<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1996
REGISTRATION NO. 333-841
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DATA DIMENSIONS, INC.
(Name of Small Business Issuer as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7379 06-0852458
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
777 - 108TH AVENUE N.E.
BELLEVUE, WASHINGTON 98004
(206) 688-1000
(Address and Telephone Number of
Principal Executive Offices)
LARRY W. MARTIN
CHIEF EXECUTIVE OFFICER AND PRESIDENT
777 - 108TH AVENUE N.E.
BELLEVUE, WASHINGTON 98004
(206) 688-1000
(Name, Address and Telephone Number of Agent for Service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
BRUCE A. ROBERTSON MICHAEL J. ERICKSON
MICHAEL A. SKINNER LAURA A. BERTIN
Garvey, Schubert & Barer Heller, Ehrman, White & McAuliffe
1191 Second Avenue, Suite 1800 6100 Columbia Center - 701 Fifth Avenue
Seattle, Washington 98101-2939 Seattle, Washington 98104-7098
(206) 464-3939 (206) 447-0900
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PER OFFERING REGISTRATION FEE
SECURITIES TO BE REGISTERED REGISTERED UNIT (2) PRICE (2) (3)
<S> <C> <C> <C> <C>
Common Stock, par value $.001 (1)..... 1,150,000 $16.50 $18,975,000 $1,635.78
Representative's Warrant to purchase
shares of Common Stock............... 100,000 $.001 $100 $0.01
Common Stock, par value $.001,
issuable upon exercise of
Representative's Warrant............. 100,000 $19.80 $1,980,000 $170.69
Total....................................................................................... $1,806.48
</TABLE>
(1) Includes 150,000 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(3) The total registration fee is $3,961.77, of which $2,155.29 was paid upon
the original filing of this Registration Statement on February 9, 1996.
Accordingly, only the additional amount due of $1,806.48 is being submitted
with this Pre-Effective Amendment No. 1.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD, NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED MARCH 20, 1996
1,000,000 SHARES
[DATA DIMENSIONS LOGO]
[DATA DIMENSIONS LOGO]
COMMON STOCK
Of the 1,000,000 shares of Common Stock offered hereby, 951,666 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."
The Company's Common Stock is quoted on the over-the-counter market under
the symbol "DDIM." The closing bid price for the Common Stock on March 18, 1996,
was $16.50 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 Company has applied to have the Common Stock listed on the Nasdaq
SmallCap Market under the symbol "DDIM" effective upon the closing of this
offering.
------------------------
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....................... $ $ $ $
Total (3)....................... $ $ $ $
</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 100,000 shares of Common Stock at an
exercise price of 120% 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 $791,828, of which approximately
$767,903 is payable by the Company and $23,925 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 150,000 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 $ , $ , $ and
$ , 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 ,
1996.
------------------------
CRUTTENDEN ROTH
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 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.... 951,666
Common Stock offered by the Selling
Stockholders.......................... 48,334
Common Stock to be outstanding after
this offering (1)..................... 3,301,659
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 SmallCap 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) $ 13,484
Total assets............................................................................ 2,254 15,932
Total liabilities....................................................................... 2,282 2,282
Total stockholders' equity (deficit).................................................... (28) 13,650
</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 951,666 shares of
Common Stock offered hereby at an assumed public offering price of $16.50
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 29% of the
Company's outstanding Common Stock (approximately 28% 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. The Company's
Common Stock is currently traded on the over-the-counter market. There has not
been an active market in this stock. The Company has applied to have its Common
Stock listed on the Nasdaq SmallCap Market effective upon the closing of this
offering. 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 Company has applied to have its Common Stock
listed on the Nasdaq SmallCap Market effective upon the closing of this
offering. In order to continue to be listed on the Nasdaq SmallCap 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
SmallCap 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 SmallCap 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 3,301,659 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 1,813,071 shares of Common
Stock (including the 1,000,000 shares sold in this offering) will be freely
tradeable without restriction. An additional 543,558 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
8
<PAGE>
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 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." See "Management -- Directors
and Executive Officers."
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
update 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 951,666 shares of
Common Stock offered by the Company at the assumed public offering price of
$16.50 per share are estimated to be $13,678,000 ($15,881,000 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 Company expects to use a portion of its net proceeds to
eliminate reliance on advances from its accounts receivable factor
(approximately $1,581,000 as of March 15, 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
The Company has applied to have the Common Stock listed on the Nasdaq
SmallCap Market, effective upon closing of this offering, 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 18, 1996).................................. 16.50 3.38
</TABLE>
On March 18, 1996, the closing bid price of the Common Stock on the
over-the-counter market was $16.50 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
951,666 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 $13,650,386 or $4.19 per share of Common Stock. This represents an
immediate increase in net tangible book value of $4.20 per share to the existing
stockholders and an immediate dilution of $12.31 per share to new investors, as
illustrated by the following table:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $ 16.50
Net tangible book value per share before the offering..... $ (0.01)
Increase per share attributable to new investors.......... (4.20)
---------
Net tangible book value per share after the offering........ 4.19
---------
Dilution per share to new investors......................... $ 12.31
---------
---------
</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 951,666 shares of Common Stock offered hereby at an assumed public offering
price of $16.50 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 3,255,821 shares as adjusted(1)............................ 69 3
Additional paid-in capital............................................................. 1,457 15,201
Accumulated deficit.................................................................... (1,554) (1,554)
---------
Total stockholders' equity (deficit)................................................. (28) 13,650
--------- -----------
--------- -----------
Total capitalization..................................................................... $ (28) 13,650
--------- -----------
--------- -----------
</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, 100,000 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 Operation -- 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 increase
in percentage was primarily a 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
restructuring, 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) for 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 any 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.
20
<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
22
<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.
23
<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>
25
<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 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.
26
<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 951,666 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 100,000 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 28.56%
777 - 108th Avenue N.E.
Suite 2070
Bellevue, Washington 98004
Bay Partners IV ......................... 319,060 13.58 0 319,060 9.66
10600 North DeAnza, #100
Cupertino, California 95014
R&W Ventures II (3) ..................... 209,270 8.91 0 209,270 6.34
3000 Sand Hill Road
Building 2, #175
Menlo Park, California 94025
Rogers Family Trust (3) ................. 33,333 1.42 0 33,333 1.01
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 1.00
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........................ 8,333 * 6,667 1,666 *
All Directors and Officers as a group (4
persons) (7)............................ 1,071,357 41.63 33,334 1,038,023 29.44
</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
2,350,159 shares were issued and outstanding as of March 18, 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, 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 76,667 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.
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.
29
<PAGE>
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 3,301,659 shares of
Common Stock outstanding. Immediately following the completion of this offering,
a total of 1,813,071 shares of Common Stock (including the 1,000,000 shares sold
in this offering) will be freely tradeable without restriction. An additional
543,558 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.....................................................
----------
Total........................................................................ 1,000,000
----------
----------
</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, for whom Cruttenden Roth
Incorporated is acting as Representative (the "Representative"), 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 $ per share. The
Underwriters may allow, and such dealers may reallow, a discount not to exceed
$ 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 Representatives of the Underwriters.
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
150,000 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 own an
aggregate of 814,191 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 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
32
<PAGE>
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 100,000 shares of
Common Stock at an exercise price per share equal to 120% 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 includes a net exercise provision permitting the holder(s) to pay the
exercise price by cancellation of a number of shares with a fair market value
equal to the exercise price of the Representative's Warrant. 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 requests given upon the authority of said firm as experts
in auditing and 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.
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>
- -----------------------------------------------------
-----------------------------------------------------
- -----------------------------------------------------
-----------------------------------------------------
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>
--------------------------
1,000,000 SHARES
[DATA DIMENSIONS LOGO]
COMMON STOCK
----------------------
PROSPECTUS
----------------------
CRUTTENDEN ROTH
INCORPORATED
, 1996
- -----------------------------------------------------
-----------------------------------------------------
- -----------------------------------------------------
-----------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation, as amended, contains a provision
that requires the Company to indemnify its directors, officers, agents and
employees to the extent permitted under Delaware law. The Company's Amended and
Restated Bylaws provide that the Company shall indemnify its directors,
officers, employees and other agents to the fullest extent permitted by law. The
Company believes that indemnification under its Amended and Restated Bylaws
covers at least negligence and gross negligence on the part of the indemnified
parties. The Company's Amended and Restated Bylaws also require it to maintain
insurance, to the extent reasonably available and at its expense, to protect any
person entitled to indemnity thereunder against any liability for which
indemnification would be provided thereunder, whether or not the Company has the
power to indemnify such person against such liability under Delaware law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Common Stock being registered.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 3,962
National Association of Securities Dealers, Inc. Filing Fee....... 1,649
Nasdaq Filing Fee................................................. 8,408
Non-accountable expense allowance................................. 471,075
Blue Sky Fees and Expenses........................................ 40,000*
Legal Fees and Expenses........................................... 150,000*
Accounting Fees and Expenses...................................... 15,000*
Printing and Engraving Expenses................................... 65,000*
Transfer Agent Fee................................................ 3,000*
Miscellaneous Expenses............................................ 9,809
---------
Total......................................................... 767,903
---------
---------
</TABLE>
- ------------------------
* Estimated for the purpose of this filing.
In the event the Underwriters' over-allotment option is exercised in full,
an additional $74,250 in non-accountable expenses will be payable by the
Registrant.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1993, the following securities of the Registrant have been
issued without registration under the Securities Act:
1. On February 26, 1996, an aggregate of 137,517 shares of the
Registrant's common stock, par value $.01 per share, was issued upon
conversion of certain Common Stock Purchase Warrants expiring on March 5,
1996 (does not reflect a one-for-three reverse stock split to be effective
upon completion of this offering).
2. In an offering closing on August 29, 1995, seven individuals and
entities, all of whom were "accredited investors" under Regulation D
promulgated by the Securities and Exchange Commission, purchased a total of
300,000 shares of the Registrant's common stock, par value $.01 per share,
for a total purchase price of $300,000 (does not reflect a one-for-three
reverse stock split to be effective upon the completion of this offering).
These shares are entitled to certain registration rights.
3. On September 26, 1993, the Registrant's outstanding shares of Series
A Preferred Stock, par value $.01 per share (the "Preferred Stock"), were
automatically converted into 2,800,000 shares of Registrant's Common Stock
for no additional consideration.
The foregoing sales were made without registration pursuant to the exemption
available under Section 4(2) of the Act applicable to transactions not involving
a public offering or pursuant to the terms and
II-1
<PAGE>
provisions of Regulation D promulgated by the Securities and Exchange
Commission. The following factors were relied upon by the Registrant to
establish the availability of this exemption for the sales of securities
described above: (1) Each purchaser was an accredited investor or was
sophisticated in relation to his or her investment; (2) Each purchaser gave
written assurance of investment intent; (3) Share certificates or warrants
included legends referring to restrictions on transfer; (4) Sales were made to a
limited number of persons; and (5) Each purchaser was given, or had full access
to, all material information regarding the Registrant and the security necessary
to make an informed decision.
No underwriting commissions or discounts were paid with respect to any of
the sales of unregistered securities described above.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
NO. DESCRIPTION
- -------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
1.2* Form of Warrant Agreement
3.1 Certificate of Incorporation and all amendments
thereto
3.2 Amended and Restated Bylaws
4.1 Form of Common Stock Certificate
4.2 See Exhibits 3.1 and 3.2 for provisions in the
Certificate of Incorporation and Amended and
Restated Bylaws of the Company defining the
rights of the holders of Common Stock
5.1* Opinion of Garvey, Schubert & Barer regarding
legality
10.1 Stock Purchase Warrant issued on March 6, 1991 by
the Company to R&W Ventures II granting R&W
Ventures II the right to purchase from the
Company 58,333 shares of the Company's Common
Stock at a price of $0.24 per share
10.2 Stock Purchase Warrant issued on March 6, 1991 by
the Company to BPIV granting BPIV the right to
purchase from the Company 7,333 shares of the
Company's Common Stock at a price of $0.24 per
share
10.3 Stock Purchase Warrant issued on March 6, 1991 by
the Company to Bay Partners IV granting Bay
Partners IV the right to purchase from the
Company 84,334 shares of the Company's Common
Stock at a price of $0.24 per share
10.4 1988 Incentive Stock Option Plan and 1988
Nonstatutory Stock Option Plan
10.5 Lease Agreement, dated June 7, 1994, between the
Company and Rainier Plaza Limited Partnership
10.6 Lease Agreement, dated December 14, 1994, between
the Company and Wright Runstad Properties L.P.
10.7 Factoring Agreement, dated June 13, 1995, between
the Company and Silicon Valley Financial Services
10.8 Promissory Note, dated February 28, 1994, made by
Larry W. Martin in favor of the Company in the
original principal amount of $65,000
10.9 Promissory Note, dated August 31, 1994, made by
Larry W. Martin in favor of the Company in the
original principal amount of $50,000
10.10 1996 Client Services Agreement and Financial
Schedule, dated September 27, 1995, between the
Company and Kaiser Permanente
10.11* Promissory Note, dated February 9, 1996, made by
the Company in favor of William H. Parsons in the
original principal amount of $65,000
10.12* Promissory Note, dated February 9, 1996, made by
the Company in favor of Larry W. Martin, in the
original principal amount of $50,000
23.1+ Consent of Independent Auditors
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
- -------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith.
+ Replaces previously filed exhibit.
(B) FINANCIAL STATEMENT SCHEDULES
Report of Independent Auditors on Financial Statement Schedules
<TABLE>
<S> <C> <C>
Schedule II -- Valuation and Qualifying Accounts
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
For determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
small business issuer under Rule 424(b)(1), or (4), or 497(h) under the
Securities Act will be treated as part of this Registration Statement as of the
time the Commission declares it effective.
For determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus will be treated as a new
Registration Statement for the securities offered in the Registration Statement,
and the offering of the securities at that time will be treated as the initial
bona fide offering of those securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Bellevue, State of Washington, on
March 20, 1996.
REGISTRANT: DATA DIMENSIONS, INC.
By /s/ LARRY W. MARTIN
------------------------------------
Larry W. Martin, CEO & President
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities stated on March 20, 1996.
Principal Executive Officer:
By /s/ LARRY W. MARTIN
-----------------------------------
Larry W. Martin, CEO & President
Principal Financial and Accounting
Officer:
By /s/ WILLIAM H. PARSONS
-----------------------------------
William H. Parsons, Chief
Financial Officer
Board of Directors:
By /s/ LARRY W. MARTIN
-----------------------------------
Larry W. Martin, Director
By /s/ WILLIAM H. PARSONS
-----------------------------------
William H. Parsons, Director
By /s/ THOMAS W. FIFE
-----------------------------------
Thomas W. Fife, Director
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S> <C>
1.1* Form of Underwriting Agreement
1.2* Form of Warrant Agreement
3.1 Certificate of Incorporation and all amendments thereto
3.2 Amended and Restated Bylaws
4.1 Form of Common Stock Certificate
4.2 See Exhibits 3.1 and 3.2 for provisions in the Certificate of
Incorporation and Amended and Restated Bylaws of the Company defining the
rights of the holders of Common Stock
5.1* Opinion of Garvey, Schubert & Barer regarding legality
10.1 Stock Purchase Warrant issued on March 6, 1991 by the Company to R&W
Ventures II granting R&W Ventures II the right to purchase from the
Company 58,333 shares of the Company's Common Stock at a price of $0.24
per share
10.2 Stock Purchase Warrant issued on March 6, 1991 by the Company to BPIV
granting BPIV the right to purchase from the Company 7,333 shares of the
Company's Common Stock at a price of $0.24 per share
10.3 Stock Purchase Warrant issued on March 6, 1991 by the Company to Bay
Partners IV granting Bay Partners IV the right to purchase from the
Company 84,334 shares of the Company's Common Stock at a price of $0.24
per share
10.4 1988 Incentive Stock Option Plan and 1988 Nonstatutory Stock Option Plan
10.5 Lease Agreement, dated June 7, 1994, between the Company and Rainier Plaza
Limited Partnership
10.6 Lease Agreement, dated December 14, 1994, between the Company and Wright
Runstad Properties L.P.
10.7 Factoring Agreement, dated June 13, 1995, between the Company and Silicon
Valley Financial Services
10.8 Promissory Note, dated February 28, 1994, made by Larry W. Martin in favor
of the Company in the original principal amount of $65,000
10.9 Promissory Note, dated August 31, 1994, made by Larry W. Martin in favor
of the Company in the original principal amount of $50,000
10.10 1996 Client Services Agreement and Financial Schedule, dated September 27,
1995, between the Company and Kaiser Permanente
10.11* Promissory Note, dated February 9, 1996, made by the Company in favor of
William H. Parsons in the original principal amount of $65,000
10.12* Promissory Note, dated February 9, 1996, made by the Company in favor of
Larry W. Martin, in the original principal amount of $50,000
23.1+ Consent of Independent Auditors
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith.
+ Replaces previously filed exhibit.
II-5
<PAGE>
<PAGE>
1,000,000 SHARES
DATA DIMENSIONS, INC.
