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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
SECURITY EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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)
411-108TH AVENUE NE, SUITE 2100
BELLEVUE, WASHINGTON 98004
(425) 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 $.001 PER SHARE
(Title of Class)
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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 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 the Form 10-KSB
or any amendment to this Form 10-KSB. (X)
The issuer's revenues for the fiscal year ended December 31, 1997 were
$47,457,000.
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 20, 1998 was approximately $140
million.
As of February 27, 1998, there were 12,687,402 shares of Common Stock,
par value $.001 per share, outstanding.
-----------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III.
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DATA DIMENSIONS, INC.
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TABLE OF CONTENTS
PART I
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Item 1. Business..................................................................3
Item 2 Properties................................................................8
Item 3. Legal Proceedings.........................................................8
Item 4. Submission of Matters to a Vote of Security Holders.......................8
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters.............................................9
Item 6. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations..........................10
Item 7. Financial Statements.....................................................16
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................................16
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.......................16
Item 10. Executive Compensation...................................................16
Item 11. Security Ownership of Certain Beneficial Owners
and Management.........................................................16
Item 12. Certain Relationships and Related Transactions...........................16
PART IV
Item 13. Exhibits, and Reports on Form 8-K........................................17
SIGNATURES................................................................................18
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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 process (the "Millennium Process"). This process 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 and governmental organizations. The Company
was incorporated under Delaware law in 1968.
Data Dimensions' experience in analyzing and resolving the millennium problems
of business organizations is incorporated in the Millennium Process, which
enables the Company to develop customized solutions to a client's specific
millennium problems. Through the application of the Millennium Process, 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.
Furthermore, the Company has documented its knowledge base into a series of
proprietary processes and packaged the information in a new media format for
ease of use and distribution. These processes and new media format, designated
as Ardes 2k(TM), provide step-by-step procedures to allow specialists to
identify and resolve technology related Year 2000 problems. In 1997, the Company
also developed and commenced sales of a specialized research service,
Interactive Vendor Review, that collects and makes available information on
vendor millennium compliance. These new offerings will support organizations
that desire to perform the Year 2000 work with their internal staff.
In 1997 the Company organized into four divisions to better support its clients
and grow the business. The four divisions are Knowledge Consulting, Knowledge
Transfer, Information Services (formerly Pyramid Information Services) and
International. Each division has a mission to provide services and products to
support a specific market segment. This organization is intended not only to
support the Year 2000 business but to formulate strategies for extension beyond
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., "97" for "1997"). 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 that 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, 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.
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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 hundreds of billions of dollars over
the next several 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
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 share of the millennium update process
will be outsourced to consulting firms such as Data Dimensions.
THE DATA DIMENSIONS APPROACH
As part of the Data Dimensions' "total solutions" approach, the Millennium
Process 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. The Company also includes a
complete systems testing facility through its subsidiary, Data Dimensions
Information Services. 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, and 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 services
industry by providing its clients with high quality, knowledge-based computer
consulting services and products, specializing in millennium services. The
Company's strategies include 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 continue to open new
sales and consulting offices 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 Process. The Company's strategy is to continuously
update and refine the Millennium Process to incorporate the Company's expanding
knowledge and product base. As part of this process, the Company will continue
to utilize and sell its proprietary software tools which are specifically
designed to address the unique millennium problems of each of its clients.
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Expand International Licensees and Operations. The Company will continue
to pursue strategic opportunities to expand its global presence by licensing the
Millennium Process to leading computer consulting firms in specifically targeted
markets in North and South America, Europe and the Pacific Rim. The Company
believes that these licensing arrangements provide potential growth in new
markets, enable the Company to service multinational clients and increase market
awareness of the Company's services. The Company will also continue to directly
service the UK and European markets directly through its UK subsidiary, Data
Dimensions (UK) Limited.
Market and Sell Millennium Products. The Company's strategy is to expand
its leverage by allowing current and future licensees and the Company's sales
staff to sell millennium products such as Ardes 2k and Interactive Vendor Review
directly to end users throughout the world. The Company believes that these new
offerings will support organizations who desire to perform the Year 2000 work
with their internal staff as well as support from the Company. Furthermore, the
products including Ardes 2k and training will provide the vehicle for
organizations to educate millennium staff quickly and to consistently manage the
Year 2000 problem.
Off Site Data Conversion. The Company will continue to expand the use of
its Galway, Ireland facility where code and data conversion is being completed.
The Company will also continue to review and utilize the work performed in the
Irish operations to provide similar "software factories" if the demand requires
it.
Outsourcing and Testing Services. The Company's acquisition of Pyramid
Information Services provides the Company with the capabilities to extend both
its millennium services into Year 2000 testing for its clients, and systems
outsourcing. The Company intends to continue to seek additional business in both
service sectors.
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 and knowledge management services to its
current and future customers. Recent independent studies estimate that
substantial millennium consulting work will be performed after the year 2000,
possibly into 2003 and 2004. While the Company concurs with such estimates, 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 and products for projects in other diverse
technological areas. For example, clients may require replacement for
technological upgrades to their systems after the year 2000. Although the
Company anticipates that a substantial portion 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
Knowledge Consulting. The Company's millennium consulting service is
based on the Millennium Process, which consists of three separate phases:
planning, preparation 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 comprised 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.
Preparation 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.
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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 date. Finally, the Company
monitors the conversion for a period of time sufficient to confirm that the
conversion was successful.
Knowledge-Based, Tool-Assisted Consulting. Although the Company
generated approximately 75% of its 1997 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 clients will delay certain date 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 the client's computer systems and business. The
Company also 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 project.
Knowledge Transfer. Knowledge Transfer provides products and service to
transfer methods, processes, techniques and knowledge to the Company's clients,
personnel, licensees and subsidiaries. The transfer is supported through three
venues: CD-ROM/Internet process system (Ardes 2k), third party vendor
Internet-based Year 2000 compliancy database (Interactive Vendor Review), and
instructor-led Year 2000 training.
International Services. The Company offers its technology throughout the
world on a royalty basis to suppliers of consulting services. In addition,
in the UK market, the Company provides direct services and products of all of
the Company's divisions.
Information Services. In November 1997 the Company completed the
acquisition of Pyramid Information Services, Inc. and changed the name of the
subsidiary to Data Dimensions Information Services, Inc. ("DDIS"). DDIS provides
system outsourcing and testing services through its testing center located in
Los Angeles. In 1997, all DDIS revenues were derived from non-Year 2000 related
outsourcing business. The Company has begun cross-selling Year 2000 testing
services and expects this business to commence in 1998.
SALES AND MARKETING
The Company's marketing strategy is to maintain an image as a high quality
computer services organization. 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 11,000 information services 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 and domestic licensing arrangements will increase market
awareness of its services and allow it to attract additional multinational
clients.
The Company currently maintains a direct sales force and a network of
independent sales representatives to market its millennium consulting services
and products. The Company relies on its sales team to generate new clients as
well as pursue potential leads. To this end, the Company's sales personnel 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.
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The Company carefully selects and reviews its 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. During
1997, the Company provided services to approximately 170 clients. The Company's
five largest clients in 1997 accounted for approximately 30% of revenue.
INTELLECTUAL PROPERTY
The Company's intellectual property primarily consists of the Millennium Process
and Ardes 2k. 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 Process.
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 Process or to obtain and use information that the
Company regards as proprietary.
The Company has licensed the use of the Millennium Process to many consulting
firms located in North America, Europe and the Pacific Rim. 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 Process. 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's competitors will not
independently develop substantially similar or superior processes.
As the number of competitors providing millennium consulting services increases,
overlapping processes used in such services will become more likely. Although
the Millennium Process 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.
PRODUCT AND TECHNOLOGY DEVELOPMENT
During 1997, the Company invested approximately $2 million in capitalized
product development cost, consisting of personnel and other related expenses to
develop Ardes 2k and Interactive Vendor Review. These products will be sold
directly to clients and to third-party providers, including computer and
software companies, systems integrators and consultants.
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), Computer Horizons Corp., Keane, Inc., Computer Task Group,
Inc., and Cap Gemini, Inc. Some of the Company's competitors are more
established, benefit from greater name recognition and have substantially
greater financial,
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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 process which achieves greater market acceptance than the
Millennium Process.
EMPLOYEES
As of February 28, 1998, the Company employed approximately 450 full-time
employees, including 295 technical consultants, 40 employees in product
development and product support, 40 employees providing information services to
customers, 15 employees in direct sales and 60 employees in administration and
support. None of the Company's employees are represented by a labor union, and
the Company has never experienced a work stoppage. The Company considers its
relationship 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 2002. In addition, the
Company maintains leased office space for regional offices and direct sales
personnel located in Walnut Creek, California; Joliet,Illinois; Marlboro,
Massachusetts; Woodridge, Virginia; Reston, Virginia; Raleigh, North Carolina;
East Brunswick, New Jersey; Jacksonville, Florida; Boston, Massachusetts;
Kennesaw, Georgia; Glen Rock, New Jersey; New York, New York; Dallas, Texas;
Cleveland, Ohio; Montgomery, Alabama; St. Petersburg, Florida; Roswell, Georgia;
Pasadena, California; Laguna Hills, California; Colorado Springs, Colorado;
Denver, Colorado; Honolulu, Hawaii; Thame, United Kingdom. Other than the lease
for the Company's headquarters and two regional offices which have leases
expiring on July 31, 1999 and December 1, 1999, none of the Company's leases
have terms in excess of one year. The Company's subsidiary in Ireland leases
space in Galway, Ireland pursuant to a lease ending in 2006. The Company
believes its facilities are in good condition.
ITEM 3. LEGAL PROCEEDINGS
As of March 20, 1998, there were no material pending legal proceedings to which
the Company is a party. From time to time, the Company becomes involved in
ordinary, routine or regulatory legal proceedings incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY STOCKHOLDERS
No matters were submitted to a vote of the Company's Stockholders during the
quarter ended December 31, 1997.
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PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the NASDAQ National Market System under
the symbol "DDIM." On March 20, 1997, the Company effected a 3-for-1 stock split
effected in the form of a stock dividend, and the information presented in this
Annual Report on Form 10-KSB has been adjusted to reflect the effect of this
split.
The stock prices listed below for the first quarter of 1996 represent the high
and low closing bid prices, as reported in Bloomberg Financial Market
Commodities News, a service of Bloomberg L.P. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The stock prices for subsequent periods are the
high and low bid prices as quoted on the NASDAQ National Market System.
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1996 HIGH LOW
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First Quarter ended March 31, 1996 ......... $ 7.44 $ 1.13
Second Quarter ended June 30, 1996 ......... 18.58 4.62
Third Quarter ended September 30, 1996 ..... 14.92 5.92
Fourth Quarter ended December 30, 1996 ..... 13.80 7.83
1997 HIGH LOW
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First Quarter ended March 31, 1997 ......... $ 24.75 $ 10.79
Second Quarter ended June 30, 1997 ......... 32.50 19.13
Third Quarter ended September 30, 1997 ..... 37.75 22.00
Fourth Quarter ended December 31, 1997 ..... 40.75 16.44
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On March 20, 1998, the closing price of the common stock on the NASDAQ National
Market System was $14.19 per share. As of February 27, 1998, there were
approximately 667 holders of record of the Company's Common Stock.
The Company has not paid cash dividends on its Common Stock. The Company intends
to retain earnings for use in its business and to support growth and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
There were no sales of unregistered securities by the Company during the year
ended December 31, 1997.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING-STATEMENTS AND ASSOCIATED RISKS
This Annual Report 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 Company's business strategies for expanding its presence in
the computer services 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 (iv) 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 conditions that might impact
trends in the Company's results of operations; (iii) unanticipated working
capital or other cash requirements; (iv) the Company's ability to profitably
market and sell its Knowledge Transfer products; (v) changes in the Company's
business strategies or an inability to execute its strategies due to
unanticipated changes in the millennium consulting market; and (vi) various
competitive factors that may prevent the Company from competing successfully
in the marketplace. In view of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this Annual Report
will, in fact, transpire.
OVERVIEW
Data Dimensions provides high quality knowledge-based millennium consulting
services. The Company's millennium consulting services are based on its
proprietary millennium consulting process. This process 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. Additionally, during 1996 and 1997 the Company developed and commenced
sales of a CD-ROM and Internet product, Ardes 2k, that provides step-by-step
procedures to allow technology specialists to identify, manage and implement
solutions for computer and business related millennium problems. In 1997, the
Company also developed and commenced sales of a specialized research service,
Interactive Vendor Review, that collects and makes available information on
vendor millennium compliance. These new offerings will support organizations
that desire to perform the Year 2000 work with their internal staff.
Since 1991, Data Dimensions has focused on assisting major organizations to plan
and execute programs for resolving the Year 2000 technology problems. The
Company's clients consist primarily of large business and governmental
organizations. 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, the Company plans to pursue opportunities in
the computer consulting market that are not related to the millennium problem
and to develop strategies and 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.
In November 1997, the Company acquired Pyramid Information Services, Inc.
("Pyramid"), a Los Angeles, California-based company that provides computer
mainframe outsourcing services, including data processing, operations and
systems support, network and production control, and management services to its
clients located throughout the United States, Canada and Australia. Pyramid
became a wholly-owned subsidiary of the Company and changed its name to Data
Dimensions Information Services, Inc. ("DDIS"). This business combination has
been accounted for as a pooling-of-interests, and accordingly, the accompanying
financial statements and other financial information included in this Annual
Report have been presented as though the companies had been combined for all
periods.
The Company markets its services domestically primarily through in-house
salespeople and three independent sales representatives. The Company has
leveraged its technology by licensing the right to use its millennium consulting
process to over twenty consulting firms operating in more than fifty countries
worldwide. Approximately 5% of the Company's revenue in 1996 and 1997 consisted
of royalty and license fees pursuant to license
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agreements with these consulting firms. The Company intends to pursue the
growing international market by establishing additional licensing relationships
and has an office near London, England to develop and manage these
relationships. 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.
The Company's consulting and information services revenue consists of billable
hours for services provided by its technical consultants multiplied by contract
rates, and this revenue is recognized when services are performed. The Company
receives license fees and royalties which are recognized as services are
provided and reported by licensees. Direct costs consist primarily of salaries,
benefits, commissions and other costs directly related to services provided.
Gross margins recognized depend primarily on the productivity of the Company's
billable personnel. Productivity is based on the number of billable personnel
and their billing rates, the number of working days in a period and the number
of hours worked per day. Billable personnel are paid salaries; however, clients
are charged a time-based rate. Gross margins will vary based upon the mix of
revenue, especially royalty income and product sales, because the direct costs
associated with such revenues are typically lower than those associated with
revenues for consulting or outsourcing services. Although the Company
anticipates that the amount of revenue attributable to royalties will increase,
this will primarily depend on the development of, and the amount of competition
in, the new markets where the Company has entered. Whether it will increase as a
percentage of total revenue will also depend upon revenue growth in other areas
of the business. Furthermore, while product sales will have a lower associated
direct cost, the volume of future product sales is unknown at this time, and
accordingly, the expected impact on future margins is undeterminable at present.
Finally, gross margins vary based on the percentage of revenue attributable to
the various phases of the millennium conversion process, because gross margins
for the implementation phase are generally lower than that for the planning
phase. The Company expects the percentage of revenue attributed to the
implementation phase to increase as the year 2000 approaches, which may dampen
the impact on gross margin.
General, administrative and selling expenses consist primarily of administrative
personnel compensation and benefits, recruiting, marketing, promotion, investor
relations, office expenses, travel, and other general overhead. Although the
Company expects these expenses to increase in absolute terms primarily as a
result of the Company's growth, it expects these expenses to stabilize or
gradually decrease as a percentage of revenue. Whether these expenses will
stabilize or decrease as a percentage of revenue will depend primarily on future
revenue growth and on the extent to which the increase of its administrative,
sales and support staff will support its future growth.
Management anticipates sufficient taxable income to utilize its net operating
loss carryforwards and thus realize its recorded deferred tax assets. At
December 31, 1997, the Company had net operating loss carryforwards available to
offset future taxable income of approximately $2.2 million. Limitations on
utilization may significantly diminish net operating loss carryforwards
available to offset future taxable income.
RESULTS OF OPERATIONS
The following table sets forth certain data for the year ended December 31 as a
percentage of revenue.
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenue .................................... 100.0% 100.0% 100.0%
Direct Costs ............................... 58.7 59.0 56.5
------- ------- -------
Gross Margin ............................... 41.3 41.0 43.5
General, administrative and selling expenses 30.6 35.5 34.4
------- ------- -------
Income from operations before unusual items 10.7 5.5 9.1
Unusual items .............................. -- -- 8.5
------- ------- -------
Income from operations ..................... 10.7 5.5 .6
Other income (expense) ..................... (1.9) 2.4 .9
------- ------- -------
Earnings before income tax ................. 8.8 7.9 1.5
Income tax benefit (provision) ............. 3.4 (.1) (1.5)
------- ------- -------
Net income ................................. 12.2% 7.8% 0.0%
======= ======= =======
</TABLE>
As more fully described in Note 1 to the consolidated financial statements, the
Company conducts it business through four operating divisions consisting of
Knowledge Consulting, Information Services, Knowledge Transfer and
International.
11
<PAGE> 12
Comparison of 1997 to 1996
The Company reported record annual revenue of $47.5 million for 1997, a 128%
increase from $20.8 million for 1996. Revenue from Knowledge Consulting
increased approximately $22.1 million, or 160%, primarily due to a heightened
awareness of the millennium problem and demand for millennium services. Revenues
from Information Services increased approximately $1.4 million, or 23%, due both
to increased volume of processing work from existing clients and an increased
client base. Revenue from Knowledge Transfer, a new business group in 1997, was
$1.6 million. International revenue increased approximately $1.5 million, or
149%, as a result of having licensee arrangements in place for all of 1997 for
licensees added in 1996 and, to a lesser extent, to new licensees.
Gross margin for 1997 was $20.6 million, a $12 million increase, or 141%, from
$8.6 million for 1996. Gross margin as a percentage of revenue was 43.5% for
1997 compared to 41% for 1996. This percentage increase was primarily the result
of an increase in the relative share of Knowledge Transfer and International
revenue, which has a higher gross margin contribution.
General, administrative and selling expenses for 1997 were $16.3 million, an
$8.9 million increase, or 120%, from $7.4 million for 1996. General,
administrative and selling expenses increased as a result of the added cost of
the infrastructure required in order to support the Company's rapid growth. The
Company had approximately 445 employees at the end of 1997 as compared to 225 at
the end of 1996, an increase of 98%. This growth results in increased costs of
facilities and related services, salaries, continued recruiting, training,
travel and other staffing costs. The Company believes that with increased demand
for its millennium services and products, further increases in support staff and
other related costs will continue. As a result, general, administrative and
selling expenses have increased in absolute dollars, while as a percentage of
revenues, these costs decreased to approximately 34% in 1997 from 35% in 1996.
General, administrative and selling expenses increased to approximately 37% of
revenue during the fourth quarter of 1997 as a result of the rate that
infrastructure build-up outpaced revenue growth, a trend which Company
management believes will reverse later in 1998 as a result of corrective actions
taken.
The Company recorded unusual charges against income of approximately $4 million
during the fourth quarter of 1997, which had the effect of decreasing net income
by $.21 per common share. These charges, which are more fully discussed in the
accompanying notes to consolidated financial statements, were comprised of $2.6
million of asset write-down charges for impairment of long-lived assets,
$764,000 of merger related costs and $619,000 of reorganization related costs,
substantially all of which have been paid.
The provision for income taxes increased to $700,000 in 1997 as compared to
$15,000 for 1996, and as a percentage of earnings before tax increased to 97%
from 1%. The 1997 effective tax rate was significantly higher than the expected
statutory tax rate primarily due to merger-related matters, including a $285,000
deferred tax provision recorded as of the merger date pertaining to deferred
taxes not previously recorded by Pyramid due to its being a subchapter S
corporation for federal income tax purposes. The income tax provision for 1996
was significantly less than the expected statutory tax rate resulting from a
decrease in the deferred tax asset valuation allowance and the fact that Pyramid
earnings were not subject to federal income taxes as a result of its subchapter
S status.
Comparison of 1996 and 1995
The Company reported revenue of $20.8 million for 1996, an 88% increase from
$11.1 million for 1995. Revenue from Knowledge Consulting increased
approximately $7.9 million, or 135%, primarily due to a heightened awareness of
the millennium problem and demand for millennium services. Revenues from
Information Services increased approximately $1.2 million, or 24%, both due to
increased volume of processing work from existing clients and an increased
client base. International revenue increased $688,000, or 194%, due to new
licensees and having licensee arrangements for licensees added in 1995 in place
for all of 1996.
Gross margin for 1996 was $8.6 million, a $4 million increase, or 87%, from $4.6
million for 1995. Gross margin increased due to increases in revenue. Gross
margin as a percentage of revenue approximated 41% for 1996 and 1995.
General, administrative and selling expenses for 1996 were $7.4 million, a $4
million increase, or 118%, from $3.4 million for 1995. This increase was
primarily attributable to the Company's rapid growth and normal cost increases.
General, administrative and selling expenses as a percentage of revenue
increased from 31% in 1995
12
<PAGE> 13
to 36% in 1996. This percentage increase was primarily the result of increases
in administrative, sales and other support staff in order to support the
continuous rapid growth of the Company. Because of increased competition and in
order to obtain more market share, the Company increased its marketing and
direct sales activities. The Company had approximately 225 employees at the end
of 1996 as compared to 100 at the end of 1995, an increase of 125%. This growth
resulted in increased costs of facilities and related services, salaries,
recruiting, training, travel and other staffing costs. Furthermore, as a result
of the Company's secondary public offering in April 1996, additional costs were
required to respond to and service an increased level of investor communications
activities.
Other income for 1996 was $492,000, compared to other expense of $207,000 in
1995. The other income for 1996 was attributable to investment income earned
during the last nine months totaling $583,000, which was offset by interest
expense related to accounts receivable factored during the first quarter. The
expense for 1995 was attributable to accounts receivable factored and related
finance charges.
The provision for income taxes increased to $15,000 in 1996, as compared to a
benefit of $380,000 for 1995. The income tax provision for 1996 was
significantly less than the expected statutory tax rate resulting from a
decrease in the deferred tax asset valuation allowance and the fact that Pyramid
earnings were not subject to federal income taxes as a result of subchapter S
status. The 1995 income tax benefit resulted from a decrease in the deferred tax
asset valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Comparison of 1997 and 1996
Net cash used by operating activities was $463,000 in 1997 as compared to $1.9
million in 1996. Earnings before deferred taxes, depreciation, amortization and
the non-cash portion of unusual items approximated $3 million in 1997, an
increase of $1.2 million, or 63%, over 1996. Cash provided by net income before
non-cash charges for depreciation, amortization and unusual items, and increases
in current liabilities were more than offset by the increase in accounts
receivable, which accounted for most of the use of cash by operating activities.
