<PAGE>
PROSPECTUS
1,200,000 SHARES
[DATA DIMENSIONS LOGO]
[DATA DIMENSIONS LOGO]
COMMON STOCK
Of the 1,200,000 shares of Common Stock offered hereby, 1,151,666 shares are
being offered by Data Dimensions, Inc. ("Data Dimensions" or the "Company") and
48,334 shares are being offered by certain stockholders of the Company (the
"Selling Stockholders"). The Company will not receive any of the proceeds from
the sale of shares sold by the Selling Stockholders. See "Principal and Selling
Stockholders."
Prior to this offering, the Company's Common Stock was quoted on the
over-the-counter market under the symbol "DDIM." The closing bid price for the
Common Stock on March 28, 1996, was $17.25 per share (after giving effect to a
one-for-three reverse stock split to be effective upon the closing of this
offering). See "Price Range of Common Stock." The Common Stock is currently
quoted on the Nasdaq National Market under the symbol "DDIM."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS (2)
Per Share....................... $14.00 $0.98 $13.02 $13.02
Total (3)....................... $16,800,000 $1,176,000 $14,994,691 $629,309
</TABLE>
(1) Excludes a non-accountable expense allowance payable to Cruttenden Roth
Incorporated, representative of the Underwriters (the "Representative"), and
the value of warrants to purchase up to 120,000 shares of Common Stock at an
exercise price of 165% of the public offering price to be issued to the
Representative (the "Representative's Warrant"). The Company and the Selling
Stockholders have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $800,828, of which approximately
$780,528 is payable by the Company and $20,300 is payable by the Selling
Stockholders, including the Representative's non-accountable expense
allowance and assuming no exercise of the over-allotment option described in
Note 3 below.
(3) The Company and the Selling Stockholders have granted to the Underwriters a
45-day option to purchase up to 180,000 additional shares of Common Stock on
the same terms and conditions as set forth above, solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Stockholders will be $19,320,000, $1,352,400,
$17,338,291 and $629,309, respectively. See "Underwriting."
The shares of Common Stock are being severally offered by the Underwriters
named herein, subject to prior sale, when, as and if delivered and accepted by
them, and subject to certain other conditions. The Underwriters reserve the
right to reject any order in whole or in part and to withdraw, cancel or modify
the offer without notice. It is expected that the certificates representing the
shares of Common Stock offered hereby will be available for delivery at the
offices of the Representative, Irvine, California, on or about April 3, 1996.
------------------------
CRUTTENDEN ROTH
INCORPORATED
THE DATE OF THIS PROSPECTUS IS MARCH 29, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements, and other information
filed by the Company may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at its regional offices located at 7 World Trade
Center, 13th Floor, New York, New York 10048, and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company has filed with the Commission a registration statement (the
"Registration Statement") with respect to the shares of Common Stock offered
hereby. This Prospectus, which constitutes part of the Registration Statement,
does not contain all of the information contained in the Registration Statement
and the exhibits thereto. For further information with respect to the Company
and the shares of Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto, which may be examined
without charge at, and copies of all or part of which may be obtained at
prescribed rates from, the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Statements
contained in this Prospectus as to the contents of any contract or any other
document are not necessarily complete and, in each instance, reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS ASSUMES THAT (I) THE OVER-ALLOTMENT OPTION GRANTED TO THE
UNDERWRITERS HAS NOT BEEN EXERCISED AND (II) THE ONE-FOR-THREE REVERSE STOCK
SPLIT OF THE COMMON STOCK AND ELIMINATION OF THE COMPANY'S PREFERRED STOCK, BOTH
TO BE EFFECTIVE UPON THE CLOSING OF THIS OFFERING, HAVE BEEN COMPLETED. SEE
"UNDERWRITING," "DESCRIPTION OF CAPITAL STOCK -- REVERSE STOCK SPLIT" AND
"DESCRIPTION OF CAPITAL STOCK -- PREFERRED STOCK." INVESTORS SHOULD CAREFULLY
CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
Data Dimensions, Inc. ("Data Dimensions" or the "Company") provides high
quality knowledge-based and tool-assisted millennium consulting services. The
Company's millennium consulting services are based on its proprietary millennium
consulting methodology (the "Millennium Methodology"). This methodology consists
of a documented set of procedures for resolving the widespread problems caused
by the inability of computer systems to properly interpret dates for the year
2000 and beyond. Data Dimensions began providing millennium consulting services
in 1991 and has specialized in this service since 1993. The Company's clients
consist primarily of large business organizations, including insurance
companies, financial institutions, healthcare providers and public utilities.
The "millennium problem" arises from the widespread use of computer programs
that rely on two-digit date codes to perform computations and decision-making
functions. Many of these computer programs may fail due to an inability to
properly interpret date codes. For example, such programs may misinterpret "00"
as the year 1900 rather than 2000. These "date-dependent" programs are found in
computer hardware, software and embedded systems used in many businesses.
Data Dimension's experience in analyzing and resolving the millennium
problems of business organizations is incorporated in the Millennium
Methodology, which enables the Company to develop customized solutions to a
client's specific millennium problems. Through the application of the Millennium
Methodology, the Company is able to identify, evaluate and select specific
software tools that would be most effective in assisting a client with the
millennium update process. In addition, during this process the Company gains
knowledge about all areas of the client's computer systems, positioning it to
provide a broad range of computer consulting services not related to the
millennium problem.
The millennium consulting industry consists of a wide variety of computer
consulting and software companies that offer millennium consulting as part of
their services. These companies address those aspects of the millennium problem
that cannot be resolved by in-house information services personnel. Data
Dimensions is one of a small number of companies which specialize in the
millennium consulting business. This industry is expected to grow rapidly as
business organizations become aware of the millennium problem and accelerate the
pace at which they analyze their computer systems.
The Company's strategy is to continue to focus its resources on business
organizations that process large volumes of automated transactions involving
date computations, to expand both domestically and internationally and to refine
and enhance its proprietary millennium consulting methodology. Additionally, the
Company intends to use the knowledge and relationships obtained through its
millennium consulting services to implement a long-term, post-2000 strategy of
providing a full line of computer consulting services to current and future
clients.
The Company was incorporated under Delaware law in 1968. The Company's
executive offices are located at 777 - 108th Avenue N.E., Bellevue, Washington
98004, and its telephone number is (206) 688-1000.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.... 1,151,666
Common Stock offered by the Selling
Stockholders.......................... 48,334
Common Stock to be outstanding after
this offering (1)..................... 3,501,826
Use of proceeds........................ To eliminate the factoring of accounts receivable,
to finance accounts receivable, to establish
production facilities, to pay accrued dividends on
certain preferred stock and for working capital and
general corporate purposes.
Nasdaq National Market Symbol.......... DDIM
</TABLE>
- ------------------------
(1) Does not include shares of Common Stock issuable upon exercise of options
and warrants outstanding as of the date of this Prospectus or shares of
Common Stock issuable upon exercise of the Representative's Warrant. See
"Underwriting."
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue.................................................................... $1,687 $3,360 $6,232
Direct costs............................................................... 1,152 1,980 3,485
---------- ---------- ----------
Gross margin............................................................... 535 1,380 2,747
General, administrative and selling expenses............................... 795 1,107 2,236
---------- ---------- ----------
Income (loss) from operations.............................................. (260) 273 511
Other expense.............................................................. 110 146 207
---------- ---------- ----------
Income (loss) before income tax benefit.................................... (370) 127 304
Deferred income tax benefit................................................ -- -- 450
---------- ---------- ----------
Net income (loss).......................................................... $(370) $127 $754
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per share (1)............................................ $(0.33) $0.06 $0.30
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding........................................ 1,237,821 2,298,821 2,516,932
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................................................... $ (194) $ 14,020
Total assets............................................................................ 2,254 16,468
Total liabilities....................................................................... 2,282 2,282
Total stockholders' equity (deficit).................................................... (28) 14,186
</TABLE>
- ------------------------
(1) Net loss per share for 1993 is computed by dividing net loss plus preferred
stock dividends by the weighted average shares outstanding. See Note 1 to
the Financial Statements.
(2) Adjusted to give effect to the sale by the Company of 1,151,666 shares of
Common Stock offered hereby at the public offering price of $14.00 per share
and the anticipated application of the estimated net proceeds therefrom. See
"Use of Proceeds."
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING ANY SHARES OF COMMON STOCK OFFERED HEREBY.
UNCERTAIN AND UNDEVELOPED MARKET. The primary focus of the Company's
consulting services is resolving the "millennium problem," which is the
inability of certain computer systems to properly interpret dates for the year
2000 and beyond. Although the Company believes that the market for millennium
consulting services will grow significantly as the year 2000 approaches, there
can be no assurance that this market will develop to the extent anticipated by
the Company, if at all. Significant expense for sales and marketing may be
required to inform the public of the millennium problem and the need for
millennium consulting services. There can be no assurance that the millennium
consulting industry will devote the resources necessary to effectively inform
the public of this problem or that potential clients will understand or
acknowledge the millennium problem. In addition, affected companies may not be
willing or able to allocate the resources, financial or otherwise, to address
the problem in a timely manner. Many companies may attempt to resolve the
problem internally rather than contract with outside consulting firms such as
the Company. Due to these factors, development of the market for millennium
consulting services is uncertain and unpredictable. If the market for millennium
consulting services fails to grow, or grows more slowly than anticipated, the
Company's business, operating results and financial condition could be
materially and adversely affected. See "Business -- Industry Background -- The
Millennium Consulting Market."
COMPETITION. The market for millennium consulting services is highly
competitive and will become increasingly competitive as the year 2000
approaches. The primary competitive factors in the millennium consulting
industry are price, service, the expertise and experience of the personnel
provided to clients and the ability of such personnel to provide the skills and
knowledge necessary to solve data processing problems. A large number of
companies engaged in the computer consulting business are more established,
benefit from greater name recognition and have substantially greater financial,
technical and marketing resources than the Company. Moreover, other than
technical expertise, there are no significant proprietary or other barriers to
entry in the millennium consulting industry that could keep potential
competitors from developing similar services or providing competing services in
the Company's market. There can be no assurance that the Company will be able to
compete successfully against its competitors or that the competitive pressures
faced by the Company will not affect its financial performance. See "Business --
Competition."
RAPID TECHNOLOGICAL CHANGE. The millennium consulting services industry is
characterized by evolving technology and changing methodologies. The
introduction of software tools embodying new technology and the emergence of new
millennium consulting methodologies could render existing products and services
obsolete. The Company's future success will depend on its ability to continue to
refine and update its proprietary millennium consulting methodology, including
designing software tools specifically designed to economically and efficiently
address the millennium problems of its clients. There can be no assurance that
one of the Company's competitors will not develop a software tool or millennium
consulting methodology that is superior to the Company's services or achieves
greater market acceptance than the Company's millennium consulting methodology.
The development of a superior tool or methodology by one or more competitors, or
any failure by the Company to successfully respond to such a development, could
materially and adversely affect the Company's business, operating results and
financial condition. See "Business -- Competition" and "Business -- Strategy --
Millennium Consulting Services."
DECREASE IN MILLENNIUM CONSULTING MARKET AFTER THE YEAR 2000. The Company
currently generates substantially all of its revenue from, and devotes
substantially all of its resources to, its millennium consulting services, and
it expects to continue to do so for the next several years. Although the Company
believes that demand for certain millennium consulting services will continue
after the year 2000, this demand is likely to diminish significantly. Therefore,
beginning in approximately 1998, the Company plans to pursue opportunities in
the computer consulting market that are not related to the millennium problem
and to develop services to take advantage of those opportunities. The Company
intends to use the knowledge obtained in providing its millennium consulting
services to address other computer consulting needs of its clients, but
5
<PAGE>
there can be no assurance that there will be a market for the Company's computer
consulting services after the year 2000 or, if there is a market for the
Company's services, that the Company will develop those services sufficiently to
compete in that market. The failure to diversify and develop computer consulting
services required after the year 2000 could materially and adversely affect the
Company's business, operating results and financial condition. See "Business --
Strategy -- Position for Post-2000 Market" and "Business -- Company Services --
Knowledge-Based, Tool-Assisted Consulting."
CONCENTRATION OF CLIENTS. During 1995, the Company's largest client, Kaiser
Permanente, accounted for approximately $1,763,000, or 28% of revenue. The
Company's three largest clients in 1995 accounted for approximately 44% of
revenue and the Company's ten largest clients in 1995 accounted for
approximately 72% of revenue. Most of the Company's contracts with its clients
are terminable by either party upon written notice. The loss of, or a
significant reduction in work orders from, any of the Company's major clients
could materially and adversely affect the Company's business, operating results
and financial condition. See "Business -- Clients."
MANAGEMENT OF GROWTH. The Company has experienced significant growth in
recent years and intends to pursue rapid growth as part of its business
strategy. This growth strategy will require an increase in the number of the
Company's personnel, particularly skilled technical, marketing and management
personnel. The Company competes with some of the major computer, communications,
consulting and software companies, as well as information service departments of
major corporations, in seeking to attract qualified personnel. There can be no
assurance that the Company will be able to attract and retain the personnel
necessary to pursue its growth strategy. Further, the Company will be required
to expand, train and manage its employee base. This will require an increase in
the level of responsibility for both existing and new management personnel.
