<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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
Tech Squared Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / 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.)
------------------------------------------------------------------------
/ / 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:
------------------------------------------------------------------------
<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.
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. 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 16 OF THIS PROXY
STATEMENT-PROSPECTUS.
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
<PAGE>
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
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
This proxy statement-prospectus is dated [ ] and was first mailed to
shareholders on or about [ ].
Tech Squared Inc.
5198 West 76th Street
Edina, Minnesota 55439
(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. ("Tech Squared") 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.
[Name]
[Title]
Edina, 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>
TECH SQUARED INC. DIGITAL RIVER, INC.
PROXY STATEMENT PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<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.........................12
Tech Squared Selected Historical Financial Data..........................13
Comparative Per Share Data...............................................14
Comparative Per Share Market Price Data..................................15
Risk Factors.................................................................16
Risks Relating to the Transaction............................................16
Tech Squared might not be able to receive
reasonable value from the
sale of its operating assets....................................16
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.................16
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..................17
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................18
Your beneficial interests in the liquidating trust
will not be transferrable.......................................18
The trustee might not distribute funds sufficient to pay
your tax liability arising from sales of assets by
the liquidating trust...........................................18
MacUSA's exercise of the option to purchase Digital
River stock held by Mr. Ronning might not be treated
as a tax-free exercise..........................................18
Risks Relating to the Investment in Digital River........................19
Digital River anticipates continued losses..........................19
Digital River's operating results are subject to significant
fluctuations....................................................20
Digital River depends on certain clients and experiences
lengthy sales cycles............................................21
Digital River's success depends on growth in end-user
acceptance of ESD which is highly uncertain.....................21
Digital River depends on continued growth in electronic
commerce and Internet infrastructure development................22
Digital River is entirely dependent upon the software publishers
that supply it with software, and the availability of such
software is unpredictable.......................................22
Digital River depends on online retailers...........................23
i
<PAGE>
Digital River is subject to lack of capacity, system failure and
system development risks........................................23
Digital River is subject to electronic commerce security risks......24
Digital River faces intense competition.............................24
Digital River is subject to rapid technological change..............25
Digital River may be unable to manage growth effectively............26
Digital River might be unable to successfully implement our
development and acquisition strategy............................26
Digital River depends on the continued service of key personnel
and faces intense competition for additional personnel..........27
Digital River has limited protection of its intellectual property...27
Digital River could be liable for software products content.........28
Digital River may not obtain additional funding for future
capital needs...................................................28
Government regulation and legal uncertainties could add additional
costs and risks to doing business on the Internet...............29
There are risks associated with international sales that
could harm Digital River's business.............................30
Digital River's failure to collect sales and other taxes
could harm its business.........................................30
Digital River's stock ownership is concentrated in
certain existing shareholders...................................31
Digital River's stock price has been and could be highly volatile...31
The Special Meeting of Tech Squared Shareholders.............................33
Date, Time and Place of the Special Meeting..............................33
Purpose of the Special Meeting...........................................33
Shareholder Record Date for the Special Meeting..........................33
Vote of Tech Squared Shareholders Required for Approval of the
Voluntary Dissolution...............................................33
Proxies..................................................................34
The Voluntary Dissolution and the Plan of Liquidation and Dissolution........36
General..................................................................36
Background of the Transaction............................................37
Tech Squared's Reasons for the Transaction...............................39
Digital River's Reasons for the Transaction..............................41
Recommendation of Tech Squared's Board of Directors......................42
Opinion of Tech Squared's Financial Advisor..............................42
Interests of Certain Persons in the Transaction..........................51
Certain United States Federal Income Tax Consequences of the
Transaction........................................................52
Tax Implications to Tech Squared's Shareholders.....................53
Tax Implications to Tech Squared and MacUSA.........................55
Proposed Legislation................................................56
Accounting Treatment of the Transaction..................................56
Sale of Operating Assets............................................56
The Exchange........................................................57
The Liquidation.....................................................57
ii
<PAGE>
Regulatory Filings and Approvals Required to Complete the
Voluntary Dissolution...............................................57
Restrictions on Sales of Shares by Affiliates of Digital River...........57
Listing on the Nasdaq National Market of the Common Stock to be
Issued by Digital River.............................................58
Dissenters' and Appraisal Rights.........................................58
Delisting and Deregistration of Tech Squared Common Stock
After the Transaction...............................................58
The Sale of Operating Assets.............................................58
The Acquisition Agreement................................................59
The Exchange........................................................59
No Assumption of Liabilities........................................59
Representations and Warranties......................................59
Covenants and Agreements............................................60
Conditions to Completion of the Exchange............................61
Indemnification.....................................................63
Termination of the Acquisition Agreement............................63
Amendment; Waiver...................................................64
The Liquidating Trust Agreement..........................................65
The Liquidating Trust...............................................65
Beneficiaries.......................................................65
The Trustee.........................................................65
Duration............................................................65
Distributions.......................................................66
Reports.............................................................66
Duties, Rights and Powers of the Trustee............................66
Amendment...........................................................67
The Voting Agreements....................................................67
Comparative Per Share Market Price Data......................................68
Comparison of Rights of Holders of Tech Squared Common Stock and
Digital River Common Stock..........................................69
Capitalization and Voting Rights.........................................69
Size and Classification of the Board of Directors........................69
Removal of Directors.....................................................69
Vacancies................................................................70
Shareholder Action.......................................................70
Fair Price Provision.....................................................70
Amendments to Certificates of Incorporation..............................71
Amendments to By-laws....................................................72
Shareholder Rights Plan..................................................72
Nomination Procedures and Shareholder Proposals..........................72
Special Shareholder Meetings.............................................73
Indemnification of Directors and Officers................................73
Limitation of Personal Liability of Directors............................74
Intercompany Agreements and Agreements With Affiliates.......................74
Share Ownership by Principal Shareholders,
Management and Directors of Tech Squared................................76
iii
<PAGE>
Certain Legal Matters........................................................77
Experts......................................................................78
Where You Can Find More Information..........................................79
Statements Regarding Forward-Looking Information.............................81
Annex A - Plan of Liquidation and Distribution.............................A-1
Annex B - Acquisition Agreement...........................................B-1
Annex C - Liquidating Trust Agreement.....................................C-1
Annex D - Voting Agreements...............................................D-1
Annex E - Opinion of SG Cowen Securities Corporation......................E-1
Annex F - Opinion of Arthur Andersen LLP..................................F-1
Exhibit 1 - Tech Squared Annual Report on Form 10-K, as amended on
August 9, 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>
iv
<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 AUGUST 9, 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 79 OF THIS PROXY STATEMENT-PROSPECTUS.
1
<PAGE>
THE COMPANIES
TECH SQUARED INC.
