such agreement
allowed Mr. Ronning to freely transfer the shares of Digital River to MacUSA,
Tech Squared or any of their wholly-owned subsidiaries provided that such
transferee agree to vote such shares for Fujitsu's nominee for director of
Digital River. In connection with the Acquisition Agreement, Fujitsu agreed to
waive its rights under such Modification Agreement.
LOAN TO MR. RONNING
In 1993, MacUSA loaned $200,000 to Mr. Ronning. In consideration of
Mr. Ronning's guarantee of a portion of Tech Squared's bank debt, the interest
rate on the note was reduced to 0%, effective as of January 1, 1997. The
agreement between MacUSA and Mr. Ronning also provided that, if and when the
guarantee was terminated, the interest rate would return to the original rate of
5%. The note, including the accrued and unpaid interest, was paid in full in
December 1998.
PERSONAL GUARANTY BY MR. RONNING
Beginning in 1995, borrowings under Tech Squared's credit agreements with
its primary lenders were personally guaranteed by Mr. Ronning up to a maximum of
$500,000. This guarantee was released
67
<PAGE>
in December 1998. Other than the reduction in interest on MacUSA's loan to
Mr. Ronning discussed above, Mr. Ronning was not otherwise compensated for this
guarantee.
SHARE OWNERSHIP BY PRINCIPAL
SHAREHOLDERS, MANAGEMENT AND DIRECTORS OF TECH SQUARED
The following table sets forth information concerning the beneficial
ownership of common stock of Tech Squared as of [ ], 1999 for the following:
- each person or entity who is known by Tech Squared to own beneficially
more than 5% of the outstanding shares of Tech Squared common stock;
- each of Tech Squared's current directors;
- the executive officers and a former chief executive officer of Tech
Squared; and
- all current directors and executive officers and one former executive
officer of Tech Squared, as a group.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act and the information is
not necessarily indicative of beneficial ownership for any other purpose. Under
this rule, beneficial ownership includes any shares to which the individual has
the right to acquire within 60 days of [ ], 1999 through the exercise of any
stock option or other right. Unless otherwise indicated in the footnotes or
table, each person or entity has sole voting and investment power (or shares
such powers with his or her spouse) with respect to the shares shown as
beneficially owned and has an address of c/o Tech Squared, 6690 Shady Oak Road,
Eden Prairie, Minnesota 55344.
Certain shareholders of Tech Squared, as indicated below, have entered into
Voting Agreements with Digital River agreeing to vote their shares of Tech
Squared common stock in favor of the voluntary dissolution.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- -------------------- ----------------
<S> <C> <C>
Joel A. Ronning (1)......................................... 6,231,164 45.02%
Charles E. Reese, Jr. (2)................................... 838,000 6.12%
Richard J. Runbeck (3)...................................... 100,000 *
Jeffrey F. Martin (4)....................................... 43,667 *
Richard J. Apple (5)........................................ 175,000 1.28%
All directors and executive officers as a group (5 persons)
(6)....................................................... 7,387,831 52.65%
</TABLE>
- ------------------------
* Less than 1%
(1) Includes 199,996 shares subject to options which are currently exercisable.
All of the shares beneficially owned by Mr. Ronning are subject to a voting
agreement with Digital River under which Mr. Ronning has agreed to vote his
shares of Tech Squared common stock in favor of approval of the voluntary
dissolution.
(2) Includes 50,000 shares subject to options which are currently exercisable.
All of the shares beneficially owned by Mr. Reese are subject to a voting
agreement with Digital River under which Mr. Reese has agreed to vote his
shares of Tech Squared common stock in favor of approval of the voluntary
dissolution.
(3) Includes 100,000 shares subject to options which are currently exercisable.
68
<PAGE>
(4) Includes 41,667 shares subject to options which are currently exercisable.
(5) According to the best information available to Tech Squared, Richard J.
Apple, former chief executive officer of the company, owns directly 175,000
shares. Mr. Apple has filed a lawsuit against Tech Squared and others in
which he claims that he has the right to exercise options covering an
additional 775,000 shares. Tech Squared denies this claim. This lawsuit is
discussed under the heading "Certain Legal Matters" on page 69 of this proxy
statement-prospectus.
(6) Includes 391,663 shares subject to options which are currently exercisable
and does not include the 775,000 shares for which Mr. Apple claims he has an
option.
The following current directors and executive officers of Tech Squared have
engaged in a purchase or sale of Tech Squared common stock within the past 60
days:
- Joel A. Ronning exercised, on August 31, 1999, a previously-granted option
to purchase 1,000,000 shares of common stock; Mr. Ronning surrendered the
right to receive 342,858 shares as payment of the exercise price and
received 657,142 shares of common stock. Such shares are subject to the
voting agreement with Digital River under which Mr. Ronning has agreed to
vote his shares of Tech Squared common stock in favor of the Plan of
Liquidation and Dissolution.
- On August 11, 1999 and August 23, 1999, Charles Reese exercised options to
purchase 538,000 and 250,000 shares respectively of Tech Squared common
stock. Such shares are subject to the voting agreement with Digital River
under which Mr. Reese has agreed to vote his shares of Tech Squared common
stock in favor of the Plan of Liquidation and Dissolution.
- Jeffrey Martin purchased 2,000 shares of unrestricted common stock in a
private transaction on August 19, 1999.
No other current directors or executive officers of Tech Squared have
engaged in a purchase or sale of Tech Squared common stock within the past 60
days.
CERTAIN LEGAL MATTERS
Richard J. Apple, who served as chief executive officer of Tech Squared from
July 1998 until February 1999, has filed a complaint in Minnesota state court,
Hennepin County, against Tech Squared and certain of its present and former
officers and directors, including Mr. Ronning, Mr. Reese, Mr. Runbeck and
Mr. Steiner. The complaint alleges that (1) Tech Squared unlawfully terminated
Mr. Apple's employment, (2) Mr. Apple's unvested stock options to purchase
775,000 shares became exercisable prior to his termination due to an alleged
"change of control" of Tech Squared and (3) Tech Squared's directors breached
their fiduciary duty in several instances. The complaint seeks unspecified
damages in excess of $50,000 and an award of registered shares of Tech Squared
common stock. Tech Squared believes the complaint is without merit and intends
to defend this lawsuit vigorously. Discovery is continuing.
On August 17, 1999, a shareholder of Tech Squared filed a complaint in
Minnesota state court, Hennepin County, on behalf of Tech Squared against some
of Tech Squared's current and former directors and former officers. The lawsuit,
which was brought as a derivative action and which seeks certification as a
class action, alleges that the individual defendants breached their fiduciary
duties owed to Tech Squared and its shareholders by approving the Digital River
transaction (1) for inadequate consideration and (2) on terms favorable to the
individual defendants at the expense of minority shareholders. The named
plaintiff has asked the court for a preliminary injunction preventing Tech
Squared from proceeding with the transaction with Digital River. Tech Squared
has filed a motion to dismiss the complaint. Tech Squared believes that the
allegations set forth in the complaint are without merit and intends to contest
the lawsuit to the fullest extent possible. As of the date of this proxy
statement-prospectus, motions for an injunction and to dismiss are pending.
69
<PAGE>
EXPERTS
The audited financial statements of Tech Squared and Digital River as of
December 31, 1998 and for each of the three years then ended which are
incorporated by reference in this proxy statement-prospectus or delivered
herewith have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto and included in
reliance upon the authority of said firm as experts in accounting and auditing.
Tech Squared anticipates that one or more representatives of Arthur
Andersen LLP will be present at the special meeting with an opportunity to make
a statement, if desired, and will be available to answer appropriate questions
from shareholders who are present.
EXPENSES
The following table sets forth estimated expenses of Tech Squared in
connection with the Transaction:
<TABLE>
<S> <C>
Filing Fees............................................. [ 11,900]
Transfer Agent Fees..................................... []
Printing Expenses....................................... []
Financial Advisor Fees.................................. []
Trustee Fees............................................ []
Legal Fees.............................................. [160,000]
Accounting Fees......................................... 400,000
Miscellaneous........................................... []
TOTAL................................................... $[]
</TABLE>
The source of the funds to pay the above fees is expected to be available
cash, including proceeds from the sale of the company's operating assets.
WHERE YOU CAN FIND MORE INFORMATION
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED IN OR DELIVERED WITH THIS PROXY STATEMENT-PROSPECTUS.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 after the date of this proxy
statement-prospectus and before the date of the special meeting are incorporated
by reference into and are made a part of this proxy statement-prospectus from
the date of filing of those documents.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT,
DELIVERED WITH THIS PROXY STATEMENT-PROSPECTUS OR THAT WE HAVE REFERRED YOU TO.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
The following documents, which were filed by Tech Squared with the
Securities and Exchange Commission, have been mailed to you together with this
proxy statement-prospectus and are incorporated by reference herein:
- Tech Squared's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, as amended on October [ ], 1999; and
- Tech Squared's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999.
70
<PAGE>
The following documents, which have been filed by Digital River with the
Securities and Exchange Commission, are incorporated by reference into this
proxy statement-prospectus:
- Digital River's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998;
- Digital River's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1999;
- Digital River's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999;
- Digital River's Proxy Statement on Schedule 14A filed with the Securities
and Exchange Commission on March 23, 1999;
- Digital River's Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 16, 1999;
- Digital River's Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 16, 1999; and
- The description of Digital River common stock set forth in Digital River's
Registration Statement on Form S-1/A filed with the Securities and
Exchange Commission on August 11, 1998.
Any statement contained in a document incorporated or deemed to be
incorporated by reference into this proxy statement-prospectus will be deemed to
be modified or superseded for purposes of this proxy statement-prospectus to the
extent that a statement contained in this proxy statement-prospectus or any
other subsequently filed document that is deemed to be incorporated by reference
into this proxy statement-prospectus modifies or supersedes that statement. Any
statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this proxy statement-prospectus.
The documents incorporated by reference into this proxy statement-prospectus
are available from Digital River upon request. Digital River will provide a copy
of any and all of the information that is incorporated by reference in this
proxy statement-prospectus (not including exhibits to the information unless
those exhibits are specifically incorporated by reference into this proxy
statement-prospectus) to any person, without charge, upon written or oral
request. ANY REQUEST FOR DOCUMENTS SHOULD BE MADE BY [ ], 1999 TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS.
Requests for documents relating to Digital River should be directed to:
Digital River, Inc.
9625 West 76th Street, Suite 150
Eden Prairie, Minnesota 55344
(612) 253-1234
We file reports, proxy statements and other information with the Securities
and Exchange Commission. Copies of our reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, NW Suite 1400 New York, NY 10048
Washington, D.C. 20549 Chicago, Illinois 60661
</TABLE>
Reports, proxy statements and other information concerning Digital River may
be inspected at:
The National Association of Securities Dealers
1735 K Street, N.W.
Washington, D.C. 20006
71
<PAGE>
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549 or by calling the Securities and
Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission
maintains a Website that contains reports, proxy statements and other
information regarding Tech Squared and Digital River. The address of the
Securities and Exchange Commission Website is http://www.sec.gov.
Digital River has filed a registration statement on Form S-4 under the
Securities Act with the Securities and Exchange Commission with respect to
Digital River's common stock to be issued to Tech Squared shareholders in the
liquidation of Tech Squared. This proxy statement-prospectus constitutes the
prospectus of Digital River filed as part of the registration statement. This
proxy statement-prospectus does not contain all of the information set forth in
the registration statement because certain parts of the registration statement
are omitted in accordance with the rules and regulations of the Securities and
Exchange Commission. The registration statement and its exhibits are available
for inspection and copying as set forth above.
If you have any questions about the voluntary dissolution, please call
Charles Reese or Jeffrey Martin of Tech Squared at (612) 832-5622.
THIS PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE THE SECURITIES OFFERED BY THIS PROXY
STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR
FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER,
SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROXY STATEMENT-PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES
PURSUANT TO THIS PROXY STATEMENT-PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH OR INCORPORATED INTO THIS PROXY STATEMENT-PROSPECTUS BY REFERENCE OR IN
OUR AFFAIRS SINCE THE DATE OF THIS PROXY STATEMENT-PROSPECTUS. THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS WITH RESPECT TO TECH SQUARED AND
ITS SUBSIDIARIES WAS PROVIDED BY TECH SQUARED AND THE INFORMATION CONTAINED IN
THIS PROXY STATEMENT-PROSPECTUS WITH RESPECT TO DIGITAL RIVER WAS PROVIDED BY
DIGITAL RIVER.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
The documents delivered with and incorporated by reference into this proxy
statement-prospectus contain forward-looking statements with respect to our
financial condition, results of operations and business, and on the expected
impact of the exchange on Digital River's financial performance. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
and similar expressions identify forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking statements.
In evaluating the voluntary dissolution and the transactions contemplated
thereby, you should carefully consider the discussion of risks and uncertainties
in the section entitled "Risk Factors" beginning on page 14 of this proxy
statement-prospectus.
72
<PAGE>
ANNEX A
PLAN OF LIQUIDATION AND
DISSOLUTION OF TECH SQUARED INC.
The following Plan of Liquidation and Dissolution (the "Plan") shall effect
the complete liquidation and dissolution of Tech Squared Inc., a Minnesota
corporation ("Tech Squared"), in accordance with Section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended (the "Code") and the Minnesota
Business Corporation Act (the "Act").
1. ADOPTION OF PLAN. The Plan shall become effective upon the approval of
the voluntary dissolution of Tech Squared by the affirmative vote of the holders
of record of a majority of the outstanding shares of Tech Squared's common stock
voting at a shareholders' meeting called for such purpose (the "Effective
Date").
2. NOTICE OF INTENT TO DISSOLVE. As soon as possible after the Effective
Date, Tech Squared shall file with the Secretary of State for the State of
Minnesota a notice of intent to dissolve pursuant to Section 302A.723 of the
Act, which shall have the effect specified in the Act.
3. SALE OF OPERATING ASSETS. As soon as possible after filing the notice
of intent to dissolve, Tech Squared shall sell or otherwise dispose of its
operating assets on terms satisfactory to its board of directors (the "Board").
4. MERGER OF MACUSA. After the sale or other disposition of the operating
assets, MacUSA, Inc., a wholly owned subsidiary of Tech Squared, shall be merged
with and into Tech Squared (the "Merger").
5. THE EXCHANGE. As soon as possible after the sale of its operating
assets and the Merger, and pursuant to the Acquisition Agreement dated July 11,
1999, between Tech Squared and Digital River, Inc., a Delaware corporation
("Digital River"), Tech Squared shall transfer to Digital River (i) 3,000,000
shares of Digital River common stock held by Tech Squared and (ii) $1,200,000 in
exchange for 2,650,000 shares of newly issued Digital River common stock (the
"Exchange").
6. LIQUIDATING TRUST. A liquidating trust shall be established
substantially in the form attached hereto as Annex 1. The initial trustee will
be Norwest Bank Minnesota, National Association. After the Exchange, Tech
Squared shall transfer to the trust all of its cash and cash equivalents and
enough shares of the newly issued Digital River common stock that it received in
the Exchange to satisfy, in the judgment of the Board, the actual and potential
liabilities of Tech Squared.
7. DISSOLUTION OF TECH SQUARED. After the distribution to the liquidating
trust, Tech Squared shall distribute its remaining shares of Digital River
common stock to its shareholders (the "Liquidating Distribution"). Such shares
shall be distributed on a pro rata basis and fractional shares shall be rounded
to the nearest whole share. The shareholders shall also receive beneficial
interests in the liquidating trust in proportion to their shareholdings in Tech
Squared. Thereafter, Tech Squared shall be dissolved in accordance with the
provisions of the Act.
8. CANCELLATION OF COMMON STOCK. The Liquidating Distribution shall be in
complete redemption and cancellation of all of the outstanding common stock of
Tech Squared. The Board may direct that Tech Squared's stock transfer books be
closed as of the close of business on the record date fixed by the Board for the
first or any subsequent installment of any Liquidating Distribution as the
Board, in its absolute discretion, may determine (the "Record Date").
Thereafter, certificates representing common stock shall not be assignable or
transferable on the books of Tech Squared except by will, intestate succession
or operation of law. The shareholders shall surrender their Tech Squared stock
certificates (or, if so required by the Board in its absolute discretion,
furnish indemnity bonds in
A-1
<PAGE>
the case of lost or destroyed certificates) immediately following the Record
Date as a condition to their receipt of any Liquidating Distribution.
9. MISSING SHAREHOLDERS. If any Liquidating Distribution to a shareholder
cannot be made, whether because the shareholder cannot be located, has not
surrendered a certificate evidencing the common stock of Tech Squared as
required hereunder, or for any other reason, then the distribution to which such
shareholder is entitled shall be transferred to and deposited with the state
official authorized by the laws of the State of Minnesota to receive the
proceeds of such distribution. The proceeds of such distribution shall
thereafter be held solely for the benefit of and for ultimate distribution to
such shareholder as the sole equitable owner thereof and shall escheat to the
State of Minnesota or be treated as abandoned property in accordance with the
laws of the State of Minnesota. In no event shall the proceeds of any such
distribution revert to or become the property of Tech Squared.
10. TERMINATION OF LIQUIDATING TRUST. When the trustee determines that all
of the trust's liabilities have been satisfied, it shall make a final
distribution of any remaining assets to the holders of the beneficial interests
of the trust. Any such distribution shall be only in the form of shares of
Digital River common stock.
11. INDEMNIFICATION. Tech Squared shall continue to indemnify its
officers, directors, employees and agents in accordance with applicable law, its
articles and bylaws and any contractual arrangements for actions taken in
connection with the Plan and the winding up of the affairs of Tech Squared and
shall indemnify any trustee of the liquidating trust and its agents on similar
terms. Tech Squared's obligation to indemnify such persons may be satisfied out
of the assets of the liquidating trust. The Board and the trustee, in their
absolute discretion, are authorized to obtain and maintain insurance for the
benefit of such officers, directors, employees, agents and trustees to the
extent permitted by law.
12. POWER OF BOARD OF DIRECTORS AND OFFICERS. The Board and the officers
of Tech Squared shall have authority to do or authorize any and all acts and
things as provided for in the Plan and any and all such further acts and things
as they may consider desirable to carry out the purposes of the Plan, including
the execution and filing of all such certificates, documents, information
returns, tax returns, and other documents which may be necessary or appropriate
to implement the Plan. The Board may authorize such variations from or
amendments to the provisions of the Plan as may be necessary or appropriate to
effectuate the complete liquidation and dissolution of Tech Squared and the
distribution of its assets to its shareholders in accordance with the Act and
Section 368(a)(1)(C) of the Code.
13. AMENDMENT. The Plan may be amended by the Board at any time, whether
before or after the shareholders' approval of the voluntary dissolution of Tech
Squared.
Adopted this [ ] day of October, 1999, by the Board of Directors of Tech
Squared Inc.
--------------------------------------
Secretary
A-2
<PAGE>
ANNEX B
ACQUISITION AGREEMENT
ACQUISITION AGREEMENT, dated as of July 11, 1999, between DIGITAL RIVER,
INC., a Delaware corporation (the "Buyer"), and TECH SQUARED INC., a Minnesota
corporation (the "Seller").
The Seller currently holds (through its subsidiary MacUSA, Inc.), among
other assets, an option (the "OPTION") to acquire from Joel A. Ronning ("JAR")
an aggregate of 3,000,000 shares (the "OPTION SHARES") of voting Common Stock,
par value $.01 per share, of the Buyer of the same class of common stock of the
Buyer as is registered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") ("BUYER COMMON STOCK"). The Seller has decided to terminate
all of its operating businesses, specifically including its Net Direct
Operating, DTP Catalog Operations and Distribution Sales. In anticipation of the
disposition of such operating businesses, the Seller has been considering
various alternatives and has concluded that if it continues as a company
registered under the Exchange Act and possibly becomes subject to the Investment
Company Act of 1940, as amended, the Seller would likely incur significant costs
and be subject to significant risks. The Seller has determined that the sale of
the Seller's assets to the Buyer is the most economic alternative for the
Seller. In advance of the Acquisition (as defined below), the Seller intends to
engage in the sale or other disposition (the "DISPOSITION"), through one or more
asset or stock sale transactions, of all of the assets of the Seller and its
Subsidiaries, other than the Option Shares and not less than $1,200,000 of cash
or cash equivalents of the Seller, to certain Persons (each, a "TECH SQUARED
BUSINESS ACQUIROR"). The Disposition shall include the transfer to the Tech
Squared Business Acquirors of the Liabilities of the Seller and its
Subsidiaries, other than those Liabilities expressly retained by the Seller and
its Subsidiaries.
Thereafter, pursuant to this Agreement, the Buyer and the Seller propose to
effect a tax-free reorganization under Section 368(a)(1)(C) of the Code whereby
the Seller will transfer to the Buyer, free and clear of all of the Liabilities
of the Seller and its Subsidiaries (the "ACQUISITION"), the following (the
"PURCHASED ASSETS"): (i) 3,000,000 shares of Buyer Common Stock, which shall
consist of the Option Shares and an additional number of shares of Buyer Common
Stock purchased by the Seller on the Nasdaq National Market in the event the
Option is exercised in a cashless transaction resulting in the transfer to the
holder of the Option of less than 3,000,000 shares of Seller Common Stock upon
exercise of the Option and (ii) $1,200,000 (the "PURCHASED CASH AMOUNT"). The
Purchased Assets will constitute substantially all of the assets of the Seller
as of the Closing. In consideration therefor, the Buyer will issue to the Seller
2,650,000 shares of Buyer Common Stock. The Seller will then dissolve (the
"DISSOLUTION") and, pursuant to the Dissolution, will distribute such shares of
Buyer Common Stock to the holders of Common Stock, no par value, of the Seller
("SELLER COMMON STOCK"), subject to a liquidating trust and other arrangements
that adequately provide for the payment of all Liabilities of the Seller and its
Subsidiaries, as provided in Section 8.2 below.
For federal income tax purposes, the Acquisition is intended to constitute a
"reorganization" within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"). The parties to this Agreement hereby adopt
this Agreement as a "plan of reorganization" within the meaning of Sections
1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.
Concurrently with the execution and delivery of this Agreement, each of JAR,
who owns beneficially 6,574,022 shares of Seller Common Stock, representing
approximately 44% of the outstanding Seller Common Stock (calculated in
accordance with Section 13 of the Exchange Act), and Charles Reese, who owns
beneficially 838,000 shares of the outstanding Seller Common Stock, representing
approximately 6% of the outstanding Seller Common Stock (calculated in
accordance with Section 13 of the Exchange Act), has delivered to the Buyer a
voting agreement and proxy (the "VOTING AGREEMENT AND PROXY") pursuant to which,
among other things, he has agreed to vote such shares in favor of this Agreement
and the transactions contemplated hereby.
B-1
<PAGE>
Accordingly, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound hereby, the Buyer and the
Seller hereby agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall
have the meanings indicated below:
"ACTION" means any action, suit, claim or legal, administrative or arbitral
proceeding or investigation by or before any Governmental Body.
"AFFILIATE" means, with respect to any Person, any other Person controlling,
controlled by or under common control with such Person.
"COMMISSION" means the Securities and Exchange Commission or any successor
agency.
"CONDITION OF THE SELLER" means the business, assets, properties, results of
operations or financial condition of the Seller and its Subsidiaries, taken as a
whole.
"CONTRACT" means any written, oral, implied or other agreement, contract,
understanding, arrangement, instrument, note, guaranty, indemnity,
representation, warranty, deed, assignment, power of attorney, certificate,
purchase order, work order, insurance policy, benefit plan, commitment,
covenant, assurance or undertaking of any nature.
"CONVERTIBLE PREFERRED STOCK" means the Seller's Preferred Stock, par value
$1.00 per share, convertible at any time prior to maturity or effectiveness of
redemption into shares of Seller Common Stock at a conversion price of $1.25 and
which has been the subject of a notice of redemption by the Seller, subject to
conversion prior to August 30, 1999, at scheduled redemption prices.
"DAMAGES" includes any loss, damage, injury, decline in value, lost
opportunity, Liability, claim, demand, settlement, judgment, award, fine,
penalty, Tax, fee (including any legal fee, expert fee, accounting fee or
advisory fee), charge, cost (including any cost of investigation) or expense of
any nature.
"DISCLOSURE STATEMENT" means the disclosure statement setting forth certain
information concerning the Seller delivered by the Seller to the Buyer on the
date hereof.
"GAAP" means generally accepted accounting principles.
"GOVERNMENTAL BODY" means any government or political subdivision thereof,
whether federal, state or local, domestic or foreign, or any agency or
instrumentality of any such government or political subdivision, or any court,
tribunal or arbitrator.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder.
"INDEMNITEES" means the following Persons: (a) the Buyer; (b) the Buyer's
current and future affiliates; and (c) the respective successors and assigns of
the Persons referred to in clauses "(a)"and "(b)" above.
"IRS" means the Internal Revenue Service or any successor agency.
"LIABILITY" means any debt, obligation, duty or liability of any nature
(including any unknown, undisclosed, unmatured, unaccrued, unasserted,
contingent, indirect, conditional, implied, vicarious, derivative, joint,
several or secondary liability), regardless of whether such debt, obligation,
duty or liability would be required to be disclosed on a balance sheet prepared
in accordance with generally accepted accounting principles and regardless of
whether such debt, obligation, duty or liability is immediately due and payable.
"LIEN" means any lien, pledge, mortgage, security interest, claim, lease,
charge, option, right of first refusal, easement, servitude, encumbrance or
other restriction or limitation.
B-2
<PAGE>
"MCL" means the General Corporation Law of the State of Minnesota, as
amended.
"PERSON" means any individual, corporation, partnership, firm, joint
venture, association, joint-stock company, trust, unincorporated organization,
Governmental Body or other entity.
"PROCEEDING" means any action, suit, litigation, arbitration, proceeding
(including any civil, criminal, administrative, investigative or appellate
proceeding and any informal proceeding), prosecution, contest, hearing, inquiry,
inquest, audit, examination or investigation commenced, brought, conducted or
heard by or before, or otherwise involving, any Governmental Body or any
arbitrator or arbitration panel.
"REGISTRATION STATEMENT" means the registration statement of the Buyer on
Form S-4 and the prospectus included therein for the registration under the
Securities Act of shares of Buyer Common Stock constituting the Purchase
Consideration.
"RELATED PARTY" each of the following shall be deemed to be a "Related
Party": (a) each individual who is, or who has at any time been, an officer of
the Seller; (b) each member of the family of each of the individuals referred to
in clause "(a)" above; and (c) any entity (other than the Seller) in which any
one of the individuals referred to in clauses "(a)" and "(b)" above holds or
held (or in which more than one of such individuals collectively hold or held),
beneficially or otherwise, a controlling interest or a material voting,
proprietary or equity interest.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SUBSIDIARY" means, with respect to any Person, any corporation at least a
majority of whose outstanding voting securities, or any other Person at least a
majority of whose total equity interest, is owned by such Person.
"TAX" or "TAXES" means, with respect to any Person, a net income, gross
income, gross receipts, sales, use, ad valorem, value added, franchise, profits,
license, withholding, payroll, employment, environmental, excise, severance,
stamp, transfer, occupation, premium, property or windfall profit tax, custom
duty or other tax, governmental fee or other similar assessment or charge,
together with any interest and any penalty, addition to tax or additional amount
imposed by any jurisdiction or taxing authority (domestic or foreign) on such
Person.
"TERMINATION DATE" means April 15, 2000.
The following terms are defined in the corresponding Sections listed below:
<TABLE>
<CAPTION>
TERM SECTION
- ---- --------
<S> <C>
Balance Sheet............................................... 6.5
Balance Sheet Date.......................................... 6.5
Buyer....................................................... Recitals
Buyer Common Stock.......................................... Recitals
CERCLA...................................................... 6.8.4
CERCLIS..................................................... 6.8.4
Closing..................................................... 2
Closing Date................................................ 5
Code........................................................ Recitals
Disposition................................................. Recitals
Dissolution................................................. Recitals
Exchange Act................................................ Recitals
Form 10-Q................................................... 6.5
Hazardous Substance......................................... 6.8.2
NPL......................................................... 6.8.4
Option Shares............................................... Recitals
</TABLE>
B-3
<PAGE>
<TABLE>
<CAPTION>
TERM SECTION
- ---- --------
<S> <C>
Option Stock Transfer....................................... 8.2.1
Other Buyer Filings......................................... 8.9
Other Seller Filings........................................ 8.7
Proxy Statement............................................. 8.7
Purchase Consideration...................................... 3.1.1
Purchased Assets............................................ Recitals
Purchased Cash Amount....................................... Recitals
Release..................................................... 6.8.2
Requirements of Law......................................... 6.8.1
Seller...................................................... Recitals
Seller Common Stock......................................... Recitals
Seller Financial Statements................................. 6.5
Shareholders Meeting........................................ 8.8
Tech Squared Business Acquiror.............................. Recitals
Transactions................................................ 6.2.1
Trust Amount................................................ 8.2.2
Unaudited 1999 Financial Statements......................... 6.5
Voting Agreement and Proxy.................................. Recitals
</TABLE>
2. SALE OF ASSETS.
At the closing provided for in Section 5 below (the "Closing"), the Seller
shall sell, assign, transfer and deliver to the Buyer the Purchased Assets,
which shall constitute all or substantially all of the assets of the Seller on
the Closing Date, by delivery of stock certificates representing 3,000,000
shares of Buyer Common Stock, duly endorsed in blank or accompanied by stock
powers duly executed in blank, in proper form for transfer, and $1,200,000 of
cash by wire transfer of immediately available funds to an account designated by
the Buyer not less than one business day prior to the Closing Date.
3. PURCHASE CONSIDERATION.
3.1.1 The aggregate consideration for the Purchased Assets shall be an
aggregate of 2,650,000 shares of Buyer Common Stock (the "Purchase
Consideration"); PROVIDED, HOWEVER, that the Purchase Consideration shall be
adjusted appropriately if prior to the Closing Date there is a change in the
number of shares of Buyer Common Stock held by the Seller or a change in the
class of shares of Buyer Common Stock held by the Seller, in each case, to
the extent attributable to the declaration of any stock dividend, stock
split, recapitalization, reclassification, combination or similar event.
3.1.2 At the Closing, the Buyer shall deliver to the Seller stock
certificates representing the Purchase Consideration, duly registered in the
name of the Seller. All shares of Buyer Common Stock delivered as Purchase
Consideration shall be duly authorized, fully paid and non-assessable and
free of preemptive rights and registered under the Securities Act.
4. NO ASSUMPTION OF LIABILITIES.
Anything in this Agreement to the contrary notwithstanding, the Buyer shall
not assume, or in any way be liable or responsible for, any Liabilities of the
Seller whatsoever. Without limiting the generality of the foregoing, the Buyer
shall not assume (i) any Liability of the Seller arising out of or in connection
with the negotiation and preparation of this Agreement or the consummation and
performance of the transactions contemplated hereby, including, without
limitation, any Liability relating to Taxes so arising; (ii) any Liability under
Contracts to which the Seller is a party or by or to which it or its assets,
properties or rights are bound or subject, including without limitation
B-4
<PAGE>
environmental Liabilities, wrongful termination Liabilities; (iii) any Liability
to trade or other creditors or customers of the Seller; (iv) any Liability of
the Seller or any shareholder of the Seller for any Taxes; or (v) any Liability
of the Seller with respect to any violation by the Seller or any of its
Subsidiaries of any Requirements of Law.
5. CLOSING.
The Closing of the Acquisition shall take place at the offices of Cooley
Godward llp, One Maritime Plaza, San Francisco, CA 94111 and Larkin, Hoffman,
Daly & Lindgren, Ltd., 1500 Norwest Financial Center, 7900 Xerxes Avenue South,
Bloomington, MN 55431, at 10:00 A.M., Pacific time, on a business day within 10
business days after satisfaction or waiver of each of the conditions set forth
in Section 9 below, such business day to be mutually agreed by the Buyer and the
Seller (subject to reasonable delay of the closing date by either party not to
exceed 10 additional business days), or at such other place, at such other time
or on such other date as the Buyer and the Seller mutually agree in writing. The
date upon which the Closing occurs is herein called the "Closing Date."
6. REPRESENTATIONS AND WARRANTIES OF THE SELLER.
The Seller represents and warrants to the Buyer as follows:
6.1 ORGANIZATION. The Seller is a corporation duly organized, validly
existing and in good standing under the laws of the State of Minnesota and has
the requisite corporate power to own its properties and carry on its business as
now conducted.
6.2 AUTHORITY RELATIVE TO THE AGREEMENTS.
6.2.1 The Seller has the requisite corporate power and authority to
enter into this Agreement and to engage in the Acquisition, the Disposition
and the Dissolution (collectively, the "TRANSACTIONS") and otherwise perform
its obligations hereunder and thereunder. The execution and delivery of this
Agreement by the Seller and the consummation by the Seller of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of the Seller and, except for the approval of its shareholders as
set forth in Section 8.8 below, no other corporate proceedings on the part
of the Seller are necessary to authorize this Agreement, the Transactions or
the other transactions contemplated hereby or thereby; provided that
(i) the Seller has not yet entered into definitive agreements with respect
to the Disposition and (ii) the Seller's Board of Directors has not approved
any particular form or terms of the Dissolution. This Agreement has been
duly executed and delivered by the Seller. This Agreement constitutes a
valid and binding obligation of the Seller enforceable against it in
accordance with its terms.
6.2.2 Except as set forth in the Disclosure Statement, neither the
execution and delivery of this Agreement by the Seller, nor the consummation
of the transactions contemplated hereby nor compliance by the Seller with
any of the provisions hereof or thereof will: (i) violate, conflict with, or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the performance
required by, or result in a right of termination or acceleration under, or
result in the creation of any Lien upon any of the properties or assets of
the Seller or any of its Subsidiaries under, any of the terms, conditions or
provisions of (x) its charter or by-laws or (y) any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other Contract to
which it is a party or to which it or any of its properties or assets may be
subject, or (ii) subject to compliance with the statutes and regulations
referred to in Section 6.2.3 below, violate any judgment, ruling, order,
writ, injunction or decree known to the Seller or any Subsidiary or any
statute, rule or regulation applicable to the Seller or its Subsidiaries or
any of their respective properties or assets, except in the case of clauses
(i)(y) and (ii) above for violations, breaches and
B-5
<PAGE>
defaults which would not, adversely effect (A) the ability of the Seller to
consummate the Transactions or the other transactions contemplated hereby or
(B) the Buyer.
6.2.3 Except as set forth in the Disclosure Statement, other than
compliance with (i) the Exchange Act, (ii) the Securities Act,
(iii) applicable bulk transfer laws, (iv) the HSR Act and (v) applicable
provisions of the MCL, no notice to, filing with, or authorization, consent
or approval of, any Governmental Body is necessary for the consummation by
the Seller of the Transactions or the other transactions contemplated by
this Agreement.
6.3 BOARD RECOMMENDATION. The Board of Directors of the Seller has, by
resolutions duly adopted by a vote at a meeting of such Board duly held on
July 11, 1999, approved and adopted this Agreement, the Transactions and the
other transactions contemplated herein and therein on the terms and conditions
set forth herein, and has recommended that holders of shares of Seller Common
Stock approve this Agreement, the Transactions and the other transactions
contemplated hereby and thereby; provided, that the Seller's Board of Directors
has not approved any particular form or terms of the Disposition or the
Dissolution.
6.4 TITLE TO OPTION SHARES. Following the exercise of the JAR Option in
accordance with its terms, the Seller and its Subsidiaries will own in the
aggregate beneficially and of record, and will have the power and authority to
convey, free and clear of any Lien, the Option Shares, and, upon delivery of and
payment on the Closing Date for the Option Shares as herein provided, the Seller
will convey to the Buyer good and valid title to such Option Shares, free and
clear of any Lien.
6.5 COMMISSION FILINGS; FINANCIAL STATEMENTS. The Seller has heretofore
delivered to the Buyer its (i) Annual Report on Form 10-K for the fiscal years
ended December 31, 1996, 1997 and 1998, as filed with the Commission,
(ii) Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (the
"FORM 10-Q"), and (iii) proxy statements relating to all meetings of the
Seller's shareholders (whether annual or special) since January 1, 1996,
(iv) all other reports (including any Form 8-Ks) or registration statements
filed by the Seller with the Commission since January 1, 1996, and (v) the
unaudited consolidated balance sheet and related unaudited consolidated
statements of income and cash flows of the Seller and its Subsidiaries at
June 30, 1999 and for the six months then ended (the "UNAUDITED 1999 FINANCIAL
STATEMENTS"). As of their respective dates, such reports and registration
statements (including all exhibits and schedules thereto and documents
incorporated by reference therein) complied in all material respects with all
applicable requirements of the Exchange Act or the Securities Act, as
applicable, and did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
consolidated interim financial statements of the Seller and its Subsidiaries
included or incorporated by reference in the Form 10-Q, such other reports and
the Unaudited 1999 Financial Statements (collectively, the "SELLER FINANCIAL
STATEMENTS") have been prepared in accordance with GAAP applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto); and except that the Unaudited 1999 Financial Statements do not include
footnote disclosures otherwise required by GAAP, and fairly present the
consolidated financial position of the Seller and its Subsidiaries as of the
dates thereof and the results of their operations and changes in their financial
position for the periods then ended, except as otherwise noted therein and
subject, in the case of the unaudited interim financial statements, to normal
year-end adjustments and any other adjustments described therein. The
consolidated balance sheet of the Seller and its Subsidiaries as at June 30,
1999 is referred to as the "BALANCE SHEET," and June 30, 1999, is referred to as
the "BALANCE SHEET DATE."
6.6 NO UNDISCLOSED LIABILITIES. At the Balance Sheet Date, the Seller and
its Subsidiaries taken as a whole did not have any direct or indirect
Liabilities, secured or unsecured, known or unknown, fixed or unfixed, choate or
inchoate, liquidated or unliquidated, accrued, absolute, contingent or
B-6
<PAGE>
otherwise, not reflected, reserved against or disclosed in the Balance Sheet or
in the footnotes thereto which were required to be reflected, reserved against
or disclosed therein in accordance with generally accepted accounting
principles. Since the Balance Sheet Date, except as disclosed in the Unaudited
1999 Financial Statements or the Disclosure Statement, neither the Seller nor
any of its Subsidiaries has incurred any Liabilities other than (i) in the
ordinary course of business, (ii) those contained in the agreements entered into
or to be entered into in connection with the Transactions or incurred in
connection with consummating the Transactions or (iii) in amounts that,
individually or in the aggregate, are not material to the Condition of the
Seller or its ability to consummate the Transactions or the other transactions
contemplated hereby or to the Buyer.
6.7 LITIGATION. Except as set forth in the Disclosure Statement, there is
no Action pending or, to the Seller's knowledge, threatened against or involving
the Seller or any of its Subsidiaries, or any of its properties or rights, and
neither the Seller nor any of its Subsidiaries is subject to any order, writ,
injunction or decree, which, in each case, is reasonably likely (i) to have a
material adverse effect on the Condition of the Seller or its ability to
consummate the Transactions or the other transactions contemplated hereby or
(ii) to be material to the Buyer.