There can be no assurance that the management skills and systems currently in
place will be adequate or that the Company will be able to manage its growth
effectively and to assimilate its new employees successfully. Finally, the
Company plans to implement a comprehensive management information system in 1996
or 1997. Any difficulties encountered in a transition to such a system, or any
failure to adequately manage the Company's growth, could materially and
adversely affect the Company's business, operating results and financial
condition. See "Business -- Strategy."
DEPENDENCE ON KEY EXECUTIVE. The Company's past success has depended
largely on the efforts of Larry W. Martin, Chief Executive Officer and President
of the Company. Mr. Martin is not subject to an employment agreement which would
prevent him from leaving the Company or restrict his ability to compete with the
Company following the termination of his employment. There can be no assurance
that the Company will be able to retain the services of Mr. Martin. Further, the
Company does not currently maintain life insurance on the life of Mr. Martin.
The loss of Mr. Martin could materially and adversely affect the Company's
business, operating results and financial condition. See "Management --
Directors and Executive Officers."
LIMITED PROTECTION OF PROPRIETARY RIGHTS. The Company depends in part on
its proprietary know-how to differentiate its services from those of its
competitors. The Company does not have any patents and relies upon a combination
of trade secret, copyright and trademark laws and contractual restrictions to
establish and protect its ownership of its millennium consulting methodology.
The Company generally enters into non-disclosure and confidentiality agreements
with its employees, independent sales representatives, licensees and clients.
Despite these precautions, it may be possible for an unauthorized third party to
replicate the Company's millennium consulting methodology or to obtain and use
information that the Company regards as proprietary. The Company has licensed
the use of its millennium consulting methodology to several parties. Although
the Company's license agreements contain confidentiality and non-disclosure
provisions, there can be no assurance that the licensee will take adequate
precautions to protect this methodology. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. There can be no assurance that the means used
by the Company to protect its millennium consulting methodology will be adequate
or that the Company's competitors will not independently develop substantially
similar or superior methodologies. See "Business -- Intellectual Property."
6
<PAGE>
POTENTIAL FOR CONTRACT LIABILITY. The Company's millennium consulting
services involve key aspects of its clients' computer systems. The Company has
never been the subject of a damages claim related to its millennium consulting
services. However, any failure in a client's system could result in a claim for
substantial damages against the Company, regardless of the Company's
responsibility for such failure. The Company attempts to contractually limit its
liability for damages arising from negligent acts, errors, mistakes or omissions
in rendering its professional consulting services. Despite this precaution,
there can be no assurance that the limitations of liability set forth in its
service contracts would be enforceable or would otherwise protect the Company
from liability for damages. Additionally, the Company maintains general
liability insurance coverage, including coverage for errors or omissions.
However, there can be no assurance that such coverage will continue to be
available on acceptable terms, or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Company that exceed available insurance coverage or changes in the
Company's insurance policies, including premium increases or the imposition of
large deductible or co-insurance requirements, could materially and adversely
affect the Company's business, operating results and financial condition.
LIMITED CAPITALIZATION AND POTENTIAL NEED FOR ADDITIONAL WORKING
CAPITAL. The Company has reported profits in each of the eight quarters since
December 31, 1993. However, as of December 31, 1995, the Company's stockholders'
deficit was $28,000 and its working capital deficit was $194,000. The sale of
the shares of Common Stock being offered hereby will provide the Company with
additional working capital for general use for the next twelve months, but there
can be no assurance that the Company will not experience liquidity problems
because of adverse market conditions or other unfavorable events. In addition,
under the terms of the Company's factoring agreement, the Company may be
required to repurchase any receivable sold to its factor that has not been paid
within 90 days. To date, the amount of receivables that the Company has been
required to repurchase has been insignificant, but there can be no assurance
that the Company will not be required to repurchase a significant amount of
receivables in the future. Any such repurchase could have a material adverse
effect on the Company's liquidity. Further, because of the various business
risks described elsewhere in this "Risk Factors" discussion, there can be no
assurance that the Company will continue to be profitable. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
RISKS OF THIRD PARTY CLAIMS OF INFRINGEMENT. As the number of competitors
providing millennium consulting services increases, overlapping methodologies
used in such services will become more likely. Although the Company's millennium
consulting methodology has never been the subject of an infringement claim,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future, that assertion of such claims will not result
in litigation or that the Company would prevail in such litigation or be able to
obtain a license for the use of any infringed intellectual property from a third
party on commercially reasonable terms. Furthermore, litigation, regardless of
its outcome, could result in substantial cost to the Company and divert
management's attention from the Company's operations. Any infringement claim or
litigation against the Company could, therefore, materially and adversely affect
the Company's business, operating results and financial condition. See "Business
- -- Intellectual Property."
BROAD MANAGEMENT DISCRETION AS TO USE OF PROCEEDS. A substantial portion of
the net proceeds to be received by the Company in connection with this offering
is allocated to working capital. Accordingly, management will have broad
discretion with respect to the expenditure of such proceeds. Purchasers of
shares of Common Stock offered hereby will be entrusting their funds to the
Company's management, upon whose judgment they must depend, with limited
information concerning management's specific intentions as to the specific
working capital requirements to which the funds will be applied. See "Use of
Proceeds."
OFFICER AND DIRECTOR CONTROL. Upon completion of this offering, the
Company's officers and directors will beneficially own approximately 28% of the
Company's outstanding Common Stock (approximately 27% if the over-allotment
option granted is exercised in full). As a result, although they will not have
the ability to control matters requiring approval by the Company's stockholders,
they may have the ability to influence how other stockholders will vote on such
matters, including the election of directors. The Company currently
7
<PAGE>
has only one non-employee director; however, the Company intends to identify and
elect one or more additional non-employee directors in 1996. Currently, the
affiliated directors may have the ability to control how the Board of Directors
will vote on certain transactions. See "Principal and Selling Stockholders."
LACK OF ACTIVE TRADING MARKET; VOLATILITY OF STOCK PRICE. Prior to this
offering, the Company's Common Stock was traded on the over-the-counter market.
There has not been an active market in this stock. The Common Stock is currently
quoted on the Nasdaq National Market. However, there can be no assurance that an
active market for the Common Stock will develop after completion of this
offering or, if developed, that it will be sustained. The market price of the
Common Stock could be subject to wide fluctuations in response to quarterly
variations in the Company's operating results, changes in earnings estimates by
analysts, announcements of new services offered by the Company or its
competitors, developments in the Company's client relationships, general
conditions in the computer consulting industry, or other events or factors,
including events or factors that may be unrelated to the Company. Further, in
recent years, the stock market in general, and the market for shares of stock in
technology companies in particular, have experienced extreme price fluctuations.
Such extreme market fluctuations could materially and adversely affect the
market price of the Common Stock in the future. See "Price Range of Common
Stock."
RISK OF LOW-PRICED STOCKS. The Common Stock is currently quoted on the
Nasdaq National Market. In order to continue to be listed on the Nasdaq National
Market, a company must meet certain financial maintenance criteria. Although the
Company currently meets these criteria, there can be no assurance that the
Company will continue to do so in the future. Failure to meet these maintenance
criteria in the future may result in the delisting of the Common Stock from the
Nasdaq National Market. As a result of such delisting, the Common Stock would be
traded on the over-the-counter market, in which case investors may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the Common Stock. If the Company's Common Stock were delisted from the
Nasdaq National Market, and the trading price of the Common Stock were less than
$5.00 per share, the Common Stock might be considered "penny stock" and trading
in the Common Stock might be subject to the requirements of certain rules under
the Securities Exchange Act of 1934. These rules could adversely affect the
ability and willingness of broker-dealers to sell the Common Stock, which could
reduce the liquidity of the Common Stock and have a materially adverse effect on
the trading market for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this offering, the
Company will have 3,501,826 shares of Common Stock outstanding. The Company has
also granted options to directors, employees and others to acquire 389,500
shares of Common Stock, subject to certain vesting requirements. Immediately
following the completion of this offering, a total of 1,967,399 shares of Common
Stock (including the 1,200,000 shares sold in this offering) will be freely
tradeable without restriction. An additional 589,397 shares of Common Stock will
become freely tradeable without restriction after July 31, 1996, upon expiration
of lock-up agreements with certain stockholders of the Company. Finally, an
additional 945,030 shares of Common Stock may be sold subject to the limitations
of Rule 144 under the Securities Act, of which 807,358 shares are held by the
Company's Chief Executive Officer and President and are subject to a lock-up
agreement which expires 180 days after the date of this Prospectus. The
possibility that substantial amounts of Common Stock may be sold in the public
market would likely have a material adverse effect on prevailing market prices
of the Common Stock and could impair the Company's ability to raise capital
through the sale of its equity securities. See "Shares Eligible for Future
Sale."
NO CASH DIVIDENDS. The Company intends to retain any future earnings for
its business and does not anticipate paying any cash dividends in the
foreseeable future. See "Dividend Policy."
ANTI-TAKEOVER EFFECT OF CERTAIN STATUTORY AND CHARTER PROVISIONS. Upon
completion of this offering, the Company will be subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. In general,
this statute prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
In addition, certain provisions of the Company's Certificate of Incorporation,
as amended, and Amended and Restated Bylaws could have the effect of making it
more difficult for a third
8
<PAGE>
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. These statutory and charter provisions could have the
effect of delaying, deferring or preventing a change in control of the Company
and could limit the price that certain investors might be willing to pay in the
future for shares of the Common Stock. See "Description of Capital Stock --
Certain Statutory and Charter Provisions Regarding Change of Control."
IMMEDIATE AND SUBSTANTIAL DILUTION. The offering price for the shares of
Common Stock in this offering is substantially higher than the book value per
share of the Common Stock. Purchasers of shares of Common Stock in this offering
will therefore incur immediate and substantial dilution. See "Dilution."
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS. This Prospectus contains
certain forward-looking statements, including, among others (i) the potential
extent of the millennium problem and the anticipated growth in the millennium
consulting market; (ii) anticipated trends in the Company's financial condition
and results of operations (including expected changes in the Company's gross
margin and general, administrative and selling expenses); (iii) the ability of
the Company to decrease its reliance on accounts receivable factoring and to
rely on cash generated from operations and the proceeds of this offering to
finance its working capital requirements; (iv) the Company's business strategy
for expanding its presence in the computer consulting industry (including
opening new sales offices, updating its millennium consulting methodology,
expanding its licensing arrangements and positioning itself for non-millennium
and post-2000 markets); and (v) the Company's ability to distinguish itself from
its current and future competitors.
These forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to the other risks described elsewhere in this "Risk Factors"
discussion, important factors to consider in evaluating such forward-looking
statements include (i) the shortage of reliable market data regarding the
millennium consulting market; (ii) changes in external competitive market
factors or in the Company's internal budgeting process which might impact trends
in the Company's results of operations; (iii) unanticipated working capital or
other cash requirements; (iv) changes in the Company's business strategy or an
inability to execute its strategy due to unanticipated changes in the millennium
consulting market; and (v) various competitive factors that may prevent the
Company from competing successfully in the marketplace. In light of these risks
and uncertainties, many of which are described in greater detail elsewhere in
this "Risk Factors" discussion, there can be no assurance that the
forward-looking statements contained in this Prospectus will in fact transpire.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,151,666 shares of
Common Stock offered by the Company at the public offering price of $14.00 per
share are estimated to be $14,214,000 ($16,482,000 if the over-allotment option
granted to the Underwriters is exercised in full), after deducting the estimated
underwriting discounts and commissions and other estimated offering expenses
payable by the Company. The Company will not receive any of the proceeds from
the sale of shares of Common Stock by the Selling Stockholders. The principal
reasons for this offering are to increase the Company's working capital and to
enable the Company to meet the requirements for listing of the Common Stock on
the Nasdaq National Market System. The Company expects to use a portion of its
net proceeds to eliminate reliance on advances from its accounts receivable
factor (approximately $1,746,000 as of March 28, 1996), to finance its accounts
receivable growth and to pay accrued dividends on previously outstanding
Preferred Stock in the amount of $70,000. In addition, as more clients enter the
implementation phase of the millennium conversion process, the Company plans to
establish regional and international production facilities, where code and data
conversion will be completed. The Company intends to use the balance for
additional working capital needs and general corporate purposes. The Company's
management will have broad discretion with respect to the specific working
capital requirements to which the proceeds will be applied. Pending use, the
proceeds will be invested in short-term, investment-grade, interest-bearing
securities.
9
<PAGE>
PRICE RANGE OF COMMON STOCK
Prior to this offering, the Company's Common Stock was quoted on the
over-the-counter market under the symbol "DDIM." The Common Stock is currently
quoted on the Nasdaq National Market under the symbol "DDIM." The stock prices
listed below represent the high and low closing bid prices of the Common Stock
(after giving effect to a one-for-three reverse stock split), as reported in
Bloomberg Financial Market Commodities News, a service of Bloomberg L.P., for
each fiscal quarter beginning with the first fiscal quarter of 1994.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR 1994:
First quarter ended March 31, 1994........................................................... $ 0.75 $ 0.38
Second quarter ended June 30, 1994........................................................... 2.25 0.75
Third quarter ended September 30, 1994....................................................... 3.00 2.25
Fourth quarter ended December 31, 1994....................................................... 2.63 1.50
FISCAL YEAR 1995:
First quarter ended March 31, 1995........................................................... 2.63 1.88
Second quarter ended June 30, 1995........................................................... 6.75 2.54
Third quarter ended September 30, 1995....................................................... 4.88 2.25
Fourth quarter ended December 31, 1995....................................................... 10.50 4.31
FISCAL YEAR 1996:
First quarter ended March 31, 1996 (through March 28, 1996).................................. 22.31 3.38
</TABLE>
On March 28, 1996, the closing bid price of the Common Stock on the
over-the-counter market was $17.25 per share. The foregoing quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. As of March 18, 1996, there were approximately
741 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company intends to retain earnings, if any, for use in its business and to
support growth and does not anticipate paying cash dividends on its Common Stock
in the foreseeable future.