5198 West 76th Street
Edina, Minnesota 55439
(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. As of June 30, 1999,
this investment in Digital River represented 93% 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 76th 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 36)
The voluntary dissolution will take place in accordance with the Plan
of Liquidation and Dissolution, attached as Annex A, and will involve the
following transactions:
- - 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; and
- - the establishment of a liquidating trust to provide for the payment of
the actual and potential liabilities 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.
Soon 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. The assets will consist primarily of the
Digital River common stock received in the exchange. 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."
3
<PAGE>
The number of shares of Digital River common stock that Tech Squared
will receive in the Exchange 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 trust will depend on the amount
of available cash, including proceeds received from 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.
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 58)
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.
THE ACQUISITION AGREEMENT
(SEE PAGE 59)
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;
4
<PAGE>
- - 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 65)
The Liquidating Trust Agreement establishes a trust whose purpose is to
provide for the payment of actual and potential liabilities of Tech Squared.
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. You will not be able to transfer your
beneficial interests in the liquidating trust.
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 39)
TECH SQUARED'S REASONS FOR THE TRANSACTION
Tech Squared's reasons for the Transaction include:
- - the continued losses generated by Tech Squared's operating businesses
and the costs 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,
5
<PAGE>
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 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.
SHAREHOLDER APPROVAL
(SEE PAGE 33)
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 currently own
approximately 44.23% of the outstanding Tech Squared common stock, have
entered into voting agreements with Digital River pursuant to which they have
agreed to vote all shares of Tech Squared common stock beneficially owned by
them in favor of approval of the voluntary dissolution. The above percentage
does not include shares subject to options exercisable within 60 days of the
date hereof. See page 77 for details of these options. The Voting Agreements
are discussed on page 67 of this proxy statement-prospectus.
Assuming compliance with the Voting Agreements, a majority vote of
6
<PAGE>
unaffiliated shareholders is not required to approve the voluntary
dissolution. It is also the intention of the other executive officers and
directors of Tech Squared to vote any shares of Tech Squared common stock
which they may own in favor of 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 42)
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 42)
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
7
<PAGE>
unaffiliated shareholders for the purpose of negotiating a transaction or
preparing a fairness opinion.
The complete opinion of SG Cowen is attached as Annex E. We urge you to
read it in its entirety.
PROCEDURE FOR CASTING YOUR VOTE
(SEE PAGE 34)
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 34)
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 34)
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 67)
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 44.23% 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 51)
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, Charles E. Reese, Jr. and Perry W.
Steiner presently hold, or have held, positions as officers and/or directors
of both Tech Squared and Digital River. Mr. Ronning and Mr. Reese are also
beneficial owners
8
<PAGE>
of shares of both Tech Squared and Digital River common stock. Mr. Steiner
is the beneficial owner of shares of Digital River common stock.
As of the record date, officers and directors of Tech Squared and their
affiliates beneficially owned approximately 52.63% of the outstanding shares
of Tech Squared common stock.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION
(SEE PAGE 52)
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 "Certain U.S. 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 "Certain U.S. Federal Income Tax
Consequences," in the opinion of Arthur Andersen LLP:
(i) Tech Squared's shareholders should, in general, 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 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 generally 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 "Certain U.S. Federal Income Tax Consequences" on page 52 for a more
detailed discussion of the U.S. federal income tax consequences of the
Exchange and the liquidation.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY. 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
9
<PAGE>
ADVISORS FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES TO THEM OF THE
EXCHANGE AND THE LIQUIDATION.
ACCOUNTING TREATMENT OF THE EXCHANGE
(SEE PAGE 56)
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.
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 57)
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' OR APPRAISAL RIGHTS
(SEE PAGE 58)
Under Minnesota law, you are not entitled to dissenters' or appraisal
rights in connection with the voluntary dissolution of Tech Squared.
WHERE YOU CAN FIND MORE INFORMATION
(SEE PAGE 79)
If you have any questions about the voluntary dissolution, please call
[ ] at [ ].
FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT-PROSPECTUS
(SEE PAGE 81)
This proxy statement-prospectus and the documents incorporated by
reference into, and distributed together with, this proxy statement-prospectus
contain forward-looking statements within the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 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
10
<PAGE>
dissolution, you should carefully consider the discussion of risks and
uncertainties in the section entitled "Risk Factors" beginning on page 16 of
this proxy statement-prospectus.
11
<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.
DIGITAL RIVER
<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
------- ------- ------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In Thousands, Except Loss Per Share Amounts)
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>
12
<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.
TECH SQUARED
<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>
(In Thousands, Except Earnings Per Share Amounts)
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 11,973 10,776 11,051 10,375 10,375 8,721 7,032
OUTSTANDING
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.
13
<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 AS OF OR FOR THE
SIX MONTHS ENDED FISCAL YEAR ENDED
JUNE 30 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.
14
<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 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) August [ ],
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
August [ ], 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.
15
<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.
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 annually and after any event that results in a significant
reduction in Tech Squared's liabilities, 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 proceeding referred to on page
77 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, if any, 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 19 of this proxy statement-prospectus.
16
<PAGE>
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 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'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, Tech Squared's consolidated group would
likely be subject to tax on the value of Digital River common stock at the
time of the liquidation. As a transferee of assets
17
<PAGE>
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.
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 "Certain 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.
18
<PAGE>
RISKS RELATING TO THE INVESTMENT IN DIGITAL RIVER
DIGITAL RIVER HAS A LIMITED OPERATING HISTORY
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, and if it
is not successful, its business, financial condition and operating results
could be adversely affected. 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. As a result, any significant shortfall in sales
would immediately and adversely affect its business, 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 ANTICIPATES CONTINUED LOSSES
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 anticipates its operating losses
to increase significantly from current levels. Digital River's sales may not
increase or even
19
<PAGE>
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
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.
20
<PAGE>
DIGITAL RIVER DEPENDS ON CERTAIN CLIENTS AND EXPERIENCES LENGTHY SALES
CYCLES
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 business, financial condition and
operating results 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 publisher or online retailer
clients could materially adversely affect Digital River's business, financial
condition and operating 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, financial condition and operating results would be materially
adversely affected. 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. Digital River's failure to
21
<PAGE>
do so would materially adversely affect its business, financial condition and
operating results.
DIGITAL RIVER DEPENDS ON CONTINUED GROWTH IN ELECTRONIC COMMERCE AND
INTERNET INFRASTRUCTURE DEVELOPMENT
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
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, Digital River's business,
financial condition and operating results could be materially adversely
affected. 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, financial
condition and operating results also could be materially adversely affected.
22
<PAGE>
DIGITAL RIVER DEPENDS ON ONLINE RETAILERS
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 IS SUBJECT TO LACK OF CAPACITY, SYSTEM FAILURE AND
SYSTEM DEVELOPMENT RISKS
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
materially adversely affect its business, financial condition and operating
results.