Net cash provided by investing activities was $2.3 million during 1997 as
compared to net cash used of $11.2 million during 1996. Cash provided by
investment activities in 1997 resulted from proceeds from the maturity and sale
of investments of $7.7 million, whereas cash used by investing activities in
1996 resulted primarily from net purchases of investments of $8.7 million. Cash
used by investing activities in 1997 resulted from investment in product
development, purchases of equipment, furniture and other assets. During 1997,
the Company invested approximately $2 million in capitalized product development
cost consisting primarily of personnel and other related costs in the
development of advanced products based upon its current proprietary Year 2000
process.
As of December 31, 1997, the Company had working capital of $13.2 million and
cash, cash equivalents and investment securities of approximately $5.7 million.
In December 1997, the Company obtained a $5 million, two-year, working capital,
unsecured, revolving line of credit with a bank. The Company has not borrowed
any amounts pursuant to this line of credit. The Company has no significant
commitments for capital expenditures and believes that based upon its current
operating plan, cash generated from operations and its existing cash and
investments, as potentially supplemented by line of credit borrowings, will be
adequate to finance its current working capital requirements.
Comparison of 1996 and 1995
Net cash used by operating activities was $1.9 million in 1996 as compared to
cash provided by operating activities of $154,000 in 1995. Earnings before
deferred taxes, depreciation and amortization approximated $1.8 million in 1996,
an increase of $859,000, or 87%, over 1995. Cash provided by net income before
non-cash charges for depreciation, amortization and deferred taxes and increases
in current liabilities were more than offset by the increase in accounts
receivable, which accounted for most of the use of cash by operating activities.
Net cash used by investing activities was $11.2 million in 1996 as compared to
$257,000 in 1995. The increase in the use of cash by investing activities during
1996 was due to an increase in purchases of investment securities available for
sale, investment in product development and purchases of equipment and
furniture.
13
<PAGE> 14
Net cash provided by financing activities was $15.2 million in 1996 as compared
to $438,000 in 1995. The increase in cash provided by financing activities in
1996 was primarily due to net proceeds received from the sale of common stock.
The increase was partially offset by a decrease in advances from factor
resulting from the repayment of such borrowings.
YEAR 2000 COMPLIANCE
The Company has evaluated the cost necessary to make its computer systems Year
2000 compliant. Most of these costs are expected to be incurred during 1998 and
are not expected to have a material impact on the Company's cash flows, results
of operations or financial condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
Recently issued accounting standards having relevant applicability to the
Company consist primarily of Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income," Statement of Financial Accounting Standards
No. 131 "Disclosure about Segments of an Enterprise and Related Information,"
and Statement of Position 97-2 "Software Revenue Recognition," each of which
relates to additional reporting and disclosure requirements effective for future
financial periods. It is not expected that the adoption of these accounting
pronouncements will have a material effect on the Company's operating results or
financial condition.
OUTLOOK - ISSUES AND UNCERTAINTIES
The Company does not provide forecasts of future financial performance. While
Company management is optimistic about the Company's long-term prospects, the
following issues and uncertainties, among others, should be considered.
Fluctuations in quarterly operating results
The Company has experienced and may experience in the future fluctuations in its
quarterly operating results. Several factors may influence revenues, including
the number and requirements of client engagements, employee productivity rates,
the Company's ability to retain key personnel, the ability of the Company to
develop, introduce and successfully market new and enhanced products and
services, and general economic conditions which may affect clients' decisions
about the extent and timing of investments in their information systems.
Unanticipated termination of a significant project or client decision not to
proceed to further project stages could result in decreased revenues, lower
employee productivity rates and lower profits. Additionally, varying factors
affecting gross margins include the number and project phase of services
provided during a particular period, employee productivity, staffing mix, and
salary and other compensation related costs necessary to attract and retain
qualified personnel.
Retention and recruitment of technical personnel
The Company's business is labor intensive and depends to a significant extent on
its ability to attract, train and retain highly skilled professionals. Qualified
technical professionals are in great demand and are likely to remain a limited
resource for the foreseeable future. Furthermore, the information services
industry has experienced high employee turnover rates, which have increased in
recent periods. The manner and extent to which companies respond to recruiting
and retention pressures will likely result in increases in the amounts and types
of compensation being offered to employees. There can be no assurance that the
Company will be successful in attracting a sufficient number of qualified
technical personnel or in retaining existing and future employees.
Dependence on Knowledge Consulting business
The Company's Knowledge Consulting business has accounted for approximately 66%
and 76% of revenues in 1996 and 1997, respectively. As a result, the Company's
future operating results depend to a significant extent on the continued growth
and profitability of that business. The Knowledge Consulting business has
derived, and will likely continue to derive, a significant portion of its
revenues from a limited number of large clients. In 1997, the Company's ten
largest clients accounted for approximately 44% of its revenues. The volume of
work performed for specific clients varies from period to period, and a major
client in one year may not be a major client in a subsequent period. In 1998,
anticipated revenue from one of the Company's clients are expected to account
14
<PAGE> 15
for in excess of 10% of total revenue. There can be no assurance that in the
future one or more of the Company's larger clients will not terminate a
contract, reduce the scope of a large project or elect not to proceed to a stage
of a project as anticipated by the Company. The cancellation or significant
reduction in the scope of large projects could have a material effect on the
Company's business, operating results and financial condition.
Risks associated with Year 2000 business and new products and services
The Company expects to derive a significant portion of its revenues from Year
2000 services through at least 1999. There can be no assurance that the Company
will continue to be successful in increasing its Year 2000 business or that the
revenue growth rate in future years will approach the levels attained in prior
years or, to the extent that such business increases, that the Company will be
able to meet the demand for such services on a timely basis. Furthermore, while
a substantial majority of the Company's current business is for Year 2000
projects, the company expects this demand to begin to decrease as the
implementation and testing of conversion projects are completed. The Company is
incorporating strategies to leverage its knowledge of client systems into
additional engagements involving other than Year 2000 solutions. The Company's
ability to successfully develop new services and products depends on a number of
factors, including its ability to identify and effectively integrate such
services and products into the Company's existing organizational structure. By
devoting significant resources to its Year 2000 business, the Company's ability
to develop and market new services and products could be adversely affected.
Additionally, there can be no assurance that the Company will be successful in
generating additional business from its Year 2000 clients for other services or
that the financial performance of any new offerings will meet expectations.
Competition
The markets for the Company's services and products are highly competitive and
characterized by rapid change and uncertainty due to new and emerging
technologies. The market for consulting services is fragmented, regionalized and
no company holds a dominant position. As a result, in addition to competing with
larger national and international service providers, the Company also competes
with large regional providers. Also, in many instances the Company finds itself
competing with the internal information systems resources of its clients and
prospective clients. Competition is expected to continue and intensify as the
market for information technology services and products develop. There can be no
assurance that other companies will not develop services and products that will
be more successful than those of the Company. Company management believes that
distinguishing competitive factors in the industry include, among others, strong
client relationships, quality of services and products, price, project
management capability, and technical and business expertise. Many of the
Company's current and potential competitors have significantly greater
financial, technical, marketing and other resources than the Company. There can
be no assurance that the Company will continue to compete successfully with its
current and future competitors.
Volatility of stock price
The Company's common stock has been subject to extreme price and volume
fluctuations in the past. Additionally, the stock market has experienced
significant price fluctuations, particularly among technology companies, which
often have been unrelated to the operating performance of specific companies.
Any announcement with respect to any unfavorable variance in revenues or net
income from levels generally expected by securities analysts or investors would
have an immediate and significant effect on the trading price of the common
stock. In addition, factors such as announcements of technological innovations
or new services or products by the Company, its competitors or other third
parties, rumors of such innovations or new services or products, changing market
conditions in the industry, changes in estimates by securities analysts,
announcements of unusual events, or general economic conditions may have a
significant impact on the market price of the stock.
15
<PAGE> 16
ITEM 7. FINANCIAL STATEMENTS
See "Consolidated Financial Statements" on pages F-1 through F-16 of this Annual
Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) On March 26,1998, the Company notified BDO Seidman, LLP that it
intended to engage another accounting firm as the Company's
independent accountants for the fiscal year ending December 31, 1998.
The decision to change independent accountants was approved by the
Board of Directors of Data Dimensions, Inc. on March 26, 1998.
The report of BDO Seidman, LLP on the Company's consolidated financial
statements for the years ended December 31, 1995, 1996, and 1997
contained no adverse opinion and was unmodified, except for the
inclusion of a disclosure that the consolidated financial statements
give retroactive effect to the merger of Data Dimensions, Inc. and
Pyramid Information Services, Inc., which merger has been accounted
for as a pooling of interests.
There have been no disagreements with BDO Seidman, LLP on any matter of
accounting principles or practices, financial statement disclosure or
auditing scope or procedure which, if not resolved to the satisfaction
of BDO Seidman, LLP, would have caused BDO Seidman, LLP to make
reference to the matter in their report.
(b) On March 26, 1998, the Company appointed Price Waterhouse LLP as its
independent accountants for the fiscal year ending December 31, 1998,
pursuant to the approval of the Company's Board of Directors.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information concerning Directors and Executive Officers of the Company set
forth in the Proxy Statement to be delivered to the stockholders in connection
with the Company's 1998 Annual Meeting of Stockholders (the "Proxy Statement")
under the heading "Directors and Executive Officers" is incorporated herein by
reference, as is the information concerning the Directors, Officers, and more
than 10% stockholders of the Company under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance."
ITEM 10. EXECUTIVE COMPENSATION
The information concerning executive compensation set forth in the Proxy
Statement under the heading "Executive Compensation" is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners and
management set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management" is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions set
forth in the Proxy Statement under the heading "Certain Relationships and
Related Transactions" is incorporated herein by reference.
16
<PAGE> 17
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith or incorporated by reference
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
NO.
2.1 Agreement and Plan of Reorganization by and among Data Dimensions, Inc,
DP Acquisition Corporation, Eugene M. Stabile, and Pyramid Information
Services, Inc. dated October 30, 1997. (Incorporated by reference to the
Company's October 30, 1997 Current Report on Form 8-K.)
3.1 Certificate of Incorporation and all amendments thereto (Incorporated by
reference to the Company's Registration Statement on Form SB-2. Reg. No.
333-841.)
3.2 Second Amended and Restated Bylaws (Incorporated by reference to the
Company's December 31, 1996 Annual Report on Form 10-KSB.)
4.1 Form of Common Stock Certificate (Incorporated by reference to the
Company's Registration Statement on Form SB-2.) See Exhibits 3.1 and 3.2
for provisions in the Certificate of Incorporation and Second Amended
and Restated Bylaws of the Company defining the rights of the holders of
Common Stock.
10.1 1988 Incentive Stock Option Plan and 1988 Nonstatutory Stock Option Plan
(Incorporated by reference to the Company's Registration Statement on
Form SB-2. Reg. No. 333-841.)
10.2 1997 Stock Option Plan (Incorporated by reference to the Company's
December 31, 1996 Annual Report on Form 10-KSB.)
10.3 Lease Agreement for Registrant's Facility in Bellevue, Washington
10.4 Agreement between the Company and Gordon A. Gardiner dated
November 6, 1997.
10.5 Agreement between the Company and Thomas R. Clark dated
October 31, 1997.
16.1 Letter on change in certifying accountant
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Certified Public Accountants
24.1 Power of Attorney of Thomas W. Fife
24.2 Power of Attorney of Robert T. Knight
24.3 Power of Attorney of Lucie J. Fjeldstad
27.1 Financial Data Schedule for year end December 31, 1997
27.2 Financial Data Schedule for quarter end September 30, 1997
27.3 Financial Data Schedule for quarter end June 30, 1997
27.4 Financial Data Schedule for quarter end March 31, 1997
27.5 Financial Data Schedule for year end December 31, 1996
27.6 Financial Data Schedule for quarter end March 31, 1996
27.7 Financial Data Schedule for quarter end June 30, 1996
27.8 Financial Data Schedule for quarter end September 30, 1996
27.9 Financial Data Schedule for year end December 31, 1995
(b) During the quarter ended December 31, 1997, the Company filed a Current
Report on Form 8-K dated October 31, 1997 relating to the acquisition of
Pyramid Information Services, Inc.
17
<PAGE> 18
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 27th day of March, 1998.
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Larry W. Martin Chairman of the Board, Director, March 27, 1998
- ------------------------------ Chief Executive Officer and
Larry W. Martin President (Principal Executive
Officer)
/s/Gordon A. Gardiner Executive Vice President, March 27, 1998
- ------------------------------ Chief Financial Officer and Secretary
Gordon A. Gardiner (Principal Financial and
Accounting Officer)
/s/Thomas W. Fife
- ------------------------------ Director March 27, 1998
Thomas W. Fife
/s/Robert T. Knight
- ------------------------------ Director March 27, 1998
Robert T. Knight
/s/Lucie J. Fjeldstad
- ------------------------------ Director March 27, 1998
Lucie J. Fjeldstad
</TABLE>
18
<PAGE> 19
DATA DIMENSIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants.....................F-1
Consolidated Balance Sheets............................................F-2
Consolidated Statements of Operations..................................F-3
Consolidated Statements of Stockholders' Equity........................F-4
Consolidated Statements of Cash Flows..................................F-5
Notes to Consolidated Financial Statements.............................F-6
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Data Dimensions, Inc.
We have audited the accompanying consolidated balance sheets of Data Dimensions,
Inc. and its subsidiaries as of December 31, 1995, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years then ended. 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. The consolidated
financial statements give retroactive effect to the merger of Data Dimensions,
Inc. and its subsidiaries and Pyramid Information Services, Inc. This merger has
been accounted for as a pooling of interests as described in Note 2 to the
consolidated financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Data Dimensions,
Inc. and its subsidiaries as of December 31, 1995, 1996 and 1997, and results of
their operations and their cash flows for each of the years then ended in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Seattle, Washington
February 17, 1998
F-1
<PAGE> 20
DATA DIMENSIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
------------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents .............................. $ 471 $ 2,617 $ 4,694
Investment securities available for sale ............... -- 8,677 986
Accounts receivable, net:
Trade (Note 4)
2,627 6,396 16,806
Other ............................................. -- 699 336
Prepaid and other current assets ....................... 336 1,256 937
Deferred income taxes .................................. 330 370 247
-------- -------- --------
Total current assets .............................. 3,764 20,015 24,006
Equipment and furniture, net ............................. 194 1,109 3,107
Investment in product development, net (Notes 3 and 6) ... -- 1,255 1,635
Other assets ............................................. 57 128 1,613
-------- -------- --------
$ 4,015 $ 22,507 $ 30,361
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ....................................... $ 276 $ 899 $ 3,148
Advance billings ....................................... 655 1,112 1,431
Accrued compensation and commissions ................... 716 1,105 3,128
Accrued software license obligations ................. -- 239 674
Other accrued liabilities .............................. 242 158 1,116
Dividends payable (Note 9) ............................. -- -- 1,000
Current portion of capital lease obligations ........... -- -- 287
Advances from factor ................................... 824 -- --
-------- -------- --------
Total current liabilities ......................... 2,713 3,513 10,784
-------- -------- --------
Capital lease obligations, net of current portion ........ -- -- 483
-------- -------- --------
Commitments and contingencies (Notes 7 and 12)
Stockholders' equity
Common stock, $.001 par value; 20,000 shares authorized;
7,452, 11,913 and 12,542 shares issued and outstanding 18 22 22
Additional paid in capital ............................. 1,518 18,019 22,026
Treasury stock, at cost, 7 and 108 shares .............. -- (83) (2,971)
Cumulative translation adjustment ...................... -- -- 90
Retained earnings (deficit) ............................ (234) 1,036 (73)
-------- -------- --------
Total stockholders' equity ........................ 1,302 18,994 19,094
-------- -------- --------
$ 4,015 $ 22,507 $ 30,361
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-2
<PAGE> 21
DATA DIMENSIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenue
Knowledge Consulting $ 5,878 $ 13,793 $ 35,864
Information Services 4,833 6,001 7,378
Knowledge Transfer -- -- 1,619
International 354 1,042 2,596
--------- --------- ---------
Total revenue 11,065 20,836 47,457
Direct costs 6,494 12,283 26,820
--------- --------- ---------
Gross margin 4,571 8,553 20,637
General, administrative and selling expenses 3,389 7,397 16,309
Unusual items (Notes 2 and 3) -- -- 4,024
--------- --------- ---------
Income from operations 1,182 1,156 304
--------- --------- ---------
Other income (expense)
Interest expense (207) (91) --
Interest income -- 583 415
--------- --------- ---------
Total other income (expense) (207) 492 415
--------- --------- ---------
Earnings before income tax 975 1,648 719
Income tax provision (benefit), including $285,000
Merger related in 1997 (Notes 2 and 8) (380) 15 700
--------- --------- ---------
Net income $ 1,355 $ 1,633 $ 19
========= ========= =========
Net income per share-basic $ .19 $ .15 $ .00
========= ========= =========
Net income per share-diluted $ .17 $ .15 $ .00
========= ========= =========
Weighted average shares outstanding-basic 7,209 10,678 12,308
========= ========= =========
Weighted average shares outstanding-diluted 8,091 11,230 12,609
========= ========= =========
Pro forma net income and per share information (Note 2):
Net income before pro forma adjustments $ 19
Pro forma adjustments:
Contractual increase in officer salary (71)
Federal income taxes on Pyramid earnings, net of $285,000
Merger related 73
---------
Pro forma net income $ 21
=========
Pro forma net income per share-diluted $ .00
=========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE> 22
DATA DIMENSIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Retained
-------------------- Paid in Treasury Translation Earnings
Shares $ Capital Stock Adjustment (Deficit) Total
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 7,056 $ 18 $ 1,173 $ -- $ -- $ (1,589) $ (398)
Issuance of common stock 396 -- 345 -- -- -- 345
Net income -- -- -- -- -- 1,355 1,355
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1995 7,452 18 1,518 -- -- (234) 1,302
Issuance of common stock:
Exercise of warrants 138 -- -- -- -- -- --
Public offering 3,993 4 18,639 -- -- -- 18,643
Exercise of options 330 -- 220 -- -- -- 220
Stock issue cost -- -- (2,358) -- -- -- (2,358)
Acquisition of Treasury stock
in connection with exercise
of options -- -- -- (83) -- -- (83)
Distributions to Pyramid
stockholder -- -- -- -- -- (363) (363)
Net income -- -- -- -- -- 1,633 1,633
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1996 11,913 22 18,019 (83) -- 1,036 18,994
Issuance of common stock:
Exercise of warrants 266 -- 2,772 -- -- -- 2,772
Exercise of options 363 -- 619 -- -- -- 619
Income tax benefit from stock
options -- -- 616 -- -- -- 616
Acquisition of Treasury stock
in connection with exercise
of options and warrants -- -- -- (2,888) -- -- (2,888)
Distributions and declared
dividends to Pyramid
stockholder -- -- -- -- -- (1,128) (1,128)
Cumulative translation -- -- -- -- 90 -- 90
Net income -- -- -- -- -- 19 19
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 12,542 $ 22 $ 22,026 $ (2,971) $ 90 $ (73) $ 19,094
======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE> 23
DATA DIMENSIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,355 $ 1,633 $ 19
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 59 287 932
Deferred income tax provision (benefit) (428) (75) 680
Non-cash portion of unusual items charge -- -- 1,373
Changes in operating assets and liabilities:
Increase in trade accounts receivable (1,083) (3,769) (10,410)
Decrease (increase) in other receivables -- (699) 363
Decrease (increase) in prepaid
and other current assets (164) (920) 319
Increase (decrease) in advance billings (174) 457 319
Increase in accounts payable 150 623 2,249
Increase in accrued compensation and commissions 273 488 2,023
Increase in accrued software license obligations -- 239 435
Increase (decrease) in accrued liabilities 187 (84) 958
Other (21) (41) 277
-------- -------- --------
Net cash provided (used) by operating activities 154 (1,861) (463)
-------- -------- --------
Cash flows from investing activities:
Purchase of investment securities -- (9,424) --
Proceeds from sale of investment securities -- 752 7,691
Purchase of equipment and furniture (165) (1,195) (1,953)
Investment in product development -- (1,255) (2,001)
Increase in other assets (57) (71) (1,485)
Other (35) 35 --
-------- -------- --------
Net cash provided (used) by investing activities (257) (11,158) 2,252
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 338 16,422 503
Payment of capital lease obligations -- -- (87)
Distributions to Pyramid stockholder -- (363) (128)
Repayment of notes payable (213) -- --
Increase (decrease) in advances from factor 313 (824) --
Payment of accrued preferred stock dividends -- (70) --
Net cash provided by financing activities 438 15,165 288
-------- -------- --------
Net increase in cash and cash equivalents 335 2,146 2,077
Cash and cash equivalents, beginning of year 136 471 2,617
-------- -------- --------
Cash and cash equivalents, end of year $ 471 $ 2,617 $ 4,694
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE> 24
\
DATA DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the
accounts of Data Dimensions, Inc., a Delaware corporation, and its subsidiaries
("Data Dimensions" or the "Company"). As more fully described in Note 2, in
November 1997, the Company acquired Pyramid Information Services, Inc. in a
business combination accounted for as a pooling-of-interests. The historical
financial statements for periods prior to consummation of the business
combination have been restated as though the companies had been combined for all
periods presented.
Description of Business - The Company conducts its business through four
operating divisions as follows:
- - Knowledge Consulting provides expertise in planning and implementation to
resolve complex, enterprise-wide business issues, which, to date, has
involved millennium conversion computer consulting services to customers
located primarily in the United States.
- - Information Services provides computer mainframe outsourcing services
including data processing, operations and system support, network and
production control, and Year 2000 testing services to clients located
throughout the United States, Canada and Australia.
- - Knowledge Transfer offers products that make it possible for customers to
apply Data Dimensions' expertise in resolving issues in-house and licenses
millennium conversion processes to consulting firms in the United States.
- - International licenses millennium conversion processes to consulting firms
throughout the world and, commencing in 1997, provides millenium conversion
consulting services in the United Kingdom and Europe.
Significant Customers - Revenue from major customers exceeding 10% of revenue
was one customer accounting for 28% of 1995 revenue and one customer accounting
for 13% of 1996 revenue. No single customer accounted for more than 10% of 1997
revenue.
Foreign Operations - During 1996, the Company commenced operations in the
Republic of Ireland through its wholly-owned subsidiary, Data Dimensions Ireland
Limited. During 1997, the Company commenced operations in the United Kingdom
through its wholly-owned subsidiary, Data Dimensions (UK) Limited. Data
Dimensions Ireland Limited is included in Knowledge Consulting and Data
Dimensions (UK) Limited is included in International. Knowledge Consulting 1997
revenues included approximately $2 million relating to services provided by Data
Dimensions Ireland Limited. Foreign operations' identifiable assets and net
assets, exclusive of intercompany accounts, approximated $810,000 and $440,000,
respectively, at December 31, 1997. Foreign operations comprised less than 3% of
the Company's consolidated assets, revenues and gross margin in 1996.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to concentration of credit risk include primary cash and cash
equivalents, investment securities, and accounts receivable. The Company places
its cash deposits and certain short-term investments in bank deposits and money
market funds with high credit quality financial institutions; at times deposits
exceed federally-insured limits. The Company places its cash equivalents and
investments in investment grade, short-term debt instruments and limits the
amount of credit exposure to any one issuer. Accounts receivable consist of
account balances due from several relatively large companies dispersed primarily
across the United States, with no significant geographic concentration, and
industry concentrations in financial institutions and health care. The Company
performs ongoing credit evaluations of its customer's financial condition and
generally requires no collateral from its own customers.
