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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended: MARCH 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT.
Commission File Number: 0-25602
TECH SQUARED INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1591872
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
5198 WEST 76TH STREET
EDINA, MINNESOTA 55439
(Address of principal executive offices)
(612) 832-5622
(Registrant's telephone number)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Security Exchange Act 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
--- ---
As of the close of business on April 22, 1999, 12,102,950 shares of
Common Stock, no par value, of the Company were outstanding.
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TECH SQUARED INC.
INDEX
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<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited) for the three
months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited) for the three
months ended March 31, 1999 and 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
PART II. OTHER INFORMATION
Item 1. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
2
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ITEM 1. FINANCIAL STATEMENTS
TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,224,128 $ 4,436,276
Restricted cash 273,588 229,466
Accounts receivable, net of allowance
for doubtful receivables of $382,000
and $365,000 respectively 2,982,497 3,387,907
Inventories 2,174,876 1,783,905
Prepaids and other current assets 574,065 416,666
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TOTAL CURRENT ASSETS 8,229,154 10,254,220
Property and equipment, net 516,573 499,874
Mining assets 190,000 190,000
Investment in Digital River 120,000,000 106,500,000
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$ 128,935,727 $ 117,444,094
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 685,617 $ 7,395
Current maturities of long term debt -- 15,000
Accounts payable 3,059,583 5,008,449
Accrued compensation and benefits 196,966 205,156
Accrued expenses 799,981 1,404,776
Dividends payable to officer/shareholder -- 200,000
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TOTAL CURRENT LIABILITIES 4,742,147 6,840,776
Dividends payable to officer/shareholder -- 83,857
Deferred income taxes 44,837,000 39,815,000
Redeemable preferred stock, 12% cumulative convertible,
$1 par value; 1,000,000 shares authorized; 160,000
shares issued and outstanding 247,744 247,744
STOCKHOLDERS' EQUITY:
Common stock: no par value; 25,000,000 shares authorized
12,102,950 and 11,603,075 issued and outstanding -- --
Additional paid-in capital 4,193,584 3,990,200
Stock subscription receivable (134,000) (284,000)
Retained earnings 2,715,080 2,894,345
Unrealized gain on available-for-sale securities 72,334,172 63,856,172
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TOTAL STOCKHOLDERS' EQUITY 79,108,836 70,456,717
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$ 128,935,727 $ 117,444,094
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</TABLE>
See accompanying notes to financial statements.
3
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TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
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March 31, March 31,
1999 1998
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<S> <C> <C>
Net Sales $ 11,103,411 $ 8,592,728
Cost of sales 9,726,578 7,506,225
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GROSS PROFIT 1,376,833 1,086,503
Selling and marketing expenses 752,223 520,349
General and administrative expenses 827,317 502,515
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Total Operating Expenses 1,579,540 1,022,864
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INCOME (LOSS) FROM OPERATIONS (202,707) 63,639
Interest income/(expense), net 21,394 (23,132)
Investment income 2,048 4,611
Equity in losses of Digital River -- (549,625)
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NET LOSS $ (179,265) $ (504,507)
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Net loss per common share, basic and diluted $ (0.02) $ (0.05)
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Weighted average shares outstanding, basic and diluted 11,822,603 10,549,413
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</TABLE>
See accompanying notes to financial statements.
4
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TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
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March 31, March 31,
1999 1998
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<S> <C> <C>
Operating Activities:
Net Loss $ (179,265) $ (504,507)
Non-cash items included in loss:
Depreciation and amortization 54,006 48,243
Equity in losses of Digital River -- 549,625
Gain on sale of available-for-sale securities (2,048) (4,611)
Changes In operating assets and liabilities:
Accounts receivable, net 405,410 77,102
Inventories (390,971) (103,034)
Prepaid and other current assets (157,400) (244,872)
Accounts payable (1,948,866) 733,985
Accrued compensation and benefits (8,190) (91,511)
Other accrued expenses (619,799) (199,309)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,847,123) 261,111
Investing Activities:
Restricted cash (44,122) (76,817)
Purchases of property and equipment (70,700) (50,700)
Proceeds from sale of available-for-sale securities 2,048 287,411
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (112,774) 159,894
Financing Activities:
Issuance of common stock, net 353,384 (72,080)
Net borrowings (payments) on revolving line of credit 678,222 (348,925)
Dividend paid (283,857) --
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 747,749 (421,005)
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NET DECREASE IN CASH (2,212,148) --
Cash at beginning of period 4,436,276 300
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Cash at end of period $ 2,224,128 $ 300
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</TABLE>
See accompanying notes to consolidated financial statements.