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 materially adversely affect its business,
financial
23
<PAGE>
condition and operating results. 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, which would significantly
impair its business, financial condition and operating results.
DIGITAL RIVER IS SUBJECT TO ELECTRONIC COMMERCE SECURITY RISKS
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 materially
adversely affect its business, financial condition and operating results.
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's security measures may not prevent security
breaches and failure to prevent such security breaches may materially adversely
affect its business, financial condition and operating results.
DIGITAL RIVER FACES INTENSE COMPETITION
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
24
<PAGE>
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
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, as well as a loss of market share. Further,
in response to changes in the competitive environment, Digital River may from
time to time make pricing, service or marketing decisions or acquisitions that
could materially adversely affect its business, financial condition and
operating results. Digital River may not be able to compete successfully against
current and future competitors, and any inability to do so could materially
adversely affect its business, financial condition and operating results.
DIGITAL RIVER IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE
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 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, its business, financial condition and operating results could be
materially adversely affected.
25
<PAGE>
DIGITAL RIVER MAY BE UNABLE TO MANAGE GROWTH EFFECTIVELY
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 exploit existing and potential market opportunities. If Digital River
is unable to manage growth effectively, its business, financial condition and
operating results will be materially adversely affected.
DIGITAL RIVER MIGHT BE UNABLE TO SUCCESSFULLY IMPLEMENT OUR DEVELOPMENT
AND ACQUISITION STRATEGY
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
26
<PAGE>
meaningful market share. If a significant number of clients of companies
acquired by Digital River cease doing business with it, Digital River's
business, financial condition and results of operations would suffer.
DIGITAL RIVER DEPENDS ON THE CONTINUED SERVICE OF KEY PERSONNEL AND
FACES INTENSE COMPETITION FOR ADDITIONAL PERSONNEL
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 materially adversely affect its business, financial
condition and operating results. 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 materially adversely affect its business, financial condition
and operating results.
DIGITAL RIVER HAS LIMITED PROTECTION OF ITS INTELLECTUAL PROPERTY
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 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
27
<PAGE>
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. Any significant
failure to protect Digital River's intellectual property in a meaningful
manner could materially adversely affect its business, financial condition
and operating results. 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, which could materially adversely affect
Digital River's business, financial condition and operating results.
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 may materially adversely affect Digital River's
business, financial condition and operating results. 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 business, financial condition and
operating results 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 materially
adversely affect Digital River's business, financial condition and operating
results.
DIGITAL RIVER MAY NOT OBTAIN ADDITIONAL FUNDING FOR FUTURE CAPITAL NEEDS
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
28
<PAGE>
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, which
could materially adversely affect its business, financial condition and
operating results.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL
COSTS AND RISKS TO DOING BUSINESS ON THE INTERNET
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, or otherwise adversely affect its business, financial condition and
operating results.
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.
29
<PAGE>
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 materially adversely affect its business, financial
condition and operating results.
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;
- 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, and consequently, its business, financial
condition and operating results.
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 business, financial
condition and operating results.
30
<PAGE>
DIGITAL RIVER'S STOCK OWNERSHIP IS CONCENTRATED IN CERTAIN EXISTING
SHAREHOLDERS
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;
- 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
31
<PAGE>
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, which would materially adversely affect Digital River's business,
financial condition and operating results.
32
<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, directors and executive
officers of Tech Squared and their affiliates beneficially owned
approximately 7,528,689 shares of
33
<PAGE>
Tech Squared common stock, which represented approximately 52.63% 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 5,374,026 shares
of Tech Squared common stock, which represented approximately 44.23% 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 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 5198 West 76th
Street, Edina, Minnesota 55439;
34
<PAGE>
- 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 [proxy solicitor]
at an estimated cost of $[ ] plus reimbursement of expenses, to assist in the
solicitation of proxies. Tech Squared and [proxy solicitor] 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.
35
<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 READ THIS ENTIRE DOCUMENT AND THE OTHER DOCUMENTS WE REFER TO
CAREFULLY 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:
- 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;
- the merger of MacUSA with and into Tech Squared, after the sale or
other disposition of its operating assets, 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 liquidation of Tech Squared and the 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;
36
<PAGE>
- the dissolution of Tech Squared under Minnesota law;
- the distribution to holders of beneficial interests of the liquidating
trust of assets of the trust annually and after any event that results
in a significant reduction in Tech Squared's liabilities, 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.
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 the company's operating businesses,
including the prospects and costs associated with its new Net Direct catalog
business, directed management to investigate strategic alternatives for the
company including alliances, joint ventures, mergers, and the sale of the
company's operating assets. The board was also concerned about the imbalance
between the value of the company'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 the company's operating assets and the escalating value of Tech
Squared's investment in Digital River common stock. 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. Further, the fact that the market value of Tech Squared was
considerably less than the market value of its investment in Digital River
common stock became an issue of concern for the board. 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.
Mr. 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
37
<PAGE>
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 the company, including a possible transaction with
Digital River. Shortly thereafter, 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 resigned from the special committee and
was replaced by Tech Squared's chief financial officer, Jeffery Martin.
At 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.
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. The agreement required the sale or other disposition of the
operating assets of Tech Squared and provided for the subsequent Exchange and
the liquidation of Tech Squared discussed in this proxy statement-prospectus.
38
<PAGE>
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 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, 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 factors are the major reasons for the conclusion by the
special committee of the board of directors and the board of directors of
Tech Squared that the voluntary dissolution of the company pursuant to the
Plan of Liquidation and Dissolution is fair to, and in the bests interests
of, the shareholders:
- the continued losses generated by the operating assets and the costs
and uncertain prospects relating to the newly established Net Direct
business;
39
<PAGE>
- the reasonable likelihood of finding a buyer or buyers who would pay a
fair price for the operating assets;
- 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;
- the market price of the company's investment in Digital River common
stock compared to the market valuation of Tech Squared;
- the view of some investors that ownership of Tech Squared common stock
is 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, due to the value of Digital
River common stock held by Tech Squared, 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;
- the income tax consequences of various alternatives available to the
company;
- 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 strong likelihood that the shareholders would receive an
appropriate premium over the recent market price of Tech Squared
common stock in connection with the receipt of Digital River common
stock in the liquidation of Tech Squared; and
- the fairness opinion of SG Cowen.
The board of directors also considered a number of potentially negative
factors in its deliberations including:
- the possibility that full value might not be received in connection
with the sale or other disposition of the operating assets; and
40
<PAGE>
- 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
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.
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.
41
<PAGE>
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.
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 51 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, 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
42
<PAGE>
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 THE DIGITAL RIVER AND NOT PURSUANT TO
RECOMMENDATIONS OF SG COWEN.
