EXHIBIT 2
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: JUNE 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT
Commission File Number: 0-25602
------------------------
TECH SQUARED INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 00-0000000
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
0000 XXXX 00XX XXXXXX
XXXXX, XXXXXXXXX 00000
(Address of principal executive offices)
(000) 000-0000
(Registrant's telephone number)
------------------------
Indicate whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
/X/ No / /
As of the close of business on July 26, 1999, 12,149,200 shares of Common
Stock, no par value, of the Company were outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Ex. 2-1
TECH SQUARED INC.
INDEX
PAGE
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998............... 3
Consolidated Statements of Operations (unaudited) for the three months and six months ended
June 30, 1999 and 1998..................................................................... 4
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 1999 and
1998....................................................................................... 5
Notes to Financial Statements................................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk.............................. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 12
Item 2. Changes in Securities.................................................................. 12
Item 3. Defaults upon Senior Securities........................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.................................... 12
Item 5. Other Information...................................................................... 12
Item 6. Exhibits and Reports on Form 8-K....................................................... 12
SIGNATURES................................................................................................. 13
Ex. 2-2
ITEM 1. FINANCIAL STATEMENTS
TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
-------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................................... $ 2,009,501 $ 4,436,276
Restricted cash................................................................ 263,814 229,466
Available-for-sale securities.................................................. 22,000 --
Accounts receivable, net of allowance for doubtful receivables of $348,000 and
$365,000 respectively........................................................ 2,622,513 3,387,907
Inventories.................................................................... 1,476,327 1,783,905
Prepaids and other current assets.............................................. 575,023 416,666
-------------- --------------
TOTAL CURRENT ASSETS......................................................... 6,969,178 10,254,220
Property and equipment, net.................................................... 467,971 499,874
Mining assets.................................................................. -- 190,000
Investment in Digital River.................................................... 99,750,000 106,500,000
-------------- --------------
$ 107,187,149 $ 117,444,094
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit....................................................... $ 129,489 $ 7,395
Current maturities of long term debt........................................... -- 15,000
Accounts payable............................................................... 2,746,239 5,008,449
Accrued compensation and benefits.............................................. 162,365 205,156
Accrued expenses............................................................... 726,264 1,404,776
Dividends payable to officer/shareholder....................................... -- 200,000
-------------- --------------
TOTAL CURRENT LIABILITIES.................................................... 3,764,357 6,840,776
Dividends payable to officer/shareholder......................................... -- 83,857
Deferred income taxes............................................................ 37,304,000 39,815,000
Redeemable preferred stock, 12% cumulative convertible, $1 par value; 1,000,000
shares authorized; 160,000 shares issued and outstanding....................... 262,609 247,744
STOCKHOLDERS' EQUITY:
Common stock: no par value; 25,000,000 shares authorized 12,138,950 and
11,039,179 issued and outstanding............................................ -- --
Additional paid-in capital..................................................... 4,440,663 3,990,200
Stock subscription receivable.................................................. (134,000) (284,000)
Retained earnings.............................................................. 1,932,348 2,894,345
Unrealized gain on available-for-sale securities............................... 59,617,172 63,856,172
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY................................................... 65,856,183 70,456,717
-------------- --------------
$ 107,187,149 $ 117,444,094
-------------- --------------
-------------- --------------
See accompanying notes to financial statements.