DILUTION
The net tangible book value of the Company at December 31, 1995 was
approximately ($28,000) or ($0.01) per share of Common Stock. Net tangible book
value per share is equal to the Company's total tangible assets (total assets
less intangible assets) less total liabilities divided by the number of shares
of Common Stock outstanding. After giving effect to the sale by the Company of
1,151,666 shares of Common Stock offered hereby (after deducting underwriting
discounts and commissions and other estimated offering expenses payable by the
Company), the net tangible book value of the Company at December 31, 1995 would
have been $14,186,163 or $4.11 per share of Common Stock. This represents an
immediate increase in net tangible book value of $4.12 per share to the existing
stockholders and an immediate dilution of $9.89 per share to new investors, as
illustrated by the following table:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $ 14.00
Net tangible book value per share before the offering..... $ (0.01)
Increase per share attributable to new investors.......... 4.12
---------
Net tangible book value per share after the offering........ 4.11
---------
Dilution per share to new investors......................... $ 9.89
---------
---------
</TABLE>
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1995, and as adjusted to give effect to the sale by the Company of
the 1,151,666 shares of Common Stock offered hereby at the public offering price
of $14.00 per share (and after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company).
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt........................................................................... $ 0 $ 0
Stockholders' equity (deficit):
Common Stock, par value $.001 per share, 20,000,000 shares authorized; 2,304,155 shares
issued and outstanding and 3,455,821 shares as adjusted(1)............................ 69 3
Additional paid-in capital............................................................. 1,457 15,737
Accumulated deficit.................................................................... (1,554) (1,554)
--------- -----------
Total stockholders' equity (deficit)................................................. (28) 14,186
--------- -----------
--------- -----------
Total capitalization..................................................................... $ (28) $ 14,186
--------- -----------
--------- -----------
</TABLE>
- ------------------------------
(1) As adjusted excludes 389,500 shares of Common Stock issuable upon exercise
of options outstanding as of March 18, 1996 under the Company's stock option
plan, 120,000 shares of Common Stock issuable upon exercise of the
Representative's Warrant and 45,839 shares issued upon conversion of
warrants dated March 5, 1991.
11
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below with respect to the Company's
statements of operations for each of the three years in the period ended
December 31, 1995, and with respect to the Company's balance sheets at December
31, 1994 and 1995, are derived from financial statements of the Company included
elsewhere in this Prospectus that have been audited by BDO Seidman, LLP,
independent certified public accountants, and are qualified by reference to such
financial statements and notes related thereto. The selected financial data with
respect to the Company's balance sheet as of December 31, 1993 is derived from
the Company's financial statements which were also audited by BDO Seidman, LLP
and which are not included herein. The selected financial data set forth below
is qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE
INFORMATION)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue.................................................................... $1,687 $3,360 $6,232
Direct costs............................................................... 1,152 1,980 3,485
----------- ----------- -----------
Gross margin............................................................... 535 1,380 2,747
General, administrative and selling expenses............................... 795 1,107 2,236
----------- ----------- -----------
Income (loss) from operations.............................................. (260 ) 273 511
Other expense.............................................................. 110 146 207
----------- ----------- -----------
Income (loss) before income tax benefit.................................... (370 ) 127 304
Deferred income tax benefit................................................ -- -- 450
----------- ----------- -----------
Net income (loss).......................................................... $ (370 ) $ 127 $ 754
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) per share (1)............................................ $ (0.33 ) $ 0.06 $ 0.30
Weighted average shares outstanding........................................ 1,237,821 2,298,821 2,516,932
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital deficit........................................................... $ (1,284) $ (1,203) $ (194)
Total assets...................................................................... 596 972 2,254
Total liabilities................................................................. 1,850 2,100 2,282
Total stockholders' deficit....................................................... (1,255) (1,127) (28)
</TABLE>
- ------------------------
(1) Net loss per share for 1993 is computed by dividing net loss plus preferred
stock dividends by the weighted average shares outstanding. See Note 1 to
the Financial Statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY. SEE "RISK FACTORS -- FORWARD LOOKING STATEMENTS
AND ASSOCIATED RISKS."
OVERVIEW
Data Dimensions provides high quality knowledge-based and tool-assisted
millennium consulting services. The Company's millennium consulting services are
based on its proprietary millennium consulting methodology. This methodology
consists of a documented set of procedures for resolving the widespread problems
caused by the inability of certain computer systems to properly interpret dates
for the year 2000 and beyond. Data Dimensions began providing millennium
consulting services in 1991 and has specialized in this service since 1993. The
Company's clients consist primarily of large business organizations, including
insurance companies, financial institutions, healthcare providers and public
utilities.
The Company markets its services domestically through six direct salespeople
and five independent sales representatives. Approximately 50% of the Company's
revenue in 1995 was attributable to direct sales and approximately 44% was
attributable to the Company's independent sales representatives.
Internationally, the Company has licensed the right to use its millennium
consulting methodology to four computer consulting firms located in Canada, the
United Kingdom, Finland and Israel. Approximately 6% of the Company's revenue in
1995 consisted of royalty and license fees pursuant to license agreements with
these consulting firms. The Company intends to pursue the growing international
market by establishing additional licensing relationships and has transferred an
employee to the United Kingdom to develop and manage these relationships.
However, the Company's ability to increase its international license
arrangements will depend on the development of, and the amount of competition
in, the international market. See "Risk Factors -- Uncertain and Undeveloped
Market" and "Risk Factors -- Competition." In addition, as more clients enter
the implementation phase of the millennium conversion process, the Company plans
to establish regional and international production facilities, where code and
data conversion will be completed.
The Company's revenue consists of billable hours for services rendered by
its technical consultants multiplied by contract rates and is recognized at the
time services are performed. The Company also receives royalty income from its
licensees, which is recognized as services are rendered by the licensee. The
Company currently generates substantially all of its revenue from, and devotes
substantially all of its resources to, its millennium consulting services, and
it expects to continue to do so for the next several years. Although the Company
believes that demand for certain millennium consulting services will continue
after the year 2000, this demand is likely to diminish significantly. Therefore,
beginning in approximately 1998, the Company plans to pursue opportunities in
the computer consulting market that are not related to the millennium problem
and to develop services to take advantage of those opportunities. The Company
intends to use the knowledge obtained in providing its millennium consulting
services to address other computer consulting needs of its clients, but there
can be no assurance that there will be a market for the Company's computer
consulting services after the year 2000 or, if there is a market for the
Company's services, that the Company will develop those services sufficiently to
compete in that market. The failure to diversify and develop computer consulting
services required after the year 2000 could materially and adversely affect the
Company's business, operating results and financial condition. See "Risk Factors
- -- Decrease in Millennium Consulting Market After the Year 2000."
Direct costs consist primarily of salaries, benefits and unreimbursed travel
expenses directly related to consulting services rendered by the Company.
Additionally, since the sales staff is compensated solely based on a percentage
of revenue, commissions earned are included in direct costs.
Gross margin depends primarily on the productivity of the Company's
technical staff. Productivity is based on the number of billable staff and their
billing rate, the number of working days in a period and the number of hours
worked per day. The Company's billable staff are paid salaries; however, clients
are charged a time-based rate. Gross margin also depends on the percentage of
revenue attributable to royalty income because the direct costs associated with
royalty income are lower than those associated with income for
13
<PAGE>
services rendered directly by the Company. Although the Company anticipates that
the percentage of revenue attributable to royalty income will increase, this
will primarily depend on the development of, and the amount of competition in,
the international market for consulting services. See "Risk Factors -- Uncertain
and Undeveloped Market" and "Risk Factors -- Competition." Finally, gross margin
depends on the percentage of revenue attributable to the various phases of the
millennium conversion process because gross margin for the implementation phase
is generally lower than for the planning phase. The Company expects the
percentage of revenue attributable to the implementation phase to increase as
the year 2000 approaches, which may have a slightly negative impact on gross
margin.
General, administrative and selling expenses consist primarily of the
salaries of the Company's administrative personnel and benefits, travel,
promotion and public relations, office expense and other general overhead.
Although the Company expects these expenses to increase in absolute terms as a
result of the Company's growth and normal cost increases, it expects these
expenses to stabilize or decrease slightly as a percentage of revenue. Whether
these expenses will stabilize or decrease as a percentage of revenue will depend
primarily on the extent to which the Company's recent expenditures relating to
the reorganization and increase of its administrative staff will support its
future growth. See "Risk Factors -- Management of Growth."
Other expense consists primarily of finance charges relating to the
Company's factored accounts receivable. The Company expects to eliminate its
reliance on its factor with the proceeds of this offering or through traditional
financial arrangements such as a revolving credit facility. Because traditional
financing arrangements are typically less expensive to maintain than factoring
arrangements, the Company expects other expense to decrease in 1996. However,
there can be no assurance that the Company will be able to obtain financing on
terms it finds acceptable or that it will be able to reduce or eliminate its
reliance on its factor. See "Risk Factors -- Limited Capitalization and
Potential Need for Additional Working Capital" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Company has net operating loss carryforwards for federal and state
income tax purposes and, accordingly, paid no income taxes for 1993, 1994 and
1995. Based upon its 1995 operating budget, management anticipates sufficient
income to utilize $450,000 of its deferred tax assets. Accordingly, in 1995, the
Company reversed $450,000 of its valuation allowances due to management's belief
that it is more likely than not that the related deferred tax assets will be
utilized in 1996. At December 31, 1995, the Company had federal and state net
operating loss carryforwards of $3,820,000 and $1,028,000, respectively. The
future utilization of the Company's federal net operating loss carryforwards
following certain changes in ownership is subject to limitations under Section
382 of the Internal Revenue Code. These limitations are expected to result in
the expiration of $1,312,000 of federal net operating loss carryforwards before
their complete utilization. The Company has recognized a valuation allowance on
a portion of its deferred tax assets due to the uncertainty of realizing the
benefits thereof.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenue....................................................... 100.0% 100.0% 100.0%
Direct costs.................................................. 68.3 58.9 55.9
----- ----- -----
Gross margin.................................................. 31.7 41.1 44.1
General, administrative and selling expenses.................. 47.1 33.0 35.9
----- ----- -----
Income (loss) from operations................................. (15.4) 8.1 8.2
Other expense................................................. 6.5 4.3 3.3
----- ----- -----
Income (loss) before income tax benefit....................... (21.9) 3.8 4.9
Deferred income tax benefit................................... 0.0 0.0 7.2
----- ----- -----
Net income (loss)............................................. (21.9)% 3.8% 12.1%
----- ----- -----
----- ----- -----
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenue for the year ended December 31, 1995 was $6,232,000, compared to
$3,360,000 in 1994, an increase of $2,872,000, or 85.5%. This increase was
primarily attributable to an increase in the general awareness of the millennium
problem and demand for millennium consulting services and the Company's expanded
marketing efforts. As a result of these factors, the Company's client base grew
from approximately 19 clients to approximately 50 clients in 1995. In addition,
while the Company received no royalty income in 1994, the Company received
royalty income of approximately $400,000 in 1995.
Gross margin for the year ended December 31, 1995 was $2,747,000, compared
to $1,380,000 in 1994, an increase of $1,367,000, or 99.1%. Gross margin as a
percentage of revenue was 44.1% in 1995 compared to 41.1% in 1994. This
percentage increase was primarily the result of an increase in the amount of
royalty income as a percentage of revenue (from 0% in 1994 to 6% in 1995) and an
increase in technical staff productivity. Additionally, during 1995, the number
of clients in the planning phase increased over 1994, further positively
impacting gross margin.
General, administrative and selling expenses for the year ended December 31,
1995 were $2,236,000, compared to $1,107,000 in 1994, an increase of $1,129,000,
or 102%. General, administrative and selling expenses as a percentage of revenue
increased from 33% in 1994 to 36% in 1995. This percentage increase was
primarily the result of additions to the Company's administrative and support
staff and the reorganization of its domestic operations. Related to this
reorganization, travel, promotion and recruiting expenses increased by
approximately $410,000. In the second and third quarters of 1995, the Company
hired a chief financial officer and a vice president of technical services,
which resulted in an increase in salaries and benefits of approximately
$245,000. In the third quarter of 1995, the Company reorganized its domestic
operations into three regions, which resulted in additional personnel, lease and
other office expenses of approximately $200,000. The Company believes that these
expenditures will support the anticipated increase in revenue for the next
twelve months. Therefore, although the Company expects general, administrative
and selling expenses to increase in absolute terms as a result of future growth
and normal cost increases, it expects these expenses as a percentage of revenue
to stabilize or decrease slightly over the next twelve months.
Other expense for the year ended December 31, 1995 was $207,000, compared to
$146,000 in 1994, an increase of $61,000, or 41.8%. The increase was
attributable to the increase in the volume of accounts receivable factored and
the related finance charges.
Net income for the year ended December 31, 1995 was $754,000, compared to
$127,000 in 1994, an increase of $627,000, or 493%.