Principles of Consolidation - The financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
financial statements, and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
F-6
<PAGE> 25
DATA DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Fair Value Disclosures - Recorded amounts of cash and cash equivalents,
investment securities, receivables, prepaid and other current assets, capital
lease obligations, accounts payable and other amounts included in current
liabilities meeting the definition of financial instruments approximate fair
value.
Cash and Cash Equivalents - Cash and cash equivalents represent funds on deposit
with banks or invested in a variety of highly liquid short-term instruments with
original maturities of less than three months.
Investment Securities - All investment securities are classified as
available-for-sale and are available to support current operations. These
securities are stated at estimated fair value.
Realized and unrealized gains and losses have not been significant.
Prepaid Expenses - Certain costs incurred in connection with providing computer
mainframe outsourcing services are deferred and recognized over the period
services are provided. Recurring costs deferred for existing customers are
primarily software license fees, which are typically recognized over 12 months.
Costs deferred for new customers include installation and conversion costs, are
included in other assets and are recognized over service contract lives of up to
five years.
Equipment and Furniture - Equipment and furniture are stated at cost and are
depreciated utilizing straight-line methods over estimated useful lives of 3 to
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.
Investment in Product Development - Costs related to conceptual formulation and
design of Company products are expensed as incurred. Costs incurred subsequent
to establishment of technological feasibility, but prior to the product being
available for general release to customers, are capitalized and amortized over
estimated productive lives, which range from two to three years. The Company
evaluates its investment in product development as events or changes in
circumstances may arise, for the purpose of determining whether the carrying
amount of such assets may exceed the net realizable value of the products. In
the event that capitalized costs of a product exceed the estimated net
realizable value of the product, such excess amount is written off.
Capitalized Software - Included in other assets are direct costs of computer
software developed or obtained for internal use. Costs incurred are capitalized
and amortized over periods not exceeding three years.
Impairment of Long-Lived Assets - The Company evaluates its long-lived assets
for financial impairment and continues to evaluate them as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully
recoverable. The Company evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated undiscounted
future cash flows associated with them. At the time such evaluations indicate
that the future undiscounted cash flows of certain long-lived assets are not
sufficient to recover the carrying value of such assets, the assets are adjusted
to their fair values.
Revenue Recognition - Consulting revenue consists of billable hours for services
provided by the Company's technical consultants valued at contract rates, and is
recognized as services are performed. Product revenue and license fees earned
under technology license agreements are generally recognized when the technology
has been delivered and there are no significant obligations remaining. The
Company also receives royalty revenue from licensees, which is recognized as
services are provided by the licensee. Information Services revenue is
recognized as services are performed. Advance billings are provided for by
certain contracts and are recognized as revenue when the related services are
performed.
Grant Accounting - The Company's subsidiary in Ireland has received an
employment grant from the Industrial Development Authority of the Republic of
Ireland. Employment grants, which relate to employee hiring and training, are
recognized as a reduction of expense during the period in which the related
expenditures are incurred by the Company.
F-7
<PAGE> 26
DATA DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Pre-Operating and Start-up Costs - Pre-operating and start-up costs incurred in
connection with the organization and development of new business activities are
expensed as incurred and are included in general, administrative and selling
expenses. During 1997, such costs were incurred in connection with establishing
a consulting services subsidiary in the United Kingdom and a software
factory/solution center in the United States.
Income Taxes - Deferred taxes are provided for temporary differences in the
basis of assets and liabilities for financial reporting and tax purposes. To the
extent that it is not considered to be more likely than not that all of the
Company's deferred tax assets will be realized, a valuation allowance is
recorded to reduce the deferred tax asset to its estimated net realizable value.
Stock-Based Compensation - Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation ("FAS 123"), encourages, but does not
require companies to record compensation cost for stock-based employee
compensation. The Company has chosen to continue to account for stock-based
compensation utilizing the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair market price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock. Pro forma net income and
earnings per share are presented on the basis as if compensation had been
determined pursuant to FAS 123.
Net Income Per Share - Statement of Financial Accounting Standards No. 128 ("FAS
128"), issued in February 1997, requires presentation of earnings per share for
periods ending after December 15, 1997, computed on a basis different from how
earnings per share were previously calculated. FAS 128 requires presentation of
basic and diluted earnings per share and also requires that earnings per share
for all periods presented to be restated. Basic earnings per share are computed
by dividing net income by the weighted average number of common shares
outstanding. The computation of diluted earnings per share is similar to the
computation of basic earnings per share, except that the number of shares
utilized as the denominator is increased to include the number of additional
common shares that would have been outstanding if dilutive potential common
shares had been issued. In addition to shares utilized as denominators in the
computation of basic earnings per share, the shares utilized as the denominators
in the computation of diluted earnings per share include 882,000, 552,000 and
301,000 shares relating to options and warrants in 1995, 1996, and 1997,
respectively; numerators utilized are the same in basic and diluted
computations. Approximately 6,000 shares were not included in the computation of
1997 diluted earnings per share, because to do so would have been anti-dilutive.
The Company's outstanding options and warrants have been considered utilizing
the treasury stock method in calculating diluted earnings per share. Diluted
earnings per share are equivalent to what had been reported as primary earnings
per share. Basic and diluted earnings per share were equivalent in 1996 and
1997.
In March 1996, the Company effected a one-for-three reverse stock split. In
March 1997, the Company effected a three-for-one stock split in the form of a
stock dividend. All share and per share data presented in these financial
statements have been restated for such stock splits. Additionally, as more fully
described in Note 2, during 1997 the Company issued approximately 540,000 shares
of its common stock in connection with a business combination accounted for as a
pooling-of-interests. All share and per share data presented in these financial
statements have been restated on the basis that these shares have been
outstanding for all periods presented.
On a supplemental basis, giving effect to the repayment of debt with a portion
of the Company's April 1996 stock issuance as if such repayment had occurred at
the beginning of such year, earnings per share would have approximated $.16 for
the year ended December 31, 1996.
Reclassifications - Certain amounts have been reclassified in prior year
financial statements to conform with current year presentations.
Recently Issued Accounting Standards - Recently issued accounting standards
having relevant applicability to the Company consist primarily of Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income,"
Statement of Financial Accounting Standards No. 131 "Disclosure about Segments
of an Enterprise and Related Information," and Statement of Position 97-2
"Software Revenue Recognition," each of which relates to additional reporting
and disclosure requirements effective for future financial periods. It is not
expected that the adoption of these accounting pronouncements will have a
material effect on the Company's operating results or financial condition.
F-8
<PAGE> 27
DATA DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITION OF PYRAMID INFORMATION SERVICES, INC.
On October 30, 1997, the Company entered into an agreement with Pyramid
Information Services, Inc. ("Pyramid") and its sole shareholder, pursuant to
which, in November 1997, the Company acquired all of the outstanding common
stock of Pyramid in exchange for approximately 540,000 shares of Data Dimensions
common stock. As a result of the transaction, Pyramid, a Los Angeles,
California-based company that provides computer processing and management
services to its customers, became a wholly-owned subsidiary of the Company and
changed its name to Data Dimensions Information Services, Inc. ("DDIS").
The business combination has been accounted for as a "pooling-of-interests" for
accounting and financial reporting purposes. The pooling-of-interests method of
accounting is intended to present as a single interest two or more common
shareholder interests, which were previously independent. Consequently, the
historical financial statements for periods prior to the consummation of the
combination have been restated as though the companies had been combined for all
periods presented. These restated results of operations are not necessarily
indicative of results to be expected in the future.
All fees and expenses related to the business combination and to the
consolidation of the combining companies have been expensed as required under
the pooling-of-interests accounting method and are included in the consolidated
statement of operations as a component of unusual items. Such fees and expenses
approximated $764,000 and include commissions, professional fees and other costs
associated with consolidating and integrating the combined companies.
Prior to the business combination, Pyramid was a Subchapter S Corporation for
federal income tax purposes and accordingly, its taxable income was not taxed to
the corporation, but directly to its shareholder. Upon acquisition by the
Company, Pyramid is included in the Company's consolidated income tax group. In
accordance with pooling-of-interests accounting the Company has recorded a
provision for deferred income taxes of approximately $285,000 as of the
transaction date, representing estimated future tax liabilities relating to the
excess of future net taxable income for income tax purposes resulting primarily
from cash basis accounting for tax purposes. The 1997 statement of operations
presents pro forma adjustments to reflect the effect of a provision for federal
income taxes on Pyramid's net income as if it had been a taxable entity, rather
than the Subchapter S pass through entity that it was, and to reflect the effect
of the difference between compensation actually paid to Pyramid's shareholder
and the increased contractual agreed upon salary to be paid after the business
combination.
Results of operations for the separate companies through the calendar quarter
immediately preceding the business combination are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
1995 1996 September 30, 1997
------- ------- ------------------
(Unaudited)
<S> <C> <C> <C>
Revenues
Data Dimensions $ 6,232 $14,835 $27,831
Pyramid 4,833 6,001 $ 5,505
------- ------- -------
$11,065 $20,836 $33,336
======= ======= =======
Net income
Data Dimensions $ 754 $ 947 $ 2,454
Pyramid 601 686 502
------- ------- -------
$ 1,355 $ 1,633 $ 2,956
======= ======= =======
</TABLE>
F-9
<PAGE> 28
DATA DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - UNUSUAL ITEMS
Included in the consolidated statement of operations for 1997 are unusual items,
which had the effect of decreasing net income by $.21 per common share. These
charges against income were comprised of asset write-down charges for impairment
of long-lived assets, merger related costs and costs attributable to the
Company's change in organization structure as follows (in thousands):
<TABLE>
<CAPTION>
Before After
Income Tax Income Tax
------ ------
<S> <C> <C>
Asset write-downs $2,641 $1,611
Merger related costs (Note 2) 764 666
Reorganization related costs 619 378
------ ------
$4,024 $2,655
====== ======
</TABLE>
In July 1997, the Company announced the commencement of a major change in
organizational structure to position the Company to manage the rapid growth of
its millennium consulting business and its expansion into new areas. As a
result, the Company developed its Knowledge Consulting, Knowledge Transfer and
International divisions. During the next several months personnel changes were
put into effect, and the Company consolidated its separate business locations,
which involved a move of corporate offices. Costs incurred in connection with
this reorganization consist primarily of personnel related costs, substantially
all of which have been paid.
The Company continually reviews all components of its businesses for possible
improvement of future profitability through acquisition, divestiture,
reengineering or restructuring. During the fourth quarter of 1997, after
completion of alternative analyses and testing, the Company decided to modify
its plan to utilize certain capitalized software obtained for internal use in
the Knowledge Consulting division, and as a result recorded an asset write-down
for impairment of value of approximately $1.1 million, the full amount of such
capitalized costs as the Company's strategy no longer envisions utilizing this
software. Additionally, as more fully described in Note 6, the Company recorded
an investment in product development asset write-down of approximately $1.5
million. See Note 14 for discussion of the effect of unusual items in the fourth
quarter.
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable are presented net of an allowance for doubtful accounts of
approximately $51,000, $51,000 and $297,000 at December 31, 1995, 1996 and 1997,
respectively. Included in accounts receivable are costs and accrued revenue in
excess of amounts billed at the balance sheet date, relating primarily to
services provided to customers and which have been subsequently billed. Such
unbilled amounts approximated $189,000, $578,000 and $4.8 million at December
31, 1995, 1996 and 1997, respectively. Included in other assets at December 31,
1997 is approximately $256,000 of amounts retained by customers in accordance
with contract terms, which are due upon contract completion, which is expected
to be more than one year from the balance sheet date. Amounts billed to
customers in excess of revenues recognized to date are classified as current
liabilities under advance billings.
NOTE 5 - INVESTMENT SECURITIES AVAILABLE FOR SALE
The Company's investment securities are diversified among high credit quality,
investment grade debt instruments in accordance with the Company's investment
policy. Investment securities are primarily U.S. corporate debt securities and
are generally due in one year or less.
F-10
<PAGE> 29
DATA DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG-LIVED ASSETS
Equipment and furniture consist of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Computers and equipment $ 433 $1,433 $ 3,904
Furniture and fixtures 38 144 482
------- ------- -------
471 1,577 4,386
Accumulated depreciation (277) (468) (1,279)
------- ------- -------
Equipment and furniture, net $ 194 $ 1,109 $ 3,107
======= ======= =======
</TABLE>
Computers and equipment at December 31, 1997 include equipment under capital
lease of approximately $985,000 and related accumulated amortization of
$157,000. Capitalized costs relating to computer software developed or obtained
for internal use approximated $287,000 and $131,000 at December 31, 1996 and
1997, respectively.
The Company, through Knowledge Transfer, capitalized product development costs
of approximately $1.3 million and $2 million in 1996 and 1997, respectively.
During the fourth quarter of 1997, the Company recorded an asset write-down of
approximately $1.5 million of its investment in Ardes 2k product development,
the amount by which capitalized costs exceeded the related asset's estimated net
realizable value. Investment in product development comprised the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C> <C>
Ardes 2k $ 1,086 $ 1,013
Vendor Review 169 743
------- -------
1,255 1,756
Accumulated amortization -- (121)
------- -------
Investment in product development, net $ 1,255 $ 1,635
======= =======
</TABLE>
NOTE 7 - LEASES
The Company leases facilities and certain equipment under operating leases, some
of which contain renewal options. Rent expense was $319,000, $713,000 and
$1,349,000 in 1995, 1996 and 1997, respectively. In 1997, the Company entered
into agreements for lease of certain computer equipment, which are accounted for
as capital leases. One of the Company's stockholders (the former Pyramid
stockholder) has personally guaranteed certain capital lease obligations. Future
annual minimum commitments under leases with noncancelable terms in excess of
one year at December 31, 1997, which have not been reduced by minimum sublease
revenues of $547,000, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------- -------
<S> <C> <C>
1998 $ 1,162 $ 329
1999 1,062 304
2000 664 201
2001 631 67
2002 526 --
------- -------
Total minimum payments $ 4,045 901
=======
Amounts representing interest (131)
-------
770
Current portion (287)
-------
Non-current portion $ 483
=======
</TABLE>
F-11
<PAGE> 30
DATA DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES
The Company has recorded deferred income tax benefits in 1995 and 1996 resulting
from utilization of net operating loss carryforwards and the related decrease in
the deferred tax asset valuation allowance. The income tax provision (benefit)
consists of the following for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Current Provision
State $ 48 $ 90 $ 10
Foreign -- -- 10
----- ----- -----
48 90 20
Deferred Provision (Benefit) (428) (75) 680
----- ----- -----
Income Tax Provision (Benefit) $(380) $ 15 $ 700
===== ===== =====
</TABLE>
The income tax provision (benefit) for the years ended December 31 differed from
amounts computed by applying the U.S. federal income tax rate to pretax income
as a result of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Tax at U.S. federal income tax rate $ 332 $ 560 $ 245
Effect of merger costs -- -- 174
Effect of Pyramid Sub-S status, including the
$285,000 provision relating to Sub-S termination
in 1997 (Note 2) (204) (233) 127
State income tax 83 150 36
Change in valuation allowance (568) (450) (80)
Foreign differences, net -- 19 33
Non-deductible expenses -- -- 92
Other, net (23) (31) 73
----- ----- -----
Income tax provision (benefit) $(380) $ 15 $ 700
===== ===== =====
</TABLE>
Deferred income taxes are comprised of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 965 $ 575 $ 910
Other 45 115 237
------- ------- -------
Total deferred income taxes 1,010 690 1,147
Valuation allowance (530) (80) -
------- ------- -------
Net deferred tax assets 480 610 1,147
------- ------- -------
Deferred tax liabilities:
Pyramid cash basis reporting for tax (150) (240) (260)
Investment in product development -- -- (640)
------- ------- -------
Total deferred tax liabilities (150) (240) (900)
------- ------- -------
Net deferred income taxes $ 330 $ 370 $ 247
======= ======= =======
</TABLE>
State income taxes paid approximated $56,000, $69,000 and $ 55,000 in 1995, 1996
and 1997, respectively.
The Company has recorded net deferred income tax assets relating primarily to
operating loss carryforwards, realization of which is dependent on generating
sufficient taxable income prior to the expiration of the loss carryfowards.
Although realization is not assured, management believes it is more likely than
not that the net deferred tax asset will be realized. Utilization of operating
loss carryforwards following certain changes in ownership is subject to
limitations. At December 31, 1997, the Company has net operating loss
carryforwards available to offset future taxable income of approximately $2.2
million with expiration dates through 2008. Limitations on utilization may
significantly diminish net operating loss carryforwards available to offset
future taxable income.
F-12
<PAGE> 31
DATA DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS
During 1994, pursuant to its terms, all of the issued and outstanding shares of
Series A preferred stock were converted into 933,000 shares of the Company's
common stock. During 1996, accrued preferred stock dividends of $70,000 were
paid and subsequently, the Company's authorization for issue of preferred stock
was eliminated.
During 1996, warrants to purchase 50,000 shares of common stock at $.72 per
share were exercised, pursuant to which 45,839 shares of common stock were
issued, the exercise price being paid in the form of a reduction in the number
of shares received. The warrants were issued in 1991 in connection with
promissory notes.
In connection with the Company's stock offering in April 1996, the Company
issued to the representative of the underwriters of the offering a warrant to
purchase 360,000 shares of Company common stock at an exercise price of $7.70
(165% of the public offering price), exercisable for a period of four years
beginning one year from issuance. In June 1997, the Company issued 360,000
shares of its common stock pursuant to the cash-less exercise of this warrant
and in connection therewith received from the warrant holder approximately
95,000 of such shares.
During 1997, the Company issued approximately 347,000 shares of its common stock
pursuant to exercise of outstanding options and in connection therewith received
cash proceeds of approximately $474,000 and approximately 7,000 shares of
Company common stock.
Prior to its business combination with the Company, Pyramid paid dividends to
its sole shareholder in amounts approximating its taxable income and, in 1997,
consistent with such normal pattern, declared and accrued a $1 million dividend.
Accrued dividends are non-interest bearing and payable within one year.
The Company has incentive stock option plans pursuant to which options to
purchase shares of the Company's common stock may be granted to employees,
directors and consultants. The plans provide that the option price shall not
be less than the fair market value of the shares on the date of grant. Options
vest ratably over four or five year periods as provided for in each employee's
option agreement, and generally expire in the fifth year after the options
vest. At December 31, 1997, there were approximately 680,000 shares reserved
for options to be granted under the plans. The following summarizes stock
options and warrants transactions (in thousands):
<TABLE>
<CAPTION>
WEIGHTED
PRICE PER AVERAGE
SHARES SHARE EXERCISE PRICE
------ ----- --------------
<S> <C> <C> <C>
Outstanding at January 1, 1995 951 $ 0.25 to $ 1.00 $ 0.34
Granted 483 $ 0.88 to $2.00 $ 1.32
Exercised (96) $ 0.25 to $1.00 $ 0.46
Expired or canceled (6) $ 0.25 to $1.00 $ 0.56
------
Outstanding at December 31, 1995 1,332 $ 0.25 to $2.00 $ 0.69
Granted 531 $ 1.62 to $13.50 $ 8.13
Exercised (474) $ 0.24 to $5.25 $ 0.54
Expired or canceled (35) $ 0.88 to $1.50 $ 0.89
------
Outstanding at December 31, 1996 1,354 $ 0.25 to $13.50 $ 3.66
Granted 508 $ 10.83 to $34.75 $19.32
Exercised (751) $ 0.25 to $20.50 $ 4.58
Expired or canceled (125) $ 0.88 to $20.50 $ 7.76
-------
Outstanding at December 31, 1997 986 $ 0.25 to $34.75 $10.79
=======
</TABLE>
F-13
<PAGE> 32
DATA DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS (CONTINUED)
Information relating to stock options and warrants at December 31, 1997 is
summarized by exercise price as follows (thousands of shares):
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------- -----------------------------
Weighted Average
--------------------
Exercise Price Life Exercise Weighted Average
Per Share Shares (Year) Price Shares Exercise Price
- -------------- ------ ------ --------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$0.25 157 1.7 $ 0.25 152 $ 0.25
$ 0.42 to $1.88 276 4.6 $ 0.96 119 $ 0.50
$ 2.00 to $5.54 32 5.7 $ 3.44 12 $ 3.55
$ 7.74 to $13.67 61 6.4 $ 10.89 10 $ 9.91
$18.25 to $20.50 354 9.4 $ 18.52 9 $ 20.01
$21.13 to $22.88 73 6.7 $ 25.94 14 $ 26.08
$29.19 to $34.75 33 6.7 $ 33.26 6 $ 33.36
------- ------
$ 0.25 to $34.75 986 6.2 $ 10.79 322 $ 3.07
======= ======
</TABLE>
All stock options issued to employees have an exercise price not less than the
fair value of the Company's common stock on the date of grant, and in accordance
with accounting for such options utilizing the intrinsic value method there is
no related compensation expense recorded in the Company's financial statements.
Had compensation cost for stock-based compensation been determined based on the
fair value at the grant dates consistent with the method of FAS 123, the
Company's net income and earnings per share for the years ended December 31,
would have been reduced to the pro forma amounts presented below (in thousands,
except per share data):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss)
As reported $ 1,355 $ 1,633 $ 19
Pro forma $ 1,337 $ 1,549 $(361)
Earnings (loss) per share
As reported $ .17 $ .15 $ .00
Pro forma $ .17 $ .14 $(.03)
</TABLE>
The fair market value of option grants is estimated on the date of grant
utilizing the Black-Scholes option pricing model with the following weighted
average assumptions for grants in 1995, 1996 and 1997, respectively: expected
life of options of 5 years, risk-free interest rate of approximately 6.2%, a 0%
dividend yield, and expected volatility of 21%, 37% and 50%, respectively. The
weighted average fair value at date of grant for options granted during 1995,
1996 and 1997 approximated $0.47, $3.85 and $ 9.60, respectively.
NOTE 10 - EMPLOYEE BENEFIT PLAN
Data Dimensions and DDIS each have a 401(k) plan for those employees who meet
eligibility requirements. Eligible employees may contribute up to 15% of their
compensation. Company contributions to the plans are discretionary as determined
by the Board of Directors. Total contributions charged to expense for both plans
approximated $39,000 in 1997. There were no contributions in prior years.
F-14
<PAGE> 33
DATA DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - ADVANCES FROM FACTOR AND NOTES PAYABLE
In December 1997, the Company obtained a $5 million two-year, working capital,
unsecured, revolving line of credit with a bank. The underlying revolving note
bears interest at the bank's prime rate, or LIBOR-based variable rates. The
agreement requires the Company to maintain certain minimum levels of, among
others, tangible net worth and annual net income plus non-cash expenses. The
Company has not borrowed any amounts pursuant to this line of credit.