COMMON STOCK
------------------
UNDERWRITING AGREEMENT
------------------
, 1996
------------------
Cruttenden Roth Incorporated
As Representative of the Several Underwriters
Named in Schedule I Attached Hereto
18301 Von Karman
Irvine, California 92715-1009
Dear Sirs:
Data Dimensions, Inc., a Delaware corporation (the "Company"), and the
stockholders of the Company named in Schedule II hereto (collectively, the
"Selling Stockholders"), severally propose to issue and sell an aggregate of
1,000,000 shares of the Company's Common Stock, $0.001 par value (the "Common
Shares"), to Cruttenden Roth Incorporated (the "Representative") and the several
underwriters named in Schedule I hereto (collectively with the Representative,
the "Underwriters" and individually, an "Underwriter," which terms shall also
include any Underwriter substituted as hereinafter provided in Section 12). The
Common Shares consist of 951,666 shares to be issued and sold by the Company and
48,334 outstanding shares to be sold by the Selling Stockholders. The
aforementioned 1,000,000 Common Shares to be issued and sold to the several
Underwriters by the Company and the Selling Stockholders are hereinafter
referred to as the "Offered Shares." The Offered Shares shall be offered to the
public at an initial offering price of $ per Offered Share (the "Offering
Price").
In addition, the several Underwriters, in order to cover over-allotments in
the sale of the Offered Shares, may purchase from the Company within 45 days
after the Effective Date (as
<PAGE>
hereinafter defined), for their own account for offering to the public at the
Offering Price, up to 150,000 additional Common Shares (the "Optional Shares"),
upon the terms and conditions set forth in Section 5 hereof. The Offered Shares
and the Optional Shares are hereinafter collectively referred to as the
"Shares." The Company, intending to be legally bound hereby, confirms its
agreement with each of the Underwriters as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) The Company has prepared in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the rules,
regulations, releases and instructions (the "Regulations") of the
Securities and Exchange Commission (the "SEC") under the Act in effect
at all applicable times and has filed with the SEC a registration
statement on Form SB-2 (File No. 333-841) and one or more amendments
thereto registering the Shares under the Act. Any preliminary
prospectus included in such registration statement or filed with the
SEC pursuant to Rule 424(a) of the Regulations is hereinafter called a
"Preliminary Prospectus." The various parts of such registration
statement, including all exhibits thereto and the information
contained in any form of final prospectus filed with the SEC pursuant
to Rule 424(b) of the Regulations in accordance with Section 6(a) of
this Agreement and deemed by virtue of Rule 430A of the Regulations to
be part of such registration statement at the time it was declared
effective, each as amended at the time such registration statement
became effective, are hereinafter collectively referred to as the
"Registration Statement." The final prospectus in the form included
in the Registration Statement or first filed with the SEC pursuant to
Rule 424(b) of the Regulations and any amendments or supplements
thereto is hereinafter referred to as the "Prospectus."
(b) The Registration Statement has or will become effective
under the Act as of the Effective Date, and the SEC has not issued any
stop order suspending the effectiveness of the Registration Statement
or preventing or suspending the use of any Preliminary Prospectus nor
has the SEC instituted, threatened to institute or, to the Company's
knowledge, contemplated proceedings with respect to such an order.
The Company has not received any stop order suspending the sale of the
Shares in any jurisdiction designated by the Representative pursuant
to Section 6(f) hereof, and no proceedings for that purpose have been
instituted or, to the Company's knowledge, are threatened or
contemplated. The Company has complied with any request of the SEC
and, to the Company's knowledge, any state securities commission in a
state designated by the Representative pursuant to Section 6(f)
hereof, for additional information to be included in the Registration
Statement or Prospectus or otherwise. Each Preliminary Prospectus
conformed to the Act and the Regulations as of its date and did not as
of its date contain an untrue statement of material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading, except the foregoing
2
<PAGE>
shall not apply to statements in or omissions from any Preliminary
Prospectus in reliance upon and in conformity with information
furnished to the Company in writing by or on behalf of any Underwriter
through the Representative expressly for use therein. The
Registration Statement on the date on which it was declared effective
by the SEC (the "Effective Date") conformed, and any post-effective
amendment thereof on the date it shall become effective, and the
Prospectus at the time it is filed with the SEC pursuant to Rule
424(b) of the Regulations and on the Closing Date (as defined in
Section 4 hereof) and any Option Closing Date (as defined in Section
5(b) hereof) will conform, to the requirements of the Act and the
Regulations, and neither the Registration Statement, any
post-effective amendment thereof nor the Prospectus will, on any of
such respective dates, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, except that
this representation and warranty does not apply to statements in or
omissions from the Registration Statement or the Prospectus made in
reliance upon and in conformity with information furnished to the
Company in writing by or on behalf of any Underwriter through the
Representative expressly for use therein. It is understood that the
written information described in Section 13 constitutes the only
information furnished in writing by or on behalf of any Underwriter
for inclusion in any Preliminary Prospectus, the Prospectus or the
Registration Statement.
(c) The Company is a corporation duly organized, validly
existing and in good standing under the laws of Delaware, with all
necessary corporate power and authority, and all required licenses,
permits, certifications, registrations, approvals, consents and
franchises to own or lease and operate its properties and to conduct
its business as described in the Prospectus and to execute, deliver
and perform this Agreement. The Company is duly qualified to do
business and is in good standing as a foreign corporation in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on
the Company.
(d) The Company does not own any stock or other equity interest
in, or control, directly or indirectly, any corporation, partnership
or other entity.
(e) The Company has all necessary corporate power and authority
to execute and deliver the Warrant to purchase Common Shares to be
issued and sold to the Representative under the terms of the Warrant
Agreement (as hereinafter defined) in accordance with Section 6(p) of
this Agreement (the "Representative's Warrant").
(f) This Agreement, the Warrant Agreement and the
Representative's Warrant have been duly authorized, executed and
delivered by the Company and constitute its valid and binding
obligations, enforceable against the Company in
3
<PAGE>
accordance with their respective terms, except as rights to indemnity
and contribution hereunder or thereunder may be limited by federal or
state securities laws or principles of public policy, and except as
enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles. This Agreement, the Warrant Agreement and the
Representative's Warrant conform to the description thereof in the
Prospectus.
(g) The execution, delivery and performance of this Agreement,
the Warrant Agreement and the Representative's Warrant by the Company
does not and will not, with or without the giving of notice or the
lapse of time, or both, (A) conflict with any terms or provisions of
the Certificate of Incorporation or By-laws of the Company, as amended
to the date hereof and the Closing Date or Option Closing Date, as the
case may be; (B) result in a breach of, constitute a default under,
result in the termination or modification of or result in the creation
or imposition of any lien, security interest, charge or encumbrance
upon any of the properties of the Company pursuant to any indenture,
mortgage, deed of trust, contract, commitment or other agreement or
instrument to which the Company is a party or by which any of its
properties or assets are bound or affected, the effect of which would
have a material adverse effect on the business or properties of the
Company; (C) violate any law, rule, regulation, judgment, order or
decree of any government or governmental agency, instrumentality or
court, domestic or foreign, having jurisdiction over the Company or
any of its properties or businesses or (D) result in a breach,
termination or lapse of the power and authority of the Company to own
or lease and operate its properties and conduct its business as
described in the Prospectus, the effect of which would have a material
adverse effect on the business or properties of the Company.
(h) The Company has authorized and outstanding capital stock
and, as of the date or dates indicated the Company had the
capitalization, set forth under the caption "Capitalization" in the
Prospectus and will have the as-adjusted capitalization set forth
under the caption "Capitalization" in the Prospectus. On the
Effective Date, the Closing Date and any Option Closing Date, there
will be no options or warrants for the purchase of, other outstanding
rights to purchase, agreements or obligations to issue or agreements
or other rights to convert or exchange any obligation or security
into, capital stock of the Company or securities convertible into or
exchangeable for capital stock of the Company, except as described in
the Prospectus.
(i) The authorized capital stock of the Company, including,
without limitation, the outstanding Common Shares and the Shares being
issued on the Closing Date and Option Closing Date (if any and to the
extent applicable), conforms to the descriptions thereof in the
Prospectus, and such descriptions conform to the descriptions thereof
set forth in the instruments defining the same. The information in
the Prospectus insofar as it relates to outstanding options that
4
<PAGE>
have been granted to employees, consultants and directors, the
Representative's Warrant and the Warrants, in each case as of the
Effective Date, the Closing Date and any Option Closing Date, is true,
correct and complete in all material respects.
(j) The outstanding Common Shares have been duly authorized and
are validly issued, fully paid and non-assessable. The Employee
Options and the Warrants have been duly authorized and validly issued
and are valid and binding obligations enforceable against the Company
in accordance with their terms, and except as enforcement may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors'
rights generally or by general equitable principles. The Warrant
Agreement and the Representative's Warrant, as of the Closing Date,
will have been duly authorized and validly issued and, when executed
and delivered by the Company, will be valid and binding obligations
enforceable against the Company in accordance with their terms, and
except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles. The Common Shares issuable pursuant to the Employee
Options, the Representative's Warrant and the Warrants, when issued in
accordance with the respective terms thereof, will be duly authorized,
validly issued, fully paid and non-assessable. None of such
outstanding Common Shares, Employee Options, or Warrants were, and
none of the Representative's Warrant or such issuable Common Shares
will be, issued in violation of any preemptive rights of any security
holder of the Company. The Company has reserved a sufficient number
of Common Shares for issuance pursuant to the Employee Options, the
Representative's Warrant and the Warrants. The holders of the
outstanding Common Shares are not, and will not be, subject to
personal liability solely by reason of being such holders, and the
holders of the Common Shares issuable pursuant to the Employee
Options, the Representative's Warrant and the Warrants will not be
subject to personal liability solely by reason of being such holders.
The offers and sales of the outstanding Common Shares, the Employee
Options and the Warrants were, and the issuance of the Common Shares
pursuant to the Employee Options, the Representative's Warrant and the
Warrants will be, made in conformity with applicable registration
requirements or exemptions therefrom under federal and applicable
state securities laws.
(k) The issuance and sale of the Shares by the Company have been
duly authorized and, when the Shares have been duly delivered against
payment therefor as contemplated by this Agreement, the Shares will be
validly issued, fully paid and non-assessable, and the holders thereof
will not be subject to personal liability solely by reason of being
such holders. None of the Shares will be issued in violation of any
preemptive rights of any stockholder of the Company. The certificates
representing the Shares are in proper legal form under, and conform to
the requirements of the Delaware General Corporation Law, as amended
(the "GCL"). Neither the filing of the Registration Statement nor the
offering or sale
5
<PAGE>
of the Shares as contemplated by this Agreement gives any security
holder of the Company any rights, other than those which have been
waived, for or relating to the registration of any Common Shares or
other security of the Company.
(l) No consent, approval, authorization, order, registration,
license or permit of any court, government, governmental agency,
instrumentality or other regulatory body or official is required for
the valid authorization, issuance, sale and delivery by the Company of
any of the Shares, or for the execution, delivery or performance by
the Company of this Agreement, except such as may be required for the
registration of the Shares under the Act, the Regulations and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
which consent, approval and authorization have been obtained, and for
compliance with the applicable state securities or Blue Sky laws, or
the By-laws, rules and other pronouncements of the National
Association of Securities Dealers, Inc. (the "NASD"). The Common
Shares are registered under Section 12(g) of the Exchange Act and all
necessary filings have been made to include the Shares in such
registration. Upon the effectiveness of the Registration Statement,
the Common Shares will be listed on the NASD's Nasdaq SmallCap Market.
The Company has taken no action designed, or likely, to have the
effect of terminating the registration of the Common Shares under
Section 12(g) of the Exchange Act, nor has the Company received any
notification that the SEC is contemplating terminating such
registration.
(m) The statements in the Registration Statement and Prospectus,
insofar as they are descriptions of or references to contracts,
agreements or other documents, are accurate in all material respects
and present or summarize fairly, the information required to be
disclosed under the Act and the Regulations, and there are no
contracts, agreements or other documents required to be described or
referred to in the Registration Statement or Prospectus or to be filed
as exhibits to the Registration Statement under the Act or the
Regulations that have not been so described, referred to or filed, as
required.
(n) The financial statements (including the notes thereto) filed
as part of any Preliminary Prospectus, the Prospectus and the
Registration Statement present fairly the financial position of the
Company, as of the respective dates thereto, and the results of
operations and cash flows of the Company, for the periods indicated
therein, all in conformity with generally accepted accounting
principles consistently applied, except as may be otherwise stated
therein. The supporting schedules included in the Registration
Statement fairly state the information required to be stated therein
in relation to the basic financial statements taken as a whole. The
financial information included in the Prospectus under the captions
"Prospectus Summary" and "Selected Financial Data" presents fairly the
information shown therein and has been compiled on a basis consistent
with that of the audited financial statements included in the
Registration Statement.
6
<PAGE>
(o) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, except as otherwise
stated therein, there has not been (A) any material adverse change
(including, whether or not insured against, any material loss or
damage to any assets), or development involving a prospective material
adverse change, in the general affairs, properties, assets,
management, condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company, (B) any
transaction entered into by the Company that is material to the
Company and not in the ordinary course of business, (C) any dividend
or distribution of any kind declared, paid or made by the Company on
its capital stock, (D) any liabilities or obligations, direct or
indirect, incurred by the Company that are material to the Company, or
(E) any material change in the short-term debt or long-term debt of
the Company. The Company does not have any contingent liabilities or
obligations that are material and that are not disclosed in the
Prospectus.
(p) The Company has not distributed and, prior to the later to
occur of the Closing Date, the Option Closing Date or the completion
of the distribution of the Shares, will not distribute any offering
material in connection with the offering or sale of the Shares other
than the Registration Statement, each Preliminary Prospectus and the
Prospectus, in any such case only as permitted by the Act and the
Regulations.
(q) The Company has filed with the appropriate federal, state
and local governmental agencies, and all foreign countries and
political subdivisions thereof, all tax returns that are required to
be filed, or has duly obtained extensions of time for the filing
thereof and has paid all taxes shown on such returns and all
assessments received by it to the extent that the same have become
due. The Company has not executed or filed with any taxing authority,
foreign or domestic, any agreement extending the period for assessment
or collection of any income taxes, is not a party to any pending
action or proceeding by any foreign or domestic governmental agencies
for the assessment or collection of taxes, and no claims for
assessment or collection of taxes have been asserted against the
Company that might materially adversely affect the general affairs,
properties, assets, condition (financial or otherwise), results of
operations, stockholders' equity, business or prospects of the
Company.
(r) BDO Seidman, LLP, which is certifying the financial
statements included in the Prospectus and forming a part of the
Registration Statement, is a firm of independent public accountants as
required by the Act and the Regulations.
(s) The Company is not in violation of, or in default under, any
of the terms or provisions, of (A) its Certificate of Incorporation or
By-laws, each as amended to the date hereof, the Closing Date or the
Option Closing Date, as the case may be, (B) any indenture, mortgage,
deed of trust, contract, loan or credit
7
<PAGE>
agreement, commitment or other agreement or instrument to which the
Company is a party or by which it or any of its properties are bound
or affected, (C) any law, rule, regulation, judgment, order or decree
of any government or governmental agency, instrumentality or court,
domestic or foreign, having jurisdiction over the Company or any of
its properties or businesses or (D) any license, permit,
certification, registration, approval, consent or franchise referred
to in subsections (b) or (c) of this Section 1, except where such
violation or default would not have a material adverse effect on the
business or properties of the Company.
(t) There are no claims, actions, suits, proceedings,
arbitrations, investigations or inquiries pending before or, to the
Company's knowledge, threatened or contemplated by, any governmental
agency, instrumentality, court or tribunal, domestic or foreign, or
before any private arbitrational tribunal, relating to or affecting
the Company or its properties or businesses that might affect the
issuance or validity of any of the Shares or the validity of any of
the outstanding Common Shares, or that, if determined adversely to the
Company, would, in any case or in the aggregate, result in any
material adverse change in the general affairs, properties, assets,
condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects, of the Company; nor, to
the Company's knowledge, is there any reasonable basis for any such
claim, action, suit, proceeding, arbitration, investigation or
inquiry. There are no outstanding orders, judgments or decrees of any
court, governmental agency, instrumentality or other tribunal
enjoining the Company from, or requiring the Company to take or
refrain from taking any action, or to which the Company, or any of its
properties, assets or businesses is bound or subject.
(u) Except as otherwise stated in the Prospectus, the Company
owns, or possesses adequate rights to use all patents, patent
applications, trademarks, trademark registrations, applications for
trademark registration, trade names, service marks, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential technology,
information, systems, design methodologies and devices or procedures
developed or derived from the Company's businesses), trade secrets,
confidential information, processes and formulations necessary for,
used in or proposed to be used in the conduct of its business as
described in the Prospectus (collectively, the "Intellectual
Property") that, if not so owned or possessed, would materially
adversely affect the general affairs, properties, condition (financial
or otherwise), results of operations, stockholders' equity, business
or prospects of the Company. The Company has not infringed, is not
infringing and has not received any notice of conflict with the
asserted rights of others with respect to the Intellectual Property,
and, to the Company's knowledge, no others have infringed upon or are
in conflict with the Intellectual Property.
8
<PAGE>
(v) The Company has obtained all permits, licenses and other
authorizations that are required, to the extent required, under all
environmental laws (collectively, the "Environmental Laws"), other
than any permits, licenses or other authorizations which, if not
obtained, would not have a material adverse effect on the business or
properties of the Company. The Company is in compliance with all
terms and conditions of any required permits, licenses and
authorizations, and is in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in the Environmental
Laws, except where the failure to so comply would not have a material
adverse effect on the Company.