15
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993
Revenue for the year ended December 31, 1994 was $3,360,000, compared to
$1,687,000 in 1993, an increase of $1,673,000, or 99.2%. The increase was
primarily attributable to an increase in the general awareness of the millennium
problem and demand for millennium consulting services and the Company's
expanding marketing efforts. As a result of these factors, the Company's client
base grew from approximately three clients in 1993 to approximately 19 clients
in 1994.
Gross margin for the year ended December 31, 1994 was $1,380,000, compared
to $535,000 in 1993, an increase of $845,000, or 158%. Gross margin as a
percentage of revenue was 41.1% in 1994 compared to 31.7% in 1993. This
percentage increase was the result of an increase in technical staff
productivity.
General, administrative and selling expenses for the year ended December 31,
1994 were $1,107,000, compared to $795,000 in 1993, an increase of $312,000, or
39.2%. This increase was primarily attributable to the Company's growth and
normal cost increases. However, general, administrative and selling expenses as
a percentage of revenue decreased from 47.1% in 1993 to 33.0% in 1994 because
the Company was not required to significantly increase its administrative staff
and related expenses in order to support its higher revenue base in 1994.
Other expense for the year ended December 31, 1994 was $146,000, compared to
$110,000 in 1993, an increase of $36,000, or 32.7%. The increase was
attributable to an increase in the volume of factored accounts receivable and
the related finance charges.
Net income for the year ended December 31, 1994 was $127,000, compared to a
net loss of $370,000 in 1993, an increase of $497,000.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited financial data for each of
the eight quarters in the period beginning January 1, 1994 and ended December
31, 1995. In the opinion of management of the Company, this information has been
prepared on the same basis as the audited financial information appearing
elsewhere in this Prospectus and includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for these periods. The operating results for any quarter are not
necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
1994 QUARTER ENDED 1995 QUARTER ENDED
-------------------------------------------------- ------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31 MARCH 31 JUNE 30
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C>
Revenue..................................... $ 736 $ 827 $ 851 $ 946 $ 1,038 $ 1,348
Direct costs................................ 423 479 503 575 632 814
----------- ----------- ----------- ----------- ----------- -----------
Gross margin................................ 313 348 348 371 406 534
General, administrative and selling
expenses................................... 242 277 302 286 331 369
----------- ----------- ----------- ----------- ----------- -----------
Income from operations...................... 71 71 46 85 75 165
Other expense............................... 36 36 36 38 51 57
----------- ----------- ----------- ----------- ----------- -----------
Income before income tax benefit............ 35 35 10 47 24 108
Deferred income tax benefit................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income.................................. $ 35 $ 35 $ 10 $ 47 $ 24 $ 108
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Net income per share........................ $ .02 $ .02 $ .00 $ .02 $ .01 $ .04
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Weighted average shares outstanding......... 2,200 2,200 2,200 2,300 2,300 2,400
<CAPTION>
SEPT 30 DEC 31
----------- -----------
<S> <C> <C>
Revenue..................................... $ 1,524 $ 2,322
Direct costs................................ 860 1,179
----------- -----------
Gross margin................................ 664 1,143
General, administrative and selling
expenses................................... 558 978
----------- -----------
Income from operations...................... 106 165
Other expense............................... 50 49
----------- -----------
Income before income tax benefit............ 56 116
Deferred income tax benefit................. -- 450
----------- -----------
Net income.................................. $ 56 $ 566
----------- -----------
----------- -----------
Net income per share........................ $ .02 $ .23
----------- -----------
----------- -----------
Weighted average shares outstanding......... 2,500 2,500
</TABLE>
To date, the Company has not experienced any seasonality to its business.
There can be no assurance, however, that the Company will not in the future
experience seasonality or that such seasonality will not have a materially
adverse effect on the Company's business, operating results or financial
condition.
16
<PAGE>
Gross margin has increased as a percentage of revenue due primarily to
increased productivity and an increase in the percentage of revenue attributable
to royalty income.
In the second and third quarters of 1995, the Company hired a chief
financial officer and a vice president of technical services. In the third
quarter of 1995, the Company reorganized its domestic operations into three
regions. These charges resulted in additional personnel, lease and other office
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced significant growth since 1993, with its revenue
growing from $1,687,000 in 1993 to $6,232,000 in 1995. During this period, the
Company has financed its cash requirements primarily through factoring its
accounts receivable and obtaining advance payments for services to be rendered
to certain clients. In August 1995, the Company raised gross proceeds of
$300,000 in a private placement of the Company's Common Stock. Net proceeds from
the sale of such shares were used for the Company's general working capital
needs.
At December 31, 1995, the Company had advances of $823,659 under a factoring
agreement. Advances are limited to 90% of receivables purchased by the factor. A
10% reserve is established upon the purchase of a receivable. In addition, the
Company is required to repurchase from the factor any receivable that has not
been paid within 90 days of the invoice date. Obligations under the factoring
agreement are secured by all of the Company's assets. The agreement provides for
a finance charge equal to 2% per month of the average daily account balance
outstanding. The finance charge is deducted from the established reserve. The
factoring agreement expires in June 1996 and the Company does not intend to
renew it.
The Company has recorded a reserve for uncollectible accounts receivable of
$2,500 at December 31, 1994 and 1995. Bad debt was $4,769, $1,872 and $0 in
1993, 1994 and 1995, respectively. At December 31, 1995, the Company had a
working capital deficit of $194,300. This deficit is compared to a deficit of
$1,203,000 at December 31, 1994, representing a reduction in the Company's
working capital deficit of $1,008,700. This reduction was primarily the result
of a $754,000 increase in accounts receivable resulting from higher sales.
The Company has no significant commitments for capital expenditures nor does
it anticipate entering into any such commitments in 1996.
The Company believes that, as a result of an increase in sales and
improvements in operating efficiencies, cash generated from operations along
with advances available under its factoring agreement will be adequate to
finance its working capital requirements for the next twelve months and reduce
its working capital deficit. In addition, the proceeds from this offering should
enable the Company to eliminate its reliance on factoring. The Company also
expects to obtain a revolving credit facility. There can be no assurance,
however, that the Company will be able to obtain such financing on terms it
finds acceptable. To the extent that such amounts are insufficient to finance
the Company's working capital requirements, the Company will be required to
raise additional funds through equity or debt financing. No assurance can be
given that such financing will be available on terms acceptable to the Company,
and, if available, such financing may result in further dilution to the
Company's stockholders and higher interest expense.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
Net cash provided by (used in) operating activities was $(357,600) in 1995
and $252,000 in 1994. An increase in accounts receivable and a decrease in
advance billings resulted in the decrease in cash provided by operations. This
decrease was partially offset by the increase in 1995 net income over 1994 as
well as increases in accounts payable and accrued expenses.
Net cash used in investing activities was $160,200 in 1995 and $187,800 in
1994, a decrease of $27,600. The decrease in the amount of cash used in
investing activities was attributable to a decrease in cash advanced to an
officer and was partially offset by an increase in purchases of equipment and
furniture.
17
<PAGE>
Net cash provided by (used in) financing activities was $540,600 in 1995 and
$(63,100) in 1994. The increase in cash provided by financing activities was due
primarily to an increase in advances under the factoring agreement and the
proceeds of a private placement. The increase was partially offset by the
repayment of notes payable to officers.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993
Net cash provided by (used in) operating activities was $252,000 in 1994 and
$(126,200) in 1993. Net income in 1994 and an increase in advance billings and
accrued compensation and commissions contributed to the increase. A decrease in
accounts payable and accrued payroll taxes and an increase in accounts
receivable partially offset the increase.
Net cash used in investing activities was $(187,800) in 1994 and $0 in 1993.
The decrease in cash during 1994 was due to an increase in advances to an
officer and purchases of equipment and furniture.
The cash provided by (used in) financing activities was $(63,100) in 1994
and $167,200 in 1993. The decrease in cash provided by financing activities in
1994 was due to repayments of notes payable to officers which were partially
offset by an increase in borrowings under the factoring agreement.
ADOPTION OF ACCOUNTING STANDARDS
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 "Accounting for Stock Based Compensation," which establishes a
fair value based method of accounting for stock-based compensation plans and
requires additional disclosures for those companies who elect not to adopt the
new method of accounting. While the Company studies the impact of the
pronouncement, it continues to account for employee stock options under APB
Opinion No. 23 "Accounting for Stock Issued to Employees." SFAS No. 123 will be
effective for fiscal years beginning after December 15, 1995.
18
<PAGE>
BUSINESS
THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY. SEE "RISK FACTORS -- FORWARD LOOKING STATEMENTS
AND ASSOCIATED RISKS."
INTRODUCTION
Data Dimensions, Inc. ("Data Dimensions" or the "Company") provides high
quality knowledge-based and tool-assisted millennium consulting services. The
Company's millennium consulting services are based on its proprietary millennium
consulting methodology (the "Millennium Methodology"). This methodology consists
of a documented set of procedures for resolving the widespread problems caused
by the inability of certain computer systems to properly interpret dates for the
year 2000 and beyond. Data Dimensions began providing millennium consulting
services in 1991 and has specialized in this service since 1993. The Company's
clients consist primarily of large business organizations, including insurance
companies, financial institutions, healthcare providers and public utilities.
The Company was incorporated under Delaware law in 1968.
Data Dimension's experience in analyzing and resolving the millennium
problems of business organizations is incorporated in the Millennium
Methodology, which enables the Company to develop customized solutions to a
client's specific millennium problems. Through the application of the Millennium
Methodolgy, the Company is able to identify, evaluate and select specific
software tools that would be most effective in assisting the client with the
millennium update process. In addition, during this process the Company gains
knowledge about all areas of the client's computer systems, positioning it to
provide a broad range of computer consulting services not related to the
millennium problem.
INDUSTRY BACKGROUND
THE MILLENNIUM PROBLEM. For several decades, computer programs and
programmers have encoded years using a two-digit format (e.g., "96" for "1996").
Many of the computer programs using two-digit date codes to perform computations
or decision-making functions will fail due to an inability to properly interpret
dates in the 21st century. For example, some computers will misinterpret "00" to
mean the year 1900 rather than 2000.
These "date-dependent" programs are prevalent in the computer systems used
by many companies, including the following systems:
SOFTWARE. Software applications that may be affected by the millennium
problem include those performing interest computations, actuarial
determinations, financial forecasting and scheduling, human resource
planning and inventory maintenance. Moreover, any change made to
applications software may require a corresponding change to the data used by
that software, which can involve analysis of millions of lines of records
contained in an organization's database. In addition, the software portion
of an operating system, as well as many of the utilities used by the
operating system, such as sorts, communications and language processing, may
contain date-dependent programs.
HARDWARE. Date-dependent functions are routinely incorporated into
hardware systems. For example, computer chips found in the operating systems
utilized by PCs and mainframes generally include date processing functions.
Additionally, the operating systems of some older mainframes will be
rendered inoperable due to their inability to interpret dates for the year
2000.
EMBEDDED SYSTEMS. Date-dependent programs are often embedded in devices
typically not associated with an organization's computers, such as its
security, power control, automated conveyor and telephone systems. In
addition, such programs are found in many automated teller machines.
Because of the extensive automation within most large organizations, resolving
the millennium problem may be essential for continuation of critical business
functions. In addition to problems arising in its own systems, an organization
may be indirectly affected by the date-dependent computer programs and databases
used by other organizations. For example, an organization's vendors may have
software applications that are directly integrated with the organization's
information processing applications and job-streams.
19
<PAGE>
THE MILLENNIUM CONSULTING MARKET. The millennium consulting market consists
of those aspects of the millennium problem that cannot be resolved by in-house
information services personnel. The world-wide cost of resolving the millennium
problem is estimated to exceed several billion dollars over the next four years.
The Company believes most organizations will initially attempt to resolve the
millennium problem internally. However, due to budget constraints, as well as
limitations on resources and expertise, the Company believes it is likely that a
substantial portion of the millennium update process will be outsourced to
consulting firms such as Data Dimensions.
THE DATA DIMENSIONS APPROACH
As part of Data Dimensions' "total solutions" approach, the Millennium
Methodology is designed to resolve all aspects of a client's millennium problem.
The Company performs a complete evaluation of the client's entire information
system, including its applications software, systems software and hardware, and
also identifies devices used by a client which contain embedded systems
potentially affected by the millennium problem. In addition, the Company
interfaces with a client's software vendors to determine the extent to which
those vendors are taking responsibility for updating their products, analyzes
the millennium problems of the client's vendors and the impact that the client's
millennium conversion may have on its customers, vendors and regulators.
The Company has established relationships with a number of different
software tool developers and vendors in the millennium consulting industry, but
is not contractually or otherwise affiliated with any particular software tool
vendor. These relationships enable the Company to increase its knowledge
concerning the millennium problem and keep abreast of related technical
developments that might benefit its clients. In addition, the Company's
independence from a particular vendor allows it to offer clients an objective
assessment of the strengths and weaknesses of the various software tools
currently on the market, and to choose those tools that are best suited for the
client's specific millennium conversion requirements.
STRATEGY
The Company's objective is to expand its position in the computer consulting
industry by providing its clients with high quality knowledge-based,
tool-assisted computer consulting services, specializing in millennium
consulting services. The Company's strategy includes the following key elements:
FOCUS ON SPECIFIC INDUSTRIES. The Company will continue to concentrate
its resources on business organizations that process large volumes of
automated transactions involving date computations, such as insurance
companies, financial institutions, healthcare providers and public
utilities. The Company believes that these organizations are most likely to
be aware of and affected by the millennium problem and are also able to
commit substantial resources to finding a solution.