5
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TECH SQUARED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. The accompanying consolidated financial statements and notes
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's 1998 annual report on Form 10-K.
NOTE 2 - INVENTORIES
The Company's inventories consist primarily of goods held for resale and are
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.
NOTE 3 - INVESTMENT IN DIGITAL RIVER
In December 1995, the Company's wholly-owned subsidiary, MacUSA, was
granted, by Joel Ronning, the majority shareholder and Chairman of the Board of
Directors of the Company, an option, exercisable through December 31, 2000 (the
"Digital River Option") to acquire 3,200,000 (post-split) shares (the "Digital
River Shares") of Digital River, Inc., a Minnesota corporation ("Digital River")
which was then privately held. At that time, such shares represented
approximately 60% of the outstanding common stock of Digital River.
Digital River conducted its initial public offering in August 1998.
Prior to such offering, the Company's ownership percentage of Digital River had
been reduced to approximately 23% and was being accounted for using the equity
method of accounting. Upon completion of such offering, the Company's ownership
percentage was reduced to approximately 19% at which time the Company began
accounting for its investment in Digital River as an available-for-sale security
in accordance with Statement of Financial Accounting Standards (SFAS) No. 115.
Digital River's shares are traded on the NASDAQ stock market under the symbol
"DRIV."
In December 1998, the Company participated in Digital River's
secondary offering by exercising and selling 200,000 shares subject to the
Digital River Option realizing net proceeds of $4,430,000. 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 31, 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.
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NOTE 4 - COMPREHENSIVE INCOME
During June 1997, the Financial Accounting Standards Board released SFAS No.
130, "Reporting Comprehensive Income," effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 established standards for reporting and
display in the financial statements of total net income and the components of
all other nonowner changes in equity, referred to as comprehensive income. The
Company has adopted SFAS No. 130 beginning in 1998. Other comprehensive income
for the first quarter of 1999 was approximately $8,478,000 compared to $17,000
for the first quarter of 1998. The comprehensive income consisted of an increase
in the market value of the investment in Digital River during the first quarter
of 1999.
7
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TECH SQUARED INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein are forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934
that involve a number of risks and uncertainties. Such forward-looking
information may be indicated by words such as will, may be, expects or
anticipates. In addition to the factors discussed herein, among the other
factors that could cause actual results to differ materially are the following:
business conditions and growth in the personal computer industry and the general
economy; competitive factors such as rival computer and peripheral product
sellers and price pressures; availability of vendor products at reasonable
prices; inventory risks due to shifts in market demand; and risks presented from
time to time in reports filed by the Company with the Securities and Exchange
Commission, including but not limited to the annual report on Form 10-K for the
year ended December 31, 1998.
The Company sells microcomputer hardware and software products, primarily Apple
Macintosh(R) related products and, to a lesser degree, Microsoft Windows
95/Windows NT/MS-DOS ("Wintel") compatible products. The Company's current
target markets are (i) desktop publishing ("DTP"), graphic arts and pre-press
industries through its DTP Direct catalog, (ii) computer dealers and value added
resellers through its distribution business, and (iii) developers of internal
corporate intranet and external Internet sites and managers of local area
networks ("LAN") and wide area networks ("WAN") through its Net Direct catalog.
In February 1999, the board of directors of Tech Squared authorized the officers
of the Company to make investigations and, if appropriate, enter into
preliminary negotiations regarding possible changes in the Company's business
including, but not limited to, strategic alliances, joint ventures, mergers,
sale of the Company's operating business and other alternatives. In April 1999,
the Company retained Bayview Capital Group, Inc. of Wayzata, Minnesota to act as
its exclusive advisor to locate one or more potential purchasers of certain
operating assets and businesses of the Company, specifically the DTP Catalog
Operations, Net Direct Catalog Operations and Distribution Sales Operations. The
search is at a preliminary stage and no prediction can be made as to what, if
any, transaction or changes will transpire.