Ex. 2-3
TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net Sales........................................... $ 10,516,133 $ 9,502,285 $ 21,619,544 $ 18,095,013
Cost of sales....................................... 9,241,717 8,309,159 18,968,295 15,815,384
------------- ------------- ------------- -------------
GROSS PROFIT.................................... 1,274,416 1,193,126 2,651,249 2,279,629
Selling and marketing expenses...................... 649,733 763,645 1,401,956 1,283,994
General and administrative expenses................. 1,259,722 544,565 2,087,039 1,047,080
------------- ------------- ------------- -------------
Total Operating Expenses.......................... 1,909,455 1,308,210 3,488,995 2,331,074
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS.............................. (635,039) (115,084) (837,746) (51,445)
Interest income/(expense), net...................... 13,119 (18,374) 34,513 (41,506)
Investment income................................... -- -- 2,048 4,611
Loss on mining assets............................... (145,947) -- (145,947) --
Equity in losses of Digital River................... -- (909,553) -- (1,459,178)
------------- ------------- ------------- -------------
NET LOSS.......................................... $ (767,867) $ (1,043,011) $ (947,132) $ (1,547,518)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per common share, basic and diluted........ $ (0.06) $ (0.09) $ (0.08) $ (0.14)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares outstanding, basic and
diluted........................................... 12,118,862 11,001,020 11,973,285 10,776,464
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
See accompanying notes to financial statements.
Ex. 2-4
TECH SQUARED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
1999 1998
------------- -------------
Operating Activities:
Net Loss.......................................................................... $ (947,132) $ (1,547,518)
Non-cash items included in loss:
Depreciation and amortization................................................... 106,751 92,318
Equity in losses of Digital River............................................... -- 1,459,178
Gain on sale of available-for-sale securities................................... (2,048) (4,611)
Loss on mining assets........................................................... 145,947 --
Changes in operating assets and liabilities:
Accounts receivable, net...................................................... 765,394 (135,624)
Inventories................................................................... 307,578 (58,147)
Prepaid and other current assets.............................................. (136,304) (69,670)
Accounts payable.............................................................. (2,262,210) 1,241,160
Accrued compensation and benefits............................................. (42,791) (66,629)
Other accrued expenses........................................................ (693,512) (291,165)
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......................... (2,758,327) 619,292
------------- -------------
Investing Activities:
Change in restricted cash......................................................... (34,348) (58,746)
Purchases of property and equipment............................................... (74,848) (133,344)
Proceeds from sale of available-for-sale securities............................... 2,048 287,411
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............................. (107,148) 95,321
------------- -------------
Financing Activities:
Issuance of common stock, net..................................................... 600,463 (23,330)
Net borrowings (payments) on revolving line of credit............................. 122,094 (491,283)
Dividends paid.................................................................... (283,857) (200,000)
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............................. 438,700 (714,613)
------------- -------------
NET DECREASE IN CASH............................................................ (2,426,775) 0
Cash at beginning of period......................................................... 4,436,276 300
------------- -------------
Cash at end of period............................................................... $ 2,009,501 $ 300
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements.
Ex. 2-5
TECH SQUARED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. The accompanying consolidated financial
statements and notes should be read in conjunction with the audited financial
statements and notes thereto included in the Company's 1998 annual report on
Form 10-K, as amended.
NOTE 2--INVENTORIES
The Company's inventories consist primarily of goods held for resale and are
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.
NOTE 3--DIGITAL RIVER
In December 1995, the Company's wholly-owned subsidiary, MacUSA, was
granted, by Xxxx Xxxxxxx, the majority shareholder and Chairman of the Board of
Directors of the Company, an option, exercisable through December 31, 2000 (the
"Digital River Option") to acquire 3,200,000 (post-split) shares (the "Digital
River Shares") of Digital River, Inc., a Minnesota corporation ("Digital River")
which was then privately held. At that time, such shares represented
approximately 60% of the outstanding common stock of Digital River.
Digital River conducted its initial public offering in August 1998. Prior to
such offering, the Company's ownership percentage of Digital River had been
reduced to approximately 23% and was being accounted for using the equity method
of accounting. Upon completion of such offering, the Company's ownership
percentage was reduced to approximately 19% at which time the Company began
accounting for its investment in Digital River as an available-for-sale security
in accordance with Statement of Financial Accounting Standards (SFAS) No. 115.
Digital River's shares are traded on the NASDAQ stock market under the symbol
"DRIV."
In December 1998, the Company participated in Digital River's secondary
offering by exercising and selling 200,000 shares subject to the Digital River
Option realizing net proceeds of $4,430,000.