EXPAND DOMESTIC COVERAGE. The Company intends to open several new sales
and consulting offices in various cities throughout the United States to
enhance its accessibility and responsiveness to clients. The Company also
will increase the size of its direct sales force and technical staff to meet
anticipated market growth.
REFINE MILLENNIUM METHODOLOGY. The Company's strategy is to
continuously update and refine the Millennium Methodology to incorporate the
Company's expanding knowledge base. As part of this process, the Company
will continue to test proprietary software tools which are specifically
designed to address the unique millennium problems of each of its clients.
EXPAND INTERNATIONAL COVERAGE. The Company will continue to pursue
strategic opportunities to expand its international presence by licensing
the Millennium Methodology to leading computer consulting firms in
specifically targeted countries in Europe and the Pacific Rim. The Company
believes that these licensing arrangements provide potential for growth in
new markets, enable the Company to service multinational clients and
increase market awareness of the Company's services.
In addition, as more clients enter the implementation phase of the millennium
conversion process, the Company plans to establish regional and international
production facilities where code and data conversion will be completed.
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<PAGE>
The Company intends to use the knowledge and relationships obtained through
its millennium consulting services to implement a long-term strategy of
providing a full line of computer consulting services to its current and future
customers. The Company believes that demand for millennium consulting services
will diminish after the year 2000 and intends to mitigate this by positioning
itself to provide computer consulting services for projects not related to the
millennium problem. For example, clients may require expansion of data fields
for zip-codes, branch information and currency fields. Although the Company
anticipates that substantially all of its resources will be devoted to
millennium consulting services for the next several years, the amount of
resources devoted to non-millennium consulting is expected to increase as the
year 2000 approaches.
COMPANY SERVICES
THE MILLENNIUM CONSULTING SERVICE. The Company's millennium consulting
service is based on the Millennium Methodology, which consists of three separate
phases: planning, pilot and implementation. These phases are offered either
individually or together as part of the Company's "total-solutions" approach to
resolving a client's millennium problems.
PLANNING PHASE. Working with a task force composed of a client's
information service professionals, finance personnel and key users, the
Company takes an inventory of the client's entire applications software
portfolio, identifies date-dependent applications and determines the
earliest point in the future that these applications will fail. The Company
also identifies computer hardware and embedded systems that may be affected
by the millennium problem and analyzes the impact of millennium conversion
on the client's date-sensitive products, vendor relationships and regulatory
environment. Based on this inventory and analysis, the Company determines
which design modifications, code revisions and other measures are needed and
prepares an initial cost estimate.
PILOT PHASE. In this phase, the Company tests various software tools on
a sample of the applications software identified in the planning phase to
determine which tools are best suited to automate or assist with the actual
conversion process and to create a stable environment for that process. The
Company tests tools already owned by the client, tools currently available
in the millennium consulting market and tools developed by the Company
specifically for the client. The Company also offers training in the use of
these tools for the client's information services personnel.
IMPLEMENTATION PHASE. Implementation involves the actual conversion of
the code and data contained in a client's operating systems, applications
software and related databases in accordance with the specifications
determined in the previous phases. During this phase, the Company modifies
the code, creates programs to change the data and builds bridges between
changed data and unchanged code. All of this is "unit tested" to ensure that
specific functions continue to perform, "string tested" to ensure that all
program components required in a process function together and "system
tested" to ensure that system functions within an application are working
properly and data bridges are performing correctly. The Company then moves
the changed code into the production environment and physically changes the
data. Finally, the Company monitors the conversion for a period of time
sufficient to confirm that the conversion was successful.
TOOL ASSESSMENT. In conjunction with its millennium consulting services,
the Company evaluates, analyzes and selects software tools designed to automate
or assist with each phase of its millennium consulting service. The Company
maintains working relationships with many software tool developers and vendors
involved in the millennium conversion business. The Company maintains these
relationships to increase its knowledge of the millennium problem and to stay
abreast of technical developments. As a result, the Company is able to
objectively evaluate the strengths and weaknesses of the various software tools
currently on the market. The Company offers tool assessment as part of each
phase of the millennium conversion process and as a separate service.
KNOWLEDGE-BASED, TOOL-ASSISTED CONSULTING. Although the Company currently
generates substantially all of its revenue from its millennium consulting
services, the Company intends to develop a broad range of knowledge-based,
tool-assisted consulting services not related to the millennium problem. The
Company
21
<PAGE>
believes that its clients will delay certain data processing projects unrelated
to the millennium problem while their millennium problems are being resolved. In
providing its millennium consulting services, the Company obtains an in-depth
understanding of a client's computer systems and business. The Company believes
that, as a result of its client-specific knowledge base and its experience in
tool-assisted consulting, it will be well-positioned to take advantage of the
anticipated backlog of data processing projects which are not related to the
millennium problem.
SALES AND MARKETING
The Company's marketing strategy is to maintain an image as a provider of
high quality computer consulting services. The Company focuses its marketing
efforts primarily on large business organizations including insurance companies,
financial institutions, healthcare providers and public utilities.
As part of its marketing strategy, the Company strives to be one of the
leading sources of reliable information on the millennium problem and millennium
consulting industry. To implement this strategy, the Company distributes its
quarterly MILLENNIUM JOURNAL to over 10,000 information service professionals
within its target market. In addition, the Company's employees frequently
participate in technical roundtables and conferences, thus increasing the
Company's industry presence and name recognition. Finally, the Company believes
that its international licensing arrangements will increase market awareness of
its services and allow it to attract multinational clients.
The Company currently maintains a direct sales force and a network of
independent sales representatives to market its millennium consulting services.
The Company relies on its sales force and independent sales representatives to
generate new clients as well as to pursue potential leads. To this end, the
Company's sales force and representatives are encouraged to engage in direct
marketing techniques including visits to businesses within the Company's target
market. In addition, the sales force and representatives respond to requests for
proposals, follow up on client referrals and pursue leads resulting from
technical roundtables and conferences.
The Company carefully selects and reviews the members of its sales force and
sales representatives. These parties generally enter into agreements with the
Company that govern the terms under which they market the Company's services.
Such agreements define an approved territory and typically contain one-year
terms.
CLIENTS
The Company's clients consist primarily of business organizations that
process large volumes of automated transactions involving date computations,
such as insurance companies, financial institutions, healthcare providers and
public utilities. The Company's clients include the following organizations:
<TABLE>
<CAPTION>
FINANCIAL
INSURANCE COMPANIES INSTITUTIONS HEALTHCARE PROVIDERS PUBLIC UTILITIES OTHER
- --------------------- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Allendale Mutual
Insurance Company Bank of Boston Blue Cross/Blue Ohio Edison ARCO
NationsBank Shield Nebraska Southern UNISYS
Kaiser California
Permanente Edison Company
</TABLE>
During 1995, the Company provided services to approximately 50 clients.
During 1995, the Company's largest client, Kaiser Permanente, accounted for
approximately $1,763,000, or 28% of revenue. The Company's three largest clients
in 1995 accounted for approximately 44% of revenue and the Company's ten largest
clients in 1995 accounted for approximately 72% of revenue.
INTELLECTUAL PROPERTY
The Company's intellectual property primarily consists of the Millennium
Methodology. The Company does not have any patents and relies upon a combination
of trade secret, copyright and trademark laws and contractual restrictions to
establish and protect its ownership of the Millennium Methodology. The Company
generally enters into non-disclosure and confidentiality agreements with its
employees, independent
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<PAGE>
sales representatives, licensees and clients. Despite these precautions, it may
be possible for an unauthorized third party to replicate the Millennium
Methodology or to obtain and use information that the Company regards as
proprietary.
The Company has licensed the use of the Millennium Methodology to four
computer consulting firms located in Canada, the United Kingdom, Finland and
Israel. Although the Company's license agreements with these consulting firms
contain confidentiality and non-disclosure provisions, there can be no assurance
that the licensee will take adequate precautions to protect the Millennium
Methodology. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the means used by the Company to protect
the Millennium Methodology will be adequate or that the Company's competitors
will not independently develop substantially similar or superior methodologies.
As the number of competitors providing millennium consulting services
increases, overlapping methodologies used in such services will become more
likely. Although the Millennium Methodology has never been the subject of an
infringement claim, there can be no assurance that third parties will not assert
infringement claims against the Company in the future, that assertion of such
claims will not result in litigation or that the Company would prevail in such
litigation or be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable terms.
Furthermore, litigation, regardless of its outcome, could result in substantial
cost to, and diversion of effort by, the Company. Any infringement claim or
litigation against the Company could, therefore, materially and adversely affect
the Company's business, operating results and financial condition.
COMPETITION
The market for millennium consulting services is highly competitive and will
become increasingly competitive as the year 2000 approaches. The primary
competitive factors in the millennium consulting industry are price, service,
and, most importantly, the expertise and experience of the personnel provided to
clients and the ability of such personnel to provide the skills and knowledge
necessary to solve data processing problems. The Company believes that its
"total solutions" approach to the millennium problem and its experience in
providing millennium consulting services distinguish its services from those of
its competitors.
The principal competitors within the millennium consulting industry are ISSC
(a subsidiary of IBM), a joint venture between Coopers & Lybrand and Viasoft,
Inc., Computer Horizons Corp. and Cap Gemini America, Inc. Some of the Company's
competitors are more established, benefit from greater name recognition and have
substantially greater financial, technical and marketing resources than the
Company. Moreover, other than the need for technical expertise, there are no
significant proprietary or other barriers to entry in the millennium consulting
industry. As a result, there can be no assurance that one of the Company's
competitors will not develop a millennium consulting methodology which achieves
greater market acceptance than the Millennium Methodology.
EMPLOYEES
As of January 31, 1996, the Company employed 82 full-time employees,
including 59 technical consultants, six employees in direct sales and 17
employees in administration and support. None of the Company's employees is
represented by a labor union, and the Company has never experienced a work
stoppage. The Company considers its relations with its employees to be good.
FACILITIES
The Company maintains its headquarters in a leased facility in Bellevue,
Washington. The lease on this space will expire in June 1997. In addition, the
Company maintains leased office space for its direct sales personnel located in
Walnut Creek, California; Joliet, Illinois; Wayland, Massachusetts; Dallas,
Texas; and Oxford, United Kingdom. Other than the lease for the Company's
headquarters, none of the Company's leases have terms in excess of one year. The
Company believes its facilities are in good condition.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the directors and executive officers of the
Company is set forth below.
<TABLE>
<S> <C> <C>
Larry W. Martin 59 Chairman of the Board, Chief Executive
Officer, President and Director (Class
II, exp. 1998)
William H. Parsons 63 Executive Vice President, Chief Financial
Officer, Secretary, Treasurer and
Director (Class I, exp. 1997)
Thomas W. Fife 70 Director (Class III, exp. 1996)
Richard A. Bergeon 50 Vice President, Technical Services
</TABLE>
The Company intends to identify and elect one or more additional
independent, unaffiliated directors and designate a compensation and an audit
committee in 1996.
LARRY W. MARTIN has been Chief Executive Officer, President and a Director
of the Company from June 1990 to the present. In addition, Mr. Martin has been
Chairman of the Board of the Company since February 1996. Mr. Martin served as
Vice President of Marketing for Manager Software Products, Inc., from 1989 until
joining Data Dimensions, Inc. From 1987 to 1989, Mr. Martin served as President
and Chief Executive Officer of MicroMain Software, Inc., which produced
application generator products.
WILLIAM H. PARSONS has been Chief Financial Officer, Executive Vice
President, Secretary and Treasurer of the Company since April 1995 and a
Director of the Company since June 1994. Mr. Parsons was the Executive Director
and Chief Operating Officer of Rubin and Rudman, a mid-size law firm located in
Boston, Massachusetts from 1986 to 1995. He has spent over thirty-five years
directly involved in business operations as chief financial officer in several
industries.
THOMAS W. FIFE has been a Director of the Company since June 1995. Mr. Fife
also is the co-founder and Chairman of the Board of VoiceCom Systems, Inc. Mr.
Fife was Chief Executive Officer of VoiceCom Systems, Inc. from 1984 through
1993, and has served as Chairman of the Board of Directors from June 1993 to the
present. He continues to serve as an active member of the VoiceCom Systems, Inc.
senior management staff. He also serves as a Director of Application Resources,
Inc. headquartered in San Francisco, California.
RICHARD A. BERGEON joined the Company in August 1994 and has been Vice
President of Technical Services of the Company since February 1996. From March
1994 until joining the Company, Mr. Bergeon was a Vice President of
Essentialists, Inc., a data processing consulting firm. From 1992 to 1994, Mr.
Bergeon was a named principal of Bergeon, Fu & Assoc., a computer consulting
firm which he co-founded. From 1989 to 1992, Mr. Bergeon was a Vice President of
Security Pacific Automation Company, a systems development and maintenance firm.
His responsibilities at Security Pacific included internal computer consulting
and technical training.
The Company's Board of Directors is divided into three classes, with
staggered three-year terms. Each class consists of one director. Officers serve
at the discretion of the Company's Board of Directors. No family relationship
exists between any directors or executive officers of the Company.