In arriving at its opinion, SG Cowen has 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 each of 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;
- - certain internal financial analyses, financial forecasts, 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;
43
<PAGE>
- - 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.
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 be
comprised of $900,000 in cash and 180,000 shares of Digital River stock whose
closing price on the business day preceding
44
<PAGE>
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;
- - 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
45
<PAGE>
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 the principal 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.
<TABLE>
<CAPTION>
VALUE IF SHARES DISTRIBUTED
IN TAXABLE TRANSACTION
(000,000s omitted, except for per share data)
-----------------------------------------------------------------
<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>
46
<PAGE>
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.
<TABLE>
<CAPTION>
VALUE OF PROPOSED TRANSACTION
(000s omitted, except for per share data)
<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.
<TABLE>
<CAPTION>
PREMIUMS PAID ANALYSIS
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>
47
<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.
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.
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. These companies included:
- - Amazon.com, Inc.
- - Beyond.com Corporation
- - BroadVision, Inc.
48
<PAGE>
- - DoubleClick, Inc.
- - Ticketmaster Online-City Search, Inc.
- - USinternetworking, Inc.
- - Vignette Corporation
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 (1)
($ 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
----------------------------------------------------------------------------------------------
Media 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 Securities, First Call, Investext, or Street.
(2) Adjusted market value defined as equity market value plus total debt
less cash and cash equivalents.
49
<PAGE>
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 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, none of Tech Squared and Digital River, SG Cowen or any
other person assumes responsibility if future results are materially
different from those projected. 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.
50
<PAGE>
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 letter agreement. 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. If, in the event that
a transaction is consummated with any purchaser other than Digital River
Inc., additional services would be performed and an additional fee would be
payable at the closing of the transaction, comprised of a flat fee of
$1,000,000 plus an incentive fee equal to five percent (5%) of the aggregate
consideration received in the transaction above $80,000,000. 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 beneficially owns 6,574,022 shares of Tech Squared common stock which
represents approximately 49.25% 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.
51
<PAGE>
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 the company in 1999. Mr. Reese beneficially owns 838,000 shares of Tech
Squared 's common stock which represents approximately 6.45% 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, the
company is 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 will vest. Mr. Reese's revised employment agreement also provides for
six months' severance pay upon termination of his employment.
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.
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 60,000 shares of Tech Squared common stock. Mr. Steiner
served as a director of Tech Squared from December 15, 1998 until June 28,
1999.
CERTAIN 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 certain
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 is for general
information only and 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.
52
<PAGE>
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. The Tax
Opinion is subject to certain assumptions and qualifications, including but
not limited to the truth and accuracy of certain 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
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 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) will 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 a liquidating trust. Tech Squared
shareholders should seek advice from their tax counsel to determine the tax
consequences of owning an interest in the
53
<PAGE>
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
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.
54
<PAGE>
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
55
<PAGE>
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 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.
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.
56
<PAGE>
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
being 350,000 shares of Digital River common stock) plus $1.2 million in cash
minus related deferred income taxes.
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 comon 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:
57
<PAGE>
- 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 approved for listing on the
Nasdaq National Market, subject to official notice of issuance, before the
completion of the Exchange.
DISSENTERS' AND 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 or 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.
58
<PAGE>
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 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;
59
<PAGE>
- 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;
- 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;
60
<PAGE>
- 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."
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;
61
<PAGE>
- 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.
62
<PAGE>
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;
- 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;
63
<PAGE>
- 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
timing 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.
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:
64
<PAGE>
- 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 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 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.
65
<PAGE>
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 annually and 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. When the
trustee determines that all of the trust's liabilities have been satisfied,
it will make a final distribution of any remaining assets to any beneficiaries.
Digital River is a third-party beneficiary under the Liquidating Trust
Agreement and the trustee must give notice to Digital River before any
distribution is made. Digital River can object to a distribution by giving
notice to the trustee that it reasonably believes that the proposed
distribution would result in the trust not having sufficient assets to pay
for any of Tech Squared's indemnification obligations to Digital River under
the Acquisition Agreement. See the heading "The Acquisition Agreement" of
this proxy statement-prospectus for a discussion of Tech Squared's
indemnification obligations. If Digital River gives the required notice, the
trustee cannot make the distribution unless (1) it determines that Digital
River did not have adequate grounds for providing notice and it gives Digital
River notice of its determination and its intention to proceed with the
distribution or (2) a non-appealable court order has been issued, in a court
of competent jurisdiction, providing that a distribution shall be made.
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 "Certain 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
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, Digital River and
their respective employees and agents for losses resulting from the exercise
or failure to exercise any rights under the Liquidating Trust Agreement.
66
<PAGE>
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 [record date], the Tech Squared shareholders who entered into the
Voting Agreements collectively held approximately 5,374,026 shares of Tech
Squared common stock which represented approximately 44.23% 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.
67
<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 DIGITAL RIVER
COMMON STOCK COMMON STOCK
------------------- --------------------
HIGH LOW HIGH LOW
------- ------ ------ -------
<S> <C> <C> <C> <C>
1996:
First Quarter............... $1.78 $0.38 N/A N/A
Second Quarter.............. $1.13 $0.41 N/A N/A
Third Quarter............... $0.88 $0.25 N/A N/A
Fourth Quarter.............. $0.63 $0.17 N/A N/A
1997:
First Quarter............... $0.75 $0.27 N/A N/A
Second Quarter.............. $0.47 $0.16 N/A N/A
Third Quarter............... $0.84 $0.34 N/A N/A
Fourth Quarter.............. $3.88 $0.56 N/A N/A
1998:
First Quarter............... $2.38 $1.19 N/A N/A
Second Quarter.............. $4.00 $1.40 N/A N/A
Third Quarter............... $7.63 $1.00 $13.25 $5.00
Fourth Quarter.............. $3.78 $0.47 $44.00 $5.63
1999:
First Quarter............... $6.50 $3.00 $61.38 $27.44
Second Quarter.............. $4.69 $2.66 $51.38 $19.56
</TABLE>
68
<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
by a resolution adopted by a majority vote of the board of directors, but may
not be less than (1) the number of shareholders of record, or (2) three, 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
69
<PAGE>
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 two-thirds 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.
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
70
<PAGE>
- 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;
or
- 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
- 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.
71
<PAGE>
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.
72
<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 chairman of the board, the president, 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.
73
<PAGE>
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 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
and Digital River, as well as material transactions between Digital River and
affiliates of Tech Squared.
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
74
<PAGE>
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 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.
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.
75
<PAGE>
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 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 July 23, 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 directors and executive officers 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 July 23, 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, 5198 West 76th
Street, Edina, Minnesota 55439.
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.