In July 1999, the Company completed a cashless exercise of the Digital River
option by surrendering its right to one share of Digital River common stock in
exchange for 2,999,999 shares of Digital River common stock. Subsequently, the
Company purchased one share of Digital River stock to bring its investment in
Digital River to 3,000,000 shares, which represents ownership of approximately
15% of Digital River as of June 30, 1999.
NOTE 4--COMPREHENSIVE INCOME/(LOSS)
SFAS No. 130 established standards for reporting and display in the
financial statements of total net income and the components of all other
nonowner changes in equity, referred to as comprehensive income. Other
comprehensive income/(loss) for the three and six month period ending June 30,
1999 was
Ex. 2-6
TECH SQUARED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1999
NOTE 4--COMPREHENSIVE INCOME/(LOSS) (CONTINUED)
approximately ($12,717,000) and ($4,239,000), respectively compared to
($110,000) and ($93,000) for the same periods of 1998. Other comprehensive
income/(loss) was solely comprised of changes in the market value of the
available-for-sale securities.
NOTE 5--SUBSEQUENT EVENTS
In July 1999, the Company executed a definitive agreement with Digital River
for the sale of the assets of the Company consisting primarily of 3,000,000
shares of Digital River common stock and cash in a tax-free reorganization.
Pursuant to the Agreement, the Company will receive 2,650,000 shares of Digital
River common stock for which the Company will exchange 3,000,000 shares of
Digital River common stock which it currently holds and $1.2 million in cash.
The Company intends to adopt a plan of liquidation which will provide that the
Company will distribute the shares of Digital River common stock received in the
exchange to the Company's shareholders after payment of the Company's
liabilities and the establishment of a liquidating trust to pay any potential
future liabilities of the Company. The Company expects to contribute $6.2
million to such trust. The Agreement requires that all of the operations of the
Company, including its catalog and distribution businesses, are to be sold or
liquidated prior to closing of the transaction contemplated by such Agreement.
In August 1999, the Company announced that it had signed a letter of intent
with Virtual Technology Corporation to sell substantially all of the Company's
operating assets, including the Company's DTP Direct, Net Direct and
distribution operations, together with various trade and internet domain names.
The completion of the transaction is dependent upon satisfactory due diligence,
negotiation and execution of a definitive agreement and the Company's
shareholders' approval of the plan of liquidation.
NOTE 6--SALE OF MINING ASSETS
In May 1999, the Company sold all of the common stock of the Company's
wholly-owned subsidiary, Xxxxx Resources, Ltd. ("Xxxxx") to Conjecture Silver
Mines, In. ("Conjecture"). Xxxxx held all of the Company's mining assets. Under
the terms of the agreement, in exchange for the common stock of Xxxxx, the
company received 16,000 shares of the capital stock of LSI Communications, Inc.
("LSI") from Conjecture. Unless the Company is able, within 90 days from
acquiring the shares of LSI, to sell the shares of LSI for at least $50,000,
Conjecture is required to pay the Company the difference between the amount the
Company is able to obtain from the sale of LSI capital stock and $50,000.
Ex. 2-7
TECH SQUARED INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein are forward-looking statements within
the meaning of the Securities Act of 1933 and the Securities Exchange Act of
1934 that involve a number of risks and uncertainties. Such forward-looking
information may be indicated by words such as will, may be, expects or
anticipates. In addition to the factors discussed herein, among the other
factors that could cause actual results to differ materially are the following:
business conditions and growth in the personal computer industry and the general
economy; competitive factors such as rival computer and peripheral product
sellers and price pressures; availability of vendor products at reasonable
prices; inventory risks due to shifts in market demand; and risks presented from
time to time in reports filed by the Company with the Securities and Exchange
Commission, including but not limited to the annual report on Form 10-K as
amended for the year ended December 31, 1998.