In December 1998, the Company sold a portion of the mining properties near
Virginia City, Montana to Conjecture Silver Mines, Inc.("Conjecture"). Under the
terms of the agreement, Conjecture has the first right of refusal to acquire the
remaining property near Virginia City, Montana. In April 1999, the Company
obtained an offer from an outside party for the remaining property near Virginia
City, Montana. Conjecture has been notified of the pending offer and must
respond by May 1999. In April 1999, the Company engaged Fidelity Real Estate to
offer for sale the mining property located near Rimini, Montana approximately 20
miles southwest of Helena, Montana.
For the three months ended March 31, 1999 the Company recorded a consolidated
net loss of ($179,000) or ($0.02) per share compared to a consolidated net loss
of ($505,000) or ($0.05) per share in the first quarter of 1998. The
consolidated losses from 1998 include the Company's share of losses of Digital
River, which amounted to $550,000 in the first quarter of 1998. Excluding the
Company's share of the Digital River losses, the Company recorded net income of
$45,000 in the first quarter of 1998. Digital River's issuance of additional
shares in 1998 resulted in the Company accounting for its investment in Digital
River as "available-for-sale" securities starting August 12, 1998.
RESULTS OF OPERATIONS
NET SALES
Net sales for the Company's first quarter ended March 31, 1999 totaled
$11,103,000, an increase of 29.2%, compared to $8,593,000 for the corresponding
period of 1998. The increase in sales includes an increase of 32.0% in sales to
the Company's DTP Direct catalog customers, the addition of the Net Direct
catalog which produced sales to its customers of $661,000, partially offset by a
decrease of 2.4% in sales to the Company's distribution customers. The increase
in sales to the
8
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Company's DTP Direct catalog customers is due to an increase in the number of
outbound sales reps which contributed to significant increases in sales of
computer systems, printers, hard drives and software.
Fluctuations in the Company's net sales from period to period can be expected
due to a number of factors, including the timing of new product introductions by
the Company's major vendors and their competitors, seasonal cycles commonly
experienced in computer-related industries, and changes in product mix and
product pricing. As a result, the operating results for any particular period
are not necessarily indicative of the results of any future period.
GROSS PROFIT
Gross profit for the quarter ended March 31, 1999, was $1,377,000 or 12.4% of
net sales compared to $1,087,000 or 12.6% of net sales for the comparable period
of 1998. The decrease in gross profit percentage in the three month period ended
March 31, 1999, is primarily the result of continuing downward pressure on
product prices to the Company's DTP Direct catalog customers and on margins. The
Company expects ongoing competitive pressure on gross profit, and, consequently,
changes in pricing and product configuration will be necessary in order to
remain competitive.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $752,000 during the quarter ended March
31, 1999, compared to $520,000 during the corresponding period of 1998. As a
percentage of sales, selling and marketing expenses increased to 6.8% in the
quarter ended March 31, 1999 from 6.1% for the same period in 1998. This
increase was mainly attributable to the costs associated with the May 1998
addition of the Net Direct catalog, which is directed at developers of internal
corporate intranet and external Internet sites and managers of LAN's and WAN's.
Although the Company believes the target market for the Net Direct catalog is
substantially larger than the DTP Direct catalog, and that the new catalog could
provide significant opportunity for revenue growth, there are significant risks
associated with the launch of a new catalog including; a completely new target
audience, lack of any historical direct marketing data on which to base mailing
decisions, competitive forces and new product lines. As a result, the Company
believes the launch of the Net Direct catalog will have a negative impact on
profitability of the Company in 1999, and possibly beyond.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter ended March 31, 1999 were
$827,000 compared to $503,000 for the comparable period of 1998. The increase is
attributable to several factors including increases in transaction-processing
fees, payroll and employee-related expenses and legal fees. Additionally, the
discontinuance of subletting office space to Digital River also contributed to
the increase in general and administrative expenses for the quarter.
INVESTMENT INCOME
The Company recorded investment income of $2,000 for the quarter ended March 31,
1999 compared to $5,000 for the same quarter of 1998.
NET INTEREST INCOME/(EXPENSE)
Net interest income for the first quarter of 1999 was $21,000 compared to net
interest expense of $23,000 for the same period in 1998. The reduction in
interest expense is primarily due to a decrease in the average outstanding
balance on the Company's line of credit, and the increase in interest income is
mainly attributed to an increase in cash in an interest bearing account.
9
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at March 31, 1999, consisted of
liquid funds, a revolving line of credit agreement with US Bancorp National
Association ("US Bank"), and vendor trade credit lines.