(w) There are no present or, to the Company's knowledge, past
events, conditions, circumstances, activities, practices, incidents,
actions or plans relating to the business as currently being conducted
by the Company that interfere with or prevent compliance with or
continued compliance with the Environmental Laws, the non-compliance
with which would have a material adverse effect on the Company, or
which would be reasonably likely to give rise to any material legal
liability (whether statutory or common law) or otherwise would be
reasonably likely to form the basis of any claim, action, demand,
suit, proceeding, hearing, notice of violation, study, investigation,
remediation, or clean up based on or related to the generation,
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling, or the emission, discharge, release
into the workplace, community or environment of any pollutant,
contaminant, chemical or industrial, toxic, or hazardous substance or
waste, which claim, action, demand, suit, proceeding, hearing, notice
of violation, study, investigation, remediation, or clean up would
have a material adverse effect on the Company.
(x) The Company has good and marketable title to all personal
property (tangible and intangible) described in the Prospectus as
being owned by it, free and clear of all liens, security interests,
charges or encumbrances, except such as are described in the
Prospectus or which are not material to the business of the Company.
The Company has adequately insured the personal property of the
Company against loss or damage by fire or other casualty and
maintains, in adequate amounts, insurance against such other risks as
management of the Company deems appropriate. The Company does not own
any real property, and all real property used or leased by the
Company, as described in the Prospectus (the "Premises"), is held by
the Company under a valid, subsisting and enforceable lease, and
except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles. The Premises, and all operations conducted thereon, are
now and, since the Company began to use such Premises, always have
been and, to the Company's knowledge, prior to when the Company began
to use such Premises, always had been, in compliance with the
Environmental Laws. There is no, and the Company has not received
notice of any, claim, demand, investigation, regulatory action, suit
or
9
<PAGE>
other action instituted or threatened against any of them or the
Premises relating to any of the Environmental Laws. The Company has
not received any notice of material violation, citation, complaint,
order, directive, request for information or response thereto, notice
letter, demand letter or compliance schedule to or from any
governmental or regulatory agency arising out of or in connection with
hazardous substances (as defined by applicable Environmental Laws) on,
about, beneath, arising from or generated at the Premises.
(y) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's general or
specific authorization, (B) transactions are recorded as necessary in
order to permit preparation of financial statements in accordance with
generally accepted accounting principles and to maintain
accountability for assets, (C) access to assets is permitted only in
accordance with management's general or specific authorization and (D)
the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(z) No unregistered securities of the Company have been sold by
the Company or on behalf of the Company by any person or persons
controlling, controlled by or under common control with the Company
within the three years prior to the date hereof, except as disclosed
in the Registration Statement.
(aa) Each contract or other instrument (however characterized or
described) to which the Company is a party or by which any of the
properties or business of it is bound or affected and to which
reference has been made in the Prospectus or which has been filed as
an exhibit to the Registration Statement has been duly and validly
executed by the Company, and by the other parties thereto. Except as
described in the Prospectus, each such contract or other instrument is
in full force and effect and is enforceable against the parties
thereto in accordance with its terms, and except as enforcement may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors'
rights generally or by general equitable principles, and neither the
Company, nor any other party is in default thereunder and no event has
occurred that, with the lapse of time or the giving of notice, or
both, would constitute a default thereunder.
(bb) Except as disclosed in the prospectus, and except for the
Company's 401(k) plan, the Company has no employee benefit plan,
profit sharing plan, employee pension benefit plan or employee welfare
benefit plan or deferred compensation arrangements (collectively,
"Plans") that are subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended, or the rules and regulations
thereunder ("ERISA"). To the Company's knowledge, all Plans that are
subject to ERISA are, and have been at all times since their
establishment, in compliance with ERISA and, to the extent required by
the Internal Revenue
10
<PAGE>
Code of 1986, as amended (the "Code"), in compliance with the Code.
To the Company's knowledge, the Company has not had any employee
pension benefit plan that is subject to Part 3 of Subtitle B of Title
1 of ERISA or any defined benefit plan or multiemployer plan. To the
Company's knowledge, the Company has not maintained retiree life and
retiree health insurance plans that are employee welfare benefit plans
providing for continuing benefit or coverage for any employee or any
beneficiary of any employee after such employee's termination of
employment, except as required by Section 4980B of the Code. To the
Company's knowledge, no fiduciary or other party in interest with
respect to any of the Plans has caused any of such Plans to engage in
a "prohibited action" as defined in Section 406 of ERISA. As used in
this subsection, the terms "defined benefit plan," "employee benefit
plan," "employee pension benefit plan," "employee welfare benefit
plan," "fiduciary" and "multiemployer plan" shall have the respective
meanings assigned to such terms in Section 3 of ERISA.
(cc) To the Company's knowledge, no labor dispute exists with the
employees of the Company and no such labor dispute is imminent. There
is no existing or, to the Company's knowledge, imminent labor
disturbance by the employees of any of the Company's principal
suppliers, contractors or customers (including, without limitation,
any distributors or end-users of its products).
(dd) Except for certain compensation to be paid to the
Representative, the Company has not incurred any liability for any
finder's fees or similar payments in connection with the transactions
contemplated herein.
(ee) Except as described in the Prospectus, the Company is not a
party to, and is not bound by, any agreement pursuant to which any
material royalties, honoraria or fees are payable by the Company to
any person by reason of the ownership or use of any Intellectual
Property.
(ff) Except as disclosed in the Prospectus, there are no business
relationships or related party transactions required to be disclosed
therein by Item 404 of Regulation S-B of the Regulations.
(gg) The Company is familiar with the Investment Company Act of
1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future
to continue to conduct, its affairs in such a manner to ensure that it
will not become an "investment company" within the meaning of the 1940
Act and such rules and regulations.
(hh) Neither the Company nor any director, officer, agent,
employee or other person associated with or acting on behalf of the
Company has, directly or indirectly, (A) used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful
expenses relating to any political activity, (B) made any unlawful
payment to foreign or domestic governments or governmental
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officials or employees or to foreign or domestic political parties or
campaigns from corporate funds, (C) violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended or (D) made any
bribe, rebate, payoff, influence payment, kickback or other unlawful
payment.
Any certificate signed by any officer of the Company in such capacity
and delivered to the Representative or to counsel for the Underwriters
pursuant to this Agreement shall be deemed a representation and warranty by
the Company to the several Underwriters as to the matters covered thereby.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
Selling Stockholder severally represents and warrants to each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares
to be sold by such Selling Stockholder pursuant to this Agreement and
has, and on the Closing Date (and Option Closing Date, if applicable)
will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests and
claims whatsoever.
(b) Upon delivery of and payment for such Shares pursuant to
this Agreement, good and clear title to such Shares will pass to the
Underwriters, free of all restrictions on transfer, liens,
encumbrances, security interests and claims whatsoever.
(c) Such Selling Stockholder has, and on the Closing Date will
have, full legal right, power and authority to enter into this
Agreement and the Custody Agreement between the Selling Stockholders
and American Stock Transfer & Trust Company as Custodian (the "Custody
Agreement") and to sell, assign, transfer and deliver such Shares in
the manner provided herein and therein, and this Agreement and the
Custody Agreement have been duly authorized, executed and delivered by
or on behalf of such Selling Stockholder and each of this Agreement
and the Custody Agreement is a valid and binding agreement of such
Selling Stockholder enforceable in accordance with its terms, except
as rights to indemnity and contribution hereunder may be limited by
applicable law.
(d) The power of attorney signed by such Selling Stockholder
appointing Larry W. Martin and William H. Parsons, or either one of
them, as his attorney-in-fact to the extent set forth therein with
regard to the transactions contemplated hereby and by the Registration
Statement and the Custody Agreement has been duly authorized, executed
and delivered by or on behalf of such Selling Stockholder and is a
valid and binding instrument of such Selling Stockholder enforceable
in accordance with its terms and, pursuant to such power of attorney,
such Selling Stockholder has authorized Larry W. Martin and William H.
Parsons, or either one of them, to execute and deliver on his behalf
this Agreement, the Custody Agreement and any other document necessary
or desirable in connection
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with the transactions contemplated hereby and to deliver the Shares to
be sold by such Selling Stockholder pursuant to this Agreement.
(e) Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might
reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares pursuant to the distribution
contemplated by this Agreement, and other than as permitted by the
Act, the Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection
with the offering and sale of the Shares.
(f) The execution, delivery and performance of this Agreement by
such Selling Stockholder, compliance by such Selling Stockholder with
all the provisions hereof and the consummation of the transactions
contemplated hereby will not require any consent, approval,
authorization or other order of any court, regulatory body,
administrative agency or other governmental body (except as such may
be under the Act, state securities laws or Blue Sky laws) and will not
conflict with or constitute a breach of any of the terms or provisions
of, or a default under, organizational documents of such Selling
Stockholder, if not an individual, or any agreement, indenture or
other instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder or property of such Selling Stockholder
is bound, or violate or conflict with any laws, administrative
regulation or ruling or court decree applicable to such Selling
Stockholder or property of such Selling Stockholder.
(g) Such parts of the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relate to such
Selling Stockholder do not, and will not on the Closing Date (and any
Option Closing Date, if applicable), contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of
circumstances under which they were made, not misleading.
(h) At any time during the period described in paragraph 6(b)
hereof, if there is any change in the information referred to in
paragraph 2(g) above, the Selling Stockholder will immediately notify
you of such change.
(i) Such Selling Stockholder is not aware, and has no reason to
believe, that any of the representations and warranties of the Company
set forth in Section 1 above is untrue or inaccurate in any material
respect.
3. PURCHASE AND SALE OF OFFERED SHARES. On the basis of the
representations, warranties, covenants and agreements herein contained, but
subject to the terms and conditions herein set forth, (i) the Company shall sell
951,666 Offered Shares; and (ii) each Selling Stockholder agrees, severally and
not jointly, to sell the number of Offered Shares set forth opposite such
Selling Stockholder's name in Schedule II hereto, to the several Underwriters at
the
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Offering Price less the underwriting discount shown on the cover page of the
Prospectus (the "Underwriting Discount"), and the Underwriters, severally and
not jointly, shall purchase from the Company and the Selling Stockholders, on a
firm commitment basis, at the Offering Price less the Underwriting Discount, the
respective Offered Shares set forth opposite their names on Schedule I hereto.
In making this Agreement, each Underwriter is contracting severally, and not
jointly, and, except as provided in Sections 5 and 12 hereof, the agreement of
each Underwriter is to purchase only that number of Offered Shares specified
with respect to that Underwriter in Schedule I hereto. The Underwriters shall
offer the Offered Shares to the public as set forth in the Prospectus.
4. PAYMENT AND DELIVERY. Payment for the Offered Shares shall be made to
the Company by certified or official bank check payable to the order of the
Company in next day funds, at the offices of Garvey, Schubert & Barer, Seattle,
Washington, or at such other location as shall be agreed upon by the Company and
the Representative, or in immediately available funds wired to such account or
accounts as the Company may specify (with all costs and expenses incurred by the
Underwriters in connection with such settlement (including, but not limited to,
interest or cost of funds expenses) to be borne by the Company), against
delivery of the Offered Shares to the Representative at such place as you shall
designate, for the respective accounts of the Underwriters. Such payments and
delivery will be made at 7:00 a.m., Pacific time, on the fourth business day
after the date of this Agreement or at such other time and date not later than
four business days thereafter as the Representative and the Company shall agree
upon. Such time and date are referred to herein as the "Closing Date." The
certificates representing the Offered Shares to be sold and delivered will be in
such denominations and registered in such names as the Representative requests
not less than two full business days prior to the Closing Date, and will be made
available to the Representative for inspection, checking and packaging at the
office of the Company's Transfer Agent, on the business day prior to the Closing
Date. The Representative has advised the Company that each Underwriter has
authorized the Representative to accept delivery of the Offered Shares and to
make payment and receipt therefor.
5. OPTION TO PURCHASE OPTIONAL SHARES.
(a) For the purposes of covering any over-allotments in connection
with the distribution and sale of the Offered Shares as contemplated by the
Prospectus, subject to the terms and conditions herein set forth, the
several Underwriters are hereby granted an option by the Company to
purchase all or any part of the Optional Shares from the Company (the
"Over-allotment Option"). The purchase price per share to be paid for the
Optional Shares shall be the Offering Price less the Underwriting Discount.
The Over-allotment Option granted hereby may be exercised by the
Representative on behalf of the several Underwriters as to all or any part
of the Optional Shares at any time (but not more than once) within 45 days
after the Effective Date. No Underwriter shall be under any obligation to
purchase any Optional Shares prior to an exercise of the Over-allotment
Option.
(b) The Over-allotment Option granted hereby may be exercised by the
Representative on behalf of the several Underwriters by giving notice to
the Company by
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a letter sent by registered or certified mail, postage prepaid, telex,
telegraph, telegram or facsimile (such notice to be effective when sent),
addressed as provided in Section 14 hereof, setting forth the number of
Optional Shares to be purchased, the date and time for delivery of and
payment for the Optional Shares and stating that the Optional Shares
referred to therein are to be used for the purpose of covering
over-allotments in connection with the distribution and sale of the Offered
Shares. If such notice is given prior to the Closing Date, the date set
forth therein for such delivery and payment shall not be earlier than
either three full business days thereafter or the Closing Date, whichever
occurs later. If such notice is given on or after the Closing Date, the
date set forth therein for such delivery and payment shall be a date
selected by the Representative that is not later than five full business
days after the exercise of the Over-allotment Option. The date and time
set forth in such a notice is referred to herein as the "Option Closing
Date," and a closing held pursuant to such a notice is referred to herein
as the "Option Closing." The number of Optional Shares to be sold to each
Underwriter pursuant to the exercise of the Over-allotment Option shall be
the number that bears the same ratio to the aggregate number of Optional
Shares being purchased through such Over-allotment Option exercise as the
number of Offered Shares opposite the name of such Underwriter in
Schedule I hereto bears to the total number of all Offered Shares; subject,
however, to such adjustment as the Representative may approve to eliminate
fractional shares and subject to the provisions for the allocation of
Optional Shares purchased for the purpose of covering over-allotments set
forth in Section 10 of the Agreement Among Underwriters. Upon the exercise
of the Over-allotment Option, the Company shall become obligated and sell
to the Representative for the respective accounts of the Underwriters, and
on the basis of the representations, warranties, covenants and agreements
herein contained, but subject to the terms and conditions herein set forth,
and the several Underwriters shall become severally, but not jointly,
obligated to purchase from the Company, the number of Optional Shares
specified in each notice of exercise of the Over-allotment Option.
(c) Payment for the Optional Shares shall be made to the Company by
certified or official bank check payable to the order of the Company in
next day funds, at the office of Garvey, Schubert & Barer, Seattle,
Washington, or such other location as shall be agreed upon by the Company
and the Representative, or in immediately available funds wired to such
account as the Company may specify (with all costs and expenses incurred by
the Underwriters in connection with such settlement in immediately
available funds (including, but not limited to, interest or cost of funds
expenses) to be borne by the Company), against delivery of the Optional
Shares to the Representative at such place as you shall designate, for the
respective accounts of the Underwriters. The certificates representing the
Optional Shares to be issued and delivered will be in such denominations
and registered in such names as the Representative requests not less than
two full business days prior to the Option Closing Date, and will be made
available to the Representative for inspection, checking and packaging at
the office of the Company's Transfer Agent on the business day prior to the
Option Closing Date.
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6. CERTAIN COVENANTS AND AGREEMENTS OF THE COMPANY. The Company
covenants and agrees with the several Underwriters as follows:
(a) If Rule 430A of the Regulations is employed, the Company will
timely file the Prospectus pursuant to and in compliance with Rule 424(b)
of the Regulations and will advise the Representative of the time and
manner of such filing.
(b) The Company will not at any time, whether before or after the
Registration Statement shall have become effective, during such period as,
in the opinion of counsel for the Underwriters, the Prospectus is required
by law to be delivered in connection with sales by the Underwriters or a
dealer, file or publish any amendment or supplement to the Registration
Statement or Prospectus of which the Representative have not been
previously advised and furnished a copy, or which is not in compliance with
the Regulations, or, during the period before the distribution of the
Offered Shares and the Optional Shares is completed, file or publish any
amendment or supplement to the Registration Statement or Prospectus to
which the Representative reasonably objects in writing.
(c) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time and date that this Agreement is
executed and delivered by the parties hereto, to become effective and will
advise the Representative immediately, and confirm such advice in writing,
(i) when the Registration Statement, or any post-effective amendment to the
Registration Statement, is filed with the SEC, (ii) of the receipt of any
comments from the SEC, (iii) when the Registration Statement has become
effective and when any post-effective amendment thereto becomes effective,
or when any supplement to the Prospectus or any amended Prospectus has been
filed, (iv) of any request of the SEC for amendment or supplementation of
the Registration Statement or Prospectus or for additional information,
(v) during the period when the Prospectus is required to be delivered under
the Act and Regulations, of the happening of any event which in the
Company's judgment makes any material statement in the Registration
Statement or the Prospectus untrue or which requires any changes to be made
in the Registration Statement or Prospectus in order to make any material
statements therein not misleading and (vi) of the issuance by the SEC of
any stop order suspending the effectiveness of the Registration Statement
or of any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus, the suspension of the qualification of any of
the Shares for offering or sale in any jurisdiction in which the
Underwriters intend to make such offers or sales, or of the initiation or
threatening of any proceedings for any such purposes. The Company will use
its best efforts to prevent the issuance of any such stop order or of any
order preventing or suspending such use and, if any such order is issued,
to obtain as soon as possible the lifting thereof.