6.8 REGULATORY AND ENVIRONMENTAL COMPLIANCE.
6.8.1 The Seller and each of its Subsidiaries have conducted their
respective businesses so as to comply with all applicable Requirements of
Law relating to the operations, conduct or ownership of the property or
business of the Seller or any Subsidiary, the failure to comply with which
would, individually or in the aggregate, have a material adverse effect on
the Condition of the Seller. "REQUIREMENTS OF LAW" means (i) the charter or
by-laws or other organizational or governing documents of the Seller, or
(ii) any statute, law (including common law), treaty, rule, regulation or
ordinance (including, without limitation, environmental, pollution control,
occupational health and safety and food and drug regulations) or permit or
any judgment, decree, injunction, order or legally binding determination of
any Governmental Body applicable to the Seller or any of its Subsidiaries
existing as of the date hereof.
6.8.2 No notice, written notification (and, to the Seller's knowledge,
no oral notification or notice), demand, request for information, citation,
summons or order has been received, no complaint has been filed, no penalty
has been assessed which has not been paid, and no written notice (and, to
the Seller's knowledge, no oral notification or notice) has been received by
the Seller or any of its Subsidiaries that any investigation or review is
pending or threatened by any Governmental Body or other Person, with respect
to any alleged violation by the Seller or any of its Subsidiaries of any
Requirements of Law, with respect to any generation, treatment, storage,
recycling, transportation or disposal or release, as defined in 42 U.S.C.
Section 9601(22), including into an indoor environment ("RELEASE"), of any
toxic, caustic or otherwise hazardous substance including asbestos,
petroleum, its derivatives, by-products and other hydrocarbons, regulated
under federal, state or local environmental statutes, ordinances, rules,
regulations or orders ("HAZARDOUS SUBSTANCE").
6.8.3 No Hazardous Substance is present in violation of any
Requirements of Law at any property now owned or leased by the Seller or any
of its Subsidiaries, and no Hazardous Substance resulting from the Seller's
or any of its Subsidiaries' operations is present in violation of any
Requirements of Law at any property formerly owned or leased by the Seller
or any of its Subsidiaries. There are no underground storage tanks for
Hazardous Substances present in violation of any Requirements of Law at any
property now owned or leased by the Seller or any of its Subsidiaries or, on
any property previously owned or leased by the Seller or any of its
Subsidiaries, with respect to which the Seller or any such Subsidiary may
have liability. Except as set forth in the Disclosure Statement, there has
been no Release of any Hazardous Substance, and no Hazardous Substance is
present, in a reportable or threshold quantity, where such a quantity has
been established by statute, ordinance, rule, regulation or order, at, on or
under any property
B-7
<PAGE>
now or previously owned by the Seller or any of its Subsidiaries, except for
Releases in such quantities that have been reported and for which all
Requirements of Law have been satisfied.
6.8.4 To the Seller's knowledge, neither the Seller nor any of its
Subsidiaries has transported or arranged for the transportation, directly or
indirectly, of any hazardous waste (as defined under applicable Federal or
state law) to any location which is listed or proposed for listing on the
National Priorities List ("NPL") under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), or
on the Comprehensive Environmental Response, Compensation and Liability
Information System ("CERCLIS"), or on any similar state list, which is the
subject of federal, state or local enforcement actions or other
investigations which may reasonably be expected to lead to claims against
the Seller or any of its Subsidiaries for cleanup costs, remedial work,
damages to natural resources or for personal injury claims, including, but
not limited to, claims under CERCLA.
6.8.5 Except as set forth in the Disclosure Statement, no oral or
written notification of a Release of a Hazardous Substance has been filed by
or on behalf of the Seller or any of its Subsidiaries and no property now
or, to the Seller's knowledge, previously owned or leased by the Seller or
any of its Subsidiaries is listed or, to the Seller's knowledge, proposed
for listing, on the NPL, on CERCLIS or any similar state list of sites
requiring investigation or clean-up.
6.8.6 There are no environmental Liens on any of the real property or
other properties owned or leased by the Seller or any of its Subsidiaries,
and neither the Seller nor any of its Subsidiaries has been notified of any
governmental actions that have been taken or are in process which could
subject any of such properties to such Liens and neither the Seller nor any
of its Subsidiaries are required to place any notice or restriction relating
to the presence of Hazardous Substances at any property owned by any of them
in any deed to such property.
6.8.7 To the Seller's knowledge, except as set forth in the Disclosure
Statement, there is no fact, circumstance or condition of or concerning any
property now or previously owned or leased by the Seller or any of its
Subsidiaries that is reasonably likely to result in any material Liability
to the Seller, any of its Subsidiaries or the Buyer under or based on any
Requirements of Law.
6.9 BROKERS. Other than as previously disclosed to the Buyer in writing,
no broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Acquisition or the Transactions
contemplated hereby based upon arrangements made by or on behalf of the Seller.
6.10 TAX RETURNS AND AUDITS. Except as set forth in the Disclosure
Statement:
6.10.1 The Seller and its Subsidiaries as of the Closing Date (A) will
have prepared and filed all required federal, state, local and foreign
returns, estimates, information statements and reports ("RETURNS") relating
to any and all Taxes concerning or attributable to the Seller and its
Subsidiaries or their operations and such Returns are true and correct and
have been completed in accordance with applicable law; (B) will have paid or
accrued all Taxes they are required to pay or accrue; and (C) will have
withheld with respect to their employees all federal and state income taxes,
FICA, FUTA and other Taxes required to be withheld.
6.10.2 There are no other Taxes that would be due if asserted by a
taxing authority, except with respect to which the Seller is maintaining
reserves to the extent currently required by GAAP, and as of the Closing
Date, there will not be any Contract, including but not limited to the
provisions of this Agreement, covering any employee or former employee of
the Seller or its Subsidiaries that, individually or collectively, could
give rise to the payment of any amount that would not be deductible pursuant
to Sections 280G or 162 of the Code. Neither the Seller or its subsidiaries
has executed any waiver of any statute of limitations on or extending the
period for the assessment or collection of any Tax.
B-8
<PAGE>
6.10.3 Neither the Seller nor its Subsidiaries (A) has filed any
consent agreement under Section 341(f) of the Code or agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection
(f) asset (as defined in Section 341(f)(4) of the Code) owned by the Seller
or its Subsidiaries; (B) is a party to a tax sharing, tax indemnity or tax
allocation agreement nor does the Seller or its Subsidiaries owe any amount
under any such agreement; (C) has been a member of an affiliated group of
corporations, within the meaning of Section 1504 of the Code, other than the
affiliated group of which the Seller is the common parent corporation;
(D) owns material assets that directly or indirectly secure debt the
interest on which is tax-exempt under Section 103(a) of the Code; or
(E) is, or has been at any time, a "United States real property holding
corporation" within the meaning of Section 897(c)(2) of the Code.
6.11 DISCLOSURE. No written statement, certificate, schedule, list or
other written information furnished by or on behalf of the Seller to the Buyer
contemplated by this Agreement contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact necessary in
order to make the statements herein or therein, in light of the circumstances
under which they were made, not misleading.
7. REPRESENTATIONS AND WARRANTIES OF THE BUYER.
The Buyer represents and warrants to the Seller as follows:
7.1 ORGANIZATION. The Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the requisite corporate power to carry on its business as now conducted.
7.2 AUTHORITY RELATIVE TO THIS AGREEMENT.
7.2.1 The Buyer has the requisite corporate power and authority to
enter into this Agreement and to perform its obligations hereunder. The
execution and delivery of this Agreement by the Buyer and the consummation
by the Buyer of the transactions contemplated hereby have been duly
authorized by the Board of Directors of the Buyer, and no other corporate
proceeding on the part of the Buyer is necessary to authorize this Agreement
and the transactions contemplated hereby. This Agreement has been duly
executed and delivered by the Buyer and constitutes a valid and binding
obligation of the Buyer, enforceable against the Buyer in accordance with
its terms.
7.2.2 Neither the execution and delivery of this Agreement by the
Buyer nor the consummation of the transactions contemplated hereby nor
compliance by the Buyer with any of the provisions hereof will (i) violate,
conflict with, or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate
the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any Lien upon any of the
properties or assets of the Buyer under, any of the terms, conditions or
provisions of (x) the Certificate of Incorporation or Bylaws of the Buyer or
(y) any note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which the Buyer is a party,
or to which it, or any of its properties or assets, may be subject, or
(ii) subject to compliance with the statutes and regulations referred to in
Section 7.2.3 below, violate any judgment, ruling, order, writ, injunction,
decree, statute, rule or regulation applicable to the Buyer or any of its
properties or assets, or any shares of preferred stock of any class
outstanding of the Buyer except in the case of clauses (i)(y) and
(ii) above for violations, breaches and defaults which would not,
individually or in the aggregate, adversely affect the ability of the Buyer
to consummate the Acquisition or the other transactions contemplated hereby.
B-9
<PAGE>
7.2.3 Other than compliance with the HSR Act and the Securities Act,
no notice to, filing with, or authorization, consent or approval of, any
Governmental Body is necessary for the consummation by the Buyer of the
transactions contemplated by this Agreement.
7.3 BUYER COMMON STOCK. The shares of Buyer Common Stock constituting the
Purchase Consideration, when issued and delivered as consideration for the
Purchased Assets pursuant to the terms hereof, will be validly issued and
outstanding, fully paid and nonassessable, and the issuance of such shares is
not and will not be subject to preemptive rights.
7.4 OPTION SHARES. The Option Shares are validly issued and outstanding,
fully paid and nonassessable.
7.5 BROKERS. Other than as previously disclosed to the Seller, no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the Acquisition or the transactions
contemplated hereby based upon arrangements made by or on behalf of the Buyer.
7.6 DISCLOSURE. No written statement, certificate, schedule, list or other
written information furnished by the Buyer or on behalf of the Buyer to the
Seller contemplated by this Agreement contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
8. COVENANTS AND AGREEMENTS.
The Buyer and the Seller covenant and agree as follows:
8.1 CONDUCT OF BUSINESS. From the date hereof through the Closing Date,
unless the Buyer shall otherwise agree in writing or as otherwise expressly
contemplated hereby (including, without limitation, the Disposition and the
Option Stock Transfer), neither the Seller nor any of its Subsidiaries shall,
directly or indirectly, take (or agree, in writing or otherwise, to take) any
action, including without limitation, any acquisition (by merger, consolidation,
or acquisition of stock or assets) of any other Person, or any investment either
by purchase of stock or securities, contributions to capital (other than to
wholly-owned Subsidiaries), property transfer, or, except in the ordinary
course, purchase of any property or assets of any other Person, or the
incurrence of any indebtedness for money borrowed or the issuance of any debt
securities or the assumption or guarantee of any of the foregoing, except
short-term indebtedness incurred in the ordinary course of business and
consistent with past practices, (i) which would make any representation or
warranty in Section 6 hereof untrue or incorrect in any material respect,
(ii) which impairs the Seller's ability to satisfy any of the conditions set
forth in Section 9.1 or 9.3 below or has the effect of preventing or disabling
the Seller from performing its obligations under this Agreement, (iii) which
diminishes the number of shares of Buyer Common Stock held by the Seller or its
Subsidiaries as of the date hereof or (iv) which could reasonably result in
preventing the consummation of the Transactions or the other transactions
contemplated hereby.
8.2 THE OPTION STOCK TRANSFER; THE DISPOSITION; THE DISSOLUTION.
8.2.1 Promptly following the exercise of the JAR Option in accordance
with its terms (which exercise shall be effected at the time of the signing
of this Acquisition Agreement) and the disposition of the assets of
MacUSA, Inc., and in any event prior to the Closing, MacUSA, Inc. shall
distribute all of its property, including but not limited to all of the
Option Shares (the "Option Stock Transfer"), to the Seller in accordance
with a resolution adopted by Seller authorizing the distribution of all of
the assets of MacUSA, Inc. in complete cancellation or redemption of all of
its stock pursuant to Code Section 332.
B-10
<PAGE>
8.2.2 Prior to the Closing Date, the Seller will use commercially
reasonable efforts to consummate the Option Stock Transfer in a manner that
will not give rise to the recognition of taxable income or gain to the
Seller or any of its Subsidiaries for Federal income tax purposes. In
addition, prior to the Closing Date, the Seller shall use all commercially
reasonable efforts to consummate the Disposition in a commercially
reasonable manner, except to the extent the Buyer concludes in good faith
that the manner selected by Seller may result in the Buyer incurring
Liabilities. In any case, the parties intend that the Disposition will not
create, give rise to or result in any Liability to the Buyer. In that
regard, the Seller, on or prior to the Closing Date, (i) will cause to be
paid or satisfied any of its or its Subsidiaries' liabilities that become
due on or prior to the Closing Date, and (ii) will establish a liquidating
trust in accordance with Internal Revenue Service ("IRS") Revenue Procedures
82-58 and 91-15 and the MCL containing cash (or, to the extent the Seller's
available cash shall be insufficient, shares of Buyer Common Stock received
as Purchase Consideration, and, to the extent determined by the Seller,
other assets in an amount (the "TRUST AMOUNT") reasonably believed by the
Board of Directors of the Seller, and reasonably acceptable to the Buyer, to
satisfy the requirements of the MCL and be sufficient to pay or adequately
provide for any known, actual or contingent Liabilities of the Seller or its
Subsidiaries, or arising out of the Transactions that may be asserted
against the Seller, its Subsidiaries, such liquidating trust or the Buyer.
Written notice of a preliminary estimate of the Trust Amount made by the
Seller in good faith shall be delivered to the Buyer at least 45 days prior
to the Closing Date. Written notice of the determination of the Trust Amount
by the Seller's Board of Directors and the terms thereof, including copies
of the minutes of any meetings or any consents related thereto, shall be
delivered to the Buyer at least five business days prior to the Closing
Date.
8.2.3 The foregoing liquidating trust shall be established with a
trustee selected by the stockholders of record or a court of competent
jurisdiction pursuant to a trust agreement, in form and substance reasonably
acceptable to the Buyer and drafted in accordance with IRS Revenue
Procedures 82-58 and 91-15 and the MCL, which agreements shall include
provisions entitling the Buyer to receive payment thereunder if Liabilities
of the Seller are successfully asserted against the Buyer or if the Buyer
becomes subject to Liabilities as a result of the transactions contemplated
by this Agreement. The Liabilities to be provided for in the liquidating
trust will include, without limitation, Liabilities (if any) under
Contracts, Liability (if any) to trade and other creditors, Liability (if
any) to dissenting shareholders of the Seller, any Liability (including
legal fees and disbursements) related to any litigation against Seller
(whether or not now pending) and to any Actions arising from the
transactions contemplated hereby or relating to any assertion of Liability
provided for in this Section 8.2, environmental Liabilities (if any),
indebtedness for money borrowed (if any) and the fees and expenses of
consummating the transactions contemplated hereby. Such trust agreement
shall provide that any tax imposed (other than upon the shareholders of
Seller and their successors) with respect to such trust arrangement or the
earnings with respect to amounts contained in such trust shall be paid with
funds withdrawn from such trust.
8.2.4 Within one year of the Closing Date, the Seller will consummate
the Dissolution, pursuant to which it will distribute the shares of Buyer
Common Stock received as Purchase Consideration (other than shares subject
to the liquidating trust as provided above) to the holders of Seller Common
Stock.
8.3 CALL OF CONVERTIBLE PREFERRED STOCK. Prior to the Closing Date, the
Seller will call for redemption all outstanding shares of Convertible Preferred
Stock and, on or prior to the Closing Date, cause all such shares of Convertible
Preferred Stock to be redeemed or converted into Seller Common Stock pursuant to
the terms thereof.
8.4 LIQUIDATING DISTRIBUTIONS. In pursuance of the Plan of Reorganization,
and no later than one (1) year from the Closing Date, the Seller shall
distribute the stock, securities and other properties it receives in the
Acquisition, as well as its other properties, first to its creditors, to the
extent necessary
B-11
<PAGE>
to pay all of the Seller's debts and liabilities, then to the liquidating trust,
and then to its stockholders, in complete liquidation of Seller.
8.5 TAX REPRESENTATION LETTERS. At or prior to the filing of the
Registration Statement, the Seller and the Buyer shall deliver to Arthur
Andersen LLP and Cooley Godward LLP tax representation letters in forms
reasonably satisfactory to Arthur Andersen LLP and Cooley Godward LLP. The
Seller and the Buyer shall each confirm to Arthur Andersen LLP and Cooley
Godward LLP the accuracy and completeness as of the date of effectiveness of the
Registration Statement (with respect to Arthur Andersen LLP only) and the
Closing Date (with respect to Arthur Andersen LLP and Cooley Godward LLP) of the
tax representation letters delivered pursuant to the prior sentence. The Seller
and the Buyer shall use all reasonable efforts prior to the Closing Date to
cause the Acquisition to qualify as a tax-free reorganization under
Section 368(a) of the Code. Following delivery of the tax representations
letters pursuant to the first sentence of this Section 8.5, each of the Seller
and the Buyer shall use its reasonable efforts to cause Arthur Andersen LLP to
deliver to it a tax opinion satisfying the requirements of Item 601 of
Regulation S-K promulgated under the Securities Act. In rendering such opinions
and the opinions referred to in Sections 9.2.3, 9.3.3 and 9.3.4, Arthur Andersen
LLP and Cooley Godward LLP shall be entitled to rely on the tax representation
letters described in this Section 8.5.
8.6 AGREEMENT NOT TO SELL OPTION SHARES. The Seller hereby covenants and
agrees that the Seller will not, between the date hereof and the Closing Date:
(i) directly or indirectly, sell, transfer, assign, pledge, hypothecate or
otherwise dispose of or encumber the Option Shares, or enter into any Contract
with respect to the foregoing; (ii) directly or indirectly, solicit, encourage,
participate in or initiate discussions or negotiations with, or provide
information to, any Person other than the Buyer or any Affiliate or
representative of the Buyer, concerning any direct or indirect sale or other
disposition of the Option Shares, except as permitted above; or (iii) purchase
any additional shares of Buyer Common Stock.
8.7 PROXY STATEMENT; OTHER SELLER FILINGS. As promptly as practicable
after the date hereof, the Seller shall prepare and file with the Commission
under the Exchange Act, and shall use all reasonable efforts to have cleared by
the Commission, and promptly thereafter shall mail to its shareholders, a proxy
statement and form of proxy with respect to the Shareholders Meeting. "PROXY
STATEMENT" means such proxy statement and form of proxy at the time it is
initially mailed to the Seller's shareholders and all amendments or supplements
thereto, if any, similarly filed and mailed. As soon as practicable after the
date of this Agreement, the Seller shall promptly prepare and file any other
filings required to be filed by the Seller under the Exchange Act, Securities
Act or any other federal or state securities laws relating to the Acquisition
and the transactions contemplated herein ("OTHER SELLER FILINGS"). The Seller
shall notify the Buyer promptly of the receipt of any comments of the Commission
and of any request by the Commission for amendments or supplements to the Proxy
Statement or by any other governmental official with respect to any Other Seller
Filing or for additional information and will supply the Buyer with copies of
all correspondence with respect to the Proxy Statement and any Other Seller
Filings. Each of the Seller and the Buyer shall use its best efforts to obtain
and furnish the information required to be included in the Proxy Statement and
any Other Seller Filing. The Seller, after consultation with the Buyer, shall
use its best efforts to respond promptly to any comments made by the Commission
with respect to the Proxy Statement and any Other Seller Filing and any
preliminary version thereof and cause the Proxy Statement and related form of
proxy to be mailed to the shareholders of the Seller at the earliest practicable
time. The Seller shall bear the costs and expenses of printing and distributing
the Proxy Statement and related form of proxy (which will include the prospectus
included in the Registration Statement and the related Registration Statement)
to the Seller's shareholders; provided that the Buyer shall be responsible for
any Commission or state blue sky filing or similar fees relating to the
Registration Statement, subject to Section 8.10 below. The Seller shall notify
the Buyer of its intention to mail the Proxy Statement to the shareholders of
the Seller at
B-12
<PAGE>
least 48 hours prior to the intended time of such mailing. The information
provided and to be provided by the Seller and the Buyer, respectively, for use
in the Proxy Statement and any Other Seller Filings shall, on the date the Proxy
Statement is first mailed to the Seller's shareholders or any Other Seller
Filing is filed with the appropriate Governmental Body and in each case on the
date of the Shareholders Meeting, be true and correct in all material respects
and shall not omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading, and each of the Seller and the Buyer agree to correct any such
information provided by it for use in the Proxy Statement or any Other Seller
Filing which shall have become false or misleading. The Proxy Statement and any
Other Seller Filing, when filed with the appropriate Governmental Body, shall
comply as to form in all material respects with all applicable requirements of
law.
8.8 MEETING OF SHAREHOLDERS. The Seller shall take all action necessary,
in accordance with the MCL and its Certificate of Incorporation and Bylaws, to
duly call, give notice of, convene and hold a meeting of its shareholders as
promptly as practicable to consider and vote upon the approval of the
Acquisition and the transactions contemplated hereby (such meeting and any
adjournment or postponement thereof is referred to as the "SHAREHOLDERS
MEETING"). The Proxy Statement shall contain the determinations and
recommendations of the Board of Directors of the Seller as to the Acquisition
and the transactions contemplated hereby, provided, that the Seller's Board of
Directors need not approve or recommend any particular form or terms of the
Disposition. The Seller shall use its best efforts to solicit from holders of
shares of Seller Common Stock proxies in favor of approval of the Acquisition
and the transactions contemplated hereby and to take all other action necessary
or, in the reasonable judgment of the Buyer, helpful to secure the vote of
holders of shares of Seller Common Stock required by law to effect the
Acquisition and the transactions contemplated hereby.
8.9 REGISTRATION STATEMENT; OTHER BUYER FILINGS. As promptly as
practicable after the date hereof, the Buyer shall prepare and file the
Registration Statement with the Commission under the Securities Act and shall
use all reasonable efforts to cause the Registration Statement to be declared
effective by the Commission. As soon as practicable after the date of this
Agreement, the Buyer shall promptly prepare and file any other filings required
to be filed by the Buyer under the Securities Act or any other federal or state
securities laws relating to the Acquisition and the transactions contemplated
herein ("OTHER BUYER FILINGS"). The Buyer shall notify the Seller promptly of
the receipt of any comments of the Commission and of any request by the
Commission for amendments or supplements to the Registration Statement or by any
other governmental official with respect to any Other Buyer Filing or for
additional information and will supply the Seller with copies of all
correspondence with respect to the Registration Statement and any Other Buyer
Filings. Each of the Seller and the Buyer shall use its best efforts to obtain
and furnish the information required to be included in the Registration
Statement and any Other Buyer Filing. The Buyer, after consultation with the
Seller, shall use its best efforts to respond promptly to any comments made by
the Commission with respect to the Registration Statement and any Other Buyer
Filing and any preliminary version thereof. The information provided and to be
provided by the Seller and the Buyer, respectively, for use in the Registration
Statement and any Other Buyer Filings shall, on the date the prospectus included
in the Registration Statement is first mailed to shareholders by the Seller as
part of the Proxy Statement or any Other Buyer Filing is filed with the
appropriate Governmental Body and, in each case, on the date of the Shareholders
Meeting, be true and correct in all material respects and shall not omit to
state a material fact necessary in order to make the statements made, in light
of the circumstances under which they were made, not misleading, and each of the
Buyer and the Seller agree to correct any such information provided by it for
use in the Registration Statement or any Other Buyer Filing which shall have
become false or misleading. The Registration Statement and any Other Buyer
Filing, when filed with the appropriate Governmental Body, shall comply as to
form in all material respects with all applicable requirements of law.
B-13
<PAGE>
8.10 FEES AND EXPENSES. If this Agreement or the transactions contemplated
hereby are abandoned or terminated pursuant to Sections 11.1.5, 11.1.6, 11.1.8
or 11.1.10 the Seller shall promptly (and in any event within two business days
after written request by the Buyer) reimburse the Buyer and its Affiliates for
all reasonable out-of-pocket expenses (including all fees and expenses of
counsel, outside accountants, investment banking firms, experts and consultants
to the Buyer and its Affiliates) incurred by them or on their behalf, commencing
in May 1999, in connection with the transactions contemplated hereby, including
without limitation, all costs and expenses of or relating to (i) the preparation
and negotiation of this Agreement and the Voting Agreement and Proxy, (ii) the
printing and filing of the Registration Statement and exhibits thereto, each
prospectus included therein and any amendment or supplement to the Registration
Statement or any such prospectus, including, without limitation, any filing fees
payable to the Commission or any applicable blue sky authorities, (iii) the
preparation and delivery of stock certificates representing the Purchase
Consideration, (iv) the distribution, shipping and mailing to the Seller's
shareholders of any prospectus, including any supplement thereto, included in
the Registration Statement, (v) the listing of the shares representing the
Purchase Consideration on the Nasdaq Stock Market, (vi) any registration or
qualification of the shares representing the Purchase Consideration with
applicable blue sky authorities, including the fees and disbursements of blue
sky counsel in connection therewith and the preparation and printing of any blue
sky memoranda and (vii) compliance with the HSR Act, including the payment of
any filing fees. Except as provided in the preceding sentence, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses. If this
Agreement or the transactions contemplated hereby are abandoned or terminated
pursuant to Section 11.1.7 or 11.1.9, the Buyer shall promptly (and in any event
within two business days after written request by the Seller) reimburse the
Seller and its Affiliates for all reasonable out-of-pocket expenses (including
all fees and expenses of counsel, outside accountants, investment banking firms,
experts and consultants to the Seller and its Affiliates) incurred by them or on
their behalf, commencing in May 1999, in connection with the transactions
contemplated hereby, including without limitation, all costs and expenses of or
relating to (i) the preparation and negotiation of this Agreement and the Voting
Agreement and Proxy, (ii) the printing and filing of the Registration Statement
and exhibits thereto, each prospectus included therein and any amendment or
supplement to the Registration Statement or any such prospectus, including,
without limitation, any filing fees payable to the Commission or any applicable
blue sky authorities, (iii) the distribution, shipping and mailing to the
Seller's shareholders of any prospectus, including any supplement thereto,
included in the Registration Statement, (iv) compliance with the HSR Act,
including the payment of any filing fees and (v) the preparation of the
liquidating trust.
8.11 ADDITIONAL AGREEMENTS. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its reasonable best efforts
to take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement and to
cooperate with each other in connection with the foregoing, including (i) using
reasonable best efforts to obtain all necessary waivers, consents and approvals
from other parties to loan Contracts; (ii) using reasonable best efforts to
obtain all necessary consents, approvals and authorizations as are required to
be obtained under any federal, state or foreign law or regulations, to defend
all Proceedings challenging this Agreement or the consummation of the
transactions contemplated hereby, to lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the parties
to consummate the transactions contemplated hereby; and (iii) effecting all
necessary registrations and filings, including, but not limited to, filings
under the HSR Act and submissions of information requested by governmental
authorities.
8.12 ACCESS TO INFORMATION; CONFIDENTIALITY.
8.12.1 Prior to the Closing Date, the Buyer shall be entitled, through
its officers, employees and agents, reasonable access at all reasonable
times to the offices and facilities of the Seller and
B-14
<PAGE>
its Subsidiaries and to their officers, employees, agents, properties,
books, records and Contracts, and the Seller shall furnish the Buyer and its
representatives all financial, operating and other data and information as
the Buyer, through its representatives, may reasonably request. In addition,
the Seller shall deliver to the Buyer a copy of any report, opinion,
recommendation, assessment, summary, compilation or other document relating
to the Liabilities of the Seller and its Subsidiaries and prepared for or on
behalf of or addressed to the Seller, the Seller's Board of Directors or any
committee thereof (other than any analysis completed by the Seller's
financial advisor related to the Transactions). At the Buyer's request, the
Seller shall cause the party preparing any such document to provide a letter
permitting the Buyer to rely thereon as though it were addressed to the
Buyer. Subject to the requirements of law or judicial process, the Buyer
shall hold in confidence, and shall use its best efforts to cause its
representatives to hold in confidence, all nonpublic information concerning
the Seller until such time as such information is otherwise publicly
available, and, if this Agreement is terminated, the Buyer will, and will
use its best efforts to cause its representatives to, deliver to the Seller,
within 2 business days of the date of termination, all documents, work
papers and other material (including copies) obtained by the Buyer, or on
its behalf, from the Seller as a result of this Agreement or in connection
herewith, whether so obtained before or after the execution hereof.
8.12.2 Prior to the Closing Date, the Seller shall be entitled to
participate in a due diligence meeting with one or more members of the
senior management of the Buyer, such member or members to be reasonably
designated by the Buyer, to the extent that such meeting shall be reasonably
necessary to fulfill the due diligence obligations of the Seller under the
federal securities laws in connection with the Proxy Statement. Subject to
the requirements of law or judicial process, the Seller shall hold in
confidence all nonpublic information concerning the Buyer until such time as
such information is otherwise publicly available.
8.12.3 No investigation pursuant to this Section 8.12 shall affect any
representations, warranties, covenants or agreements of the Seller or the
Buyer under this Agreement.
8.13 PUBLIC ANNOUNCEMENTS. The Seller and the Buyer will consult with each
other before issuing any press release or otherwise making any public statements
with respect to the transactions contemplated hereby (other than the
Disposition) and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by law. Each of
the Seller and the Buyer shall expeditiously review any such press release or
other document in connection with any such consultation.
8.14 NOTIFICATION OF CERTAIN MATTERS. The Seller shall give prompt notice
to the Buyer, and the Buyer shall give prompt notice to the Seller, of (i) the
occurrence, or failure to occur, of any event which occurrence or failure would
be likely to cause any of the representations or warranties of the Seller or the
Buyer, as the case may be, contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Closing Date, and (ii) any material failure of the Seller or the Buyer, as the
case may be, or of any officer, director, employee or agent thereof, to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; PROVIDED, HOWEVER, that no such notifications shall
affect the representations or warranties of the parties or the conditions to the
obligations of the parties hereunder unless waived by the other party hereto.
8.15 BROKERS. Any broker, finder or other fee or commission in connection
with the Transactions or the other transactions contemplated hereby based upon
arrangements made by or on behalf of either of the parties hereto will be paid,
except as set forth in Section 8.10 above, by the party making such arrangements
or on whose behalf such arrangements were made. Each party hereto will indemnify
and hold the other party harmless from any claims, Liabilities incurred by such
other party as a result of broker, finder or other fees or commissions which
were incurred by, or as result of
B-15
<PAGE>
any action or involvement of, the indemnifying party in connection with the
Transactions or the other transactions contemplated hereby.
8.16 RESERVED.
8.17 PERMITTED DISCLOSURES. Notwithstanding anything to the contrary
herein, neither the Seller nor the Buyer (or their respective boards of
directors) shall be prohibited from making any disclosure to its own
shareholders that, in the judgment of the disclosing party's board of directors,
in accordance with the advice of counsel, is required under applicable law;
provided that, prior to making any such disclosure, the party making such
disclosure shall notify the other party in writing and afford the other party a
reasonable opportunity for consultation as to such proposed disclosure.
9. CONDITIONS.
9.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY TO EFFECT THE
ACQUISITION. The respective obligations of each party to effect the Acquisition
shall be subject to the fulfillment at or prior to the Closing Date of each of
the following conditions, unless waived by both the Buyer and the Seller:
9.1.1 The Transactions and the other transactions contemplated hereby
shall have been approved by the shareholders of the Seller by the vote (if
any) required by the MCL. Holders of no more than 4.0% of the shares of
Seller Common Stock outstanding on the record date of the Shareholders
Meeting shall have perfected dissenter's rights with respect to any of the
Transactions.
9.1.2 Any waiting period (and any extension thereof) applicable to the
consummation of the Acquisition under the HSR Act shall have expired or been
terminated.
9.1.3 No preliminary or permanent injunction or other order, decree or
ruling issued by a Governmental Body nor any statute, rule, regulation or
executive order promulgated or enacted by a Governmental Body shall be in
effect which would (i) make the acquisition by the Buyer of the Option
Shares illegal or (ii) otherwise prevent the consummation of the Acquisition
and the transactions contemplated hereby.
9.1.4 The Registration Statement shall be effective under the
Securities Act and no "STOP ORDER" shall have been issued with respect to
the Registration Statement and no Proceeding for such purpose shall have
been commenced. The staff of the Commission shall have indicated that they
have no further comments regarding the Proxy Statement.
9.1.5 The Buyer Common Stock constituting the Purchase Consideration
shall have been approved for listing by the Nasdaq Stock Market, subject to
official notice of issuance.
9.1.6 Any licenses, permits, consents, approvals, waivers,
authorizations, qualifications and orders of domestic governmental
authorities and parties to Contracts with the Seller and its Subsidiaries as
are necessary in connection with the consummation of the transactions
contemplated hereby shall have been obtained.
9.2 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF THE SELLER. The obligation
of the Seller to effect the Acquisition is also subject to each of the following
conditions, unless waived by the Seller:
9.2.1 The Buyer shall in all material respects have performed each
obligation to be performed by it hereunder on or prior to the Closing Date.
9.2.2 The representations and warranties of the Buyer set forth in
this Agreement shall be true and correct in all material respects at and as
of the Closing Date as if made at and as of such time, except to the extent
that any such representation or warranty is made as of a specified date, in
which case such representation or warranty shall have been true and correct
as of such date.
B-16
<PAGE>
9.2.3 The Seller shall have received a written opinion from Arthur
Andersen LLP in form and substance reasonably satisfactory to it, to the
effect that the Acquisition should constitute a reorganization within the
meaning of Section 368 of the Code and such opinion shall not have been
withdrawn. In rendering such tax opinion, Arthur Andersen LLP shall be
entitled to rely on the tax representation letters referred to in
Section 8.5.
9.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF THE BUYER. The obligation
of the Buyer to effect the Acquisition is also subject to each of the following
conditions, unless waived by the Buyer:
9.3.1 The Seller shall in all material respects have performed each
obligation to be performed by it hereunder on or prior to the Closing Date.
9.3.2 The representations and warranties of the Seller set forth in
this Agreement shall be true and correct in all material respects at and as
of the Closing Date as if made at and as of such time, except to the extent
that any such representation or warranty is made as of a specified date, in
which case such representation or warranty shall have been true and correct
as of such date.
9.3.3 The Buyer shall have received a written opinion from Arthur
Andersen LLP in form and substance reasonably satisfactory to it, to the
effect that the Acquisition should constitute a reorganization within the
meaning of Section 368 of the Code and such opinion shall not have been
withdrawn. In rendering such tax opinion, Arthur Andersen LLP shall be
entitled to rely on the tax representation letters referred to in
Section 8.5.
9.3.4 The Buyer shall have received a written opinion from Cooley
Godward LLP in form and substance reasonably satisfactory to it, to the
effect that the Acquisition should constitute a reorganization within the
meaning of Section 368 of the Code and such opinion shall not have been
withdrawn. In rendering such tax opinion, counsel shall be entitled to rely
on the tax representation letters referred to in Section 8.5.
9.3.5 Prior to the Closing Date, the Seller shall have taken all steps
necessary to consummate the Dissolution other than the filing of the
Certificate of Dissolution of the Seller with the Secretary of State of the
State of Minnesota, in a form and by a method acceptable to the Buyer.
9.3.6 Prior to the Closing Date, the Seller shall have paid or
satisfied all of its Liabilities or the Seller's Board of Directors shall
have made adequate provision therefor in the liquidating trust required by
Section 8.2 above in an amount, and with terms and conditions, reasonably
satisfactory to the Buyer.
9.3.7 The Buyer shall not have reasonably determined, after taking
into account any applicable terms and provisions of the liquidating trust
required by Section 8.2 above, that the consummation of the Transactions and
the other transactions contemplated hereby (i) is likely to result in
Liability to the Buyer or (ii) is likely to result in the Buyer receiving
less than 3,000,000 shares of Buyer Common Stock, as set forth in this
Agreement.
9.3.8 No Action shall have been commenced and be pending by any Person
against the Seller or the Buyer (but, as to the Buyer, only if such Action
is related to the transactions contemplated hereby or based upon claims that
are reasonably likely to result in Liability of the Buyer for Liabilities of
the Seller) or any of their Affiliates, associates, officers or directors,
which is reasonably likely to be material to the Buyer; provided, however,
that the Buyer shall not be entitled to terminate the Acquisition based upon
an Action described in the Disclosure Statement which the Seller considered
in determining the amount of funds deposited in the Liquidating Trust unless
a development in connection with such Action has occurred after the date of
this Agreement that materially increases the likelihood of the Buyer
incurring Liabilities in connection with such Action.
B-17
<PAGE>
10. INDEMNIFICATION, ETC.
10.1 INDEMNIFICATION BY THE SELLER. The Seller shall hold harmless and
indemnify each of the Indemnitees from and against, and shall compensate and
reimburse each of the Indemnitees for, any Damages that are directly or
indirectly suffered or incurred by any of the Indemnitees or to which any of the
Indemnitees may otherwise become subject at any time (regardless of whether or
not such Damages relate to any third-party claim) and that arise directly or
indirectly from or as a direct or indirect result of, or are directly or
indirectly connected with (a) any breach of any covenant or obligation of the
Seller contained in any of the agreements with respect to the Transactions;
(b) any Liability of the Seller or of any Related Party; (c) any Liability to
which the Buyer or any of the other Indemnitees may become subject and that
arises directly or indirectly from or relates directly or indirectly to (i) any
product produced or sold or any services performed by or on behalf of the
Seller, (ii) the presence of any Hazardous Substance at any site owned, leased,
occupied or controlled by the Seller or any Subsidiary on or at any time prior
to the Closing Date, (iii) the generation, manufacture, production,
transportation, importation, use, treatment, refinement, processing, handling,
storage, discharge, release or disposal of any Hazardous Substance (whether
lawfully or unlawfully) by or on behalf of the Seller, (iv) the operation by the
Seller of its business, or (v) any failure to comply with any bulk transfer law
or similar Legal Requirement in connection with any of the Transactions,
including the Disposition; and (d) any Proceeding relating directly or
indirectly to any breach, alleged breach, Liability or matter of the type
referred to in clause "(a)," "(b)" or "(c)" above (including any Proceeding
commenced by any Indemnitee for the purpose of enforcing any of its rights under
this Section 10).
10.2 SETOFF. In addition to any rights of setoff or other rights that the
Buyer or any of the other Indemnitees may have at common law or otherwise, the
Buyer shall have the right to withhold and deduct any sum that may be owed to
any Indemnitee under this Section 10 from any amount otherwise payable by any
Indemnitee to the Seller. The withholding and deduction of any such sum shall
operate for all purposes as a complete discharge (to the extent of such sum) of
the obligation to pay the amount from which such sum was withheld and deducted.