The Company has a Revolving Line of Credit Agreement with US Bank through June
1999. Borrowings under the $2,500,000 agreement are payable on demand, limited
by eligible percentages of accounts receivable and inventory and bear interest
at the prime rate plus 1.75%. As of March 31, 1999, the Company had unused
availability under the line of credit of approximately $990,000 and outstanding
borrowings of $686,000.
The Company has a flooring program with a financing company covering up to
$633,000 in inventory purchases. The flooring program is secured by a standby
letter of credit in the amount of $560,000 issued pursuant to the Company's line
of credit with US Bank. The Company uses the flooring program to take advantage
of certain programs with its major distributors.
As of March 31, 1999, the Company had working capital of $3,487,000. In
anticipation of increasing sales, inventories increased from $1,784,000, as of
December 31, 1998, to $2,175,000 as of March 31,1999. Inventory turns in the
first quarter of 1999 were 14.1 compared to 12.8 from the previous quarter.
Capital expenditures totaled $71,000 in the first quarter of 1999 compared to
$51,000 in the first quarter of 1998. The increase in capital expenditures in
the first quarter of 1999 is mainly attributed to computer system upgrades. The
Company paid the remaining $284,000 dividend payable to officer/shareholder in
February 1999.
The Company believes that funds generated from management of receivable and
inventory levels, advances under its line of credit, further expansion of lines
with trade creditors, the cash on hand and the potential proceeds from the sale
of its investments, will be sufficient to fund its operations through the end of
1999. However, maintaining an adequate level of working capital through the end
of 1999 and thereafter depends in part on the success of the Company's sales and
marketing efforts, the Company's ability to control operating expenses and the
Company's ability to maintain its relationships with its bank and its suppliers.
Furthermore, funding of the Company's operations in future periods may require
additional investments in the Company in the form of equity or debt. There can
be no assurance that the Company will achieve desired levels of sales or
profitability or those future capital infusions will be available on terms
acceptable to the Company, if at all.
YEAR 2000 COMPLIANCE
The Company's computer system and those of third parties with whom it
does business will be affected by issues and problems related to changes
required as a result of the year 2000 problem ("Y2K"). The Company's three key
systems and assets that may be directly impacted by the Y2K issue are its
financial and data system, its telephone system and its voice mail system. The
financial and data system requirements have been assessed and are currently
being upgraded and modified to be Y2K compliant. Rollout and testing of the Y2K
compliant system began in April 1999. The telephone system is believed to be Y2K
compliant, and testing is scheduled for the second quarter of 1999. The voice
mail system is currently being analyzed to determine the degree of upgrade
needed. The upgrade to the voice mail system will be rolled out and tested
during the second quarter of 1999. The Company incurred expenses to modify its
systems and the upgrading of its current system to be Y2K compliant totaling
approximately $35,000 in 1998, and anticipates additional costs of approximately
$50,000 in 1999. Maintenance and modification costs incurred by the Company
specifically related to Y2K will be expensed as incurred and costs of new
software (whether purchased or internally developed) will be capitalized and
amortized over the useful life of the applicable software.
While the Company has exercised its best efforts to identify and remedy any
potential Y2K exposures within its control, certain risks exist with vendors and
suppliers which, to a significant extent, are beyond the immediate control of
the Company. To date, the Company has not identified any vendors or suppliers
who will not be Y2K compliant; however, this analysis is still in process.
10
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The Company plans to develop appropriate contingency plans if non-compliant
vendors are identified. Failure to achieve timely completion of required
modifications or conversions or failure of the third parties with whom the
Company has relationships (e.g., vendors, clients, credit card processors) to be
Y2K compliant could have a material affect on the financial condition and
operations of the Company. The Company, however, is unable to assess disruption
that may occur as a result of supplier's and customer's non-compliance. Because
the Company markets products manufactured by multiple sources and typically
sells the products as `packages', Y2K problems affecting the Company's vendors
may have a significant affect on the Company. In addition, customers may delay
purchase decisions because of the uncertainty about Y2K issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
11
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PART II - OTHER INFORMATION
ITEM 1. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.70 Agreement between Tech Squared Inc. and Bayview
Capital Group, Inc. to locate potential purchasers of
certain operating assets and businesses.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
12
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECH SQUARED INC.
May 12, 1999 /s/ Charles E. Reese, Jr.
------------------------------------
Charles E. Reese, Jr.