(d) The Company has delivered to the Representative, without charge,
and will continue to deliver from time to time until the Effective Date, as
many copies of each Preliminary Prospectus as the Representative may
reasonably request. The Company will deliver to the Representative,
without charge, as soon as possible after the Effective Date, and
thereafter from time to time during the period when delivery of the
Prospectus is
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<PAGE>
required under the Act, such number of copies of the Prospectus (as
supplemented or amended, if the Company makes any supplements or amendments
to the Prospectus) as the Representative may reasonably request. The
Company hereby consents to the use of such copies of each Preliminary
Prospectus and the Prospectus for purposes permitted by the Act, the
Regulations and the securities or Blue Sky laws of the jurisdictions in
which the Shares are offered or sold by the several Underwriters and by all
dealers to whom Shares may be offered or sold, both in connection with the
offering and sale of the Shares and for such period of time thereafter as
the Prospectus is required by the Act to be delivered in connection with
sales by any Underwriter or dealer. The Company has furnished or will
furnish to the Representative two signed copies of the Registration
Statement as originally filed and of all amendments thereto, whether filed
before or after the Effective Date, two copies of all exhibits filed
therewith and two signed copies of all consents and certificates of
experts, and will deliver to the Representative such number of conformed
copies of the Registration Statement, including financial statements and
exhibits, and all amendments thereto, as the Representative may reasonably
request.
(e) The Company will comply with the Act, the Regulations, the
Exchange Act and the rules and regulations thereunder so as to permit the
continuance of offers and sales of, and dealings in, the Shares for as long
as may be necessary to complete the distribution of the Shares as
contemplated hereby.
(f) The Company will furnish such information as may be required and
otherwise cooperate in the registration or qualification of the Shares, or
exemption therefrom, for offering and sale by the several Underwriters and
by dealers under the securities or Blue Sky laws of such jurisdictions in
which the Representative determines to offer the Shares, after consultation
with the Company, and will file such consents to service of process or
other documents necessary or appropriate in order to effect such
registration or qualification; provided, however, that no such
qualification shall be required in any jurisdiction where, solely as a
result thereof, the Company would be subject to taxation or qualification
as a foreign corporation doing business in such jurisdiction where it is
not now so qualified or to take any action which would subject it to
service of process in suits, other than those arising out of the offering
or sale of the Shares, in any jurisdiction where it is not now so subject.
The Company will, from time to time, prepare and file such statements and
reports as are or may be required to continue such qualification in effect
for so long a period as is required under the laws of such jurisdiction for
such offering and sale.
(g) Subject to subsection (b) of this Section 6, in case of any
event, at any time within the period during which, in the opinion of
counsel for the Underwriters, a prospectus is required to be delivered
under the Act and Regulations, as a result of which event any Preliminary
Prospectus or the Prospectus, as then amended or supplemented, would
contain, in the judgment of the Company or in the opinion of counsel for
the Underwriters, an untrue statement of a material fact, or omit to state
any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, or,
if it is necessary at any time to amend any
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Preliminary Prospectus or the Prospectus to comply with the Act and
Regulations or any applicable securities or Blue Sky laws, the Company
promptly will prepare and file with the SEC, and any applicable state
securities commission, an amendment or supplement that will correct such
statement or omission or an amendment that will effect such compliance and
will furnish to the Representative such number of copies of such amendment
or amendments or supplement or supplements to such Preliminary Prospectus
or the Prospectus (in form and substance satisfactory to the Representative
and counsel for Underwriters) as the Representative may reasonably request.
For purposes of this subsection, the Company will furnish such information
to the Representative, the Underwriters' counsel and counsel for the
Company as shall be necessary to enable such persons to consult with the
Company with respect to the need to amend or supplement any Preliminary
Prospectus or the Prospectus, and shall furnish to the Representative and
the Underwriters' counsel such further information as each may from time to
time reasonably request. If the Company and the Representative agree that
any Preliminary Prospectus or the Prospectus should be amended or
supplemented, the Company, if requested by the Representative, will, if and
to the extent required by law, promptly issue a press release announcing or
disclosing the matters to be covered by the proposed amendment or
supplement.
(h) The Company will make generally available to its security holders
as soon as practicable and in any event not later than 45 days after the
end of the period covered thereby, an earnings statement of the Company
(which need not be audited unless required by the Act, the Regulations, the
Exchange Act or the rules or regulations thereunder) that shall comply with
Section 11(a) of the Act and cover a period of at least 12 consecutive
months beginning not later than the first day of the Company's fiscal
quarter next following the Effective Date.
(i) For a period of five years from the Effective Date, the Company
will deliver to the Representative upon request: (A) a copy of each report
or document, including, without limitation, reports on Forms 8-K, 10-C,
10-K and 10-Q (or such similar forms as may be designated by the SEC),
registration statements and any exhibits thereto, filed with or furnished
to the SEC or any securities exchange or the NASD, as soon as practicable
after the date each such report or document is so filed or furnished,
(B) as soon as practicable, copies of any reports or communications
(financial or other) of the Company mailed to its security holders and
(C) every material press release in respect of the Company or its affairs
that was released or prepared by the Company.
(j) During the course of the distribution of the Shares, the Company
has not taken, nor will it take, directly or indirectly, any action
designed to or that might, in the future, reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common
Shares.
(k) The Company will cause each person listed on Schedule III hereto
to execute a legally binding and enforceable agreement (a "lockup
agreement") to, for the period specified on Schedule III hereto, not sell,
offer to sell, contract to sell, grant any
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option for the sale of or otherwise transfer or dispose of any Common
Shares (except for the sale of the Shares as contemplated by this
Agreement), any options to purchase Common Shares or any securities
convertible into or exchangeable for Common Shares (excluding the issuance
of Common Shares pursuant to the Employee Options) without the prior
written consent of the Representative, which lockup agreement shall be in
form and substance satisfactory to the Representative and the Underwriters'
counsel, and deliver such lockup agreement to the Representative prior to
the Effective Date. Appropriate stop transfer instructions will be issued
by the Company to the transfer agent for the securities affected by the
lockup agreements.
(l) The Company will not sell, issue, contract to sell, offer to sell
or otherwise dispose of any Common Shares, options to purchase Common
Shares or any other security convertible into or exchangeable for Common
Shares, from the date of the Effective Date through 180 days after the
Effective Date, without the prior written consent of the Representative,
except for the sale of the Shares as contemplated by this Agreement, the
granting of options, and the issuance of Common Shares upon their exercise,
under the Company's stock option plans described in the Prospectus, the
issuance of Common Shares pursuant to the Employee Options and the Warrants
and the issuance of the Representative's Warrant.
(m) The Company will use all reasonable efforts to maintain the
inclusion of the Common Shares on the Nasdaq SmallCap Market.
(n) The Company shall, at its sole cost and expense, supply and
deliver to the Representative and the Underwriters' counsel, within a
reasonable period after the Closing Date, six transaction binders, each of
which shall include the Registration Statement, as amended or supplemented,
all exhibits to the Registration Statement, each Preliminary Prospectus,
the Prospectus, the Preliminary Blue Sky Memorandum and any supplement
thereto and all underwriting and other closing documents.
(o) The Company will use the net proceeds from the sale of the Shares
to be sold by it hereunder substantially in accordance with the description
thereof set forth in the Prospectus and shall file such reports with the
SEC with respect to the sale of such Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the
Act.
(p) On the Closing Date, the Company shall sell to the
Representative, at a purchase price of $0.001 per warrant, a
Representative's Warrant to purchase 100,000 Common Shares. Such
Representative's Warrant shall be issued pursuant to the terms of the
Warrant Agreement and shall have an exercise price per share equal to
$______, shall be exercisable during the period beginning on the first
anniversary of the Effective Date and ending on the fifth anniversary of
the Effective Date, and shall contain customary anti-dilution and
registration rights provisions.
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7. PAYMENT OF EXPENSES.
(a) Whether or not the transactions contemplated by this Agreement
are consummated and regardless of the reason this Agreement is terminated,
the Company will pay or cause to be paid, and bear or cause to be borne,
all costs and expenses incident to the performance of the obligations of
the Company under this Agreement, including: (i) the fees and expenses of
the accountants and counsel for the Company incurred in the preparation of
the Registration Statement and any post-effective amendments thereto
(including financial statements and exhibits), each Preliminary Prospectus
and the Prospectus and any amendments or supplements thereto; (ii) printing
and mailing expenses associated with the Registration Statement and any
post-effective amendments thereto, each Preliminary Prospectus, the
Prospectus (including any supplement thereto), this Agreement, the
Agreement Among Underwriters, the Underwriters' Questionnaire, the Power of
Attorney, the Selected Dealer Agreement and related documents and the
Preliminary Blue Sky Memorandum and any supplement thereto; (iii) the costs
incident to the authentication, issuance, delivery and transfer of the
Shares to the Underwriters; (iv) all taxes, if any, on the issuance,
delivery and transfer of the Shares to be sold by the Company; (v) the
fees, expenses and all other costs of qualifying the Shares for the sale
under the securities or Blue Sky laws of those jurisdictions in which the
Shares are to be offered or sold including the fees and disbursements of
Underwriters' counsel and such local counsel as may have been reasonably
required and retained for such purpose; (vi) the fees, expenses and other
costs of, or incident to, securing any review or approvals by or from the
NASD exclusive of fees of the Underwriters' counsel; (vii) the filing fees
of the SEC; (viii) the cost of furnishing to the Underwriters copies of the
Registration Statement, each Preliminary Prospectus and the Prospectus
(including any supplement or amendment thereto) as herein provided;
(ix) the Company's travel expenses in connection with meetings with the
brokerage community and institutional investors and expenses associated
with hosting such meetings, including meeting rooms, meals, facilities and
ground transportation expenses; (x) the costs and expenses associated with
settlement in same day funds (including, but not limited to, interest or
cost of funds expenses), if desired by the Company; (xi) the fees for
inclusion of the Shares on the Nasdaq SmallCap Market; (xii) the cost of
printing and engraving certificates for the Shares; (xiii) the cost and
charges of any transfer agent; and (xiv) all other costs and expenses
reasonably incident to the performance of its obligations hereunder that
are not otherwise specifically provided for in this Section 7, provided
that, except as specifically set forth in subsection (c) of this Section 7,
the Underwriters shall be responsible for their out-of-pocket expenses,
including their lodging and travel expenses associated with meetings with
the brokerage community and institutional investors, and the fees and
expenses of their counsel for other than Blue Sky work.
(b) The Company shall pay as due any registration, qualification and
filing fees and any accountable out-of-pocket disbursements in connection
with such registration, qualification or filing in the jurisdictions in
which the Representative determines, after consultation with the Company,
to offer or sell the Shares.
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(c) In addition to the foregoing expenses, the Company shall at the
Closing Date pay to the Representative a non-accountable expense allowance
equal to three percent (3%) of the gross proceeds received from the sale of
the Offered Shares. In the event the Over-allotment Option is exercised,
the Company shall pay to the Representative at the Option Closing Date an
additional amount equal to three percent (3%) of the gross proceeds
received upon exercise of the Over-allotment Option.
(d) In the event the Underwriters are willing to proceed with the
issuance and sale of the Offered Shares as contemplated by this Agreement
and the Company elects not to proceed for any reason, the Company shall
reimburse the Representative for all of their out-of-pocket expenses
incurred in connection with the offering of the Offered Shares (including
but not limited to the fees and disbursements of its counsel), in an amount
not to exceed $150,000.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligation of each
Underwriter to purchase and pay for the Offered Shares that it has agreed to
purchase hereunder on the Closing Date, and to purchase and pay for any Optional
Shares as to which its right to purchase under Section 5 has been exercised on
an Option Closing Date, is subject at the date hereof, the Closing Date and any
Option Closing Date to the continuing accuracy of the representations and
warranties of the Company set forth herein, to the performance by the Company of
its covenants, agreements and obligations hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become effective not later
than 2:30 p.m., Pacific time, on the date of this Agreement, or at such
later time or on such later date as the Representative may agree to in
writing; if required by the Regulations, the Prospectus shall have been
filed with the SEC pursuant to Rule 424(b) of the Regulations within the
applicable time period prescribed for such filing by the Regulations and in
accordance with subsection (a) of Section 6 hereof; on or prior to the
Closing Date or any Option Closing Date, as the case may be, no stop order
or other order preventing or suspending the effectiveness of the
Registration Statement or the sale of any of the Shares shall have been
issued under the act or any state securities law and no proceedings for
that purpose shall have been initiated or shall be pending or, to the
Representatives' knowledge or the knowledge of the Company, shall be
contemplated by the SEC or any authority in any jurisdiction designated by
the Representative pursuant to subsection (f) of Section 6 hereof and any
request on the part of the SEC for additional information shall have been
complied with to the reasonable satisfaction of counsel for the
Underwriters.
(b) All corporate proceedings and other matters incident to the
authorization, form and validity of this Agreement, the Warrant Agreement,
the Representative's Warrant and the Shares and the form of the
Registration Statement, each Preliminary Prospectus and the Prospectus, and
all other legal matters relating to this Agreement and the transactions
contemplated hereby, shall be satisfactory in all respects to counsel to
the Underwriters; the Company shall have furnished to such counsel all
documents and information that they may reasonably request to enable them
to pass upon such matters; and the Representative shall have received from
the Underwriters' counsel, Heller,
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Ehrman, White & McAuliffe, a favorable opinion, dated as of the Closing
Date and any Option Closing Date, as the case may be, and addressed to the
Representative individually and as the Representative of the several
Underwriters with respect to the due authorization, execution and delivery
of this Agreement, that the issuance and sale of the Shares have been duly
authorized by the Company, that when the Shares have been duly delivered
against payment therefor as contemplated by this Agreement, they will be
validly issued, fully paid and non-assessable and that the Registration
Statement has become effective under the Act.
(c) The NASD shall have indicated that it has no objection to the
underwriting arrangements pertaining to the sale of any of the Shares.
(d) The Representative shall have received copies of the lockup
agreements described in subsection (k) of Section 6 signed by those persons
set forth on Schedule III hereto.
(e) The Representative shall have received at or prior to the Closing
Date from the Underwriters' counsel a memorandum or summary, in form and
substance satisfactory to the Representative, with respect to the
qualification for offering and sale by the Underwriters of the Shares under
the securities or Blue Sky laws of such jurisdictions designated by the
Representative pursuant to subsection (f) of Section 6 hereof.