Prior to April 1996, the Company factored its accounts receivable with a bank on
a full recourse basis. The bank advanced 90% of the value of factored
receivables and charged a finance fee of 2% per month on the outstanding
balance. Advances under the factoring agreement, which expired in June 1996,
approximated $824,000 at December 31, 1995, were limited to the lesser of
eligible receivables or $1.25 million, and were collateralized by substantially
all Company assets. The weighted average interest rate during 1995 and 1996
approximated 27%. The Company paid cash interest of $206,000 and $86,000 during
1995 and 1996, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company is from time to time involved in various claims and legal
proceedings of a nature considered by Company management to be routine and
incidental to its business. In the opinion of Company management, after
consultation with outside legal counsel, the ultimate disposition of such
matters is not expected to have a material adverse effect on the Company's
financial position, results of operations or liquidity.
During 1996, the Company's subsidiary in Ireland entered into a grant agreement
with Ireland's Industrial Development Authority pursuant to which, under certain
conditions, the Company may receive grant monies of up to 1.1 million Irish
Pounds (approximately $1.6 million at December 31, 1997). During the years ended
December 31, 1996 and 1997, the Company recognized grant monies of approximately
$138,000 and $124,000, respectively. Pursuant to terms of the grant the Company
could have an obligation to repay grant funds in the event that the Company
should discontinue its Irish operations prior to the commitment period provided
for in the grant agreement, which expires in 2001.
NOTE 13 - RELATED PARTY TRANSACTIONS
During January 1995, the Company repaid its note payable due to its President of
approximately $132,000 through offset of a $124,000 note receivable and the
issuance of 16,300 shares of Company common stock.
F-15
<PAGE> 34
DATA DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly information is unaudited and, for periods prior to the
November 1997 business combination, as more fully described in Note 2, has been
restated to give effect to such business combination accounted for on a
pooling-of-interests basis (dollars in thousands, except per share information):
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------------------
Quarter Ended
--------------------------------------------------------- Year Ended
March 31 June 30 September 30 December 31 December 31
--------- ------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $ 8,572 $ 10,950 $ 13,814 $ 14,121 $ 47,457
Gross margin $ 3,675 $ 5,397 $ 6,365 $ 5,200 $ 20,637
Income from operations $ 509 $ 1,392 $ 2,399 $ (3,996) $ 304
Net income $ 426 $ 1,002 $ 1,529 $ (2,938)(b) $ 19
Net income per share $ .03 $ .08 $ .12 $ (.23)(b) $ .00
Pro forma net income (a) $ 367 $ 918 $ 1,461 $ (2,725) $ 21
Pro forma net income per share (a) $ .03 $ .07 $ .11 $ (.21) $ .00
1996
------------------------------------------------------------------------------
Quarter Ended
--------------------------------------------------------- Year Ended
March 31 June 30 September 30 December 31 December 31
--------- ------- ------------ ----------- -----------
Revenue $ 3,784 $ 4,592 $ 5,424 $ 7,036 $20,836
Gross margin $ 1,477 $ 1,760 $ 2,168 $ 3,148 $ 8,553
Income from operations $ 267 $ 217 $ 284 $ 388 $ 1,156
Net income $ 162 $ 284 $ 330 $ 857 $ 1,633
Net income per share $ .02 $ .02 $ .03 $ .07 $ .15
</TABLE>
(a) Pro forma net income gives effect to adjustments, as more fully described in
Note 2, primarily to reflect the effect of a provision for federal income
taxes relating to a Subchapter S corporation acquired in 1997.
(b) As more fully described in Notes 2 and 3, the fourth quarter of 1997
includes an approximately $2.65 million after tax provision for unusual
items and $285,000 provision for income taxes relating to deferred taxes
recorded upon the acquired company's conversion from Subchapter S status.
The total effect of these items on net income was $2.95 million, or $.23 per
share.
F-16
<PAGE> 35
. EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
NO.
2.1 Agreement and Plan of Reorganization by and among Data Dimensions, Inc,
DP Acquisition Corporation, Eugene M. Stabile, and Pyramid Information
Services, Inc. dated October 30, 1997. (Incorporated by reference to the
Company's October 30, 1997 Current Report on Form 8-K.)
3.1 Certificate of Incorporation and all amendments thereto (Incorporated by
reference to the Company's Registration Statement on Form SB-2. Reg. No.
333-841.)
3.2 Second Amended and Restated Bylaws (Incorporated by reference to the
Company's December 31, 1996 Annual Report on Form 10-KSB.)
4.1 Form of Common Stock Certificate (Incorporated by reference to the
Company's Registration Statement on Form SB-2.) See Exhibits 3.1 and 3.2
for provisions in the Certificate of Incorporation and Second Amended
and Restated Bylaws of the Company defining the rights of the holders of
Common Stock.
10.1 1988 Incentive Stock Option Plan and 1988 Nonstatutory Stock Option Plan
(Incorporated by reference to the Company's Registration Statement on
Form SB-2. Reg. No. 333-841.)
10.2 1997 Stock Option Plan (Incorporated by reference to the Company's
December 31, 1996 Annual Report on Form 10-KSB.)
10.3 Lease Agreement for Registrant's Facility in Bellevue, Washington
10.4 Agreement between the Company and Gordon A. Gardiner dated November 6,
1997.
10.5 Agreement between the Company and Thomas R. Clark dated October 31,
1997.
16.1 Letter on certifying accountant
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Certified Public Accountants
24.1 Power of Attorney of Thomas W. Fife
24.2 Power of Attorney of Robert T. Knight
24.3 Power of Attorney of Lucie J. Fjeldstad
27.1 Financial Data Schedule for year end December 31, 1997
27.2 Financial Data Schedule for quarter end September 30, 1997
27.3 Financial Data Schedule for quarter end June 30, 1997
27.4 Financial Data Schedule for quarter end March 31, 1997
27.5 Financial Data Schedule for year end December 31, 1996
27.6 Financial Data Schedule for quarter end March 31, 1996
27.7 Financial Data Schedule for quarter end June 30, 1996
27.8 Financial Data Schedule for quarter end September 30, 1996
27.9 Financial Data Schedule for year end December 31, 1995
<PAGE> 1
EXHIBIT 10.3
- --------------------------------------------------------------------------------
ONE BELLEVUE CENTER
LEASE AGREEMENT
BETWEEN
WRIGHT RUNSTAD PROPERTIES L.P.
Landlord
and
DATA DIMENSIONS, INC.
Tenant
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. LEASE DATA AND EXHIBITS ........................................... 1
(a) Building .......................................................... 1
(b) Premises .......................................................... 1
(c) Tenant's Pro Rata Share ........................................... 1
(d) Basic Plans Delivery Date ......................................... 1
(e) Final Plans Delivery Date ......................................... 1
(f) Commencement Date ................................................. 1
(g) Expiration Date ................................................... 1
(h) Rent .............................................................. 1
(i) Security Deposit .................................................. 1
(j) Base Year ......................................................... 1
(k) Parking ........................................................... 2
(1) Notice Addresses .................................................. 2
(m) Payment Address ................................................... 2
(n) Exhibits .......................................................... 2
2. PREMISES .......................................................... 2
3. COMMENCEMENT AND EXPIRATION DATES ................................. 3
(a) Commencement Date ................................................. 3
(b) Delays ............................................................ 3
(c) Confirmation of Commencement Date ................................. 3
(d) Expiration Date ................................................... 3
4. ACCEPTANCE OF PREMISES ............................................ 3
5. RENT AND ADDITIONAL RENT .......................................... 3
6. SECURITY DEPOSIT .................................................. 4
7. PARKING ........................................................... 4
8. USES .............................................................. 4
9. SERVICES AND UTILITIES ............................................ 4
(a) Standard Services ................................................. 4
(b) Normal Business Hours ............................................. 4
(c) Interruption of Services .......................................... 5
(d) Additional Services ............................................... 5
(c) Costs of Additional Services ...................................... 5
10. COSTS OF OPERATIONS AND REAL ESTATE TAXES ......................... 5
(a) Additional Rent ................................................... 5
(b) Definitions ....................................................... 5
(c) Estimated Costs ................................................... 6
(d) Actual Costs ...................................................... 7
(c) Records and Adjustments ........................................... 7
(f) Personal Properly Taxes ........................................... 7
11. CARE OF PREMISES .................................................. 7
12. ACCESS ............................................................ 7
13. DAMAGE OR DESTRUCTION ............................................. 8
(a) Damage and Repair ................................................. 8
(b) Destruction During Last Year of Term .............................. 8
(c) Tenant Improvements ............................................... 8
14. WAIVER OF SUBROGATION ............................................. 8
15. INDEMNIFICATION ................................................... 8
16. INSURANCE ......................................................... 8
(a) Liability Insurance ............................................... 9
(b) Property Insurance ................................................ 9
(c) Insurance Policy Requirements ..................................... 9
(d) Certificate of Insurance .......................................... 9
(c) Primary Policies .................................................. 9
17. ASSIGNMENT AND SUBLETTING ......................................... 9
(a) Assignment or Sublease ............................................ 9
(b) Landlord Right to Terminate Portion of Lease ...................... 10
(c) Tenant Transfer of Lease .......................................... 10
(d) Assignee Obligations .............................................. 10
(e) Sublessee Obligations ............................................. 10
18. SIGNS ............................................................. 10
19. LIENS AND INSOLVENCY .............................................. 10
(a) Liens ............................................................. 10
(b) Insolvency ........................................................ 11
20. DEFAULT ........................................................... 11
(a) Cumulative Remedies ............................................... 11
(b) Tenant's Right to Cure ............................................ 11
(c) Abandonment ....................................................... 11
(d) Landlord's Reentry ................................................ 11
(c) Reletting the Premises ............................................ 12
(e) Trade Fixtures .................................................... 12
21. PRIORITY .......................................................... 12
22. SURRENDER OF POSSESSION ........................................... 13
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
23. REMOVAL OF PROPERTY ............................................... 13
24. NON-WAIVER ........................................................ 13
25. HOLDOVER .......................................................... 13
26. CONDEMNATION ...................................................... 13
(a) Entire Taking ..................................................... 13
(b) Constructive Taking of Entire Premises ............................ 13
(c) Partial Taking .................................................... 14
(d) Awards and Damages ................................................ 14
27. NOTICES ........................................................... 14
28. COSTS AND ATTORNEYS FEES .......................................... 14
29. LANDLORD'S LIABILITY .............................................. 14
30. ESTOPPEL CERTIFICATES ............................................. 14
31. TRANSFER OF LANDLORD'S INTEREST ................................... 15
32. RIGHT TO PERFORM .................................................. 15
33. QUIET ENJOYMENT ................................................... 15
34. CORPORATE AUTHORITY ............................................... 15
35. HAZARDOUS MATERIALS ............................................... 15
(a) Tenant Obligations ................................................ 15
(b) Landlord Obligations .............................................. 16
36. TELECOMMUNICATIONS LINES AND EQUIPMENT ............................ 16
(a) Location of Tenant's Equipment and Landlord Consent ............... 16
(b) Landlord's Rights ................................................. 17
(c) Indemnification ................................................... 17
(d) Limitation of Liability ........................................... 17
(e) Electromagnetic Fields ............................................ 17
37. GENERAL ........................................................... 17
(a) Headings .......................................................... 17
(b) Successors and Assigns ............................................ 17
(c) Payment of Brokers ................................................ 18
(d) Entire Agreement .................................................. 18
(e) Severability ...................................................... 18
(f) Overdue Payments .................................................. 18
(g) Force Majeure ..................................................... 18
(h) Right to Change Public Space ...................................... 18
(i) Governing Law ..................................................... 19
(j) Building Directory ................................................ 19
(k) Building Name ..................................................... 19
</TABLE>
ii
<PAGE> 4
EXHIBIT 10.3
LEASE AGREEMENT
ONE BELLEVUE CENTER
THIS LEASE made this 19th day of August, 1997 between WRIGHT RUNSTAD PROPERTIES
L.P., a Delaware limited partnership ("Landlord"), and DATA DIMENSIONS, INC., a
Washington corporation ("Tenant").
As parties hereto, Landlord and Tenant agree:
1. LEASE DATA AND EXHIBITS
The following terms as used herein shall have the meanings provided in this
Section 1, unless otherwise specifically modified by provisions of this Lease:
(a) BUILDING
Known as One Bellevue Center, or such other name as Landlord may
designate from time to time, situated on a portion of the real property more
particularly described in Section 2 hereof, with an address of 411 - 108th
Avenue N.E., Bellevue, Washington 98004.
(b) PREMISES
Consisting of the area on the twenty-first (21st) and twenty-second
(22nd) floor(s) of the Building, as outlined on the floor plan(s) attached
hereto as Exhibit A, including tenant improvements, if any, as described in
Exhibit B.
(c) TENANT'S PRO RATA SHARE:
Landlord and Tenant agree that, for purposes of this Lease, the
rentable area of the Premises is deemed to be 24,751 square feet and Tenant's
Pro Rata Share of the Building is deemed to be 7.18%.
(d) BASIC PLANS DELIVERY DATE:
September 3, 1997.
(e) FINAL PLANS DELIVERY DATE:
September 22, 1997.
(f) COMMENCEMENT DATE:
November 1, 1997 or such earlier or later date as provided in Section
3 hereof.
(g) EXPIRATION DATE:
October 31, 2002.
(h) RENT:
$(SEE EXHIBIT C, SECTION 1) Rent shall be adjusted from time to time
pursuant to Sections 9 and 10 of the Lease. Tenant has deposited with Landlord
on the date hereof $50,533.29 to be applied to the first Rent payment due
hereunder.
(i) SECURITY DEPOSIT:
$52,600.
(j) BASE YEAR:
For purposes of this Lease, the Base Year shall be: 1997.
1
<PAGE> 5
(k) PARKING:
Tenant shall have the right to purchase fifty (50) permits to park
automobiles in the Building garage on an unassigned self-park (or executive
valet) basis (as designated by Landlord from time to time) at the prevailing
monthly rates established by Landlord from time to time.
(l) NOTICE ADDRESSES:
Landlord: WRIGHT RUNSTAD PROPERTIES L.P.
411 - 108th Avenue N.E.
Suite 1980
Bellevue, Washington 98004-5554
Tenant: DATA DIMENSIONS, INC.
411 - 108th Avenue N.E.
Suite 2100
Bellevue, Washington 98004-5554
(m) PAYMENT ADDRESSES:
Landlord: WRIGHT RUNSTAD PROPERTIES L.P.
One Bellevue Center
P.O. Box 94043
Seattle, WA 98124-9443
Tenant: DATA DIMENSIONS, INC.
411 - 108th Avenue N.E.
Suite 2100
Bellevue, Washington 98004-5554
(n) EXHIBITS:
The following exhibits or riders are made a part of this Lease:
Exhibit A - Floor Plan of Premises
Exhibit B - Tenant Improvements
Exhibit C - Addendum to Lease
2. PREMISES:
Landlord does hereby lease to Tenant, and Tenant does hereby lease from
Landlord, upon the terms and conditions herein set forth, the Premises described
in Section 1(b) hereof as shown on Exhibit A attached hereto and incorporated
herein, together with rights of ingress and egress over common areas in the
Building located on the land ("Land") more particularly described as:
Lot 1, as delineated on City of Bellevue Short Plat No. 81-08 R, recorded
under King County Recording No. 8201069002 (as amended recorded under King
County Recording No. 8202040368), being more particularly described as
follows:
That portion of the South one-half of Lot 3 in block 2 of Cheriton Fruit
Gardens, Plat No. 1 as per plat recorded in Volume 7 of plats, page 47,
records of King County, EXCEPT the East 230 feet of the North 100 feet,
and EXCEPT the East 30 feet thereof deeded to King County for road by
deeds recorded under Auditor's File Nos. 913743 and 913775 records of King
County, Washington, and less the South 13.5 feet thereof, more
particularly described as follows:
Beginning at the most southeasterly corner of the above described parcel
of land; thence North 88 degrees 51'21" West along the South line of the
above described parcel of land, 231.75 feet; thence North 01 degrees
11'05" East, 285.52 feet; thence South 88 degrees 46'31" East, 26.31 feet;
thence South 00 degrees 06'00" West, 84.00 feet; thence South 88 degrees
48'55" East, 200.04 feet to the East line of the above described parcel of
land; thence South 00 degrees 06'00" West along said East line, 201.39
feet to the Point of Beginning.
The above property being situated in the Northeast quarter of the
Northwest quarter of Section 32, Township 25 North, Range 5 East, W.M.,
City of Bellevue, King County, Washington.
2
<PAGE> 6
3. COMMENCEMENT AND EXPIRATION DATES:
(a) COMMENCEMENT DATE:
Landlord and Tenant shall use their best efforts to complete tenant
improvements in the Premises in accordance with Exhibit B hereto on the
date specified in Section 1(f) or as soon thereafter as practicable. The
Commencement Date shall be the earlier of: the date specified in Section
1(f), or, if tenant improvements are to be completed in the Premises, the
date of acceptance of the Premises by Tenant pursuant to Section 4 hereof,
or the date Tenant actually occupies the Premises, or the date when the
premises would have been completed except for delays caused by the failure
of Tenant to fulfill any obligation pursuant to the terms of this lease or
any exhibit hereto.
(b) DELAYS:
In the event, due to delays from any cause other than Tenant's
failure to comply with the terms of this Lease, the Premises are not
available for occupancy by Tenant within one (1) month following the date
specified in Section 1(f), Tenant may terminate this Lease by written
notice IN WHICH CASE ALL CONSIDERATION PREVIOUSLY PAID BY TENANT TO
LANDLORD ON ACCOUNT OF THE LEASE, INCLUDING THE SECURITY DEPOSIT, SHALL BE
RETURNED TO TENANT, THIS LEASE SHALL THEREAFTER BE OF NO FURTHER FORCE OR
EFFECT; provided, however, that such one-month period shall be extended for
delays due to causes beyond the reasonable control of Landlord.
(c) CONFIRMATION OF COMMENCEMENT DATE:
In the event the Commencement Date is established as a later or
earlier date than the date provided in Section 1(f) hereof, Landlord shall
confirm the same to Tenant in writing.
(d) EXPIRATION DATE:
This Lease shall expire on the date specified in Section 1(g).
4. ACCEPTANCE OF PREMISES:
If this Lease shall be entered into prior to the completion of tenant
improvements in the Premises, the acceptance of the Premises by Tenant shall be
deferred until the giving of written notice by Landlord to Tenant of the
completion of such construction. Within five (5) days ("Inspection Period")
after Landlord gives such notice, Tenant shall make such inspection of the
Premises as Tenant deems appropriate. Except as otherwise specified by Tenant
in writing to Landlord within the Inspection Period, and except for latent
defects not reasonably observable by Tenant, Tenant shall be deemed to have
accepted the Premises at the end of the Inspection period. If, as a result of
such inspection, Tenant discovers minor deviations or variations from the plans
and specifications for Tenant's improvements which do not materially affect
Tenant's use of the premises and are of a nature commonly found on a "punch
list" (as that term is used in the construction industry). Tenant shall, during
the Inspection Period, notify Landlord in writing of such deviations. Landlord
shall promptly repair all punch list items. The existence of such punch list
items shall not postpone the Commencement Date of this Lease nor the obligation
or Tenant to pay Rent.
5. RENT AND ADDITIONAL RENT:
Tenant shall pay Landlord without notice the Rent stated in Section 1(h)
hereof and Additional Rent as provided in Section 9 and Section 10 and any
other payments due under this Lease without deduction or offset in lawful money
of the United States in advance on or before the first day of each month at
Landlord's Payment Address set forth in Section 1(n) hereof, or to such other
party or at such other place as Landlord may hereafter from time to time
designate in writing. Rent and Additional Rent for any partial month at the
beginning or end of the Lease term shall be prorated in proportion to the
number of days in such month. All amounts which Tenant assumes or agrees to pay
to Landlord pursuant to this Lease shall be deemed Additional Rent hereunder
and, in the event of nonpayment thereof, Landlord shall have all remedies
provided for in the case of nonpayment of Rent, SUBJECT TO THE PROVISIONS OF
SECTION 20(B) HEREIN.
6. SECURITY DEPOSIT:
As security for the performance of this Lease by Tenant, Tenant has paid
to Landlord the Security Deposit as specified in Section 1(i) hereof, receipt
of which is hereby acknowledged. Landlord may apply all or any part of
3
<PAGE> 7
the Security Deposit to the payment of any sum in default or any other sum
which Landlord may in its reasonable discretion deem necessary to spend or incur
by reason of Tenant's default AND TENANT'S FAILURE TO CURE WITHIN THE CURE
PERIOD AS SET FORTH IN SECTION 20(B). In such event, Tenant shall, within five
(5) business days after written demand therefore by Landlord, deposit with
Landlord the amount so applied. the amount of the Security Deposit then held by
Landlord shall be repaid to Tenant within thirty (30) days after the expiration
or sooner termination of this Lease. Landlord shall not be required to keep any
Security Deposit separate from its general funds and Tenant shall not be
entitled to any interest thereon.
7. PARKING:
Use of parking in the Building by the Tenant shall be subject to such
reasonable rules and regulations as Landlord or its parking operator, or the
City of Bellevue may publish from time to time. Tenant shall provide Landlord
with thirty (30) days prior written notice of the number of parking permits
required by Tenant, up to the maximum number specified in Section 1(k), and of
any changes in those requirements. Short-term hourly parking shall be offered
on a space available basis during Normal Business Hours [as defined in Section
9(b)] except Saturday, and except Sundays or legal holiday, for Tenant's
clients and customers.
8. USES:
The Premises are to be used only for general office purposes ("Permitted
Uses"), and for no other business or purpose without the prior written consent
of Landlord, which consent may be withheld if Landlord, in its sole discretion,
determined that any proposed use is inconsistent with or detrimental to the
maintenance and operation of the Building as a first-class office building or
its inconsistent with any restriction on use of the Premises, the Building, or
the Land contained in any lease, mortgage, or other instrument or agreement by
which the Landlord is bound or to which any of such property is subject.
Tenant shall not commit any act that is intended to increase the then existing
cost of insurance on the building without landlord's consent. Tenant shall
promptly pay upon demand the amount of any increase in insurance costs caused by
any act or acts of Tenant. Tenant shall not commit or allow to be committed any
waste upon the Premises, or any public or private nuisance or other act which
disturbs the quiet enjoyment of any other tenant in the Building or which is
unlawful. Tenant shall not,without the written consent of Landlord, use any
apparatus, machinery or device in or about the Premises which will cause any
substantial noise, vibration or fumes. Tenant shall not permit smoking in the
Premises; Landlord has designated all internal portions of the Building as a
smoke-free zone. If any of Tenant's office machines or equipment should disturb
the quiet enjoyment of any other tenant in the Building, then Tenant shall
provide adequate insulation, or take other action as may be necessary to
eliminate the disturbance. Tenant shall comply with all laws relating to its
use or occupancy of the Premises and shall observe such reasonable rules and
regulations (not inconsistent with the terms of this Lease) as may be adopted
and made available to Tenant by Landlord from time to time for the safety, care
and cleanliness of the Premises or the Building, and for the Preservation of
good order therein.