COMPENSATION OF DIRECTORS
The Company currently pays $500 per Board meeting attended to each director
who is not an employee of the Company. All directors are entitled to
reimbursement for expenses incurred in traveling to and from meetings of the
Company's Board of Directors. On June 20, 1995, Mr. Fife was granted an option
under the Company's 1988 Incentive Stock Option Plan and 1988 Nonstatutory Stock
Option Plan to purchase up to 3,333 shares of Common Stock at an exercise price
of $4.50 per share.
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<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth all compensation paid or accrued during the
three fiscal years ended December 31, 1995 for the Chief Executive Officer and
each executive officer of the Company whose total annual salary and bonuses
determined as at December 31, 1995 exceeded $100,000 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL -------------
COMPENSATION SECURITIES
NAME AND ------------- UNDERLYING
PRINCIPAL POSITION YEAR SALARY OPTIONS(#)
- --------------------------------------------- --------- ------------- -------------
<S> <C> <C> <C>
Larry W. Martin, CEO and President (1)....... 1995 $ 406,057 0
1994 395,300 0
1993 148,800 0
William H. Parsons, CFO (2).................. 1995 $ 110,565 99,999
1994 0 0
1993 0 0
Richard A. Bergeon, Vice President (3)....... 1995 $ 103,461 8,333
1994 36,538 0
1993 0 0
</TABLE>
- ------------------------------
(1) Beginning on April 1, 1996, Mr. Martin's base compensation will be $200,000
per year. In addition, Mr. Martin will be eligible to receive a bonus of 1%
of the base compensation for each 1% of increase in revenue over the prior
fiscal year.
(2) Mr. Parson's employment with the Company commenced in April 1995.
(3) Mr. Bergeon's employment with the Company commenced in August 1994.
The following table sets forth all individual grants of stock options made
by the Company during the fiscal year ended December 31, 1995 to each of the
Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO EXERCISE OR
UNDERLYING OPTIONS EMPLOYEES IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED (#) YEAR (1) ($/SHARE) DATE
- ---------------------------------------- ------------------- ------------------- ------------- ------------
<S> <C> <C> <C> <C>
Larry W. Martin......................... 0 0 N/A N/A
William H. Parsons...................... 49,166 31% $ 2.61 4/17/2005
17,500 11% 4.50 6/20/2005
33,333 20% 5.63 12/26/2005
Richard A. Bergeon...................... 8,333 5% 2.61 1/26/2005
</TABLE>
- ------------------------------
(1) Based on stock options representing an aggregate of 160,333 shares of
Common Stock granted to employees during the fiscal year ended December 31,
1995.
The following table sets forth information, on an aggregated basis,
concerning each exercise of stock options during the fiscal year ended December
31, 1995 by each of the Named Executive Officers and the fiscal year-end value
of unexercised options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FY-END (#) FY-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
- ---------------------------------------- ------------- --------- ---------------- --------------------
<S> <C> <C> <C> <C>
Larry W. Martin......................... 26,666 $ 33,600 190,000/0 $196,900/0
William H. Parsons...................... 0 0 20,000/80,000 67,080/327,495
Richard A. Bergeon...................... 0 0 3,333/5,000 8,700/13,050
</TABLE>
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<PAGE>
STOCK OPTION PLAN
The Company grants options pursuant to its 1988 Incentive Stock Option Plan
and 1988 Nonstatutory Stock Option Plan (the "Plan"). An aggregate of 500,000
shares of Common Stock are available for issuance pursuant to the Plan. At March
18, 1996, options to purchase an aggregate of 389,500 shares of Common Stock
were outstanding under the Plan. The Plan provides for (i) the granting to
employees (including officers and directors) of "incentive stock options" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and (ii) the granting to employees and non-employee directors of
nonstatutory stock options. The Plan is administered by the Board of Directors,
which determines the terms of all options granted under the Plan, interprets the
Plan and makes all determinations generally necessary for the administration of
the Plan. The option exercise price for shares of Common Stock issued under the
Plan will be determined by the Board of Directors. In no event will the option
exercise price be less than the fair market value of such shares determined as
of the date the option is granted. The aggregate fair market value (as of the
date the option is granted) of the shares issued for which incentive stock
options are exercisable for the first time by a person eligible to participate
under the Plan will not exceed $100,000 in any calendar year. The Plan provides
that options will have a term of not more than five years from the date of
grant.
Upon the termination of the employment of an optionee (other than by reason
of death or disability), any installments under an option held which have not
yet vested will expire and become unexercisable. All installments which have
vested as of such date will expire and become unexercisable three months
following the termination date (but not after the option has expired under its
terms). In accordance with the Plan, if the employment or directorship of any
option holder is terminated by reason of death or disability, the option may be
exercised at any time within one year of the terminating event (but not after
the expiration date of the option) to the extent rights to purchase have vested
pursuant to the option. The number of shares under each option and the price of
any shares under such option may be adjusted in a manner consistent with any
capital adjustment resulting from a stock dividend, stock split,
recapitalization, reorganization, merger, consolidation, liquidation, or a
combination or exchange of shares.
CERTAIN TRANSACTIONS
In 1992, Larry W. Martin, the Company's Chief Executive Officer and
President, made a demand loan to the Company in the amount of $300,000 bearing
interest at prime plus three percent. At December 1994, the principal and
accrued interest owing on this loan was $132,500.
In February and August 1994, the Company made two loans to Mr. Martin in the
amount of $65,000 and $50,000, respectively, each bearing interest at 11% and
each payable upon demand. At December 31, 1994, the aggregate principal and
accrued interest owing on these loans was $123,800.
In January 1995, Mr. Martin's loan to the Company was offset against the
Company's loans to Mr. Martin, leaving a balance of $6,859 owing to Mr. Martin.
This balance was offset in partial payment of the exercise price of stock
options exercised by Mr. Martin in May 1995.
In 1995, the Company made a non-interest bearing demand loan to Mr. Martin
in the amount of $35,000. This loan will be paid in full upon completion of this
offering by offsetting it against the accrued dividends on the Preferred Stock
payable to Mr. Martin.
In 1995, the Company made payments to two former officers and directors of
the Company in the total amount of $111,000. These payments discharged a note
payable and accrued consulting fees for services provided in 1992, 1993 and 1994
following the termination of their employment with the Company.
In February 1996, Mr. Martin and William H. Parsons, the Company's Executive
Vice President and Chief Financial Officer, made demand loans to the Company in
the amount of $50,000 and $65,000, respectively, bearing interest at 10%.
Any future material transactions and loans with affiliates will be made or
entered into on terms no less favorable to the Company than those that could be
obtained from unaffiliated third parties, and any such transactions and loans,
and any forgiveness of loans, will be approved by a majority of the non-employee
members of the Company's Board of Directors who do not have an interest in the
transaction.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, as of March 18, 1996, and as adjusted
to reflect the sale of the 1,151,666 shares of Common Stock offered hereby, with
respect to (i) each person known by the Company to own beneficially more than 5%
of the Common Stock; (ii) each of the Company's directors; (iii) each of the
Named Executive Officers; (iv) each Selling Stockholder; and (v) all directors
and executive officers of the Company as a group. This table assumes that the
over-allotment option granted to the Underwriters has not been exercised and
excludes 120,000 shares of Common Stock issuable upon exercise of the
Representative's Warrant. See "Underwriting."
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK BENEFICIALLY SHARES OF COMMON
OWNED PRIOR TO STOCK BENEFICIALLY
OFFERING SHARES TO OWNED AFTER OFFERING
------------------------------ BE SOLD IN ---------------------------
NAME AND ADDRESS (1) NUMBER PERCENT OFFERING NUMBER PERCENT
- ----------------------------------------- ----------------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Larry W. Martin (2) ..................... 1,030,692 40.58% 33,334 997,358 27.02%
777 - 108th Avenue N.E.
Suite 2070
Bellevue, Washington 98004
Bay Partners IV ......................... 319,060 13.58 0 319,060 9.11
10600 North DeAnza, #100
Cupertino, California 95014
R&W Ventures II (3) ..................... 209,270 8.90 0 209,270 5.98
3000 Sand Hill Road
Building 2, #175
Menlo Park, California 94025
Rogers Family Trust (3) ................. 33,333 1.42 0 33,333 *
3000 Sand Hill Road
Building 2, #175
Menlo Park, California 94025
California BP IV L.P. .................. 27,734 1.18 0 27,734 *
10600 North DeAnza, #100
Cupertino, California 95014
William H. Parsons (4) .................. 33,333 1.40 0 33,333 *
777 - 108th Avenue N.E.
Suite 2070
Bellevue, Washington 98004
Thomas W. Fife (5) ...................... 666 * 0 666 *
777 - 108th Avenue N.E.
Suite 2300
Bellevue, Washington 98004
Richard A. Bergeon (6) .................. 6,666 * 0 6,666 *
777 - 108th Avenue N.E.
Suite 2300
Bellevue, Washington 98004
P.R. Zaykowski & Co. L.P................. 8,333 * 8,333 0 *
Doyle R. McCravey........................ 6,667 * 6,667 0 *
All Directors and Officers as a group (4
persons) (7)............................ 1,071,357 41.62 33,334 1,038,023 27.86
</TABLE>
- ------------------------
* Represents less than 1% of the total issued and outstanding shares of
Common Stock.
27
<PAGE>
(1) Except as otherwise indicated, the stockholders identified in this table
have sole voting and investment power with regard to the shares shown as
beneficially owned by them.
(2) Includes 3,000 shares held by Mr. Martin's wife. Also includes 190,000
shares subject to options exercisable within 60 days of March 18, 1996.
(3) Roy L. Rogers controls voting and disposition power over all shares
beneficially owned by R&W Ventures II and Rogers Family Trust, as General
Partner and Trustee, respectively, thereof.
(4) Includes 1,667 shares held by Mr. Parson's wife. Also includes 29,833
shares subject to options exercisable within 60 days of March 18, 1996.
(5) Includes 666 shares subject to options exercisable within 60 days of March
18, 1996.
(6) Includes 3,333 shares subject to options exercisable within 60 days of
March 18, 1996.
(7) Includes 223,832 shares subject to options exercisable within 60 days of
March 18, 1996.
28
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company has 20,000,000 authorized shares of Common Stock, of which
2,350,160 shares were issued and outstanding as of March 28, 1996. Holders of
the Common Stock are entitled to one vote per share on all matters requiring
stockholder action. The Company's Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), does not permit cumulative voting for the
election of directors. Holders of Common Stock have no preemptive or other
subscription rights and there are no redemption, sinking fund or conversion
privileges applicable thereto. Holders of the Common Stock are entitled to
receive dividends as and when declared by the Company's Board of Directors out
of funds legally available therefor. See "Dividend Policy." Upon liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities.
All outstanding shares of the Common Stock are, and all shares to be issued and
sold by the Company in this offering will be, fully paid and non-assessable.
REVERSE STOCK SPLIT
At a special meeting held on February 16, 1996, the Company's stockholders
approved, subject to the closing of this offering, an amendment to the
Certificate of Incorporation to give effect to a one-for-three reverse stock
split of the Common Stock. As a result of the one-for-three reverse stock split,
each three shares of the Company's Common Stock, par value $.01 per share,
outstanding immediately prior to closing of this offering will be exchanged for
one share of Common Stock, par value $.001 per share. Purchasers in this
offering will receive shares of Common Stock, par value $.001 per share, which
shares will not be subject to the reverse stock split.
PREFERRED STOCK
The Company has 3,000,000 authorized shares of Series A Preferred Stock, par
value $.01 per share (the "Preferred Stock"), 2,800,000 shares of which have
been converted to Common Stock and are no longer issuable. At a special meeting
held on February 16, 1996, the Company's stockholders approved, subject to the
closing of this offering, an amendment to the Certificate of Incorporation to
eliminate authorization of the Preferred Stock.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Upon the completion of this offering, the holders of 85,000 shares of Common
Stock (the "Registrable Securities") or their transferees are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of an agreement
between the Company and the holders of the Registrable Securities. If the
Company registers any of its Common Stock either for its own account or for the
account of other security holders, the holders of Registrable Securities are
entitled to include their shares of Common Stock in the registration, subject to
the ability of the underwriters to limit the number of shares included in the
registration to not more than 10% of the offering. All registration expenses
must be borne by the Company; provided, however, that all underwriting discounts
and selling commissions applicable to the sale of shares in connection with any
registration shall be borne by the holders of the securities registered pro rata
on the basis of the number of shares of such securities being registered.
REPRESENTATIVE'S WARRANT
For a description of the warrant to be sold to the Representative in
connection with this offering, see "Underwriting."
CERTAIN STATUTORY AND CHARTER PROVISIONS REGARDING LIMITATIONS OF LIABILITY OF
DIRECTORS
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty as
a director except liability for (i) breaches of the duty of loyalty to the
Company or its stockholders, (ii) acts or omissions in bad faith or involving
intentional misconduct or knowing violations of law, (iii) a violation of
Section 174 of the Delaware General Corporation Law (including the payment of
unlawful dividends or unlawful stock purchases or redemptions), or (iv)
transactions in which a director receives an improper personal benefit.
29
<PAGE>
The Company's Certificate of Incorporation further provides that, if the
Delaware General Corporation Law is amended to authorize the elimination or
limitation of director liability which is greater than therein provided, then
the liability of a director of the Company will be eliminated or limited to the
fullest extent permitted by such law, as so amended.