(f) You shall have received on the Closing Date and on the Option
Closing Date, if any, the following opinions of Garvey, Schubert & Barer,
counsel for the Company, dated the Closing Date and the Option Closing
Date, if any, and addressed to the Underwriters and with reproduced copies
or signed counterparts thereof for each of the Underwriters:
(i) the Company is a corporation validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority required to carry
on its business as it is currently being conducted and to own, lease and
operate its properties;
(ii) to such counsel's knowledge after due inquiry (as defined
in such counsel's opinion), the Company is duly qualified and is in good
standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the failure
to be so qualified would not have a material adverse effect on the Company;
(iii) to such counsel's knowledge after due inquiry, the company
owns no capital stock of, or other ownership interests in, any business;
(iv) the Company has authorized and outstanding capital stock as
set forth under the heading "Capitalization" in the Prospectus; all the
outstanding shares of Common Stock (including the Shares to be sold by the
Selling Stockholders) have been
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duly authorized and validly issued, are fully paid and non-assessable, are
duly authorized for quotation on the Nasdaq SmallCap Market, have been
issued in compliance with all federal and state securities laws, and were
not issued in violation of or subject to any preemptive rights or to such
counsel's knowledge after due inquiry, other rights, which have not been
waived, to subscribe for or purchase securities;
(v) the Shares to be issued and sold by the Company (A)
hereunder and (B) under the Warrant Agreement have been duly authorized,
and when issued and delivered to the Underwriters against payment therefor
as provided by this Agreement and the Warrant Agreement, respectively, will
have been validly issued and will be fully paid and non-assessable, and the
issuance of such Shares is not subject to any preemptive or, to such
counsel's knowledge, other similar rights; the description set forth in the
Prospectus of the Company's stock option, stock bonus and other stock plans
or arrangements, and to such counsel's knowledge after due inquiry, the
options or other rights granted and exercised thereunder, accurately and
fairly presents the information required to be shown with respect to such
plans, arrangements, options and rights; to such counsel's knowledge after
due inquiry, no securityholder of the Company has any right which has not
been waived to require the Company to register the sale of any securities
owned by such securityholder under the Act in the public offering
contemplated by this Agreement; and no further approval or authorization of
the stockholders or the Board of Directors of the Company is required for
(A) the issuance and sale of the Shares to be sold by the Company or the
transfer and sale of the Shares to be sold by the Selling Stockholders
pursuant to this Agreement or (B) the issuance and sale of the Shares
issuable upon exercise of the Warrant Agreement;
(vi) this Agreement and the Warrant Agreement have been duly
authorized, executed and delivered by the Company and (as to this
Agreement) each of the Selling Stockholders and is a valid and binding
agreement of the Company and (as to this Agreement) each Selling
Stockholder, enforceable in accordance with its terms (except as rights to
indemnity and contribution hereunder may be limited by applicable law);
(vii) the authorized capital stock of the Company, including the
Common Stock and the Shares, conforms as to legal matters to the
description thereof contained in the Prospectus;
(viii) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the knowledge of such counsel, pending
before or contemplated by the Commission;
(ix) the statements under the captions "Description of Capital
Stock" in the Prospectus and Items 24 and 26 of Part II of the Registration
Statement insofar as such statements constitute a summary of legal matters,
documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, documents and
proceedings;
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(x) the Company is not in violation of its Certificate of
Incorporation or By-Laws and, to counsel's knowledge after due inquiry,
except as to defaults which individually and in the aggregate would not be
material to the Company, the Company is not in default in the performance
of any obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any other agreement,
indenture or instrument to which the Company is a party or by which it or
its property is bound;
(xi) the execution, delivery and performance of this Agreement
and the Warrant Agreement by the Company and (as to this Agreement) each
Selling Stockholder, compliance by the Company and (as to this Agreement)
each Selling Stockholder with all the provisions hereof and of the Warrant
Agreement and the consummation of the transactions contemplated hereby and
by the Warrant Agreement will not require any consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body (except as such may be required under the
Act or other securities or Blue Sky laws) and will not conflict with or
constitute a breach of any of the terms or provisions of, or a default
under, the Certificate of Incorporation or By-Laws of the Company or (as to
this Agreement) the organizational documents of any Selling Stockholder
that is not an individual or, to such counsel's knowledge after due
inquiry, any agreement, indenture or other instrument to which the Company
or (as to this Agreement) any Selling Stockholder is a party or by which
the Company or (as to this Agreement) any Selling Stockholder or their
respective properties are bound, or violate or conflict with any laws,
administrative regulations or rulings or court decrees known to such
counsel and applicable to the Company or (as to this Agreement) any Selling
Stockholder or their respective properties;
(xii) after due inquiry, such counsel does not know of any legal
or governmental proceeding pending or threatened to which the Company is a
party or to which any of its property is subject which is required to be
described in the Registration Statement or the Prospectus and is not so
described, or of any contract or other document which is required to be
described in the Registration Statement or the Prospectus or is required to
be filed as an exhibit to the Registration Statement which is not described
or filed as required;
(xiii) to such counsel's knowledge, after due inquiry, the
Company has not violated any applicable foreign, federal, state or local
law or regulation, including without limitation any Environmental Laws, any
federal or state law relating to discrimination in the hiring, promotion or
pay of employees, any applicable federal or state wages and hours laws, and
any provisions of the Employee Retirement Income Security Act or the rules
and regulations promulgated thereunder, which in each case might result in
any material adverse change in the business, prospects, financial condition
or results of operation of the Company;
(xiv) to such counsel's knowledge, after due inquiry, the
Company has such permits, licenses, franchises and authorizations of
governmental or regulatory
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authorities ("permits"), including, without limitation, under any
applicable Environmental Laws, as are necessary to own, lease and operate
its properties and to conduct its business in the manner described in the
Prospectus; to such counsel's knowledge, after due inquiry, the Company has
fulfilled and performed all of its material obligations with respect to
such permits and no event has occurred which allows, or after notice or
lapse of time would allow, revocation or termination thereof or result in
any other material impairment of the rights of the holder of any such
permit, subject in each case to such qualification as may be set forth in
the Prospectus; and, except as described in the Prospectus, such permits
contain no restrictions that are materially burdensome to the Company;
(xv) the Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
(xvi) to such counsel's knowledge, after due inquiry, no holder
of any security of the Company has any right to require registration of
shares of Common Stock or any other security of the Company except as
disclosed in the Prospectus;
(xvii) (1) the Registration Statement (including any
registration statement filed under 462(b) of the Act, if any) and the
Prospectus and any supplement or amendment thereto (except for financial
statements as to which no opinion need be expressed) comply as to form in
all material respects with the Act, and (2) such counsel has no reason to
believe that (except for financial statements, as aforesaid) the
Registration Statement and the prospectus included therein at the time the
Registration Statement became effective did not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and that the Prospectus, as amended or supplemented, if
applicable (except for financial statements, as aforesaid) does not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In giving such opinion with respect to the matters covered by clause
(xvii) such counsel may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification except as specified.
In rendering such opinion, such counsel may rely, as to matters of
fact, on certificates of officers of the Company and of government
officials, in which case their opinion is to state that they are so doing
and copies of said certificates are to be attached to the opinion.
The opinion of Garvey, Schubert & Barer described in paragraph (f)
above shall be rendered to you at the request of the Company and shall so
state therein.
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(g) You shall have received on the Closing Date the following
opinions of counsel for each Selling Stockholder, which counsel shall be
reasonably satisfactory to counsel to the Underwriters. Each opinion shall
be dated the Closing Date, addressed to Underwriters, and in form and scope
satisfactory to counsel for the Underwriters, with reproduced copies or
signed counterparts thereof for each of the Underwriters:
(i) to such counsel's knowledge, after due inquiry, the Custody
Agreement has been duly authorized, executed and delivered by each Selling
Stockholder and is a valid and binding agreement of such Selling
Stockholder enforceable in accordance with its terms;
(ii) to such counsel's knowledge, after due inquiry, each
Selling Stockholder has full legal right, power and authority, and any
approval required by law (other than any approval imposed by the applicable
state securities and Blue Sky laws) to sell, assign, transfer and deliver
the Shares to be sold by him in the manner provided in this Agreement and
the Custody Agreement;
(iii) to such counsel's knowledge, after due inquiry, upon
delivery of the certificates for the Shares to be sold by each Selling
Stockholder pursuant hereto and payment therefor, good and clear title will
pass to the Underwriters (whom such counsel may assume to be bona fide
purchasers), severally, free of all restrictions on transfer, liens,
encumbrances, security interests and claims whatsoever, assuming in each
case that the Underwriters have no notice of any adverse claim with respect
to such Shares; and
(iv) to such counsel's knowledge, after due inquiry, the power
of attorney signed by each Selling Stockholder appointing Larry W. Martin
and William H. Parsons, or either of them, as his attorney-in-fact to the
extent set forth therein with regard to the transactions contemplated
hereby and by the Registration Statement has been duly authorized, executed
and delivered by or on behalf of each Selling Stockholder and is the valid
and binding instrument of such Selling Stockholder enforceable in
accordance with its terms, and pursuant to such power of attorney, each of
the Selling Stockholders has authorized Larry W. Martin and William H.
Parsons, or either of them, to execute and deliver on their behalf this
Agreement and any other document necessary or desirable in connection with
transactions contemplated hereby and to deliver the Shares to be sold by
them pursuant to this Agreement.
(h) At the Closing Date and any Option Closing Date: (A) the
Registration Statement and any post-effective amendment thereto and the
Prospectus and any amendments or supplements thereto shall contain all
statements that are required to be stated therein in accordance with the
Act and the Regulations and shall conform, in all material respects, to the
requirements of the Act and the Regulations, and neither the Registration
Statement nor any post-effective amendment thereto nor the Prospectus and
any amendments or supplements thereto shall contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary
26
<PAGE>
to make the statements therein, in light of the circumstances under which
they were made, not misleading, (B) since the respective dates as of which
information is given in the Registration Statement and any post-effective
amendment thereto and the Prospectus and any amendments or supplements
thereto, except as otherwise stated therein, there shall have been no
material adverse change in the properties, condition (financial or
otherwise), results of operations, stockholders' equity, business or
management of the Company, from that set forth therein, whether or not
arising in the ordinary course of business, other than as referred to in
the Registration Statement or Prospectus, (C) since the respective dates as
of which information is given in the Registration Statement and any
post-effective amendment thereto and the Prospectus or any amendment or
supplement thereto, there shall have been no transaction, contract or
agreement entered into by the Company, other than in the ordinary course of
business and as set forth in the Registration Statement or Prospectus, that
has not been, but would be required to be, set forth in the Registration
Statement or Prospectus; (D) no action, suit or proceeding at law or in
equity shall be pending or, to the knowledge of the Company, threatened
against the Company that would be required to be set forth in Prospectus,
other than as set forth therein, and no proceedings shall be pending or, to
the knowledge of the Company, threatened against the Company before or by
any federal, state or other commission, board or administrative agency
wherein an unfavorable decision, ruling or finding would materially
adversely affect the properties, condition (financial or otherwise),
results of operations, stockholders' equity or business of the Company,
other than as set forth in the Prospectus. The Representative shall have
received at the Closing Date and any Option Closing Date certificates of
each of the Chief Executive Officer and the Chief Financial Officer of the
Company dated as of the date of the Closing Date or Option Closing Date, as
the case may be, and addressed to the Representative to the effect that the
conditions set forth in this subsection have been satisfied and as to the
accuracy and performance, as of the Closing Date or the Option Closing
Date, as the case may be, of the agreements, representations and warranties
of the Company set forth herein.
(i) At the time this Agreement is executed and at the Closing Date
and any Option Closing Date, the Representative shall have received a
letter addressed to the Representative, individually and as the
Representative of the several Underwriters, and in form and substance
satisfactory to the Representative in all respects (including the
nonmaterial nature of the changes or decreases, if any, referred to in
clause (iii) below) from BDO Seidman, LLP, dated as of the date of this
Agreement, the Closing Date or Option Closing Date, as the case may be:
(i) confirming that they are independent public accountants
within the meaning of the Act and the Regulations and stating that the
section of the Registration Statement under the caption "Experts" is
correct insofar as it relates to them;
(ii) stating that, in their opinion, the financial statements of
the Company audited by them and included in the Registration Statement
comply in
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form in all material respects with the applicable accounting
requirements of the Act and the Regulations;
(iii) stating that, on the basis of specified procedures, which
included a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the
latest available unaudited interim financial statements), a reading of
the minutes of the meetings of the stockholders and the Board of
Directors of the Company and audit and compensation committees of such
Board, if any, and inquiries to certain officers and other employees
of the Company who are responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come
to their attention that would cause them to believe that (A) the
unaudited financial statements and related schedules of the Company
included in the Registration Statement, if any, (I) do not comply in
form in all material respects with the applicable accounting
requirements of the Act and the Regulations or (II) were not fairly
presented in conformity with generally accepted accounting principles
on a basis substantially consistent with that of the audited financial
statements and related schedules included in the Registration
Statement or (B)(I) at a specified date, not more than five business
days prior to the date of such letter there was any change in the
capital stock or short-term or long-term debt of the Company, or any
decrease (increase) in net current assets, total assets or
stockholders' equity as compared with the amounts shown in the
December 31, 1995 unaudited balance sheet of the Company included in
the Registration Statement, other than as set forth in or contemplated
by the Registration Statement and Prospectus, and (II) during the
period from December 31, 1995 to a specified date not more than five
business days prior to the date of such letter, there has been any
decrease (increase), as compared with the corresponding period in the
preceding year, in revenues, operating income or income before income
taxes or in total or per share amounts of net income of the Company
or, if there was any such change or decrease (increase), setting forth
the amount of such change or decrease (increase); and
(iv) stating that they have compared specific dollar amounts,
numbers of shares and other information pertaining to the Company set
forth in the Registration Statement and Prospectus that have been
specified by the Representative prior to the date of this Agreement,
to the extent that such amounts, numbers, percentages and information
may be derived from the general accounting or other records of the
Company with the result obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures
do not constitute an audit in accordance with generally accepted
auditing standards) set forth in the letter, and found them to be in
agreement.
(j) The Company shall have executed and delivered a Warrant Agreement
in a form satisfactory to the Representative (the "Warrant Agreement") and
there shall
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have been tendered to the Representative certificates representing all of
the Representative's Warrant described in subsection (p) of Section 6, to
be purchased by the Representative on the Closing Date.
(k) At the Closing Date and any Option Closing Date, the
Representative shall have been furnished such additional documents and
certificates as they shall reasonably request.
(l) No action shall have been taken by the NASD, the effect of which
is to make it improper, at any time prior to the Closing Date or any Option
Closing Date, for members of the NASD to execute transactions as principal
or as agent in the Shares or to trade or deal in the Shares, and no
proceedings for the purpose of taking such action shall have been
instituted or shall be pending or, to the Company's or the Representatives'
knowledge, shall be contemplated by the NASD.
If any conditions to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date, shall not have been fulfilled, the
Representative may on behalf of the several Underwriters terminate this
Agreement or, if they so elect, waive any such conditions which have not been
fulfilled or extend the time for their fulfillment.
9. INDEMNIFICATION.
(a) The Company and Larry W. Martin, jointly and severally (subject
to the limitation set forth in the last sentence of this Section 9(a)),
agree to indemnify and hold harmless each Underwriter and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), from and against any and all losses, claims, damages,
liabilities and judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or the
Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) or any preliminary prospectus, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, except insofar as such losses, claims, damages, liabilities
or judgments are caused by any such untrue statement or omission or alleged
untrue statement or omission which is based upon information relating to
any Underwriter furnished in writing to the Company by or on behalf of any
Underwriter through the Representative expressly for use therein; provided,
however, that the indemnification contained in this paragraph (a) with
respect to any preliminary prospectus shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter)
on account of any such loss, claim, damage, liability or expense arising
from the sale of the Shares by such Underwriter to any person if a copy of
the Prospectus shall not have been delivered or sent to such person within
the time required by the Act and the regulations thereunder, provided that
the Company has delivered the Prospectus to the several Underwriters in
requisite quantity on a timely basis to permit such delivery or sending.
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Notwithstanding the foregoing, the aggregate liability of Mr. Martin
pursuant to the provisions of this paragraph shall be limited to an amount
equal to the aggregate purchase price received by Mr. Martin from the sale
of Mr. Martin's Shares hereunder.
(b) In case any action shall be brought against any Underwriter or
any person controlling such Underwriter, based upon any preliminary
prospectus, the Registration Statement or the Prospectus or any amendment
or supplement thereto and with respect to which indemnity may be sought
against the Company, such Underwriter shall promptly notify the parties
against whom indemnification is being sought (the "Indemnifying Parties")
in writing and the Indemnifying Parties shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to such
indemnified party and payment of all fees and expenses. Any Underwriter or
any such controlling person shall have the right to employ separate counsel
in any such action and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Underwriter or
such controlling person unless (i) the employment of such counsel has been
specifically authorized in writing by the Indemnifying Parties, (ii) the
Indemnifying Parties shall have failed to assume the defense and employ
counsel or (iii) the named parties to any such action (including any
impleaded parties) include both such Underwriter or such controlling person
and the Indemnifying Parties and such Underwriter or such controlling
person shall have been advised by such counsel that there may be one or
more legal defenses available to it which are different from or additional
to those available to the Indemnifying Parties (in which case the
Indemnifying Parties shall not have the right to assume the defense of such
action on behalf of such Underwriter or such controlling person, it being
understood, however, that the Indemnifying Parties shall not, in connection
with any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more
than one separate firm of attorneys (in addition to any local counsel) for
all such Underwriters and controlling persons, which firm shall be
designated in writing by the Representative and that all such fees and
expenses shall be reimbursed as they are incurred). The Indemnifying
Parties shall not be liable for any settlement of any such action effected
without their written consent. If settled with such written consent, the
Indemnifying Parties agree to indemnify and hold harmless any Underwriter
and any such controlling person from and against any loss or liability by
reason of such settlement. Notwithstanding the immediately preceding
sentence, if in any case where the fees and expenses of counsel are at the
expense of the Indemnifying Parties and an indemnified party shall have
requested the Indemnifying Parties to reimburse the indemnified party for
such fees and expenses of counsel as incurred, the Indemnifying Parties
agree that they shall be liable for any settlement of any action effected
without its written consent if (i) such settlement is entered into more
than ten business days after the receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall have failed to
reimburse the indemnified party in accordance with such request for
reimbursement prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened proceeding in
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respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter
of such proceeding.
(c) Each Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, the Company, its directors, its officers
who sign the Registration Statement, and any person who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company
to each Underwriter, but only with respect to the information furnished in
writing by or on behalf of such Selling Stockholder expressly for use in
the Registration Statement, the Prospectus or any preliminary prospectus,
or any amendment or supplement thereto. If any action, suit or proceeding
shall be brought against any Underwriter, any such controlling person of
any Underwriter, the Company, any of its directors, any such officer, or
any such controlling person of the Company, based on the Registration
Statement, the Prospectus or any preliminary prospectus or any amendment or
supplement thereto, and in respect of which indemnity may be sought against
any Selling Stockholder pursuant to this paragraph (c), such Selling
Stockholder shall have the rights and duties given to the Company by
paragraph (b) above (except that if the Company shall have assumed the
defense thereof such Selling Stockholder shall not be required to do so,
but may employ separate counsel therein and participate in the defense
thereof, but the fees and expenses of such counsel shall be at such Selling
Stockholder's expense), and each Underwriter, each such controlling person
of any Underwriter, the Company, its directors, any such officer, and any
such controlling person of the Company shall have the rights and duties
given to the Underwriters by paragraph (b) above. The liability of each
Selling Stockholder under this paragraph (c) and paragraph (e) shall be
limited to an amount equal to the net proceeds of the Shares sold by such
Selling Stockholder to the Underwriters.
(d) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, any person controlling the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
Selling Stockholder and each person, if any, controlling such Selling
Stockholder within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act to the same extent as the foregoing indemnity from the
Company and the Selling Stockholders to each Underwriter but only with
reference to information relating to such Underwriter furnished in writing
by or on behalf of such Underwriter through you expressly for use in the
Registration Statement, the Prospectus or any preliminary prospectus. In
case any action shall be brought against the Company, any of its directors,
any such officer or any person controlling the Company or any Selling
Stockholder or any person controlling such Selling Stockholder based on the
Registration Statement, the Prospectus or any preliminary prospectus and in
respect of which indemnity may be sought against any Underwriter,
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the Underwriter shall have the rights and duties given to the Company and
the Selling Stockholders by paragraph (b) above (except that if any Seller
shall have assumed the defense thereof, such Underwriter shall not be
required to do so, but may employ separate counsel therein and participate
in the defense thereof but the fees and expenses of such counsel shall be
at the expense of such Underwriter), and the Company, its directors, any
such officers and any person controlling the Company and the Selling
Stockholders and any person controlling such Selling Stockholders shall
have the rights and duties given to the Underwriter by Section 9(b) hereof.