The Company sells microcomputer hardware and software products, primarily
Apple Macintosh-Registered Trademark- related products and, to a lesser degree,
Microsoft Windows 95/Windows NT/MS-DOS ("Wintel") compatible products. The
Company's current target markets are (i) desktop publishing ("DTP"), graphic
arts and pre-press industries through its DTP Direct catalog, (ii) computer
dealers and value added resellers through its distribution business, and (iii)
developers of internal corporate intranet and external Internet sites and
managers of local area networks ("LAN") and wide area networks ("WAN") through
its Net Direct catalog.
In February 1999, the board of directors of Tech Squared authorized the
officers of the Company to make investigations and, if appropriate, enter into
preliminary negotiations regarding possible changes in the Company's business
including, but not limited to, strategic alliances, joint ventures, mergers,
sale of the Company's operating business and other alternatives. In April 1999,
the Company retained Bayview Capital Group, Inc. of Wayzata, Minnesota to act as
its exclusive advisor to locate one or more potential purchasers of certain
operating assets and businesses of the Company, specifically the DTP Catalog
Operations, Net Direct Catalog Operations and Distribution Sales Operations. In
August 1999, the Company announced it had signed a letter of intent with Virtual
Technology Corporation to sell substantially all of the Company's operating
assets including the Company's DTP Direct, Net Direct and distribution
operations together with various trade and internet domain names. The completion
of the transaction is dependent upon satisfactory due diligence, negotiation and
execution of a definitive agreement and the Company's shareholders' approval of
the Company's plan of liquidation.
In May 1999, the Company sold all of the common stock of the Company's
wholly-owned subsidiary, Xxxxx Resources, Ltd. ("Xxxxx") to Conjecture Silver
Mines, In. ("Conjecture"). Xxxxx held all of the Company's mining assets. Under
the terms of the agreement, in exchange for the common stock of Xxxxx, the
company received 16,000 shares of the capital stock of LSI Communications, Inc.
("LSI") from Conjecture. Unless the Company is able, within 90 days from
acquiring the shares of LSI, to sell the shares of LSI for at least $50,000,
Conjecture is required to pay the Company the difference between the amount the
Company is able to obtain from the sale of LSI capital stock and $50,000.
In July 1999, the Company executed a definitive agreement with Digital River
for the sale of the assets of the Company consisting primarily of 3,000,000
shares of Digital River common stock and cash in a tax-free reorganization.
Pursuant to the Agreement, the Company will receive 2,650,000 shares of Digital
River common stock for which the Company will exchange 3,000,000 shares of
Digital River common stock which it currently holds and $1.2 million in cash.
The Company intends to adopt a plan of liquidation which will provide that the
Company will distribute the shares of Digital River common stock received in the
exchange to the Company's shareholders after payment of the Company's
liabilities and the establishment of a liquidating trust to pay any potential
future liabilities of the Company. The Company expects to contribute $6.2
million to such trust. The Agreement requires that all of the operations of the
Company,
Ex. 2-8
including its catalog and distribution businesses, are to be sold or liquidated
prior to closing of the transaction contemplated by such Agreement.
For the three months ended June 30, 1999 the Company recorded a consolidated
net loss of ($768,000) or ($0.06) per share compared to a consolidated net loss
of ($1,043,000) or ($0.09) per share in the second quarter of 1998. The
consolidated losses from 1998 include the Company's share of losses of Digital
River, which amounted to $910,000 in the second quarter of 1998. For the six
months ended June 30, 1999 the Company recorded a consolidated net loss of
($947,000) or ($0.08) per share compared to a consolidated net loss of
($1,548,000) or ($0.14) per share for the same period of 1998. The consolidated
losses for the first six months of 1998 included the Company's share of losses
of Digital River, which amounted to $1,459,000. Digital River's issuance of
additional shares in 1998 resulted in the Company accounting for its investment
in Digital River as "available-for-sale" securities starting August 12, 1998.