CERTAIN STATUTORY AND CHARTER PROVISIONS REGARDING CHANGE IN CONTROL
Upon completion of this offering, the Company will be subject to Section 203
of the Delaware General Corporation Law ("Section 203") which, subject to
certain exceptions, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
(x) by persons who are directors and also officers and (y) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
The Company's Certificate of Incorporation includes a provision which
requires the affirmative vote of the holders of 66 2/3% of the shares of the
"Public Stock" for the adoption or authorization of any "Business Combination,"
for the amendment or repeal of the section of the Company's Bylaws which fixes
the number of directors constituting the Company's board of directors, and for
the repeal or amendment of this supermajority voting provision. "Public Stock"
is defined in the Company's Certificate of Incorporation as stock of the Company
entitled to vote on any business combination other than such stock held by a
"Controlling Stockholder." A "Controlling Stockholder" is any person, firm or
corporation which is, or at any time has been, or which together with certain
described affiliates or associates is, or at any time has been, the beneficial
owner of 30% or more of the Company's voting stock. A Controlling Stockholder is
deemed to beneficially own shares of stock in the Company which it has the right
to acquire pursuant to an agreement, or upon exercise of conversion rights,
warrants or options, or otherwise. "Business Combination" is defined in the
Company's Certificate of Incorporation as any merger or consolidation of the
Company with or into any other corporation, any exchange of shares of the
Company's voting stock for securities or obligations of, another corporation, a
sale or lease of all or substantially all of the property and assets of the
Company to any person, firm or corporation, or a sale or lease to the Company or
any subsidiary of the Company of any assets having an aggregate fair market
value of more than $2 million in exchange for securities of the Company. The
Company's Certificate of Incorporation further provides that a majority of the
Company's directors has the power to determine whether any person is a
Controlling Stockholder and whether assets being acquired by the Company in
exchange for its securities have an aggregate fair market value greater than $2
million.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's securities is American
Stock Transfer and Trust Company.
30
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and, after giving effect to a one-for-three
reverse stock split of the Common Stock, there will be 3,501,826 shares of
Common Stock outstanding. Immediately following the completion of this offering,
a total of 1,967,399 shares of Common Stock (including the 1,200,000 shares sold
in this offering) will be freely tradeable without restriction. An additional
589,397 shares of Common Stock will become freely tradeable without restriction
after July 31, 1996 upon expiration of lock-up agreements with certain
stockholders of the Company. Finally an additional 945,030 shares of Common
Stock may be sold subject to the limitations of Rule 144 under the Securities
Act, of which 807,358 shares are held by the Company's Chief Executive Officer
and President and are subject to a lock-up agreement which expires 180 days
after the date of this Prospectus.
In general, under Rule 144 a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least two years, including
any persons who may be deemed to be an affiliate of the Company, is entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of 1% of the total number of then-outstanding shares of Common Stock or
the average weekly trading volume in the Common Stock as reported by Nasdaq
during the four calendar weeks preceding such sale. Sales pursuant to Rule 144
also are subject to certain other requirements relating to the manner of sale,
notice and availability of current public information about the Company.
Affiliates may publicly sell shares not constituting restricted securities under
Rule 144 in accordance with the foregoing volume limitations and other
restrictions but without regard to the two-year holding period. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days immediately preceding a sale by such person, and who
has beneficially owned restricted shares for at least three years, is entitled
to sell such shares under Rule 144 without regard to any of the limitations
described above.
No prediction can be made as to the effect, if any, that future sales of
shares or the availability of shares for future sale will have on the prevailing
market price of the Common Stock. Sales of substantial amounts of Common Stock
of the Company in the public market or the perception that such sales might
occur, could adversely affect the prevailing market price of the Common Stock.
31
<PAGE>
UNDERWRITING
The Underwriters named below, acting through Cruttenden Roth Incorporated
(the "Representative"), have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock set forth opposite their respective names in the table below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Cruttenden Roth Incorporated..................................................... 700,000
Hambrecht & Quist LLC............................................................ 100,000
Montgomery Securities............................................................ 100,000
Dain Bosworth Incorporated....................................................... 60,000
Hanifen, Imhoff Inc.............................................................. 60,000
Janney Montgomery Scott Inc...................................................... 60,000
Wedbush Morgan Securities Inc.................................................... 60,000
Wessels, Arnold & Henderson, L.L.C............................................... 60,000
----------
Total........................................................................ 1,200,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent. The nature of the Underwriters'
obligation is that they are committed to purchase all shares of Common Stock
offered hereby if any of such shares are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose initially to offer the shares of Common Stock directly to the public at
the public offering price set forth on the cover page of this Prospectus and to
certain dealers (which may include Underwriters) at such public offering price
less a concession not to exceed $0.50 per share. The Underwriters may allow, and
such dealers may reallow, a discount not to exceed $0.10 per share in sales to
certain other dealers. After the offering to the public, the public offering
price and concessions and discounts may be changed by the Representative.
The Company granted to the Underwriters an option, exercisable not later
than 45 days after the date of this Prospectus, to purchase up to an additional
180,000 shares of Common Stock, at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the table above bears to the number of shares of Common Stock
offered hereby, and the Company will be obligated pursuant to the option to sell
such shares to the Underwriters. The Underwriters may exercise the option only
for the purposes of covering over-allotments, if any, made in connection with
the distribution of the shares of Common Stock to the public.
The Company has agreed to pay the Representative a non-accountable expense
allowance of three percent of the offering proceeds, which will include proceeds
from the over-allotment option, if exercised. The Representative's expenses in
excess of the non-accountable expense allowance, including its legal expenses,
will be borne by the Representative.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales of shares of the Common Stock offered hereby to any
accounts over which they exercise discretionary authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
All of the Company's current directors and officers, who will beneficially
own an aggregate of 1,038,023 shares of Common Stock upon completion of this
offering, have agreed not to sell, offer to sell, contract to sell or otherwise
dispose of any of their shares of Common Stock or any other security convertible
into or exchangeable for, or options or warrants to purchase or acquire, shares
of Common Stock without the prior written consent of the Representative prior to
July 31, 1996 or, in the case of Larry W. Martin, the Company's
32
<PAGE>
Chief Executive Officer and President, prior to 180 days after the date of this
Prospectus. See "Shares Eligible for Future Sale." In addition, the Company has
agreed not to sell, issue, contract to sell, offer to sell or otherwise dispose
of any shares of Common Stock or any other security convertible into or
exchangeable for shares of Common Stock without the prior written consent of
Cruttenden Roth Incorporated during the same period.
The Company has agreed to sell to the Representative, for nominal
consideration, a warrant to purchase from the Company up to 120,000 shares of
Common Stock at an exercise price per share equal to 165% of the offering price
(the "Representative's Warrant"). The Representative's Warrant is exercisable
for a period of four years beginning one year from the date of this Prospectus,
and is not transferable for a period of one year except to officers of the
Representative or to any successor to the Representative. The Representative's
Warrant and the shares of the Common Stock issuable upon exercise of the
Representative's Warrant are being registered together with the Common Stock
offered hereby. In addition, the Company has granted certain other registration
rights to the holders of the Representative's Warrant.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof, copies of which are on file at the offices of the
Representative, the Company and the Commission. See "Available Information."
LEGAL MATTERS
The law firm of Garvey, Schubert & Barer, Seattle, Washington has acted as
counsel to the Company in connection with this offering and will render an
opinion as to the legality of the shares of Common Stock being offered hereby.
Heller, Ehrman, White & McAuliffe, Seattle, Washington, has acted as counsel to
the Underwriters in connection with certain legal matters relating to this
offering.
EXPERTS
The financial statements included in this Prospectus and in the Registration
Statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their reports
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports and given upon the authority of said firm as
experts in auditing.
33
<PAGE>
DATA DIMENSIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants......................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Stockholders' Deficit........................................................................ F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Data Dimensions, Inc.
We have audited the accompanying balance sheets of Data Dimensions, Inc. as
of December 31, 1994 and 1995, and the related statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 1995. 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 Data Dimensions, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Seattle, Washington
January 22, 1996, except for Notes 2, 5 and 10
as to which the date is March 18, 1996
F-2
<PAGE>
DATA DIMENSIONS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Current assets
Cash.............................................................................. $ 42,100 $ 64,800
Accounts receivable, less allowance for doubtful accounts of $2,500 in 1994 and
1995............................................................................. 695,000 1,448,600
Due from officer.................................................................. 123,800 35,000
Prepaid and other assets.......................................................... 36,000 89,600
Deferred income taxes............................................................. -- 450,000
------------- -------------
Total current assets............................................................ 896,900 2,088,000
------------- -------------
Equipment and furniture
Computers and equipment........................................................... 120,700 222,300
Furniture......................................................................... 11,500 15,800
Leasehold improvements............................................................ 7,000 21,500
------------- -------------
139,200 259,600
Less accumulated depreciation....................................................... 63,900 93,300
------------- -------------
Equipment and furniture, net........................................................ 75,300 166,300
------------- -------------
$ 972,200 $ 2,254,300
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Advance billings.................................................................. $ 829,100 $ 654,800
Advances from factor.............................................................. 510,500 823,700
Accrued compensation.............................................................. 115,700 221,300
Accounts payable.................................................................. 57,600 211,400
Accrued payroll taxes............................................................. 169,800 121,300
Accrued commissions............................................................... 80,500 142,500
Dividends payable................................................................. 70,000 70,000
Accrued expenses.................................................................. 55,400 37,300
Notes and other payables to officers.............................................. 211,000 --
------------- -------------
Total current liabilities....................................................... 2,099,600 2,282,300
------------- -------------
Stockholders' deficit
Series A preferred stock; $.01 par value; 3,000,000 shares authorized; 200,000
issuable; none issued and outstanding............................................ -- --
Common stock; $.01 par value; 20,000,000 shares authorized; 6,515,464 and
6,912,464 shares issued and outstanding in 1994 and 1995......................... 65,200 69,200
Capital in excess of par value.................................................... 1,115,800 1,456,900
Accumulated deficit............................................................... (2,308,400) (1,554,100)
------------- -------------
Total stockholders' deficit..................................................... (1,127,400) (28,000)
------------- -------------
$ 972,200 $ 2,254,300
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
DATA DIMENSIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995
1993 ------------ ------------
------------
(RESTATED)
<S> <C> <C> <C>
Revenue................................................................. $ 1,686,500 $ 3,359,800 $ 6,231,600
Direct costs............................................................ 1,151,700 1,980,000 3,484,700
------------ ------------ ------------
Gross margin............................................................ 534,800 1,379,800 2,746,900
General, administrative and selling expenses............................ 794,700 1,107,200 2,235,800
------------ ------------ ------------
Income (loss) from operations........................................... (259,900) 272,600 511,100
------------ ------------ ------------
Other (income) expense
Interest.............................................................. 109,700 152,600 205,900
Other................................................................. -- (6,900) 900
------------ ------------ ------------
Total other expense................................................. 109,700 145,700 206,800
------------ ------------ ------------
Income (loss) before income tax benefit................................. (369,600) 126,900 304,300
Deferred income tax benefit............................................. -- -- 450,000
------------ ------------ ------------
Net income (loss)....................................................... $ (369,600) $ 126,900 $ 754,300
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share............................................. $ (.10) $ .02 $ .10
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding..................................... 3,713,464 6,896,464 7,550,797
------------ ------------ ------------
------------ ------------ ------------
Pro forma -- unaudited
Net income (loss) per share........................................... $ (.33) $ .06 $ .30
Shares used in computation of pro forma net income (loss) per share... 1,237,821 2,298,821 2,516,932
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
DATA DIMENSIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK CAPITAL IN
---------------------- --------------------- EXCESS OF ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAR VALUE DEFICIT TOTAL
----------- --------- ---------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993............ 2,800,000 $ 28,000 3,713,464 $ 37,100 $ 1,115,400 $ (2,030,700) $ (850,200)
Dividends........................... -- -- -- -- -- (35,000) (35,000)
Net loss restated................... -- -- -- -- -- (369,600) (369,600)
----------- --------- ---------- --------- ----------- ------------ ------------
Balance, December 31, 1993.......... 2,800,000 28,000 3,713,464 37,100 1,115,400 (2,435,300) (1,254,800)
Conversion of preferred stock to
common stock....................... (2,800,000) (28,000) 2,800,000 28,000 -- -- --
Issuance of common stock............ -- -- 2,000 100 400 -- 500
Net income.......................... -- -- -- -- -- 126,900 126,900
----------- --------- ---------- --------- ----------- ------------ ------------
Balance, December 31, 1994.......... -- -- 6,515,464 65,200 1,115,800 (2,308,400) (1,127,400)
Issuance of common stock............ -- -- 397,000 4,000 341,100 -- 345,100
Net income.......................... -- -- -- -- -- 754,300 754,300
----------- --------- ---------- --------- ----------- ------------ ------------
Balance, December 31, 1995.......... -- $ -- 6,912,464 $ 69,200 $ 1,456,900 $ (1,554,100) $ (28,000)
----------- --------- ---------- --------- ----------- ------------ ------------
----------- --------- ---------- --------- ----------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
DATA DIMENSIONS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995
1993 ----------- -----------
-----------
(RESTATED)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)......................................................... $ (369,600) $ 126,900 $ 754,300
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........................................... 15,100 15,900 32,900
Deferred income taxes................................................... -- -- (450,000)
Loss on disposition of assets........................................... -- 1,900 1,300
Provision for bad debts................................................. 4,769 1,800 --
Changes in assets and liabilities:
Accounts receivables.................................................... (261,769) (168,700) (753,600)
Prepaid and other assets................................................ 30,400 (38,600) (53,600)
Advance billings........................................................ 399,200 429,900 (174,300)
Accounts payable........................................................ (68,600) (56,100) 153,800
Accrued compensation.................................................... (29,600) 35,700 105,600
Accrued commissions..................................................... -- 80,500 62,000
Accrued payroll taxes................................................... 113,300 (164,600) (48,500)
Accrued expenses........................................................ 40,600 (12,600) 12,500
----------- ----------- -----------
Net cash provided by (used in) operating activities......................... (126,200) 252,000 (357,600)
----------- ----------- -----------
Cash flows from investing activities
Purchases of equipment and furniture...................................... -- (64,000) (125,200)
Advances to officer....................................................... -- (123,800) (35,000)
----------- ----------- -----------
Net cash used in investing activities....................................... -- (187,800) (160,200)
----------- ----------- -----------
Cash flows from financing activities
Decrease in checks issued against future deposits......................... (25,800) -- --
Decrease in line-of-credit................................................ (27,900) -- --
Repayment of notes payable to officers.................................... -- (236,000) (111,000)
Proceeds from notes and other payables to officers........................ 53,500 32,000 --
Increase in advances from factor.......................................... 167,400 140,400 313,200
Issuance of common stock.................................................. -- 500 338,300
----------- ----------- -----------
Net cash provided by (used in) financing activities......................... 167,200 (63,100) 540,500
----------- ----------- -----------
Net increase in cash........................................................ 41,000 1,100 22,700
Cash, beginning of year..................................................... -- 41,000 42,100
----------- ----------- -----------
Cash, end of year........................................................... $ 41,000 $ 42,100 $ 64,800
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
DATA DIMENSIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
NATURE OF BUSINESS AND SIGNIFICANT CUSTOMERS
Data Dimensions, Inc. (the "Company") provides millennium conversion
computer consulting services to customers located throughout the United States,
Canada and Europe. Additionally, the Company licenses its millennium conversion
methodology to computer consulting firms located in Canada, the United Kingdom,
Finland and Israel. The Company is incorporated in the state of Delaware.