(e) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities and judgments (i) in
such proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company and the Selling Stockholders and the Underwriters in connection
with the statements or omissions which resulted in such losses, claims,
damages, liabilities or judgments, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the
Selling Stockholders and the Underwriters shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholders, and the
total underwriting discounts and commissions received by the Underwriters,
bear to the total price to the public of the Shares, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
of the Company and the Selling Stockholders and the Underwriters shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Company, the Selling
Stockholders or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Selling Stockholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 9(e) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations
set forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of
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the amount by which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 9(e) are
several in proportion to the respective number of Shares purchased by each
of the Underwriters hereunder and not joint.
10. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Date and any Option Closing Date; and such
representations, warranties and agreements of the Underwriters and the Company,
including without limitation the indemnity and contribution agreements contained
in Section 9 hereof and the agreements contained in Sections 7, 10, 11 and 14
hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any controlling person,
and shall survive delivery of the Shares and termination of this Agreement,
whether before or after the Closing Date or any Option Closing Date.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
(a) This Agreement shall become effective immediately as to Sections
7, 9, 10, 11 and 14 and, as to all other provisions, (i) if at the time of
execution and delivery of this Agreement the Registration Statement has not
become effective, at 6:30 a.m., Pacific time, on the first business day
following the Effective Date, or (ii) if at the time of execution and
delivery of this Agreement the Registration Statement has been declared
effective, at 6:30 a.m., Pacific time, on the date of execution of this
Agreement; but this Agreement shall nevertheless become effective at such
earlier time after the Registration Statement becomes effective as the
Representative may determine by notice to the Company or by release of any
of the Shares for sale to the public. For the purposes of this Section 10,
the Shares shall be deemed to have been so released upon the release for
publication of any newspaper advertisement relating to the Shares or upon
the release by the Representative of telegrams (i) advising the
Underwriters that the shares are released for public offering or
(ii) offering the Shares for sale to securities dealers, whichever may
occur first. The Representative may prevent the provisions of this
Agreement (other than those contained in Sections 7, 9, 10, 11 and 14)
hereof from becoming effective without liability of any party to any other
party, except as noted below, by giving the notice indicated in
subsection (c) of this Section 10 before the time the other provisions of
this Agreement become effective.
(b) The Representative shall have the right to terminate this
Agreement at any time prior to the Closing Date as provided in Sections 8
and 12 hereof or if any of the following have occurred: (i) since the
respective dates as of which information is
33
<PAGE>
given in the Registration Statement and the Prospectus, any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the
Company, or the earnings, business affairs, management or business
prospects of the Company, whether or not arising in the ordinary course of
business; (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic, political or
financial market conditions if such outbreak, calamity, crisis or change
would, in the Representative's reasonable judgment, make it impractical or
inadvisable to commence or continue the offering of the Shares; (iii)
suspension of trading generally in securities on the New York Stock
Exchange or the over-the-counter market or limitation on prices (other than
limitations on hours or numbers of days of trading) for securities or the
promulgation of any federal or state statute, regulation, rule or order of
any court or other governmental authority which in the Representative's
reasonable opinion materially and adversely affects trading on either such
Exchange or the over-the-counter market; (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation,
rule or order of any court or other governmental authority which in the
Representative's reasonable opinion materially and adversely affects or
will materially and adversely affect the business or operations of the
Company; (v) declaration of a banking moratorium by either federal or state
authorities; (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in
the Representatives' reasonable opinion has a material adverse effect on
the securities markets in the United States; (vii) declaration of a
moratorium in foreign exchange trading by major international banks or
other institutions or (viii) trading in any securities of the Company shall
have been suspended or halted by the NASD or the SEC.
(c) If the Representatives elect to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this
Section 11, the Representative shall notify the Company thereof promptly by
telephone, telex, telegraph or facsimile, confirmed by letter.
12. DEFAULT BY AN UNDERWRITER.
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Offered Shares or Optional Shares hereunder, and if
the Offered Shares or Optional Shares with respect to which such default
relates do not exceed the aggregate of ten percent (10%) of the number of
Offered Shares or Optional Shares, as the case may be, that all
Underwriters have agreed to purchase hereunder, then such Offered Shares or
Optional Shares to which the default relates shall be purchased severally
by the non-defaulting Underwriters in proportion to their respective
commitments hereunder.
(b) If such default relates to more than ten percent (10%) of the
Offered Shares or Optional Shares, as the case may be, the Representative
may in its discretion arrange for another party or parties (including a
non-defaulting Underwriter) to
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<PAGE>
purchase such Offered Shares or Optional Shares to which such default
relates, on the terms contained herein. In the event that the
Representative does not arrange for the purchase of the Offered Shares or
Optional Shares to which a default relates as provided in this Section 12
within 36 hours after such default, this Agreement may be terminated by the
Representative or by the Company without liability on the part of the
nondefaulting Underwriters (except as provided in Section 9 hereof) or the
Company (except as provided in Sections 7 and 9 hereof), but nothing herein
shall relieve a defaulting Underwriter of its liability, if any, to the
other several Underwriters and to the Company for damages occasioned by its
default hereunder.
(c) If the Offered Shares or Optional Shares to which the default
relates are to be purchased by the non-defaulting Underwriters, or are to
be purchased by another party or parties as aforesaid, the Representative
or the Company shall have the right to postpone the Closing Date or any
Option Closing Date, as the case may be, for a reasonable period but not in
any event exceeding seven days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus
or in any other documents and arrangements, and the Company agrees to file
promptly any amendment to the Registration Statement or supplement to the
Prospectus which in the opinion of counsel for the Underwriters may thereby
be made necessary. The terms "Underwriters" and "Underwriter" as used in
this Agreement shall include any party substituted under this Section 12
with like effects as if it had originally been a party to this Agreement
with respect to such Offered Shares or Optional Shares.
13. INFORMATION FURNISHED BY UNDERWRITERS. The Representative, on behalf
of the Underwriters, represents and warrants to the Company that the information
appearing in any preliminary prospectus, the Prospectus or the Registration
Statement (a) on the cover page of the Prospectus with respect to price,
underwriting discounts and commissions and terms of offering, (b) on the inside
front cover page with respect to stabilization, (c) in the section entitled
"Underwriting," and (d) in the section entitled "Legal Matters" with respect to
the identity of counsel for the Underwriters was furnished to the Company by and
on behalf of the Underwriters for use in connection with the preparation of the
Registration Statement and the Prospectus and is correct in all material
respects. The parties acknowledge that this information constitutes the only
information furnished in writing by or on behalf of any Underwriter for
inclusion in any preliminary prospectus, the Prospectus or the Registration
Statement referred to in subsection (b) of Section 1 hereof and subsections (a)
and (b) of Section 9 hereof.
14. NOTICES. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to any Underwriter,
shall be mailed, delivered, telexed, telegrammed, telegraphed or telecopied and
confirmed to such Underwriter, c/o Cruttenden Roth Incorporated, 18301 Von
Karman, Irvine, California 97215-1009, Attention: President, with a copy to
Heller, Ehrman, White & McAuliffe, 6100 Columbia Center, 701 Fifth Avenue,
Seattle, Washington 98104-7098, Attention: Michael J. Erickson; if sent to the
Company shall be mailed, delivered, telexed, telegrammed, telegraphed or
telecopied and
35
<PAGE>
confirmed to Data Dimensions, Inc., 777 108th Avenue N.E., Bellevue, Washington
98004, Attention: President, with a copy to Garvey, Schubert & Barer, 1191
Second Avenue, Suite 1800, Seattle, Washington 98101-2939, Attention: Bruce A.
Robertson.
15. PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the several Underwriters, the Company, and the
controlling persons, directors and officers referred to in Section 9 hereof, and
their respective successors, assigns, heirs and legal representatives, and no
other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained. The term "successors" and "assigns" shall not
include any purchaser of the Shares merely because of such purchase.
16. DEFINITION OF BUSINESS DAY. For purposes of this Agreement, "business
day" means any day on which the New York Stock Exchange, Inc. is open for
trading.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and all such counterparts will constitute one and the same
instrument.
18. CONSTRUCTION. This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to agreements
made and performed entirely within such State.
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<PAGE>
If the foregoing correctly sets forth the understanding among the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement by and
among the Underwriters and the Company.
Very truly yours,
DATA DIMENSIONS, INC.
By:
------------------------------------------
Its
---------------------------------------
THE SELLING STOCKHOLDERS
NAMED IN SCHEDULE II HERETO
By:
------------------------------------------
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
CRUTTENDEN ROTH INCORPORATED
By:
------------------------------
Its
--------------------------
Acting severally on behalf of itself and the several Underwriters named in
Schedule I hereto
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<PAGE>
SCHEDULE I
UNDERWRITERS
NUMBER OF OFFERED SHARES
UNDERWRITER TO BE PURCHASED
----------- ---------------
<PAGE>
SCHEDULE II
SELLING STOCKHOLDERS
<PAGE>
SCHEDULE III
PERSONS SUBJECT TO LOCKUP AGREEMENTS
NAME LOCKUP PERIOD
---- -------------
<PAGE>
WARRANT AGREEMENT
This WARRANT AGREEMENT ("Agreement") dated as of _____________, 1996 is by
and between Data Dimensions, Inc., a Delaware corporation (the "Company"), and
Cruttenden Roth Incorporated ("Cruttenden" or the "Representative").
WHEREAS, the Representative has agreed pursuant to the Underwriting
Agreement dated _____________, 1996 (the "Underwriting Agreement") to act as
the representative of the several underwriters in connection with the
proposed public offering by the Company and certain selling stockholders of
up to 1,150,000 shares in the aggregate of Common Stock, including 150,000 of
such shares covered by an over-allotment option (the "Public Offering"); and
WHEREAS, pursuant to Section 6(p) of the Underwriting Agreement, the
Company has agreed to issue warrants to the Representative (the "Warrants") to
purchase, at a price of $0.001 per warrant, up to an aggregate of 100,000 shares
(hereinafter, and as the number thereof may be adjusted hereto, the "Warrant
Shares"), of the Company's Common Stock, $0.001 par value per share (the "Common
Stock"), each Warrant initially entitling the holder thereof to purchase one
share of Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein and in the Underwriting Agreement set forth and for other good and
valuable consideration, the parties hereto agree as follows:
1. ISSUANCE OF WARRANTS; FORM OF WARRANT. The Company will issue and
deliver to the Representative, Warrants to purchase 100,000 Warrant Shares on
the Closing Date referred to in the Underwriting Agreement in consideration
for, and as part of the Representative's compensation in connection with, the
Representative acting as the representative of the several underwriters for
the Public Offering pursuant to the Underwriting Agreement. The text of the
Warrants and of the form of election to purchase shares shall be
substantially as set forth in EXHIBIT A attached hereto. The Warrants shall
be executed on behalf of the Company by the manual or facsimile signature of
the present or any future Chairman of the Board, President or Vice President
of the Company, under its corporate seal, affixed or in facsimile, attested
by the manual or facsimile signature of the Secretary or an Assistant
Secretary of the Company.
Warrants bearing the manual or facsimile signatures of individuals who were
at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any one of them shall have ceased to
hold such offices prior to the delivery of such Warrants or did not hold such
offices on the date of this Agreement. Warrants shall be dated as of the date of
execution thereof by the Company either upon initial issuance or upon division,
exchange, substitution or transfer.
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<PAGE>
2. REGISTRATION. The Warrants shall be numbered and shall be registered
on the books of the Company (the "Warrant Register") as they are issued. The
Company shall be entitled to treat the registered holder of any Warrant on the
Warrant Register (the "Holder") as the owner in fact therefor for all purposes
and shall not be bound to recognize any equitable or other claim to or interest
in such Warrant on the part of any other person, and shall not be liable for any
registration or transfer of Warrants which are registered or are to be
registered in the name of a fiduciary or the nominee of a fiduciary unless made
with the actual knowledge that a fiduciary or nominee is committing a breach of
trust in requesting such registration or transfer, or with the knowledge of such
facts that its participation therein amounts to bad faith. Warrants to purchase
75,000 shares shall be registered initially in the name of "Cruttenden Roth
Incorporated," or in such other denominations as Cruttenden may request in
writing to the Company.
3. EXCHANGE OF WARRANT CERTIFICATES. Subject to any restriction upon
transfer set forth in this Agreement, each Warrant certificate may be exchanged
for another certificate or certificates entitling the Holder thereof to purchase
a like aggregate number of Warrant Shares as the certificate or certificates
surrendered then entitled such Holder to purchase. Any Holder desiring to
exchange a Warrant certificate or certificates shall make such request in
writing delivered to the Company, and shall surrender, properly endorsed, the
certificate or certificates to be so exchanged. Thereupon, the Company shall
execute and deliver to the person entitled thereto a new Warrant certificate or
certificates, as the case may be, as so requested.
4. TRANSFER OF WARRANTS. Until __________, 1997, the Warrants will not
be sold, transferred, assigned or hypothecated except to bona fide officers and
partners of the Representative who agree in writing to be bound by the terms
hereof, and after ____________, 1997, the Warrants will not be sold,
transferred, assigned or hypothecated except to the foregoing persons and
employees of the Representative who agree in writing to be bound by the terms
hereof. The Warrants shall be transferable only on the Warrant Register upon
delivery thereof duly endorsed by the Holder or by the Holder's duly authorized
attorney or representative, or accompanied by proper evidence of succession,
assignment or authority to transfer. In all cases of transfer by an attorney,
the original power of attorney, duly approved, or an official copy thereof, duly
certified, shall be deposited with the Company. In case of transfer by
executors, administrators, guardians or other legal representatives, duly
authenticated evidence of their authority shall be produced, and may be required
to be deposited with the Company in its discretion. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto.
5. TERM OF WARRANTS; EXERCISE OF WARRANTS.
5.1 Each Warrant entitles the registered owner thereof to purchase
one share of Common Stock at any time from 10:00 a.m., Pacific time, on
______________, 1997 (the "Initiation Date") until 6:00 p.m., Pacific time, on
______________, 2001 (the "Expiration Date") at a purchase price of $_____,
subject to adjustment (the "Warrant Price").
5.2 The Warrant Price and the number of Warrant Shares issuable upon
exercise of Warrants are subject to adjustment upon the occurrence of certain
events, pursuant to the
2
<PAGE>
provisions of Section 11 of this Agreement. Subject to the provisions of this
Agreement, each Holder of Warrants shall have the right, which may be exercised
as expressed in such Warrants, to purchase from the Company (and the Company
shall issue and sell to such Holder of Warrants) the number of fully paid and
nonassessable Warrant Shares specified in such Warrants, upon surrender to the
Company, or its duly authorized agent, of such Warrants, with the form of
election to purchase on the reverse thereof duly filled in and signed, and upon
payment to the Company of the Warrant Price, as adjusted in accordance with the
provisions of Section 11 of this Agreement, for the number of Warrant Shares in
respect of which such Warrants are then exercised. Payment of such Warrant
Price shall be made in cash or by certified or official bank check, or a
combination thereof. No adjustment shall be made for any dividends on any
Warrant Shares of stock issuable upon exercise of a Warrant.
5.3 Upon such surrender of Warrants, and payment of the Warrant Price
as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the Holder of such Warrants
and in such name or names as such registered Holder may designate, a certificate
or certificates for the number of full Warrant Shares so purchased upon the
exercise of such Warrants, together with cash, as provided in Section 12 of this
Agreement, in respect of any fraction of a share otherwise issuable upon such
surrender and, if the number of Warrants represented by a Warrant Certificate
shall not be exercised in full, a new Warrant Certificate, executed by the
Company for the balance of the number of whole Warrant Shares represented by the
Warrant Certificate.
5.4 If permitted by applicable law, such certificate or certificates
shall be deemed to have been issued and any person so designated to be named
therein shall be deemed to have become a holder of record of such shares as of
the date of the surrender of such Warrants and payment of the Warrant Price as
aforesaid. The rights of purchase represented by the Warrants shall be
exercisable, at the election of the registered Holders thereof, either as an
entirety or from time to time for only part of the shares specified therein.
6. COMPLIANCE WITH GOVERNMENT REGULATIONS. The Company covenants that if
any shares of Common Stock required to be reserved for purposes of exercise or
conversion of Warrants require, under any Federal or state law or applicable
governing rule or regulation of any national securities exchange, registration
with or approval of any governmental authority, or listing on any such national
securities exchange before such shares may be issued upon exercise, the Company
will in good faith and as expeditiously as possible endeavor to cause such
shares to be duly registered, approved or listed on the relevant national
securities exchange, as the case may be; PROVIDED, HOWEVER, that (except to the
extent legally permissible with respect to Warrants of which the Representative
is the Holder) in no event shall such shares of Common Stock be issued, and the
Company is hereby authorized to suspend the exercise of all Warrants, for the
period during which such registration, approval or listing is required but not
in effect.
7. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes,
if any, attributable to the initial issuance of Warrant Shares upon the exercise
of Warrants; PROVIDED, HOWEVER, that the Company shall not be required to pay
any tax or taxes which may be payable
3
<PAGE>
in respect of any transfer involved in the issue or delivery of any Warrants or
certificate for Warrant Shares in a name other than that of the registered
Holder of such Warrants.
8. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company may in its discretion issue
and deliver in exchange and substitution for and upon cancellation of the
mutilated Warrant, or in lieu of and substitution for the Warrant lost, stolen
or destroyed, a new Warrant of like tenor and representing an equivalent right
or interest; but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction of such Warrant and, if requested,
indemnity or bond also reasonably satisfactory to the Company. An applicant for
such substitute Warrants shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
9. RESERVATION OF WARRANT SHARES. There have been reserved out of the
authorized and unissued shares of Common Stock, a number of shares sufficient to
provide for the exercise of the rights of purchase represented by the Warrants,
and the transfer agent for the Common Stock ("Transfer Agent") and every
subsequent Transfer Agent for any shares of the Company's capital stock issuable
upon the exercise of any of the rights of purchase aforesaid are hereby
irrevocably authorized and directed at all times until the Expiration Date to
reserve such number of authorized and unissued shares as shall be required for
such purpose. The Company will keep a copy of this Agreement on file with the
Transfer Agent and with every subsequent Transfer Agent for any shares of the
Company's capital stock issuable upon the exercise of the rights of purchase
represented by the Warrants. The Company will supply such Transfer Agent with
duly executed stock certificates for such purposes and will itself provide or
otherwise make available any cash which may be issuable as provided in
Section 12 of this Agreement. The Company will furnish to such Transfer Agent a
copy of all notices of adjustments, and certificates related thereto,
transmitted to each Holder pursuant to Section 11.2 of this Agreement. All
Warrants surrendered in the exercise of the rights thereby evidenced shall be
cancelled.
10. OBTAINING STOCK EXCHANGE LISTINGS. The Company will from time to time
take all action which may be necessary so that the Warrant Shares, immediately
upon their issuance upon the exercise of Warrants, will be listed on the
principal securities exchanges and markets within the United States of America,
if any, on which other shares of Common Stock are then listed.
11. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT SHARES. The number
and kind of securities purchasable upon the exercise of each Warrant and the
Warrant Price shall be subject to adjustment from time to time upon the
happening of certain events as hereinafter defined. For purposes of this
Section 11, "Common Stock" means shares now or hereafter authorized of any class
of common stock of the Company and any other stock of the Company, however
designated, that has the right (subject to any prior rights of any class or
series of preferred stock) to participate in any distribution of the assets or
earnings of the Company without limit as to per share amount.
11.1 MECHANICAL ADJUSTMENTS. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Warrant Price shall be subject to
adjustment as follows:
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<PAGE>
(a) In case the Company shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock, (iii) combine its outstanding shares of
Common Stock or (iv) issue by reclassification of its shares of Common Stock
other securities of the Company (including any such reclassification in
connection with a consolidation or merger in which the Company is the surviving
corporation), the number of Warrant Shares purchasable upon exercise of each
Warrant immediately prior thereto shall be adjusted so that the Holder of each
Warrant shall be entitled to receive the kind and number of Warrant Shares or
other securities of the Company which he would have owned or would have been
entitled to receive after the happening of any of the events described above,
had such Warrants been exercised immediately prior to the happening of such
event or any record date with respect thereto. An adjustment made pursuant to
this paragraph (a) shall become effective immediately after the effective date
of such event retroactive to the record date, if any, for such event. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(b) In case the Company shall distribute to all holders of its
shares of Common Stock (including any such distribution made in connection with
a consolidation or merger in which the Company is the surviving corporation)
evidences of its indebtedness or assets (excluding cash dividends or
distributions payable out of consolidated earnings or earned surplus and
dividends or distributions referred to in paragraph (a) above or in the
paragraph immediately following this paragraph) or rights, options or warrants,
or convertible or exchangeable securities containing the right to subscribe for
or purchase shares of Common Stock, then in each case the number of Warrant
Shares thereafter purchasable upon the exercise of each Warrant shall be
determined by multiplying the number of Warrant Shares theretofore purchasable
upon the exercise of each Warrant by a fraction, the numerator of which shall be
the then current market price per share of Common Stock (as defined in paragraph
(c) below) on the date of such distribution, and the denominator of which shall
be the then current market price per share of Common Stock, less the then fair
value (as determined by the Board of Directors of the Company, whose
determination shall be conclusive) of the portion of the assets or evidences of
indebtedness so distributed or of such subscription rights, options or warrants,
or of such convertible or exchangeable securities applicable to one share of
Common Stock. Such adjustment shall be made whenever any such distribution is
made, and shall become effective on the date of distribution retroactive to the
record date for the determination of stockholders entitled to receive such
distribution.
In the event of a distribution by the Company to all holders of
its shares of Common Stock of stock of a subsidiary or securities convertible
into or exercisable for such stock, then in lieu of an adjustment in the number
of Warrant Shares purchasable upon the exercise of each Warrant, the Holder of
each Warrant, upon the exercise thereof at any time after such distribution,
shall be entitled to receive from the Company, such subsidiary or both, as the
Company shall determine, the stock or other securities to which such Holder
would have been entitled if such Holder had exercised such Warrant immediately
prior thereto, all subject to further adjustment as provided in this
Section 11.1; PROVIDED, HOWEVER, that no adjustment in respect of dividends or
interest on such stock or other securities shall be made during the term of a
Warrant or upon the exercise of a Warrant.
5
<PAGE>
(c) For the purpose of any computation under paragraph (b) of
this Section, the current market price per share of Common Stock at any date
shall be the average of the daily closing prices for 20 consecutive trading days
commencing 30 trading days before the date of such computation. The closing
price for each day shall be the last such reported sales price regular way or,
in case no such reported sale takes place on such day, the average of the
closing bid and asked prices regular way for such day, in each case on the
principal national securities exchange on which the shares of Common Stock are
listed or admitted to trading or, if not listed or admitted to trading, the
average of the closing bid and asked prices of the Common Stock in the over-the
counter market as reported by the Nasdaq National Market System or Nasdaq
SmallCap System or if not approved for quotation on the Nasdaq National Market
System or Nasdaq SmallCap System, the average of the closing bid and asked
prices as furnished by two members of the National Association of Securities
Dealers, Inc. selected from time to time by the Company for that purpose.
(d) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of Warrant Shares
purchasable upon the exercise of each Warrant; PROVIDED, HOWEVER, that any
adjustments which by reason of this paragraph (d) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest one-thousandth of a share.
(e) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Warrant Price
payable upon exercise of each Warrant shall be adjusted by multiplying such
Warrant Price immediately prior to such adjustment by a fraction, the numerator
of which shall be the number of Warrant Shares purchasable upon the exercise of
each Warrant immediately prior to such adjustment, and the denominator of which
shall be the number of Warrant Shares purchasable immediately thereafter.
(f) No adjustment in the number of Warrant Shares purchasable
upon the exercise of each Warrant need be made under paragraph (b) if the
Company issues or distributes to each Holder of Warrants the rights, options,
warrants, or convertible or exchangeable securities, or evidences of
indebtedness or assets referred to in those paragraphs which each Holder of
Warrants would have been entitled to receive had the Warrants been exercised
prior to the happening of such event or the record date with respect thereto. No
adjustment need be made for a change in the par value of the Warrant Shares.
(g) In the event that at any time, as a result of an adjustment
made pursuant to paragraph (a) above, the Holders shall become entitled to
purchase any securities of the Company other than shares of Common Stock,
thereafter the number of such other shares so purchasable upon exercise of each
Warrant and the Warrant Price of such shares shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Shares contained in paragraphs (a)
through (f), inclusive, above, and the provisions of Sections 5, 11.2 and 11.3,
with respect to the Warrant Shares, shall apply on like terms to such other
securities.
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(h) Upon the expiration of any rights, options, warrants or
conversion or exchange privileges, if any thereof shall not have been exercised,
the Warrant Price and the number of shares of Common Stock purchasable upon the
exercise of each Warrant shall, upon such expiration, be readjusted and shall
thereafter be such as it would have been had it been originally adjusted (or had
the original adjustment not been required, as the case may be) as if (i) the
only shares of Common Stock so issued were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such rights, options, warrants or
conversion or exchange rights and (ii) such shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Company upon such
exercise plus the aggregate consideration, if any, actually received by the
Company for the issuance, sale or grant of all such rights, options, warrants or
conversion or exchange rights whether or not exercised; PROVIDED, HOWEVER, that
no such readjustment shall have the effect of increasing the Warrant Price or
decreasing the number of shares of Common Stock purchasable upon the exercise of
each Warrant by an amount in excess of the amount of the adjustment initially
made in respect to the issuance, sale or grant of such rights, options, warrants
or conversion or exchange rights.
11.2 NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares,
purchasable upon the exercise of each Warrant or the Warrant Price of such
Warrant Shares is adjusted, as herein provided, the Company shall promptly mail
by first class, postage prepaid, to each Holder notice of such adjustment or
adjustments and a certificate of a firm of independent public accounts selected
by the Board of Directors of the Company (who may be the regular accountants
employed by the Company) setting forth the number of Warrant Shares purchasable
upon the exercise of each Warrant and the Warrant Price of such Warrant Shares
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made. Such certificate shall be conclusive evidence of the correctness of such
adjustment.
11.3 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section 11.1,
no adjustments in respect of any dividends shall be made during the term of a
Warrant or upon the exercise of a Warrant.
11.4 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION, ETC.
In case of any consolidation of the Company with or merger of the Company into
another corporation or in case of any sale, transfer or lease to another
corporation of all or substantially all the property of the Company, the Company
or such successor or purchasing corporation, as the case may be, shall execute
with each Holder an agreement that each Holder shall have the right thereafter
upon payment of the Warrant Price in effect immediately prior to such action to
purchase upon exercise of each Warrant the kind and amount of shares and other
securities, cash and property which he would have owned or would have been
entitled to receive after the happening of such consolidation, merger, sale,
transfer or lease had such Warrant been exercised immediately prior to such
action; PROVIDED, HOWEVER, that no adjustment in respect of dividends, interest
or other income on or from such shares or other securities, cash and property
shall be made during the term of a Warrant or upon the exercise of a Warrant.
Such agreement shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided
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for in this Section 11. The provisions of this Section 11.4 shall similarly
apply to successive consolidations, mergers, sales transfer or leases.
11.5 STATEMENTS ON WARRANTS. Irrespective of any adjustments in the
Warrant Price or the number or kind of shares purchasable upon the exercise of
the Warrants, Warrants theretofore or thereafter issued may continue to express
the same price and number and kind of shares as are stated in the Warrants
initially issuable pursuant to this Agreement.
12. FRACTIONAL INTERESTS. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same holder, the
number of full Warrant Shares which shall be issuable upon the exercise thereof
shall be computed on the basis of the aggregate number of Warrant Shares
purchasable on exercise of the Warrants so presented. If any fraction of a
Warrant Share would, except for the provisions of this Section 12, be issuable
on the exercise of any Warrant (or specified portion thereof), the Company shall
pay an amount in cash equal to the closing price for one share of the Common
Stock, as defined in paragraph (c) of Section 11.1, on the trading day
immediately preceding the date the Warrant is presented for exercise, multiplied
by such faction.
13. REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Representative
represents and warrants to the Company that it will not dispose of the Warrants
or the Warrant Shares except pursuant to (i) an effective registration statement
under the Securities Act of 1933, as amended (the "Act'), including a post-
effective amendment to the Registration Statement, (ii) Rule 144 under the Act
(or any similar rule under the Act relating to the disposition of securities),
or (iii) an opinion of counsel, reasonably satisfactory to counsel of the
Company that an exemption from such registration is available.
14. CERTIFICATE TO BEAR LEGENDS. The Warrant shall be subject to a stop-
transfer order and the certificate or certificates therefore shall bear the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAW. SAID SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT.
The Warrant Shares or other securities issued upon exercise of the Warrant
shall be subject to a stop-transfer order and the certificate or certificates
evidencing any such Warrant Shares or securities shall bear the following
legend:
THE SHARES [OR OTHER SECURITIES] REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAW. SAID SECURITIES
MAY NOT BE SOLD OR
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TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT.
15. REGISTRATION RIGHTS.
15.1 DEMAND REGISTRATION RIGHTS. The Company covenants and agrees
with the Representative and any subsequent Holders of the Warrants and/or
Warrants Shares that, on one occasion, within 60 days after receipt of a written
request from the Representative or from Holders of more than 25% in interest of
the aggregate of Warrants and/or Warrant Shares issued pursuant to this
Agreement that the Representative or such Holders of the Warrants and/or Warrant
Shares desires and intends to transfer more than 25% in interest of the
aggregate number of the Warrants and/or Warrant Shares under such circumstances
that a public offering, within the meaning of the Act, will be involved, the
Company shall, on that one occasion, file a registration statement (and use its
best efforts to cause such registration statement to become effective under the
Act at the Company's expense) with respect to the offering and sale or other
disposition of the Warrant Shares (the "Offered Warrant Shares"); PROVIDED,
HOWEVER, that the Company shall have no obligation to comply with the foregoing
provisions of this Section 15.1 if in the opinion of counsel to the Company
reasonably acceptable to the Holder or Holders, from whom such written requests
has been received, registration under the Act is not required for the transfer
of the Offered Warrant Shares in the manner proposed by such person or persons
or that a post-effective amendment to an existing registration statement would
be legally sufficient for such transfer (in which latter event the Company shall
promptly file such post-effective amendment (and use its best efforts to cause
such amendment to become effective under the Act)). Notwithstanding the
foregoing, the Company shall not be obligated to file a registration statement
with respect to the Offered Warrant Shares on more than one occasion.
The Company may defer the preparation and filing of a registration
statement for up to 90 days after the request for registration is made if the
Board of Directors determines in good faith that such registration or post-
effective amendment would adversely affect or otherwise interfere with a
proposed or pending transaction by the Company, including without limitation a
material financing or a corporate reorganization, or during any period of time
in which the Company is in possession of material inside information concerning
the Company or its securities, which information the Company determines in good
faith is not ripe for disclosure.
The Company shall not honor any request to register Warrant Shares
pursuant to this Section 15.1 received later than five (5) years from the
effective date of the Company's Registration Statement on Form SB-2 (File No.
333-841) (the "Effective Date"). The Company shall not be required (i) to
maintain the effectiveness of the registration statement beyond the earlier to
occur of 90 days after the effective date of the registration statement or the
date on which all of the Offered Warrant Shares have been sold (the "Termination
Date"); PROVIDED, HOWEVER, that if at the Termination Date the Offered Warrant
Shares are covered by a registration statement which also covers other
securities and which is required to remain in effect beyond the Termination
Date, the Company shall maintain in effect such registration statement as it
relates to Offered Warrant Shares for so long as such registration statement (or
any substitute registration statement) remains or is required to remain in
effect for any such other securities, or (ii) to cause
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<PAGE>
any registration statement with respect to the Warrant Shares to become
effective prior to the Initiation Date. All expenses of registration pursuant
to this Section 15.1 shall be borne by the Company (excluding underwriting
discounts and commissions on Warrant Shares not sold by the Company).
The Company shall be obligated pursuant to this Section 15.1 to
include in the registration statement Warrant Shares that have not yet been
purchased by a Holder of Warrants so long as such Holder of Warrants submits an
undertaking to the Company that such Holder intends to exercise Warrants
representing the number of Warrant Shares to be included in such registration
statement prior to the consummation of the public offering with respect to such
Warrant Shares. In addition, such Holder of Warrants is permitted to pay the
Company the Warrant Price for such Warrant Shares upon the consummation of the
public offering with respect to such Warrant Shares.
15.2 PIGGY-BACK REGISTRATION RIGHTS. The Company covenants and agrees
with the Holders and any subsequent Holders of the Warrants and/or Warrant
Shares that in the event the Company proposes to file a registration statement
under the Act with respect to any class of security (other than in connection
with an exchange offer, a non-cash offer or a registration statement on Form S-8
or other unsuitable registration statement form) which becomes or which the
Company believes will become effective at any time after the Initiation Date
then the Company shall in each case give written notice of such proposed filing
to the Holders of Warrants and Warrant Shares at least 30 days before the
proposed filing date and such notice shall offer to such Holders the opportunity
to include in such registration statement such number of Warrant Shares as they
may request, unless, in the opinion of counsel to the Company reasonably
acceptable to any such holder of Warrants or Warrant Shares who wishes to have
Warrant Shares included in such registration statement, registration under the
Act is not required for the transfer of such Warrants and/or Warrant Shares in
the manner proposed by such Holders. The Company shall not honor any such
request to register any such Warrant Shares if the request is received later
than seven (7) years from the Effective Date, and the Company shall not be
required to honor any request (a) to register any such Warrant Shares if the
Company is not notified in writing of any such request pursuant to this
Section 15.2 within at least 20 days after the Company has given notice to the
Holders of the filing, or (b) to register Warrant Shares that represent in the
aggregate fewer than 25% of the aggregate number of Warrant Shares. The Company
shall permit, or shall cause the managing underwriter of a proposed offering to
permit, the Holders of Warrant Shares requested to be included in the
registration (the "Piggy-back Shares,") to include such Piggy-back Shares in the
proposed offering on the same terms and conditions as applicable to securities
of the Company included therein or as applicable to securities of any person
other than the Company and the Holders of Piggy-back Shares if the securities of
any such person are included therein. Notwithstanding the foregoing, if any
such managing underwriter shall advise the Company in writing that it believes
that the distribution of all or a portion of the Piggy-back Shares requested to
be included in the registration statement concurrently with the securities being
registered by the Company would materially adversely affect the distribution of
such securities by the Company for its own account, then the Holders of such
Piggy-back Shares shall delay their offering and sale of Piggy-back Shares (or
the portion thereof so designated by such managing underwriter) for such period,
not to exceed 120 days, as the managing underwriter shall request provided that
no such
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<PAGE>
delay shall be required as to Piggy-back Shares if any securities of the Company
are included in such registration statement for the account of any person other
than the Company and the Holders of Piggy-back Shares. In the event of such
delay, the Company shall file such supplements, post-effective amendments or
separate registration statement, and take any such other steps as may be
necessary to permit such Holders to make their proposed offering and sale for a
period of 90 days immediately following the end of such period of delay ("Piggy-
back Termination Date"); PROVIDED, HOWEVER, that if at the Piggy-back
Termination Date the Piggy-back Shares are covered by a registration statement
which is, or required to remain, in effect beyond the Piggy-back Termination
Date, the Company shall maintain in effect the registration statement as it
relates to the Piggy-back Shares for so long as such registration statement
remains or is required to remain in effect for any of such other securities.