76
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- -------------------- -------------------- ----------------
<S> <C> <C>
Joel A. Ronning (1).................... 6,574,022 49.25%
Charles E. Reese, Jr. (2).............. 838,000 6.45%
Richard J. Runbeck (3)................. 100,000 *
Jeffrey F. Martin (4).................. 16,667 *
Richard J. Apple (5)................... 225,000 1.85%
All directors and executive officers
as a group (5 persons) (6)............. 7,753,689 54.21%
</TABLE>
* Less than 1%
(1) Includes 1,199,996 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 838,000 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.
(4) Includes 16,667 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 225,000
shares. Mr. Apple has filed a lawsuit against the company and others in which
he claims that he has the right to exercise options covering an additional
775,000 shares. The company denies this claim. This lawsuit is discussed
under the heading "Certain Legal Matters" on page 77 of this proxy
statement-prospectus.
(6) Includes 2,154,663 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.
None of the current directors or executive officers of Tech Squared has
engaged in a purchase or sale of Tech Squared common stock within the past 60
days, except for Jeffrey Martin, who was granted an immediately exercisable
option to purchase 16,667 shares at an exercise price per share of $3.79 on
July 2, 1999 and Charles E. Reese, Jr., who exercised a previously granted
option to purchase, and immediately sold, 10,000 shares on July 14, 1999,
11,000 shares on July 25, 1999 and 6,000 shares on July 28, 1999.
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
became exercisable prior to his termination due to an alleged "change of
control" of
77
<PAGE>
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.
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 incorporated by
reference in this proxy statement-prospectus and appearing elsewhere herein
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto and included herein 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 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:
Filing Fees................................ [400,000]
Transfer Agent Fees........................ [ ]
Printing Expenses.......................... [ ]
Financial Advisor Fees..................... [ ]
Trustee Fees............................... [ ]
Legal Fees................................. [ ]
Accounting Fees............................ 400,000
Miscellaneous.............................. [ ]
TOTAL...................................... $[ ]
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.
78
<PAGE>
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:
- Tech Squared's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, as amended on August 9, 1999; and
- Tech Squared's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999.
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 June 30, 1999;
- Digital River's Proxy Statement on Schedule 14A filed with the
Securities and Exchange Commission on April 16, 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.
79
<PAGE>
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:
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
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
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.
80
<PAGE>
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
Tech Squared Investor Relations at [ ].
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
This proxy statement-prospectus and the documents delivered with and
incorporated by reference into this proxy statement-prospectus contain
forward-looking statements within the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 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 16 of
this proxy statement-prospectus.
81
<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. After the Exchange, Tech
Squared shall transfer to the trust all of its cash and cash equivalents and
enough
A-1
<PAGE>
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"). 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 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
A-2
<PAGE>
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 August, 1999, by the Board of Directors
of Tech Squared Inc.
______________________________
Secretary
A-3
<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.
"MCL" means the General Corporation Law of the State of Minnesota, as
amended.
B-2
<PAGE>
"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
Option Stock Transfer.......................................... 8.2.1
Other Buyer Filings............................................ 8.9
</TABLE>
B-3
<PAGE>
<TABLE>
<CAPTION>
TERM SECTION
- ---- -----------
<S> <C>
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
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.
B-4
<PAGE>
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 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
B-5
<PAGE>
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
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
B-6
<PAGE>
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 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,
B-7
<PAGE>
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.
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.
B-9
<PAGE>
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.
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
B-10
<PAGE>
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 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
B-11
<PAGE>
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 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.
B-12
<PAGE>
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.
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,
B-13
<PAGE>
(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 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
B-14
<PAGE>
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 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.
B-15
<PAGE>
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.
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.
B-16
<PAGE>
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.
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
B-17
<PAGE>
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 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.
B-18
<PAGE>
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;
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;
B-19
<PAGE>
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 76th 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 76th 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.
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
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>
AMENDMENT
TO
ACQUISITION AGREEMENT
AMENDMENT TO ACQUISITION AGREEMENT, dated as of July 30, 1999, between
DIGITAL RIVER, INC., a Delaware corporation (the "Buyer"), and TECH SQUARED
INC., a Minnesota corporation (the "Seller").
WHEREAS, Buyer and Seller entered into an Acquisition Agreement dated as of
July 11, 1999; and
WHEREAS, at the time of the Acquisition Agreement, it was anticipated that
$7.2 million would be contributed to the liquidating trust referenced in the
Acquisition Agreement; and
WHEREAS, it is now anticipated that $6.2 million will be contributed to the
liquidating trust;
NOW, THEREFORE, THE PARTIES HEREBY AGREE:
Section 11.1.5 of the Acquisition Agreement is amended, as follows:
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 $6,200,000 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-25
<PAGE>
This Amendment to Acquisition Agreement may be executed in one or more
counterparts which together shall constitute a single agreement.
IN WITNESS WHEREOF, the Seller and the Buyer have caused this Amendment to
Acquisition Agreement to be executed as of the date first above written by their
respective officers thereunto duly authorized.
DIGITAL RIVER, INC. TECH SQUARED INC.
By: /s/ P.W. Steiner By: /s/ Charles Reese
-------------------------- ---------------------------
Name: Perry W. Steiner Name: Charles E. Reese, Jr.
Title: President Title: President and Chief
Executive Officer
B-26
<PAGE>
ANNEX C
FORM OF
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
_________________, 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 have 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 cash equivalents and enough
shares of the newly issued Digital River common stock received in the Exchange
to satisfy, in the judgment of the Board of Directors, the actual and potential
liabilities of Tech Squared (the "Retained Assets"), (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
C-1
<PAGE>
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 I
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) AGREEMENT shall mean this instrument as originally executed
or as it may from time to time be amended pursuant to the terms hereof.
(b) 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.
(c) INITIAL BENEFICIARY shall mean each of the Shareholders.
(d) 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.
(e) 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 Beneficiaries.
(f) SHARES shall mean the shares of common stock, no par value
per share, of Tech.
C-2
<PAGE>
(g) SHAREHOLDERS shall mean the holders of record of the
outstanding common shares of Tech Squared at the close of business on the Record
Date.
(h) TRUST shall mean the Trust created by this Agreement.
(i) TECH SQUARED shall mean Tech Squared Inc.
(j) TRUST ASSETS shall mean all the property held from time to
time by the Trustee under this Agreement, which initially shall consist of the
Retained Assets granted, assigned and conveyed to the Trustee by Tech Squared
pursuant to the Plan, and in addition, shall thereafter include all dividends,
income, proceeds and other receipts of, from, or attributable to any assets held
by the Trust.
(k) TRUSTEE shall mean the original Trustee and such Trustee's
successors.
ARTICLE II
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 Retained Assets, for the
uses and purposes stated herein, subject to the terms and provisions set out
below, and the Trustee hereby accepts such Retained Assets, subject to the
following terms and provisions.