RESULTS OF OPERATIONS
NET SALES
Net sales for the Company's second quarter ended June 30, 1999 totaled
$10,516,000 compared to $9,502,000 for the corresponding period of 1998, an
increase of 10.7%. Sales to DTP Direct catalog customers increased 5.8% and the
addition of the Net Direct catalog produced $810,000 in sales while sales
through the Company's distribution business decreased 1.7% in the second
quarter. The fastest growing product categories, based on the percentage
increase in dollar sales over the second quarter of 1998, were digital cameras,
networking equipment, magnetic drives, printers and computer systems. Net sales
for the first six months of 1999 totaled $21,620,000 compared to $18,095,000 for
the same period of 1998, an increase of 19.5%. The increase in sales during the
first six months of 1999 compared to the same period of 1998 was mainly due to
an 18.4% increase to DTP Direct catalog customers, primarily due to an increase
in the number of outbound sales reps, and the addition of the Net Direct catalog
which produced $1,471,000 in sales during that period.
Fluctuations in the Company's net sales from period to period can be
expected due to a number of factors, including the timing of new product
introductions by the Company's major vendors and their competitors, seasonal
cycles commonly experienced in computer-related industries, and changes in
product mix and product pricing. As a result, the operating results for any
particular period are not necessarily indicative of the results of any future
period.
GROSS PROFIT
Gross profit for the quarter ended June 30, 1999, was $1,274,000 or 12.1% of
net sales compared to $1,193,000 or 12.6 % of net sales for the comparable
period of 1998. Gross profit for the six-month period ended June 30, 1999 was
$2,651,000 or 12.3% compared to $2,280,000 or 12.6% of net sales for the same
period in 1998. The decrease in gross profit percentage in both the three and
six month periods ended June 30, 1999, is primarily the result of continuing
downward pressure on product prices to the Company's DTP Direct catalog
customers and on margins. The Company expects ongoing competitive pressure on
gross profit, and, consequently, changes in pricing and product configuration
will be necessary in order to remain competitive.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses totaled $650,000 or 6.2% of sales during the
quarter ended June 30, 1999, compared to $764,000 or 8.0% of sales during the
corresponding period of 1998. For the six month period ended June 30, 1999,
selling and marketing expenses were $1,402,000 or 6.5% of sales versus
$1,284,000 or 7.1% of sales for the same period in 1998. The decrease was mainly
attributable to a decrease in net marketing costs associated with the May 1998
launch of Net Direct, which is directed at
Ex. 2-9
developers of internal corporate intranet and external Internet sites and
managers of LAN's and WAN's. Although the Company believes the target market for
the Net Direct catalog is substantially larger than the DTP Direct catalog, and
that the new catalog could provide significant opportunity for revenue growth,
there are significant risks associated with the launch of a new catalog
including; a completely new target audience, lack of any historical direct
marketing data on which to base mailing decisions, competitive forces and new
product lines. As a result, the Company believes the launch of the Net Direct
catalog will have a negative impact on the profitability of the Company in 1999,
and possibly beyond.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter ended June 30, 1999 were
$1,260,000 compared to $545,000 for the comparable period of 1998. For the six
month period ended June 30, 1999, general and administrative expenses were
$2,087,000 compared to $1,047,000 for the related period of 1998. The increases
for the three and six month periods ended June 30, 1999 over the same periods of
1998 is attributable to several factors including payroll and employee-related
expenses, transaction processing fees, and legal and consulting fees.
Additionally, the discontinuance of subletting office space to Digital River
also contributed to the increase in general and administrative expenses for the
first six months of 1999.
INVESTMENT INCOME
Investment income for the six-month period ended June 30, 1999 was $2,000
compared to $5,000 for the related period in 1998.
LOSSES ON MINING ASSETS
In May 1999, the Company sold the remaining mining assets for approximately
$146,000 less than the book value these assets.
NET INTEREST INCOME/(EXPENSE)
Net interest income for the quarter ending June 30, 1999 was $13,000
compared to net interest expense of $18,000 for the same period in 1998. Net
interest income for the six-month period ended June 30, 1999 was $35,000
compared to net interest expense of $42,000 for the same period in 1998. The
reduction in interest expense is primarily due to a decrease in the average
outstanding balance on the Company's line of credit, and the increase in
interest income is mainly attributed to an increase in cash in an interest
bearing account.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at June 30, 1999, consisted of
liquid funds, a revolving line of credit agreement with US Bancorp National
Association ("US Bank"), and vendor trade credit lines.