9. SERVICES AND UTILITIES:
(a) STANDARD SERVICES:
Landlord shall maintain the Premises and the public and common areas
of the Building in good order and condition consistent with the operation
and maintenance of a first-class office building in downtown Bellevue,
Washington. Landlord shall furnish the premises with electricity for
normal office use, including lighting and operation of low power usage
office office machines, water and elevator service at all times during the
term of the Lease. Landlord shall also provide lamp replacement service for
building standard light fixtures, toilet room supplies, window washing at
reasonable intervals, and customary building janitorial service. No
janitorial service shall be provided for Saturdays, Sundays or legal
holidays. The costs of any janitorial or other service provided by Landlord
to Tenant, AT TENANT'S WRITTEN REQUEST, which are in addition to the
services ordinarily provided Building tenants shall be repaid by Tenant as
Additional Rent upon receipt of billings therefor.
(b) NORMAL BUSINESS HOURS:
From 7:00 a.m. to 6:00 p.m. on weekdays and from 8:00 a.m. to 1:00
p.m. on Saturdays, excluding legal holidays ("Normal Business Hours"),
Landlord shall furnish to the Premises heat and air conditioning. If
requested by Tenant, Landlord shall furnish heat and air conditioning at
times other than Normal Business Hours and the cost of such services as
estimated by Landlord, WHICH COST IS CURRENTLY $14.00 PER HOUR, PER FLOOR
shall be paid by Tenant as Additional Rent. During other than normal
Business Hours, Landlord may restrict access to the Building in accordance
with the Building's security system, provided that Tenant shall have at
all times during the term of this Lease (24 hours of all days) reasonable
access to the Premises.
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(c) INTERRUPTION OF SERVICES:
Landlord shall not be liable for any loss, injury or damage to person or
property caused by or resulting from any variation, interruption, or failure of
any services or facilities provided by Landlord pursuant to this Lease EXCEPTING
THOSE EVENTS CAUSED BY THE WILLFUL MISCONDUCT OR NEGLIGENCE OF LANDLORD, ITS
EMPLOYEES, AGENTS, CONTRACTORS OR SUBCONTRACTORS. No temporary interruption or
failure of such services or facilities incident to the making of repairs,
alterations, or improvements, or due to accident, strike or conditions or events
beyond Landlord's reasonable control shall be deemed an eviction of Tenant or
relieve Tenant from any of Tenant's obligations hereunder; provided, however, if
such interruption or failure shall continue for five (5) business days, Tenant's
Rent hereunder shall thereafter abate to the extent the Premises are thereby
rendered untenantable for Tenant's normal business operations until such
services are restored. Landlord shall use its best efforts in good faith to
minimize any disruption of Tenant's use of the Premises arising from any
interruption or failure of such services or facilities.
(d) ADDITIONAL SERVICES:
The Building mechanical system is designed to accommodate heating loads
generated by lights and equipment using up to 2.5 watts per square foot. Before
installing lights and equipment in the Premises which in the aggregate exceed
such amount, Tenant shall obtain the written permission of Landlord. Landlord
may refuse to grant such permission unless Tenant shall agree to pay the costs
of Landlord for installation of supplementary air conditioning capacity or
electrical systems as necessitated by such equipment or lights.
(e) COSTS OF ADDITIONAL SERVICES:
In addition, Tenant shall in advance, on the first day of each month
during the Lease term, pay Landlord as Additional Rent the reasonable amount
established by Landlord as the cost of furnishing electricity for the operation
of such equipment or lights and the reasonable amount established by Landlord a
the costs of operation and maintenance of supplementary air conditioning units
necessitated by Tenant's use of such equipment or lights. Landlord shall be
entitled to install and operate a Tenant's cost, AND WITH TENANT'S PRIOR
WRITTEN APPROVAL, A monitoring/metering system in the Premises to measure the
added demands on electricity, heating, ventilation, and air conditioning
systems resulting from such equipment or lights and from Tenant's after-hours
heating, ventilation and air conditioning service requirements. Tenant
shall comply with Landlord's reasonable instructions for the use of drapes,
blinds and thermostats in the Building.
10. COSTS OPERATIONS AND REAL ESTATE TAXES:
(a) ADDITIONAL RENT:
Tenant shall pay as Additional Rent is pro rata share of increases in
taxes and operating costs in excess of taxes and operating costs in the Base
Year ("Base Amounts"). Operating costs shall be adjusted to reflect 100%
occupancy in the Building. Increases in taxes and Operating costs over the
applicable Base Amounts shall be determined and shall be payable separately
under this Section 10.
(b) DEFINITIONS:
(i) For the purposes of this section, "Taxes" shall mean taxes and
assessments (including special district levies) on real and personal property
payable during any calendar year or fiscal year, based on the actual assessment
period, with respect to the Land, the Building and all property of Landlord,
real or personal, used directly in the operation of the Building and located in
or on the Building, together with any taxes levied or assessed in addition to or
in lieu of any such taxes or any tax upon leasing of the Building or the rents
collected (excluding any net income or franchise tax) ("Taxes").
(ii) For purposes of this Section, "Operating Costs" or "Costs" shall mean
all expenses of Landlord for maintaining, operating and repairing the Land and
Building and the personal property used in connection therewith, including
without limitation insurance premiums, utilities, customary management fees and
other expenses which in accordance with generally accepted accounting and
management principles (GAAP) would be considered an expense of maintaining,
operating or repairing the Building ("Operating Costs" or "Costs"); excluding,
however: (I) Costs of any special services rendered to individual tenants for
which a separate charge is collected; (II) leasing commissions and other leasing
expenses; and (III) Costs of improvements required to be capitalized in
accordance with generally accepted accounting principles (GAAP), except
Operating Costs shall include amortization OVER THE USEFUL LIFE of capital
improvements (A) made subsequent to initial development of the Building which
are designed with a reasonable probability of improving the operating efficiency
of the Building, or providing savings in the cost of operating the Building; or,
(B) which are reasonably responsive to requirements imposed with respect to the
Building under any amendment to any applicable building, health, safety, fire,
nondiscrimination, or similar law or regulation ("law"), or any new law, or any
new interpre-
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tation of an existing law ("new interpretation"), which amendment, law or new
interpretation is adopted or arose after the Commencement Date of this Lease.
DURING THE INITIAL LEASE TERM, ESTIMATED OR ACTUAL COSTS (EXCLUDING TAXES AND
THE COSTS OF ENERGY) SHALL BE SUBJECT TO A MAXIMUM CUMULATIVE INCREASE OF FOUR
PERCENT (4%) PER ANNUM (THE "CAP"). FOR EXAMPLE, IF BASE AMOUNT (EXCLUDING
TAXES AND ENERGY) = $2.00, THEN YEAR 1998 CAP = $2.08, YEAR 1999 CAP = $2.16
ETC. For purposes of this Lease, a new interpretation shall mean any
interpretation, enforcement or application of a law enacted prior to the
Commencement Date that imposes requirements with respect to the Building that
Landlord in the exercise of sound business judgment and good faith at the time
of Landlord's execution of this Lease would not have deemed applicable to the
Building.
(iii) "Year" shall mean the calendar year.
(iv) NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS LEASE TO
THE CONTRARY, OPERATING COSTS AND EXPENSES SHALL NOT INCLUDE THE FOLLOWING:
(I) COSTS OF ALTERATIONS OR IMPROVEMENTS, OTHER
THAN MAINTENANCE ITEMS OR REPAIRS, TO THE LEASED PREMISES OF OTHER TENANTS,
INCLUDING CAPITAL EXPENDITURES TO COMPLY WITH APPLICABLE LAWS;
(II) EXPENSES RESULTING FROM THE NEGLIGENCE OF THE
LANDLORD, ITS AGENTS, SERVANTS OR EMPLOYEES, OR ANOTHER TENANT;
(III) COSTS FOR WHICH LANDLORD IS REIMBURSED BY ANY
TENANT OR OCCUPANT OF THE BUILDING, BY INSURANCE, OR BY ANYONE ELSE;
(IV) ANY BAD DEBT LOSS, RENT LOSS, OR RESERVES FOR
BAD DEBTS OR RENT LOSS;
(V) COSTS ASSOCIATED WITH THE OPERATION OF THE
BUSINESS OF THE ENTITY WHICH CONSTITUTES LANDLORD (WHETHER PARTNERSHIP,
CORPORATION OR OTHER), INCLUDING ACCOUNTING, LEGAL, AND GENERAL ADMINISTRATIVE
EXPENSES, AS DISTINGUISHED FROM THE COSTS OF OPERATION OF THE BUILDING;
(VI) THE WAGES AND BENEFITS OF ANY EMPLOYEE WHO DOES
NOT DEVOTE SUBSTANTIALLY ALL OF HIS OR HER TIME TO THE BUILDING UNLESS SUCH
WAGES AND BENEFITS ARE PRORATED TO REFLECT TIME SPENT ON OPERATING AND MANAGING
THE BUILDING;
(VII) FINES, PENALTIES AND INTEREST;
(VIII) COSTS, INCLUDING PERMIT, LICENSE AND INSPECTION
COSTS INCURRED WITH RESPECT TO THE INSTALLATION OF TENANT IMPROVEMENTS MADE FOR
NEW TENANTS IN THE BUILDING OR INCURRED IN RENOVATING OR OTHERWISE IMPROVING,
DECORATING, PAINTING OR REDECORATING THE SPACE OF TENANTS OR OTHER OCCUPANTS OF
THE BUILDING;
(IX) EXPENSES IN CONNECTION WITH SERVICES OR OTHER
BENEFITS WHICH ARE NOT AVAILABLE OR FOR WHICH TENANT IS CHARGED DIRECTLY BUT
WHICH ARE PROVIDED TO ANOTHER TENANT OR OCCUPANT OF THE BUILDING WITHOUT A
SEPARATE CHARGE;
(X) COSTS PAID TO LANDLORD OR TO OTHER AFFILIATES
OF LANDLORD FOR SERVICES IN THE BUILDING INCLUDING MANAGEMENT FEES TO THE
EXTENT THE SAME EXCEED OR WOULD EXCEED THE REASONABLE MARKET COSTS FOR SUCH
SERVICES IF RENDERED BY UNAFFILIATED THIRD PARTIES ON A COMPETITIVE BASIS;
(XI) RENTALS AND OTHER RELATED EXPENSES INCURRED IN
LEASING AIR CONDITIONING SYSTEMS, ELEVATORS OR OTHER EQUIPMENT WHICH WOULD
ORDINARILY BE CONSIDERED CAPITAL IN NATURE IF PURCHASED EXCEPT EQUIPMENT NOT
AFFIXED TO THE BUILDING; AND
(XII) COSTS ARISING FROM LANDLORD'S POLITICAL OR
CHARITABLE CONTRIBUTIONS.
(c) ESTIMATED COSTS:
At the beginning of each year after the Base Year, Landlord shall
furnish Tenant a written statement of estimated Operating Costs and Taxes for
such year; a calculation of the amount, if any, by which such estimated
Operating Costs and Taxes will exceed the relevant Base Amounts; and a
calculation of Tenant's Pro Rata Share of any such amount. Tenant shall pay
one-twelfth (1/12) of that amount as Additional Rent for each month during the
year. If at any time during the year Landlord reasonably believes that the
actual Operating Costs or Taxes will vary from such estimated Operating Costs
or Taxes by more than five percent (5%), Landlord may by written notice to
Tenant revise the estimate for such year, and Additional Rent for the balance
of such year shall be paid based upon such revised estimates.
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(d) ACTUAL COSTS:
Within ninety (90) days after the end of each year after the Base Year
or as soon thereafter as practicable, Landlord shall deliver to Tenant a
written statement setting forth Tenant's Pro Rata Share of the actual Operating
Costs and Taxes in excess of the Base Amounts during the preceding year. If the
actual Operating Costs in excess of the Base Amount or actual Taxes in excess
of the Base Amount, or both, exceed the estimates for each paid by Tenant
during the year, Tenant shall pay the amount of such UNDISPUTED excess to
Landlord as Additional Rent within thirty (30) days after receipt of such
statement OR IF TENANT EXERCISES ITS RIGHT TO INSPECT SUCH RECORDS, THEN SUCH
EXCESS AMOUNT SHALL BE DUE THIRTY (30) DAYS FOLLOWING INSPECTION OF SUCH
RECORDS BY TENANT. If the actual Operating Costs in excess of the Base Amount
or actual Taxes in excess of the Base Amount, or both, are less than the amount
paid by Tenant to Landlord, then the amount of such overpayment by Tenant shall
be, at Landlord's option, credited against any amounts owed by Tenant under
this Lease, refunded by check to Tenant, or credited against the next Rent
payable by Tenant hereunder. Notwithstanding any other provision of this Section
10, Tenant shall not receive any credit or offset against any other amount
payable under this Lease to the extent either actual Operating Costs or Taxes
are less than the applicable Base Amount.
(e) RECORDS AND ASSESSMENTS:
Landlord shall keep records showing all expenditures made in connection
with Operating Costs and Taxes, and such records shall be available for
inspection by Tenant within THIRTY (30) days after receipt of the statement of
actual costs; Landlord and Tenant agree the results of any such audit or review
shall remain confidential. Tenant hereby waives any right to any adjustment of
sums paid under this Section 10 unless a claim in writing specifying the
reasons therefor is delivered to Landlord no later than TWELVE (12) months
after the end of the year for which the sums were paid. Operating Costs and
Taxes shall be prorated for any portion of a year at the beginning or end of
the term of this Lease. Notwithstanding this Section 10, the Rent payable by
Tenant shall in no event be less than the Rent specified in Section 1(h) hereof
AS A RESULT OF ANY ADJUSTMENT UNDER THE LAST SENTENCE OF SECTION 10(d) HEREIN.
(f) PERSONAL PROPERTY TAXES:
Tenant shall pay all personal property taxes with respect to property
of Tenant located on the Premises or in the Building. "Property of Tenant"
shall include all improvements which are paid for by Tenant and "personal
property taxes" shall include all property taxes assessed against the property
of Tenant, whether assessed as real or personal property.
11. CARE OF PREMISES:
Landlord shall perform all normal maintenance and repairs reasonably
determined by Landlord as necessary to maintain the Premises and the Building as
a first-class office building; provided that Landlord shall not be required to
maintain or repair any property of Tenant or any appliances (such as
refrigerators, water heaters, microwave ovens, and the like) which are part of
the Premises. Tenant shall take good care of the Premises. Tenant shall not
make any alterations, additions or improvements ("Alterations") in or to the
Premises, or make changes to locks on doors, or add, disturb or in any way
change any plumbing or wiring ("Changes") without first obtaining the written
consent of Landlord and, where appropriate, in accordance with plans and
specifications reasonably approved by Landlord. As a condition to its approval,
Landlord may require Tenant to remove such Alterations or Changes upon the
expiration or earlier termination of the Term and to restore the Premises to
the condition they were in prior to such Alterations or Changes, including
restoring any damage resulting from such removal, all at Tenant's expense. Any
Alterations or Changes required to be made to Tenant's Premises by any amendment
to any applicable building, health, safety, fire, nondiscrimination, or similar
law or regulation ("law"), or any new law shall be made at Tenant's sole
expense and shall be subject to the prior written consent of Landlord. Tenant
shall reimburse Landlord for any reasonable sums expended for examination and
approval of the architectural and mechanical plans and specifications of the
Alterations and Changes and direct costs reasonably incurred during any
inspection or supervision of the Alterations or Changes. EXCEPT FOR ANY WILLFUL
MISCONDUCT OR NEGLIGENCE OF LANDLORD, all damage or injury done to the Premises
or Building by Tenant or by any persons who may be in or upon the Premises or
Building with the express or implied consent of Tenant, including but not
limited to the cracking or breaking of any glass of windows and doors, shall be
paid for by Tenant.
12. ACCESS:
Tenant shall permit Landlord and its agents to enter into and upon the
Premises at all reasonable times AND WITH REASONABLE NOTICE for the purpose of
inspecting the same or for the purpose of cleaning, repairing, altering or
improving the Premises or the Building. Upon reasonable notice, Landlord shall
have the right to enter the
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Premises for the purpose of showing the Premises to prospective tenants within
the period of one hundred eighty (180) days prior to the expiration or sooner
termination of the Lease term.
13. DAMAGE OR DESTRUCTION:
(a) DAMAGE AND REPAIR:
If the Building is damaged by fire or any other cause to such extent
that the cost of restoration, as reasonably estimated by Landlord, will equal
or exceed thirty percent (30%) of the replacement value of the Building
(exclusive of foundations) just prior to the occurrence of the damage, or if
insurance proceeds sufficient for restoration are for any reason unavailable,
then Landlord may no later than the sixtieth day following the damage, give
Tenant a notice of election to terminate this Lease. In the event of such
election, this Lease shall be deemed to terminate on the third day after the
giving of said notice, and Tenant shall surrender possession of the Premises
within a reasonable time thereafter, and the Rent and Additional Rent shall be
apportioned as of the date of said surrender and any Rent and Additional Rent
paid for any period beyond such date shall be repaid to Tenant WITHIN SIXTY
(60) DAYS AFTER LANDLORD'S NOTICE. If the cost of restoration as estimated by
Landlord shall amount to less than thirty percent (30%) of said replacement
value of the Building and insurance proceeds sufficient for restoration are
available, or if Landlord does not elect to terminate this Lease, Landlord
shall restore the Building and the Premises (to the extent of improvements to
the Premises originally provided by Landlord hereunder) with reasonable
promptness, subject to delays beyond Landlord's control and delays in the
making of insurance adjustments by Landlord, and Tenant shall have no right to
terminate this Lease except as herein provided. To the extent that the Premises
are rendered untenantable, the Rent and Additional Rent shall proportionately
abate, except TO THE EXTENT such damage resulted from or was contributed to,
directly or indirectly, by the WILLFUL MISCONDUCT OR NEGLIGENCE of Tenant,
Tenant's officers, contractors, agents, employees, clients, customers, or
licensees, in which event Rent and Additional Rent shall abate only to the
extent Landlord receives proceeds from any rental income insurance policy to
compensate Landlord for such loss. No damages, compensation or claim shall be
payable by Landlord for inconvenience, loss of business or annoyance arising
from any repair or restoration of any portion of the Premises or of the
Building. Landlord shall use its best efforts to effect such repairs promptly.
TENANT MAY TERMINATE THE LEASE IF LANDLORD FAILS TO MAKE REASONABLE PROGRESS
TOWARD COMPLETING SUCH REPAIRS WITHIN A REASONABLE PERIOD OF TIME, BUT IN NO
EVENT SHALL SUCH PERIOD OF TIME EXCEED ONE (1) YEAR.
(b) DESTRUCTION DURING LAST YEAR OF TERM:
In case the Building shall be substantially destroyed by fire or other
cause at any time during the last twelve months of the term of this Lease,
either Landlord or Tenant may terminate this Lease upon written notice to the
other party hereto given within sixty (60) days of the date of such destruction.
(c) TENANT IMPROVEMENTS:
Landlord will not carry insurance of any kind on Tenant's furniture or
furnishings or on any fixtures, equipment, improvements (EXCLUDING TENANT
IMPROVEMENTS AS PROVIDED FOR IN EXHIBIT B OF THE LEASE) or appurtenances of
Tenant under this Lease and Landlord shall not be obligated to repair any
damage thereto or replace the same.
14. WAIVER OR SUBROGATION:
Whether a loss or damage is due to the negligence of either Landlord or
Tenant, their agents or employees, or any other cause, Landlord and Tenant do
each hereby release and relieve the other, their agents or employees, from
responsibility for, and waive their entire claim of recovery for (i) any loss or
damage to the real or personal property of either located anywhere in the
Building or on the Land, including the Building itself, arising out of or
incident to the occurrence of any of the perils which are covered by their
respective insurance policies, and (ii) any loss resulting from business
interruption at the Premises or loss of rental income from the Building,
arising out of or incident to the occurrence of any of the perils which are
covered by a business interruption insurance policy or loss of rental income
insurance policy held by Landlord or Tenant. Each party shall use best efforts
to cause its insurance carriers to consent to the foregoing waiver of rights of
subrogation against the other party. Notwithstanding the foregoing, no such
release shall be effective unless the aforesaid insurance policy or policies
shall expressly permit such a release or contain a waiver of the carrier's
right to be subrogated.
15. INDEMNIFICATION:
(a) Tenant shall indemnify and hold Landlord harmless from and
against ALL liabilities, damages, losses, claims, and expenses, including
attorneys fees, arising from any act, omission, or negligence of Tenant or its
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officers, contractors, licensees, agents, employees, clients or customers in or
about the Building or Premises or arising from any breach or default under this
Lease by Tenant. The foregoing provisions shall not be construed to make Tenant
responsible for loss, damage, liability or expense resulting from injuries to
third parties caused by the ACT, OMISSION OR negligence of Landlord, or its
officers, contractors, licensees, agents, employees, clients or customers or
other tenants of the Building.
(b) Landlord shall indemnify and hold Tenant harmless from and against
all liabilities, damages, losses, claims, and expenses, including attorneys'
fees arising from any act, omission, or negligence of Landlord or its officers,
contractors, licensees, agents, employees, clients, or customers in or about
the Building or Premises, or arising from any breach or default under this
Lease by Landlord. Landlord shall not be liable for any loss or damage to
persons or property sustained by Tenant or other persons, which may be caused
by theft, or by any act or neglect of Tenant or any other tenant or occupant of
the Building or any third parties. In no event shall Landlord be liable to
Tenant for any damage to the Premises or for any loss, damage or injury to any
property therein or thereon occasioned by bursting, rupture, leakage or
overflow of any plumbing or other pipes (including, without limitation, water,
steam and/or refrigerant lines), sprinklers, tanks, drains, drinking fountains
or washstands or other similar cause in, above, upon or about the Premises or
the Building EXCEPTING THOSE EVENTS CAUSED BY THE WILLFUL MISCONDUCT OR
NEGLIGENCE OF LANDLORD.
16. INSURANCE:
(a) LIABILITY INSURANCE:
Tenant shall, throughout the term of this Lease and any renewal hereof,
at its own expense, keep and maintain in full force and effect, a policy of
commercial general liability (occurrence form) insurance, including contractual
liability insuring Tenant's activities upon, in or about the Premises or the
Building against claims of bodily injury or death or property damage or loss
with a combined single limit of not less than Three Million Dollars
($3,000,000) per occurrence and Five Million Dollars ($5,000,000) in the
aggregate. Landlord and the Building manager shall be named as an additional
insureds.
(b) PROPERTY INSURANCE:
Tenant shall, throughout the term of this Lease and any renewal
thereof, at its own expense, keep and maintain in full force and effect, what
is commonly referred to as "All Risk" or "Special" coverage insurance
(excluding earthquake and flood) on Tenant's Leasehold Improvements in an
amount not less than one hundred percent (100%) of the replacement value
thereof. As used in this Lease, "Tenant's Leasehold Improvements" shall mean
any alterations, additions or improvements installed in or about the Premises
by or with Landlord's permission or otherwise permitted in this Lease, whether
or not the cost thereof was paid for by Tenant.
(c) INSURANCE POLICY REQUIREMENTS:
All insurance required under this Section 16 shall be with companies
rated AX or better by A.M. Best or otherwise reasonably approved by Landlord.
No insurance policy required under this Section 16 shall be canceled or reduced
in coverage except after forty-five (45) days prior written notice to Landlord,
except after ten (10) days prior written notice to Landlord in the case of
non-payment of premium.