2.2 PURPOSE OF TRUST.
(a) The Trust is organized for the sole purpose of winding up
Tech Squared's affairs and the liquidation of the Retained 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 of
any unsatisfied debts, claims, liabilities, judgments, decrees, suits or other
obligations, whether contingent or fixed, (the "Liabilities") without any
established procedure to satisfy such Liabilities, Tech Squared's Board of
Directors approved the Plan and the
C-3
<PAGE>
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. The Retained Assets, granted and assigned to the
Trustee shall be held in the Trust and the Trustee will: (i) further
liquidate the Trust Assets if necessary to carry out the purpose of the Trust
and facilitate distribution of the Trust Assets; (ii) allocate, protect,
conserve and manage the Trust Assets in accordance with the terms and
conditions hereof; (iii) complete the winding up of Tech Squared's affairs;
(iv) act on behalf of the Beneficiaries; and (v) distribute the Trust Assets
in accordance with the terms and conditions hereof.
(c) It is intended that the granting, assignment and conveyance
of the Retained 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-4
<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 Trustee hereby assumes all Liabilities.
Should any Liability be asserted against the Trustee as the transferee of the
Trust Assets 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 contesting
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 the event that the Trust Assets are not sufficient to satisfy 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.
2.8 NOTICE TO UNLOCATED SHAREHOLDERS. If the Trust holds Trust Assets
for unlocated Shareholders, due notice shall be given to such Shareholders in
accordance with Minnesota law.
ARTICLE III
BENEFICIARIES
3.1 BENEFICIAL INTERESTS.
(a) The Initial Beneficial Interest of each former Shareholder as
a Beneficiary hereof shall be determined by the Trustee in accordance with a
certified copy of Tech Squared's shareholder list as of the Record Date. Tech
Squared shall deliver such a certified copy of its shareholder list to the
Trustee within a reasonable time after the Record Date. The Trustee shall
express the Beneficial Interest of each Beneficiary in terms of units ("Units").
C-5
<PAGE>
(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 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 they
shall deem appropriate, to fully indemnify them 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 hereunder 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 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,
C-6
<PAGE>
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.
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 may not be a Beneficiary or
hold a Beneficial Interest hereunder.
ARTICLE IV
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 5.6; 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, in its
discretion, may extend the existence of this Trust to such later date as it may
designate, if it determines an extension is reasonably necessary to satisfy the
Liabilities; provided, however, the Trust shall not in any event terminate
pursuant to this clause (iii) prior to the date on which the Trustee is
permitted to make a final distribution in accordance with Section 5.6. 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 provide for the retention of
the books, 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
records and documents 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 V
ADMINISTRATION OF TRUST ASSETS
C-7
<PAGE>
5.1 SALE OF TRUST ASSETS. The Trustee may, at such times as the 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
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.
5.3 RESTRICTION ON TRUST ASSETS. Other than the shares of Digital River
common stock, 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 limited partnership interest, except any stock or
securities received in a transaction contemplated by Section 6.2(j) hereof. The
Trustee shall not retain cash in excess of a reasonable amount to meet expenses,
charges, and obligations of the Trust, the Trust Assets and all Liabilities.
5.4 PAYMENT OF EXPENSES AND LIABILITIES. The Trustee shall pay from the
Trust Assets all expenses, charges, and obligations of the Trust and of the
Trust Assets and all Liabilities and 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.
5.5 INTERIM DISTRIBUTIONS. Subject to the procedures and conditions set
forth in Section 14.3, at such time as may be determined by the Trustee, but at
least
C-8
<PAGE>
annually and after any event which, to the knowledge of the Trustee, results
in a significant reduction in Liabilities, the Trustee shall distribute, or
cause to be distributed to the Beneficiaries in proportion to the number of
Units held by each Beneficiary, such cash and/or shares of Digital River common
stock comprising a portion of the Trust Assets as the Trustee may in its sole
discretion determine may be distributed in a manner which is consistent with
the purpose of the Trust and the provisions of this Agreement.
5.6 FINAL DISTRIBUTION. Subject to the procedures and conditions set
forth in Section 14.3, if the Trustee determines that the 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 Beneficiaries in proportion to the number of Units held
by each Beneficiary. The Trustee shall hold in the Trust and thereafter make
disposition of all liquidating distributions and other payments due any
Beneficiaries who have not been located, in accordance with Minnesota law,
including its laws regarding escheat and abandoned property.
5.7 REPORTS TO BENEFICIARIES AND OTHERS. As soon as practicable after
the end of each taxable 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 assets and liabilities of the Trust at the end of each such
taxable year or upon termination and the receipts and disbursements of the
Trustee for such taxable year or period, certified by an independent certified
public accountant; (ii) any changes in the Trust Assets 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 the taxable
year as it deems advisable or as may be required by a governmental agency. The
taxable year of the Trust shall end on December 31 of each year unless the
Trustee deems it advisable to establish some other date as the date on which the
taxable year of the Trust shall end.
Within 30 days after the end of each calendar six month period that
includes any period prior to the termination of the Trust, the Trustee shall
deliver to Digital
C-9
<PAGE>
River a written report showing: (i) a schedule of the assets held by the
Trust; (ii) disbursements made by the Trust during such six month period;
(iii) claims asserted against the Trust and expenses incurred by the Trust
during such six month period; and (iv) all pending claims asserted against
the Trust. In addition, Digital River shall be furnished, concurrently with
the delivery thereof to the Trustee, with a copy of any written report (other
than a privileged communication) concerning the Trust provided to the Trustee
or to any Beneficiary. The Trustee shall provide oral updates to Digital
River relating to the information set forth in subparagraphs (i)-(iv) above,
upon the reasonable request of Digital River during normal business hours.
The obligation of the Trustee to provide written reports or oral updates is
conditioned upon the receipt from Digital River of a confidentiality
agreement in form reasonably acceptable to the Trustee.
5.8 FEDERAL INCOME TAX INFORMATION. As soon as practicable after the
close of each taxable year, the Trustee shall mail to each Person who was a
Beneficiary, a statement 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.
ARTICLE VI
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
C-10
<PAGE>
administration thereof in accordance with the provisions of this Agreement.
In no event shall the Trustee 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 is 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, liquidate or otherwise convert into cash, or such
other property as it deems appropriate, all property, assets and rights in the
Trust 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
C-11
<PAGE>
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 claims, expenses, charges,
Liabilities, and obligations of the Trust or Tech; (ii) contingencies; and
(iii) 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;
C-12
<PAGE>
(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;
(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.
ARTICLE VII
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 thereof 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:
C-13
<PAGE>
(a) Although the Trustee shall be free to sell or otherwise
dispose of the shares of Digital River common stock or other securities in its
complete discretion or in connection with the satisfaction or discharge of
claims, expenses, charges, Liabilities and 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 Trustee in office prior to the date on which he becomes
a 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 on the part of the Trustee, 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;
(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.