President, Chief Executive Officer
Chief Operation Officer
/s/ Jeffrey F. Martin
------------------------------------
Jeffrey F. Martin
Chief Financial Officer
And Principal Accounting Officer
13
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EXHIBIT INDEX
EXHIBIT INDEX DESCRIPTION
10.70 Agreement between Tech Squared Inc. and Bayview Capital
Group, Inc. to locate potential purchasers of certain
operating assets and businesses.
27.1 Financial Data Schedule
14
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Exhibit 10.70
April 1, 1999
Mr. Chuck Reese
Chief Executive Officer
TECH SQUARED INC.
5198 West 76th Street
Edina, Minnesota 55439
Dear Chuck:
Tech Squared Inc. ("T2" or the "Company") hereby retains Bayview Capital Group,
Inc. ("Bayview") to act as its exclusive advisor to locate one or more potential
purchasers of certain operating assets and businesses of T2, specifically T2's
Net Direct Operations, T2's DTP Catalog Operations and T2's Distribution Sales
(the "Subject Businesses"), but only such Subject Businesses, and to initiate
negotiations regarding one or more such Transaction(s) on the terms and
conditions described below.
Bayview agrees to use its best efforts to actively market the Subject Businesses
for sale and to make an earnest effort to sell the Subject Businesses. The
Company shall, however, retain the sole and absolute discretion to accept or
reject the terms of any proposed sale or offer to purchase.
THE TRANSACTION(S)
The "Transaction(s)" shall include merger of the "Subject Businesses" into
another entity, or the sale of the Subject Businesses. "Transaction(s)" shall
not include a merger of the Company with, or any other transaction between the
Company and MacUSA, Inc. or Digital River, Inc. "Transaction(s)" shall also not
include any sale or other transaction relating to T2's mining properties.
ADVISORY FEES
Bayview will be entitled to a Success Fee, contingent upon the completion of one
or more Transaction(s), equal to:
6% of the first $5,000,000 of Purchase Consideration paid or assumed
plus 2% of any purchase consideration paid or assumed in excess of
$5,000,000. As to any Transaction(s) (or portion of a Transaction)
closed before June 30, 1999, the Success Fee related to the first five
million dollars of Purchase Consideration shall be increased to 7%. In
addition, as to any Transaction(s) ,which is for 100% cash, with no
contingencies or holdback amounts and in the amount of not less than
$100,000, the Success Fee otherwise payable shall be increased to 107%
of the amount otherwise calculated.
If there are multiple Transaction(s), all such Transaction(s) shall be
considered as a single Transaction for calculation of Success Fees except that
the increases in such fee set forth in the preceding paragraph (i.e. the 1%
bonus related to transactions prior to June 30 and the 107%, multiplier related
to all-cash transactions) shall be payable only with respect to those
Transaction(s) meeting such requirements. If any Transaction(s) are completed,
the minimum fee shall be $100,000.
<PAGE>
Mr. Chuck Reese
April 1, 1999
Page 2
Each Success Fee shall be due immediately and payable on or after the time of
closing and at the time of each payment of a contingent portion of the Purchase
Consideration to the Company. The Success Fee on future, non-contingent payments
shall be computed based on the present value of those payments discounted at 8%
and shall be paid at closing. The Success Fee on contingent payments shall be
paid when the contingency is satisfied and the contingent payments are made.
Success Fees on future contingent payments shall be based on the percentage
schedule for Success Fees with the applicable percentage allocated in the order
payments are received.
PURCHASE CONSIDERATION
Purchase Consideration shall include all consideration paid or provided by the
Buyer to the Company or its shareholders. Such Consideration shall include, but
not be limited to, the value of (a) payments of cash, stock or notes; (b)
interest-bearing debt, either assumed or forgiven; (c) contingent payments; and
(d) non-compete or consulting agreements. For purposes of calculating Bayview's
fee, current assets minus current liabilities will not be less than zero.
EXPENSE REIMBURSEMENT AND RETAINER FEE
T2 agrees to reimburse Bayview for all reasonable and ordinary out-of-pocket
expenses incurred in connection with the Transaction(s). Bayview agrees that it
will not incur out-of-pocket expenses aggregating in excess of $5,000 without
the Company's prior written consent. Bayview shall account to T2 for all such
expenses.
T2 agrees to pay Bayview a retainer fee of $50,000 which shall be deemed earned
when paid. The Retainer Fee is due five (5) days from the date of this
Agreement.
TERM OF AGREEMENT
This Agreement will expire six (6) months from the date hereof but can be
extended by mutual agreement.