(d) CERTIFICATE OF INSURANCE:
Tenant shall deliver to Landlord prior to the Commencement Date, and
from time to time thereafter, copies of policies of such insurance or
certificates evidencing the existence and amounts of same and evidencing
Landlord and the Building manager as additional insureds thereunder. In no
event shall the limits of any insurance policy required under this Section 16
be considered as limiting the liability of Tenant under this Lease.
(c) PRIMARY POLICIES:
All policies required under Section 16(a) shall be written as primary
policies and not contributing to or in excess of any coverage Landlord may
choose to maintain.
17. ASSIGNMENT AND SUBLETTING:
(a) ASSIGNMENT OR SUBLEASE:
Tenant shall not assign, mortgage, encumber or otherwise transfer this
lease nor sublet the whole or any part of the Premises without in each case
first obtaining Landlord's prior written consent. Subject to Section 17(b),
below, such consent shall not be unreasonably withheld, except: (1) Landlord
may withhold its consent if in Landlord's judgment occupancy by any proposed
assignee, subtenant, or other transferee (i) is not consistent with
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the maintenance and operation of a first-class office building due to
the nature of the proposed occupant's business or manner of
conducting business or its experience or reputation in the community,
or (ii) is likely to cause disturbance to the normal use and
occupancy of the Building; (2) Landlord may withhold in its absolute
and sole discretion consent to any mortgage, hypothecation, pledge,
or other encumbrance of any interest in this Lease or the Premises by
Tenant or any subtenant; (3) Landlord may withhold its consent to the
extent it deems necessary to comply with any restrictions on use
of the Premises, the Building, or the Land contained in any lease,
mortgage, or other agreement or instrument by which the Landlord is
bound or to which an of such property is subject. No such assignment,
subletting or other transfer shall relieve Tenant of any liability
under this Lease. Consent to any such assignment, subletting or
transfer shall not operate as a waiver of the necessity for consent to
any subsequent assignment, subletting or transfer. Each request for
an assignment or subletting must be accompanied by a Processing Fee
of $500 in order to reimburse Landlord for expenses, including
attorneys fees, incurred in connection with such request ("Processing
Fee") WHICH FEE SHALL BE THE ONLY AMOUNT DUE TO LANDLORD IN
CONNECTION WITH SUCH ASSIGNMENT OR SUBLEASE. Tenant shall provide
Landlord with copies of all assignments, subleases and assumption
instruments.
(b) LANDLORD RIGHT TO TERMINATE PORTION OF LEASE:
If such consent is requested, Landlord reserves the right to terminate this
Lease TO THE EXTENT OF ANY SUBLEASE OR ASSIGNMENT, or if consent is requested
form subletting less than the entire Premises to terminate this Lease with
respect to the portion for which such consent is requested, at the proposed
effective date of such subletting, in which event Landlord may enter into the
relationship of landlord and tenant with any such proposed subtenant or
assignee, based on the rent (and/or other compensation) and the terms agreed to
by such subtenant or assignee and otherwise upon the terms and conditions of
this Lease.
(c) TENANT TRANSFER OF LEASE:
If a Tenant is a corporation or any other entity, any transfer of this
Lease by merger, consolidation or liquidation, or any change in the ownership of
or power to vote a majority of its outstanding voting stock partnership
interests, or other ownership interests, shall not constitute an assignment for
the purpose of this Section. If Tenant is a partnership, conversion of Tenant
to a limited liability company or partnership or to a corporation (or to
another entity by which the parties in Tenant would be relieved of liability to
any creditors of Tenant) shall constitute an assignment for purposes of this
Section.
(d) ASSIGNEE OBLIGATIONS:
As a condition to Landlord's approval, any potential assignee otherwise
approved by Landlord shall assume in writing all obligations of Tenant under
this Lease and shall be jointly and severally liable with Tenant for rental and
other payments and performance of all terms, covenants and conditions of this
Lease.
(e) SUBLEASE OBLIGATIONS:
Any sublessee shall assume all obligations of Tenant as to that portion
of the Premises which is subleased and shall be jointly and severally liable
with Tenant for rental and other payments and performance of all terms,
covenants, and conditions of this Lease with respect to such portion of the
Premises.
18. SIGNS:
Tenant shall not place or in any manner display any sign, graphics, or
other advertising matter anywhere in or about the Premises or the Building at
places visible (either directly or indirectly) from anywhere outside the
Premises without first obtaining Landlord's written consent hereto, such
consent to be at Landlord's sole discretion. Any such consent by Landlord shall
be upon the understanding and condition that Tenant shall remove the same at
the expiration or sooner termination of this Lease and Tenant shall repair any
damage to the Premises or the Building caused thereby. Landlord shall not
unreasonably without its consent to normal Tenant signage within the Premises
which is consistent in Landlord's opinion with the Building's image and signage
and graphics program. Signage other than Building directory or building
standard elevator lobby directory signage is at Tenant's sole expense. INITIAL
COST OF STANDARD BUILDING SIGNAGE SHALL BE AT THE SOLE COST AND EXPENSE OF THE
LANDLORD.
19. LIENS AND INSOLVENCY:
(a) LIENS:
Tenant shall keep its interest in this Lease, the Premises, the Land
and the Building free from any liens arising out of any work performed and
materials ordered or obligations incurred by or on behalf of Tenant and
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hereby indemnifies and holds Landlord harmless from any liability from any such
lien, including without limitation, liens arising from the work performed
pursuant to Section IV of Exhibit B hereto. In the event any lien is filed
against the Building, the Land or the Premises by any person claiming by,
through or under Tenant, Tenant shall, upon request of Landlord and at Tenant's
expense, immediately cause such lien to be released of record or furnish to
Landlord a bond, in form and amount and issued by a surety reasonably
satisfactory to landlord, indemnifying Landlord, the Land and the Building
against all liability, costs and expenses, including attorneys fees, which
Landlord may incur as a result thereof. Provided that such bond has been
furnished to Landlord, Tenant, at its sole cost and expense and after written
notice to Landlord, may contest, by appropriate proceedings conducted in good
faith and with due diligence, any lien, encumbrance or charge against the
Premises arising from work done or materials provided to or for Tenant, if, and
only if, such proceedings suspend the collection thereof against Landlord,
Tenant and the Premises and neither the Premises, the Building nor the Land nor
any part thereof or interest therein is or will be in any danger of being sold,
forfeited or lost.
(b) INSOLVENCY:
If Tenant becomes insolvent or voluntarily or involuntarily bankrupt, or
if a receiver, assignee or other liquidating officer is appointed for the
business of Tenant, Landlord at its option may terminate this Lease and Tenant's
right of possession under this Lease and in no event shall this Lease or any
rights or privileges hereunder be an asset of Tenant in any bankruptcy,
insolvency or reorganization proceeding.
20. DEFAULT:
(a) CUMULATIVE REMEDIES:
All rights of Landlord herein enumerated shall be cumulative, and none
shall exclude any other right or remedy allowed by law. In addition to the
other remedies provided in this Lease, Landlord shall be entitled to restrain
by injunction the violation or threatened violation of any of the covenants,
agreements or conditions of this Lease.
(b) TENANT'S RIGHT TO CURE:
Tenant shall have a period of FIVE (5) business days from the date of
written notice from Landlord to Tenant within which to cure any default in the
payment of Rent. Tenant shall have a period of TWENTY (20) days from the date
of written notice from Landlord to Tenant within which to cure any other
default INCLUDING PAYMENT OF ADDITIONAL RENT AND OTHER SUMS DUE hereunder;
provided, however, that with respect to any such default capable of being cured
by Tenant which cannot be cured within TWENTY (20) days, the default shall not
be deemed to be uncured if Tenant commences to cure within TWENTY (20) days and
for so long as Tenant is diligently pursuing the cure thereof OR TWENTY (20)
DAYS AFTER EITHER PARTY HAS NOTIFIED THE OTHER THAT NEGOTIATIONS HAVE FAILED.
(c) ABANDONMENT:
Abandonment shall be defined as an absence from the Premises of five
(5) BUSINESS days or more while Tenant is in default or Landlord otherwise
reasonably determines that Tenant has abandoned the Premises and its interest
under this Lease. Any abandonment by Tenant shall be considered a default with
no right to cure, allowing Landlord to re-enter the Premises as hereinafter set
forth.
(d) LANDLORD'S REENTRY:
Upon abandonment or an uncured default of this Lease by Tenant,
Landlord, in addition to any other rights or remedies it may have, at its
option, may enter the Premises or any part thereof, and expel, remove or put
out Tenant or any other persons who may be thereon, together with all personal
property found therein; and Landlord may terminate this Lease, or it may from
time to time, without terminating this Lease, relet the Premises or any part
thereof for such term or terms (which may be for a term less than or extending
beyond the term hereof) and at such rental or rentals and upon such other terms
and conditions as Landlord in its sole discretion may deem advisable, with the
right to repair, renovate, remodel, redecorate, alter and change the Premises,
Tenant remaining liable for any deficiency computed as hereinafter set forth.
In the case of any default, reentry and/or dispossession all Rent and
Additional Rent shall become due thereupon, together with such expenses as
Landlord may reasonably incur for attorneys fees, advertising expenses,
brokerage fees and/or putting the Premises in good order or preparing the same
for re-rental, together with interest thereon as provided in Section 37(f)
hereof, accruing from the date of any such expenditure by Landlord. No such
re-entry or taking possession of the Premises shall be construed as an election
on Landlord's part to terminate this Lease unless a written notice of such
intention be given to Tenant. NOTWITHSTANDING THE FOREGOING PARAGRAPH, LANDLORD
SHALL USE ITS BEST EFFORTS TO RELET THE PREMISES AFTER TAKING POSSESSION AND
SHALL REQUIRE ANY RENTAL AGREEMENT FOR THE PREMISES BE ON MARKET TERMS; AND
REPAIRS OR SIMILAR EXPENSES INCURRED BY LANDLORD TO MAKE THE PREMISES RENTABLE
SHALL BE DEEMED
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REASONABLE IN LANDLORD'S OPINION; AND LANDLORD SHALL COMPLY WITH ALL LAWS WITH
RESPECT TO PERSONAL PROPERTY FOUND ON THE PREMISES.
(e) RELETTING THE PREMISES:
At the option of Landlord, rents received by Landlord from such reletting
shall be applied first to the payment of any indebtedness from Tenant to
Landlord other than Rent and Additional Rent due hereunder; second, to the
payment of any costs and expenses of such reletting and including, but not
limited to, attorneys fees, advertising fees and brokerage fees, and to the
payment of any repairs, renovations, remodeling, redecoration, alterations and
changes in the Premises; third, to the payment of Rent and Additional Rent due
and to become due hereunder, and, if after so applying said Rents there is any
deficiency in the Rent or Additional Rent to be paid by Tenant under this Lease,
Tenant shall pay any deficiency to Landlord monthly on the dates specified
herein. Any payment made or suits brought to collect the amount of the
deficiency for any month shall not prejudice in any way the right of Landlord to
collect the deficiency for any subsequent month. The failure of Landlord to
relet the Premises or any part or parts thereof shall not release or affect
Tenant's liability hereunder, nor shall Landlord be liable for failure to relet,
or in the event of reletting, for failure to collect the Rent thereof, and in no
event shall Tenant be entitled to receive any excess of net Rents collected over
sums payable by Tenant to Landlord hereunder. Notwithstanding any such reletting
without termination, Landlord may at any time elect to terminate this Lease for
such previous breach and default. Should Landlord terminate this Lease by reason
of any default, in addition to any other remedy it may have, it may recover from
Tenant the then present value of Rent and Additional Rent reserved in this Lease
for the balance of the Term, as it may have been extended, over the then fair
market rental value of the Premises for the same period, plus all court costs
and attorneys fees incurred by LANDLORD in the collection of the same.
NOTWITHSTANDING THE FOREGOING, LANDLORD SHALL MAKE REASONABLE EFFORTS TO RELET
PREMISES ON MARKET TERMS AND TENANT SHALL BE LIMITED TO PAYING REASONABLE COSTS
AND EXPENSES ACTUALLY PAID BY LANDLORD.
(f) TRADE FIXTURES:
Tenant shall have no right to, and Tenant agrees that it will not, remove
any trade fixtures or movable furniture from the Premises at any time while
Tenant is in default hereunder.
21. PRIORITY:
(a) Tenant agrees that this Lease shall be subordinate to any first
mortgage or deed of trust now existing or hereafter placed upon the Premises or
the Building created by or at the instance of Landlord and to any and all
advances to be made thereunder and to interest thereon and all renewals,
replacements, or extensions thereof ("Landlord's Mortgage"). Upon demand by
Landlord or the holder of any Landlord's Mortgage ("Holder"), Tenant shall
execute and deliver subordination and attornment agreements in form and
substance satisfactory to such Holder. Notwithstanding the foregoing, upon
demand of such Holder, such Landlord's Mortgage shall be subordinate to this
Lease; provided, however, that in such event, notwithstanding such
subordination, such Landlord's Mortgage shall be superior to this Lease with
respect to (i) the right, claim and lien of the Landlord's Mortgage in, to and
upon any award or other compensation for any taking by eminent domain of any
part of the Premises or the Building and the right of disposition thereof in
accordance with the provisions of the Landlord's Mortgage; and upon any proceeds
payable under any policies of fire and rental insurance upon the Premises or the
Building and to the right of disposition thereof in accordance with the terms of
the Landlord's Mortgage (ii) any lien, right or judgment which may have arisen
at any time under the terms of the Lease; and (iii) such other matters as may be
specifically reserved by the Holder of such Landlord's Mortgage in writing in
connection with such subordination.
(b) Upon request Tenant shall attorn to the Holder of any Landlord's
Mortgage or any person or persons purchasing or otherwise acquiring the Land,
Building or Premises at any sale or other proceeding under any Landlord's
Mortgage. Tenant shall property execute, acknowledge and deliver instruments
which the holder of any Landlord's Mortgage may reasonably require to effectuate
the provisions of this Section.
(c) This Lease is technically a sublease in that the Land is subject to a
Ground Lease ("Ground Lease") between Castle Family Limited Partnership, a
Hawaii limited partnership, as Ground Lessor and the Landlord named herein as
Ground Lessee. LANDLORD REPRESENTS AND WARRANTS TO TENANT THAT IT HAS A RIGHT TO
LEASE PREMISES. This Lease shall not terminate or be terminable by Tenant by
reason of any termination of the Ground Lease by summary proceedings or
otherwise (including merger of the fee and leasehold estates). If requested by
the Ground Lessor, Tenant shall attorn to the Ground Lessor provided that the
Ground Lessor agrees to recognize this lease as long as Tenant shall not be in
default hereunder beyond the period for curing the same. Tenant hereby waives
the provisions of any statute or rule of law now or hereafter in effect which
may give Tenant any
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right of election to terminate this Lease or to surrender possession of the
Premises in the event the Ground Lease is terminated. This Lease shall not be
subordinate to any mortgage or deed of trust now existing or hereafter placed
upon the Land or any interest therein by or at the instance of the Ground
Lessor, without the prior written consent of each of Tenant, Landlord and the
Holder of any Landlord's Mortgage.
22. SURRENDER OF POSSESSION:
Subject to the terms of Section 13 relating to damage and destruction, upon
expiration of the term of this Lease, whether by lapse of time or otherwise,
Tenant shall promptly and peacefully surrender the Premises to Landlord in as
good condition as when received by Tenant from Landlord or as thereafter
improved (subject to Tenant's obligation to remove any Alterations or Changes if
requested by Landlord pursuant to Section 11, above), reasonable use and wear
and tear excepted.
23. REMOVAL OF PROPERTY:
UNLESS OTHERWISE MUTUALLY AGREED UPON BY LANDLORD AND TENANT, Tenant shall
remove all of its movable personal property, telephone, data and computer
cabling, and trade fixtures paid for by Tenant which can be removed without
damage to the Premises at the expiration or earlier termination of this Lease,
and shall pay Landlord any damages for injury to the Premises or building
resulting from such removal. All other improvements and additions to the
Premises shall thereupon become the property of Landlord.
24. NON-WAIVER:
Waiver by Landlord or Tenant of any term, covenant or condition herein
contained or any breach thereof shall not be deemed to be a waiver of such term,
covenant, or condition or of any subsequent breach of the same or any other
term, covenant, or condition herein contained. The subsequent acceptance of any
payment hereunder by Landlord shall not be deemed to be a waiver of any
preceding breach by Tenant of any term, covenant or condition of this Lease,
other than the failure of Tenant to pay the amount so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
payment.
25. HOLDOVER:
If Tenant shall, with the written consent of Landlord, hold over after the
expiration of the term of this Lease, such tenancy shall be deemed a
month-to-month tenancy, which tenancy may be terminated as provided by
applicable law. During such tenancy, Tenant agrees to pay to Landlord the
greater of (a) the then quoted rates for similar space in the Building or (b)
ONE HUNDRED TWENTY-FIVE PERCENT (125%) of the Rent and Additional Rent in effect
upon the date of such expiration as stated herein, and to be bound by all of the
terms, covenants and conditions herein specified, so far as applicable.
Acceptance by Landlord of Rent and Additional Rent after such expiration or
earlier termination shall not result in a renewal of this lease. The foregoing
provisions of this Section 25 are in addition to and do not affect Landlord's
right of re-entry or any rights of Landlord hereunder or as otherwise provided
by law. If Tenant shall hold over after the expiration or earlier termination of
this Lease without the written counsel of Landlord, such occupancy shall be
deemed an unlawful detainer of the Premises subject to the applicable laws of
the state in which the Building is located and, in addition, Tenant shall be
liable for any costs, damages, losses and expenses incurred by Landlord as a
result of Tenant's failure to surrender the Premises in accordance with this
Lease.
26. CONDEMNATION:
(a) ENTIRE TAKING:
If all of the Premises or such portions of the Building as may be required
for the reasonable use of the Premises, are taken by eminent domain, this Lease
shall automatically terminate as of the date title vests in the condemning
authority and all Rent, Additional Rent and other payments shall be paid to that
date.
(b) CONSTRUCTIVE TAKING OF ENTIRE PREMISES:
In the event of a taking of a material part of but less than all of the
Building, where Landlord shall reasonably determine that the remaining portions
of the Premises cannot be economically and effectively used by it (whether on
account of physical, economic, aesthetic or other reasons), or if, in the
REASONABLE opinion of Landlord, the Building should be restored in such a way as
to alter the Premises materially, Landlord shall forward a written notice to
Tenant of such determination not more than sixty (60) days after the date of
taking. The term of
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this Lease shall expire upon such date as Landlord shall specify in such notice
but not earlier than sixty (60) days after the date of such notice.
(c) PARTIAL TAKING:
In case of taking of a part of the Premises, or a portion of the Building
not required for the reasonable use of the Premises, then this Lease shall
continue in full force and effect and the Rent shall be equitably reduced based
on the proportion by which the floor area of the Premises is reduced, such Rent
reduction to be effective as of the date title to such portion vests in the
condemning authority. If a portion of the Premises shall be so taken which
renders the remainder of the Premises unsuitable for continued occupancy by
Tenant under this Lease, Tenant may terminate this Lease by written notice to
Landlord within sixty (60) days after the date of such taking and the term of
this Lease shall expire upon such date as Tenant shall specify in such notice
not later than sixty (60) days after the date of such notice.
(d) AWARDS AND DAMAGES:
Landlord reserves all rights to damages to the Premises for any partial,
constructive, or entire taking by eminent domain, and Tenant hereby assigns to
Landlord any right Tenant may have to such damages or award, and Tenant shall
make no claim against Landlord or the condemning authority for damages for
termination of the leasehold interest or interference with Tenant's business.
Tenant shall have the right, however, to claim and recover from the condemning
authority compensation for any loss to which Tenant may be put for Tenant's
moving expenses, business interruption or taking of Tenant's personal property
and leasehold improvements paid for by Tenant (not including Tenant's leasehold
interest) provided that such damages may be claimed only if they are awarded
separately in the eminent domain proceedings and not out of or as part of the
damages recoverable by Landlord.
27. NOTICES:
All notices under this Lease shall be in writing and delivered in person
or sent by registered or certified mail, or nationally recognized courier (such
as Federal Express, DHL, etc.), postage prepaid, to Landlord and to Tenant at
the Notice Addresses provided in Section 1(1) (provided that after the
Commencement Date any such notice may be mailed or delivered by hand to Tenant
at the Premises) and to the holder of any mortgage or deed of trust at such
place as such holder shall specify to Tenant in writing; or such other
addresses as may from time to time be designated by any such party in writing.
Notices mailed as aforesaid shall be deemed given on the date of such mailing.
28. COSTS AND ATTORNEYS FEES:
If Tenant or Landlord shall bring any action for any relief against the
other, declaratory or otherwise, arising out of this Lease, including any suit
by Landlord for the recovery of Rent, Additional Rent or other payments
hereunder or possession of the Premises, each party shall, and hereby does, to
the extent permitted by law, waive trial by jury and the losing party shall pay
the prevailing party a reasonable sum for attorneys fees in such suit, at trial
and on appeal, and such attorneys fees shall be deemed to have accrued on the
commencement of such action.
29. LANDLORD'S LIABILITY:
Anything in this Lease to the contrary notwithstanding, covenants,
undertakings and agreements herein made on the part of Landlord are made and
intended not as personal covenants, undertakings and agreements for the purpose
of binding Landlord personally or the assets of Landlord except Landlord's
interest in the Premises and Building, but are made and intended for the purpose
of binding only the Landlord's interest in the Premises and Building, as the
same may from time to time be encumbered. No personal liability or personal
responsibility is assumed by, nor shall at any time be asserted or enforceable
against Landlord or its partners or their respective heirs, legal
representatives, successors, and assigns on account of the Lease or on account
of any covenant, undertaking or agreement of Landlord in this Lease contained.
UNLESS OTHERWISE SPECIFICALLY AUTHORIZED IN THE LEASE, TENANT SHALL NOT BE
LIABLE FOR ANY CONSEQUENTIAL OR EXEMPLARY DAMAGES OF ANY KIND.
30. ESTOPPEL CERTIFICATES:
Tenant shall, from time to time, upon written request of Landlord,
execute, acknowledge and deliver to Landlord or its designee a written
statement prepared by Landlord stating: The date this Lease was executed and
the date it expires; the date the term commenced and the date Tenant accepted
the Premises; the amount of minimum monthly Rent and the date to which such
Rent has been paid; and certifying to the extent true: That this
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Lease is in full force and effect and has not been assigned, modified,
supplemented or amended in any way (or specifying the date and terms of
agreement so affecting this Lease); that this Lease represents the entire
agreement between the parties as to this leasing; that all conditions under
this Lease to be performed by Landlord have been satisfied; that all required
contributions by Landlord to Tenant on account of Tenant's improvements have
been received; that on this date there are no existing claims, defenses or
offsets which Tenant has against the enforcement of this Lease by Landlord;
that the security deposit is as stated in the Lease; and such other matters
as Landlord may reasonably request. It is intended that any such statement
delivered pursuant to this paragraph may be relied upon by a prospective
purchaser of Landlord's interest or the holder of any mortgage upon Landlord's
interest in the Building. If Tenant shall fail to respond within ten (10) days
of receipt by Tenant of a written request by Landlord as herein provided, Tenant
shall be deemed to have give such certificate as above provided without
modification and shall be deemed to have admitted the accuracy of any
information supplied by Landlord to a prospective purchaser or mortgagee and
that this Lease is in full force and effect, that there are no uncured default
in Landlord's performance, that the security deposit is as states in the Lease,
and that not more than one month's Rent has been paid in advance.