7.2 RELIANCE BY TRUSTEE. Except as otherwise provided in Section 7.1:
C-14
<PAGE>
(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) 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 nor Digital River, 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 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.
C-15
<PAGE>
7.5 INDEMNIFICATION. The Trustee and each agent of the Trust, Tech
Squared, Digital River and their 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
Digital River or any director, officer, employee, or agent of Tech Squared or
Digital River, by reason of Tech Squared or Digital River or any such director,
officer, employee, or agent of Tech Squared or Digital River 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 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,
C-16
<PAGE>
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.
ARTICLE VIII
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 IX
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 shall
be determined by the Board of Directors of Tech Squared or as may subsequently
be approved by Beneficiaries having an aggregate Beneficial Interest of more
than fifty percent (50%).
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.
C-17
<PAGE>
ARTICLE X
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.
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 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 earlier. 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
C-18
<PAGE>
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. 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 XI
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 having an aggregate Beneficial Interest of at least twenty-five
percent (25%) shall have made
C-19
<PAGE>
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 XII
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.
C-20
<PAGE>
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.
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.
C-21
<PAGE>
ARTICLE XIII
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 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; (iii)
expand the liability or potential liability of a Trustee for acts performed by
the Trustee prior to the adoption of such amendment; or (iv) affect any right or
benefit of Digital River hereunder without Digital River's consent.
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 XIV
MISCELLANEOUS PROVISIONS
C-22
<PAGE>
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.
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 THIRD PARTY BENEFICIARY; NOTICE OF PROPOSED DISTRIBUTIONS.
(a) Tech Squared and the Trustee each acknowledge that Digital
River is a third party beneficiary of this Agreement.
(b) The Trustee shall give Digital River written notice of any
proposed distribution of Trust Assets to the Beneficiaries. Digital River may,
upon notice delivered to the Trustee within twenty days after its receipt of the
Trustee's notice, object to the distribution if it reasonably believes that the
contemplated distribution would result in the remaining Trust Assets being
insufficient to pay for any of Tech Squared's indemnification obligations under
Section 10 of the Acquisition Agreement, dated as of July 11, 1999, between Tech
Squared and Digital River.
(c) If Digital River provides the notice specified above, the
Trustee shall not make the distribution unless (i) it determines that Digital
River did not have adequate grounds for providing the notice specified above and
it gives Digital River twenty days notice of such determination and its intent
to make a distribution, or (ii) a non-appealable court order has been issued, in
a court of competent jurisdiction, providing that a distribution shall be made.
14.4 BENEFICIARIES HAVE NO RIGHTS OR PRIVILEGES AS SHAREHOLDERS OF TECH
SQUARED. Except as expressly provided in this Agreement or under applicable
law,
C-23
<PAGE>
the Beneficiaries shall have no rights or privileges attributable to their
former status as Shareholders of Tech.
14.5 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.
14.6 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.
14.7 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:
(a) If to the Trustee:
with a copy to:
Facsimile:
C-24
<PAGE>
(b) If to Tech Squared: Tech Squared Inc.
5198 West 76th Street, Suite 220
Edina, Minnesota 55439
Attention: Charles E. Reese, Jr.
Facsimile: 612-831-6156
C-25
<PAGE>
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
(c) If to Digital River: Digital River, Inc.
9625 West 76th Street, Suite 150
Eden Prairie, Minnesota 55444
Attention: Joel A. Ronning
Facsimile: 612-830-1154
with a copy to: Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, California 94111-3580
Attention: Michael Sullivan
Facsimile: 415-951-3699
14.8 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.
14.9 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.
14.10 SPECIFIC PERFORMANCE. The Trustee acknowledges that failure on its
part to comply with the terms of Sections 5.5 and 5.6 hereof may cause Digital
River immediate and irreparable harm that cannot be adequately compensated by
the remedies of law, and that in the event of such breach or violation, or
threatened
C-26
<PAGE>
breach or violation, Digital River may have such sections of this Agreement
specifically enforced by preliminary and permanent injunctive relief without
having to prove the inadequacy of the available remedies at law or any actual
damages. Any remedy sought or obtained by Digital River shall not be
considered either exclusive or a waiver of the rights of Digital River or any
other person to assert any other remedies it has in law or equity. In any
proceeding upon a motion for any such injunctive relief, the Trustee's
ability to answer in damages shall not be a bar, or be interposed as a
defense, to the granting of such injunctive relief against the Trustee;
provided, however, that this Section 14.10 shall not preclude the Trustee
from defending the contemplated distribution. Any rights under this Section
14.10 may be enforced in any appropriate court in the State of Minnesota.
C-27
<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.
TECH SQUARED INC.
By: ______________________________
Name:
Title:
Attest:
__________________________________
Secretary
TRUSTEE
By: _______________________________
Name:
Title:
C-28
<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.
D-1
<PAGE>
(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 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
D-2
<PAGE>
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 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,
D-3
<PAGE>
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.
D-4
<PAGE>
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 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.
D-5
<PAGE>
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 AGREE TO AND SHALL
BECOME BOUND BY THE PROVISIONS OF
D-6
<PAGE>
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
D-7
<PAGE>
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.
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.
D-8
<PAGE>
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;
(ii) agrees that service of any process, summons,
notice or document by U.S. mail addressed to him at the address set forth
in
D-9
<PAGE>
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
D-10
<PAGE>
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.
(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.
D-11
<PAGE>
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>
SHARES HELD OF RECORD OPTIONS AND OTHER RIGHTS ADDITIONAL SECURITIES
BENEFICIALLY OWNED
<S> <C> <C>
</TABLE>
Signature Page to Voting Agreement
D-12
<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).
D-13
<PAGE>
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.
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-14
<PAGE>
ANNEX E
July 11, 1999
Special Committee of the Board of Directors and
Board of Directors
Tech Squared Inc.
5198 West 76th 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.
E-1
<PAGE>
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 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
E-2
<PAGE>
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.
E-3
<PAGE>
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 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
E-4
<PAGE>
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-5
<PAGE>
EXHIBIT 1
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
THIS FORM 10-K/A3 IS BEING FILED TO AMEND FORM 10-K/A2, WHICH WAS FILED IN
ERROR BY THE COMPANY'S PRINTER. THIS FORM 10-K/A3 COMBINES FORM 10-K AND FORM
10-K/A AND AMENDS ITEM 11 AS WELL AS CERTAIN OTHER INFORMATION AS IT RELATES TO
ITEM 11. THIS FORM 10-K/A3 IS REDLINED AGAINST FORM 10-K FOR ITEMS 1 TO 9 AND
AGAINST FORM 10-K/A FOR ITEMS 10 TO 14. THE FORM 10-K/A2 FILING IS BEING
IGNORED BY THE COMPANY FOR PURPOSES OF THIS FILING AND ALL SUBSEQUENT FILINGS.