10.3 NONEXCLUSIVITY OF INDEMNIFICATION REMEDIES. The indemnification
remedies and other remedies provided in this Section 10 shall not be deemed to
be exclusive. Accordingly, the exercise by any Person of any of its rights under
this Section 10 shall not be deemed to be an election of remedies and shall not
be deemed to prejudice, or to constitute or operate as a waiver of, any other
right or remedy that such Person may be entitled to exercise (whether under this
Agreement, under any other Contract, under any statute, rule or other Legal
Requirement, at common law, in equity or otherwise).
10.4 DEFENSE OF THIRD PARTY CLAIMS. In the event of the assertion or
commencement by any Person of any claim or Proceeding (whether against the
Buyer, against any other Indemnitee or against any other Person) with respect to
which the Seller may become obligated to indemnify, hold harmless, compensate or
reimburse any Indemnitee pursuant to this Section 10, the Buyer shall have the
right, at its election, to designate the Seller to assume the defense of such
claim or Proceeding at the sole expense of the Seller. If the Buyer so elects to
designate the Seller to assume the defense of any such claim or Proceeding
(1) the Seller shall proceed to defend such claim or Proceeding in a reasonable
and diligent manner with counsel reasonably satisfactory to the Buyer; (2) the
Buyer shall make available to the Seller any non-privileged documents and
materials in the possession of the Buyer that may be necessary to the defense of
such claim or Proceeding; (3) the Seller shall keep the Buyer informed of all
material developments and events relating to such claim or Proceeding; (4) the
Buyer shall have the right to participate in the defense of such claim or
Proceeding at its own expense; (5) the Seller shall not settle, adjust or
compromise such claim or Proceeding without the prior written consent of the
Buyer, which consent shall not be unreasonably withheld; and (6) the Buyer may
at any time (notwithstanding the prior designation of the Seller to assume the
defense of such claim or Proceeding) assume the defense of such claim or
Proceeding. If the Buyer does not elect to designate
B-18
<PAGE>
the Seller to assume the defense of any such claim or Proceeding (or if, after
initially designating the Seller to assume such defense, the Buyer elects to
assume such defense), the Buyer may proceed with the defense of such claim or
Proceeding on its own. If the Buyer so proceeds with the defense of any such
claim or Proceeding on its own: (a) the Buyer shall proceed to defend such claim
or Proceeding in a reasonable and diligent manner with counsel reasonably
satisfactory to the Seller; (b) all reasonable expenses relating to the defense
of such claim or Proceeding (whether or not incurred by the Buyer) shall be
borne and paid exclusively by the Seller; (c) the Seller shall make available to
the Buyer any non-privileged documents and materials in the possession or
control of the Seller that may be necessary to the defense of such claim or
Proceeding; (d) the Buyer shall keep the Seller informed of all material
developments and events relating to such claim or Proceeding; and (e) the Buyer
shall have the right to settle, adjust or compromise such claim or Proceeding
with the consent of the Seller; PROVIDED, HOWEVER, that the Seller shall not
unreasonably withhold such consent.
10.5 EXERCISE OF REMEDIES BY INDEMNITEES OTHER THAN BUYER. No Indemnitee
(other than the Buyer or any successor thereto or assign thereof) shall be
permitted to assert any indemnification claim or exercise any other remedy under
this Agreement unless the Buyer (or any successor thereto or assign thereof)
shall have consented to the assertion of such indemnification claim or the
exercise of such other remedy.
11. TERMINATION, AMENDMENT AND WAIVER.
11.1 TERMINATION. This Agreement may be terminated and the Acquisition and
the transactions contemplated hereby may be abandoned, by written notice
promptly given to the other party hereto, at any time prior to the Closing Date,
whether prior to or after approval by the shareholders of the Seller:
11.1.1 By mutual written consent of the Seller and the Buyer;
11.1.2 By either the Seller or the Buyer, if a Governmental Body shall
have issued an order, decree or ruling or promulgated or enacted any
statute, rule, regulation or executive order, in each case, permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement; PROVIDED, HOWEVER, that any such order,
decree or ruling shall have become final and nonappealable;
11.1.3 By either the Seller or the Buyer, if the Closing shall not have
occurred on or before the Termination Date, unless the absence of such
occurrence shall be due to the failure of the party seeking to terminate
this Agreement to perform in all material respects each of its obligations
under this Agreement required to be performed by it prior to the Closing
Date;
11.1.4 By either the Seller or the Buyer, if at the Shareholders
Meeting the Transactions and any other transactions contemplated hereby that
are required to be approved by the shareholders of the Seller shall fail to
be approved by such shareholders by the vote required by the MCL or holders
of more than four percent of the shares of Seller Common Stock outstanding
have perfected their dissenter's rights;
11.1.5 By the Buyer, if the Buyer shall have reasonably determined,
after taking into account any applicable terms and provisions of the
liquidating trust required by Section 8.2 above, that consummation of the
Transactions and the other transactions contemplated hereby could result in
Liability to the Buyer; provided, however, that the Buyer shall have ten
days from the date it receives notice of such determination to cure any
circumstance giving rise to such determination; and provided, further, that
if cash or other assets having a value of at least $7,200,000 are deposited
in the liquidating trust, the Buyer shall only make such determination based
upon claims or potential Liabilities not described in the Disclosure
Statement or material adverse developments relating to Liabilities described
in the Disclosure Statement;
B-19
<PAGE>
11.1.6 By the Buyer, if the Seller shall have (i) withdrawn, modified
or amended in any respect its approval or recommendation of the Acquisition
or the transactions contemplated hereby (other than any particular form of
Disposition), (ii) failed to include in the Proxy Statement such
recommendation (including the recommendation that the shareholders of the
Seller vote in favor of the Acquisition and the transactions contemplated
hereby (other than any particular form of Disposition), (iii) taken any
public position inconsistent with such recommendation or (iv) if the Board
of Directors of the Seller shall have resolved to do any of the foregoing;
11.1.7 By the Seller, if the Buyer fails to perform in all material
respects its obligations under this Agreement; PROVIDED, HOWEVER, that the
Buyer shall have ten days from the date it receives notice of such failure
to cure any failure to perform any such obligations;
11.1.8 By the Buyer, if the Seller fails to perform in all material
respects its obligations under this Agreement; PROVIDED, HOWEVER, that the
Seller shall have ten days from the date it receives notice of such failure
to cure any failure to perform any such obligations;
11.1.9 By the Buyer, if the board of directors of the Buyer determines
in good faith that termination of this Agreement would be in the best
interests of the Buyer and its stockholders, provided that the Buyer shall
not exercise any rights under this section unless the Buyer shall determine
in good faith to enter into a transaction that its board of directors
determines in good faith to be in the best interests of the Buyer and its
stockholders; or
11.1.10 By the Seller, if the board of directors of Seller determines in
good faith on the basis of advice of counsel that termination of this
Agreement is necessary in order for such board of directors to comply with
its fiduciary obligations under applicable law; provided that the Seller
shall not exercise any rights under this section unless the Seller shall
determine in good faith to enter into a transaction that its board of
directors determines, based upon advice of counsel, the Seller is required
to enter into in accordance with the board's fiduciary obligations.
In the event this Agreement is terminated pursuant to Section 11.1.9 in
connection with a transaction proposed to be entered into by the Buyer that is
intended to be accounted for as a pooling of interests in connection with which
affiliates of the Buyer are required to enter into agreements related to their
equity interests in the Buyer, the Seller agrees to execute such agreements as
are executed by other affiliates of the Buyer; provided, however, that the
Seller shall not be required to enter into such agreements if the board of
directors of the Seller determines in good faith on the basis of advice of
counsel that execution of such agreements would violate the fiduciary
obligations of such board of directors under applicable law.
11.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement and abandonment of the Acquisition as provided in Section 11.1 above,
this Agreement shall forthwith become void and there shall be no Liability on
the part of the Seller or the Buyer, except as set forth in this Section,
Section 8.10 above, the last sentences of Sections 8.12.1 and 8.12.2 above,
Section 8.12.3 above, 8.13 above, 8.17 above and the last sentence of
Section 11.1 above, and except to the extent that such termination results from
the willful breach of a party hereto of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
11.3 AMENDMENT. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto.
11.4 WAIVER. At any time prior to the Closing Date, whether before or
after the Shareholders Meeting, any party hereto, by action taken by its Board
of Directors, may (i) extend the time for the performance of any of the
obligations or other acts of any other party hereto or (ii) waive compliance
with any of the agreements of any other party or with any conditions to its own
obligations. Any agreement on the part of a party hereto to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party by a duly authorized officer.
B-20
<PAGE>
12. GENERAL PROVISIONS.
12.1 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered personally or
sent by cable, telegram, telecopier or telex to the parties at the following
addresses or at such other addresses as shall be specified by the parties by
like notice:
(A) if to the Seller:
Tech Squared Inc.
5198 West 76(th) St., Suite 220
Edina, MN 55439
Attention: Charles E. Reese, Jr.
Facsimile: (800) 311-7077
with a copy to:
Larkin, Hoffman, Daly & Lindgren, Ltd.
1500 Norwest Financial Center
7900 Xerxes Avenue South
Bloomington, MN 55431
Attention: Michael W. Schley
Facsimile: (612) 896-3333
(B) if to the Buyer:
Digital River, Inc.
9625 West 76(th) Street, Suite 150
Eden Prairie, MN 55444
Attention: Joel A. Ronning
Facsimile: (612) 830-1154
with a copy to:
Cooley Godward LLP
One Maritime Plaza
San Francisco, CA 94111
Attention: Michael J. Sullivan
Facsimile: (415) 951-3699
12.2 REPRESENTATIONS AND WARRANTIES; ETC. The respective representations
and warranties of the Seller and the Buyer contained herein shall expire with,
and be terminated and extinguished upon, consummation of the Acquisition and the
transactions contemplated hereby, and thereafter neither the Seller nor the
Buyer nor any officer, director or principal thereof shall be under any
Liability whatsoever with respect to any such representation or warranty. This
Section 12.2 shall have no effect upon any other obligation of the parties
hereto, whether to be performed before or after the consummation of the
Acquisition and the transactions contemplated hereby.
12.3 VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
12.4 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
B-21
<PAGE>
12.5 PARTIES IN INTEREST. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to confer upon any other Person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
12.6 MISCELLANEOUS. This Agreement and the Voting Agreement and Proxy
(i) constitute the entire agreement and supersede all other prior agreements and
undertakings, both written and oral, between or among the parties thereto with
respect to the subject matter hereof or thereof; (ii) may not be assigned by
either the Seller or the Buyer without the consent of the other party; and
(iii) shall be governed in all respects, including validity, interpretation and
effect, by the laws of the State of Delaware applicable to agreements made and
to be performed entirely within such State. Any legal action or other legal
proceeding relating to this Agreement or the enforcement of any provision of
this Agreement may be brought or otherwise commenced, and shall be venued, in
any state or federal court located in Hennepin County in the State of Minnesota.
This Agreement may be executed in one or more counterparts which together shall
constitute a single agreement.
B-22
<PAGE>
IN WITNESS WHEREOF, the Seller and the Buyer have caused this Agreement to
be executed as of the date first above written by their respective officers
thereunto duly authorized.
<TABLE>
<S> <C> <C> <C>
DIGITAL RIVER, INC. TECH SQUARED INC.
By: /s/ PW STEINER By: /s/ CHARLES REESE
------------------------------------ ------------------------------------
Name: Perry Steiner Name: Charles E. Reese, Jr.
Title: President Title: President, CEO
</TABLE>
B-23
<PAGE>
The undersigned, Joel A. Ronning, although not otherwise a party to this
Agreement, hereby confirms that, prior to exercise of the JAR Option in
accordance with its terms, the undersigned owns, in the aggregate, beneficially
and of record, and has the power and authority to convey, free and clear of any
Lien, the Option Shares, and, upon delivery of and payment of the exercise price
under the JAR Option, the undersigned will convey to the Seller good and valid
title to such Option Shares, free and clear of any Lien and, following the
exercise of the JAR Option in accordance with its terms, the Seller and its
Subsidiaries will own, in the aggregate, beneficially and of record, and will
have the power and authority to convey free and clear of any Lien, the Option
Shares, and upon delivery of and payment of the Closing Price for the Option
Shares as herein provided, the Seller will convey to the Buyer good and valid
title to such Option Shares, free and clear of any Lien.
/s/ JOEL RONNING
--------------------------------------
Joel A. Ronning
B-24
<PAGE>
ANNEX C
TECH SQUARED INC.
LIQUIDATING TRUST AGREEMENT
AGREEMENT AND DECLARATION OF TRUST, dated as of , 1999, by and between
Tech Squared Inc., a Minnesota corporation ("Tech Squared") and Norwest Bank
Minnesota, National Association, as trustee (the "Trustee").
WHEREAS, Tech Squared's Board of Directors and shareholders have approved
the voluntary dissolution of Tech Squared pursuant to a Plan of Liquidation and
Dissolution (the "Plan");
WHEREAS, Tech Squared's Board of Directors anticipates that Tech Squared may
not be able to fully wind up all of its affairs prior to its dissolution, and
therefore has made specific arrangements for such contingency in the Plan; and
WHEREAS, the Plan provides, among other things, for: (i) the sale or other
disposition of the operating assets of Tech Squared, including its Net Direct
Operations, DTP Catalog Operations and Distribution Sales (collectively, the
"Operating Assets"), on terms to be approved by the Board of Directors;
(ii) the merger of Tech Squared's wholly owned subsidiary, MacUSA, Inc., with
and into Tech Squared; (iii) the transfer to Digital River, Inc. ("Digital
River") of 3,000,000 shares of Digital River common stock held by Tech Squared
and $1.2 million in cash, in exchange for 2,650,000 newly issued shares of
Digital River common stock (the "Exchange"); (iv) the establishment of a
liquidating trust pursuant to the terms and conditions hereof (the "Trust");
(v) the transfer by Tech Squared to the Trust of all of its cash and shares of
the newly issued Digital River common stock received in the Exchange as
described on Schedule I attached hereto (the "Retained Assets") sufficient, in
the judgment of the Board of Directors, to satisfy the actual and potential
liabilities of Tech Squared; (vi) the liquidation of Tech Squared and the
distribution of its remaining shares of Digital River common stock to the
shareholders of Tech Squared; (vii) the dissolution of Tech Squared in
accordance with Minnesota law; and (viii) the authorization of the Trustee to
allocate, hold and distribute the Trust Assets (as defined below) for and on
behalf of the beneficiaries of the Trust (the "Beneficiaries") in accordance
with the terms and conditions hereof.
NOW, THEREFORE, in consideration of the premises and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1.
NAMES AND DEFINITIONS
1.1) NAME. This trust shall be known as the Tech Squared Liquidating
Trust.
1.2) DEFINED TERMS. For all purposes of this instrument, unless the
context otherwise requires:
(a) ADDITIONAL ASSETS shall mean any cash that may be identified as
having been owned by or owing to Tech Squared and not disposed of by Tech
Squared prior to its dissolution, which is accepted by the Trustee;
provided, however, that Additional Assets shall not include, and the Trustee
shall not accept, any operating assets of a going-concern or business or any
other non-cash assets or property of any kind.
(b) AGREEMENT shall mean this instrument as originally executed or as it
may from time to time be amended pursuant to the terms hereof.
(c) ASSERTED LIABILITY shall mean a Liability, of which the Trustee has
actual knowledge, which has been asserted in writing, or otherwise overtly
asserted or identified as a claim against the Trust or the Trust Assets;
C-1
<PAGE>
(d) BENEFICIAL INTEREST shall mean each Beneficiary's proportionate
share of the Trust Assets initially determined by the ratio of the number of
Shares held by the Initial Beneficiary on the close of business on the
Record Date over the total number of Shares issued and outstanding on such
Record Date and thereafter each Beneficiaries' proportional Beneficial
Interest in the Trust.
(e) BENEFICIARY shall mean each Initial Beneficiary and each person to
whom a Beneficial Interest is transferred pursuant to Section 3.3.
(f) CLASS A BENEFICIARY shall mean each Initial Class A Beneficiary and
each Person to whom a Beneficial Interest is transferred pursuant to Section
3.3 from an Initial Class A Beneficiary.
(g) CLASS B BENEFICIARY shall mean each Initial Class B Beneficiary and
each Person to whom a Beneficial Interest is transferred pursuant to Section
3.3 from an Initial Class B Beneficial.
(h) FINAL LIABILITY shall mean a Litigation Liability which is evidenced
by a final non-appealable judgment; or an Asserted Liability or a Litigation
Liability which the Trustee determines should be accepted or settled and
paid out of Trust Assets.
(i) INITIAL BENEFICIARY shall mean any Initial Class A Beneficiary and
any Initial Class B Beneficiary.
(j) INITIAL CLASS A BENEFICIARY shall mean each of the Shareholders that
has surrendered all evidence of such Shareholder's Shares to the stock
transfer agent of Tech Squared.
(k) INITIAL CLASS B BENEFICIARY shall mean each of the Shareholders that
has not surrendered all evidence of such Shareholder's Shares to the stock
transfer agent of Tech Squared.
(l) LIABILITIES shall mean any unsatisfied debts, claims, liabilities,
judgments, decrees, suits or other payment obligations of Tech Squared,
whether contingent or fixed, acknowledged or disputed as to validity, or
identified or asserted prior to or after creation of the Trust.
(m) LITIGATION LIABILITY shall mean a Liability which involves any legal
action for which the Trustee has received service of process.
(n) PERSON shall mean an individual, corporation, partnership,
association, joint stock company, limited liability company, trust, joint
venture, any unincorporated organization, or government or political
subdivision thereof.
(o) RECORD DATE shall mean the date selected by Tech Squared's Board of
Directors for determination of the Shareholders of Tech Squared entitled to
become Initial Beneficiaries.
(p) SHARES shall mean the shares of common stock, no par value per
share, of Tech Squared.
(q) SHAREHOLDERS shall mean the holders of record of the outstanding
common shares of Tech Squared at the close of business on the Record Date,
as identified by name and address together with the number of each holder's
Shares in a written schedule certified as complete and accurate by an
officer of Tech Squared, and delivered to the Trustee by Tech Squared.
(r) TRUST shall mean the Trust created by this Agreement.
(s) TECH SQUARED shall mean Tech Squared Inc.
(t) TRUST ASSETS shall mean all the property held from time to time by
the Trustee under this Agreement, which initially shall consist solely of
the Retained Assets granted, assigned and conveyed to the Trustee by Tech
Squared pursuant to the Plan, and in addition, shall thereafter include
Additional Assets and all dividends, income, proceeds and other receipts of,
from, or attributable to any assets held by the Trust.
(y) TRUSTEE shall mean the original Trustee and such Trustee's
successors.
C-2
<PAGE>
ARTICLE 2.
GRANT TO AND NATURE OF TRUST
2.1) GRANT. Tech Squared hereby grants, delivers, releases, assigns and
conveys unto the Trustee for the benefit of the Beneficiaries of the Trust, all
of Tech Squared's right, title, interest in and to the Trust Assets, for the
uses and purposes stated herein, subject to the terms and provisions set out
below, and the Trustee hereby accepts such Trust Assets, and agrees to hold and
manage the Trust Assets in trust, subject to the following terms and provisions.
2.2) PURPOSE OF TRUST.
(a) The Trust is organized for the sole purpose of liquidating the Trust
Assets with no objective to continue or engage in the conduct of a trade or
business.
(b) As Tech Squared is required to liquidate and dissolve prior to fully
winding up it affairs, including, but not limited to, its payment, discharge
or other resolution of any Liabilities without any established procedure to
so resolve such Liabilities, Tech Squared's Board of Directors approved the
Plan and the shareholders of Tech Squared approved the voluntary dissolution
of Tech Squared pursuant to the Plan, which calls for the establishment of
the Trust, for the purpose of providing a procedure which will enable Tech
Squared to dissolve in a timely fashion, and wind up its affairs, by
distributing to the Shareholders pro-rata all its assets, other than the
Retained Assets, which are granted, assigned, conveyed and delivered to the
Trustee pursuant to the terms contained herein. Due notice has been given to
unlocated Shareholders regarding their Beneficial Interests in the Trust to
the extent required by Minnesota law. The Retained Assets granted and
assigned to the Trustee and the other Trust Assets shall be held in the
Trust and the Trustee will: (i) further liquidate the Trust Assets if
necessary to carry out the purposes of the Trust and facilitate distribution
of the Trust Assets; (ii) allocate, protect, conserve and manage the Trust
Assets and apply the same to the satisfaction, discharge or other resolution
of Liabilities in accordance with the terms and conditions hereof; and
(iii) distribute the Trust Assets not required for the satisfaction,
discharge or other resolution of Liabilities, in accordance with the terms
and conditions hereof.
(c) It is intended that the granting, assignment and conveyance of the
Trust Assets by Tech Squared to the Trustee pursuant to the terms hereof
shall be treated for federal and state income tax purposes as if Tech
Squared made such distributions directly to the Shareholders. It is further
intended that for federal, state, and local income tax purposes, the Trust
shall be treated as a liquidating trust under Treasury Regulation Section
301.7701-4(d) and any analogous provision of any state or local law, and the
Beneficiaries shall be treated as the owners of their respective share of
the Trust pursuant to Sections 671-678 of the Internal Revenue Code of 1986,
as amended (the "Code") and any analogous provision of state or local law,
and shall be taxed on their respective share of the Trust's taxable income
(including both ordinary and capital gains) pursuant to Section 671 of the
Code and any analogous provision of state or local law. The Trustee shall
file all tax returns required to be filed with any governmental agency
consistent with its position, including, but not limited to, any returns
required of grantor trusts pursuant to Section 1.671-4(a) of the Income Tax
Regulations.
2.3) PROHIBITED ACTIVITIES. The Trust shall not continue or engage in the
conduct of any trade or business, and the Trustee is expressly prohibited from,
and shall have no power or authority to, continue or engage in the conduct of
any trade or business on behalf of the Trust or the Beneficiaries, and all of
the terms and conditions hereof shall be construed accordingly.
2.4) NO REVERSION TO TECH SQUARED. In no event shall any part of the Trust
Assets revert to or be distributed to Tech Squared.
C-3
<PAGE>
2.5) INSTRUMENTS OF FURTHER ASSURANCE. After the dissolution of Tech
Squared, such Persons as shall have the right and power to so act, will upon
reasonable request of the Trustee, execute, acknowledge, and deliver such
further instruments and do such further acts as may be necessary or proper to
carry out the purposes of this Agreement, to confirm or effectuate the transfer
to the Trustee of any property intended to be covered hereby, and to vest in the
Trustee, its successors and assigns, the estate, powers, instruments or funds in
trust hereunder.
2.6) PAYMENT OF LIABILITIES. The Trust hereby assumes all valid
Liabilities. Should any Liability be asserted against the Trustee as the
transferee of the Trust Assets on behalf of the Trust or as the result of the
assumption made in this paragraph, the Trustee may use such part of the Trust
Assets as may be necessary in evaluating and contesting the validity of any such
Liability or in payment thereof, but in no event shall the Trustee be personally
liable, nor shall resort be had to the private property of the Trustee in its
separate corporate capacity, in the event that the Trust Assets are not
sufficient to satisfy, discharge or otherwise resolve the Liabilities of the
Trust.
2.7) INCIDENTS OF OWNERSHIP. The Shareholders shall be the Initial
Beneficiaries of the Trust created by this Agreement and the Trustee shall
retain only such incidents of legal ownership as are necessary to undertake the
actions and transactions authorized herein.
ARTICLE 3.
BENEFICIARIES
3.1) BENEFICIAL INTERESTS.
(a) The Beneficial Interest of each former Shareholder as an Initial
Beneficiary hereof shall be determined by the Trustee in accordance with a
copy of Tech Squared's shareholder list certified by an officer of Tech
Squared as of the Record Date. Tech Squared shall deliver such a certified
copy of its shareholder list to the Trustee in electronic format within five
days after the Record Date. The Trustee shall express the Beneficial
Interest of each Beneficiary in terms of units ("Units"), with the number of
Units of each Initial Beneficiary equal to the number of his, her or its
Shares.
(b) If a conflicting claim or demand is asserted with respect to the
ownership of any Units, or if there is a disagreement between the
transferees, assignees, heirs, representatives or legatees succeeding to all
or part of the interest of a Beneficiary resulting in adverse claims or
demands being made in connection with such Units, then, in any such event,
the Trustee shall be entitled, at its sole discretion, to refuse to comply
with any such conflicting claim or demand and the Trustee may elect to make
no payment or distribution with respect to such Units, or to make such
payment to a court of competent jurisdiction or an escrow agent, and in so
doing, the Trustee shall not be or become liable to any of such parties for
their failure or refusal to comply with any of such conflicting claims or
demands, nor shall the Trustee be liable for interest on any funds which
they may so withhold. The Trustee shall be entitled to refrain and refuse to
act until either: (i) the rights of the adverse claimants have been
adjudicated by a final, non-appealable judgment of a court of competent
jurisdiction; (ii) all differences have been adjusted by the valid written
agreement of all such parties, and the Trustee shall have been furnished
with an executed counterpart of such agreement; or (iii) there is furnished
to the Trustee a surety bond or other security satisfactory to the Trustee,
as it shall deem appropriate, to fully indemnify it as between all
conflicting claims or demands.
3.2) RIGHTS OF BENEFICIARIES. Each Beneficiary shall be entitled to
participate in the rights and benefits due a Beneficiary in accordance with the
terms hereof according to the Beneficiary's Beneficial Interest. Each
Beneficiary shall take and hold the same subject to all of the terms and
provisions hereunder. The interest of each Beneficiary hereunder, is and shall
be in all respects, personal property and upon the death of an individual
Beneficiary, the Beneficiary's Beneficial Interest shall pass as
C-4
<PAGE>
personal property to the Beneficiary's legal representative and such death shall
in no way terminate or affect the validity of this Agreement. A Beneficiary
shall have no title to, right to, possession of, management of, or control of,
the Trust Assets except as provided herein. No widower, widow, heir or devisee
of any person who may be a Beneficiary shall have any rights of dower,
homestead, inheritance, partition, or of any other right, statutory or
otherwise, in any property forming a part of the Trust Assets but the whole
title to all of the Trust Assets shall be vested in the Trustee and the sole
interest of the Beneficiaries shall be the rights and benefits given to such
Person under this Agreement.
3.3) TRANSFER OF INTERESTS OF BENEFICIARIES. The Beneficial Interest of a
Beneficiary may not be transferred either by the Beneficiary in person or by a
duly authorized agent or attorney, or by the properly appointed legal
representative of the Beneficiary, nor may a Beneficiary have authority or power
to sell, assign, transfer, encumber or in any other manner anticipate or dispose
of the Beneficiary's Beneficial Interest; provided, however, that the Beneficial
Interest shall be assignable or transferable by will, intestate succession or
operation of law upon such Beneficiary's death or legal dissolution, and in such
event may be reregistered as to legal title if transferred among custodial
agents acting on behalf of the Beneficiary or transferred directly to the
Beneficiary from such agent, in each such case, upon duly given written notice
to the Trustee. The Beneficial Interests of the Beneficiaries hereunder shall
not be subject to attachment, execution, sequestration or any order of a court,
nor shall such interest be subject to the contracts, debts, obligations,
engagements or liabilities of any Beneficiary.
3.4) TRUSTEE AS BENEFICIARY. The Trustee, in its own corporate capacity,
may not be a Beneficiary or hold a Beneficial Interest hereunder.
ARTICLE 4.
DURATION AND TERMINATION OF TRUST
4.1) DURATION. This Trust shall terminate upon the earliest of: (i) a
termination required by the applicable laws of the State of Minnesota; (ii) a
termination due to distribution of all of the Trust Assets as provided in
Section 5.7; or (iii) the expiration of a period of three (3) years from the
date of the creation of the Trust; provided, however, that the Trustee, may
extend the existence of this Trust to such later date as it may designate, upon
receipt of a an opinion from a qualified advisor that such extension will not
cause the Trust to be treated as other than a liquidating trust under Treasury
Regulation Section 301.7701-4(d) and any analogous provision of applicable state
or local law. The date that the Trust terminates shall be referred to herein as
the "Termination Date."
4.2) OBLIGATION OF TRUSTEE UPON TERMINATION. Upon termination of the Trust
pursuant to Section 4.1, the Trustee shall thereafter act only in a custodial
capacity to provide for the retention of the documents, records, lists of
holders of Units, and files which shall have been delivered to or created by the
Trustee. At the Trustee's discretion, all such documents, records, lists and
files may be destroyed at any time after seven (7) years from the distribution
of all of the Trust Assets. Except as is otherwise specifically provided herein,
upon the distribution of all of the Trust Assets, the Trustee shall have no
further duties or obligations hereunder.
ARTICLE 5.
ADMINISTRATION OF TRUST ASSETS
5.1) TRUST ACCOUNT; SALE OF TRUST ASSETS. The Trustee shall credit the
Trust Assets to a segregated account established on the books of the Trustee
("ACCOUNT"), and shall invest moneys in the Account only as provided in Section
6.1 hereto. The Trustee may make investments permitted under this Agreement
through or from its own bond department or trust investments department, or its
parent's or affiliate's bond department or trust investment department. The
Trustee may, at such times as the
C-5
<PAGE>
Trustee may deem appropriate, transfer, assign, or otherwise dispose of all or
any part of the Trust Assets as it deems appropriate; provided, however, that
the Trustee may not sell Digital River common stock unless it determines in its
sole discretion such sale is necessary to pay, or to provide for the payment of,
Liabilities or other obligations of the Trust. Provided, further, that the
Trustee shall not be required to diversify the Trust Assets, and specifically
the shares of Digital River common stock, and shall incur no personal liability
whatsoever in tort, contract, or otherwise, due to any such lack of
diversification of the Trust Assets.
5.2) TRANSACTIONS WITH RELATED PERSONS. Notwithstanding any other
provisions of this Agreement, the Trustee shall not knowingly, directly or
indirectly, sell or otherwise transfer all or any part of the Trust Assets to,
or contract with: (i) any agent (acting in their individual capacity) of the
Trust; or (ii) any Person of which any Trustee or agent of this Trust is an
affiliate by reason of being a trustee, director, officer, partner or direct or
indirect beneficial owner of 5% or more of the outstanding capital stock, shares
or other equity interest of such Persons. No provision herein shall prohibit any
distribution hereunder to a Class A Beneficiary.
5.3) RESTRICTION ON TRUST ASSETS. Other than the shares of Digital River
common stock that are transferred as part of the Retained Assets, the Trust
shall not receive transfers of any assets prohibited by Revenue Procedure 82-58,
as the same may be amended, supplemented, or modified, including, but not
limited to, any listed stocks or securities, any readily- marketable assets, any
operating assets of a going business, any unlisted stock of a single issuer that
represents eighty percent (80%) or more of the stock of such issuer, or any
general or limited partnership interest, except any stock or securities received
in a transaction contemplated by Section 6.2(j) hereof. The Trustee shall not
receive or retain cash in excess of a reasonable amount to meet expenses,
charges, and obligations of the Trust, the Trustee, the Trust Assets, and to
satisfy, discharge or otherwise resolve all Liabilities. The Trustee may not
sell Digital River common stock unless it determines in its sole discretion that
such sale is necessary to pay, or to provide for the payment of, Liabilities and
other obligations of the Trust.
5.4) PAYMENT OF EXPENSES AND LIABILITIES. From the Trust Assets, the
Trustee shall pay all expenses, charges, and obligations of the Trust, the
Trustee and the Trust Assets, shall satisfy, discharge or otherwise resolve all
Liabilities as provided in Section 5.5 below and shall pay such transferee
liabilities which the Trustee may be obligated to pay as transferee of the Trust
Assets, including, but not limited to, interest, penalties, taxes, assessments,
and public charges of any kind or nature and the cost, charges, and expenses
connected with or growing out of the execution or administration of this Trust
and such other payments and disbursements as are provided in this Agreement or
which may be determined to be a proper charge against the Trust Assets by the
Trustee. The Trustee will make continuing efforts to dispose of the Trust
Assets, make timely distributions, and not unduly prolong the duration of the
Trust.
5.5) LIABILITY ADMINISTRATION.
(a) To facilitate the administration of Liabilities pursuant to this
Section 5.5 Tech Squared shall deliver to the Trustee the records, files and
documents in the possession of Tech Squared which are within the categories
described on Schedule II attached hereto.
(b) When administering Liabilities involving claims or legal actions
against the Trust Assets, the Trustee shall observe, subject to the other
applicable provisions of this Agreement, the following procedures:
ASSERTED LIABILITY: The Trustee will review and analyze an Asserted
Liability and determine whether to accept and pay or to dispute and
contest the Liability based upon the Trustee's determination of the
Liability's legal validity (whether the Claim as asserted is legally
enforceable) and amount (whether correct and due).
C-6
<PAGE>
LITIGATION LIABILITY: The Trustee will contest and defend a
Litigation Liability to final judgment, including appropriate appeals, or
settle as an appropriate resolution of the Liability, as it may determine
in its discretion to be in the best interests of the Beneficiaries, but
subject to the requirements of this Agreement.
In determining whether to contest or settle any Asserted Liability or
Litigation Liability, the Trustee shall consider, among other things, the
following criteria:
Cost of defense (including, without limitation, all legal fees and
expenses attributable to such Liability and defense of a legal action
seeking to enforce such Liability) compared to the amount of the Asserted
Liability;
Likelihood of the Liability claimant prevailing under the asserted legal
theory or cause of action and then known facts (including proof
considerations);
Precedential effect on administration of other Liabilities or potential
Liabilities claiming against the Trust Assets; and
Whether the amount of the Liability is or is not supported by known facts
regarding actual damages.
In evaluating whether to contest or settle, the Trustee shall apply the
reasonable business judgment rule (i.e., the Trustee would be responsible
for diligent identification of the legal issues, factual considerations and
related risks and uncertainties presented by the Asserted Liability or
Litigation Liability, relying on advice and evaluations of legal counsel,
which may include counsel retained by Tech Squared prior to the creation of
the Trust to defend such Liability, and other professional advisors or
consultants), and then exercising reasonable judgment after consideration of
all relevant factors and information. In the selection of legal counsel for
any matter, the Trustee shall consider the amount and complexity of the
matter in relation to the appropriate experience, resources, reputation and
fees and costs of selected counsel.
(c) The Trustee shall have the right to defend any Liability claim or
legal action against the Trust and may assert counterclaims in such actions,
and upon advice of counsel, the Trustee may initiate any legal proceeding
against a third party regarding any Liability. In any action taken by the
Trustee, the Trustee shall be deemed to represent the interests of all of
the Beneficiaries, and it shall not be necessary to make any Beneficiary a
party to such action. It is understood that in representing the interests of
any such Beneficiary, the Trustee is authorized only to represent such
Beneficiary in its or that person's capacity as a Beneficiary hereunder and
not in any other capacity. The Trustee may file such proofs of claim and
other papers as may be necessary or appropriate in order to have the claims
of the Trustee or Beneficiaries allowed in any judicial proceeding.
(d) Whenever the Trustee, after consultation with counsel, consultants
or other professional advisors, determines that there is a reasonable
prospect that the Trust Assets will not be sufficient to satisfy all
outstanding Liabilities and reasonably anticipated Liabilities, the Trustee
may issue a Determination of Anticipated Insolvency, based upon the
Trustee's assessment of available information. The Trustee may also revoke
any such Determination at any time if it determines that certain facts or
circumstances, material to its previous determination, have changed.
Notwithstanding anything to the contrary in this Agreement, upon notice of a
Determination of Anticipated Insolvency, and so long as such Determination
has not been revoked by the Trustee, no payments shall be made by the
Trustee in respect of Liabilities.
5.6) INTERIM DISTRIBUTIONS. Subject to the retention by the Trustee of a
reasonable amount of Trust Assets or proceeds or income therefrom to meet
Liabilities and other obligations of the Trust, at such time as may be
determined by the Trustee, but at least annually, the Trustee shall distribute,
or cause to be distributed to the Class A Beneficiaries, and shall reserve and
hold for the Class B
C-7
<PAGE>
Beneficiaries, in proportion to the number of Units held by each Beneficiary,
such shares of Digital River common stock comprising a portion of the Trust
Assets as the Trustee in its sole discretion may determine to be distributed to
such Beneficiaries in a manner which is consistent with the purpose of the Trust
and the provisions of this Agreement; provided, that the Trust Assets allocated
to Class A Beneficiaries with fewer than ten (10) Units shall not be
distributed, and instead shall be reserved and held for such Class A
Beneficiaries for distribution only upon final distribution of the Trust
pursuant to Section 5.7.
5.7) FINAL DISTRIBUTION. If the Trustee determines that all valid
Liabilities and all other claims, expenses, charges, and obligations of the
Trust have been satisfied, the Trustee shall, as expeditiously as is consistent
with the conservation and protection of the Trust Assets, distribute any
remaining Trust Assets to the Class A Beneficiaries, and shall reserve and hold
for the Class B Beneficiaries in proportion to the number of Units held by each
Beneficiary. Fractional interests in single shares or minimum denominations of a
security shall be aggregated to whole shares or denominations and reallocated to
the Class A Beneficiaries with the largest fractional interests in such security
in descending order until such aggregated interests are fully so allocated. The
Trustee shall hold in the Trust and thereafter make disposition of all
liquidating distributions and other payments due any Class A Beneficiaries for
whom no correct address is known to the Trustee or whom distribution payments
are returned or checks are not negotiated, and any reserved distributions held
for remaining Class B Beneficiaries, in accordance with applicable state law,
including laws regarding escheat and abandoned property and the Trustee shall
have no other duties regarding such property; provided, however, that to the
fullest extent permitted by law, the Trustee may deposit such distributions and
payments with state abandoned property authorities sooner than required by such
laws.
5.8) REPORTS TO BENEFICIARIES. As soon as practicable after the end of
each calendar year of the Trust and after termination of the Trust, the Trustee
shall submit a written report and account to the Beneficiaries showing: (i) the
Trust Assets credited to the Account and the liabilities of the Trust recognized
pursuant to generally accepted accounting principles the end of each such year
or upon termination and the receipts and disbursements of the Trustee for such
year or period, certified by an independent Certified Public Accountant;
(ii) any changes in the Trust Assets, Asserted Liabilities, Litigation
Liabilities and Final Liabilities which were not previously reported; and
(iii) any action taken by the Trustee in the performance of its duties under
this Agreement which it has not previously reported, and which in its opinion,
materially affects the Trust Assets. The Trustee may submit similar reports for
such interim periods during each year as it deems advisable or as may be
required by a governmental agency. The reporting year of the Trust shall end on
December 31 of each year. Notwithstanding any other provision herein, the
Trustee shall not report or disclose to any Person any matter or information
that is subject to attorney-client privilege or confidentiality between the
Trustee and its legal counsel.