31. TRANSFER OF LANDLORD'S INTEREST:
In the event of transfer of Landlord's interest in the Premises or in the
Building, other that a transfer for security purposes only, the transferor
shall be automatically relieved of any and all obligations and liabilities on
the part of Landlord accruing from and after the date of such transfer and such
transferee shall have no obligation or liability with respect to any matter
occurring or arising prior to the date of such transfer. Tenant agrees to attorn
to the transferee.
32. RIGHT TO PERFORM:
If Tenant shall fail to pay any sum or money, other than Rent and
Additional Rent required to be paid by it hereunder, or shall fail to perform
any other act on its part REQUIRED to be performed hereunder, and such failure
shall continue for ten (10) BUSINESS days after notice thereof by Landlord,
Landlord may, but shall not be obligated so to do, and without waiving or
releasing Tenant from any obligations of Tenant, make such payment or perform
any such other act on Tenant's part to be made or performed as provided in this
Lease. Any such paid by Landlord hereunder shall be immediately due and payable
by Tenant to Landlord and Landlord shall have (in addition to any other right
or remedy of Landlord) the same rights and remedies in the event of the
nonpayment of sums due under this Section as in the case of default by Tenant
in the payment of Rent.
33. QUIET ENJOYMENT:
Tenant shall have the right to the peaceable and quiet use and enjoyment
of the Premises, subject to the provisions of this Lease, so long as Tenant is
not in default hereunder.
34. AUTHORITY:
If Tenant is a corporation, limited liability company, limited liability
partnership or limited or general partnership, each individual executing this
Lease on behalf of Tenant represents and warrants that he or she is duly
authorized to execute and deliver this Lease on behalf of Tenant, in accordance
with a duly adopted resolution or consents of all appropriate persons or
entities required therefor and in accordance with the formation documents of
Tenant, and that this Lease is binding upon Tenant in accordance with its terms.
At Landlord's request, Tenant shall, prior to execution of this Lease, deliver
to Landlord a copy of a resolution or consent, certified by an appropriate
officer, partner or manager of Tenant authorizing or ratifying the execution of
this Lease.
35. HAZARDOUS MATERIALS:
(a) TENANT OBLIGATIONS:
(i) Tenant shall not dispose of or otherwise allow the release of
any hazardous waste or materials in, on or under the Premises or the Building,
or any adjacent property, or in any improvements placed on the Premises. TO THE
BEST OF TENANT'S KNOWLEDGE, Tenant's intended use of the Premises does not
involve the use, production, disposal or bringing on to the Premises of any
hazardous waste or materials, except only ordinary and general office supplies
typically used in first-class downtown office buildings and only in such
quantities or concentrations as allowed under applicable laws, rules and
regulations. As used in this Section, the term "hazardous waste or materials"
includes any substance, waste or material defined or designated has hazardous,
toxic or dangerous (or any similar term) pursuant to any statute, regulation,
rule or
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ordinance now or hereafter in effect. Tenant shall promptly comply with all
such statutes, regulations, rules and ordinances, and if Tenant fails to so
comply Landlord may, after reasonable prior notice to Tenant (except in case of
emergency) effect such compliance on behalf of Tenant. Tenant shall immediately
reimburse Landlord for all costs incurred in effecting such compliance.
(ii) Tenant agrees to indemnify and hold harmless Landlord against any and
all losses, liabilities, suits, obligations, fines, damages, judgments,
penalties, claims, charges, cleanup costs, remedial actions, costs and expenses
(including, without limitation, consultant fees, attorneys' fees and
disbursements) which may be imposed on, incurred or paid by Landlord, or
asserted in connection with (i) any misrepresentation, breach of warranty or
other default by Tenant under this Section, or (ii) the acts or omissions of
Tenant, or any subtenant or other person for whom Tenant would otherwise be
liable, resulting in the release of any hazardous waste or materials.
(b) LANDLORD OBLIGATIONS:
Landlord represents to Tenant that, to the best of Landlord's knowledge,
no hazardous waste or materials have been generated, stored or disposed of on
the Premises other than in compliance with all applicable laws. Landlord will
hold Tenant harmless from and indemnify Tenant against any actual costs
resulting from any breach of this representation or resulting from the release
of hazardous waste or materials on the Premises by Landlord or its employees,
agents or contractors. Landlord shall not be responsible for any hazardous
waste or materials resulting from the acts of other tenants or occupants of the
Building or other third parties, or for consequential damages arising from the
presence of any hazardous wastes or materials on the Premises or in the
Building.
36. TELECOMMUNICATIONS LINES AND EQUIPMENT:
(a) LOCATION OF TENANT'S EQUIPMENT AND LANDLORD CONSENT:
(i) Tenant may install, maintain, replace, remove and use communications
or computer wires, cables and related devices (collectively, the "Lines") at
the Building in or serving the Premises, only with Landlord's prior written
consent, which consent may be withheld in Landlord's REASONABLE discretion.
Tenant shall locate all electronic telecommunications equipment within the
Premises and shall relocate all Tenant's equipment which is located within the
Building telephone closets or riser spaces, at Tenant's cost, to the Tenant's
Premises. Any request for consent shall contain detailed plans, drawings and
specifications identifying all work to be performed, the time schedule for
completion of the work, the identity of the entity that will provide service to
the Lines and the identity of the entity that will perform the proposed work
(which entity shall be subject to Landlord's approval). Landlord shall have a
reasonable time in which to evaluate the request after it is submitted by
Tenant.
(ii) Without in any way limiting Landlord's right to withhold its consent,
Landlord may consider the following factors, among others, in making its
determination: (A) the experience, qualifications and prior work practice of
the proposed contractor and its ability to provide sufficient insurance
coverage for its work at the Building; (B) whether or not the proposed work
will interfere with the use of any then existing Lines at the Building; (C)
whether or not an acceptable number of spare Lines and space for additional
Lines shall be maintained for existing and future occupants of the Building:
(D) A REQUIREMENT THAT TENANT REMOVE EXISTING ABANDONED LINES LOCATED IN OR
SERVICING THE PREMISES, AS A CONDITION TO PERMITTING THE INSTALLATION OF NEW
LINES; (E) whether or not Tenant is in default of any of its obligations
under this Lease; (F) whether the proposed work or resulting Lines will impose
new obligations on Landlord, expose Landlord to liability of any nature or
description, increase Landlord's insurance premiums for the Building, create
liabilities for which Landlord is unable to obtain insurance protection or
imperil Landlord's insurance coverage; (G) WHETHER TENANT'S PROPOSED SERVICE
PROVIDER IS WILLING TO PAY REASONABLE MONETARY COMPENSATION FOR THE USE AND
OCCUPATION OF THE BUILDING; and (H) whether the work or resulting Lines would
adversely affect the Land, Building or any space in the Building in any manner.
(iii) Landlord's approval of, or requirements concerning, the Lines or any
equipment related thereto, the plans, specifications or designs related
thereto, the contractor or subcontractor, or the work performed hereunder,
shall not be deemed a warranty as to the adequacy thereof, and Landlord hereby
disclaims any responsibility or liability for the same. Landlord disclaims all
responsibility for the condition or utility of the intra-building network
cabling ("INC") and makes no representation regarding the suitability of the
INC for Tenant's intended use.
(iv) If Landlord consents to Tenant's proposal, Tenant shall (A) pay all
costs in connection therewith (including all costs related to new Lines); (B)
comply with all requirements and conditions of this Section; (C) use, maintain
and operate the Lines and related equipment in accordance with and subject to
all laws governing the Lines and equipment. Tenant shall further insure that
(I) Tenant's contractor complies with the provisions of this Section and
Landlord's reasonable requirements governing any work performed; (II) Tenant's
contractor provides all insurance required by Landlord; (III) any work
performed shall comply with all Laws; and (IV) as soon as the work is
completed, Tenant shall submit "as-built" drawings to Landlord.
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(v) Landlord reserves the right to require that Tenant remove any Lines
located in or serving the Premises which are installed in violation of these
provisions, or which are at any time in violation of any laws or present a
dangerous or potentially dangerous condition (whether such Lines were installed
by Tenant or any other party ACTING AT TENANT'S INSTRUCTION), within three (3)
BUSINESS days after written notice.
(b) LANDLORD'S RIGHTS:
Landlord may (but shall not have the obligation to):
(i) install new lines at the Building;
(ii) create additional space for Lines at the Building; and
(iii) direct, monitor and/or supervise the installation, maintenance,
replacement and removal of, the allocation and periodic re-allocation of
available space (if any) for, and the allocation of excess capacity (if any)
on, any Lines now or hereafter installed at the Building by Landlord, Tenant or
any other party (but Landlord shall leave no right to monitor or control the
information transmitted through such Lines). LANDLORD SHALL USE ITS BEST
EFFORTS TO ENSURE THAT ALL SUCH WORK IS PERFORMED AT TIME AND IN SUCH MANNER SO
AS NOT TO INTERFERE WITH THE OPERATION OF TENANT'S BUSINESS.
(c) INDEMNIFICATION:
In addition to any other indemnification obligations under this Lease,
Tenant shall indemnify and hold harmless Landlord and its employees, agents,
officers, and contractors from and against any and all claims, demands,
penalties, fines, liabilities, settlements, damages, costs or expenses
(including reasonable attorneys' fees) TO THE EXTENT arising out of or in any
way related to the acts and omissions of Tenant, Tenant's officers, directors,
employees, agents, contractors, subcontractors, subtenants, and invitees with
respect to: (i) any Lines or equipment related thereto serving Tenant in the
Building; (ii) any personal injury (including wrongful death) or property
damage arising out of or related to any Lines or equipment related thereto
serving Tenant in the Building; (iii) any lawsuit brought or threatened,
settlement reached, or governmental order, fine or penalty relating to such
Lines or equipment related thereto; and (iv) any violations or Laws or demands
of governmental authorities, or any reasonable policies or requirement of
Landlord, which are based upon or in any way related to such Lines or equipment.
(d) LIMITATION OF LIABILITY:
Except to the extent arising from the ACTS OR OMISSIONS of Landlord or
Landlord's agents or employees, Landlord shall have no liability for damages
arising from, and Landlord does not warrant that the Tenant's use of any Lines
will be free from the following (collectively called "Line Problems"); (i) any
shortages, failures, variations, interruptions, disconnections, loss or damage
caused by the installation, maintenance, or replacement, use or removal of Lines
by or for other tenants or occupants at the Building, by any failure of the
environmental conditions or the power supply for the Building to conform to any
requirement of the Lines or any associated equipment, or any other problems
associated with any Lines by any other cause; (ii) any failure of any Lines to
satisfy Tenant's requirements; or (iii) any eavesdropping or wiretapping by
unauthorized parties. Landlord in no event shall be liable for damages by reason
of loss of profits, business interruption or other consequential damage arising
from any Line Problems. Under no circumstances shall any Line Problems be deemed
an actual or constructive eviction of Tenant, render Landlord liable to Tenant
for abatement of Rent, or relieve Tenant from performance of Tenant's
obligations under this Lease.
(e) ELECTROMAGNETIC FIELDS:
If Tenant at any time uses any equipment that may create an electromagnetic
field exceeding the normal installation ratings of ordinary twisted pair riser
cable or cause radiation higher than normal background radiation, Landlord
reserves the right to require Tenant to appropriately insulate the Lines
therefore (including riser cables) to prevent such excessive electromagnetic
fields or radiation.
37. GENERAL:
(a) HEADINGS:
Title to Sections of this Lease are not a part of this Lease and shall
have no effect upon the construction or interpretation of any part hereof.
(b) SUCCESSORS AND ASSIGNS:
All of the covenants, agreements, terms and conditions contained in this
Lease shall inure to and be binding upon the Landlord and Tenant and their
respective successors and assigns.
17
<PAGE> 21
(c) BROKERS; AGENCY DISCLOSURE; BROKERAGE RELATIONSHIPS:
(i) Payment of Brokers. Landlord shall pay the commissions due those
real estate brokers or agents named in Section 37(c)(ii). If Tenant
has dealt with any other person or real estate broker with respect
to leasing or renting space in the Building, Tenant shall be solely
responsible for the payment of any fee due said person or firm and
Tenant shall hold Landlord free and harmless against any liability
in respect thereto, including attorney's fees and costs.
(ii) Agency Disclosure At the signing of this Lease Agreement, the
Landlord's Leasing Agent, JANE STRATTON, of Wright Runstad &
Company, represented (X) Landlord (_) Tenant or (_) both Landlord
and Tenant. The listing Tenant's agent, JASON SMITH, of COLLIERS
MACAULEY NICOLLS, represented (_) Landlord (X) Tenant or (_) both
Landlord and Tenant. Each party signing this document confirms that
the prior oral and/or written disclosure of agency was provided to
him/her in this transaction. (As required by WAC 308-124D-040).
(iii) Brokerage Relationships. Landlord and Tenant, by their execution of
this Lease Agreement, each acknowledge that they have received a
pamphlet on the law of real estate agency as required under RCW
18.86.030(1)(f).
(d) ENTIRE AGREEMENT:
This Lease contains all covenants and agreements between Landlord and
Tenant relating in any manner to the leasing, use and occupancy of the
Premises, to Tenant's use of the Building and other matters set forth in this
Lease. No prior agreements or understanding pertaining to the same shall be
valid or of any force or effect and the covenants and agreements of this Lease
shall not be altered, modified or added to except in writing signed by Landlord
or Tenant.
(e) SEVERABILITY:
Any provision of this Lease which shall be held invalid, void or illegal
shall in no way affect, impair or invalidate any other provision hereof and the
remaining provisions hereof shall nevertheless remain in full force and effect.
(f) OVERDUE PAYMENTS:
Tenant acknowledges that a late payment of Rent or other sums due
hereunder will cause Landlord to incur costs not contemplated by this Lease.
Such costs may include, but not limited to, processing and accounting charges,
and penalties imposed by terms of any contracts, mortgages or deeds of trust
covering the Building. Therefore, in the event Tenant shall fail to pay any
Rent, Additional Rent or other sums payable by Tenant under this Lease for five
(5) BUSINESS days after such amount is due, then Tenant shall pay Landlord, as
Additional Rent, a late charge ("Late Charge") equal to 5% of such amount
owing, but not in excess of the highest rate permitted by law. In addition to
any Late Charges which may be incurred hereunder, any Rent, Additional Rent or
other sums payable by Tenant under this Lease which are more than thirty (30)
days past due, shall bear interest at a rate equal to 18% per annum but not in
excess of the highest rate permitted under applicable laws, calculated from the
original due date thereof to the date of payment ("Overdue Fee"); provided,
however, the minimum Overdue Fee shall be $100.00.
In addition, if payments are received by check or draft from Tenant, and
two (2) or more of such checks or drafts are dishonored by the bank or other
financial institution they were drawn upon in any twelve (12) month period,
Landlord may thereafter require all Rent and other payments due hereunder from
Tenant to Landlord to be made by bank creditor's or bank certified check or
other similar means of payment and Landlord shall not be required to accept
any checks or drafts of Tenant which do not comply with such requirements.
(g) FORCE MAJEURE:
Except for the payment of Rent, Additional Rent and other sums payable by
Tenant, time periods for Tenant's or Landlord's performance under any
provisions of this Lease shall be extended for periods of time during which
Tenant's or Landlord's performance is prevented due to circumstances beyond
Tenant's or Landlord's reasonable control.
(h) RIGHT TO CHANGE PUBLIC SPACE:
Landlord shall have the right at any time, without thereby creating an
actual or constructive eviction or incurring any liability to Tenant therefor,
to change the arrangement or location of such of the following as are not
contained within the Premises or any part thereof: entrances, passageways,
doors and doorways, corridors, stairs, toilets and other like public service
portions of the Building. Nevertheless, in no event shall Landlord diminish any
service, change the arrangement or location of the elevators serving the
Premises, make any change which shall diminish the area of the Premises, make
any change which shall interfere with access to the Premises or change the
character of the Building from that of a first-class office building.
18
<PAGE> 22
(i) GOVERNING LAW:
This Lease shall be governed by and construed in accordance
with the laws of the State of Washington.
(j) BUILDING DIRECTORY:
Landlord shall maintain in the lobby of Building a directory
which shall include the name of Tenant and any other names reasonably
requested by Tenant in proportion to the number of listings given to
comparable tenants of the Building.
(k) BUILDING NAME:
The building shall be known by such name as Landlord may
designate from time to time.
IN WITNESS WHEREOF this Lease has been executed the day and year first
above set forth.
TENANT: DATA DIMENSIONS, INC.
By:
-------------------------------------
Its: President
-------------------------------
By:
-------------------------------------
Its:
-------------------------------
TENANT CORPORATE ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 15 day of September, 1997, before me,
the undersigned, a notary public in and for the state of Washington, duly
commissioned and sworn, personally appeared Larry W. Martin, to me known to be
the President & C.E.O., respectively, of Data Dimensions, the corporation that
executed the within and foregoing instrument, and acknowledged the said
instrument to be the free and voluntary act and deed of said corporation for the
users and purposes therein mentioned, and on oath stated that they were
authorized to execute said instrument, and that the seal affixed, if any, is
the corporate seal of said corporation.
WITNESS my hand and official seal the day and year in this
certificate first above written.
Signature /s/ CAROL SAGE STOCKON
--------------------------------------------
Printed Name Carol Sage Stockton
-----------------------------------------
Notary public in and for the state of Washington
----------------
residing at Bellevue
------------------------------------------
My appointment expires 12/19/97
-------------------------------
19
<PAGE> 23
LANDLORD: WRIGHT RUNSTAD PROPERTIES L.P.
a Delaware limited partnership
By: WRIGHT RUNSTAD ASSET MANAGEMENT L.P.,
a Washington limited partnership
By: WRAM, Inc.
a Washington corporation
By: [SIG]
---------------------------------
Its Senior Vice President
------------------------------
LANDLORD ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that I know or have satisfactory evidence that
Jon F. Nordby is the person who appeared before me, and said person
acknowledged that the signed this instrument, on oath stated that he was
authorized to execute the instrument and acknowledged it as the Executive V.P.
of WRAM, Inc., a corporation, to me known to be the general partner of WRIGHT
RUNSTAD ASSET MANAGEMENT L.P., a limited partnership, to me known to be the
general partner of WRIGHT RUNSTAD PROPERTIES L.P., the limited partnership
that executed the within and foregoing instrument, and acknowledged the said
instrument to be the free and voluntary act and deed of said corporation and
partnerships for the uses and purposes therein mentioned, and on oath stated
that said individual was authorized to execute said instrument.
WITNESS my hand and official seal this 19th day of September, 1997.
Signature /s/ JANICE E. BLACKMORE
--------------------------------------------
Printed Name Janice E. Blackmore
-----------------------------------------
Notary public in and for the state of Washington
residing at Seattle
------------------------------------------
My appointment expires 9/9/00
-------------------------------
20
<PAGE> 24
EXHIBIT A
Addendum to Lease between
WRIGHT RUNSTAD PROPERTIES L.P. (LANDLORD)
and
DATA DIMENSIONS, INC. (TENANT)
FLOOR PLAN OF PREMISES
FLOORS 21 AND 22
24,751 NET RENTABLE SQUARE FEET
21st FLOOR
15,485 NRSF
22ND FLOOR
9,266 RSF
Exhibit A, Page 1 of 1
<PAGE> 25
EXHIBIT B
TO
WRIGHT RUNSTAD PROPERTIES L.P.
LEASE AGREEMENT
TENANT IMPROVEMENTS
1. IMPROVEMENTS PROVIDED BY LANDLORD: Landlord has provided the
following improvements in the Premises:
A. Completed Public and/or Core Areas finished in accordance with
plans and specifications for the Building.
(1) Plumbing: Men's restrooms, women's restrooms, and drinking
fountains installed in accordance with the plans and specifications for the
Building.
(2) Electrical: Total electrical service for each floor shall
include 60 each 20-ampere, single pull circuit breakers in an electrical closet.
B. Tenant's Usable Area as outlined in Exhibit A shall be completed
as follows:
(1) Walls: Core and perimeter walls only prepared to receive
paint or other wall covering, except for final coat of mud and final sanding.
(2) Floor: Prepared to receive floor covering. Floor loading
capacities: 70 pounds per square foot live load; 20 pounds per square foot
partition load.
(3) Mechanical: Primary cooling duct loop. The Building
standard mechanical system is designed to accommodate heating loads generated
by lights and equipment up to 2.5 watts per square foot. If Tenant's design or
use of the Premises results in concentrated loads in excess of 2.5 watts per
square foot (e.g., data processing areas, conference rooms and machine rooms),
then any additional engineering design and installation of mechanical equipment
and/or controls required to accommodate such excess shall be provided at
Tenant's cost pursuant to Section II of this Exhibit B.
(4) Fire Sprinklers: Primary distribution loop to Tenant's
Usable Area as outlined on the floor plan(s) in Exhibit A.
II. IMPROVEMENTS BY TENANT/REIMBURSEMENT BY LANDLORD: Design and
construction of all improvements in the Premises beyond those listed in Section
I of this Exhibit B shall be provided at Tenant's expense. Landlord shall pay
the cost of such additional improvements up to an amount equal to $14.00 per
square foot of "Tenant's Rentable Area" as outlined on the floor plan(s) in
Exhibit A, for a total payment by Landlord of $346,514.00 ("Tenant Improvement
Allowance"). The Tenant Improvement Allowance shall be applied to the cost of
design and construction of such improvements including but not limited to:
Architectural and engineering design, partitions, doors, door frames,
hardware, paint, wall coverings, base, ceilings, lights, mechanical
distribution, diffusers, thermostats, sprinkler distribution, sprinkler heads,
emergency speakers, fire extinguishers and cabinets, telephone and electrical
outlets, light switches, floor coverings, and all applicable permit fees and
sales tax. TO THE EXTENT THAT THE ALLOWANCE SPECIFIED HEREIN IS MORE THAN THE
TOTAL COST OF TENANT IMPROVEMENTS, TENANT MAY USE THE BALANCE OF SUCH FUNDS TO
OFFSET COSTS OF TELEPHONE AND COMPUTER CABLING AND OTHER COSTS TENANT MAY INCUR
IN THE PREMISES WHICH WILL BENEFIT LANDLORD AS WELL AS TENANT.
Such construction manager shall manage the bidding of tenant improvements
to at least two (2) general contractors, expedite all permits and government
approvals and assume specific responsibility for delivery of the Premises as
defined in the Lease and this Exhibit B, provided Tenant shall have met the
drawing delivery dates herein.
Exhibit B, Page 1 of 5
<PAGE> 26
III. BUILDING STANDARD IMPROVEMENTS: Tenant shall use the following
Building Standard items: draperies (required by Landlord); carpet and base;
hardware; lighting fixtures; and heating, ventilating, and air conditioning
distribution and controls.