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A3
[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)
MINNESOTA 41-1591872
(State of Incorporation) (I.R.S. Employer Identification No.)
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(R) 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(R) 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.
Ex. 1-2
<PAGE>
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 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
Ex. 1-3
<PAGE>
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 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.
Ex. 1-4
<PAGE>
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, 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.
Ex. 1-5
<PAGE>
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.
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 10K 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,
Ex. 1-6
<PAGE>
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 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-", "NU Design 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
Ex. 1-7
<PAGE>
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 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 set forth in Digital River's
filings with the Securities and Exchange Commission, such as its recently-filed
Form 10K.
Ex. 1-8
<PAGE>
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
Ex. 1-11
<PAGE>
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 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.
Ex. 1-12
<PAGE>
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.
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
---- ---- ---
<S> <C> <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>
Ex. 1-13
<PAGE>
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. 1-14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED:
-------------------------------
(IN THOUSANDS) 1998(2) 1997(1) 1996
--------- ------- ----
<S> <C> <C> <C>
Net Sales $38,800 $36,995 $37,387
Gross Profit 4,971 4,467 3,911
Income/(loss) from operations (864) 402 (849)
Net loss applicable to common shares (567) (1,032) (651)
Net income/(loss) excluding Digital River (3)(4) 1,294 344 (203)
Total assets 117,444 7,600 8,620
Long term debt & long term portion of dividend
payable to officer / shareholder 84 298 298
Redeemable preferred stock 12% cumulative
Convertible 248 217 198
Stockholders' equity 70,457 2,190 1,214
</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.
Ex. 1-15
<PAGE>
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 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. 1-16
<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
Ex. 1-17
<PAGE>
Company's accounting and computer systems, and transaction processing fees
and charges from third-party credit card and similar providers.
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.
Ex. 1-18
<PAGE>
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.
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.
Ex. 1-19
<PAGE>
(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.
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
Ex. 1-20
<PAGE>
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.
Ex. 1-21
<PAGE>
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
TECH SQUARED INC. AND SUBSIDIARIES
Index To Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Comprehensive Income (loss) F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
Ex. 1-22
<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. 1-23
<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. 1-24
<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. 1-25
<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. 1-26
<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. 1-27
<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. 1-28
<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
Ex. 1-29
<PAGE>
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.
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.
Ex. 1-30
<PAGE>
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.
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
Ex. 1-31
<PAGE>
and 6,201,958 were excluded from dilutive earnings per share in 1998, 1997
and 1996, respectively, as their effect is antidilutive.
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, resulting in
realized gains of approximately $5,000. 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.
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.
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
Ex. 1-32
<PAGE>
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>
<CAPTION>
1998 1997
------- -------
<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.
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>
Ex. 1-33
<PAGE>
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 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
Ex. 1-34
<PAGE>
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>
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.
Ex. 1-35
<PAGE>
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
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.
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.
Ex. 1-36
<PAGE>
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. 1-37
<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 1996
Officer 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.
Ex. 1-38
<PAGE>
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.
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.
Ex. 1-39
<PAGE>
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.
(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.
Ex. 1-40
<PAGE>
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
Percentage of Total Price 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 $1.50 per share, exercisable for
six years commencing on September 1, 1998.
AGGREGATE OPTIONS EXERCISED IN THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND
OPTION VALUES AT DECEMBER 31, 1998
The following table sets forth certain information regarding options
to purchase shares of Common Stock exercised during the Company's fiscal year
ended December 31, 1998, and the number and value of options to purchase
shares of Common Stock held as of December 31, 1998, by the executive
officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
Value of Unexercised
Number of Number of Options In-the-Money
Shares at December 31, 1998 Options at December 31, 1998(2)
Acquired Value ----------------------------- -------------------------------
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- --------------------- --------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(#) ($) (#) (#) ($) ($)
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-
Ex. 1-41
<PAGE>
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.
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
Ex. 1-42
<PAGE>
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.
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.
Ex. 1-43
<PAGE>
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.
[GRAPH]
<TABLE>
<CAPTION>
----------- ------------ ----------- ----------- ------------
5/12/95 12/29/95 12/31/96 12/31/97 12/31/98
----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Tech Squared, Inc. 100 67 17 130 160
- ----------------------------------------------- ----------- ------------ ----------- ----------- ------------
Nasdaq Retail Trade Stocks 100 109 130 153 186
- ----------------------------------------------- ----------- ------------ ----------- ----------- ------------
Nasdaq Stock Market (US Companies) 100 124 152 186 262
- ----------------------------------------------- ----------- ------------ ----------- ----------- ------------
</TABLE>
Ex. 1-44
<PAGE>
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, 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 PREFERRED
SHARES OF COMMON STOCK STOCK BENEFICIALLY TOTAL VOTING SHARES
BENEFICIALLY OWNED(1) OWNED(1) BENEFICIALLY OWNED(2)
---------------------- -------------------- -----------------------
PERCENT PERCENT PERCENT
NAME OF BENEFICIAL OWNER AMOUNT OF CLASS AMOUNT OF CLASS AMOUNT OF 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 7,584,022 53.7% -- -- 7,584,022 52.4%
Executive Officers as a Group
(5 persons)(8)
</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.
Ex. 1-45
<PAGE>
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, 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 PREFERRED
SHARES OF COMMON STOCK STOCK TOTAL VOTING SHARES
BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(2)
----------------------- --------------------- ---------------------
NAME AND ADDRESS PERCENT PERCENT PERCENT
OF BENEFICIAL OWNER AMOUNT OF CLASS AMOUNT OF CLASS AMOUNT OF 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 -- -- 20,000 12.5% 20,000 *
for Lauren A. Long and
Kathryn W. Long
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.
Ex. 1-46
<PAGE>
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 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
Ex. 1-47
<PAGE>
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 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. 1-48
<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.
TECH SQUARED INC.
Date: July 21, 1999 By: /s/ Charles E. Reese, Jr.
-----------------------------------
Charles E. Reese, Jr.
President, Chief Executive Officer,
Chief Operation Officer
By: /s/ Jeffrey F. Martin
-----------------------------------
Jeffrey F. Martin
Chief Financial Officer
and Principal Accounting Officer
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.
Signature and Title Date Executed
------------------- --------------
/s/ Joel A. Ronning July 21, 1999
-------------------------------- --------------
Joel A. Ronning, Director
/s/ Charles E. Reese, Jr. July 21, 1999
-------------------------------- --------------
Charles E. Reese, Jr., Director
------------------------------- --------------
Richard J. Runbeck, Director
/s/ Perry W. Steiner July 21, 1999
------------------------------- --------------
Perry W. Steiner, Director
Ex. 1-49
<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.