5.9) FEDERAL INCOME TAX INFORMATION AND REPORTING. By the date required of
each year pursuant to the Code, the Trustee shall provide to each Beneficiary a
statement for the preceding calendar year showing, on a Unit basis, the dates
and amount of all distributions made by the Trustee, the number of shares of
Digital River common stock and any other securities, disposed of by the Trust,
if any, income earned on assets held by the Trust, if any, and such other
information as is reasonably available to the Trustee which may be helpful in
determining the amount of gross income attributable to the Trust that such
Beneficiary should include in such Beneficiary's federal income tax return for
the preceding year. In addition, after receipt of a request in good faith, or in
the Trustee's discretion without such request or as required by applicable law,
the Trustee shall furnish to any Person who has been a Beneficiary at any time
during the preceding year, a statement containing such further information as is
reasonably available to the Trustee which shall be helpful in determining the
amount of taxable income which such Person should include in such Person's
federal income tax return.
C-8
<PAGE>
ARTICLE 6.
POWER OF AND LIMITATIONS ON THE TRUSTEE
6.1) LIMITATIONS ON TRUSTEE. The Trustee shall not at any time, on behalf
of the Trust or Beneficiaries, enter into or engage in any trade or business,
and no part of the Trust Assets shall be used or disposed of by the Trustee in
furtherance of any trade or business. The Trustee shall be restricted to the
holding and collection of the Trust Assets and the payment and distribution
thereof for the purposes set forth in this Agreement and to the conservation and
protection of the Trust Assets and the administration thereof in accordance with
the provisions of this Agreement. In no event shall the Trustee retain cash in
excess of a reasonable amount needed to meet Liabilities and pay other
obligations, or receive any property, make any distribution, satisfy or
discharge any claims, expenses, charges, Liabilities, and obligations or
otherwise take any action which is inconsistent with the complete liquidation of
Tech Squared as that term is used and interpreted by Section 368(a)(1)(C) and
(a)(2)(G) of the Code, Treasury Regulations promulgated thereunder, and rulings,
decisions, and determinations of the Internal Revenue Service and courts of
competent jurisdiction, or take any action which would jeopardize the status of
the Trust as described in Section 2.2(c). This limitation shall apply regardless
of whether the conduct of any such trade or business would otherwise be deemed
by the Trustee to be necessary or proper for the conservation and protection of
the Trust Assets. In addition to the restrictions of Section 5.3, the Trustee
shall not invest any of the funds held as Trust Assets, except that the Trustee
may invest any portion of the Trust Assets in demand and time deposits in banks
or savings institutions, or temporary investments such as short-term
certificates of deposit or treasury bills, or any other investments which may be
determined by the Trustee to be permissible under Revenue Procedure 82-58, as
the same may be amended, supplemented, or modified.
6.2) SPECIFIC POWERS OF TRUSTEE. Subject to the provisions of Section 6.1,
the Trustee shall have the following specific powers in addition to any powers
conferred upon it by any other Section or provision of this Agreement or any
statutory laws of the State of Minnesota; provided, however, that the
enumeration of the following powers shall not be considered in any way to limit
or control the power of the Trustee to act as specifically authorized by any
other Section or provision of this Agreement and to act in such a manner as the
Trustee deems necessary or appropriate to conserve and protect the Trust Assets
or to confer on the Beneficiaries the benefits intended to be conferred upon
them by this Agreement:
(a) to determine the nature and amount of the consideration to be
received with respect to the sale or other disposition of the Trust Assets;
(b) to collect, enforce, liquidate or otherwise convert into cash, or
such other property as it deems appropriate, all property, assets and rights
in the Trust Assets, to accept, or to disclaim or abandon, any Additional
Assets and to pay, discharge, and satisfy all other claims, expenses,
charges, Liabilities and obligations existing with respect to the Trust
Assets, the Trust, or the Trustee;
(c) to elect, appoint, engage, or retain any Persons as agents,
representatives, or independent contractors (including, without limitation,
investment advisors, accountants, transfer agents, attorneys at law,
managers, appraisers, brokers, or otherwise) in one or more capacities, and
to pay compensation from the Trust Assets for services in as many capacities
as such Person may be so elected, appointed, engaged or retained, to
prescribe the titles, powers, and duties, terms of service and other terms
and conditions of the election, appointment, engagement or retention of such
Persons and, except as prohibited by law, to delegate any of the powers and
duties of the Trustee to any one or more Trustee, agents, representatives,
independent contractors, or other Persons;
(d) in accordance with Section 5.3, to retain and set aside such funds
out of the Trust Assets as the Trustee shall deem necessary or expedient to
pay, or provide for the payment of: (i) unpaid
C-9
<PAGE>
claims, expenses, charges, Liabilities, and obligations of the Trust or Tech
Squared; and (ii) the expenses of administering the Trust Assets;
(e) to do and perform any and all acts necessary or appropriate for the
conservation and protection of the Trust Assets, including acts or things
necessary or appropriate to maintain assets held by the Trustee pending
disposition thereof or distribution thereto to the Beneficiaries;
(f) to institute or defend actions or declaratory judgments or other
actions and to take such other action, in the name of the Trust, or Tech
Squared or as otherwise required, as the Trustee may deem necessary or
desirable to enforce any instruments, contracts, agreements, causes of
action, or rights relating to or forming a part of the Trust Assets;
(g) to determine conclusively from time to time the value of and to
re-value the securities and other property of the Trust, in accordance with
independent appraisals or other information as it deems necessary;
(h) to cancel, terminate, or amend any instruments, contracts,
agreements, obligations, or causes of action relating to or forming a part
of the Trust, and to execute new instruments, contracts, agreement,
obligations, or causes of action notwithstanding that the terms of any such
instruments, contracts, agreements, obligations, or causes of action may
extend beyond the terms of this Trust, provided that no such instrument,
contract, agreement, obligation, or cause of action shall permit the Trustee
to engage in any activity prohibited by Section 6.1;
(i) to vote by proxy or otherwise on behalf of the Beneficiaries and
with full power of substitution all shares of stock and all securities held
by the Trustee hereunder and to exercise every power, election, discretion,
option and subscription right and give every notice, make every demand, and
to do every act or thing in respect of any shares of stock or any securities
held by the Trustee which the Trustee might or could do if it were the
absolute owner thereof; provided, however, with respect to voting Digital
River common stock, the Trustee shall vote in its discretion regarding
uncontested matters, and shall solicit the Beneficiaries for their direction
regarding contested matters and vote all of its Digital River shares
regarding such matters in proportion to the Beneficiaries' relative
responses to such solicitation;
(j) to undertake or join in any merger, plan of reorganization,
consolidation, liquidation, dissolution, readjustment or other transaction
of any corporation, any of whose shares of stock or other securities,
obligations, or properties may at any time constitute a part of the Trust
Assets and to accept the substituted shares of stock, bonds, securities,
obligations and properties and to hold the same in trust in accordance with
the provisions hereof;
(k) in connection with the sale or other distribution or disposition of
any securities held by the Trustee, to comply with applicable Federal and
state securities laws, and to enter into agreements relating to the sale or
other disposition or distribution thereof; and
(l) to perform any act authorized, permitted, or required under any
instrument, contract, agreement, right, obligation, or cause of action
relating to or forming a part of the Trust Assets whether in the nature of
an approval, consent, demand, or notice thereunder or otherwise, unless such
act would require the consent of the Beneficiaries in accordance with the
express provisions of this Agreement.
C-10
<PAGE>
ARTICLE 7.
CONCERNING THE TRUSTEE, SHAREHOLDERS,
AND AGENTS
7.1) GENERALLY. The Trustee accepts and undertakes to discharge the Trust
created by this Agreement, upon the terms and conditions hereof on behalf of the
Beneficiaries. The Trustee shall exercise such of the rights and powers vested
in it by this Agreement and, subject to the terms of this Agreement, use the
same degree of care and skill in their exercise as a prudent man would exercise
or use under the circumstances in the conduct of his own affairs. No provision
of this Agreement shall be construed to relieve the Trustee from liability for
its own negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(a) Although the Trustee shall be free to sell or otherwise dispose of
the shares of Digital River common stock or other securities in connection
with the payment, or provision for the payment of, Liabilities and other
obligations with respect to the Trust Assets, the Trust or the Trustee shall
not be required to diversify the Trust Assets, and specifically the shares
of Digital River common stock, and the Trustee shall incur no personal
liability whatsoever, in tort, contract, or otherwise, due to any such lack
of diversification of the Trust Assets;
(b) No successor Trustee shall be in any way responsible for the acts or
omissions of any predecessor Trustee in office prior to the date on which
such successor becomes Trustee;
(c) No Trustee shall be liable except for the performance of such duties
and obligations as are specifically set forth herein, and no implied
covenants or obligations shall be read into this Agreement against the
Trustee;
(d) In the absence of bad faith, the Trustee may conclusively rely, as
to the truth of the statements and the correctness of the opinions expressed
therein, upon any certificates or opinions furnished to the Trustee and
conforming to the requirements of this Agreement; but in the case of any
such certificates or opinions which are specifically required to be
furnished to the Trustee by any provision hereof, the Trustee shall be under
a duty to examine the same to determine whether or not they conform to the
requirements of this Agreement;
(e) No Trustee shall be liable for any error of judgment made in good
faith; and
(f) No Trustee shall be liable with respect to any action taken or
omitted to be taken by such Trustee in good faith in accordance with the
direction of Beneficiaries having aggregate Beneficial Interests of more
than fifty percent (50%) relating to the time, method, and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee under this
Agreement; provided that the Trustee has been provided with indemnification
satisfactory to it for expenses, claims, losses and liabilities resulting
from such directed actions taken or omitted.
7.2) RELIANCE BY TRUSTEE. Except as otherwise provided in Section 7.1:
(a) The Trustee may rely and shall be protected in acting upon any
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, or other paper or document believed by it to be
genuine and to have been signed or presented by the proper party or parties.
(b) The Trustee may consult with legal counsel, auditors or other
experts to be selected by it, and the advice or opinion of such counsel,
auditors, or other experts shall be full and complete personal protection to
the Trustee and agents of the Trust in respect of any action taken or
suffered by the Trustee in good faith and in the reliance on, or in
accordance with, such advice or opinion.
C-11
<PAGE>
(c) Persons dealing with the Trustee shall look only to the Trust Assets
to satisfy any liability incurred by the Trustee to such Person in carrying
out the terms of this Trust, and the Trustee shall have no personal or
individual obligation to satisfy any such liability.
(d) As far as practicable, the Trustee shall cause any written
instrument creating an obligation of the Trust to include a reference to
this Agreement and to provide that neither the Beneficiaries, the Trustee,
nor their agents shall be liable thereunder, and that the other parties to
such instrument shall look solely to the Trust Assets for the payment of any
claim thereunder or the performance thereof; provided, however, that the
omission of such provision from any such instrument shall not render the
Beneficiaries, the Trustee, or their agents liable, nor shall the Trustee be
liable to anyone for such omission.
7.3) LIABILITY TO THIRD PERSONS. Neither any Beneficiary nor Tech Squared
shall be subject to any personal liability whatsoever, in tort, contract, or
otherwise, to any Person in connection with the Trust Assets or the affairs of
the Trust, and no Trustee, or agent of this Trust shall be subject to any
personal liability whatsoever in tort, contract, or otherwise, to any Person in
connection with the Trust Assets or the affairs of this Trust, except for the
Trustee's or agent's own willful misconduct, knowingly and intentionally
committed in bad faith; and all such other Persons shall look solely to the
Trust Assets for satisfaction of claims of any nature arising in connection with
the affairs of this Trust.
7.4) RECITALS. Any written instrument creating an obligation of this Trust
shall be conclusively taken to have been executed or done by the Trustee or
agent of this Trust only in its capacity as Trustee under this Agreement, or in
its capacity as an employee or agent of the Trust.
7.5) INDEMNIFICATION. The Trustee, and each agent of the Trust, Tech
Squared and Tech Squared's respective directors, officers, employees and agents
(each an "Indemnified Person" and collectively the "Indemnified Persons") shall
be indemnified out of the Trust Assets against all liabilities and expenses,
including amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and attorneys' fees, reasonably incurred by the Indemnified
Persons in connection with the defense or disposition of any action, suit or
other proceeding by the Trust or any other Person, whether civil or criminal, in
which the Indemnified Person may be involved or with which the Indemnified
Person may be threatened: (i) in the case of the Trustee, or agent of the Trust,
while in office or thereafter, by reason of his being or having been such a
Trustee, employee or agent; and (ii) in the case of Tech Squared or any
director, officer, employee, or agent of Tech Squared, by reason of Tech Squared
or any such director, officer, employee, or agent of Tech Squared exercising or
failing to exercise any right hereunder; provided, however, that except as
otherwise specifically provided in this Agreement, the Indemnified Person shall
not be entitled to such indemnification with respect to any matter as to which
the Indemnified Person shall have been adjudicated to have acted in bad faith or
with willful misfeasance, negligence, or reckless disregard of the Indemnified
Person's duties and; provided, further, however, that, as to any matter disposed
of by a compromise payment by such Indemnified Person pursuant to a consent
decree or otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trustee shall have received a written
opinion from independent counsel approved by the Trustee to the effect that if
the foregoing matters had been adjudicated, such Indemnified Person would not
have been found to have acted in bad faith or with willful misfeasance,
negligence, or in reckless disregard to the Indemnified Person's duties. The
rights accruing to any Indemnified Person under these provisions shall not
exclude any other right to which the Indemnified Person may be lawfully
entitled; provided, however, that no Indemnified Person may satisfy any right of
indemnity or reimbursement granted herein, or to which the Indemnified Person
may be otherwise entitled, except out of the Trust Assets, and no Beneficiary
shall be personally liable to any person with respect to any claim for indemnity
or reimbursement or otherwise. The Trustee may make advance payments in
connection with the indemnification under this Section provided that the
Indemnified Person shall have given a written undertaking to repay any amount
advanced to the Indemnified Person and to reimburse the Trust in the event that
it is subsequently
C-12
<PAGE>
determined that the Indemnified Person is not entitled to such indemnification.
The Trustee may purchase such insurance as it feels, in the exercise of its
discretion, adequately insures that each Indemnified Person shall be indemnified
against any such loss, liability, or damage pursuant to this Section 7.5. The
rights accruing to any Indemnified Person by reason of the foregoing shall not
be deemed to exclude any other rights to which such Indemnified Person may
legally be entitled nor shall anything else contained herein restrict the right
of the Trustee to indemnify or reimburse such Indemnified Person in any proper
case, even though not specifically provided for herein, nor shall anything
contained herein restrict the right of any such Indemnified Person to
contribution under applicable law.
7.6) TRUST PROCEEDING. The Trustee in connection with the exercise of its
discretionary duties hereunder, or to preserve and protect the interests of
Beneficiaries in the Trust, and any Beneficiary of the Trust, shall be entitled
to commence a proceeding and request judicial consideration, direction and other
actions regarding all aspects of the administration and governance of the Trust,
pursuant to Minnesota Statutes, Sections 501B.16-.25.
ARTICLE 8.
PROTECTION OF PERSONS DEALING WITH THE TRUSTEE
8.1) RELIANCE ON STATEMENTS BY TRUSTEE. Any Person dealing with the
Trustee shall be fully protected in relying upon the Trustee's certificate,
signed by the Trustee, that it has the authority to take any action under this
Trust. Any Person dealing with the Trustee shall be fully protected in relying
upon the Trustee's certificate setting forth the facts concerning the calling of
any meeting of the Beneficiaries, the giving of notice thereof, and the action
taken at such meeting.
ARTICLE 9.
COMPENSATION OF TRUSTEE
9.1) AMOUNT OF COMPENSATION. In lieu of commissions or other compensation
fixed by law for trustees, the Trustee shall receive as compensation for
services as the Trustee hereunder, such compensation as initially established is
set forth on Schedule III attached hereto.
9.2) DATES OF PAYMENT. The compensation payable to the Trustee pursuant to
provisions of Section 9.1 shall be paid monthly or at such other times as the
Trustee may determine.
9.3) EXPENSES. The Trustee shall be reimbursed from the Trust Assets for
all expenses reasonably incurred by the Trustee in the performance of the
Trustee's duties in accordance with this Agreement.
9.4) LIEN ON TRUST ASSETS. The Trustee shall have a first priority lien on
all Trust Assets to secure payment of its compensation and reimbursement of its
fees, costs, and expenses, as well as the fees, costs. Payment of such items
shall not be subject to any limitation upon payment of Liabilities.
ARTICLE 10.
TRUSTEE AND SUCCESSOR TRUSTEE
10.1) NUMBER OF TRUSTEES. There shall always be one (1) Trustee of this
Trust, which shall be a corporation which is incorporated under the laws of a
state in the United States and, if a corporation, shall be authorized to act as
a corporate fiduciary under the laws of the State of Minnesota. If any corporate
Trustee shall ever change its name, or shall reorganize or reincorporate, or
shall merge with or into or consolidate with any other bank or trust company,
such corporate trustee shall be deemed to be a continuing entity and shall
continue to act as a trustee hereunder with the same liabilities, duties,
powers, titles, discretions, and privileges as are herein specified for a
Trustee.
C-13
<PAGE>
10.2) RESIGNATION AND REMOVAL. The Trustee may resign and be discharged
from the Trust hereby created by mailing written notice thereof to the
Beneficiaries at their respective addresses as they appear on the records of the
Trustee and by mailing notice to the Beneficiaries and any known creditors whose
claims have not been previously satisfied. Such resignation shall become
effective on the day specified in such notice or upon the appointment of such
Trustee's successor, and such successor's acceptance of such appointment,
whichever is later. Any Trustee may be removed at anytime, with or without
cause, by Beneficiaries having an aggregate Beneficial Interest of at least
two-thirds of the total Beneficial Interests.
10.3) APPOINTMENT OF SUCCESSOR. Should at anytime the Trustee resign or be
removed, or be adjudged bankrupt or insolvent, a vacancy shall be deemed to
exist and a successor shall be elected by Beneficiaries holding a majority of
the Beneficial Interests. In the event that the Beneficiaries do not elect a
Trustee within thirty (30) days of the resignation, removal, bankruptcy or
insolvency of the Trustee, the successor Trustee shall be appointed by a court
of competent jurisdiction upon application of any Beneficiary or known creditor
of Tech.
10.4) ACCEPTANCE OF APPOINTMENT BY SUCCESSOR TRUSTEE. Any successor
Trustee appointed hereunder shall, without any further act, become vested with
all the estates, properties, rights, powers, trusts, and duties of its
predecessor in the Trust hereunder with like effect as if originally named
therein; but the retiring Trustee shall nevertheless, when requested in writing
by the successor Trustee, execute and deliver an instrument or instruments
conveying and transferring to such successor Trustee upon the trust herein
expressed, all the estates, properties, rights, powers, and trusts of such
retiring Trustee, and it shall duly assign, transfer, and deliver to such
successor Trustee all property and money held by such Trustee hereunder.
10.5) BONDS. Unless required by the Board of Directors of Tech Squared
prior to the Record Date, or unless a bond is required by law, no bond shall be
required of any original Trustee hereunder. Prior to a successor Trustee's
acceptance of an appointment as such pursuant to Section 10.3, or unless a bond
is required by law and such requirement cannot be waived by or with the approval
of the Beneficiaries, no bond shall be required of any successor trustee
hereunder. If a bond is required by law, no surety or security with respect to
such bond shall be required unless required by law, and such requirement cannot
be waived by or with the approval of the Beneficiaries or unless required by the
Board of Directors of Tech Squared prior to the Record Date. If a bond is
required by the Board of Directors of Tech Squared or by law, the Board of
Directors of Tech Squared or the Trustee, as the case may be, shall determine
whether, and to what extent, a surety or security with respect to such bond
shall be required.
ARTICLE 11.
CONCERNING THE BENEFICIARIES
11.1) EVIDENCE OF ACTION BY BENEFICIARIES. Whenever in this Agreement it
is provided that the Beneficiaries may take any action (including the making of
any demand or request, the giving of any notice, consent, or waiver, the removal
of a Trustee, the appointment of a successor Trustee, or the taking of any other
action), the fact that at the time of taking any such action such Beneficiaries
have joined therein may be evidenced: (i) by any instrument or any number of
instruments of similar tenor executed by the Beneficiaries in person or by agent
or attorney appointed in writing; or (ii) by the record of the Beneficiaries
voting in favor thereof at any meeting of Beneficiaries duly called and held in
accordance with the provisions of Article 12.
11.2) LIMITATION ON SUITS BY BENEFICIARIES. No Beneficiary shall have any
right by virtue of any provision of this Agreement to institute any action or
proceeding at law or in equity against any party other than the Trustee upon or
under or with respect to the Trust or the agreements relating to or forming part
of the Trust, and the Beneficiaries do hereby waive any such right, unless
Beneficiaries
C-14
<PAGE>
having an aggregate Beneficial Interest of at least twenty-five percent (25%)
shall have made written request to the Trustee to institute such action or
proceeding in their own names as Trustee hereunder and shall have offered to the
Trustee reasonable indemnity against the costs and expenses to be incurred
therein or thereby, and the Trustee for thirty (30) days after the receipt of
such notice, request, and offer of indemnity shall have failed to institute any
such action or proceeding.
11.3) REQUIREMENT OF UNDERTAKING. The Trustee may request any court to
require, and any court may in its discretion require, in any suit for the
enforcement of any right or remedy under this Agreement, or in any suit against
the Trustee for any action taken or omitted to be taken by it as Trustee, the
filing by any party litigant in such suit of an undertaking to pay the costs of
such suit, and such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; provided, however, that the provisions of this Section 11.3
shall not apply to any suit by the Trustee.
ARTICLE 12.
MEETING OF BENEFICIARIES
12.1) PURPOSE OF MEETINGS. A meeting of the Beneficiaries may be called at
any time and from time to time pursuant to the provisions of this Article for
the purposes of taking any action which the terms of this Agreement permit a
Beneficiary having a specified aggregate Beneficial Interest to take either
acting alone or with the Trustee.
12.2) MEETING CALLED BY TRUSTEE. The Trustee may at any time call a
meeting of the Beneficiaries to be held at such time and at such place within
the State of Minnesota (or elsewhere if so determined by the Trustee) as the
Trustee shall determine. Written notice of every meeting of the Beneficiaries
shall be given by the Trustee (except as provided in Section 12.3), which
written notice shall set forth the time and place of such meeting and in general
terms the action proposed to be taken at such meeting, and shall be mailed not
more than sixty (60) nor less than ten (10) days before such meeting is to be
held to all of the Beneficiaries of record not more than sixty (60) days before
the date of such meeting. The notice shall be directed to the Beneficiaries at
their respective addresses as they appear in the records of the Trust.
12.3) MEETING CALLED ON REQUEST OF BENEFICIARIES. Within thirty (30) days
after written request to the Trustee by Beneficiaries having an aggregate
Beneficial Interest of at least twenty-five percent (25%) to call a meeting of
all the Beneficiaries, which written request shall specify in reasonable detail
the action proposed to be taken, the Trustee shall proceed under the provisions
of Section 12.2 to call a meeting of the Beneficiaries, and if the Trustee fails
to call such meeting within such thirty (30) period then such meeting may be
called by Beneficiaries, or their designated representative, having an aggregate
Beneficial Interest of at least twenty-five percent (25%).
12.4) PERSONS ENTITLED TO VOTE AT MEETING OF BENEFICIARIES. Each
Beneficiary shall be entitled to vote at a meeting of the Beneficiaries either
in person or by his proxy duly authorized in writing. The vote of each
Beneficiary shall be weighted based on the number of Units held by each
Beneficiary in the Trust. The signature of the Beneficiary on such written
authorization need not be witnessed or notarized.
12.5) QUORUM. At any meeting of Beneficiaries, the presence of
Beneficiaries having an aggregate Beneficial Interest sufficient to take action
on any matter for the transaction of which such meeting was called shall be
necessary to constitute a quorum.
12.6) ADJOURNMENT OF MEETING. Any meeting of Beneficiaries may be
adjourned from time to time and a meeting may be held at such adjourned time and
place without further notice.
C-15
<PAGE>
12.7) CONDUCT OF MEETINGS. The Trustee shall appoint the Chairman and the
Secretary of the meeting. The vote upon any resolution submitted to any meeting
of Beneficiaries shall be by written ballot. Two inspectors of votes, appointed
by the Chairman of the meeting, shall count all votes cast at the meeting for or
against any resolution and shall make and file with the Secretary of the meeting
their verified written report.
12.8) RECORD OF MEETING. A record of the proceedings of each meeting of
Beneficiaries shall be prepared by the Secretary of the meeting. The record
shall be signed and verified by the Secretary of the meeting and shall be
delivered to the Trustee to be preserved by them. Any record so signed and
verified shall be conclusive evidence of all of the matters therein stated.
ARTICLE 13.
AMENDMENTS
13.1) CONSENT OF BENEFICIARIES. At the direction or with the consent of
Beneficiaries having an aggregate Beneficial Interest of at least two-thirds or
such greater percentage as shall be specified in this Agreement for the taking
of an action by the Beneficiaries under the affected provision of this
Agreement, of the total Beneficial Interest, the Trustee shall promptly make and
execute a declaration amending this Agreement for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Agreement or amendments thereto; provided, however, that no such amendment
shall: (i) permit the Trustee to engage in any activity prohibited by
Section 6.1 hereof or affect the Beneficiaries' rights to receive their pro rata
shares of the Trust Assets at the time of any distribution; (ii) cause the
Trust, in the opinion of counsel to the Trustee, to be treated for federal,
state or local income tax purposes, as other than a liquidating trust under
Treasury Regulation Section 301.7701-4(d), or cause the Beneficiaries to be
treated as other than the owner of their respective shares of the Trust's
taxable income pursuant to Section 671-678 of the Code and any analogous
provision of state or local law; or (iii) expand the liability or potential
liability of a Trustee for acts performed by the Trustee prior to the adoption
of such amendment.
13.2) NOTICE AND EFFECT OF AMENDMENT. Promptly after the execution by the
Trustee of any such declaration of amendment, the Trustee shall give notice of
the substance of such amendment to the Beneficiaries or, in lieu thereof, the
Trustee may send a copy of the amendment to each Beneficiary. Upon the execution
of any such declaration of amendment by the Trustee, this Agreement shall be
deemed to be modified and amended in accordance therewith and the respective
rights, limitations of rights, obligations, duties, and immunities of the
Trustee and the Beneficiaries under this Agreement shall thereafter be
determined, exercised and enforced hereunder subject in all respects to such
modification and amendments, and all the terms and conditions of any such
amendment shall thereby be deemed to be part of the terms and conditions of this
Agreement for any and all purposes.
ARTICLE 14.
MISCELLANEOUS PROVISIONS
14.1) FILING DOCUMENTS. This Agreement shall be filed or recorded in such
office or offices as the Trustee may determine to be necessary or desirable. A
copy of this Agreement and all amendments thereof shall be maintained in the
office of each Trustee and shall be available at all times during regular
business hours for inspection by any Beneficiary or his duly authorized
representative. The Trustee shall file or record any amendment of this Agreement
in the same places where the original Agreement is filed or recorded. The
Trustee shall file or record any instrument which relates to any change in the
office of the Trustee in the same places where the original Agreement is filed
or recorded.
C-16
<PAGE>
14.2) INTENTION OF PARTIES TO ESTABLISH TRUST. This Agreement is not
intended to create, and shall not be interpreted as creating, a corporation,
association, partnership, or joint venture of any kind for purposes of federal
income taxation or for any other purpose.
14.3) BENEFICIARIES HAVE NO RIGHTS OR PRIVILEGES AS SHAREHOLDERS OF TECH
SQUARED. Except as expressly provided in this Agreement or under applicable
law, the Beneficiaries shall have no rights or privileges attributable to their
former status as Shareholders of Tech.
14.4) LAWS AS TO CONSTRUCTION. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota. The Trustee and
the Beneficiaries consent and agree that this Agreement shall be governed by and
construed in accordance with such laws.
14.5) SEVERABILITY. In the event any provision of this Agreement or the
application thereof to any Person or circumstances shall be finally determined
by a court of proper jurisdiction to be invalid or unenforceable to any extent,
the remainder of this Agreement, or the application of such provision to persons
or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each provision of this
Agreement shall be valid and enforced to the fullest extent permitted by law.
14.6) NOTICES. Any notice or communication by the Trustee to any
Beneficiary shall be deemed to have been sufficiently given, for all purposes,
if deposited, postage prepaid, in the post office or letter box addressed to
such Person at his address as shown in the records of the Trust. All notices and
other communications hereunder shall be in writing and shall be deemed to have
been duly given if delivered personally or sent by cable, telegram, telecopier
or telex to the parties at the following addresses or at such other addresses as
shall be specified by the parties by like notice:
<TABLE>
<S> <C> <C>
(a) If to the Trustee: Norwest Bank Minnesota, N.A.
Sixth & Marquette
MAC N9303-120
Minneapolis, Minnesota 55402
Attention: Lon LeClair
Facsimile: 612-667-9825
(b) If to Tech Squared: Tech Squared Inc.
5198 West 76(th) Street, Suite 220
Edina, Minnesota 55439
Attention: Charles E. Reese, Jr.
Facsimile: 612-831-6156
with a copy to: Larkin, Hoffman, Daly & Lindgren, Ltd.
7900 Xerxes Avenue South, Suite 1500
Bloomington, Minnesota 55431
Attention: Michael W. Schley, Esq.
Facsimile: 612-896-3334
</TABLE>
14.7) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
14.8) BINDING.
(a) The name Tech Squared Inc. is the designation created by Articles of
Incorporation dated May 9, 1995, as amended, to which reference is hereby
made. The obligations of Tech Squared are not personally binding upon, nor
shall resort be had to the private property of, any of the directors,
Shareholders, officers, employees or agents of Tech Squared, but only the
property of Tech Squared shall be bound.
(b) The obligations of the Trust are not personally binding upon, nor
shall resort be had to the private property of, any of the Trustee,
Beneficiaries, employees or agents of the Trust, but only the Trust Assets
shall be bound.
C-17
<PAGE>
IN WITNESS WHEREOF, Tech Squared Inc. has caused this Agreement to be signed
and acknowledged by its President and Chief Executive Officer, and the same to
be attested by its Secretary, and the Trustee herein has executed this
Agreement, as Trustee and not as an individual, effective this day of
, 1999.
<TABLE>
<S> <C> <C>
TECH SQUARED INC.
By:
----------------------------------------
Name:
Title: President and Chief Executive
Officer
Attest:
- -------------------------------------------
Secretary
NORWEST BANK
MINNESOTA,
NATIONAL ASSOCIATION,
As Trustee
By:
----------------------------------------
Name:
</TABLE>
C-18
<PAGE>
SCHEDULE I
RETAINED ASSETS
C-19
<PAGE>
SCHEDULE II
RECORDS, FILES AND DOCUMENTS
C-20
<PAGE>
SCHEDULE III
TRUSTEE'S COMPENSATION
C-21
<PAGE>
ANNEX D
VOTING AGREEMENT
THIS VOTING AGREEMENT is entered into as of July 11, 1999, by and between
Digital River, Inc., a Delaware corporation ("Buyer"), and the undersigned
holder of common stock of Tech Squared Inc. ("Stockholder").
RECITALS
A. In order to induce Buyer to purchase substantially all of the assets of
Tech Squared Inc., a Minnesota corporation (the "Company"), pursuant to that
certain Acquisition Agreement (the "Acquisition Agreement") of even date
herewith (the "Acquisition"), Buyer has required that Stockholder, and
Stockholder has agreed to, enter into this Agreement. Capitalized terms used but
not separately defined herein shall have the respective meanings set forth in
the Acquisition Agreement.
B. In connection with the consummation of the Acquisition, Stockholder has
agreed for the future voting of his shares of the Company's capital stock as set
forth below.
AGREEMENT
The parties to this Voting Agreement, intending to be legally bound, agree
as follows:
SECTION 1. CERTAIN DEFINITIONS.
For purposes of this Voting Agreement:
(a) "COMPANY COMMON STOCK" shall mean the common stock, no par value, of
the Company.
(b) "EXPIRATION DATE" shall mean the earlier of (i) the date upon which
the Acquisition Agreement is validly terminated, or (ii) the date upon which
the Acquisition is consummated.
(c) Stockholder shall be deemed to "OWN" or to have acquired "OWNERSHIP"
of a security if Stockholder: (i) is the record owner of such security; or
(ii) is the "beneficial owner" (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934) of such security.
(d) "PERSON" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity, or (iii) governmental
authority.
(e) "SUBJECT SECURITIES" shall mean: (i) all securities of the Company
(including all shares of Company Common Stock and all options, warrants and
other rights to acquire shares of Company Common Stock) Owned by Stockholder
as of the date of this Agreement; and (ii) all additional securities of the
Company (including all additional shares of Company Common Stock and all
additional options, warrants and other rights to acquire shares of Company
Common Stock) of which Stockholder acquires Ownership during the period from
the date of this Agreement through the Expiration Date.
(f) A Person shall be deemed to have effected a "TRANSFER" of a security
if such Person directly or indirectly: (i) sells, pledges, encumbers, grants
an option with respect to, transfers or disposes of such security or any
interest in such security; or (ii) enters into an agreement or commitment
contemplating the possible sale of, pledge of, encumbrance of, grant of an
option with respect to, transfer of or disposition of such security or any
interest therein.
SECTION 2. TRANSFER OF SUBJECT SECURITIES.
2.1 TRANSFEREE OF SUBJECT SECURITIES TO BE BOUND BY THIS
AGREEMENT. Stockholder agrees that, during the period from the date of this
Voting Agreement through the Expiration Date, Stockholder shall not
D-1
<PAGE>
cause or permit any Transfer of any of the Subject Securities to be effected
unless each Person to which any of such Subject Securities, or any interest in
any of such Subject Securities, is or may be transferred shall have:
(a) executed a counterpart of this Voting Agreement and a proxy in the form
attached hereto as Exhibit A (with such modifications as Buyer may reasonably
request); and (b) agreed to hold such Subject Securities (or interest in such
Subject Securities) subject to all of the terms and provisions of this Voting
Agreement.
2.2 TRANSFER OF VOTING RIGHTS. Stockholder agrees that, during the period
from the date of this Voting Agreement through the Expiration Date, Stockholder
shall ensure that: (a) none of the Subject Securities is deposited into a voting
trust; and (b) no proxy inconsistent with this Agreement is granted, and no
voting agreement or similar agreement is entered into, with respect to any of
the Subject Securities.
SECTION 3. VOTING OF SHARES.
3.1 VOTING AGREEMENT. Stockholder agrees that, during the period from the
date of this Voting Agreement through the Expiration Date:
(a) at any meeting of stockholders of the Company, however called,
Stockholder shall (unless otherwise directed in writing by Buyer) cause all
outstanding shares of Company Common Stock that are Owned by Stockholder as
of the record date fixed for such meeting to be voted (i) in favor of the
approval of the voluntary dissolution of the Company pursuant to the Plan of
Liquidation and Dissolution attached hereto as Exhibit B (the "Plan"), and
in favor of each of the other actions contemplated by the Plan, including
the Acquisition and (ii) against any action or proposal that would impair or
prevent the consummation of the transactions contemplated by the Plan,
including the Acquisition; and
(b) in the event written consents are solicited or otherwise sought from
stockholders of the Company with respect to the approval of the voluntary
dissolution of the Company pursuant to the Plan or with respect to any of
the other actions contemplated by the Plan, Stockholder shall (unless
otherwise directed in writing by Buyer) cause to be executed, with respect
to all outstanding shares of Company Common Stock that are Owned by
Stockholder as of the record date fixed for the consent to the proposed
action, a written consent or written consents to such proposed action.
3.2 PROXY; FURTHER ASSURANCES.
(a) Contemporaneously with the execution of this Voting Agreement:
(i) Stockholder shall deliver to Buyer a proxy in the form attached to this
Voting Agreement as Exhibit A, which shall be irrevocable to the fullest extent
permitted by law, with respect to the shares held of record referred to therein
(the "Proxy"); and (ii) Stockholder shall cause to be delivered to Buyer an
additional proxy (in the form attached hereto as Exhibit A) executed on behalf
of the record owner of any outstanding shares of Company Common Stock that are
owned beneficially (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934), but not of record, by Stockholder.
(b) Stockholder shall, at his own expense, perform such further acts and
execute such further documents and instruments as may reasonably be required to
vest in Buyer the power to carry out and give effect to the provisions of this
Voting Agreement.
SECTION 4. NO SOLICITATION.
Stockholder agrees that, during the period from the date of this Voting
Agreement through the Expiration Date, Stockholder shall not, directly or
indirectly, and Stockholder shall ensure that his representatives (as defined in
the Acquisition Agreement) do not, directly or indirectly: (i) solicit,
initiate, encourage or induce the making, submission or announcement of any
Acquisition Proposal (as
D-2
<PAGE>
defined below) or take any action that could reasonably be expected to lead to
an Acquisition Proposal; (ii) furnish any information regarding the Company or
any direct or indirect subsidiary of the Company to any Person in connection
with or in response to an Acquisition Proposal or potential Acquisition
Proposal; or (iii) engage in discussions with any Person with respect to any
Acquisition Proposal. Stockholder shall immediately cease and discontinue, and
Stockholder shall ensure that his representatives immediately cease and
discontinue, any existing discussions with any Person that relate to any
Acquisition Proposal. For purposes of this Agreement, an Acquisition Proposal
shall mean any transaction or series of transactions involving: (a) any merger,
consolidation, amalgamation, share exchange, business combination, issuance of
securities, acquisition of securities, tender offer, exchange offer or other
similar transaction (1) in which the Company is a constituent company, (2) in
which a Person or "group" (as defined in the Exchange Act and the
rules promulgated thereunder) of Persons directly or indirectly acquires the
Company or more than 20% of the Company's business or directly or indirectly
acquires beneficial or record ownership of securities representing, or
exchangeable for or convertible into, more than 20% of the outstanding
securities of any class of voting securities of the Company, or (3) in which the
Company issues securities representing more than 20% of the outstanding
securities of any class of voting securities of the Company; (b) any sale,
lease, exchange, transfer, license, acquisition or disposition of more than 20%
of the assets of the Company; or (c) any liquidation or dissolution of the
Company.
SECTION 5. LOCK-UP.
Stockholder hereby agrees not to offer to sell, contract to sell or
otherwise sell, dispose of, loan, pledge or grant any rights (collectively, a
"Disposition") with respect to any shares of Buyer's common stock transferred to
Stockholder in connection with the transactions contemplated by the Plan,
including the Acquisition, other than (i) as a bona fide gift or gifts, provided
the donee or donees thereof agree to be bound by this Section 5 or (ii) with the
prior written consent of Buyer until January 1, 2000. Stockholder may then sell
(a) one-third of such shares after January 1, 2000, (b) an additional one-third
of such shares after April 1, 2000 and (c) any remaining shares after June 1,
2000 (each, a "Lock-Up Period"). The foregoing restriction is expressly agreed
to preclude the holder of such shares from engaging in any hedging or other
transaction which is designed to or is reasonably expected to lead to or result
in a Disposition of such shares during each Lock-Up Period even if such shares
would be disposed of by someone other than Stockholder. Such prohibited hedging
or other transactions would include without limitation any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including
without limitation any put or call option) with respect to any of such shares or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from such
shares.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER.