All expenses of registration pursuant to this Section 15.2 shall be borne by the
Company, except that underwriting commissions and expenses attributable to the
Piggy-back Shares and fees and disbursements of counsel (if any) to the Holders
requesting that such Piggy-back Shares be offered will be borne by such Holders.
The Company shall be obligated pursuant to this Section 15.2 to
include in the Piggy-back Offering, Warrant Shares that have not yet been
purchased by a holder of Warrants so long as such Holder of Warrants submits an
undertaking to the Company that such Holder intends to exercise Warrants
representing the number of Warrant Shares to be included in such Piggy-back
Offering prior to the consummation of such Piggy-back Offering. In addition,
such Holder of Warrants is permitted to pay the Company the Warrant Price for
such Warrant Shares upon the consummation of the Piggy-back Offering.
If the Company decides not to proceed with a Piggy-back Offering, the
Company has no obligation to proceed with the offering of the Piggy-back Shares,
unless the Holders of the Warrants and/or Warrant Shares otherwise comply with
the provisions of Section 15.1 hereof (without regard to the 60 days' written
request required thereby). Notwithstanding any of the foregoing contained in
this Section 15.2, the Company's obligation to offer registration rights to the
Piggy-back Shares pursuant to this Section 15.2 shall terminate two (2) years
after the Expiration Date.
15.3 In connection with the registration of Warrants Shares in
accordance with Section 15.1 and 15.2 above, the Company agrees to:
(a) Use its best efforts to register or qualify the Warrant
Shares for offer or sale under the state securities or Blue Sky laws of
such states which the Holders of such Warrant Shares shall designate, until
the dates specified in Section 15.1 and 15.2 above in connection with
registration under the Act; PROVIDED, HOWEVER, that in no event shall the
Company be obligated to qualify to do business in any jurisdiction where it
is not now so qualified or to take any action which would subject it to
general service of process in any jurisdiction where it is not now so
subject or to register or get a license as a broker or dealer in securities
in any jurisdiction where it is not so registered or licensed or to
register or qualify the Warrant Shares for offer or sale under the state
securities or Blue Sky laws of any state other than the states in which
some or all of the shares offered or sold in the Public Offering were
registered or qualified for offer and sale.
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(b) (i) In the event of any post-effective amendment or other
registration with respect to any Warrant Shares pursuant to Section 15.1 or
15.2 above, the Company will indemnify and hold harmless any Holder whose
Warrant Shares are being so registered, and each person, if any, who
controls such Holder within the meaning of the Act, against any losses,
claims, damages or liabilities, joint or several, to which such Holder or
such controlling person may be subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained, on the effective date
thereof, in any such registration statement, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each such Holder
and each such controlling person for any legal or other expenses reasonably
incurred by such Holder or such controlling person in connection with
investigating or defending any such loss, claim, damage, liability or
action; PROVIDED, HOWEVER, that the Company will not be liable in such case
to the extent that any such loss, claim, damage or liability arises out of
or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in any such registration statement, any
preliminary prospectus or final prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with written information
furnished by such Holder expressly for use in the preparation thereof. The
Company will not be liable to a claimant to the extent of any misstatement
corrected or remedied in any amended prospectus if the Company timely
delivers a copy of such amended prospectus to such indemnified person and
such indemnified person does not timely furnish such amended prospectus to
such claimant. The Company shall not be required to indemnify any Holder
or controlling person for any payment made to any claimant in settlement of
any suit or claim unless such payment is approved by the Company.
(ii) Each Holder of Warrants and/or Warrant Shares who
participates in a registration pursuant to Section 15.1 or 15.2 will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed any such registration statement, and each person,
if any, who controls the Company within the meaning of the Act, against any
losses, claims, damages or liabilities to which the Company, or any such
director, officer or controlling person may become subject under the Act,
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in any such
registration statement, any preliminary prospectus or final prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged
omission was made in any such registration statement, any preliminary
prospectus or final prospectus, or any amendment or supplement thereto, in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in the preparation thereof; and will reimburse any
legal or other expenses
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<PAGE>
reasonably incurred by the Company, or any such director, officer or
controlling person in connection with investigating or defending any such
loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
indemnity agreement contained in this subparagraph (ii) shall not apply to
amounts paid to any claimant in settlement of any suit or claim unless such
payment is first approved by such Holder.
(iii) In order to provide for just and equitable
contribution in any action in which a claim for indemnification is made
pursuant to this clause (b)(iii) of Section 15.3 but is judicially
determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial
of the last right of appeal) that such indemnification may not be enforced
in such case notwithstanding the fact that this clause (b)(iii) of
Section 15.3 provides for indemnification in such case, all the parties
hereto shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others)
in such proportion so that each Holder whose Warrant Shares are being
registered is responsible pro rata for the portion represented by the
public offering price received by such Holder from the sale of such
Holder's Warrant Shares, and the Company is responsible for the remaining
portion; PROVIDED, HOWEVER, that (i) no Holder shall be required to
contribute any amount in excess of the public offering price received by
such Holder from the sale of such Holder's Warrant Shares and (ii) no
person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who is not guilty of such fraudulent misrepresentation. This
subsection (b)(iii) shall not be operative as to any Holder of Warrant
Shares to the extent that the Company has received indemnity under this
clause (b)(iii) of Section 15.3.
16. NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDERS. Nothing contained in
this Agreement or in any of the Warrants shall be construed as conferring upon
the Holders or their transferee(s) the right to vote or to receive dividends or
to consent to or receive notice as stockholders in respect of any meeting of
stockholders for the election of directors of the Company or any other matter,
or any rights whatsoever as stockholders of the Company. If, however, at any
time prior to the expiration of the Warrants and prior to their exercise, any of
the following events shall occur:
(a) the Company shall declare any dividend payable in any
securities upon its shares of Common Stock or make any distribution (other
than a cash dividend) to the holders of its shares of Common Stock; or
(b) the Company shall offer to the holders of its shares of
Common Stock any additional shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock or any right to
subscribe to or purchase any thereof; or
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(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger, sale, transfer or
lease of all or substantially all of its property, assets, and business as
an entirety) shall be proposed,
then in any one or more of said events the Company shall (i) give notice in
writing of such event to the Holders, as provided in Section 17 hereof and (ii)
if there are more than 100 Holders, cause notice of such event to be published
once in The Wall Street Journal (national edition), such giving of notice and
publication to be completed at least 20 days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, or subscription rights, or
for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
publish, mail or receive such notice or any defect therein or in the publication
or mailing thereof shall not affect the validity of any action taken in
connection with such dividend, distribution or subscription rights, or such
proposed dissolution, liquidation or winding up.
17. NOTICES. Any notice pursuant to this Agreement to be given or made by
the registered Holder of any Warrant to or on the Company shall be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed as
follows:
CRUTTENDEN ROTH INCORPORATED
18301 Von Karman, Suite 100
Irvine, California 92715
Attention: Mr. Byron C. Roth
Notices or demands authorized by this Agreement to be given or made by the
Company to the registered Holder of any Warrant shall be sufficiently given or
made (except as otherwise provided in this Agreement) if sent by first-class
mail, postage prepaid, addressed to such Holder at the address of such Holder as
shown on the Warrant Register.
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without giving effect to
principles of conflicts of laws.
19. SUPPLEMENTS AND AMENDMENTS. The Company and the Representative may
from time to time supplement or amend this Agreement in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Representative may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrants and which shall not
adversely affect the interests of the Holders. This Agreement may also be
supplemented or amended from time to time by a writing executed by or on behalf
of the Company and all of the Holders.
20. SUCCESSORS. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Holders shall bind and inure to the
benefit of their respective
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successors and assigns hereunder. Assignments by the Holders of their rights
hereunder shall be made in accordance with Section 4 hereof.
21. MERGER OR CONSOLIDATION OF THE COMPANY. So long as Warrants remain
outstanding, the Company will not merge or consolidate with or into, or sell,
transfer or lease all or substantially all of its property to, any other
corporation unless the successor or purchasing corporation, as the case may be
(if not the Company), shall expressly assume, by supplemental agreement executed
and delivered to the Holders, the due and punctual performance and observance of
each and every covenant and condition of this Agreement to be performed and
observed by the Company.
22. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Holders, any legal or equitable right, remedy or claim under this Agreement, but
this Agreement shall be for the sole and exclusive benefit of the Company and
the Holders of the Warrants and Warrant Shares.
23. CAPTIONS. The captions of the sections and subsections of this
Agreement have been inserted for convenience only and shall have no substantive
effect.
24. COUNTERPARTS. This Agreement may be executed in any number of
counterparts each of which when so executed shall be deemed to be an original;
but such counterparts together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day, month and year first above written.
CRUTTENDEN ROTH INCORPORATED
Attest:
By:
- ------------------------- ---------------------------
- --------
Name:
Title:
DATA DIMENSIONS, INC.
Attest:
By:
- ------------------------- ---------------------------
- -------
Name:
Title:
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EXHIBIT A
[Form of Warrant Certificate]
EXERCISABLE ON OR BEFORE __________, 2001
No. 100,000 Warrants
Warrant Certificate
DATA DIMENSIONS, INC.
This Warrant Certificate certifies that Cruttenden Roth Incorporated,
or registered assigns, is the registered holder of Warrants expiring
___________, 2001 (the "Warrants") to purchase Common Stock, $0.001 par value
per share (the "Common Stock"), of Data Dimensions, Inc., a Delaware corporation
(the "Company"). Each Warrant entitles the holder upon exercise to receive from
the Company from 10:00 a.m., Pacific time, on ____________, 1997 through and
until 6:00 p.m., Pacific time, on _____________, 2001, one fully paid and
nonassessable share of Common Stock (a "Warrant Share") at the initial exercise
price (the "Exercise Price") of $_____, payable in lawful money of the United
States of America upon surrender of this Warrant Certificate and payment of the
Exercise Price at the office of the Company designated for such purpose, but
only subject to the conditions set forth herein and in the Warrant Agreement
referred to on the reverse hereof. The Exercise Price and number of Warrant
Shares issuable upon exercise of the Warrants are subject to adjustment upon the
occurrence of certain events set forth in the Warrant Agreement.
No Warrant may be exercised after 6:00 p.m., Pacific time, on
_____________, 2001, and to the extent not exercised by such time such Warrants
shall become void.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by
the Company.
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IN WITNESS WHEREOF, DATA DIMENSIONS, INC. has caused this Warrant
Certificate to be signed by its President and by its Secretary and has caused
its corporate seal to be affixed hereunto or imprinted hereon.
Dated: _____________, 1996
DATA DIMENSIONS, INC.
By:
--------------------------
- -------
Title:
--------------------------
By:
- ------- --------------------------
Title:
--------------------------
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[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring ____________, 2001 entitling the holder on
exercise to receive shares of Common Stock, $0.001 par value per share, of the
Company (the "Common Stock"), and are issued or to be issued pursuant to a
Warrant Agreement, dated as of _____________, 1996 (the "Warrant Agreement"),
duly executed and delivered by the Company, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants. A copy of the Warrant Agreement may be obtained by the holder
hereof upon written request to the Company.
The Warrants may be exercised at any time on or before _______________,
2001. The holder of Warrants evidenced by this Warrant Certificate may exercise
them by surrendering this Warrant Certificate, with the form of election to
purchase set forth hereon properly completed and executed, together with payment
of the Exercise Price in cash at the office of the Company designated for such
purpose. In the event that upon any exercise of Warrants evidenced hereby the
number of Warrants exercised shall be less than the total number of Warrants
evidenced hereby, there shall be issued to the holder hereof or his assignee a
new Warrant Certificate evidencing the number of Warrants not exercised. No
adjustment shall be made for any dividends on any Common Stock issuable upon
exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of certain events
the number of shares of Common Stock issuable upon the exercise of each Warrant
shall be adjusted. If the number of shares of Common Stock issuable upon such
exercise is adjusted, the Warrant Agreement provides that the Exercise Price set
forth on the face hereof may, subject to certain conditions, be adjusted. No
fractions of a share of Common Stock will be issued upon the exercise of any
Warrant, but the Company will pay the cash value thereof determined as provided
in the Warrant Agreement.
The holders of the Warrants are entitled to certain registration rights
with respect to the Common Stock purchasable upon exercise thereof. Said
registration rights are set forth in full in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Company by the
registered holder thereof in person or by legal representative or attorney duly
authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
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Upon due presentation for registration of transfer of this Warrant
certificate at the office of the Company a new Warrant certificate or Warrant
certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to other transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
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[Form of Election to Purchase]
(To Be Executed Upon Exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive ___________ shares of Common
Stock and herewith tenders payment for such shares to the order of Data
Dimensions, Inc., in the amount of $___________ in accordance with the terms
hereof. The undersigned requests that a certificate for such shares be
registered in the name of ___________________________, whose address is
______________ _________________________________________________ and that such
shares be delivered to ____________________________, whose address is
____________________________________. If said number of shares is less than all
of the shares of Common Stock purchasable hereunder, the undersigned requests
that a new Warrant certificate representing the remaining balance of such shares
be registered in the name of ________________________________, whose address is
_________________________, and that such Warrant certificate be delivered to
_____________________, whose address is __________________________________.
Signature:
Date:
Signature Guaranteed:
3
<PAGE>
EXHIBIT 5.1
OPINION OF COUNSEL
March 19, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: Data Dimensions, Inc.
Registration No. 333-841
Ladies and Gentlemen:
We are acting as counsel to Data Dimensions, Inc., a Delaware corporation
(the "Company"), in connection with the Registration Statement under the
Securities Act of 1933 (Registration No. 333-841) filed by the Company with the
Securities and Exchange Commission on Form SB-2 (the "Registration Statement"),
and the proposed sale by the Company of the securities described on the facing
page of the Registration Statement (the "Securities").
In connection with the foregoing, we are of the opinion that the Securities,
when sold, will be legally issued, fully paid and non-assessable.
We hereby authorize and consent to the use of this opinion as Exhibit 5.1 to
the Registration Statement.
Very truly yours,
GARVEY, SCHUBERT & BARER
By:
------------------------------------------------------------------------------
Bruce A. Robertson
<PAGE>
EXHIBIT 10.11
DEMAND PROMISSORY NOTE
February 9, 1996 $65,000
-------
For value received, the undersigned, DATA DIMENSIONS, INC., a Delaware
corporation, (herein the "Payor"), hereby promises to pay, on demand, to the
order of William H. Parsons (herein the "Payee"), the principal sum of SIXTY
FIVE THOUSAND DOLLARS with interest thereon from the date hereof until paid, at
the rate per annum equal to 10 percent (10%). Payor shall pay interest monthly
in arrears. All interest will be calculated for the actual number of days. The
principal balance of this Note may be prepaid in part or in full at any time
without penalty.
This Note is governed by, and shall be construed in accordance with the
laws of the State of Washington.
IN WITNESS WHEREOF, the undersigned has executed this Demand Promissory
Note this 22 day of February, 1996.
DATA DIMENSIONS, INC.
By: /s/ Larry W. Martin
----------------------
Larry W. Martin
President
Amount paid to Scottsdale Plaza Resort as deposit
<PAGE>
EXHIBIT 10.12
DEMAND PROMISSORY NOTE
February 9, 1996 $50,000
-------
For value received, the undersigned, DATA DIMENSIONS, INC., a Delaware
corporation, (herein the "Payor"), hereby promises to pay, on demand, to the
order of Larry W. Martin (herein the "Payee"), the principal sum of FIFTY
THOUSAND DOLLARS with interest thereon from the date hereof until paid, at the
rate per annum equal to 10 percent (10%). Payor shall pay interest monthly in
arrears. All interest will be calculated for the actual number of days. The
principal balance of this Note may be prepaid in part or in full at any time
without penalty.
This Note is governed by, and shall be construed in accordance with the
laws of the State of Washington.
IN WITNESS WHEREOF, the undersigned has executed this Demand Promissory
Note this 22nd day of February, 1996.
DATA DIMENSIONS, INC.
by: /s/ William H. Parsons
-------------------------
William H. Parsons
Executive Vice President/CFO
Amount paid to Scottsdale Plaza Resort as deposit
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Data Dimensions, Inc.
Bellevue, Washington
We hereby consent to the use in the Prospectus constituting a part of this
Amendment No. 1 to Registration Statement of our report dated January 22, 1996
(except for Notes 2, 5 and 10, as to which the date is March 18, 1996) relating
to the financial statements of Data Dimensions, Inc. which are contained in that
Propectus.
We also consent to the reference to us under the captions "Selected
Financial Data" and "Experts."
BDO SEIDMAN, LLP
Seattle, Washington
March 19, 1996
