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______________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
__________________________
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number 0-4748
DATA DIMENSIONS, INC.
(Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 06-0852458
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
777 - 108TH AVENUE N.E.
BELLEVUE, WASHINGTON 98004
(206) 688-1000
(Address and Telephone Number of Principal Executive Offices)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
____________________________________
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended December 31, 1995 were
$6,231,600.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the
average bid and asked price of such stock, as of March 27, 1996 was
approximately $6.40.
As of March 18, 1996, there were 7,050,481 shares of Common Stock,
par value $.01 per share, outstanding.
This is page 1 of 33 pages. The index to exhibits appears on page 30
of this document.
_______________________________________________________________________________
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - 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
Methodology, 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
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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.
THE MILLENNIUM CONSULTING MARKET. The world-wide cost of resolving the
millennium problem is estimated to exceed several billion dollars over the next
four years. The millennium consulting market consists of those aspects of the
millennium problem that cannot be resolved by in-house information services
personnel. 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:
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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.
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
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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 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.
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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.
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 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
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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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains its headquarters in a leased facility in Bellevue,
Washington. The lease on this space will expire in June, 1997. In addition,
the Company maintains leased office space for its direct sales personnel located
in Walnut Creek, California; Joliet, Illinois; Wayland, Massachusetts; Dallas,
Texas; and Oxford, United Kingdom. Other than the lease for the Company's
headquarters, none of the Company's leases have terms in excess of one year.
The Company believes its facilities are in good condition.
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ITEM 3. LEGAL PROCEEDINGS
As of March 26, 1996, there were no material pending legal proceedings
to which the Company was a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the quarter ended December 31, 1995.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company filed a Registration Statement on Form SB-2 (Reg No. 333-
841) with the U.S. Securities and Exchange Commission (the "SEC") on February 9,
1996 (as amended by Amendment No. 1 filed with the SEC on March 20, 1996, the
"Registration Statement") in connection with an underwritten public offering
(the "Offering") of the Company's common stock, par value $.001 per share (the
"New Common Stock"). In addition, at a special stockholders' meeting held on
February 16, 1996, the Company's stockholders approved a reverse stock split of
the Common Stock, effective upon completion of the Offering, pursuant to which
stockholders will receive one share of New Common Stock for each three shares of
Common Stock held immediately prior to the completion of the Offering. The
information regarding the Common Stock set forth in this Item 5 assumes that the
reverse stock split has been completed.
The Company's Common Stock is quoted on the over-the-counter market under
the symbol "DDIM." The Company has applied to have the Common Stock listed on
the Nasdaq National Market System under the symbol "DDIM" effective upon the
closing of the Offering.
The stock prices listed below represent the high and low closing bid
prices of the Common Stock, 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...................... $ .75 $ .38
Second quarter ended June 30, 1994...................... 2.25 .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>
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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.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS.
THIS ANNUAL REPORT ON FORM 10-KSB 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 THE 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.
IMPORTANT FACTORS TO CONSIDER IN EVALUATING SUCH FORWARD-LOOKING STATEMENTS
INCLUDE (I) THE SHORTAGE OF RELIABLE MARKET DATA REGARDING THE MILLENNIUM
CONSULTING MARKET; (II) CHANGES IN EXTERNAL COMPETITIVE MARKET FACTORS OR IN THE
COMPANY'S INTERNAL BUDGETING PROCESS WHICH MIGHT IMPACT TRENDS IN THE COMPANY'S
RESULTS OF OPERATIONS; (III) UNANTICIPATED WORKING CAPITAL OR OTHER CASH
REQUIREMENTS; (IV) CHANGES IN THE COMPANY'S BUSINESS STRATEGY OR AN INABILITY TO
EXECUTE ITS STRATEGY DUE TO UNANTICIPATED CHANGES IN THE MILLENNIUM CONSULTING
MARKET; AND (V) VARIOUS COMPETITIVE FACTORS THAT MAY PREVENT THE COMPANY FROM
COMPETING SUCCESSFULLY IN THE MARKETPLACE. IN LIGHT OF THESE RISKS AND
UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS ANNUAL REPORT ON FORM 10-KSB WILL IN FACT TRANSPIRE.
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.
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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. 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.
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 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. 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.
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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.
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.
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. 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. 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.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of revenue.
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
YEAR ENDED DECEMBER 31,
-----------------------
<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
Page 11 of 33 pages
<PAGE>
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%.
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
Page 12 of 33 pages
<PAGE>
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.
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. In addition, in April 1996, the Company expects to
complete the Offering pursuant to the Registration Statement described in
response to Item 5 above (such description being incorporated herein by this
reference). The net proceeds to the Company at the assumed offering price of
$16.50 per share are estimated to be $13,678,000. The Company expects to use
a portion of the proceeds to eliminate reliance on advances from its
accounts receivable factor, to finance its accounts receivable growth and to
pay accrued dividends on previously outstanding Preferred Stock in the amount
of $70,000. In addition, the Company intends 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.
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
Page 13 of 33 pages
<PAGE>
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.
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.
ITEM 7. FINANCIAL STATEMENTS
See "Financial Statements and Notes to Financial Statements" set forth
on pages 17 through 28 of this Annual Report on Form 10-K5B.