Stockholder hereby represents and warrants to Buyer as follows:
6.1 AUTHORIZATION, ETC. Stockholder has the capacity to execute and
deliver this Voting Agreement and the Proxy and to perform his obligations
hereunder and thereunder. This Voting Agreement and the Proxy have been duly
executed and delivered by Stockholder and constitute legal, valid and binding
obligations of Stockholder, enforceable against Stockholder in accordance with
their terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
6.2 NO CONFLICTS OR CONSENTS. To the best of the knowledge of Stockholder,
the execution and delivery of this Voting Agreement and the Proxy by Stockholder
do not, and the performance of this Voting Agreement and the Proxy by
Stockholder will not: (i) conflict with or violate any law, rule, regulation,
order, decree or judgment applicable to Stockholder or by which he or any of his
properties
D-3
<PAGE>
is or may be bound or affected; or (ii) result in or constitute (with or without
notice or lapse of time) any breach of or default under, or give to any other
Person (with or without notice or lapse of time) any right of termination,
amendment, acceleration or cancellation of, or result (with or without notice or
lapse of time) in the creation of any encumbrance or restriction on any of the
Subject Securities pursuant to, any contract to which Stockholder is a party or
by which Stockholder or any of his affiliates or properties is or may be bound
or affected. The execution and delivery of this Voting Agreement and the Proxy
by Stockholder do not, and the performance of this Voting Agreement and the
Proxy by Stockholder will not, require any consent or approval of any Person.
6.3 TITLE TO SECURITIES. As of the date of this Voting Agreement:
(a) Stockholder holds of record (free and clear of any encumbrances or
restrictions) the number of outstanding shares of Company Common Stock set forth
under the heading "Shares Held of Record" on the signature page hereof;
(b) Stockholder holds (free and clear of any encumbrances or restrictions) the
options, warrants and other rights to acquire shares of Company Common Stock set
forth under the heading "Options and Other Rights" on the signature
page hereof; (c) Stockholder Owns the additional securities of the Company set
forth under the heading "Additional Securities Beneficially Owned" on the
signature page hereof; and (d) Stockholder does not directly or indirectly Own
any shares of capital stock or other securities of the Company, or any option,
warrant or other right to acquire (by purchase, conversion or otherwise) any
shares of capital stock or other securities of the Company, other than the
shares and options, warrants and other rights set forth on the signature
page hereof.
6.4 ACCURACY OF REPRESENTATIONS. The representations and warranties
contained in this Voting Agreement are accurate in all material respects as of
the date of this Voting Agreement, will be accurate in all material respects at
all times through the Expiration Date and will be accurate in all material
respects as of the date of the consummation of the Acquisition as if made on
that date except that Stockholder may acquire additional shares of Company
Common Stock, including upon exercise of outstanding stock options.
SECTION 7. ADDITIONAL COVENANTS OF STOCKHOLDER.
7.1 FURTHER ASSURANCES. From time to time and without additional
consideration, Stockholder shall (at Stockholder's sole expense) execute and
deliver, or cause to be executed and delivered, such additional transfers,
assignments, endorsements, proxies, consents and other instruments, and shall
(at Stockholder's sole expense) take such further actions, as Buyer may request
for the purpose of carrying out and furthering the intent of this Voting
Agreement.
7.2 LEGEND. Immediately after the execution of this Voting Agreement (and
from time to time upon the acquisition by Stockholder of Ownership of any shares
of Company Common Stock prior to the Expiration Date), Stockholder shall ensure
that each certificate evidencing any outstanding shares of Company Common Stock
or other securities of the Company Owned by Stockholder bears a legend in the
following form:
THE SECURITY OR SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
EXCHANGED OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH
THE TERMS AND PROVISIONS OF THE VOTING AGREEMENT DATED AS OF JULY 11, 1999,
BETWEEN THE ISSUER AND THE HOLDER OF THIS CERTIFICATE, AS IT MAY BE AMENDED,
A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER.
Furthermore, Stockholder shall ensure that each certificate representing shares
of common stock that may be issued by Buyer to Stockholder as a result of the
Acquisition or any other transaction contemplated by the Plan bears a legend in
the following form:
THE SECURITY OR SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 5 OF A VOTING AGREEMENT
DATED AS OF JULY 11, 1999, BETWEEN THE ISSUER AND THE HOLDER OF THIS
CERTIFICATE. ANY PERSON ACCEPTING ANY INTEREST IN SUCH SECURITIES SHALL BE
DEEMED TO
D-4
<PAGE>
AGREE TO AND SHALL BECOME BOUND BY THE PROVISIONS OF SECTION 5 OF SUCH
AGREEMENT. A COPY OF SUCH VOTING AGREEMENT WILL BE FURNISHED TO THE RECORDER
HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE
COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS.
SECTION 8. MISCELLANEOUS.
8.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations, warranties, covenants and agreements made by Stockholder in
this Voting Agreement shall survive (i) the consummation of the Acquisition,
(ii) any termination of the Acquisition Agreement and (iii) the Expiration Date.
8.2 INDEMNIFICATION. Stockholder shall hold harmless and indemnify Buyer
and Buyer's affiliates from and against, and shall compensate and reimburse
Buyer and Buyer's affiliates for, any loss, damage, claim, liability, fee
(including attorneys' fees), demand, cost or expense (regardless of whether or
not such loss, damage, claim, liability, fee, demand, cost or expense relates to
a third-party claim) that is directly or indirectly suffered or incurred by
Buyer or any of Buyer's affiliates, or to which Buyer or any of Buyer's
affiliates otherwise becomes subject, and that arises directly or indirectly
from, or relates directly or indirectly to, (a) any inaccuracy in or breach of
any representation or warranty contained in this Voting Agreement, or (b) any
failure on the part of Stockholder to observe, perform or abide by, or any other
breach of, any restriction, covenant, obligation or other provision contained in
this Voting Agreement or in the Proxy.
8.3 EXPENSES. All costs and expenses incurred in connection with the
transactions contemplated by this Voting Agreement shall be paid by the party
incurring such costs and expenses.
8.4 NOTICES. Any notice or other communication required or permitted to be
delivered to either party under this Voting Agreement 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):
if to Stockholder:
at the address set forth below Stockholder's signature on the signature
page hereof
if to Buyer:
Digital River, Inc.
9625 W. 76th Street, Suite 150
Eden Prairie, MN 55344
Attn: President
Fax: (612) 830-9042
8.5 SEVERABILITY. If any provision of this Voting Agreement 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 enforceability of the remainder of such provision or the
validity or enforceability of any other provision of this Voting Agreement. Each
provision of this Voting Agreement is separable from every other provision of
this Voting Agreement, and each part of each provision of this Voting Agreement
is separable from every other part of such provision.
D-5
<PAGE>
8.6 ENTIRE AGREEMENT. This Voting Agreement, the Proxy and any other
documents delivered by the parties in connection herewith constitute the entire
agreement between the parties with respect to the subject matter hereof and
thereof and supersede all prior agreements and understandings between the
parties with respect thereto. No addition to or modification of any provision of
this Voting Agreement shall be binding upon either party unless made in writing
and signed by both parties.
8.7 ASSIGNMENT; BINDING EFFECT. Except as provided herein, neither this
Voting Agreement nor any of the interests or obligations hereunder may be
assigned or delegated by Stockholder and any attempted or purported assignment
or delegation of any of such interests or obligations shall be void. Subject to
the preceding sentence, this Voting Agreement shall be binding upon Stockholder
and his heirs, estate, executors, personal representatives, successors and
assigns, and shall inure to the benefit of Buyer and its successors and assigns.
Without limiting any of the restrictions set forth in Section 2 or elsewhere in
this Voting Agreement, this Voting Agreement shall be binding upon any Person to
whom any Subject Securities are transferred. Nothing in this Voting Agreement is
intended to confer on any Person (other than Buyer and its successors and
assigns) any rights or remedies of any nature.
8.8 SPECIFIC PERFORMANCE. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Voting Agreement or the
Proxy was not performed in accordance with its specific terms or was otherwise
breached. Stockholder agrees that, in the event of any breach or threatened
breach by Stockholder of any covenant or obligation contained in this Voting
Agreement or in the Proxy, Buyer shall be entitled (in addition to any other
remedy that may be available to it, including monetary damages) to seek and
obtain (a) a decree or order of specific performance to enforce the observance
and performance of such covenant or obligation, and (b) an injunction
restraining such breach or threatened breach. Stockholder further agrees that
neither Buyer nor any other Person shall be required to obtain, furnish or post
any bond or similar instrument in connection with or as a condition to obtaining
any remedy referred to in this Section 8.8, and Stockholder irrevocably waives
any right he may have to require the obtaining, furnishing or posting of any
such bond or similar instrument.
8.9 NON-EXCLUSIVITY. The rights and remedies of Buyer under this Voting
Agreement are not exclusive of or limited by any other rights or remedies which
it may have, whether at law, in equity, by contract or otherwise, all of which
shall be cumulative (and not alternative). Without limiting the generality of
the foregoing, the rights and remedies of Buyer under this Voting Agreement, and
the obligations and liabilities of Stockholder under this Voting Agreement, are
in addition to their respective rights, remedies, obligations and liabilities
under common law requirements and under all applicable statutes, rules and
regulations. Nothing in this Voting Agreement shall limit any of Stockholder's
obligations, or the rights or remedies of Buyer, under any Affiliate Agreement
between Buyer and Stockholder; and nothing in any such Affiliate Agreement shall
limit any of Stockholder's obligations, or any of the rights or remedies of
Buyer, under this Voting Agreement.
8.10 GOVERNING LAW; VENUE.
(a) This Voting Agreement and the Proxy shall be construed in accordance
with, and governed in all respects by, the laws of the State of Delaware
(without giving effect to principles of conflicts of laws).
(b) Any legal action or other legal proceeding relating to this Voting
Agreement or the Proxy or the enforcement of any provision of this Voting
Agreement or the Proxy may be brought or otherwise commenced in any state or
federal court located in the City of Minneapolis, Minnesota. Stockholder:
(i) expressly and irrevocably consents and submits to the jurisdiction
of each state and federal court located in the City of Minneapolis,
Minnesota (and each appellate court located in the State of Minnesota), in
connection with any such legal proceeding;
D-6
<PAGE>
(ii) agrees that service of any process, summons, notice or document by
U.S. mail addressed to him at the address set forth in Section 8.4 shall
constitute effective service of such process, summons, notice or document
for purposes of any such legal proceeding;
(iii) agrees that each state and federal court located in the City of
Minneapolis, Minnesota, shall be deemed to be a convenient forum; and
(iv) agrees not to assert (by way of motion, as a defense or otherwise),
in any such legal proceeding commenced in any state or federal court located
in the City of Minneapolis, Minnesota, any claim that Stockholder is not
subject personally to the jurisdiction of such court, that such legal
proceeding has been brought in an inconvenient forum, that the venue of such
proceeding is improper or that this Voting Agreement or the subject matter
of this Voting Agreement may not be enforced in or by such court.
Nothing contained in this Section 8.10 shall be deemed to limit or otherwise
affect the right of Buyer to commence any legal proceeding or otherwise proceed
against Stockholder in any other forum or jurisdiction.
(c) STOCKHOLDER IRREVOCABLY WAIVES THE RIGHT TO A JURY TRIAL IN CONNECTION
WITH ANY LEGAL PROCEEDING RELATING TO THIS VOTING AGREEMENT OR THE PROXY OR THE
ENFORCEMENT OF ANY PROVISION OF THIS VOTING AGREEMENT OR THE PROXY.
8.11 COUNTERPARTS. This Voting Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument.
8.12 CAPTIONS. The captions contained in this Voting Agreement are for
convenience of reference only, shall not be deemed to be a part of this Voting
Agreement and shall not be referred to in connection with the construction or
interpretation of this Voting Agreement.
8.13 ATTORNEYS' FEES. If any legal action or other legal proceeding
relating to this Voting Agreement or the enforcement of any provision of this
Voting Agreement is brought against Stockholder, 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).
8.14 WAIVER. No failure on the part of Buyer to exercise any power, right,
privilege or remedy under this Voting Agreement, and no delay on the part of
Buyer in exercising any power, right, privilege or remedy under this Voting
Agreement, 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. Buyer shall not be deemed to have waived any claim
available to Buyer arising out of this Voting Agreement, or any power, right,
privilege or remedy of Buyer under this Voting Agreement, 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 Buyer; and any such
waiver shall not be applicable or have any effect except in the specific
instance in which it is given.
8.15 CONSTRUCTION.
(a) For purposes of this Voting Agreement, whenever the context requires:
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
masculine and feminine genders.
(b) The parties agree that any rule of construction to the effect that
ambiguities are to be resolved against the drafting party shall not be applied
in the construction or interpretation of this Voting Agreement.
D-7
<PAGE>
(c) As used in this Voting Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Voting Agreement
to "Sections" and "Exhibits" are intended to refer to Sections of this Voting
Agreement and Exhibits to this Voting Agreement.
IN WITNESS WHEREOF, Buyer and Stockholder have caused this Voting Agreement
to be executed as of the date first written above.
DIGITAL RIVER, INC.
By:
Title:
Address:
Facsimile: (612) 830-1154
STOCKHOLDER:
Signature
--------------------------------------
Print Name:
Address:
Facsimile:
<TABLE>
<CAPTION>
ADDITIONAL SECURITIES
SHARES HELD OF RECORD OPTIONS AND OTHER RIGHTS BENEFICIALLY OWNED
--------------------- ------------------------ ---------------------
<S> <C> <C>
</TABLE>
Signature Page to Voting Agreement
D-8
<PAGE>
EXHIBIT A
FORM OF IRREVOCABLE PROXY
The undersigned stockholder of TECH SQUARED, INC., a Minnesota corporation
(the "Company"), hereby irrevocably (to the fullest extent permitted by law)
appoints and constitutes Perry Steiner and Robert Strawman and Digital
River, Inc., a Delaware corporation ("Buyer"), and each of them, the attorneys
and proxies of the undersigned with full power of substitution and
resubstitution, to the full extent of the undersigned's rights with respect to
(i) the outstanding shares of capital stock of the Company owned of record by
the undersigned as of the date of this proxy, which shares are specified on the
final page of this proxy, and (ii) any and all other shares of capital stock of
the Company which the undersigned may acquire on or after the date hereof. (The
shares of the capital stock of the Company referred to in clauses "(i)" and
"(ii)" of the immediately preceding sentence are collectively referred to as the
"Shares.") Upon the execution hereof, all prior proxies given by the undersigned
with respect to any of the Shares are hereby revoked, and the undersigned agrees
that no subsequent proxies will be given with respect to any of the Shares.
This proxy is irrevocable, is coupled with an interest and is granted in
connection with the Voting Agreement, dated as of the date hereof, between Buyer
and the undersigned (the "Voting Agreement"), and is granted in consideration of
Buyer entering into the Acquisition Agreement, dated as of the date hereof,
between Buyer, and the Company (the "Acquisition Agreement").
The attorneys and proxies named above will be empowered, and may exercise
this proxy, to vote the Shares at any time until the earlier to occur of the
valid termination of the Acquisition Agreement or the consummation of the
Acquisition contemplated thereby (the "Acquisition") at any meeting of the
stockholders of the Company, however called, or in connection with any
solicitation of written consents from stockholders of the Company, in favor of
the approval of the voluntary dissolution of the Company pursuant to the Plan of
Liquidation and Dissolution (the "Plan") and, in favor of each of the other
actions contemplated by the Plan, including the Acquisition and against any
action or proposal that would impair or prevent the consummation of the
transactions contemplated by the Plan, including the Acquisition.
The undersigned may vote the Shares on all other matters.
This proxy shall be binding upon the heirs, estate, executors, personal
representatives, successors and assigns of the undersigned (including any
transferee of any of the Shares).
If any provision of this proxy 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 enforceability of the remainder of
such provision or the validity or enforceability of any other provision of this
proxy. Each provision of this proxy is separable from every other provision of
this proxy, and each part of each provision of this proxy is separable from
every other part of such provision.
D-9
<PAGE>
This proxy shall terminate upon the earlier of the valid termination of the
Acquisition Agreement or the consummation of the Acquisition.
Dated: , .
Name
Number of shares of common stock of
the Company owned of record as of this
proxy:
--------------------------------------
D-10
<PAGE>
ANNEX E
July 11, 1999
Special Committee of the Board of Directors and
Board of Directors
Tech Squared Inc.
5198 West 76(th) Street
Edina, MN 55439
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of common stock of Tech Squared Inc. (the "Company"), other
than Joel A. Ronning, Charles E. Reese, Jr. and Perry W. Steiner, of the
Consideration (as defined below) to be received by such holders pursuant to the
terms of that certain draft Agreement, dated as of July 11, 1999 (the
"Transaction Agreement"), by and between the Company and Digital River, Inc.
(the "Transaction Partner").
The Transaction Agreement provides, among other things, that the Company,
after having exercised (through its subsidiary, MacUSA, Inc.) an option to buy
3.0 million shares of common stock of the Transaction Partner from Joel A.
Ronning for a nominal consideration (the "Option Shares") and completed the sale
or disposition of all of its assets (other than the Option Shares and certain
cash and cash equivalents), will transfer (the "Transaction") to the Transaction
Partner, free and clear of any and all liabilities, substantially all of the
Company's assets, including the Option Shares and $1.2 million in cash in
exchange for 2.65 million shares of common stock of the Transaction Partner.
After such transfer, the Company will be dissolved and 2.47 million shares of
common stock of the Transaction Partner (the "Consideration") will be
distributed to the holders of common stock of the Company. The remaining 0.18
million shares of common stock of the Transaction Partner will be deposited by
the Company into a liquidating trust (the "Liquidating Trust") to satisfy the
Company's outstanding liabilities. The terms and conditions of the Transaction
are more fully set forth in the Transaction Agreement.
SG Cowen Securities Corporation ("SG Cowen"), as part of its investment
banking business, is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
We are acting as exclusive financial advisor to the Special Committee of the
Board of Directors and the Board of Directors of the Company in connection with
the Transaction and will receive a fee from the Company for our services
pursuant to the terms of our engagement letter with the Company, dated as of
June 23, 1999, a significant portion of which is contingent upon the
consummation of the Transaction. Under the terms of that engagement letter, the
Company has agreed to indemnify us for certain matters in connection with the
Transaction. We will also receive a fee for providing this opinion.
In connection with our opinion, we have reviewed and considered such
financial and other matters as we have deemed relevant, including, among other
things: (i) a draft of the Transaction Agreement, dated as of July 11, 1999;
(ii) certain publicly available information for the Company and the Transaction
Partner, including each of the annual reports of the Company and the Transaction
Partner filed on Form 10-K for each of the years ended 1997 and 1998, and each
of the quarterly reports of the Company and the Transaction Partner filed on
Form 10-Q for the quarter ended March 31, 1999 and certain projected financial
data; (iii) certain internal financial analyses, financial forecasts, reports
and other information concerning the Company and the Transaction Partner
prepared by the respective management teams of the Company and the Transaction
Partner; (iv) First Call consensus estimates of
E-1
<PAGE>
financial institutions and currently available Wall Street analysts' reports for
the Company and the Transaction Partner (the "First Call and Analysts'
Projections"); (v) discussions we have had with certain members of the
management of each of the Company and the Transaction Partner concerning the
historical and current business operations, financial conditions and prospects
of the Company and the Transaction Partner and such other matters that we deemed
relevant; (vi) the reported price and trading histories of the shares of the
common stock of the Company and the Transaction Partner as compared to the
reported price and trading histories of certain publicly traded companies that
we deemed relevant; (vii) financial information of the Transaction Partner as
compared to financial information of certain other companies that we deemed
relevant; (viii) discounts and premiums paid in other selected business
combinations that we deemed relevant; (ix) certain financial terms of the
Transaction as compared to the financial terms of selected other business
combinations that we deemed relevant; and (x) such other information, financial
studies, analyses and investigations and such other factors that we deemed
relevant for the purposes of this opinion.
In conducting our review and arriving at our opinion, we have, with your
consent, assumed and relied, without independent investigation, upon the
accuracy and completeness of all financial and other information publicly
available or provided to us by the Company and the Transaction Partner,
respectively, and we have not undertaken any responsibility for the accuracy,
completeness or reasonableness of, nor have we independently verified such
information. In addition, we have not conducted any physical inspection of the
properties or facilities of the Company or the Transaction Partner. We have
further relied upon the assurance of management of the Company that they are
unaware of any facts involving the Transaction, the Company or the Transaction
Partner that would make the information provided to us incomplete or misleading
in any respect and that they have not omitted to provide us with any material
information regarding the Company or the Transaction Partner which would be
necessary or useful to us in our analysis of the Transaction. We have, with your
consent, assumed that the financial forecasts which we examined were reasonably
prepared by the respective management of the Company and the Transaction Partner
on bases reflecting the best currently available estimates and good faith
judgments of management as to the future performance of the Company and the
Transaction Partner. For certain of our analyses we have utilized the First Call
and Analysts' Projections, which we have assumed, with your consent, provide a
reasonable basis for our opinion. We have not made or obtained any independent
evaluations, valuations or appraisals of the assets or liabilities of the
Company or the Transaction Partner, nor have we been furnished with such
materials and, to our knowledge, no such materials are available. With respect
to all legal matters relating to the Company and the Transaction Partner, we
have relied on the advice of legal counsel to the Company. Management of the
Company has informed us after consultation with the Company's auditors, and we
have assumed, that the Transaction will be treated as a tax-free reorganization.
Our services to the Company in connection herewith have been comprised of
rendering an opinion from a financial point of view with respect to the
Consideration. Our opinion is necessarily based upon economic and market
conditions and other circumstances as they exist and can be evaluated by us as
of the date hereof. It should be understood that although subsequent
developments may affect our opinion, we do not have any obligation to update,
revise or reaffirm our opinion, and we expressly disclaim any responsibility to
do so.
For purposes of rendering our opinion we have assumed in all respects
material to our analyses, that the representations and warranties of each party
contained in the Transaction Agreement are true and correct, that each party
will perform all of the covenants and agreements required to be performed by it
under the Transaction Agreement and that all conditions to the consummation of
the Transaction will be satisfied without waiver thereof. We have assumed that
the final form of the Transaction Agreement will be substantially similar to the
last draft reviewed by us. We have also assumed that all governmental,
regulatory and other consents and approvals contemplated by the Transaction
Agreement will be obtained and, that in the course of obtaining any of those
consents, no restrictions will be imposed or waivers made that would have an
adverse effect on the contemplated benefits of the
E-2
<PAGE>
Transaction. In addition, for the purposes of our analyses, we have assumed that
the 0.18 million shares of common stock of the Transaction Partner not
distributed to the holders of common stock of the Company together with the
Company's cash and cash equivalents will be sufficient to satisfy all of the
Company's liabilities (including any amounts due to holders of common stock that
exercise dissenter's rights) and that any assets remaining after satisfaction of
the Company's liabilities will be distributed pro rata to the beneficiaries of
the Liquidating Trust. We have assumed that all assets, other than the Option
Shares and certain cash and cash equivalents to be transferred to the
Transaction Partner, will be sold or disposed of for fair value, and we are not
rendering any opinion on any such sale or disposition.
It is understood that this letter is intended for the benefit and use of the
Special Committee of the Board of Directors and the Board of Directors of the
Company in their consideration of the Transaction and may not be used for any
other purpose or reproduced, disseminated, quoted or referred to at any time, in
any manner or for any purpose without our prior written consent, except that
this letter may be reproduced in its entirety in a proxy statement relating to
the proposed Transaction filed by the Company under the Securities Exchange Act
of 1934, as amended, and distributed to stockholders in accordance therewith,
provided that it is reproduced in full and any description of or reference to SG
Cowen or any summary of this letter in such proxy statement will be in form and
substance acceptable to SG Cowen and its counsel.
This letter does not constitute a recommendation to any stockholder as to
how such stockholder should vote with respect to the Transaction or to take any
other action in connection with the Transaction or otherwise. We are not
expressing any opinion as to what the value of the common stock of the
Transaction Partner actually will be when issued to the Company pursuant to the
Transaction. We have not been requested to opine as to, and our opinion does not
in any manner address, the Company's underlying business decision to effect the
Transaction or any potential conflict of interest that may exist between the
Board of Directors of the Company and the Transaction Partner. Furthermore, we
express no view as to the price or trading range for shares of the common stock
of the Transaction Partner following the consummation of the Transaction.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that, as of the date hereof,
the Consideration to be received by the holders of common stock of the Company
is fair, from a financial point of view, to such holders, other than Joel A.
Ronning, Charles E. Reese, Jr. and Perry W. Steiner with respect to whom we
express no opinion.
Very truly yours,
SG COWEN SECURITIES CORPORATION
E-3
<PAGE>
ANNEX F
[Letterhead]
October 20, 1999
Mr. Chuck Reese
Board Member and Chief Executive Officer
Tech Squared Inc.
6690 Shady Oak Rd.
Eden Prairie, Minnesota 55433
Mr. Chuck Reese
Chief Executive Officer
MacUSA, Inc.
6690 Shady Oak Rd.
Eden Prairie, Minnesota 55433
Mr. Joel A. Ronning
Shareholder
C/O Digital River, Inc.
9625 West 76th Street
Eden Prairie, Minnesota 55344
Dear Sirs:
You have requested our opinion with respect to certain U.S. federal income
tax consequences to Tech Squared Inc. ("Tech Squared"), its stockholders (the
"Stockholders") and MacUSA, Inc. ("MacUSA"), a wholly owned subsidiary of Tech
Squared, in connection with:
(1) the complete liquidation of MacUSA into Tech Squared (the "Liquidation") and
subsequent to the Liquidation and as part of the same integrated plan,
(2) the exchange of substantially all of the assets of Tech Squared for voting
shares of Digital River, Inc. ("Digital River") (the "Reorganization")
pursuant to the Acquisition Agreement dated July 11, 1999 (the "Agreement").
The assets transferred by Tech Squared to Digital River will consist
primarily of Digital River shares currently owned by MacUSA that will be
received by Tech Squared upon the complete liquidation of MacUSA. As part of
the Reorganization, Tech Squared will immediately liquidate pursuant to the
Plan of Liquidation and Dissolution of Tech Squared Inc. (the "Dissolution
Plan") by distributing all of its assets to its Stockholders, including the
shares of Digital River received pursuant to the Agreement.
We have not considered any non-income tax, or state, local or foreign income
tax consequences, and, therefore, do not express any opinion regarding the
treatment that would be given to the transaction by the applicable authorities
on any non-income tax or any state, local or foreign tax issue. We also express
no opinion on nontax issues, such as corporate law or securities law matters. We
express no opinion other than that as stated immediately above, and neither this
opinion nor any prior statements are intended to imply or to be an opinion on
any other matters.
In rendering our opinion, we have relied upon: (i) the information contained
in the Agreement; (ii) the background and the facts relating to these
transactions that are discussed in the Discussion of Facts dated October 20,
1999; (iii) the representation letters dated October 20, 1999; (iv) the
Preliminary Proxy Statement-Prospectus filed with the SEC on October 14, 1999
with the exception of Annex C, (the "Proxy"), and (v) the Liquidating Trust
Agreement as drafted on October 20, 1999. You
F-1
<PAGE>
Mr. Chuck Reese
Page 2
October 20, 1999
have represented to us that we have been provided all of the facts and
assumptions necessary for us to form our opinion; however, we have not
independently audited or otherwise verified any of these facts or assumptions.
PREMISE OF OPINION
Our opinion is based on the Internal Revenue Code of 1986, as amended ("the
Code"), the regulations thereunder, reported judicial decisions, and the current
position of the Internal Revenue Service ("the IRS") in such matters as
reflected in published and private rulings as of the date of this letter, all of
which are subject to change. If there is a change, including a change having
retroactive effect, in the Code, Treasury Regulations, IRS rulings or releases,
or in the prevailing judicial interpretation of the foregoing, the opinions
expressed herein would necessarily have to be re-evaluated in light of any such
changes. Other then as indicated below, we have no responsibility to update this
opinion for changes in the above-listed law and authority occurring after the
above date.
The opinions expressed herein reflect what we regard to be the material U.S.
federal income tax effects to Tech Squared, its respective Stockholders, and
MacUSA of the Reorganization and Liquidation described herein; nevertheless,
they are opinions only and should not be taken as an assurance of the ultimate
tax treatment.
The opinions expressed herein are not binding on the IRS and there can be no
assurance that the IRS will not take a position contrary to any of the opinions
expressed therein. Should the IRS challenge the tax treatment of the
transaction, we believe that the treatment set forth in our opinion should
prevail.
Our opinion is based upon facts and technical authorities as of October 20,
1999, and any new facts or changes in technical authorities after October 20,
1999, would have to be considered and may adversely affect our opinion. This
document is in the form of the opinion we would expect to issue at the closing
date to Tech Squared. However, any changes in facts or technical authorities may
cause us to withdraw our opinion before the closing date of the Reorganization.
Other than as indicated above, we have no responsibility to update this opinion
for events, transactions, circumstances or changes in any of the facts,
assumptions or representations occurring after this date.
OPINIONS
Our opinions set forth below are subject to the following factual
assumptions, representations, and Discussion of Facts being true and correct
(including statements relating to future actions and facts represented to be to
the best knowledge of management, whether or not known). Authorized
representatives of Digital River, Tech Squared, and MacUSA have represented to
us by a letter of said date herewith that the assumptions in the attached
representation letter and Discussion of Facts are true and correct.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED TRANSACTIONS
Our opinion expressed below is addressed only to those U.S. federal income
tax aspects relating to the Reorganization and Liquidation which in our judgment
are material to Tech Squared, its respective Stockholders, and MacUSA. On the
basis of and subject to the foregoing and in reliance upon the
F-2
<PAGE>
Mr. Chuck Reese
Page 3
October 20, 1999
representations described above, we are of the opinion that the U.S. federal
income tax consequences are:
1. The Liquidation should constitute a liquidation within the meaning of
Section 332 of the Code.
2. No gain or loss should be recognized by MacUSA on the distribution of assets
to Tech Squared in connection with the Liquidation. Sec. 337.
3. No gain or loss should be recognized by Tech Squared upon the receipt of
assets from MacUSA in connection with the Liquidation. Sec. 332.
4. The tax basis of Tech Squared in the assets received from MacUSA should be
the same as the tax basis of those assets in the hands of MacUSA prior to
the Liquidation. Sec. 334.
5. The holding period of Tech Squared in the assets received from MacUSA should
be the same as the holding period in the hands of MacUSA prior to the
Liquidation. Sec. 1223(2).
REORGANIZATION
1. The Reorganization should constitute a reorganization within the meaning of
Section 368(a)(1)(C) of the Code. Tech Squared and Digital River should each
be a "party to the reorganization" within the meaning of Section 368(b) of
the Code.
2. No gain or loss should be recognized by Tech Squared on the transfer of
assets to Digital River in connection with the Reorganization. No gain or
loss should be recognized by Tech Squared on the distribution of shares of
Digital River stock received by Tech Squared pursuant to the Reorganization
to Tech Squared Stockholders. Sec. 361.
3. Tech Squared's Stockholders should not recognize gain or loss for U.S.
federal income tax purposes upon the receipt of Digital River common stock
in connection with the liquidation of Tech Squared, although gain (but not
loss) or dividend income may be recognized to the extent that a Tech Squared
Stockholder is deemed to receive property other than shares of Digital River
common stock as a consequence of receiving an interest in the liquidating
trust. Secs. 354 and 356.
4. The tax basis of Tech Squared's assets in the hands of Digital River after
the Reorganization should be the same as the tax basis of those assets in
the hands of Tech Squared immediately prior to the Reorganization except for
shares of Digital River stock acquired in the Reorganization. Sec. 362.
5. The holding period of the Digital River stock to be received in the
Reorganization by Stockholders of Tech Squared should include the holding
period of shares of Tech Squared exchanged therefor, provided that the
shares of Tech Squared are not held for sale to customers at the time of the
Reorganization. Sec. 1223(1).
6. The holding period of the assets of Tech Squared in the hands of Digital
River should include the period during which those assets were held by Tech
Squared. Sec. 1223(2).
7. Assets transferred to the liquidating trust will be deemed to have been
distributed to each Tech Squared Stockholder and contributed to the
liquidating trust in proportion to such Stockholder's interest in the
liquidating trust.
8. The tax basis of Digital River stock received in the Reorganization by
Stockholders of Tech Squared should be the same as the basis of the shares
of Tech Squared surrendered in exchange
F-3
<PAGE>
Mr. Chuck Reese
Page 4
October 20, 1999
therefor, decreased by the amount of cash or the fair market value of any
other property received by the shareholder and increased by any gain
recognized in the exchange. Sec. 358.
9. The liquidating trust should qualify as a "liquidating trust" under Treas.
Reg. Section 301.7701-4(d).
No opinion is expressed concerning the tax treatment of the Liquidation and
Reorganization beyond the scope of this opinion or concerning the tax treatment
of any conditions existing at the time of, or effects resulting from, the
Liquidation and Reorganization that are not specifically covered by the above
opinion. These opinions are solely for the benefit of Tech Squared, its
Stockholders, and MacUSA and are not intended to be relied upon by any other
party. Without our written consent, our opinion can not be furnished to any
other party or parties or referred to in any public filing or document. We will
permit use of our opinion in a proxy or prospectus, but we shall have the right
to review, edit and reasonably approve the language disclosing our opinion and
reasonably consent to the use of our opinion in all Securities and Exchange
Commission filings and other public disclosures prior to the filing of any
documents.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
F-4
<PAGE>
ANNEX G
[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;
G-1
<PAGE>
Board of Directors
Digital River, Inc.
July 11, 1999
Page 2
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 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
G-2
<PAGE>
ANNEX H
VIRTUAL TECHNOLOGY CORPORATION
3100 WEST LAKE STREET, SUITE 400
MINNEAPOLIS, MINNESOTA 55416
July 30, 1999
Mr. Charles E. Reese, Jr.
Tech Squared Inc.
5198 West 76(th) Street
Edina, Minnesota 55439
Dear Mr. Reese:
We are writing to you with respect to our desire to acquire all of the
operating assets of Tech Squared Inc. ("T2") used in connection with its Net
Direct, DTP catalog and distribution sales businesses, including the trade and
internet domain names for "netdirect" and "DTP Direct," and the trade and
internet domain names for "Tech Squared," "T2" and "MacUSA" (together, the
"Selected T2 Operating Assets") in exchange for cash paid by a subsidiary of
Virtual Technology Corporation ("VTC") formed for purposes of the acquisition
(the "Subsidiary"). Except as provided in Sections 6 through 11 below (the
provisions of which are binding), this letter is not intended to bind either T2
or VTC to this transaction (the "Transaction"), but is intended solely to
acknowledge VTC's intention to proceed with a due diligence investigation of
T2's business and financial affairs and prospects and VTC's intention to
negotiate with T2 in good faith a definitive purchase agreement for acquisition
of such assets (the "Definitive Agreement") containing the terms and conditions
set forth below.
We propose the following basic terms and conditions for the Transaction:
1. FORM OF TRANSACTION. At Closing, the Subsidiary would acquire the
Selected T2 Operating Assets free and clear of all claims, liens or encumbrances
of any kind except for those liabilities of T2 associated with the Selected T2
Operating Assets which, after completion of due diligence, the Subsidiary
expressly agrees to assume (the "Assumed Liabilities"). T2 would remain
responsible for all other liabilities, contingent, undisclosed or otherwise, of
T2 related to the Selected T2 Operating Assets and for liabilities of T2
unrelated to the Selected T2 Operating Assets.
2. PURCHASE CONSIDERATION. At Closing, the Subsidiary would pay T2 an
amount equal to $1,000,000 plus the net book value of the Selected T2 Operating
Assets (as determined in accordance with generally accepted accounting
principles consistently applied) on the Closing Date. This purchase price will
be estimated on the Closing Date and will be adjusted after completion of an
audit of the Closing Date balance sheet by VTC's independent accountants.
3. EMPLOYMENT AND CONSULTING ARRANGEMENTS. T2 recognizes that VTC would
want to enter into employment and/or consulting agreements and possibly
non-competes with certain key people. VTC will want to identify these key people
during the course of its due diligence and negotiate the terms of the employment
and/or consulting agreements with these key employees and individuals. T2
understands that nothing in this Section obligates the Subsidiary to employ or
engage any or all of T2's employees, officers or directors.
4. REPRESENTATIONS AND WARRANTIES BY T2. The Definitive Agreement would
contain customary representations and warranties by T2 relating to the business,
financial condition and affairs of T2 and the title to the Selected T2 Operating
Assets. The representations and warranties would last for a period of twelve
months. The Definitive Agreement would require T2 to indemnify and hold VTC and
the Subsidiary harmless against claims, liabilities and other expenses and
damages, including attorneys'
H-1
<PAGE>
Mr. Charles E. Reese, Jr.
Tech Squared Inc.
July 30, 1999
Page 2
fees and expenses, related to a breach of any other representations and
warranties made by T2 in the Definitive Agreement to the extent that any such
claims, liabilities and other expenses and damages exceed $50,000 in the
aggregate; provided, however, that the aggregate of all claims, liabilities and
other expenses shall not exceed $1,000,000.
5. CONDITIONS TO SIGNING OF THE DEFINITIVE AGREEMENT. Prior to the signing
of the Definitive Agreement, VTC shall complete to its satisfaction its
investigation of business and financial affairs and prospects of T2, including,
without limitation, the discovery by VTC in the course of such investigation of
no adverse matters affecting the business and financial affairs and prospects of
T2 and the determination by VTC's independent accountants that the financial
statements of the T2 divisions being acquired can be audited for the requisite
period to comply with SEC requirements (to the extent that VTC's accountants
determine that the audit is required).
6. DUE DILIGENCE INVESTIGATION. Upon execution of this letter, T2 agrees
to permit VTC and its employees, attorneys, accountants, investment bankers and
other agents to have full and free access, during normal business hours, to the
books and records of T2 and to T2's premises, employees, customers and suppliers
(VTC will work closely with T2's senior management to avoid disruption of T2's
relationships with such parties) for the purpose of investigating the business
and financial affairs and prospects of T2.
7. CONFIDENTIALITY. Each party, for itself and its respective employees,
stockholders and agents, agrees to keep confidential (i) except as provided in
the second paragraph of this Section 7, the existence and terms of this letter
and (ii) all confidential information provided by or through a party to the
other. Confidential information includes all business and financial information
of a party whether disclosed prior to or after execution of this letter,
including financial statements, tax returns, business and marketing plans and
customer and supplier data. Despite the foregoing, "confidential information"
does not include publicly available information, information obtained from a
third party source not under an agreement or obligation to maintain the
confidentiality of such information and information independently developed by a
party without the use of any otherwise confidential information. For purposes of
this Section 7, the obligation to keep information confidential includes both
not disclosing confidential information to third parties and not using the
confidential information for purposes other than those related to this
transaction. The parties agree that any breach or threatened breach of the
provisions of this Section 7 may be enjoined by a court of competent
jurisdiction. The parties agree that the state and federal courts located in
Minneapolis, Minnesota shall have personal and subject matter jurisdiction as to
any such injunctive action.