The Company had a Revolving Line of Credit Agreement with US Bank which
expired by its terms in June 1999. The agreement has been orally extended under
the same terms and conditions until a new agreement is signed. Borrowings under
the $2,500,000 agreement are payable on demand, limited by eligible percentages
of accounts receivable and inventory and bear interest at the prime rate plus
1.75%. As of June 30, 1999, the Company had unused availability under the line
of credit of approximately $1,183,000 and outstanding borrowings of $129,000.
The Company has a flooring program with a financing company covering up to
$633,000 in inventory purchases. The flooring program is secured by a standby
letter of credit in the amount of $560,000 issued
Ex. 2-10
pursuant to the Company's line of credit with US Bank. The Company uses the
flooring program to take advantage of certain programs with its major
distributors.
As of June 30, 1999, the Company had working capital of $3,205,000.
Inventories decreased from $1,784,000, as of December 31, 1998, to $1,476,000 as
of June 30,1999. Inventory turns in the second quarter of 1999 were 16.1
compared to 13.2 from the same period in 1998. Capital expenditures totaled
$75,000 in the second quarter of 1999 compared to $83,000 in the second quarter
of 1998.
The Company believes that funds generated from management of receivable and
inventory levels, advances under its line of credit, further expansion of lines
with trade creditors, the cash on hand and the potential proceeds from the sale
of its investments, will be sufficient to fund its operations through the end of
1999. However, maintaining an adequate level of working capital through the end
of 1999 and thereafter depends in part on the success of the Company's sales and
marketing efforts, the Company's ability to control operating expenses and the
Company's ability to maintain its relationships with its bank and its suppliers.
Furthermore, funding of the Company's operations in future periods may require
additional investments in the Company in the form of equity or debt. There can
be no assurance that the Company will achieve desired levels of sales or
profitability or those future capital infusions will be available on terms
acceptable to the Company, if at all.
YEAR 2000 COMPLIANCE
The Company's computer system and those of third parties with whom it does
business will be affected by issues and problems related to changes required as
a result of the year 2000 problem ("Y2K"). The Company's three key systems and
assets that may be directly impacted by the Y2K issue are its financial and data
system, its telephone system and its voice mail system. The financial and data
system requirements have been assessed and were upgraded and modified to be Y2K
compliant in April 1999. The telephone system is believed to be Y2K compliant,
and testing is scheduled for the third quarter of 1999. The voice mail system is
currently being analyzed to determine the degree of upgrade needed. The upgrade
to the voice mail system will be rolled out and tested during the third quarter
of 1999. The Company incurred expenses to modify its systems and the upgrading
of its current system to be Y2K compliant totaling approximately $35,000 in
1998, and approximately $30,000 through June 1999, and anticipates additional
costs of approximately $20,000 through the end of 1999. Maintenance and
modification costs incurred by the Company specifically related to Y2K will be
expensed as incurred and costs of new software (whether purchased or internally
developed) will be capitalized and amortized over the useful life of the
applicable software.