Page 14 of 33 pages
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company will file a definitive proxy statement (the "Proxy
Statement") relating to its 1996 Annual Meeting of Stockholders pursuant to
and in accordance with Section 240.14a-101 within 120 days after the end of
the fiscal year covered by this Form. The information required by this item
is incorporated by reference to the Proxy Statement under the headings
"Management" and "Compliance with Section 16(a) of the Securities Exchange
Act of 1934."
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Voting Securities and Principal Holders
Thereof."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Related Party Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 10-KSB
(a) The following documents are filed as a part of this report:
NO. DESCRIPTION
- ------ -------------------
3.1* Certificate of Incorporation and all amendments thereto
3.2* Amended and Restated Bylaws
4.1* Form of Common Stock Certificate
Page 15 of 33 pages
<PAGE>
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
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
11.1 Statement of computation of per share earnings
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
- ------------------------------------
* Incorporated by reference to the Registration Statement on Form SB-2
(Reg. No. 333-841) filed by the Company on February 9, 1996.
+ Incorporated by reference to Amendment No. 1 to Registration Statement on
Form SB-2 (Reg. No. 333-841) filed by the Company on March 20, 1996.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1995.
Page 16 of 33 pages
<PAGE>
DATA DIMENSIONS, INC.
FINANCIAL STATEMENTS AND
NOTES TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
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
F-1 Page 17 of 33 pages
<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 18 of 33 pages
<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 19 of 33 pages
<PAGE>
DATA DIMENSIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
<S> <C> <C> <C>
(RESTATED)
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 20 of 33 pages
<PAGE>
DATA DIMENSIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
CAPITAL IN
EXCESS OF ACCUMULATED
PREFERRED STOCK COMMON STOCK PAR VALUE DEFICIT TOTAL
SHARES AMOUNT SHARES AMOUNT
<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 21 of 33 pages
<PAGE>
DATA DIMENSIONS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
<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 22 of 33 pages
<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.
F-7 Page 23 of 33 pages
---
<PAGE>
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.
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>
F-8 Page 24 of 33 pages
---
<PAGE>
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.
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
F-9 Page 25 of 33 pages
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<PAGE>
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.
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:
F-10 Page 26 of 33 pages
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<PAGE>
YEARS ENDING
DECEMBER 31,
1996.................... $101,700
1997.................... 53,900
1998.................... 2,900
--------
$158,500
--------
--------
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
F-11 Page 27 of 33 pages
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<PAGE>
in March 1996. Subsequent to year end, the warrants were exercised.
The Company accounted for the exercise using the treasury stock method
and accordingly issued 137,517 common shares.
NOTE 11 _ PRIOR PERIOD ADJUSTMENT
An error in recording prior years' interest and penalties on overdue
payroll taxes was discovered in 1994. Correction of this error resulted in an
increase of the 1993 reported loss and an increase in accrued payroll taxes of
$78,000.
F-12 Page 28 of 33 pages
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<PAGE>
SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on this 29th day of March, 1996.
DATA DIMENSIONS, INC.
(Registrant)
By /s/ Larry W. Martin
-------------------------------------------
Larry W. Martin
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
------------- --------- ---------
/s/ Larry W. Martin Chief Executive Officer March 29, 1996
- ----------------------------------- and Director (principal
Larry W. Martin executive officer)
/s/ William H. Parsons Chief Financial Officer March 29, 1996
- ----------------------------------- and Director
William H. Parsons (principal financial
officer)
/s/ Thomas W. Fife Director March 29, 1996
- -----------------------------------
Thomas W. Fife
Page 29 of 33 pages
<PAGE>
EXHIBIT INDEX
NO. DESCRIPTION Page No.
- ---------------
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
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
11.1 Statement of computation of per share earnings 31
23.1 Consent of Independent Auditors 32
27.1 Financial Data Schedule 33
- ------------------------------------
* Incorporated by reference to the Registration Statement on Form SB-2 (Reg.
No. 333-841) filed by the Company on February 9, 1996.
+ Incorporated by reference to Amendment No. 1 to Registration Statement on
Form SB-2 (Reg. No. 333-841) filed by the Company on March 20, 1996.
Page 30 of 33 pages
<PAGE>
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
Net loss per share for 1993 is computed by dividing net loss plus
accrued dividends on previously oustanding Preferred Stock 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 to primary
earnings per share.
Page 31 of 33 pages
---
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995 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 therein.
BDO SEIDMAN, LLP
Seattle, Washington
March 29, 1996
Page 32 of 33 pages
---
<PAGE>
FINANCIAL DATA SCHEDULE
Page 33 of 33 pages
---
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF DATA DIMENSIONS, INC. AS OF DECEMBER 31, 1995 AND 1994
AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 64,800
<SECURITIES> 0
<RECEIVABLES> 1,486,100
<ALLOWANCES> 2,500
<INVENTORY> 0
<CURRENT-ASSETS> 2,088,000
<PP&E> 259,600
<DEPRECIATION> (93,300)
<TOTAL-ASSETS> 2,254,300
<CURRENT-LIABILITIES> 2,282,300
<BONDS> 0
0
0
<COMMON> 69,200
<OTHER-SE> (97,200)
<TOTAL-LIABILITY-AND-EQUITY> 2,254,300
<SALES> 6,231,600
<TOTAL-REVENUES> 6,231,600
<CGS> 3,484,700
<TOTAL-COSTS> 2,746,900
<OTHER-EXPENSES> 2,235,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206,800
<INCOME-PRETAX> 304,300
<INCOME-TAX> 450,000
<INCOME-CONTINUING> 754,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 754,300
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