In addition, the parties acknowledge that each, as a public company, may be
required publicly to disclose the existence of this letter and potentially its
contents. The parties will provide each other with reasonable notice prior to
any such press release and will reasonably attempt to agree upon the written
text of any such press release prior to its public distribution.
8. NO-SHOP AGREEMENT. In consideration of this letter and the time and
expense to be incurred by VTC in conducting its due diligence investigation of
T2, T2 and its employees and agents agree not to solicit, negotiate with or
provide any information to any other person, firm or entity regarding any
acquisition of the Selected T2 Operating Assets. This agreement shall extend
through the earliest of (i) the date of execution of the Definitive Agreement,
(ii) the date that VTC notifies T2 in writing of VTC's intention to abandon the
proposed Transaction or (iii) September 30, 1999. Further, VTC agrees that if it
concludes that it is not prepared to consummate the Transaction on substantially
the terms as
H-2
<PAGE>
Mr. Charles E. Reese, Jr.
Tech Squared Inc.
July 30, 1999
Page 3
provided in this letter, it will immediately notify T2, and the no-shop
provisions of this Section 8 shall immediately terminate upon the giving of such
notice. The parties agree that any breach or threatened breach of the provisions
of this Section 8 may be enjoined by a court of competent jurisdiction. The
parties agree that the state and federal courts located in Minneapolis,
Minnesota shall have personal and subject matter jurisdiction as to any such
injunctive action. Despite the above, if in the event that after the execution
of this letter, T2's legal counsel advises the T2 Board of Directors that it has
a fiduciary obligation to consider an unsolicited offer by another party for all
or substantially all of the Selected T2 Operating Assets, and if T2 accepts such
offer prior to expiration of this letter of intent, then as a condition of such
other closing, T2 will pay VTC a "breakup" fee equal to $100,000.
9. DEFINITIVE AGREEMENT, CLOSING DATE AND OPERATIONS. The parties agree to
negotiate promptly and exclusively the terms and conditions of the Definitive
Agreement in good faith in accordance with the provisions of this letter with
the non-binding intention of executing the Definitive Agreement on or prior to
September 30, 1999. T2 agrees promptly to provide VTC with copies of any
written, and a written summary of any oral, offer or solicitation of an offer
made to T2 or any of T2's employees or agents after execution of this letter
relating to any acquisition of the Selected T2 Operating Assets or any request
for information related to the foregoing. In the event that the Definitive
Agreement is not executed by September 30, 1999, all of T2's obligations under
this letter expire, including, without limitation, T2's obligation to negotiate
in good faith.
Pending the Closing, T2 agrees to operate T2's business related to the
Selected T2 Operating Assets in the ordinary course and in a manner consistent
with the operations thereof prior to execution of this letter.
10. SHAREHOLDER APPROVAL. The sale of the Selected T2 Operating Assets is
part of a plan of liquidation and dissolution of T2. The voluntary dissolution
of T2 is subject to shareholder approval. The closing conditions in the
Definitive Agreement will include a provision that shareholder approval of the
dissolution of T2 and T2's filing of a notice of dissolution with the Secretary
of State of the State of Minnesota shall be conditions of closing.
11. TERMINATION FEE. In the event the Transaction does not close because
of T2's failure to obtain shareholder approval as described above, or
shareholder approval of the Transaction, as the case may be, VTC shall be
entitled to a termination fee of $100,000, but in no event shall both a breakup
and termination fee be paid.
If this letter correctly summarizes our agreement, please indicate so by
your signature below.
<TABLE>
<S> <C>
Very truly yours, Agreed to and accepted:
Virtual Technology Corporation Tech Squared Inc.
By: /s/ Greg Appelhof By: /s/ Charles E. Reese, Jr.
------------------------------------------- -------------------------------------------
Greg Appelhof, President and Charles E. Reese, Jr., Chief Executive
Chief Executive Officer Officer
</TABLE>
H-3
<PAGE>
EXHIBIT 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A4
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-25602
------------------------
TECH SQUARED INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MINNESOTA 41-1591872
(State of Incorporation) (I.R.S. Employer
Identification No.)
</TABLE>
5198 WEST 76TH STREET
EDINA, MINNESOTA 55439
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 832-5622
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR
VALUE
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of April 23, 1999, 12,102,950 shares of Common Stock of the Company were
outstanding, and the aggregate market value of the Common Stock of the Company
as of that date (based upon the closing bid price of the Common Stock at that
date on the OTC Bulletin Board quotation system), excluding outstanding shares
beneficially owned by affiliates, was approximately $23,551,234.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ex. 1-1
<PAGE>
PART I.
ITEM 1. BUSINESS
(a) BUSINESS DEVELOPMENT
GENERAL
Tech Squared Inc. ("Tech Squared") was incorporated under the laws of the
State of Minnesota in 1988 and currently has three wholly-owned subsidiaries,
Tabor Resources Corporation, a Minnesota corporation ("Tabor"), MacUSA, Inc., a
Minnesota corporation ("MacUSA") and PLI Corporation, a Nevada corporation
("PLI"). Throughout this document the "Company" is used to collectively refer to
Tech Squared Inc. and the subsidiaries discussed above.
The Company's primary business focus is on marketing & selling to the
businesses in the desktop publishing industry through direct catalog mailings
(approximately 72% of total revenues in 1998) and to value added reseller's
(VAR's) and other dealers. The Company's sales have been primarily of Apple
Macintosh-Registered Trademark- and, to a lesser degree, Microsoft Windows
95/Windows NT/Windows/MS-DOS ("Wintel") compatible products such as
(1) microcomputer hardware and peripherals, including desktop computers,
printers and printing related devices, video monitors, electronic media, storage
devices and memory and (2) software programs primarily related to those utilized
in the graphic arts industry from such name brands as Adobe and Quark. Computer
sales were approximately 24% and 19% of total sales of its direct catalog ("DTP
Direct") sales in 1998 and 1997, respectively. DTP Direct's sales of Apple
computers accounted for 97% and 98% of the total computer system sales in 1997
and 1996, respectively.
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. Such
investigation is at a preliminary stage and no prediction can be made as to
what, if any, transactions or changes will be effected.
(b) BUSINESS OF ISSUER
Tech Squared is a national direct marketer and distributor of microcomputer
hardware and software products primarily for users of Apple
Macintosh-Registered Trademark- personal computers as well as for users of IBM
compatible personal computers. The Company's sales and marketing efforts are
currently targeted (i) at desktop publishing ("DTP"), graphic arts and pre-press
industries through its DTP Direct catalog, (ii) to computer dealers and
value-added resellers through its distribution business, and (iii) to 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. The Company offers popular brand name hardware, software and
peripherals from leading vendors such as Adobe, Apple, Epson, GCC, Hewlett-
Packard, IBM, Iomega, Kodak, Minolta, Mitsubishi, NEC, Quantum, Quark, Seagate,
Sony, SyQuest, Umax Technologies, Umax Computer Corporation and U.S. Robotics.
The Company markets its products through targeted mailings of its DTP Direct
catalog, which is currently produced six times per year and its Net Direct
catalog which was launched in 1998 and which is currently produced five times
per year. The Company's catalogs, which are mailed throughout the year, include
detailed descriptions and full-color photographs of the products sold by the
Company. In 1998, the Company mailed approximately 2.3 million DTP Direct
catalogs and approximately 1.1 million Net Direct catalogs. The Company also
markets its products to its DTP Direct and Net Direct customers and dealers
through its sales force using outbound telemarketing, to attract and retain its
small to mid-sized business customers.
In 1998 and 1997, a substantial majority of the Company's net sales were
sales of Apple Macintosh-Registered Trademark- compatible products. Apple
Macintosh is a registered trademark of Apple Computer. While the Company
believes it could diversify its product offerings if its customers desired
alternatives, a decline in sales of
Ex. 1-2
<PAGE>
Apple Macintosh computers or a decrease in the supply of or demand for software
and peripherals for such computers could have a material adverse impact on the
Company's business. During 1998 the Company continued to expand its Wintel
offerings through its Build-to-Order PC program and has increased the variety of
its Wintel offerings in other categories primarily through its Net Direct
catalog. The Company plans to continue its efforts to expand its Wintel
offerings in 1999. Notwithstanding the Company's efforts to expand these
offerings, the Company is still substantially dependent on sales of
Apple-related products and there is no assurance that the Company will
successfully transition enough sales to Wintel-related products to offset any
decline in the demand for Apple-related products.
DIRECT MARKETING
The Company's direct marketing operations are carried out primarily through
its DTP Direct catalog and through its recently added Net Direct catalog. DTP
Direct markets a broad assortment of DTP and graphics products through a catalog
that is currently published six times per year. The Company published its first
DTP Direct catalog in April. DTP Direct competes on the basis of price,
delivery, depth of product offering and product knowledge. The Company believes
that many of its' customers buy from the Company because of the knowledge and
expertise that the Company's sales force has developed. Computer sales were
approximately 24% and 19% of total sales of its direct catalog ("DTP Direct")
sales in 1998 and 1997, respectively. DTP Direct's sales of Apple computers
accounted for 97% and 98% of the total computer system sales in 1998 and 1997,
respectively.
The Company developed and launched the Net Direct catalog in the second
quarter of 1998. The Net Direct catalog is directed at the developers and
managers of intranet/internet websites offering the necessary hardware and
software that "webmasters" and LAN and WAN managers require to prepare and
maintain websites for corporate and personal use. Although the Company believes
the target market for its Net Direct catalog is substantially larger than for
its DTP Direct catalog market, and that the Net Direct catalog could provide a
significant opportunity for overall revenue growth, there are significant risks
associated with the launch and maintenance of such catalog including; a
completely new target audience, lack of any historical direct marketing data
upon which to base mailing decisions, competitive forces and new product lines.
The launch of the Net Direct catalog had a negative impact on profitability of
the Company in 1998, and will probably continue to have a negative impact on
profitability in 1999 and possibly beyond.
The Company's direct marketing programs are designed to attract new
customers and to stimulate additional purchases from existing customers. The
Company continuously attracts new customers by selectively mailing catalogs to
prospective customers. Names of prospective customers are obtained from various
sources, including vendors, trade publications, and list brokers and are updated
continuously in an attempt to maximize the response rate from each catalog
delivered.
DISTRIBUTION
The Company's dealer division sells computer hardware and software products,
wholesale to computer retailers, value-added resellers ("VARs"), and other
resellers (collectively, the "Distribution Business").
The Company's Distribution Business focuses primarily on the Desktop
Publishing market and expertise in storage devices, which has allowed the
Company to identify many smaller dealers and VARs. Sales and marketing
activities in the Distribution Business include outbound telemarketing
activities to the Company's dealer customer list and a fax and e-mail broadcast
system used to update dealers on current pricing and special offers.
Historically, storage devices have been the largest category of peripheral
device sold by the Company's Distribution Business. Beginning in late 1995 the
Company began broadening the products sold to its dealers and increasing its
customer base. As a result of Apple's decisions to stop licensing its Mac
Ex. 1-3
<PAGE>
operating system ("OS") to clone manufacturers and limit distribution of its
computer systems to a few large distributors, the Company's distribution
business experienced a significant reduction in computer systems sales in 1998.
The Company has its own private brand of storage device products marketed under
the "NuDesign-TM-" name. These products have historically been sold primarily to
the Company's mass merchant retail customers. In late 1995, the Company
significantly reduced its sales and marketing activities targeted towards these
mass merchant customers because of the high cost of doing business with them and
because of increasing downward pressure on gross margins. Sales to these mass
merchant customers in 1996 were nominal and were nonexistent in 1997 and 1998.
PURCHASING
The Company purchases from approximately 700 vendors, which includes direct
purchases from manufacturers and from distributors. In 1998, approximately 46%
of the Company's total purchases were from distributors compared to
approximately 27% in 1997 and 20% in 1996. The increase is primarily due to two
factors. The first factor is the elimination of Mac OS clone systems that were
purchased directly from Umax Computer Corporation ("UCC") which resulted in
increased purchases of Apple computer systems from distributors. Additionally,
several manufacturers including Iomega and Seagate discontinued selling to the
Company directly, consequently these products were instead purchased mostly
through distributors. The Company does not maintain any long-term purchase or
supply contracts with any of its vendors instead purchasing primarily on a
purchase order basis. In order to meet customer's needs for product the Company
has continued to focus on drop shipments sent directly to the customers from
participating distributors and vendors. This allows the Company to reduce
freight expense as well as compete with larger competitors as to product
availability and diversification.
In 1998 and 1997, sales of products purchased from Ingram Micro accounted
for approximately 24% and under 10%, respectively, of total sales. Sales of
products purchased from UCC accounted for approximately 13% and 12% of total
sales in 1997 and 1996, respectively. During 1997, Apple Computer announced its
intention to stop licensing the Mac OS to clone manufacturers, and accordingly
UCC stopped shipping Apple clones in the second quarter of 1998. In 1997 the
Company began shifting its Mac OS CPU sales to Apple, and in the second half of
1998, the Company moved exclusively to Apple for Mac OS CPU sales. There can be
no assurance that any Company supplier will remain in business or that they will
be able to fulfill the Company's supply requirements or its supply schedule. Any
inability to do so by such suppliers or the Company's inability to locate other
suppliers could have a material adverse effect on the Company.
The Company's suppliers make funds available to the Company to promote and
increase sales of their products. The Company typically receives price
protection should a vendor subsequently lower its price.
COMPETITION
DIRECT MARKETING
A substantial number of companies, both large and small, compete in the
retail and wholesale computer industry. Rapid technological advances in hardware
and software, short product life cycles, and continuing downward pressure on
product prices and margins characterize the industry.
A growing segment of the retail computer industry involves sales of computer
hardware and software via the Internet. Companies engaged in such sales are
increasingly becoming a significant competitive factor because they typically
sell their products at lower margins than traditional direct marketing
companies. Additionally, the websites of these companies are readily available
to most consumers for price comparisons causing further price pressure.
The Company's DTP Direct and Net Direct catalogs compete with consumer
electronic and computer retail stores, including superstores, and other direct
marketers of software and computer-related products,
Ex. 1-4
<PAGE>
and, to a lesser degree, direct marketing efforts to sell microcomputer
hardware, software and peripherals through the Internet. Additionally, the
Company competes with other direct marketing companies. Some of the catalogs
within this channel include: CDW, Creative Computers' MacMall, MacConnection,
MacWAREHOUSE, MicroWAREHOUSE, Multiple Zones, PC Connection and CompUSA Direct.
DISTRIBUTION BUSINESS
Competition for the Company's Distribution Business comes primarily from the
largest distributors whose general scale of operations supports competitive
pricing for desktop publishing products without need for specialization. These
major distributors and competition include but are not limited to Gates/ Arrow,
Ingram Micro, Merisel, Pinacor and Tech Data. The principal factors on which
competition is based in this market are price, product availability, delivery
time and the willingness of the distributor to extend credit to the reseller.
Nearly all of the Company's competitors have substantially greater
financial, marketing, and technological resources, larger product lines, larger
customer bases, greater name recognition, and greater purchasing power with
vendors than the Company. There can be no assurance that the Company can
continue to compete effectively against existing competitors or competitors that
may enter the market. In addition, price is an important competitive factor in
the personal computer software and hardware market and there can be no assurance
that the Company will not be subject to increased price competition.
BRANDED PRODUCTS
The Company assembles and markets products under several brand names. All
branded products are assembled at the Company's Edina, Minnesota headquarters.
Assembling operations consist of final assembly, testing and formatting of
storage devices into external storage devices which can be "plugged-in" to an
Apple Macintosh computer, as well as upgrades to CPU's. A summary of the brands
that the Company offered in 1998 is as follows:
MIRROR. The Company acquired the rights to the Mirror product line in 1994.
The Company currently markets storage devices under the "Mirror" name. Mirror
branded products are sold primarily through direct channels with emphasis on
sales through the DTP Direct catalog.
NUDESIGN PRO. In 1995, the Company introduced a line of hot swappable
storage systems using the NuDesign Pro brand name. These products are targeted
and sold primarily through the Company's DTP Direct and Net Direct catalogs and
through its Distribution Business.
RETURN POLICY
Certain products identified as such in the Company's DTP Direct catalog,
including tape drives, hard drives, optical drives, and CD-ROM drives may be
returned within 30 days from the date shipped by the Company for a full refund
of the purchase price excluding original shipping charges. Returned product must
be in like new condition, in original packing, complete with all warranty cards,
manuals, cables and other materials as originally shipped, and must not be
modified or damaged. After 30 days from shipment, it is the Company's policy to
not give credit or refunds. The Company attempts to return all products back to
the manufacturer or distributor from which the product was purchased. If the
Company is unsuccessful in returning the product to the respective manufacturer
or distributor it is forced to sell at a reduced price or discard the equipment.
Provisions are made currently for estimated product returns expected to occur
under the Company's return policy and for which it may not be able to return to
the manufacturer or distributor.
Ex. 1-5
<PAGE>
DIGITAL RIVER, INC.
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 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%. Upon completion of such offering, the Company's
ownership percentage was reduced to approximately 19%. Since such offering,
Digital River's shares have been 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 of the Digital River Option
realizing net proceeds of $4,430,000. The Company continues to hold an option to
purchase 3,000,000 shares, which would represent ownership of approximately 15%
of Digital River as of March 15, 1999. The option is not transferable and the
balance is exercisable at any time through December 31, 2000 for total
consideration of $0.93 (ninety-three cents). During the term of the option,
Mr. Ronning has agreed to vote the Digital River Shares at the direction of the
Company's Board of Directors. As additional consideration, the Company has
agreed to reimburse Mr. Ronning for any tax liability incurred in connection
with the transfer of the Option or the shares of Digital River stock issuable
upon the exercise thereunder.
The Digital River Shares are subject to the provisions of the Fujitsu
Modification Agreement dated December 11, 1997 (the "Modification Agreement"),
between Mr. Ronning, Fujitsu Limited, a company organized under the laws of
Japan ("Fujitsu"), Digital River Inc., and MacUSA (collectively, the "Parties").
Pursuant to the terms of the Modification Agreement, the Parties agreed to
terminate previous agreements entered into in connection with an investment by
Fujitsu in Digital River and entered into the Modification Agreement. Under the
terms of the Modification Agreement, MacUSA remains a party to the agreement to
the extent that Mr. Ronning may transfer all shares of Digital River Inc. he
owns, along with any and all rights related thereto pursuant to the agreement or
otherwise to MacUSA, Inc., or Tech Squared Inc.
The following summary of the business of Digital River is extracted from the
Form 10-K filed by Digital River on March 19, 1999: Digital River is a leading
provider of comprehensive electronic commerce outsourcing solutions to software
publishers and online retailers. Digital River has developed a technology
platform that allows it to provide a suite of electronic commerce services to
its software publisher and online retailer clients, including electronic
software delivery ("ESD"). Digital River also provides data mining and
merchandising services to assist clients in increasing Internet page view
traffic to, and sales through, their Web stores. Rather than maintaining its own
branded Web store that would compete with its clients, Digital River provides an
outsourcing solution that allows its clients to promote their own brands while
leveraging Digital River's investment in infrastructure and technology. As of
March 5, 1999, Digital River had contracts with 1,621 software publisher clients
and 1,174 online retailer clients, including Corel Corporation, Cyberian
Outpost, Inc., Lotus Development Corporation, Micro Warehouse, Inc., Network
Associates, Inc., Symantec Corporation, Kmart Corporation, CompUSA, Inc. and
Wal-Mart Stores, Inc., and maintained a database of more than 100,000 software
products from its various software publisher clients, including more than 30,000
software titles and more than 70,000 digital images and fonts. Through March 5,
1999, Digital River had completed more than 610,000 transactions for more than
490,000 unique end-users.
Digital River's proprietary commerce network server ("CNS") technology
serves as the platform for Digital River's solutions. The CNS incorporates
custom software applications that enable ESD, Web store
Ex. 1-6
<PAGE>
authoring, fraud prevention, export control, merchandising programs and online
registration, and features a database of more than 100,000 software products.
Using its CNS platform, Digital River creates Web stores for its clients that
replicate the look and feel of each client's Web site. End-users enter the
client site and are then seamlessly transferred to Digital River's system.
End-users can then browse for products and make purchases online, and, once
purchases are made, Digital River delivers the products directly to the
end-user, primarily through ESD. Digital River also provides
transaction-processing services and collects and maintains critical information
about end-users. This information can later be used by Digital River's clients
to facilitate add-on or upgrade sales and for other direct marketing purposes.
Digital River actively manages direct marketing campaigns for its clients, and
also delivers purchase information and Web store traffic statistics to its
clients on a regular basis.
The shares of Digital River common stock are registered with the Securities
and Exchange Commission under the Securities Act of 1934 and Digital River files
reports with the Securities and Exchange Commission pursuant thereto. Further
information regarding Digital River can be obtained from such reports, which are
available from the Commission's EDGAR database at www.sec.gov.
PATENTS AND TRADEMARKS
The Company has obtained a registered and protectable mark on the name "Tech
Squared-Registered Trademark-" from the U.S. Patent and Trademark Office. The
Company also uses and claims rights to the names "Mirror-TM-", "Nu Design-TM-",
"NuDesign Pro-TM-", "DTP Direct-TM-" and "Net Direct-TM-" to identify its
products and services. Except with respect to "Tech Squared", the Company has
not filed trademark registration applications or obtained registered and
protectable marks on any of the foregoing names. There can be no assurance that
any application, if filed, will result in the receipt of a registered and
protectable mark.
The effect of the foregoing tradenames is to provide an identity between the
Company and its products and services. While prior use of a tradename may
establish an exclusive right to its use in connection with the sale of products
and services in a particular market area, registration with the U.S. Patent and
Trademark Office provides such right throughout the United States and a
presumption of damage to the Company should the tradename be infringed. There
can be no assurance that the Company's use of the foregoing tradenames will not
infringe the rights of others or that any of the tradenames used by the Company,
whether or not registered, will be free from future challenge by others.
NON-OPERATING ASSETS
In addition to the Digital River Shares, The Company owns certain assets
that are not related to its core operations, or to its future operating plans. A
brief summary of these assets is as follows:
CAM DESIGNS, INC. The Company owns shares of Cam Designs, Inc., ("CAM
Designs") common stock (the "Cam Designs Shares"). Cam Designs, a Delaware
corporation, is the parent company of MGA Holdings Ltd., a United Kingdom
corporation ("MGA") which shares are virtually all of the assets of Cam Designs.
MGA designs and engineers prototypes and tools for the automobile and aerospace
industries. Cam Designs' common stock is quoted on the NASDAQ National Market
under the symbol "CMDA." During the first quarter of 1998, the Company sold a
portion of the Cam Design Shares resulting in realized gains of approximately
$5,000. On October 21, 1998, Cam Designs Inc. announced that it had agreed to
have MGA placed in receivership because of its inability to secure adequate
banking facilities and reduce outstanding debt. The value of the remaining
shares of Cam Designs was reduced to zero.
MINING PROPERTIES
The Company owns certain land or mining rights to land in two different
areas in Montana, known to have historically produced gold and silver from
mining operations. See "ITEM 2. Description of Property." The Company sold a
portion of the property located near Virginia City, Montana in December 1998.
The total remaining land area either owned or leased by the Company is
approximately 1,900 acres. The
Ex. 1-7
<PAGE>
Company intends to continue soliciting offers for the remaining property, and
does not intend to further develop these mining properties because it believes
the cost and risks involved would be significant. The Company wrote down the
value of the remaining assets by $538,000. See "ITEM 3. Legal Proceedings--
Hanover Gold Litigation".
EMPLOYEES
The Company employs approximately 100 people, all of whom are located at the
Company's headquarters in Edina, Minnesota. There are approximately 50 employees
in sales, marketing, technical support and customer service, and the remaining
employees are in operations and corporate administration.
RISK FACTORS
In evaluating the Company and its business, you should carefully consider
the following risk factors as well as all of the information contained in this
report. The following risk factors are not exhaustive. In addition to the
factors discussed in this annual report, among the other factors that could
cause actual results to differ materially are the following: business conditions
and growth in the personal computer industry and the general economy;
significant changes in the consumer demand for computers and requirements
related to relative platforms such as Apple vs. Wintel; competitive factors such
as rival computer and peripheral product sellers and price pressures;
availablity of vendor products at reasonable prices; inventory risks due to
shifts in market demand; and other risks represented from time to time in
reports filed by the Company with the Securities and Exchange Commission,
including this Form 10-K.
LOSSES
The Company has incurred losses from operations in 1996 and 1998 and net
losses during each of 1996, 1997 and 1998. The Company expects losses from
operations to continue for the foreseeable future.
RISKS RELATED TO NEW LINE OF BUSINESS
The Company's recently-launched Net Direct catalog involves significant
risks including a completely new target audience, lack of any historical direct
marketing data upon which to base mailing decisions, competitive forces, and new
product lines. The launch of the Net Direct catalog had a negative impact on the
Company's profitability in 1998 and will likely continue to have a negative
impact on profitability in 1999 and, possibly, beyond.
RISKS RELATED TO DIGITAL RIVER
The Company's net worth is substantially tied to the market price of Digital
River common stock. At December 31, 1998, over 90 percent of the Company's
assets, as shown on its balance sheet, consisted of its investment in Digital
River. The stock of Digital River has been subject to significant volatility in
the public market since Digital River's initial public offering in August 1998.
The Company's investment in Digital River is at-risk and subject to such
volatility.
The shares of Digital River beneficially held by the Company represent
approximately 15 percent of the outstanding common stock of Digital River. As a
result, such shares are subject to restrictions on transferability, both legal
and market-imposed. If the Company were to attempt to liquidate its investment
in Digital River, it would likely cause the trading price of Digital River
common stock to decline significantly.
The Company's investment in Digital River is also subject to all of the
risks associated with the business of Digital River, as published or announced
by Digital River from time to time, including those
Ex. 1-8
<PAGE>
set forth in Digital River's filings with the Securities and Exchange
Commission, such as its recently-filed Form 10-K.
The Company is also subject to a significant tax liability upon any sale of
shares of Digital River common stock. The distribution of shares of Digital
River common stock to the shareholders of the Company would likely be treated as
a sale, subjecting the Company to significant tax liability for such a
distribution. Accordingly, the Company's ability to realize any profit from the
exercise of its option to acquire Digital River shares and sell such shares
would be subject to a significant reduction by such taxes.
CONTINUED DEVELOPMENT OF ELECTRONIC COMMERCE AND INTERNET INFRASTRUCTURE
DEVELOPMENT
An increasing portion of sales are made over the Internet in part because of
the growing use and acceptance of the Internet by end-users. This growth is a
recent development. No one can be certain that acceptance and use of the
Internet will continue to develop or that a sufficiently broad base of consumers
will adopt and continue to use the Internet and other online services as a
medium of commerce. Sales of computer-related products over the Internet do not
currently represent a significant portion of overall computer product sales.
Growth of Internet sales is dependent on potential customers using the Internet
in addition to traditional means of commerce to purchase products. The Company
cannot accurately predict the rate at which they will do so.
COMPETITION
The Company is subject to significant competition from a number of
companies, both large and small. Further, recent technological advances, shorter
product life cycles, and increased sales via the Internet subject the Company to
further risk and continuing downward pressure on product prices and margins.
Many of the Company's competitors have significantly greater resources, access
to manufacturers, purchasing power and name recognition than the Company. Some
competitors, including an increasing number of Internet retailers, are now
marketing their products at or below cost. There can be no assurance the Company
will be able to compete effectively.
PRIVACY CONCERNS WITH RESPECT TO LIST DEVELOPMENT AND MAINTENANCE
The Company mails catalogs and sends electronic messages to names in its
proprietary customer database and to potential customers whose names are
obtained from rented or exchanged mailing lists. World-wide public concern
regarding personal privacy has subjected the rental and use of customer mailing
lists and other customer information to increased scrutiny. Any domestic or
foreign legislation enacted limiting or prohibiting these practices could
negatively affect the Company's business, financial condition and results of
operations.
MANAGEMENT INFORMATION SYSTEMS
The Company depends on the accuracy and proper use of its management
information systems. Many of the Company's key functions depend on the quality
and effective utilization of the information generated by its management
information systems, including: --its ability to manage its inventory and
accounts receivable collections; --its ability to purchase, sell and ship its
products efficiently and on a timely basis; --its ability to maintain its
operations. These systems require continual upgrades to most effectively manage
the Company's operations and customer data base.
CHANGES IN MANAGEMENT
The Company has experienced several changes in its management over the last
year. Such changes could have a negative impact on the Company's ability to
conduct business effectively and to compete.
Ex. 1-9
<PAGE>
CONTROL BY MANAGEMENT
The Company's executive officers and directors currently beneficially own
over 50% of the outstanding Common Stock of the Company. Accordingly, the
Company's management is able to exercise substantial control over the election
of directors and over the operations of the Company. This concentration of
ownership could also have the effect of delaying, deferring or preventing a
change in control of the Company or effecting a change in control, which may not
be favored by the Company's other shareholders.
VOLATILITY OF STOCK PRICE
The technology sector of the United States stock market, and particularly
the group of Internet-related stocks within this sector, has experienced
substantial volatility in recent periods. The value of our common stock is
influenced by numerous conditions that impact the technology sector or the stock
market in general, whether or not such events relate to or reflect upon our
operating performance.
REDUCTIONS IN INCENTIVE PROGRAMS, SHIFTING OF INVENTORY RISK
The Company acquires products for resale both directly from manufacturers
and indirectly through distributors and other sources. Many of these
manufacturers and distributors provide us with incentives such as supplier
reimbursements, price protection payments, rebates and other similar
arrangements. The increasingly competitive computer hardware market has already
resulted in reduction and/or elimination of some of these incentive programs.
For example, Apple has initiated a number of restrictions on resellers,
including: --more restrictive price protection and other terms; and --reduced
advertising allowances and incentives. Additionally, manufacturers are limiting
return rights and are also taking steps to reduce their inventory exposure by
supporting "build to order" programs authorizing distributors and resellers to
assemble computer hardware under the manufacturers' brands. These trends reduce
the costs to manufacturers and shift the burden of inventory risk to resellers
like the Company which could negatively impact its business, financial condition
and results of operations. In addition, certain Wintel manufacturers including
Compaq Computer Corp. have recently expanded their direct sales efforts. The
continuing impact of these matters may adversely affect the Company's business,
financial condition and results of operations.
SEASONALITY
Fluctuations in the Company's net sales from period to period can be
expected due to a number of factors, including the timing of new product
introductions by the Company's major vendors and their competitors, seasonal
cycles commonly seen in computer-related industries, and changes in product mix
and product pricing. As a result, the operating results for any particular
period are not necessarily indicative of the results of any future period.
Y2K RISKS
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 has identified and is
undertaking certain modifications or conversions to make its systems Y2K
compliant. 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. Failure to achieve timely completion of required
modifications or conversions or failure of the third parties with whom the
Company has relationships to be Y2K compliant could have a material affect on
the financial condition and operations of the Company. In addition, customers
may delay purchase decisions because of the uncertainty about Y2K issues.
Ex. 1-10
<PAGE>
LACK OF LONG-TERM PURCHASING AGREEMENTS
The Company does not maintain any long-term purchase or supply contracts
with any of its vendors instead purchasing primarily on a purchase order basis.
No assurance can be given that the Company will be able to purchase needed
inventory at favorable prices when needed to meet sales commitments.
RETURNS
The Company's policies provide that some products may be returned within 30
days for a full refund. The Company attempts to return all products back to the
manufacturer or distributor from which the product was purchased. If the Company
is unsuccessful in returning such products to the respective manufacturer or
distributor, the Company may incur a loss on such transaction.
RELIANCE ON APPLE/TRANSITION TO WINTEL
The Company's sales of Apple computers accounted for 92% and 98% of the
total computer system sales in 1998 and 1997, respectively. The Company plans to
continue its efforts to expand its Wintel offerings in 1999. Notwithstanding the
Company's efforts to expand these offerings, the Company is still substantially
dependent on sales of Apple-related products and there is no assurance that the
Company will successfully transition enough sales to Wintel-related products to
offset any decline in the demand for Apple-related products. Also, while the
Company believes it could diversify its product offerings if its customers
desired alternatives, a decline in sales of Apple Macintosh computers or a
decrease in the supply of or demand for software and peripherals for such
computers could have a material adverse impact on the Company's business.
GOVERNMENT REGULATION
The Company currently collects Minnesota sales tax on sales made within the
State of Minnesota. Various states have attempted to impose on direct marketers,
the burden of collecting use taxes on the sale of products shipped to state
residents. The United States Supreme Court affirmed its position that it is
unlawful for a state to impose use tax collection obligations on an out-of-state
mail order company whose only contact with the state were the distribution of
catalogs and other advertising materials through the mail and subsequent
delivery of purchased goods by parcel post and interstate common carriers. If
legislation is passed to overturn the United States Supreme Court's decision,
the imposition of a use tax collection obligation on the Company in states to
which it ships products would result in additional administrative expenses to
the Company, could result in price increases to the customer, and could have a
material adverse effect on the Company.
The United States Department of State and Department of Commerce restrict
the export of encrypting technology outside of the United States. Although
Digital River does not currently believe its method of conducting business is
impacted to any significant degree by these restrictions, any significant change
in these rules or interpretations or any failure by Digital River to comply with
existing or future restrictions could have a material adverse impact on the
business of Digital River.
INCREASES IN POSTAGE, SHIPPING AND PAPER COSTS
Increases in postal or shipping rates and paper costs could significantly
impact the cost of producing and mailing our catalogs and shipping customer
orders. Postage prices and shipping rates increase periodically and we have no
control over future increases. The United States Postal Service recently
increased postal rates. Paper prices historically have been cyclical and we have
experienced substantial increases in the past. Significant increases in postal
or shipping rates and paper costs could adversely impact our business, financial
condition and results of operations, particularly if we cannot pass on such
increases to our customers or offset such increases by reducing other costs. In
addition, strikes or other
Ex. 1-11
<PAGE>
service interruptions by the postal service or third party couriers, such as
Federal Express, could undermine our ability to deliver products on a timely
basis.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate headquarters are located at 5198 West 76th Street,
Edina, Minnesota 55439. The Company leases approximately 31,000 square feet of
office and warehouse space. The lease for the location expires on June 30, 1999
and the total monthly rent is approximately $18,000.
Digital River currently occupies approximately 7,000 square feet of
warehouse space at the Company's corporate headquarters. Prior to August 1998,
the offices of Digital River were also located in the Company's facilities. The
Company bills Digital River for the leased space, and prior to 1999, certain
related costs such as direct labor costs, phone services, general liability
insurance and janitorial services through an administrative charge. Total
charges by the Company to Digital River for administrative expenses were
approximately $207,000, $160,000 and $82,000 in 1998, 1997 and 1996,
respectively.
During 1997, the Company began performing fulfillment services for Digital
River on physical shipments of products, for which Digital River pays the
Company a fulfillment fee. The Company billed Digital River approximately
$246,000 and $8,000 for these services in 1998 and 1997, respectively. Digital
River has notified the Company that the fulfillment services the Company is
providing will be discontinued during the second quarter of 1999.
The Company owns rights in certain non-operating mining properties primarily
in two locations. The Company disposed of a portion of its mining property in
December 1998. The total land area still either owned or leased by the Company's
Tabor subsidiary includes approximately 1,900 acres. The property, which is in
and around the Alder Gulch, near Virginia City, Montana, includes a total of
58 unpatented lode-mining claims and 3 patented lode claims. Tabor also owns a
51% interest in 56 1/2 lode mining claims including 24 1/2 patented and
32 unpatented claims near Rimini, Montana approximately 20 miles southwest of
Helena, Montana. See "ITEM 1 Business--Business of Issuer--Non Operating
Assets."
ITEM 3. LEGAL PROCEEDINGS
Except as discussed below, there are no material pending legal,
governmental, administrative or other proceedings to which the Company is a
party or to which any of its property is subject.
HANOVER GOLD LITIGATION
In 1996, the Company entered into an Asset Purchase Agreement for the sale
of substantially all of its mining properties and rights in the Alder Gulch area
(the "Property") in exchange for 525,000 shares of Hanover Gold Company, Inc.
("Hanover") common stock (the "Hanover Shares") 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 the Property 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 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.
Ex. 1-12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the year ended December 31, 1998.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Company's common stock is quoted on the local over-the-counter market
and is quoted on the OTC Bulletin Board quotation system under the Symbol
"TSQD". The following table sets forth, for each of the calendar periods
indicated, the quarterly high and low bid quotations for the Company's Common
Stock as reported by the OTC Bulletin Board. The prices in the table represent
prices between dealers, and do not include adjustments for retail mark-ups,
markdowns or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
YEAR HIGH LOW
- ---- -------- --------
<C> <S> <C> <C>
1998 Fourth quarter...................................... $3.78 $0.47
Third quarter....................................... 7.63 1.00
Second quarter...................................... 4.00 1.44
First quarter....................................... 2.44 1.38
1997 Fourth quarter...................................... $3.88 $0.57
Third quarter....................................... 0.85 0.36
Second quarter...................................... 0.43 0.19
First quarter....................................... 0.69 0.30
</TABLE>
HOLDERS
As of March 12, 1999, there were approximately 157 holders of record of
common stock. The Company believes the actual number of beneficial owners is
significantly greater than the 157 reported above.
DIVIDENDS
Tech Squared Inc. has never declared cash dividends on its common stock and
management intends to retain any earnings for use in its operations and does not
anticipate declaring any cash dividends in the foreseeable future. The Company
has 160,000 shares of preferred stock outstanding. The holders of these
preferred shares may be entitled to a 12% cumulative dividend that has not been
paid since December 1994. The total dividend owing as of December 31, 1998 is
approximately $88,000.
Pursuant to an Agreement and Plan of Merger effective as of May 9, 1995, a
wholly-owned subsidiary of the immediate predecessor of the Company merged with
and into MacUSA (the "Merger"). Prior to the Merger, MacUSA declared a dividend
of $1,188,000 payable to the former shareholders of MacUSA in connection with
the conversion of MacUSA from a Subchapter S corporation to a C corporation. The
Company paid approximately $261,000 of this dividend during 1995, approximately
$201,000 in 1996, approximately $201,000 in 1997 and approximately $200,000 in
1998. The remainder of the dividend payable was paid in February 1999.
SALES OF UNREGISTERED SECURITIES
During the three-month period ended December 31, 1998 the Company did not
sell any of its securities in transactions not registered under the Securities
Act of 1933.