In fiscal years 1993, 1994 and 1995, sales to several major customers
exceeding 10% of total revenue were: 1993 -- three customers accounted for 12%,
17% and 21% of revenue, 50% in the aggregate; 1994 -- three customers accounted
for 10%, 11% and 49% of revenue, 70% in the aggregate; and 1995 -- one customer
accounted for 28%.
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 amounts reported in the financial statements. Actual
results could differ from those estimates.
EQUIPMENT AND FURNITURE
Equipment and furniture are stated at cost and are depreciated using the
straight-line method over estimated useful lives of 5 years. Leasehold
improvements are amortized over the lesser of the lease term, or useful lives.
Repairs and maintenance expenditures which do not extend productive life are
expensed as incurred.
REVENUE RECOGNITION
Revenue consists of billable hours for services rendered by the Company's
technical consultants multiplied by contract rates, and is recognized at the
time services are performed. The Company also receives royalty revenue from its
licensees, which is recognized as services are rendered by the licensee. Advance
billings are provided for by certain contracts and will be recognized as revenue
when the related services are performed.
NET INCOME (LOSS) PER SHARE
Net loss per share for 1993 is computed by dividing net loss plus the Series
A preferred stock dividends by the weighted average number of common shares
outstanding. Net income per share for 1994 and 1995 is computed by dividing net
income by the weighted average number of common shares. The Company's
outstanding options and warrants are considered to be common stock equivalents
in calculating primary earnings per share. Fully diluted earnings per share is
equivalent to primary earnings per share.
INCOME TAXES
Deferred taxes are provided for temporary differences in the basis of assets
and liabilities for book and tax purposes. If it is more likely than not that
some portion of a deferred tax asset will not be realized, a valuation allowance
is recorded.
RECLASSIFICATION
Certain balances have been reclassified in the 1994 financial statements to
conform with the 1995 presentation.
NOTE 2 -- LIQUIDITY AND CAPITAL RESOURCES
The Company has reported net income of $754,300 in 1995, however, as of
December 31, 1995, has a working capital deficit of $194,300.
The Company's 1996 operating plan has been developed to improve operating
efficiency and increase sales by broadening its revenue base. Management
anticipates that with increased revenues and improved efficiency along with
advances available under the Company's factoring agreement, it will be able to
fund operations for 1996 and reduce the working capital deficit.
F-7
<PAGE>
DATA DIMENSIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Although the Company believes its 1996 operating plan will be adequate to
meet its working capital needs, there can be no assurance that the Company will
not experience liquidity problems because of adverse market conditions or other
unfavorable events.
The Company has commenced an offering of approximately 3,000,000 shares of
its common stock which is expected to close in March 1996. In conjunction with
the closing of the offering, the Company intends to eliminate the authorization
of its preferred stock and complete a one-for-three reverse common stock split.
Pro forma net income (loss) per share and the number of shares used in the
computation of per share amounts are set forth in the accompanying statement of
operations.
NOTE 3 -- SERIES A PREFERRED STOCK
During 1994, 2,800,000 shares of Series A preferred stock were converted
into 2,800,000 shares of the Company's common stock under terms of the preferred
stock agreement. The Company can not declare or pay dividends on its common
stock until the balance of dividends in arrears on the Series A preferred stock
of $70,000 at December 31, 1995 are paid. See Note 2.
NOTE 4 -- STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the years for:
Interest................................................. $ 81,000 $ 152,250 $ 205,900
--------- ---------- ----------
Taxes.................................................... $ -- $ -- $ --
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
Noncash financing activities are as follows:
During 1994, 2,800,000 shares of Series A preferred stock were converted
to 2,800,000 shares of common stock.
During 1995, $123,800 of notes and accrued interest payable to the
Company's President were offset against his note receivable. Additionally,
16,300 shares of common stock were issued in exchange for $6,800 of his
notes payable.
NOTE 5 -- INCOME TAXES
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net operating loss carryforwards:
Federal........................................ $ 1,367,800 $ 1,412,500 $ 1,300,000
State.......................................... 84,400 111,000 97,000
Other............................................ 4,800 6,500 15,000
------------- ------------- -------------
1,457,000 1,530,000 1,412,000
Valuation allowance.............................. (1,457,000) (1,530,000) (962,000)
------------- ------------- -------------
$ -- $ -- $ 450,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Company has recognized a valuation allowance on a portion of its
deferred tax assets due to the uncertainty of realizing the benefits thereof.
F-8
<PAGE>
DATA DIMENSIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- INCOME TAXES (CONTINUED)
The federal and state income tax provision (benefit) is as follows for the
years ended December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
--------- ---------- -----------
<S> <C> <C> <C>
Current Provision
Federal................................................. $ -- $ 20,936 $ 105,000
State................................................... -- 9,015 13,000
--------- ---------- -----------
-- 29,951 118,000
--------- ---------- -----------
Deferred Benefit.......................................... -- (29,951) (568,000)
--------- ---------- -----------
Total Tax Benefit..................................... $ -- $ -- $ (450,000)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
The deferred benefit consists entirely of the utilization of federal and
state net operating loss carryforwards and the reduction of the Company's
valuation allowances by $450,000 for 1995.
At December 31, 1995, the Company has federal net operating loss
carryforwards of approximately $3,820,000 with expiration dates through 2008.
Additionally, the Company has state net operating loss carryforwards of
approximately $1,028,000 with expiration dates through 2000. The use of federal
operating loss carryforwards following certain changes in ownership is subject
to limitations. The Company anticipates that these limitations may significantly
diminish the net operating loss carryforwards available for utilization in
future years.
NOTE 6 -- ADVANCES FROM FACTOR
The Company factors its accounts receivable with a bank with full recourse.
The bank advances 90% of the face value of factored receivables and charges a
financing fee of 2% per month on the outstanding balance. Reserves withheld by
the factor are included in accounts receivable until collected. Advances under
the factoring agreement are $823,700 at December 31, 1995 and are limited to the
lesser of eligible receivables or $1,250,000. The factor agreement is
collateralized by substantially all assets of the Company and expires in June
1996. Financing fees during 1993, 1994 and 1995 were $109,800, $144,200 and
$202,100, respectively. The weighted average interest rate during 1993, 1994 and
1995 was 20%, 34% and 27% respectively.
NOTE 7 -- RELATED-PARTY TRANSACTIONS
The Company had consulting and employment agreements with former officers,
which expired December 31, 1994. At December 31, 1994, there was consulting fees
of $66,000 accrued, which the Company paid during the year ended December 31,
1995. Consulting fee expense was $72,000 and $32,000 in 1993 and 1994.
The Company had a note payable to a former officer bearing interest at 12%
and payable on demand. The amount outstanding at December 31, 1994 was $45,000.
In 1995, the outstanding principal balance was paid. Interest expense relating
to this note was approximately $5,400, $4,000 and $4,000 in 1993, 1994 and 1995.
The Company had a note payable and receivable with its President at December
31, 1994 of $132,500 and $123,800, respectively, including related accrued
interest of $32,500 and $8,800, respectively. The note payable and receivable
were bearing interest at prime (8.75% at December 31, 1995) plus 3% and 11%,
respectively and were payable upon demand. During January 1995, the client
offset the note payable with the note receivable. The remaining accrued interest
of $6,800 was offset against issuance of shares of common stock. Interest
expense related to the notes payable was $27,000 and $21,100 in 1993 and 1994.
Interest income related to the notes receivable was $0 and $8,800 in 1993 and
1994. There was no interest expense or income related to these notes in the
fiscal year ended December 31, 1995. At December 31, 1995 there is an unsecured,
non-interest bearing receivable due from the President for $35,000.
F-9
<PAGE>
DATA DIMENSIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- OPERATING LEASES
The Company leases equipment and office space in Washington and Texas under
noncancelable operating leases. Future minimum lease payments for the remaining
terms of the leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- ---------------------------------------------
<S> <C>
1996......................................... $ 101,700
1997......................................... 53,900
1998......................................... 2,900
----------
$ 158,500
----------
----------
</TABLE>
Rent expense was $77,800, $36,800 and $139,600 in 1993, 1994 and 1995,
respectively.
NOTE 9 -- EMPLOYEE BENEFIT PLAN
During 1995, the Company implemented a 401(k) employee benefit plan for
those employees who meet the eligibility requirements set forth in the plan.
Eligible employees may contribute up to 15% of their compensation. The Company's
annual contribution to the plan is determined by the board of directors. The
Company made no contributions during the year ended December 31, 1995.
NOTE 10 -- STOCK OPTIONS AND WARRANTS
The Company has an incentive stock option plan under which options to
purchase shares of the Company's common stock may be granted to employees. The
plan provides that the option price shall not be less than the fair market value
of the shares on the date of grant and that the options expire in the fifth year
after that date. The options vest ratably over four or five year periods as
provided for in each employee's option agreement.
The following is a summary of transactions:
<TABLE>
<CAPTION>
COMMON STOCK
UNDER OPTION
--------------------------------
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Outstanding, January 1............................................... 732,500 772,500 800,000
Exercised during the year (at prices ranging from $.25 to $1.00 per
share).............................................................. -- (97,000)
Granted during the year (at prices ranging from $.25 to $2.00 per
share).............................................................. 110,000 37,500 485,000
Expired during the year.............................................. (70,000) (10,000) (6,000)
--------- --------- ----------
Outstanding, December 31 (at prices ranging from $.25 to $2.00 per
share).............................................................. 772,500 800,000 1,182,000
--------- --------- ----------
Eligible, December 31, for exercise currently (at prices ranging from
$.25 to $2.00 per share)............................................ 499,000 649,500 735,000
--------- --------- ----------
--------- --------- ----------
</TABLE>
At December 31, 1994 and 1995, there were 1,000,000 and 1,500,000 shares
reserved for options to be granted under the plans.
In March 1991, in connection with promissory note agreements, the Company
issued warrants to certain stockholders. The warrants are exercisable for
150,000 shares of common stock at $.24 per share and expire in March 1996.
Subsequent to year end, the warrants were exercised. The Company accounted for
the exercise using the treasury stock method and, accordingly, issued 137,517
common shares.
NOTE 11 -- PRIOR PERIOD ADJUSTMENT
An error in recording prior years' interest and penalties on overdue payroll
taxes was discovered in 1994. Correction of this error resulted in an increase
of the 1993 reported loss and an increase in accrued payroll taxes of $78,000.
F-10
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information......................... 2
Prospectus Summary............................ 3
Risk Factors.................................. 5
Use of Proceeds............................... 9
Price Range of Common Stock................... 10
Dividend Policy............................... 10
Dilution...................................... 10
Capitalization................................ 11
Selected Financial Data....................... 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 13
Business...................................... 19
Management.................................... 24
Certain Transactions.......................... 26
Principal and Selling Stockholders............ 27
Description of Capital Stock.................. 29
Shares Eligible for Future Sale............... 31
Underwriting.................................. 32
Legal Matters................................. 33
Experts....................................... 33
Index to Financial Statements................. F-1
</TABLE>
--------------------------
1,200,000 SHARES
[DATA DIMENSIONS LOGO]
COMMON STOCK
----------------------
PROSPECTUS
----------------------
CRUTTENDEN ROTH
INCORPORATED
MARCH 29, 1996
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