Bayview will inform T2 of introductions made to prospective purchasers on at
least a weekly basis. These communications may be done by e-mail or by fax to
Mr. Chuck Reese and Jeff Martin. Bayview will review its "hit list" of
prospective purchasers with T2 prior to initial contacts being made. Such "hit
list" will not include Digital River (or any subsidiary thereof) nor Chuck
Reese. If a transaction is not completed during the term of this Agreement but
is completed within twelve (12) months from the termination of this Agreement
with a party whom Bayview introduced to T2, and was supplied a confidentiality
agreement regarding the contemplated Transaction(s), T2 shall pay Bayview the
Success Fees as herein provided.
<PAGE>
Mr. Chuck Reese
April 1, 1999
Page 3
INDEMNIFICATION
T2 agrees to indemnify and hold Bayview and its affiliates, employees and agents
(each an "Indemnified Person") harmless from and against all losses, claims,
damages, liabilities, costs or expenses, including those resulting from any
threatened of pending investigation, action, proceeding or dispute whether or
not any Indemnified Person is a party to such investigation, action, proceeding
or dispute, arising out of Bayview's entering into or performing services under
this Agreement or arising out of any matter referred to in this Agreement. This
indemnity will also include Bayview's and/or such other Indemnified Person's
reasonable attorneys' and accountants' fees and out-of-pocket expenses incurred
in, and the cost of Bayview's personnel whose time is spent in connection with,
such investigations, actions, proceedings or disputes which fees, expenses and
costs will be periodically reimbursed to Bayview and/or to any such other
Indemnified Person by the Company as they are incurred; provided, however, that
the indemnity herein set forth will not apply where a court of competent
jurisdiction, or any person designated to resolve disputes between us, has made
a final determination that Bayview or any Indemnified Person acted in a grossly
negligent manner, engaged in willful misconduct, or violated any applicable laws
or regulations in the performance of Bayview's services under this Agreement
which gave rise to the loss, claim, damage, liability, cost or expense sought to
be recovered hereunder. The Company also agrees that neither Bayview nor any
Indemnified Person will have any liability (whether direct or indirect, in
contract or tort or otherwise) to the Company for or in connection with any act
or failure to act by Bayview as a result of Bayview's engagement under this
Agreement except for any such liability for losses, claims, damages, liabilities
or expenses incurred by the Company that is found in a final determination by a
court of competent jurisdiction, or any person designated to resolve disputes
between us, to have resulted from Bayview's gross negligence, willful misconduct
or violation of law. The terms and conditions set forth in this paragraph shall
survive the termination and expiration of this Agreement.
Bayview agrees to indemnify and hold the Company, its affiliates, employees and
agents (each an "Indemnified Person") harmless from and against all losses,
claims, damages, liabilities, costs or expenses, including those resulting from
any threatened or pending investigation, action, proceeding or dispute whether
or not any Indemnified Person is a party to such investigation, action,
proceeding or dispute, arising out of any matter referred to in this Agreement
where a court of competent jurisdiction, or any person designated to resolve
disputes between us, has made a final determination that Bayview acted in a
grossly negligent manner, engaged in willful misconduct, or violated any
applicable laws or regulations in the performance of Bayview's services under
this Agreement, which gave rise to the loss, claim, damage, liability, cost or
expense sought to be recovered hereunder. This indemnity will also include the
Company's and/or such other Indemnified Person's reasonable attorneys' and
accountants' fees and out-of-pocket expenses incurred in, and the cost of the
Company's personnel whose time is spent in connection with, such investigations,
actions, proceedings or disputes. Bayview also agrees that neither the Company
nor any Indemnified Person will have any liability (whether direct or indirect,
in contract or tort or otherwise) to Bayview for or in connection with any act
or failure to act by the Company as a result of Bayview's engagement under this
Agreement except for any such liability for losses, claims, damages, liabilities
or expenses incurred by Bayview that is found in a final determination by a
court of competent jurisdiction, or any person designated to resolve disputes
between us, to have resulted from the Company's gross negligence, willful
misconduct or violation of law. Notwithstanding, the amount of any
indemnification due and owing from Bayview shall not be greater than the amount
of fees collected or earned by Bayview pursuant to the terms and conditions of
this agreement. The terms and conditions set forth in this paragraph shall
survive the termination and expiration of this Agreement.