Ex. 1-13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED:
----------------------------------------------------
1998(2) 1997(1) 1996 1995 1994
(IN THOUSANDS) -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Sales...................................... $38,800 $36,995 $37,387 $42,136 $46,645
Gross Profit................................... 4,971 4,467 3,911 3,285 5,867
Income/(loss) from operations.................. (864) 402 (849) (1,511) 526
Net loss applicable to common shares........... (567) (1,032) (651) (1,652) 424
Net income/(loss) excluding Digital
River(3)(4).................................. 1,294 344 (203) (1,566) 416
Total assets................................... 117,444 7,600 8,620 9,739 8,971
Long term debt & long term portion of dividend
payable to officer/shareholder............... 84 298 298 393 --
Redeemable preferred stock 12% cumulative
Convertible.................................. 248 217 198 185 --
Stockholders' equity........................... 70,457 2,190 1,214 2,238 1,982
Cash dividends declared per common share....... -- -- -- 0.13 0.03
</TABLE>
- ------------------------
(1) Beginning January 1, 1997, the Company began to account for its investment
in Digital River using the equity method of accounting (see Item 7.
Management's Discussion and Analysis of Financial Condition). Prior to 1997
Digital River was consolidated with the Company's results.
(2) Beginning August 12, 1998, the Company began to account for its investment
in Digital River as "available-for-sale" securities.
(3) Reflects operating results of the Company excluding Digital River.
(4) The fiscal year ended 1998 includes investment income of $4,047,000 on the
sale of 200,000 shares of Digital River stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained in this annual report are forward-looking
statements within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934 that involve a number of risks and uncertainties. Such
forward-looking information may be identified by words such as "will," "maybe,"
"expects" or "anticipates." In addition to the factors discussed in this annual
report, among the other factors that could cause actual results to differ
materially are the following: business conditions and growth in the personal
computer industry and the general economy; significant changes in the consumers
demand for computers and requirements related to relative platforms such as
Apple vs. Wintel, competitive factors such as rival computer and peripheral
product sellers and price pressures; availability of vendor products at
reasonable prices; inventory risks due to shifts in market demand; and other
risks presented from time to time in reports filed by the Company with the
Securities and Exchange Commission, including this Form 10-K.
The Company sells computer and peripheral products. The Company's business
has historically been targeted primarily at the graphic arts market, which
currently includes primarily Macintosh-related products. More recently, the
Company's business has also been targeted at the intranet and external Internet
network markets.
Prior to 1997, the consolidated financial statements included the accounts
of Tech Squared Inc. and its wholly owned subsidiaries (the "Company"), and
Digital River, Inc. ("Digital River"), which the Company controlled through its
bargain purchase option. As a result of private placements of Digital River
common stock in 1997, the Company's ownership percentage of Digital River was
reduced from 60% at December 31, 1996 to approximately 35% at December 31, 1997.
During 1998, Digital River completed various private placements and an initial
public offering of its common stock which resulted in net proceeds to
Ex. 1-14
<PAGE>
Digital River of approximately $36,300,000 and issuance of 6,500,000 new shares
of Digital River common stock. Through August 11, 1998, the date of Digital
River's initial public offering, the Company recorded gain on issuance of stock
by Digital River of approximately $4,374,000, net of deferred income taxes,
which was recorded as an adjustment to stockholders' equity. In December 1998,
Digital River completed a follow-on public offering in which Digital River sold
2,200,000 additional shares of common stock and received net proceeds totaling
$48,100,000. The Company participated in the follow-on as a selling shareholder
by exercising a portion of the Digital River Option and selling 200,000 shares
of the Digital River Common Stock. The impact of the issuance of additional
shares by Digital River and the exercise and sale of a portion of the Digital
River Option by the Company resulted in a reduction in the Company's effective
ownership of Digital River from approximately 35% at December 31, 1997 to
approximately 15% as of December 31, 1998. As a result, beginning August 12,
1998, the Company is accounting for its investment in Digital River as
"available-for-sale" securities, which, as of December 31, 1998 are valued at
$35.50 per share, the closing market price on such date.
The following is a summary of the operating results of Tech Squared Inc.
including Digital River for the year ended December 31, 1998, 1997 and 1996,
respectively (in 000's, except per share information).
<TABLE>
<CAPTION>
TECH SQUARED INC.,
INCLUDING DIGITAL RIVER
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net loss applicable to common shares........................ $ (567) $(1,032) $ (651)
Net loss per share applicable to common share............... $(0.05) $ (0.10) $ (0.06)
</TABLE>
Summarized condensed consolidated financial information for Tech Squared
Inc. excluding Digital River operations is as follows (in 000's, except per
share information):
BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current assets.............................................. $ 10,254 $5,465 $6,171
Total assets................................................ 117,444 6,761 7,490
Current liabilities......................................... 6,841 4,895 5,945
Stockholders' equity........................................ 70,457 1,351 1,254
</TABLE>
OPERATING INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $38,800 $36,995 $37,276
Operating expenses.......................................... 5,835 4,065 4,047
Net income/(loss)(1) ....................................... 1,294 344 (203)
Per share................................................... $ 0.12 $ 0.03 $ (0.02)
</TABLE>
- ------------------------
(1) The fiscal year ended 1998 includes investment income of $4,047,000 on the
sale of 200,000 shares of Digital River stock.
Ex. 1-15
<PAGE>
(a) RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following discussion sets forth information with regard to the results
of operations of the Company, not including the results of operation of Digital
River. In some prior reports, results of operations included a portion of the
operations of Digital River. In August 1998, the Company's deemed ownership
percentage of Digital River was reduced below 20% and, since such date, the
Company has accounted for its investment in Digital River as available-for-sale
securities.
NET SALES
Net sales for 1998 totaled $38,800,000 compared to $36,995,000 for 1997. The
4.9% increase in sales was mainly attributable to a 5.9% increase in sales to
DTP Direct catalog customers through the addition of an outbound sales group and
the addition of the Net Direct catalog, which contributed $1,342,000 to net
sales. The increases were partially offset by an 8.7% decrease in sales to the
Company's distribution customers, which was primarily due to the elimination of
Macintosh clone system sales. The Company also experienced a 14.4% reduction in
product returns in 1998 compared to 1997 largely due to continued focus and
attention Company-wide to product returns and awareness.
Fluctuations in the Company's net sales from period to period can be
expected due to a number of factors, including the timing of new product
introductions by the Company's major vendors and their competitors, seasonal
cycles commonly seen in computer-related industries, and changes in product mix
and product pricing. As a result, the operating results for any particular
period are not necessarily indicative of the results of any future period.
GROSS PROFIT
Gross profit for 1998 was $4,971,000 or 12.8% of net sales compared to
$4,467,000 or 12.1% of net sales in 1997. Gross profit as a percentage of sales
increased in 1998 due to an increase in fulfillment fee revenue and a reduction
in variable overhead expenses. The Company expects ongoing competitive pressure
on gross margins in 1999 and beyond.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $3,101,000 or 8.0% of net sales in
1998 compared to $1,883,000 or 5.1% of net sales in 1997. The increase was
primarily due to an increase in the number of outbound sales consultants from 3
to 12, an increase in net marketing costs related to the development, production
and distribution of DTP Direct catalogs, and the costs related to the
development, production and distribution of a new catalog, Net Direct. Although
the Company believes the potential target market for the Net Direct catalog is
substantially larger than that for the DTP Direct catalog, and that the Net
Direct catalog could provide significant opportunity for revenue growth, there
are significant costs and risks associated with the launch and maintenance 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. The launch of the Net Direct catalog had a negative impact on
the profitability of the Company in 1998, and will probably continue to have a
negative impact on profitability in 1999 and possibly beyond.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for 1998 were $2,734,000 compared to
$2,182,000 for 1997. The increase was attributable to several factors including
the reallocation of certain payroll and employee-related expenses, consulting
fees related to the enhancement of the Company's accounting and computer
systems, and transaction processing fees and charges from third-party credit
card and similar providers.
Ex. 1-16
<PAGE>
INVESTMENT INCOME/(LOSS)
The Company recorded investment income of $3,781,000 in 1998 compared to
$27,000 in 1997. In December 1998, the Company recognized investment income of
$4,048,000 when it exercised an option to purchase 200,000 shares of Digital
River Common Stock and sold such shares in Digital River's follow-on public
offering.
During 1998, the Company recorded net investment loss of $267,000 on
available-for-sale securities of Cam Designs Inc. due to Cam Designs Inc.
announcing that it had agreed to have its operations placed in receivership
because of its inability to secure adequate banking facilities.
LOSSES ON MINING ASSETS
In December 1998, the Company sold a portion of its mining assets and
reduced the book value of the remaining assets by $538,000 to management's best
estimate based on the value of consideration received upon such partial sale and
an independent appraisal performed in the fourth quarter.
INTEREST EXPENSE, NET
Net interest expense for 1998 was approximately $97,000 compared to
approximately $85,000 in 1997. The increase in interest expense is primarily due
to an increase in the average outstanding balance on the Company's line of
credit.
INCOME TAXES
The Company recorded an income tax provision in 1998 of $988,000. There was
no income tax provision recorded in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales for 1997 totaled $36,995,000 compared to $37,387,000 for 1996. The
decline in sales was mainly attributable to a 13.5% decline in the Company's
distribution sales due to a significant decline in sales of hard drives, optical
drives, scanners and media. The decline in sales to the Company's distribution
customers was partially offset by an increase in DTP Direct catalog sales of
$1,205,000 or 5.2% compared to 1996 levels. Sales from the DTP Direct catalog
increased primarily due to an increase in Mac systems sales, printers and
graphics software. The Company also experienced a 20% reduction in product
returns in 1997 compared to 1996 primarily due to increased focus and attention
Company-wide to product returns and awareness.
Fluctuations in the Company's net sales from period to period can be
expected due to a number of factors, including the timing of new product
introductions by the Company's major vendors and their competitors, seasonal
cycles commonly seen in computer-related industries, and changes in product mix
and product pricing. As a result, the operating results for any particular
period are not necessarily indicative of the results of any future period.
GROSS PROFIT
Gross profit for 1997 was $4,467,000 or 12.1% of net sales compared to
$3,911,000 or 10.5% of net sales in 1996. Gross profit as a percentage of net
sales increased in 1997 due to a reduction in inventory obsolescence and to an
increase in DTP Direct catalog sales, which generally have a higher margin, as a
percentage of total sales. DTP Direct catalog sales gross margins increased from
17.2% in 1996 to 18.1% in 1997.
Ex. 1-17
<PAGE>
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $1,883,000 or 5.1% of net sales in
1997 compared to $2,016,000 or 5.4% of net sales in 1996 excluding Digital River
selling and marketing expense of $68,000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for 1997 were $2,182,000 compared to
$2,031,000 for 1996. The increase in 1997 was primarily due to an increase in
payroll and related costs including the addition of a new President and COO in
late 1996.
GAIN ON SALE OF SECURITIES
Gain on sale of securities for 1997 was approximately $27,000. There was no
gain on sale of securities in 1996.
INTEREST EXPENSE, NET
Net interest expense for 1997 was approximately $85,000 compared to
approximately $43,000 in 1996. The increase in interest expense was primarily
due to an increase in the average outstanding balance on the Company's line of
credit.
INCOME TAXES
The Company recorded no income tax provision in 1997 or in 1996 due to the
availability of net operating loss carryforwards from prior years to offset any
tax expense.
(b) LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at December 31, 1998, consisted
of liquid funds, a revolving line of credit agreement with US Bancorp National
Association ("US Bank"), and vendor trade credit lines.
As of December 31, 1998 the Company had working capital of $3,413,000. At
December 31, 1998, such working capital reflected the current portion of a
dividend declared but not yet paid to the Company's majority shareholder and
Chairman, in the amount of approximately $200,000. The remaining balance of the
dividend was paid in February 1999. In December 1998, the Company received
proceeds of $4,430,000 on the exercise and sale of 200,000 shares of its Digital
River Option.
The Company has a Revolving Line of Credit Agreement with US Bank through
June 1999. Borrowings under the $2,500,000 line of credit with US Bank are
payable on demand, limited by eligible percentages of accounts receivable and
inventory and bear interest at the prime rate plus 1.75%. In December 1998, the
Company paid down the line of credit, and obtained from US Bank a release of the
guarantee by the Chairman. As of December 31, 1998 the Company had unused
availability under the discretionary revolving line of credit of approximately
$1,685,000 and outstanding borrowings of $7,000.
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 better programs with its major distributors.
As of December 31, 1998, inventory levels decreased slightly to $1,784,000
compared to $1,890,000 at December 31, 1997. Capital expenditures totaled
$345,000 in 1998 compared to $168,000 in 1997. The increase in capital
expenditures in 1998 was primarily due to computer system upgrades and
modifications and office renovation.
Ex. 1-18
<PAGE>
The Company believes that funds generated from management of receivables and
inventory levels, advances under its discretionary line of credit, further
expansion of lines with trade creditors, cash on hand and potential proceeds
from the sale of its investments, will be sufficient to fund its operations
through the end of 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 are currently being upgraded and
modified to be Y2K compliant. Anticipated rollout and testing of the Y2K
compliant system is expected in April 1999. The telephone system is believed to
be Y2K compliant, and testing is scheduled for the second 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 second 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 anticipates additional costs of approximately
$50,000 in 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 7A. MARKET RISK DISCLOSURES
The Company's primary exposure to market risk relates to potential
fluctuations in the price of it's 3,000,000 shares of Digital River, Inc. common
stock that it holds through a bargain purchase option. The fair value of the
Digital River common stock could decrease and result in a reduction of the
Company's net assets and comprehensive income. The Company does not enter into
derivatives or other financial instruments.
The 3,000,000 Digital River shares are valued at $66,051,000 (net of
deferred taxes of $40,449,000) in Tech Squared's balance sheet as of
December 31, 1998. That valuation was based upon the closing market price of
Digital River common stock of $35.50 per share on December 31, 1998. A $5 and
$10 per share reduction in the market price of the Digital River common stock
would result in a $9,420,000 and
Ex. 1-19
<PAGE>
$18,840,000 reduction, respectively, in the net assets and comprehensive income
of Tech Squared. Such a decrease would not impact net loss or cash flows.
ITEM 8. FINANCIAL STATEMENTS
The balance sheets of the Company as of December 31, 1998 and 1997, and the
related statements of operations, comprehensive income (loss), shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998 are included in this report on pages F-1 to F-16. The index to
the financial statements appears on page F-1. The financial statements were
audited by Arthur Andersen LLP, whose related report of independent accountants
appears on page F-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Ex. 1-20
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants.................... 22
Consolidated Balance Sheets................................. 23
Consolidated Statements of Operations....................... 24
Consolidated Statements of Comprehensive Income (Loss)...... 25
Consolidated Statements of Stockholders' Equity............. 26
Consolidated Statements of Cash Flows....................... 27
Notes to Consolidated Financial Statements.................. 28
</TABLE>
Ex. 1-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tech Squared Inc.:
We have audited the accompanying consolidated balance sheets of Tech Squared
Inc. (a Minnesota corporation) and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, comprehensive
income (loss), stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tech Squared Inc. and
Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 19, 1999
Ex. 1-22
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 4,436,276 $ 300
Restricted cash........................................... 229,466 143,623
Available-for-sale securities............................. -- 467,438
Trade accounts receivable, less allowance for doubtful
accounts of $365,000 and $180,000, respectively......... 3,387,907 2,727,883
Inventories............................................... 1,783,905 1,890,480
Prepaids and other current assets......................... 416,666 234,936
------------ ----------
Total current assets.................................. 10,254,220 5,464,660
Property and Equipment, net................................. 499,874 346,419
Receivable From Officer/Stockholder......................... -- 201,512
Mining Assets............................................... 190,000 748,276
Investment in Digital River................................. 106,500,000 839,202
------------ ----------
$117,444,094 $7,600,069
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit.................................. $ 7,395 $ 765,728
Current maturities of long-term debt...................... 15,000 80,000
Accounts payable.......................................... 5,008,449 2,816,959
Accrued compensation and benefits......................... 205,156 239,748
Other accrued expenses.................................... 1,404,776 791,743
Dividend payable to officer/shareholder................... 200,000 200,721
------------ ----------
Total current liabilities............................. 6,840,776 4,894,899
Dividend Payable to Officer/Shareholder..................... 83,857 283,136
Long-Term Debt, less current maturities..................... -- 15,000
Deferred Income Taxes....................................... 39,815,000 --
Redeemable Preferred Stock, 12% cumulative convertible, $1
par value, 1,000,000 shares authorized; 160,000 shares
issued and outstanding.................................... 247,744 216,700
------------ ----------
Commitments and Contingencies (Note 7)
Stockholders' Equity:
Common stock, no par value, 25,000,000 shares authorized;
11,603,075 and 10,375,037 shares issued and outstanding,
respectively............................................ 3,990,200 3,189,436
Stock subscription receivable............................. (284,000) --
Retained earnings (accumulated deficit)................... 2,894,345 (912,539)
Unrealized gain (loss) on available-for-sale securities... 63,856,172 (86,563)
------------ ----------
Total stockholders' equity............................ 70,456,717 2,190,334
------------ ----------
$117,444,094 $7,600,069
============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
Ex. 1-23
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................. $38,800,270 $36,995,277 $37,386,715
Cost of sales......................................... 33,829,265 32,527,878 33,475,525
----------- ----------- -----------
Gross profit.................................... 4,971,005 4,467,399 3,911,190
----------- ----------- -----------
Selling and marketing expenses........................ 3,101,205 1,882,729 2,083,961
General and administrative expenses................... 2,734,190 2,182,458 2,676,190
----------- ----------- -----------
Total operating expenses........................ 5,835,395 4,065,187 4,760,151
----------- ----------- -----------
Income (loss) from operations......................... (864,390) 402,212 (848,961)
Gain on sale of securities............................ 3,780,872 26,646 --
Loss on mining assets................................. (538,276) -- --
Interest expense, net................................. (96,677) (85,078) (43,068)
Equity in loss from Digital River..................... (1,829,207) (1,356,370) --
----------- ----------- -----------
Income (loss) before income taxes and minority
interest
in losses of Digital River........................ 452,322 (1,012,590) (892,029)
Provision for income taxes............................ 988,000 -- --
----------- ----------- -----------
Loss before minority interest....................... (535,678) (1,012,590) (892,029)
Minority interest in losses of Digital River.......... -- -- 275,634
----------- ----------- -----------
Net loss............................................ (535,678) (1,012,590) (616,395)
Preferred stock dividends............................. 31,045 19,200 35,000
----------- ----------- -----------
Net loss applicable to common shares................ $ (566,723) $(1,031,790) $ (651,395)
=========== =========== ===========
Net loss per common share, basic and diluted.......... $ (0.05) $ (.10) $ (.06)
=========== =========== ===========
Weighted average common shares outstanding, basic
and diluted......................................... 11,050,724 10,374,870 10,374,870
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Ex. 1-24
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Net loss................................................ $ (535,678) $(1,012,590) $(616,395)
----------- ----------- ---------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities--
Unrealized holding gains (losses) arising during
the year.......................................... 67,723,607 (199,917) (260,000)
Less--Reclassification adjustment for gains included
in net loss....................................... (3,780,872) (26,646) --
----------- ----------- ---------
Other comprehensive income (loss)....................... 63,942,735 (226,563) (260,000)
----------- ----------- ---------
Comprehensive income (loss)............................. $63,407,057 $(1,239,153) $(876,395)
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Ex. 1-25
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK STOCK EARNINGS
----------------------- SUBSCRIPTION (ACCUMULATED
SHARES AMOUNT RECEIVABLE DEFICIT)
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995................... 10,374,870 $3,302,066 $ -- $ (1,463,569)
Net loss................................... -- -- -- (616,395)
Payment for shares to effect Jaguar Group,
Ltd. merger.............................. -- (193,485) -- --
Preferred stock dividends.................. -- -- -- (35,000)
Final allocation of purchase price to
effect Jaguar Group, Ltd. merger......... -- 80,522 -- --
Net change in unrealized loss on
available-for-sale securities............ -- -- -- --
---------- ---------- ---------- ------------
Balance, December 31, 1996................... 10,374,870 3,189,103 -- (2,114,964)
Net loss -- -- -- (1,012,590)
Gain on sale of stock by Digital River..... -- -- -- 2,234,215
Preferred stock dividends.................. -- -- -- (19,200)
Warrants exercised......................... 167 333 -- --
Net change in unrealized loss on
available-for-sale securities............ -- -- -- --
---------- ---------- ---------- ------------
Balance, December 31, 1997................... 10,375,037 3,189,436 -- (912,539)
Net loss................................... -- -- -- (535,678)
Preferred stock dividends.................. -- -- -- (31,045)
Payment for options exercised.............. 1,228,038 800,764 (284,000) --
Gain on sale of stock by Digital River..... -- -- -- 4,373,607
Net change in unrealized gain on
available-for-sale securities............ -- -- -- --
---------- ---------- ---------- ------------
Balance, December 31, 1998................... 11,603,075 $3,990,200 $ (284,000) $ 2,894,345
========== ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
SECURITIES TOTAL
-------------- -----------
<S> <C> <C>
Balance, December 31, 1995.................................. $ 400,000 $ 2,238,497
Net loss.................................................. -- (616,395)
Payment for shares to effect Jaguar Group, Ltd. merger.... -- (193,485)
Preferred stock dividends................................. -- (35,000)
Final allocation of purchase price to effect Jaguar Group,
Ltd. merger............................................. -- 80,522
Net change in unrealized loss on available-for-sale
securities.............................................. (260,000) (260,000)
----------- -----------
Balance, December 31, 1996.................................. 140,000 1,214,139
Net loss.................................................. -- (1,012,590)
Gain on sale of stock by Digital River.................... -- 2,234,215
Preferred stock dividends................................. -- (19,200)
Warrants exercised........................................ -- 333
Net change in unrealized loss on available-for-sale
securities.............................................. (226,563) (226,563)
----------- -----------
Balance, December 31, 1997.................................. (86,563) 2,190,334
Net loss.................................................. -- (535,678)
Preferred stock dividends................................. -- (31,045)
Payment for options exercised............................. -- 516,764
Gain on sale of stock by Digital River.................... -- 4,373,607
Net change in unrealized gain on available-for-sale
securities.............................................. 63,942,735 63,942,735
----------- -----------
Balance, December 31, 1998.................................. $63,856,172 $70,456,717
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Ex. 1-26
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ----------
<S> <C> <C> <C>
Operating Activities:
Net loss................................................ $ (535,678) $ (1,012,590) $ (616,395)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities-....................
Depreciation and amortization......................... 174,931 191,737 244,599
Equity in losses of Digital River..................... 1,829,207 1,356,370 --
Gain on sale of securities............................ (3,780,872) (26,646) --
Minority interest in Digital River.................... -- -- (275,634)
Loss on mining assets................................. 538,276 -- --
Change in operating assets and liabilities:
Trade accounts receivable........................... (660,024) 151,317 (573,104)
Inventories......................................... 106,575 16,066 1,612,822
Prepaids and other current assets................... (181,730) 110,787 173,297
Accounts payable.................................... 2,191,490 (1,457,016) (511,199)
Accrued compensation and benefits................... (34,592) 52,098 44,804
Other accrued expenses.............................. 730,033 280,090 (32,865)
----------- ------------ ----------
Net cash provided by (used in) operating
activities...................................... 377,616 (337,787) 66,325
----------- ------------ ----------
Investing Activities:
Change in restricted cash............................... (85,843) (143,623) --
Purchase of property and equipment...................... (345,012) (168,016) (244,047)
Patents and organization costs.......................... -- -- (27,964)
Proceeds from sale of securities........................ 4,709,272 272,646 --
Proceeds from sale of mining assets..................... 20,000 -- --
Decrease in cash due to deconsolidation of Digital
River................................................. - (799,721) --
Change in officer/stockholder receivable................ 201,512 -- 4,288
----------- ------------ ----------
Net cash provided by (used in) investing activities... 4,499,929 (838,714) (267,723)
----------- ------------ ----------
Financing Activities:
Net borrowings (payments) on revolving line of credit... (758,333) 486,363 (377,277)
Issuance of common stock, net........................... 516,764 -- --
Stock repurchase........................................ -- -- (37,500)
Dividends paid.......................................... (200,000) (208,120) (200,730)
Proceeds from issuance of Digital River long-term debt,
net................................................... -- -- 848,093
----------- ------------ ----------
Net cash provided by (used in) financing activities... (441,569) 278,243 232,586
----------- ------------ ----------
Increase (decrease) in cash and cash equivalents.......... 4,435,976 (898,258) 31,188
Cash and cash equivalents, beginning of year.............. 300 898,558 867,370
----------- ------------ ----------
Cash and cash equivalents, end of year.................... $ 4,436,276 $ 300 $ 898,558
=========== ============ ==========
Supplemental cash flow information:
Cash paid for interest.................................. $ 112,770 $ 93,970 $ 50,375
Cash paid for income taxes.............................. -- -- --
Noncash Financing Activities:
Dividends accrued....................................... 31,045 19,200 35,000
Noncash repurchase of shares............................ -- -- 178,485
Stock subscription receivable........................... 284,000 -- --
Decrease in various accounts upon deconsolidation of
Digital River:
Prepaids and other current assets....................... -- (8,934) --
Property and equipment.................................. -- (106,617) --
Debt issuance costs..................................... -- (147,413) --
Patents and organization costs.......................... -- (133,488) --
Convertible debentures.................................. -- (998,750) --
Accounts payable........................................ -- (142,445) --
Other accrued liabilities............................... -- (93,621) --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Ex. 1-27
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS AND OPERATIONS
Tech Squared Inc. and its wholly owned subsidiaries (the Company) is a
national direct marketer and distributor of microcomputer hardware and software
products primarily for users of Apple Macintosh-Registered Trademark- personal
computers and IBM-compatible personal computers. The Company's sales and
marketing efforts are currently targeted at desktop publishing, graphic arts and
prepress industries through its catalog, "DTP Direct," to computer dealers and
value-added resellers through its distribution business, and to developers of
internal corporate intranet and external Internet sites and managers of local
area networks and wide area networks through its "Net Direct" catalog.
Prior to January 1, 1997, the consolidated financial statements included the
accounts of the Company and Digital River, Inc. (Digital River), an on-line
distributor of software products via the Internet. In December 1995, the Company
obtained a bargain purchase option to acquire 3,200,000 shares of Digital River
common stock from the Company's majority stockholder and Chairman, representing
at the time a 60% ownership in Digital River. The option is not transferable and
is exercisable at any time through December 31, 2000 for a total exercise price
of $1. During 1997, Digital River converted all of its outstanding debentures
and issued additional common stock pursuant to private placements which reduced
the Company's effective control from 60% at December 31, 1996 to approximately
35% at December 31, 1997. As a result of the reduction in the Company's
ownership percentage, the financial results of Digital River are no longer
consolidated with those of the Company. Beginning January 1, 1997, the Company
accounted for its investment in Digital River using the equity method of
accounting. Digital River sold additional shares of common stock in 1998 through
private placements and its initial public offering of common stock. The
following amounts were recorded as credits to retained earnings in the
accompanying statement of stockholders' equity as a result of the 1997 and 1998
sales of stock by Digital River:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase to investment in Digital River.............. $6,964,607 $2,234,215
Deferred income taxes................................ 2,591,000 --
---------- ----------
Gain on sale......................................... $4,373,607 $2,234,215
========== ==========
</TABLE>
On August 11, 1998, Digital River completed an initial public offering of
3,000,000 shares of common stock. This caused the Company's ownership to
decrease to approximately 19%. As of August 12, 1998, 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,
"Accounting for Certain Investments in Debt and Equity Securities," which is
valued at $35.50 per share, the closing market price at December 31, 1998. In
December 1998, the Company participated in Digital River's follow-up offering by
selling 200,000 shares, further reducing the Company's ownership to
approximately 15% as of December 31, 1998. The sale of 200,000 shares in
December 1998 resulted in proceeds of $4.4 million and a realized gain of
$4,048,000 which is recorded as gain on sale of securities in the accompanying
statement of operations. The cost of the shares was determined using the
historical cost for financial reporting purposes. Unrealized holding gains and
losses are recognized in comprehensive income, net of deferred taxes. The cost
and gross unrealized holding gains related to the Digital River shares was
$5,610,000 and $100,890,000
Ex. 1-28
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
as of December 31, 1998. Deferred income taxes recorded on the balance sheet
related to the Digital River shares totaled $40,449,000 as of December 31, 1998.
Digital River had total assets of $80,328,000 and $3,405,000 as of
December 31, 1998 and 1997, respectively. For the years ended December 31, 1998,
1997 and 1996, Digital River recorded a net loss of $13,798,000, $3,485,000 and
$689,000 on net sales of $20,911,000, $2,472,000 and $111,000, respectively.
Digital River currently occupies approximately 7,000 square feet of
warehouse space at the Company's corporate headquarters. Prior to August 1998,
the offices of Digital River were also located in the Company's facilities. The
Company bills Digital River for the leased space, and prior to 1999, certain
related costs such as direct labor costs, phone services, general liability
insurance and janitorial services through an administrative charge. Total
charges by the Company to Digital River for administrative expenses were
approximately $207,000, $160,000 and $82,000 in 1998, 1997 and 1996,
respectively.
During 1997, the Company began performing fulfillment services for Digital
River on physical shipments of products, for which Digital River pays the
Company a fulfillment fee. The Company billed Digital River $246,000 and $8,000
for these services in 1998 and 1997, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
RESTRICTED CASH
Restricted cash represents amounts held in escrow by certain financial
service providers.
INVENTORIES
Inventories, consisting primarily of products held for resale, are stated at
the lower of cost or market, as determined by the first-in, first-out inventory
method.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of furniture, equipment and leasehold
improvements, are stated at cost. For financial reporting purposes, depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, generally five years, or for leasehold improvements, over the length
of the lease.
Ex. 1-29
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Furniture and equipment............................. $ 1,551,112 $ 1,224,304
Leasehold improvements.............................. 159,134 140,929
----------- -----------
1,710,246 1,365,233
Less--Accumulated depreciation and amortization..... (1,210,372) (1,018,814)
----------- -----------
$ 499,874 $ 346,419
=========== ===========
</TABLE>
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment to the customer.
Certain product sales to end users are made pursuant to a 30-day cash back
refund policy. A reserve for returns is established based on historical trends.
ADVERTISING COSTS
Advertising costs related to mailed direct-response advertising are deferred
and charged to expense over the period during which the related sales are
expected to occur. The cost of nondirect-response advertising is charged to
expense the first time the advertising takes place. The Company uses an
accelerated amortization schedule for its "DTP Direct" catalog whereby
approximately 90% of the costs are amortized in the first four months and fully
amortized by the sixth month. Direct-response-related advertising expense was
$1,000,000, $371,000 and $491,000 in 1998, 1997 and 1996, respectively.
INCOME TAXES
Deferred income tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using currently enacted tax rates in effect for the years in which
the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts expected to be realized.
NET LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing net loss applicable to
common shares by the weighted average number of shares of common stock
outstanding during the year. The computation of diluted earnings per common
share is similar to the computation of basic loss per common share, except that
the denominator is increased for the assumed conversion of convertible
securities and the exercise of dilutive options using the treasury stock method.
The shares used in computing basic and diluted earnings per share were the same
for the years ended December 31, 1998, 1997 and 1996. Options and warrants
totaling 4,452,974, 5,661,484 and 6,201,958 were excluded from dilutive earnings
per share in 1998, 1997 and 1996, respectively, as their effect is antidilutive.
Ex. 1-30
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," on
January 1, 1998. SFAS No. 130 establishes standards for reporting and display in
the financial statements of net income and the components of all other nonowner
changes in equity, referred to as comprehensive income. The Company has elected
to present comprehensive income (loss) as a separate statement in the
accompanying consolidated financial statements.
The Company also adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in 1998. SFAS No. 131 requires disclosure
of business and geographic segments in the consolidated financial statements of
the Company. The adoption of the disclosure requirements of SFAS No. 131 had no
impact on the Company's consolidated financial statements as there is only one
reportable segment.
2. INVESTMENTS:
The Company acquired the following assets in a merger in 1995 that are not
related to its current operations or to its future operating plans.
CAM DESIGNS, INC.
Cam Designs, Inc. (Cam Designs), a Delaware corporation, is the parent
company of MGA Holdings Ltd., a United Kingdom corporation which designs,
engineers and prototypes tools for the automobile and aerospace industries.
During 1998, the Company sold a portion of its holdings of Cam Designs stock for
$288,600, resulting in realized gains of approximately $5,000. Cost was
determined using the average cost method. In October 1998, Cam Designs announced
that its United Kingdom companies were placed in receivership because Cam
Designs could not secure adequate bank financing. Due to Cam Designs distressed
financial situation, the Company wrote off the balance of the Cam Designs stock
during 1998 and recognized a loss of $272,000.
During 1997, the Company sold shares resulting in realized gains on sale of
Cam Designs common stock of $27,500, less commissions and fees. As part of a
settlement agreement, the Company is required to hold shares of Cam Design stock
with an escrow agent. The number of escrow shares will be adjusted downward and
released from escrow as payments, set forth in the agreement, are made. These
shares remain in escrow at December 31, 1998.
Unrealized gains and losses resulting from the Cam Designs holdings are
recorded in other comprehensive income in the accompanying financial statements.
Unrealized holding gains (losses) were $0, ($87,000), and $140,000 as of
December 31, 1998, 1997, and 1996, respectively. The cost of the shares for
Ex. 1-31
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
2. INVESTMENTS: (CONTINUED)
financial reporting purposes was $0, $574,000, and $800,000 as of December 31,
1998, 1997, and 1996, respectively.
MINING ASSETS
The Company holds certain mining properties and rights in the Alder Gulch
area of the Virginia City Mining District in southwest Montana, and also near
Rimini, Montana. These properties and rights were obtained in a 1995 merger. In
December 1998, the Company sold a portion of these assets and reduced the
remaining assets to the estimated fair value based upon an independent appraisal
performed on the properties.
3. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT:
The Company has a revolving credit agreement with a bank which expires in
June 1999. Borrowings under the $2,500,000 line are payable on demand, limited
by eligible percentages of accounts receivable and inventory, as defined, and
bear interest at the prime rate plus 1.75%. Borrowings under the agreement are
secured by substantially all the Company's assets. Borrowings on the line
averaged $751,000, $642,000 and $638,000 at average interest rates of 10.10%,
10.25% and 10.25% in 1998, 1997 and 1996, respectively.
Long-term debt consisted of the following at December 31:
<TABLE>
<S> <C> <C>
Note payable, with interest at 7.5%...................... $ 15,000 $ 95,000
Less--Current portion.................................... (15,000) (80,000)
-------- --------
$ -- $ 15,000
======== ========
</TABLE>
The Company has a flooring program with a financing company covering up to
$633,000 in inventory purchases. As of December 31, 1998, 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 the bank.
4. INCOME TAXES:
As of December 31, 1998, the Company had net operating loss carryforwards
[NOL's] of approximately $2.0 million. Certain restrictions caused by the change
in ownership could limit annual utilization of the net operating loss
carryforwards. The NOL's expire in various years from 1999 to 2007. The Company
recorded a full valuation allowance in 1998 and 1997 due to the uncertainty
associated with the Company's ability to realize the benefits related to net
operating losses generated.
Ex. 1-32
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
4. INCOME TAXES: (CONTINUED)
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
U.S. statutory rate.......................... 34.0% (34.0)% (34.0)%
State taxes, net of federal benefit.......... 3.2 (3.2) (3.2)
Digital River net losses..................... 181.2 49.7 20.0
Increase (decrease) in valuation allowance... -- (12.5) 17.2
-------- -------- --------
Effective income tax rate.................... 218.4% --% --%
======== ======== ========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
Deferred tax assets:
Inventories..................................... $ 114,000 $ 159,000
Accrued expenses and reserves................... 292,000 184,000
Net operating loss carryforwards and credits.... 853,000 999,000
Investments..................................... 664,000 684,000
------------- -----------
1,923,000 2,026,000
Deferred tax valuation allowance................ (1,183,000) (1,183,000)
------------- -----------
Total deferred tax assets......................... 740,000 843,000
------------- -----------
Deferred tax liabilities:
Depreciation and other.......................... (106,000) (12,000)
Investment in Digital River..................... (40,449,000) (831,000)
------------- -----------
Total deferred tax liabilities.................... (40,555,000) (843,000)
------------- -----------
Net deferred tax liability........................ $ (39,815,000) $ --
============= ===========
</TABLE>
5. STOCK OPTIONS AND WARRANTS:
MACUSA PLAN
In 1995, the Company's stockholders approved the MacUSA 1995 Stock Option
Plan (the "MacUSA Plan"), reserving and granting options for 2,870,016 shares of
the Company's common stock. Options granted under the MacUSA Plan have been
granted at the current market price on the date of grant. Such options generally
vest six years from the date of grant and may vest earlier in the event certain
targeted net income is achieved. At December 31, 1998, 199,996 of these options
remain outstanding.
TECH SQUARED INC. 1995 STOCK OPTION PLAN
In December 1995, the Company's board of directors approved the Tech Squared
Inc. 1995 Stock Option Plan (the 1995 Plan) and reserved 2,500,000 shares for
future grant. In July 1997, the Company's board of directors approved an
increase to the maximum number of shares available for grant under the
Ex. 1-33
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
5. STOCK OPTIONS AND WARRANTS: (CONTINUED)
1995 Plan to 4,000,000 shares, subject to shareholder approval. Options granted
under the 1995 Plan are granted at not less than the current market price on the
date of grant, cannot remain outstanding for over ten years and generally become
exercisable over a period of four years. Options outstanding under the 1995 Plan
totaled 2,642,000, 3,600,500 and 2,425,000 in 1998, 1997 and 1996, respectively.
As of December 31, 1998, 373,857 options in the Plan remain to be granted.
1995 NON-EMPLOYEE DIRECTOR OPTION PLAN
Also in December 1995, the Company's board of directors approved the Tech
Squared Inc. 1995 Non-Employee Director Option Plan (the Plan), reserving
350,000 shares of stock for future grant. The Plan allows each director to be
granted options for up to 60,000 shares, exercisable at the share price on the
date of issuance. These options vest over a two-year period and remain
exercisable for a period of seven years. Of previously granted shares, 140,000
remain outstanding pursuant to the Plan as of December 31, 1998.
A summary of the Company's various stock option plans at year-end, with
changes during the year then ended, is as follows (see Notes 10 and 12):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year........ 5,661,484 $0.89 6,201,958 $1.18 6,974,468 $1.27
Granted............................. 1,561,500 1.54 1,354,000 0.75 1,602,500 0.75
Exercised........................... (1,228,038) 0.78 -- -- -- --
Forfeited/canceled.................. (1,541,972) 1.08 (1,894,474) 1.72 (2,375,010) 0.75
----------- ----- ----------- ----- ----------- -----
Outstanding, end of year.............. 4,452,974 $1.06 5,661,484 $ .89 6,201,958 $1.18
=========== ===== =========== ===== =========== =====
Exercisable, end of year.............. 2,784,838 $0.83 2,002,366 $ .99 3,066,958 $1.51
=========== ===== =========== ===== =========== =====
Weighted average fair value of
employee options granted............ $1.54 $ .50 $ .22
===== ===== =====
</TABLE>
The Company accounts for these plans under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss and net loss
per share would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ----------
<S> <C> <C> <C>
Net loss:
As reported.......................... $ (535,678) $ (1,012,590) $ (616,395)
Pro forma............................ (2,425,937) (1,453,394) (884,399)
Basic and diluted loss per share:
As reported.......................... $ (.05) $ (.10) $ (.06)
Pro forma............................ (.22) (.14) (.09)
</TABLE>
Ex. 1-34
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
5. STOCK OPTIONS AND WARRANTS: (CONTINUED)
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for employee option grants: risk-free interest rate from 4.22%
to 5.50% in 1998, 6.11% in 1997 and 6% in 1996; no expected dividend yield;
expected lives of five years; and expected volatility of 162% to 195% in 1998,
and 206% in 1997. No volatility was used for 1996 as trading was limited.