While the Company has exercised its best efforts to identify and remedy any
potential Y2K exposures within its control, certain risks exist with vendors and
suppliers which, to a significant extent, are beyond the immediate control of
the Company. To date, the Company has not identified any vendors or suppliers
who will not be Y2K compliant; however, this analysis is still in process. The
Company plans to develop appropriate contingency plans if non-compliant vendors
are identified. Failure to achieve timely completion of required modifications
or conversions or failure of the third parties with whom the Company has
relationships (e.g., vendors, clients, credit card processors) to be Y2K
compliant could have a material affect on the financial condition and operations
of the Company. The Company, however, is unable to assess disruption that may
occur as a result of supplier's and customer's non-compliance. Because the
Company markets products manufactured by multiple sources and typically sells
the products as "packages', Y2K problems affecting the Company's vendors may
have a significant affect on the Company. In addition, customers may delay
purchase decisions because of the uncertainty about Y2K issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
Ex. 2-11
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Xxxxxxx X. Apple, who served as Chief Executive Officer of the Company from
July 1998 until February 1999, has commenced a lawsuit against the Company and
certain of its officers and based on claims that (i) Mr. Apple's stock options
vested, prior to his termination, pursuant to a claimed acceleration of vesting
due to a supposed "change of control;" (ii) the Company unlawfully terminated
Apple's employment; and (iii) the Company's directors breached their fiduciary
duty in several instances. Such complaint seeks unspecified damages in excess of
$50,000 and an award of 775,000 registered shares of the Company's common stock.
The Company believes such claims are without merit and intends to contest
such lawsuit vigorously.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.71 Agreement for sale and purchase of Xxxxx Resources, Ltd. By Conjecture
Silver Mines, Inc. dated May 20, 1999.
10.72 Acquisition Agreement between the Registrant and Digital River, Inc. dated
July 11, 1999. (incorporated as Exhibit 10.1 in Company's Report on Form
8-K filed July 12, 1999)
10.73 Voting Agreement between Digital River and Xxxxxxx X. Xxxxx Xx. dated July
11, 1999. (incorporated as Exhibit 10.2 in Company's Report on Form 8-K
filed July 12, 1999)
10.74 Voting Agreement between Digital River and Xxxx X. Xxxxxxx dated July 11,
1999. (incorporated as Exhibit 10.3 in Company's Report on Form 8-K
filed July 12, 1999)
10.75 Amended and Restated (Second) Stock Option Agreement and Notice and
Acceptance of Exercise dated July 11, 1999, between Xxxx X. Xxxxxxx and
MacUSA, Inc. (a wholly-owned subsidiary of the Registrant).
(incorporated as Exhibit 10.4 in Company's Report on Form 8-K filed July
12, 1999)
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On July 12, 1999, the Company filed a report on Form 8-K reporting that the
Company had entered into an agreement related to the sale of substantially all
of its assets, after certain anticipated dispositions, to Digital River, Inc., a
Delaware corporation.
Ex. 2-12
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.
/s/ XXXXX XXXXX
------------------------------------------
Xxxxx Xxxxx
August 13, 1999 CHIEF EXECUTIVE OFFICER
/s/ XXXXXXX X. XXXXXX
------------------------------------------
Xxxxxxx X. Xxxxxx
CHIEF FINANCIAL OFFICER
Ex. 2-13
EXHIBIT INDEX
EXHIBIT
INDEX DESCRIPTION
------ --------------------------------------------------------------------------
10.71 Agreement for sale and purchase of Xxxxx Resources, Ltd. By Conjecture
Silver Mines, Inc. dated May 20, 1999.
10.72 Acquisition Agreement between the Registrant and Digital River, Inc. dated
July 11, 1999. (incorporated as Exhibit 10.1 in Company's Report on Form
8-K filed July 12, 1999)
10.73 Voting Agreement between Digital River and Xxxxxxx X. Xxxxx Xx. dated July
11, 1999. (incorporated as Exhibit 10.2 in Company's Report on Form 8-K
filed July 12, 1999)
10.74 Voting Agreement between Digital River and Xxxx X. Xxxxxxx dated July 11,
1999. (incorporated as Exhibit 10.3 in Company's Report on Form 8-K
filed July 12, 1999)
10.75 Amended and Restated (Second) Stock Option Agreement and Notice and
Acceptance of Exercise dated July 11, 1999, between Xxxx X. Xxxxxxx and
MacUSA, Inc. (a wholly-owned subsidiary of the Registrant).
(incorporated as Exhibit 10.4 in Company's Report on Form 8-K filed July
12, 1999)
27.1 Financial Data Schedule.
Ex. 2-14