<PAGE>
Mr. Chuck Reese
April 1, 1999
Page 4
LIMITATION ON LIABILITY
If for any reason, the foregoing indemnification is unavailable to Bayview or
any other Indemnified Person or insufficient to hold them harmless, then the
Company will contribute to the amount paid or payable by Bayview or any such
other Indemnified Person as a result of such loss, claim, damage or liability in
such proportion as is appropriate to reflect not only the relative benefits
received by the Company and its shareholders on the one hand and Bayview or any
other Indemnified Person on the other hand, but also the relative fault of the
Company and Bayview or any other Indemnified Person, as well as any relevant
equitable considerations. The reimbursement, indemnity and contribution
obligations of the Company set forth above shall be in addition to any liability
which the Company may otherwise have, and these obligations and the other
provisions set forth above shall be binding upon and inure to the benefit of any
successors, assigns, heirs and personal representatives of the Company, Bayview
and any other Indemnified Persons. The terms and conditions set forth in this
paragraph shall survive the termination and expiration of this Agreement.
If for any reason, the foregoing indemnification is unavailable to the Company
or any other Indemnified Person or insufficient to hold them harmless, then
Bayview will contribute to the amount paid or payable by the Company or any such
other Indemnified Person as a result of such loss, claim, damage or liability in
such proportion as is appropriate to reflect not only the relative benefits
received by the Company and its shareholders on the one hand and Bayview on the
other hand, but also the relative fault of the Company and Bayview, as well as
any relevant equitable considerations. Bayview's reimbursement indemnity and
contribution obligations as set forth above shall be in addition to any
liability which Bayview may otherwise have, and these obligations and the other
provisions set forth above shall be binding upon and inure to the benefit of any
successors, assigns, heirs and personal representatives of the Company, Bayview
and any other Indemnified Persons. The terms and conditions set forth in this
paragraph shall survive the termination and expiration of this Agreement.
DISCLOSURE OF CONFIDENTIAL INFORMATION
(a) DEFINITION OF CONFIDENTIAL INFORMATION. For purposes of this
Agreement, "Confidential Information" means any information that is not
generally known to the public that relates to the existing or reasonably
foreseeable business of the Company which has been expressly or implicitly
protected by the Company or which, from all of the circumstances, Bayview knows
or has reason to know that the Company intends or expects the secrecy of such
information to be maintained. Confidential Information includes, but is not
limited to, information contained in, or relating to, the development plans or
proposals, marketing plans or proposals, strategies, financial statements,
budgets, trade secrets, test data, other data, software licenses, pricing
formulas, customer and supplier information, employee information, research and
development information, designs, products, processes, manufacturing techniques,
know-how, and other proprietary information of the Company, whether written,
oral or communicated in another type of medium, whether disclosed directly or
indirectly, whether originals or copies, and whether or not legal protection has
been obtained or sought under applicable law. Bayview shall treat all such
information as Confidential Information regardless of its source and whether or
not marked as confidential.
(b) BAYVIEW SHALL NOT DISCLOSE CONFIDENTIAL INFORMATION. Bayview will
not, during the term of Bayview's engagement or following the termination of
Bayview's engagement by the Company,
<PAGE>
Mr. Chuck Reese
April 1, 1999
Page 5
use, show, display, release, discuss, communicate, divulge or otherwise disclose
Confidential Information to any person, firm, corporation, association, or other
entity for any reason or purpose whatsoever, without the prior written consent
or authorization of the Company, unless such Confidential Information is already
in the public domain.
(c) TITLE. All documents or other tangible or intangible property
relating in anyway to the business of the Company (including without limitation
the Subject Businesses) which come into Bayview's possession during the
engagement period shall be and remain the exclusive property of the Company, and
Bayview agrees to return all such documents, and tangible and intangible
property or copies thereof, which are the property of the Company or which
relate in any way to the business, customers, products, practices or techniques
of the Company, and all other property of the Company to the Company upon the
termination of Bayview's engagement by the Company, or at such earlier time as
the Company may request.
(d) COMPELLED DISCLOSURE. In the event a third party seeks to compel
disclosure of Confidential Information by Bayview by judicial or administrative
process, Bayview shall promptly notify the Board of Directors of the Company of
such occurrence and furnish to the Board of Directors a copy of the demand,
summons, subpoena or other process served upon Bayview to compel such
disclosure, and will permit the Company to assume, at its expense, but with
Bayview's cooperation, defense of such disclosure demand. In the event that the
Company refuses to contest such a third party disclosure demand under judicial
or administrative process, or a final judicial order is issued compelling
disclosure of Confidential Information by Bayview, Bayview shall be entitled to
disclose such information in compliance with the terms of such administrative or
judicial process or order.