6. STOCKHOLDERS' EQUITY:
The Company's redeemable preferred stock carries a 12% cumulative dividend
payable quarterly, is convertible into common stock at any time for $12.50 per
share, carries a preference on liquidation or dissolution of the Company, and
has equal voting rights with the Company's outstanding common stock. The Company
is obligated to pay $1.00 per share plus accrued but unpaid dividends upon
redemption of the redeemable preferred stock. As of December 31, 1998, the
redemption value of the preferred stock ($160,000) plus accrued but unpaid
dividends ($88,000) totaled $247,744. The preferred shares are callable by the
Company at any time with 60 days' written notice, and all outstanding shares
must be redeemed by 2002. The Company has no obligation to redeem the preferred
stock prior to 2002. In 1996, the Company redeemed 25,000 shares of preferred
stock for total consideration of $22,500.
The dividend payable to officer/shareholder is evidenced primarily by a note
payable to the Company's majority stockholder and Chairman. The Company paid
approximately $200,000 of this dividend during 1998 and approximately $200,000
in 1997. The note is noninterest-bearing, due on demand and subordinated to the
revolving line of credit. Pursuant to the debt subordination agreement, the
Company can only make payments up to $200,000 in a calendar year.
STOCK SUBSCRIPTION RECEIVABLE
The Company advanced $469,500 to an employee which was used to purchase
shares of common stock. The balance is due in full by September 2000. During
1998, the employee repaid $185,500 of the loan, and 142,000 shares of common
stock are held by the Company as collateral on the note at December 31, 1998.
WARRANTS
In 1995, the Company granted a warrant to purchase 150,000 shares of stock
for $1.00 per share as compensation for investment banking services and a
warrant to purchase 50,000 shares for $1.00 per share as partial settlement of a
note payable. Both warrants were exercised in 1998.
In connection with a 1995 merger, the Company acquired the Jaguar Group,
Ltd. options and warrants outstanding. These options and warrants allow the
holders to purchase 1,114,354 shares of stock at prices between $2.00 and $15.00
per share. At December 31, 1997, 1,098,076 of these shares expired and were
forfeited. The remaining 16,278 options and warrants will expire at various
dates from May 1999 through July 2000.
Ex. 1-35
<PAGE>
TECH SQUARED INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company has been named as a defendant in lawsuits in the normal course
of business. Management believes that the ultimate resolution of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
EMPLOYEE RETIREMENT SAVINGS PLAN
The Company maintains an employee retirement savings plan (the Plan) which
qualifies under Section 401(k) of the Internal Revenue Code. The Plan is
designed to provide eligible employees with an incentive to make regular
contributions into a long-term investment and savings program. The Company
contributed $3,000 in 1998 and $0 in 1997 and 1996.
OPERATING LEASES
The Company leases all of its warehouse and office space and certain
equipment under operating lease agreements. The Company recorded operating lease
rental expense totaling $209,000, $193,000 and $184,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Future minimum lease payments of
$110,000, including estimated common area maintenance, are due by December 31,
1999.
GOVERNMENT REGULATION
The Company presently collects Minnesota sales tax on sales made within the
state of Minnesota. Various states have attempted to impose on direct marketers
the burden of collecting use taxes on the sale of products shipped to state
residents. The United States Supreme Court affirmed its position that it is
unlawful for a state to impose use tax collection obligations on an out-of-state
mail order company whose only contact with the state was the distribution of
catalogs and other advertising materials through the mail and subsequent
delivery of purchased goods by parcel post and interstate common carriers. If
legislation is passed to overturn the United States Supreme Court's decision,
the imposition of a use tax collection obligation on the Company in states to
which it ships products would result in additional administrative expenses to
the Company, could result in price increases to the customer and could have a
material adverse effect on the Company.
8. RELATED-PARTY TRANSACTIONS:
In December 1995, the Company entered into a consulting agreement with
Jaguar Ventures, Limited, an entity owned by one of the Company's board members
and by two significant stockholders who were principals of Jaguar Group, Ltd.
Pursuant to the agreement, the Company agreed to issue warrants to acquire
300,000 shares of the Company's common stock at $1.75 per share with certain
registration rights, and paid $50,000 in cash. In September 1996, the Company
repriced these warrants to $1.01 per share. In September 1997, the Company
agreed to extend the term by one year to December 1999, subject to certain
restrictions.
The Company has agreed to indemnify its majority stockholder and Chairman
for any tax liability resulting from any challenges to the Company's
S corporation tax returns from 1994 through the date of the Company's conversion
to a C corporation in 1995.
Ex. 1-36
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about each of the
Company's directors and executive officers:
<TABLE>
<CAPTION>
NAMES OF DIRECTORS, OFFICERS AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ---------------------------- -------- ---------------------------------- --------------
<S> <C> <C> <C>
Joel A. Ronning........................... 42 Chairman of the Board 1995
Charles E. Reese, Jr. .................... 45 President, Chief Executive Officer 1996
and Chief Operating Officer
Jeffrey F. Martin......................... 43 Chief Financial Officer N/A
Richard J. Runbeck........................ 53 Director 1996
Perry W. Steiner.......................... 33 Director 1998
</TABLE>
JOEL A. RONNING has been Chairman of the Company's Board of Directors since
May 1995. From May 1995 to July 1998, Mr. Ronning served as the Chief Executive
Officer of the Company. From May 1995 to September 1996, Mr. Ronning also served
as the Company's President. From July 1996 to July 1998, Mr. Ronning also served
as the Company's Chief Financial Officer. Mr. Ronning is the founder of
MacUSA, Inc. ("MacUSA"), a wholly-owned subsidiary of the Company, and has
served as a member of the MacUSA Board of Directors since April 1990. From
April 1990 to July 1998, Mr. Ronning also served as the Chief Executive Officer
of MacUSA, Inc. Mr. Ronning is also the Chief Executive Officer and a director
of Digital River, Inc., a Minneapolis, Minnesota-based company specializing in
electronic software distribution, in which the Company holds a 15.3% beneficial
ownership interest as of April 23, 1999. Mr. Ronning also serves as a director
of the Software Publishers Association and JASC, Inc.
CHARLES E. REESE, JR. has served as a director of the Company since
June 1996, has served as President and Chief Operating Officer of the Company
since September 1996 and has served as Chief Executive Officer of the Company
since February 1999. Mr. Reese is also a member of the Board of Directors of
Digital River, Inc., a publicly-held Minneapolis, Minnesota-based company
specializing in electronic software distribution. Mr. Reese is also a member of
the Board of directors of MacUSA, Inc., a wholly-owned subsidiary of the
Company. From April 1995 to August 1996, he was Vice President of Sales and
Marketing of The Weidt Group, a custom software and internet site developer
based in Minnetonka, Minnesota. Mr. Reese served as Vice President of Sales from
July 1987 to April 1995 for LaserMaster Technologies, Inc., an Eden Prairie,
Minnesota based developer, manufacturer and marketer of digital color printers
and chemical-free filmsetters.
JEFFREY F. MARTIN has served as Chief Financial Officer and Secretary of the
Company since November 1998. From March 1996 to October 1998, Mr. Martin served
as a Vice President and Chief Financial Officer of Andersen Consulting
(Enterprise Group), a management company based in Minneapolis, Minnesota. From
February 1988 to March 1996, Mr. Martin served as a Vice President and Chief
Financial Officer of Addco Holding Company, a manufacturing and distribution
company based in St. Paul, Minnesota.
RICHARD J. RUNBECK has served as a director of the Company since July 1996.
Since December 7, 1998, Mr. Runbeck has been a director of MacUSA, a
wholly-owned subsidiary of the Company. Since October 1985, he has been the
President of Runbeck & Associates, P.A., an accounting firm located in Brooklyn
Center, Minnesota. Mr. Runbeck is a member of the Board of Directors of Ontrack
Data International, Inc., a provider of data recovery services based in Eden
Prairie, Minnesota.
Ex. 1-37
<PAGE>
PERRY W. STEINER has served as a director of the Company since
December 1998. Since July 1998, Mr. Steiner has been President of Digital
River, Inc., a publicly-held, Minneapolis, Minnesota-based company specializing
in electronic software distribution, and has served as a director of Digital
River, Inc., since April 1998. From January 1997 to July 1998, Mr. Steiner
served as Vice President of Wasserstein Perella & Co., Inc., an investment
banking firm, and as Vice President of Wasserstein Perella Ventures, Inc., the
general partner of Wasserstein Adelson Ventures, L.P., a venture capital fund.
From June 1993 to December 1996, Mr. Steiner was a principal of TCW Capital, a
group of leveraged buyout funds managed by Trust Company of the West.
SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934--BENEFICIAL OWNERSHIP AND
COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires executive officers and directors of the Company, and persons who
beneficially own more than 10 percent of the Company's outstanding shares of
Common Stock or Preferred Stock, to file initial reports of ownership and
reports of changes in ownership of securities of the Company with the Securities
and Exchange Commission. Officers, directors and persons owning more than 10
percent of the Company's outstanding Common Stock or Preferred Stock are
required by Securities and Exchange Commission regulation to furnish the Company
with copies of all Section 16(a) forms filed. Based solely on a review of the
copies of such reports and amendments thereto furnished to or obtained by the
Company or written representations that no other reports were required, the
Company believes that during the fiscal year ended December 31, 1998, the
Company's directors, officers and beneficial owners of more than 10 percent of
the Company's shares of Common Stock or Preferred Stock complied with all
applicable filing requirements except Joel A. Ronning and Richard J. Runbeck
each filed late one Statement of Changes in Beneficial Ownership and Perry W.
Steiner filed late one Initial Statement of Beneficial Ownership.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain cash and non-cash compensation
awarded to or earned during the Company's fiscal years ended December 31, 1996,
1997 and 1998 by the Chief Executive Officer and each executive officer of the
Company who earned or was awarded total compensation in excess of $100,000 in
the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION($) COMPENSATION(#)
----------------------------------- ------------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION UNDERLYING OPTIONS COMPENSATION($)
- ----------------- -------- -------- -------- ------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Ronning(1)(2).............. 1998 16 201,512 4,100(3) 1,000,000 19,600(4)
Chairman of the Board 1997 16 -- 13,250(3) -- 19,600(4)
1996 298 -- 13,250(3) -- 9,800(4)
Charles E. Reese, Jr. ............. 1998 135,000 -- -- -- --
President and Chief 1997 132,014 -- -- 1,000,000 --
Operating Officer
Richard J. Apple(5)................ 1998 126,250 2,219 -- -- --
</TABLE>
- ------------------------------
(1) Prior to July 1998, Mr. Ronning was also Chief Executive Officer and Chief
Financial Officer of the Company. The Company currently accrues and pays
Mr. Ronning a nominal monthly amount relating primarily to his health
insurance and other employee benefits.
(2) Does not include compensation paid to Mr. Ronning by Digital River, Inc.
(3) Compensation relates to an automobile owned by the Company and used by
Mr. Ronning.
Ex. 1-38
<PAGE>
(4) Represents compensation resulting from a loan to Mr. Ronning on which
interest was payable at an annual rate of 5%, 0% and 0% for 1996, 1997 and
1998, respectively, which is below the market rate, assumed for purposes of
determining compensation, to be 10%. Such loan was repaid in full in
December 1998. See "CERTAIN TRANSACTIONS."
(5) Mr. Apple was Chief Executive Officer of the Company from July 1998 to
February 1999. Mr. Apple was employed by the Company in other capacities
prior to his election as Chief Executive Officer. The compensation shown
includes compensation received in all capacities.
OPTION GRANTS DURING THE FISCAL YEAR ENDED DECEMBER 31, 1998
The following table sets forth information with respect to each option
granted to the executive officers named in the Summary Compensation Table during
the fiscal year ended December 31, 1998:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
PERCENTAGE OF TOTAL APPRECIATION FOR
OPTIONS GRANTED TO OPTION TERM(1)
OPTIONS EMPLOYEES EXERCISE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---- --------- ------------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(#) (%) ($) ($) ($)
Joel A. Ronning(2)........... 1,000,000 64 1.50 9/1/2004 340,096 771,561
Charles E. Reese............. -- -- -- -- -- --
Richard J. Apple............. -- -- -- -- -- --
</TABLE>
- ------------------------
(1) The compounding assumes all options are exercised at the end of their
six-year term. These amounts represent certain assumed rates of
appreciation, required to be set forth pursuant to Securities and Exchange
Commission rules. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock, overall stock
market conditions, and continued employment of the option holder through the
vesting period. The amounts reflected in this table may not necessarily be
achieved.
(2) In April 1995, MacUSA granted to Mr. Ronning, pursuant to the MacUSA, Inc.
1995 Stock Option Plan (the "MacUSA Plan"), options to purchase 1,099,990
shares, 1,370,010 shares and 199,996 shares of Common Stock, respectively,
at an exercise price of $1.01 per share. The ability to exercise some of
such options was delayed until 2001, subject to acceleration if the Company
met certain profitability goals or under certain other circumstances.
Effective as of January 12, 1998, the Company granted to Mr. Ronning, in
connection with his cancellation of 2,470,000 of such options, options to
purchase 1,000,000 shares of Common Stock at an exercise price of $1.50 per
share, exercisable for six years commencing on September 1, 1998.
Ex. 1-39
<PAGE>
AGGREGATE OPTIONS EXERCISED IN THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND
OPTION VALUES AT DECEMBER 31, 1998
The following table sets forth certain information regarding options to
purchase shares of Common Stock exercised during the Company's fiscal year ended
December 31, 1998, and the number and value of options to purchase shares of
Common Stock held as of December 31, 1998, by the executive officers named in
the Summary Compensation Table:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
NUMBER OF NUMBER OF OPTIONS OPTIONS AT
SHARES AT DECEMBER 31, 1998 DECEMBER 31, 1998(2)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(#) ($) (#) (#) ($) ($)
Joel A. Ronning........... -- -- 1,199,996 0 1,897,992 0
Charles E. Reese.......... -- -- 675,000 375,000 1,518,750 843,750
Richard J. Apple.......... 50,000 112,500 175,000 775,000 393,750 1,743,750
</TABLE>
- ------------------------
(1) Value Realized is the difference between the closing price per share on the
date of exercise, and the option price per share, multiplied by the number
of shares acquired upon exercise of the option.
(2) Value of Unexercised In-the-Money Options is the difference between the
closing price per share of $3.00 at December 31, 1998, and the exercise
price per share multiplied by the number of shares subject to options.
DIRECTOR COMPENSATION
Upon initial election to the Board of Directors, each non-employee director
automatically receives an option to purchase 50,000 shares of Common Stock under
the Tech Squared Inc. 1995 Non-Employee Director Option Plan (the "Director
Plan"). The Director Plan was amended in December 1998 to allow the Board of
Directors to vary the number of Shares issuable upon exercise of the option
granted to each new director and to vary other terms of such options. Options
granted under the Director Plan, unless otherwise detained by the Board of
Directors, have an exercise price equal to the fair market value of one share of
Common Stock on the date of grant. Unless otherwise determined by the Board of
Directors, the options become exercisable in three equal installments on each of
the date of initial election to the Board of Directors and the first two
anniversaries of the date of such election. Options vest and become exercisable
only if the director is a member of the Board of the Directors on the vesting
date. Options granted under the Director Plan expire seven years from the date
of grant. Upon his election as a director of the Company in June 1996,
Mr. Reese was granted an option to purchase 50,000 shares under the Director
Plan. All of such options have vested. Upon his election as a director of the
Company in July 1996, Mr. Runbeck was granted an option to purchase 50,000
shares under the Director Plan, all of such options have vested. Additionally,
in December 1998, Mr. Runbeck was granted an option to purchase an additional
50,000 shares under the Director Plan at an exercise price of $2.25 per share.
Such options vested immediately upon grant. Upon his election as a director of
the Company in December 1998, Mr. Steiner was granted an option to purchase
60,000 shares under the Director Plan at an exercise price of $2.25 per share.
Such option vested immediately upon grant.
The Company generally reimburses non-employee directors for out-of-pocket
expenses incurred to attend the Board of Directors meetings. The Company does
not pay director fees to members of the Board of Directors who are full-time
employees of the Company and does not reimburse such persons for out-of-pocket
expenses in connection with attending Board of Director meetings.
Ex. 1-40
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
INTRODUCTION. During the fiscal year ended December 31, 1998, the Board of
Directors was responsible for matters relating to the compensation of the
Company's executive officers named in the Summary Compensation Table, namely
Joel A. Ronning, the Company's Chairman of the Board, Charles E. Reese, Jr., the
Company's President, Chief Executive Officer and Chief Operating Officer, and
Richard J. Apple who served as Chief Executive Officer, from July 1998, to
February 1999.
COMPENSATION PROGRAM. The Company's current executive compensation program
involves a combination of base salary, performance-based bonuses and long-term
incentive awards. Base salaries are intended to attract and retain
highly-qualified executives. Bonuses to executive officers are intended to
reward short-term performance of the executive officer and the Company. Grants
of stock options by the Company are intended to encourage and reward executive
officers based upon the Company's long-term performance and to provide executive
officers with a financial interest in the success of the Company, which aligns
the executive officers' interests with the interests of the Company's
shareholders.
BASE SALARY. The philosophy of the Board of Directors is to set base
salaries for each of the executive officers of the Company at appropriate levels
for the relative positions of the officer and the duties of the position. The
Board of Directors has the authority to determine the salaries of the Company's
Chief Executive Officer and other executive officers, subject to the terms of
pre-existing employment agreements. The Board of Directors believes that there
should be little change from year to year in the base salary of the executive
officers other than increases due to: (i) growth of the Company's sales;
(ii) growth in responsibility of the position; or (iii) cost of living
increases. The Board of Directors believes that additional compensation above
base levels should be by bonus based on individual performance and the financial
performance of the Company.
PERFORMANCE-BASED BONUSES. Payment of bonuses to officers of the Company is
determined by the Board of Directors based upon the executive officer's
performance and the Company's financial results.
LONG-TERM INCENTIVE AWARDS. The Company's long-term incentive program
consists of stock option grants which encourage achievement of long-term goals
and objectives consistent with enhancing shareholder value. Awards of stock
options provide executives with increased motivation and incentive to exert
their best efforts on behalf of the Company by increasing their personal stake
in the Company's success through the opportunity to acquire a greater equity
interest in the Company and to benefit from appreciation in the value of the
Company's stock. All stock options granted to executive officers have an
exercise price of not less than the market value of the Company's Common Stock
on the date of grant, thereby ensuring that any value derived from such options
is dependent upon subsequent increases in share value which will be realized by
shareholders generally. Executives generally must be continually employed in
order for stock options to vest and become exercisable.
COMPENSATION OF THE CHAIRMAN OF THE BOARD. The Company has not entered into
an employment agreement with Mr. Ronning. Mr. Ronning is currently being paid a
nominal monthly amount which is applied directly to his health insurance and
other employee benefits.
COMPLIANCE WITH SECTION 162(m) OF THE TAX CODE. Section 162(m) of the Tax
Code, generally disallows a tax deduction to public companies for compensation
over $1,000,000 to the chief executive officer and the four highest compensated
officers, with certain exceptions. The Company did not pay cash compensation to
any employee during the fiscal year ending December 31, 1998 in excess of the
deduction limit of Section 162(m), and does not anticipate doing so during the
fiscal year ending December 31, 1998.
Ex. 1-41
<PAGE>
The foregoing Report will not be deemed incorporated by reference by any
statement incorporating by reference this Proxy Statement, or any portion
thereof, into any filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934 and shall not otherwise be deemed filed under
such Acts.
Joel A. Ronning
Richard J. Runbeck
Richard J. Runbeck
Perry W. Steiner
Board Members
EMPLOYMENT AGREEMENTS
On August 20, 1996, the Company entered into an employment agreement with
Mr. Reese, as President and Chief Operating Officer of the Company, at an annual
salary of $135,000, with a bonus plan based on the Company's quarterly profit
and growth in sales levels. The plan requires an increase in both profit and
growth in sales, with a cap of $5,000 bonus pay for profit increase and a
minimum of .5% net profits and 20% sales growth before any bonus is available.
In addition, Mr. Reese was granted options to purchase a total of 1,000,000
shares the Company's Common Stock at $.75 per share, 625,000 of which have
vested as of December 31, 1998.
COMPARATIVE STOCK PERFORMANCE
The following graph compares the cumulative total shareholder return,
assuming $100 invested on May 12, 1995, as if such amount had been invested in
each of: (i) the Company's Common Stock; (ii) the stocks comprising the Nasdaq
Retail Trade Index; and (iii) the stocks included in the Nasdaq Stock Market
Index. The graph assumes the reinvestment of all dividends, if any. The prices
for the Company's Common Stock are closing bid prices as reported by the Nasdaq
OTC Bulletin Board.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TECH SQUARED, INC. NASDAQ RETAIL TRADE STOCKS NASDAQ STOCK MARKET (US COMPANIES)
<S> <C> <C> <C>
5/12/95 100 100 100
12/29/95 67 109 124
12/31/96 17 130 152
12/31/97 130 153 186
12/31/98 160 186 262
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Common Stock and Preferred Stock of the Company as of the close of
business on April 23, 1999, unless otherwise indicated,
Ex. 1-42
<PAGE>
by each director, by each executive officer named in the Summary Compensation
Table and by all directors and executive officers (regardless of compensation
level) of the Company as a group.
<TABLE>
<CAPTION>
SHARES OF
SHARES OF COMMON PREFERRED STOCK
STOCK BENEFICIALLY BENEFICIALLY TOTAL VOTING SHARES
OWNED(1) OWNED(1) BENEFICIALLY OWNED(2)
---------------------- --------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF
NAME OF BENEFICIAL OWNER AMOUNT CLASS AMOUNT CLASS AMOUNT TOTAL
- ------------------------------------------- --------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Ronning(3)......................... 6,574,022 49.4% -- -- 6,574,022 48.8%
Charles E. Reese, Jr.(4)................... 625,000 4.9% -- -- 625,000 4.8%
Richard J. Runbeck(5)...................... 100,000 * -- -- 100,000 *
Perry W. Steiner(6)........................ 60,000 * -- -- 60,000 *
Rick Apple(7).............................. 225,000 1.8% -- -- 225,000 1.8%
All Directors and Executive Officers as a
Group (5 persons)(8)..................... 7,584,022 53.7% -- -- 7,584,022 52.4%
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares.
(1) Unless otherwise noted, all of the shares are held by individuals possessing
sole voting and dispositive power with respect to the shares owned. Shares
not outstanding, but deemed beneficially owned by virtue of the right of a
person or member of a group to acquire them within 60 days, are treated as
outstanding only when determining the amount and percentage owned by such
person or group.
(2) Each share of Preferred Stock of the Company has the right to vote on all
matters voted upon by the holders of Common Stock. Accordingly, the
Preferred Stock and Common Stock have been considered to be one voting class
to show Total Voting Shares Beneficially Owned. The percentage of
outstanding shares is calculated based upon 12,102,950 shares of Common
Stock and 160,000 shares of Preferred Stock outstanding as of the close of
business on April 23, 1999.
(3) Includes 1,199,996 shares that Mr. Ronning has the right to acquire pursuant
to the exercise of stock options within 60 days of April 23, 1999.
(4) Includes 625,000 shares that Mr. Reese has the right to acquire pursuant to
the exercise of stock options within 60 days of April 23, 1999.
(5) Includes 100,000 shares that Mr. Runbeck has the right to acquire pursuant
to the exercise of stock options within 60 days of April 23, 1999.
(6) Includes 60,000 shares that Mr. Steiner has the right to acquire pursuant to
the exercise of stock options within 60 days of April 23, 1999.
(7) According to the best information available to Tech Squared, Richard J.
Apple, former chief executive officer of the Company, owns directly 225,000
shares. Mr. Apple has filed a lawsuit against the Company and others in
which he claims he has the right to exercise options covering an additional
775,000 shares. The Company denies this claim. The number of shares and
percent of class listed on the accompanying table does not include the
contested 775,000 shares.
(8) Includes 1,800,996 shares that all directors and executive officers as a
group have the right to acquire pursuant to the exercise of stock options
within 60 days of April 23, 1999.
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding the beneficial
ownership of Common Stock and Preferred Stock of the Company as of the close of
business on April 23, 1999, unless otherwise indicated,
Ex. 1-43
<PAGE>
by each person known by the Company to be the owner of more than five percent of
the Company's outstanding Common Stock or Preferred Stock.
<TABLE>
<CAPTION>
SHARES OF
SHARES OF COMMON PREFERRED STOCK TOTAL VOTING
STOCK BENEFICIALLY BENEFICIALLY SHARES BENEFICIALLY
OWNED(1) OWNED(1) OWNED(2)
--------------------- --------------------- ---------------------
NAME AND ADDRESS PERCENT OF PERCENT OF PERCENT OF
OF BENEFICIAL OWNER AMOUNT CLASS AMOUNT CLASS AMOUNT TOTAL
- ------------------------------------------------ -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ginger Elliot .................................. -- -- 60,000 37.5% 60,000 *
P.O. Box 1036
Kirtland, NM 87417
Betty Plattner ................................. -- -- 50,000 31.3% 50,000 *
1414 Highland Dr.
Solana Beach, CA 92075
Lela D. McCauley ............................... -- -- 20,000 12.5% 20,000 *
P.O. Box 574
Okmulgee, OK 74447
Marianne M. Long, as Trustee for
Lauren A. Long and Kathryn W. Long............ -- -- 20,000 12.5% 20,000 *
Zelmay Long .................................... -- -- 10,000 6.3% 10,000 *
1733 S. Florence Av.
Tulsa, OK 74104
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares.
(1) Unless otherwise noted, all of the shares are held by individuals possessing
sole voting and dispositive power with respect to the shares shown. Shares
not outstanding, but deemed beneficially owned by virtue of the right of a
person or member of a group to acquire them within 60 days, are treated as
outstanding only when determining the amount and percentage owned by such
person or group.
(2) Each share of Preferred Stock of the Company has the right to vote on all
matters voted upon by the holders of Common Stock. Accordingly, the
Preferred Stock and Common Stock have been considered to be one voting class
to show Total Voting Shares Beneficially Owned. The percentage of
outstanding shares is calculated based upon 12,102,950 shares of Common
Stock and 160,000 shares of Preferred Stock outstanding as of the close of
business on April 23, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOAN TO MR. RONNING. In 1993, MacUSA loaned $200,000 to Mr. Ronning. In
consideration of Mr. Ronning's guarantee of a portion of the Company's bank
debt, the interest rate on the note was reduced to 0%, effective as of
January 1, 1997. Such agreement also provided that when the guaranty was
terminated, the interest rate would return to the original amount of 5%. The
note, including the accrued and unpaid interest, was paid in full in
December 1998.
DIVIDEND TO MR. RONNING; REIMBURSEMENT OF TAXES. In 1995, MacUSA declared a
dividend of $1,188,000 payable to the former shareholders of MacUSA in
connection with the conversion of MacUSA from a Subchapter S corporation to a
Subchapter C corporation. The Company paid approximately $200,731 of this
dividend during 1996, approximately $200,731 during 1997, and $200,000 during
1998 of which Mr. Ronning received $200,000 in 1996, $200,000 in 1997 and
$199,268 in 1998. The remainder of the dividend payable to Mr. Ronning was
evidenced by a note payable to Mr. Ronning (the "Note") in the principal amount,
as of December 31, 1998, of $283,857. The Note did not bear interest, was due on
demand and, under the terms of a Debt Subordination Agreement dated June 27,
1997 between the Company, Mr. Ronning and First Bank Minnesota, National
Association, now US Bank, National
Ex. 1-44
<PAGE>
Association ("US Bank"), was subordinated to indebtedness owed by the Company to
US Bank pursuant to the terms of the Financing and Security Agreement with
US Bank dated June 27, 1997. The Company was limited to making dividend payments
of not more than $200,000 to Mr. Ronning in the aggregate in any calendar year,
provided that the Company was in compliance with the Financing Agreement with
US Bank before and after making such dividend payments. Apart from the
foregoing, the Company was not allowed to make dividend payments without the
prior written consent of US Bank. In March 1996, the Company agreed to reimburse
Mr. Ronning for any personal tax he was required to pay as a result of the
non-interest bearing status of the Note. The balance of such note was paid in
February 1999.
PERSONAL GUARANTY BY MR. RONNING. Borrowings under the Revolving Line of
Credit Agreement with US Bank were personally guaranteed by Mr. Ronning up to a
maximum of $500,000. Such guarantee was released in December 1998.
GRANT FROM MR. RONNING OF AN OPTION TO ACQUIRE A SUBSTANTIAL INTEREST IN
DIGITAL RIVER, INC. In December 1995, MacUSA was granted an option by
Mr. Ronning to acquire 3,200,000 shares (after adjustment for an August 1998
2-for-3 reverse split) of common stock (the "Digital River Shares") owned by
Mr. Ronning. The option (the "Digital River Option") provided that it was
exercisable at any time through December 31, 2000 for total consideration of one
dollar.
The Digital River Shares are subject to the provisions of the Fujitsu
Modification Agreement dated December 11, 1997 (the "Fujitsu Agreement") between
Mr. Ronning, Fujitsu Limited, a company organized under the laws of Japan
("Fujitsu"), Digital River, and MacUSA (collectively, the "Parties"). Pursuant
to the terms of the Modification Agreement, the Parties agreed to terminate
previous agreements entered into in connection with an investment by Fujitsu in
Digital River. Under the terms of the Modification Agreement, MacUSA remains a
party to the agreement to the extent that Mr. Ronning may transfer all shares of
Digital River he owns, along with any and all rights related thereto pursuant to
the agreement or otherwise to MacUSA or the Company. Digital River is engaged in
the business of electronic software distribution. Mr. Ronning is the President
and a director of Digital River.
In December 1998, the Company participated in Digital River's secondary
offering by exercising and selling 200,000 shares (post-split) of the Digital
River Option realizing net proceeds of $4,430,000. The Company continues to hold
an option to purchase 3,000,000 shares (post-split), which would represent
ownership of approximately 15% of Digital River as of April 23, 1999. The option
is not transferable and the balance is exercisable at any time through
December 31, 2000 for total consideration of $0.93 (ninety-three cents). During
the term of the option, Mr. Ronning has agreed to vote the Digital River Shares
at the direction of the Company's Board of Directors. As additional
consideration, the Company has agreed to reimburse Mr. Ronning for any tax
liability incurred in connection with the transfer of the Option or the shares
of Digital River stock issuable upon the exercise thereunder.
TAX INDEMNIFICATION AGREEMENT WITH MR. RONNING. In December 1995, the
Company entered into a Tax Indemnification Agreement with Mr. Ronning whereby
the Company agreed to indemnify Mr. Ronning for the amount of any penalties or
interest resulting from the redetermination of Mr. Ronning's share of taxable
income attributable to MacUSA and the amount of any additional taxes due from
Mr. Ronning, to the extent such tax adjustment results in a future decrease in
the taxable income of MacUSA. In 1995, Mr. Ronning owned approximately 95% of
MacUSA, which was a Subchapter S corporation within the meaning of Section 1361
of the Internal Revenue Code. MacUSA's Subchapter S status was terminated in
1995, and MacUSA is now a wholly-owned subsidiary of the Company.
DIGITAL RIVER LEASE AND FULFILLMENT SERVICES. During 1998 and until
April 1999, Digital River occupied up to approximately 7,000 square feet of
warehouse space at the Company's corporate headquarters. Prior to August 1998,
the offices of Digital River were also located in the Company's facilities. The
Company billed Digital River for the leased space and certain related costs such
as direct labor costs, phone services, general liability insurance and
janitorial services through an administrative charge. Total charges by the
Ex. 1-45
<PAGE>
Company to Digital River for administrative expenses were approximately
$207,000, $160,000 and $82,000 in 1998, 1997 and 1996, respectively.
During 1997, the Company began performing fulfillment services for Digital
River on physical shipments of products, for which Digital River paid the
Company a fulfillment fee. The Company billed Digital River approximately
$246,000 and $8,000 for these services in 1998 and 1997, respectively. Such
fulfillment services by the Company were discontinued in April 1999.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Only exhibits filed with this Amendment to Form 10K are listed.
<TABLE>
<CAPTION>
ITEM
NO. DESCRIPTION
- --------------------- -------------------------------
<S> <C>
23.1 Consent of Arthur Andersen LLP.
</TABLE>
(B) REPORTS ON FORM 8-K
None.
Ex. 1-46
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<S> <C> <C>
TECH SQUARED INC.
Date: October [ ], 1999 By:
-----------------------------------------
Charles E. Reese, Jr.
PRESIDENT, CHIEF EXECUTIVE OFFICER,
CHIEF OPERATION OFFICER
By:
-----------------------------------------
Jeffrey F. Martin
CHIEF FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER
</TABLE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE EXECUTED
------------------- -------------
<S> <C>
------------------------------------------- October [ ], 1999
Joel A. Ronning, Director
------------------------------------------- October [ ], 1999
Charles E. Reese, Jr., Director
-------------------------------------------
Richard J. Runbeck, Jr., Director
------------------------------------------- October [ ], 1999
Jeffrey F. Martin, Director
</TABLE>
Ex. 1-47
<PAGE>
TECH SQUARED INC.
SPECIAL MEETING OF SHAREHOLDERS
[ ], 1999
The undersigned, having read the Notice of Special Meeting of
Shareholders and Proxy Statement-Prospectus dated [ ], 1999,
receipt of which is hereby acknowledged, does hereby appoint and
P constitute [ ] and [ ], and each or any of them, the
R attorneys and proxies of the undersigned, with full power of
O substitution to each, for and in the name of the undersigned to vote
X and act at the Special Meeting of Shareholders of Tech Squared Inc.
Y to be held at [ ], on [ ], 1999 at [ ] a.m. and at
any postponement or adjournment thereof, with respect to all shares
of Common Stock of the Company standing in the name of the undersigned
or with respect to which the undersigned is entitled to vote or act,
with all the powers that the undersigned would possess if personally
present and acting, as follows:
(IMPORTANT-TO BE SIGNED AND DATED ON REVERSE SIDE)
---------------------
SEE REVERSE SIDE
---------------------
- -------------------------------------------------------------------------------
- -----
X Please mark votes
- ----- as in this example.
This proxy, when properly executed, will be voted in the manner
directed below. If no direction is made, this proxy will be voted as the
Board of Directors recommends.
- -------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
1. To approve the voluntary dissolution of Tech Squared Inc. FOR AGAINST ABSTAIN
pursuant to the Plan of Liquidation and Dissolution. / / / / / /
2. To transact such other business as may properly come before
the meeting and any postponement or adjournment thereof.
</TABLE>
DATE:_____________________________, 1999
- ------------------------------------------
- ------------------------------------------
SIGNATURE(S)
IMPORTANT: Please sign exactly as your name appears hereon.
When signing as attorney, executor, administrator, trustee,
guardian, etc., give title as such. If joint account, each
joint owner should sign.
<PAGE>
EXHIBIT 2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ex. 2-1
<PAGE>
TECH SQUARED INC.
INDEX
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C> <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................................................................................................. 13
</TABLE>
Ex. 2-2
<PAGE>
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 authorized 12,138,950 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.
Ex. 2-3
<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,
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.
Ex. 2-4
<PAGE>
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.
Ex. 2-5
<PAGE>
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 income. Other
comprehensive income/(loss) for the three and six month period ending June 30,
1999 was
Ex. 2-6
<PAGE>
TECH SQUARED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1999
NOTE 4--COMPREHENSIVE INCOME/(LOSS) (CONTINUED)
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.
Ex. 2-7
<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 as
amended for the year ended December 31, 1998.
The Company sells microcomputer hardware and software products, primarily
Apple Macintosh-Registered Trademark- 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,
Ex. 2-8
<PAGE>
including its catalog and distribution businesses, are to be sold or liquidated
prior to closing of the transaction contemplated by such Agreement.
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
Ex. 2-9
<PAGE>
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 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
Ex. 2-10
<PAGE>
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 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
Ex. 2-11
<PAGE>
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
<TABLE>
<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>
(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.
Ex. 2-12
<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.
<TABLE>
<S> <C>
TECH SQUARED INC.
/s/ CHUCK REESE
------------------------------------------
Chuck Reese
August 13, 1999 CHIEF EXECUTIVE OFFICER
/s/ JEFFREY F. MARTIN
------------------------------------------
Jeffrey F. Martin
CHIEF FINANCIAL OFFICER
</TABLE>
Ex. 2-13
<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>
Ex. 2-14
<PAGE>
TECH SQUARED INC.
SPECIAL MEETING OF SHAREHOLDERS
[ ], 1999
The undersigned, having read the Notice of Special Meeting of
Shareholders and Proxy Statement-Prospectus dated [ ], 1999,
receipt of which is hereby acknowledged, does hereby appoint and
P constitute [ ] and [ ], and each or any of them, the
R attorneys and proxies of the undersigned, with full power of
O substitution to each, for and in the name of the undersigned to vote
X and act at the Special Meeting of Shareholders of Tech Squared Inc.
Y to be held at [ ], on [ ], 1999 at [ ] a.m. and at
any postponement or adjournment thereof, with respect to all shares
of Common Stock of the Company standing in the name of the undersigned
or with respect to which the undersigned is entitled to vote or act,
with all the powers that the undersigned would possess if personally
present and acting, as follows:
(IMPORTANT-TO BE SIGNED AND DATED ON REVERSE SIDE)
---------------------
SEE REVERSE SIDE
---------------------
- -------------------------------------------------------------------------------
- -----
X Please mark votes
- ----- as in this example.
This proxy, when properly executed, will be voted in the manner
directed below. If no direction is made, this proxy will be voted as the
Board of Directors recommends.
- -------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
1. To approve the voluntary dissolution of Tech Squared Inc. FOR AGAINST ABSTAIN
pursuant to the Plan of Liquidation and Dissolution. / / / / / /
2. To transact such other business as may properly come before
the meeting and any postponement or adjournment thereof.
</TABLE>
DATE:_____________________________, 1999
- ------------------------------------------
- ------------------------------------------
SIGNATURE(S)
IMPORTANT: Please sign exactly as your name appears hereon.
When signing as attorney, executor, administrator, trustee,
guardian, etc., give title as such. If joint account, each
joint owner should sign.