INDEPENDENT CONTRACTOR STATUS
The parties hereto agree that:
(a) Bayview shall not be considered an agent or employee of the Company
for any purpose, but shall be an independent contractor. The Company shall not
exercise any supervision over Bayview in the performance of its services
hereunder, nor shall the Company require Bayview's compliance with detailed
orders or instructions. Bayview shall have no right or authority to assume or
create any obligation or responsibility, express or implied, on behalf of or in
the name of the Company, nor to accept service of legal process addressed to or
intended for the Company, or to bind the Company in any manner whatsoever.
(b) Bayview shall not be treated as an employee for purposes of
employment taxes, income tax withholding and employee benefits. Bayview shall be
solely responsible for the payment of all applicable federal and state
self-employment and income taxes (including, without limitation, FICA and social
security).
MISCELLANEOUS
This Agreement sets forth the entire understanding of the parties relating to
the subject matter hereof and supersedes and cancels any prior communications,
understandings and agreements between the parties, whether written or oral. This
Agreement cannot be terminated or changed, nor can any of its provisions be
waived, except by written agreement signed by the parties hereto.
<PAGE>
Mr. Chuck Reese
April 1, 1999
Page 6
ANY CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT WILL BE
REFERRED TO THE AMERICAN ARBITRATION ASSOCIATION, MINNEAPOLIS, MINNESOTA, AND
ANY SUCH PROCEEDING WILL BE CONDUCTED IN MINNEAPOLIS, MINNESOTA. THE AWARD
DECISION OF 'THE ARBITRATORS WILL BE CONCLUSIVE AND BINDING UPON THE PARTIES AND
MAY BE ENTERED IN ANY COURT OF COMPETENT JURISDICTION. THIS AGREEMENT SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA, WITHOUT REFERENCE TO SUCH
STATE'S CONFLICTS OR CHOICE OF LAW PROVISIONS. THE PARTIES EXPRESSLY AGREE THAT
THE COURTS LOCATED IN THE STATE OF MINNESOTA WILL BE THE ONLY COURTS HAVING
JURISDICTION IN CONNECTION WITH ANY CONTROVERSY OR CLAIM ARISING OUT OF OR
RELATING TO THIS AGREEMENT, AND THAT SERVICE OF PROCESS BY REGISTERED OR
CERTIFIED MAIL SHALL BE DEEMED ADEQUATE AND LAWFUL. THE TERMS AND CONDITIONS SET
FORTH IN THIS PARAGRAPH SHALL SURVIVE ANY EXPIRATION OR TERMINATION OF THIS
AGREEMENT.
Any correspondence or notices pursuant to this Agreement will be delivered to
our respective addresses as set forth herein, unless and until we have given
each other written notice of a change of address.
If this letter sets forth the understanding between us, please sign and date the
copy of this letter under the word "agreed" and return the signed copy to us.
Sincerely,
/s/ Peter J. Slocum
- ----------------------------------
Peter J. Slocum, Managing Director
Bayview Capital Group
Agreed and accepted this 5th day of Apirl, 1999
TECH SQUARED INC.
By: /s/ Chuck Reese
-------------------------------------
Chuck Reese
Its: Chief Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,498
<SECURITIES> 0
<RECEIVABLES> 2,982<F1>
<ALLOWANCES> 0
<INVENTORY> 2,175
<CURRENT-ASSETS> 8,229
<PP&E> 517<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 128,936
<CURRENT-LIABILITIES> 4,742
<BONDS> 0
248
0
<COMMON> 0
<OTHER-SE> 79,109
<TOTAL-LIABILITY-AND-EQUITY> 128,936
<SALES> 11,103
<TOTAL-REVENUES> 11,103
<CGS> 9,727
<TOTAL-COSTS> 9,727
<OTHER-EXPENSES> 1,580
<LOSS-PROVISION> 89
<INTEREST-EXPENSE> (21)
<INCOME-PRETAX> (179)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (179)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
<FN>
<F1>AMOUNTS REPORTED FOR ACCOUNTS RECEIVABLE AND PROPERTY, PLANT & EQUIPMENT ARE NET
AMOUNTS.
</FN>
</TABLE>