IV. DESIGN OF TENANT IMPROVEMENTS: The Tenant Improvement Allowance
shall be applied to Tenant retaining the services of a qualified office
planner, approved by Landlord, to prepare the necessary drawings for Basic
Plans and supply the information necessary to complete the Working Drawings and
Engineering Drawings referred to in Section IV(B) of this Exhibit B for
construction of the tenant improvements in Tenant's Usable Area. All Tenant's
Plans shall be subject to approval of Landlord in accordance with Section IV(C)
of this Exhibit B.
Tenant's office planner shall ensure that the work shown on Tenant's Plans
is compatible with the basic Building Plans and that necessary basic Building
modifications are included in Tenant's Plans. Such modifications shall be
subject to the Landlord's approval and the cost thereof shall be paid by Tenant
AND SHALL BE INCLUDED IN THE ALLOWANCE SPECIFIED IN SECTION II OF EXHIBIT B,
HEREIN.
On or before the indicated dates, Tenant shall supply Landlord with one
(1) reproducible copy and five (5) black line prints of the following Tenant
Plans:
A. BASIC PLANS DELIVERY DATE: SEPTEMBER 3, 1997.
The Basic Plans due on this date shall be signed by Tenant and include:
Architectural Floor Plans: These shall be fully dimensioned floor plans
showing partition layout and identifying each room with a number and each door
with a number. The Basic Plans must clearly identify and locate equipment
requiring plumbing or other special mechanical systems, area(s) subject to
above-normal floor loads, special openings in the floor, and other major or
special features.
B. WORKING DRAWINGS DELIVERY DATE: SEPTEMBER 16, 1997.
On this date and at Tenant's expense, Tenant's office planner shall
produce four (4) sets of Full Working Drawings for construction from the Basic
Plans using the Pin Bar or CADD System, which system shall be approved by
Landlord for compatibility with the other Building drawings, THE COST OF WHICH
SHALL BE INCLUDED IN THE ALLOWANCE SPECIFIED IN SECTION II OF EXHIBIT B HEREIN.
The four (4) sets of Working drawings due on this date shall be signed by the
Tenant and include all items in the Basic Plans referenced in Section IV(A)
above plus the following additional information:
(1) Electrical and Telephone Outlets: Locate all power and telephone
requirements: Dimension the position from a corner and give height above
concrete slab for all critically located outlets. Identify all dedicated
circuits and identify all power outlets greater than 120 volts. For the
equipment used in these outlets which require dedicated circuits and/or which
require greater than 120 volts, identify the type of equipment, the
manufacturer's name and the manufacturer's model number, and submit a brochure
for each piece of equipment. Also identify the manufacturer's name of the phone
system to be used and the power requirements, size, and location of its
processing equipment.
(2) Reflected Ceiling Plan: Lighting layout showing location and
type of all Building Standard and special lighting fixtures.
(3) Furniture Layout: Layout showing furniture location so that
Landlord's engineer can review the location of all light fixtures.
The Tenant Improvement Allowance shall be applied to the cost of
Landlord's engineers preparing plumbing, electrical, heating, air conditioning
and structural plans ("Engineering Drawings") for Tenant's improvements based
on the signed Working Drawings.
Exhibit B, Page 2 of 5
<PAGE> 27
C. FINAL PLANS REVIEW DATE: SEPTEMBER 18, 1997.
On this date, Tenant's office planner shall deliver to Landlord and
Tenant for review and approval four (4) complete sets of Final Plans which will
incorporate the Working Drawings referenced in Section IV(B) above, plus the
following additional information:
(1) Millwork Details: These drawings shall be in final form with
Tenant's office planner's title block in the lower right hand corner of the
drawing, and shall include construction details of all cabinets, paneling, trim,
bookcases, and door and jamb details for non-Building Standard doors and jambs.
(2) Keying Schedules and Hardware Information: This information
shall be in final form and include a Keying Schedule indicating which doors are
locked and which key(s) open each lock, plus an "X" on the side of the door
where the key will be inserted if a keyed door. Complete specifications for all
non-Building Standard hardware will also be provided.
(3) Room Finish and Color Schedule. This information shall be in
final form and include locations and specifications for all wall finishes, floor
covering and base for each room.
(4) Construction Notes and Specifications: Complete
specifications for every item included except those specified by the Landlord.
D. FINAL PLANS DELIVERY DATE: SEPTEMBER 22, 1997.
The four (4) sets of Final Plans approved by Landlord and Tenant and
due on this date shall include all the Final Plans referenced in Section IV(C)
above. Final Plans are to be signed by Tenant and delivered to Landlord by the
Final Plans Delivery Date. Landlord shall return one (1) signed set to Tenant
for Tenant's records. Landlord will incorporate Engineering Drawings with
Tenant's Final Plans for transmittal to the General Contractor.
Tenant shall be responsible for delays and additional costs in
completion of the Tenant Improvements incurred as a result of changes made BY
TENANT to any of Tenant's Plans after the specified Plan Delivery Date, delays
caused by Tenant's failure to comply with the Plan Delivery Dates, Tenant's
failure to provide adequate specifications or information for the completion of
Tenant's Plans, or by delays caused by Tenant's specification of special
materials.
V. CONSTRUCTION OF TENANT IMPROVEMENTS
A. AUTHORIZATION TO PROCEED. Upon completion of Tenant's Final Plans
and at the request of Tenant, Landlord shall provide to Tenant written notice of
the price for such improvements. Within five (5) days of receipt of such price,
Tenant shall give Landlord written authorization to complete the Premises in
accordance with such Final Plans. Tenant may in such authorization delete any or
all items of extra cost; however, if Landlord deems these changes to be
extensive, at its option, Landlord may refuse to accept the authorization to
proceed until all changes have been incorporated in the Final Plans signed by
Tenant and written acceptance of the revised price has been received by Landlord
from Tenant. In the absence of such written authorization to proceed, Landlord
shall not be obligated to commence work on the Premises and Tenant shall be
responsible for any costs due to any resulting delay in completion of the
Premises and as provided in Section 3(b) of the Lease.
B. PAYMENTS. Prior to commencement of Tenant improvements and if the
price for such improvements is greater than the Tenant Improvement Allowance
defined in Section II above, Tenant shall deposit with Landlord ninety percent
(90%) of any additional cost above the Tenant Improvement Allowance (the
"Additional Cost Deposit"). Landlord's contractor shall complete Tenant's
improvements in accordance with Tenant's approved Final Plans. Payments shall be
made: first, by applying the entire
EXHIBIT B, PAGE 3 OF 5
<PAGE> 28
(6) Prior to commencement of any work on the Premises by Tenant
or Tenant's contractor, Tenant or Tenant's contractor shall enter into an
indemnity agreement and a lien priority agreement satisfactory to Landlord
indemnifying and holding harmless Landlord and Landlord's contractors for any
liability, losses or damages directly or indirectly from lien claims affecting
the land, the Building or the Premises arising out of Tenant's or Tenant's
contractor's work or that of subcontractor or suppliers, and subordinating any
such liens to the liens of construction and permanent financing for the
Building. As a condition to approving Tenant's contractor or any subcontractor,
Landlord may require one or more payment or performance bonds covering such work
reasonably satisfactory to Landlord.
(7) Landlord shall have the right to pose a notice or notices in
conspicuous places in or about the Premises announcing its non-responsibility
for the work being performed therein.
E. TENANT'S ENTRY TO PREMISES. Tenant's entry to the Premises for
any purpose, including without limitation, inspection or performance of Tenant
Construction by Tenant's agents, prior to the Commencement Date as specified in
Section 3(a) of the Lease shall be scheduled in advance with Landlord and shall
be subject to all the terms and conditions of the Lease, except the payment of
Rent. Tenant's entry shall mean entry by Tenant, its officers, contractors,
office planner, licensees, agents, servants, employees, guests, invitees, or
visitors.
F. TENANT'S TELEPHONE AND COMPUTER/DATA SERVICE. Tenant is
responsible for Tenant's telephone service, computer and data service, and
related cabling. Tenant shall select and coordinate installation of such
communication and information systems with the Landlord pursuant to Section 36
of the Lease.
EXHIBIT B, PAGE 5 OF 5
<PAGE> 29
Tenant Improvement Allowance provided by Landlord against the monthly progress
payments due, secondly by applying Tenant's Additional Cost Deposit, and then
third, TO THE EXTENT OF ANY DEFICIENCY, Tenant shall pay within ten (10) days
after receipt of monthly progress statements from Landlord, the full amount of
such progress billings in cash. The progress billings may include a retainage
amount up to ten percent (10%) of the work ("Retainage"). Final billing shall be
rendered and payable within ten (10) days after acceptance of the Premises by
Tenant in accordance with the terms of the Lease Retainage pursuant to the terms
of this paragraph shall be payable with such final billing. In the event
acceptance of the Premises is subject to punchlist items as provided in the
Lease, a portion of the retainage equal to the cost to complete each outstanding
punchlist item may be retained until such punchlist item is complete.
C. FINAL PLANS AND MODIFICATIONS. If Tenant shall request any change
FROM THE FINAL PLANS, Tenant shall request such change in writing to Landlord
and such request shall be accompanied by all plans and specifications necessary
to show and explain changes from the approved Final Plans. After receiving this
information, Landlord shall give Tenant a written price for the cost of
engineering and design services to incorporate the change in Tenant's Final
Plans. If Tenant approves such price in writing, Landlord shall have such Final
Plans changes made and Tenant shall promptly pay Landlord for this cost.
Promptly upon completion of such changes in the Final Plans, Landlord shall
notify Tenant in writing of the costs, if any, which shall be chargeable or
credited to Tenant for such change, addition or deletion. The cost for such
changes, whether chargeable or credited to Tenant, shall include a Landlord
coordination fee equal to fifteen percent (15%) of the amount of such change,
addition or deletion. If Tenant wishes to proceed with such changes, Tenant
shall promptly so notify Landlord in writing and pay to Landlord the amount of
any additional costs occasioned thereby. In the absence of such notice,
Landlord shall proceed in accordance with the previously approved Final Plans
before such change, addition or deletion was requested. In accordance with
Section 3(b) of the Lease, Tenant shall be responsible for any resulting delay
in completion of the Premises due to modification of Final Plans. Tenant shall
also be responsible for any demolition work required as a result of the change.
D. IMPROVEMENTS CONSTRUCTED BY TENANT. If any work is to be performed
in connection with Tenant improvements on the Premises by Tenant or Tenant's
contractor:
(1) Such work shall proceed upon Landlord's written approval of
(i) Tenant's contractor, (ii) public liability and property damage insurance
satisfactory to Landlord carried by Tenant's contractor, (iii) detailed plans
and specifications for such work, and (iv) amount of general conditions to be
paid by Tenant to Landlord for the services still provided by Landlord's
contractor.
(2) All work shall be done in conformity with a valid building
permit when required, a copy of which shall be furnished for Landlord before
such work is commenced, and in any case, all such work shall be performed in
accordance with all applicable governmental regulations. Notwithstanding any
failure by Landlord to object to any such work, Landlord shall have no
responsibility for Tenant's failure to meet all applicable regulations.
(3) All work by Tenant or Tenant's contractor shall be scheduled
through Landlord.
(4) Tenant or Tenant's contractor shall arrange for necessary
utility, hoisting and elevator service with Landlord's contractor and shall pay
such reasonable charges for such services as may be charged by Landlord's
contractor. This will be included in the general conditions of Subsection
(1)(iv) above.
(5) Tenant shall promptly reimburse Landlord for REASONABLE costs
incurred by Landlord due to faulty work done by Tenant or its contractors, or
by reason of any delays caused by such work, or by reason of inadequate
clean-up.
EXHIBIT B, PAGE 4 OF 5
<PAGE> 30
EXHIBIT C
Addendum to Lease between
WRIGHT RUNSTAD PROPERTIES L.P. (LANDLORD)
and
DATA DIMENSIONS, INC. (TENANT)
ADDITIONAL LEASE TERMS
1. RENT.
The base rental rate per net rentable square foot per annum for the
Premises as shown on Exhibit A shall be as follows:
<TABLE>
<CAPTION>
PERIOD OF THE LEASE TERM RATE PER NRSF PER YEAR
------------------------ ----------------------
<S> <C>
11/01/97 - 10/31/00 $24.50/NRSF/YR
11/01/00 - 10/31/02 $25.50/NRSF/YR
</TABLE>
The total annual base rent (base rental rate per net rentable square foot
per year multiplied by net rentable area of the Premises) shall be paid in
12 equal monthly payments and shall be payable in accordance with Section 5
of this Lease. Rent shall be adjusted from time to time pursuant to the
terms of Sections 9 and 10 of this Lease.
2. OPTION TO EXTEND LEASE TERM.
Tenant shall have the right, to be exercised as hereinafter provided, to
extend the initial Lease term ("Extension Option") for the entire Premises
for EITHER OR BOTH FLOORS FOR one (1) additional period of five (5) years,
provided that:
a. Tenant shall not be in default in the performance of any term,
covenant or condition herein contained;
b. The rental rate for the extended term shall be the projected fair
market rental rate for comparable term-extensions in comparable
first-class buildings in downtown Bellevue on the effective date of
the option.
c. Notice. No later than FIFTEEN (15) months prior to the expiration of
the initial Lease term, Landlord shall notify Tenant in writing,
stating the rental rate which shall apply to said extended term.
d. Exercise: Tenant shall exercise the Extension Option by written
notice to Landlord no later than TWELVE (12) months prior to the
expiration of the initial Lease term. If Tenant does not so exercise
the Extension Option, the Lease shall expire at the end of the
initial Lease term.
e. TENANT'S DISPUTE OF RENTAL RATE: IN THE EVENT TENANT DISAGREES WITH
THE RENTAL RATE DETERMINED BY LANDLORD, AND THE PARTIES HAVE NOT
REACHED AGREEMENT AT THE TIME TENANT EXERCISES THE EXTENSION OPTION,
THEN TENANT SHALL NOTIFY LANDLORD IN WRITING STATING ITS INTENT TO
EXERCISE THE EXTENSION OPTION AND INITIATE ARBITRATION TO DETERMINE
THE RENTAL RATE FOR THE EXTENDED TERM. THE RENTAL RATE, AS DEFINED IN
2b, ABOVE, SHALL BE DETERMINED BY ARBITRATION IN THE FOLLOWING
MANNER:
(i) LANDLORD AND TENANT SHALL EACH APPOINT ONE ARBITRATOR WHO SHALL
BY PROFESSION BE A REAL ESTATE APPRAISER WHO SHALL HAVE BEEN
ACTIVE OVER THE FIVE (5) YEAR PERIOD ENDING ON THE DATE OF
TENANT'S EXERCISE OF SAID OPTION IN THE COMMERCIAL PROPERTY
BUSINESS IN THE AREA IN WHICH THE BUILDING IS
EXHIBIT C, PAGE 1 OF 2
<PAGE> 31
LOCATED. EACH SUCH ARBITRATOR SHALL BE APPOINTED WITHIN FIFTEEN (15)
DAYS FOLLOWING LANDLORD'S RECEIPT OF TENANT'S WRITTEN NOTICE OF ITS
INTENT TO ARBITRATE THE RENTAL RATE FOR THE EXTENDED TERM.
(ii) THE TWO ARBITRATES SO APPOINTED SHALL, WITHIN FIFTEEN (15) DAYS OF
THE DATE OF THE APPOINTMENT OF THE LAST APPOINTED ARBITRATOR, AGREE
UPON AND APPOINT A THIRD ARBITRATOR WHO SHALL BE QUALIFIED UNDER THE
SAME CRITERIA SET FORTH FOR QUALIFICATIONS OF THE INITIAL TWO
ARBITRATORS.
(iii) THE THREE ARBITRATORS SHALL, WITHIN THIRTY (30) DAYS OF THE
APPOINTMENT OF THE THIRD ARBITRATOR, REACH A DECISION AS TO WHAT
CONSTITUTES THE FAIR MARKET RENTAL RATE AND NOTIFY LANDLORD AND
TENANT OF THAT DECISION.
(iv) THE DECISION OF THE MAJORITY OF THE THREE ARBITRATORS SHALL BE
BINDING UPON LANDLORD AND TENANT. FAILURE OF A MAJORITY OF THE
ARBITRATORS TO REACH AGREEMENT SHALL RESULT IN THE RENTAL RATE
BEING DETERMINED BY TAKING THE AVERAGE OF THE THREE APPRAISALS, ONE
FROM EACH ARBITRATOR.
(v) IF EITHER LANDLORD OR TENANT FAILS TO APPOINT AN ARBITRATOR WITHIN
THE TIME PERIOD REQUIRED IN SECTION (i) ABOVE, THE SOLE APPOINTED
ARBITRATOR SHALL REACH A DECISION AND NOTIFY LANDLORD AND TENANT OF
THE DECISION, AND THAT DECISION SHALL BE BINDING UPON LANDLORD AND
TENANT.
(vi) IF THE TWO INITIAL ARBITRATORS FAIL TO AGREE UPON AND APPOINT A
THIRD ARBITRATOR, BOTH ARBITRATORS SHALL BE DISMISSED AND THE
MATTER TO BE DECIDED SHALL BE SUBMITTED TO ARBITRATION UNDER THE
PROVISIONS OF THE AMERICAN ARBITRATION ASSOCIATION.
(vii) THE COST OF ARBITRATION SHALL BE PAID BY LANDLORD AND TENANT
EQUALLY.
3. RIGHTS OF FIRST OFFER.
a. Subject to Puget Sound Energy, Inc.'s Right of First Refusal and the
rights of Computer Associates, Inc. to extend the term of their
existing lease, Tenant shall have the right of first offer to the
sixth floor of the Building. Prior to leasing such space to any
other party, Landlord shall first notify Tenant in writing. Within
five (5) business days after receipt of such notice, Tenant shall
give Landlord written notice of its acceptance of the offer to
lease such space upon the terms, conditions and rental rate offered
by Landlord, or upon other terms and conditions acceptable to
Landlord. If, within such five (5) business days, Tenant shall
either fail to give such notice or give notice of its rejection of
the offer, Landlord may, without further notice to Tenant, lease
such space to another party.
b. Subject to Puget Sound Energy, Inc.'s Right of First Refusal,
Computer Associates. Inc.'s Right of First Offer, and Harding
Lawson Associates' right to extend its existing lease term, Tenant
shall have a right of first offer on the fourth floor of the
Building. Prior to leasing such space to any other party, Landlord
shall first notify Tenant in writing. Within five(5) business days
after receipt of such notice, Tenant shall give Landlord written
notice of its acceptance of the offer to lease such space upon the
terms, conditions and rental rate offered by Landlord, or upon
other terms and conditions acceptable to Landlord. If, within such
five (5) business days, Tenant shall either fail to give such
notice or give notice of its rejection of the offer, Landlord may,
without further notice to Tenant, lease such space to another party.
ExHIBIT C, PAGE 2 OF 2
<PAGE> 1
Exhibit 10.4
November 6, 1997
Mr. Gordon A. Gardiner
Dear Gordon:
This letter will supersede my letter to you of November 3, 1997.
We are pleased to offer you the position of Executive Vice President, Chief
Financial Officer, and Corporate Secretary for Data Dimensions, Inc. You will
be located in Bellevue and will report directly to me. It is hoped that you
will commence your employment on Monday December 1, 1997, or earlier, if
practicable.
Your compensation package will consist of:
- - Monthly Salary of $16,666.67 (annual $200,000) paid bi-weekly as earned.
- - You will be eligible for a performance bonus of up to $50,000.00 of your
base annualized salary. This bonus will be predicated upon meeting
mutually agreed upon performance objectives.
- - Options to purchase 150,000 shares of Data Dimensions, Inc. common stock
subject to the approval of the Board of Directors. The exercise price of
the options will be based on the market close on the day you begin
employment with Data Dimensions, Inc. The options will vest in quarters
(25%), annually, on the anniversary date of your employment.
- - In the event your employment is terminated for other than cause, your
salary, benefits, and stock options will be extended for six months. In
the event there is a change in Company ownership your salary and benefits
will be extended for six months and your stock options will be completely
vested.
- - Company standard vacation, group medical and other benefits as outlined in
the Employee Handbook (enclosed).
<PAGE> 2
There are other details to be discussed. I suggest you plan to meet with me
before your official start date. Please schedule a convenient time with my
assistant Carol Stockton.
Please indicate your acceptance by signing below and returning a copy to me.
Gordon, we look forward to working with you as we continue to make Data
Dimensions a success.
Sincerely,
DATA DIMENSIONS, INC.
/s/ LARRY W. MARTIN
- -------------------------------
Larry W. Martin
CEO and President
/s/Gordon A. Gardiner 11/6/97
-------------------------- -----------
Gordon A. Gardiner
<PAGE> 1
EXHIBIT 10.5
AGREEMENT BETWEEN THE COMPANY AND THOMAS R. CLARK
October 31, 1997
This letter will confirm our offer to you to join Data Dimensions, Inc. and set
forth our understanding regarding the terms of your employment. We are excited
about your joining Data Dimensions, Inc. and look forward to having you join us
here as soon as possible but no later than December 1, 1997.
I am enclosing a duplicate copy of this letter for you to sign and return to me.
Your doing so will indicate your understanding of and agreement to the terms set
forth in this letter. This offer is valid through November 15, 1997.
1. Title: You will have the titles of President, Knowledge Transfer Division and
Executive Vice President, Data Dimensions, Inc.
2. Responsibilities: You will be responsible for leading the Knowledge Transfer
Division in all aspects of its operations and to contribute to the general
management of Data Dimensions, Inc. You will be expected to perform these job
responsibilities to the satisfaction of the President and/or Chief Executive
Officer of Data Dimensions, Inc.
3. Base Salary: Your annual base salary will be $190,000.00 ($15,833.33 per
month) to be paid in accordance with our normal payroll procedures (which
currently are every two weeks).
4. Bonus: You will be eligible for an annual bonus based on performance. Your
normal bonus range would be 0-36% of base salary, with a possible upside
potential of 72%. These bonuses are discretionary and depend on a number of
factors, primarily the performance of the division in terms of 1998 (for the
first year) revenues and profits.
5. Stock Options: Subject to board approval, you will receive options to
purchase 150,000 shares of common stock pursuant to the terms of Data
Dimensions, Inc.'s stock option plan. The exercise price of the options will be
the market price at the close of trading on the day we receive your written
acceptance of this offer.
6. Benefits: You are entitled to participate fully in any benefits plans,
programs, policies and fringe benefits which may be made available to the senior
executives of Data Dimensions, Inc. generally, including medical, dental,
disability, and life insurance. An employee handbook is enclosed for your
review, which outlines these and other benefits programs as currently in place.
Pursuant to the handbook, the Company may change available benefits at any time.
<PAGE> 2
7. Expenses: Documented expenses for reasonable and necessary business expenses
incurred in the course of carrying out your duties for Data Dimensions, Inc.,
consistent with company policies.
8. Term: Your employment with Data Dimensions, Inc. is at will, which means that
either of us can terminate your employment at any time with or without notice or
cause.
9. Termination for other than cause: For purposes of this letter and your
employment with Data Dimensions, Inc., "cause" shall be defined as (i) any of
the following acts that are not cured within thirty (30) days following the
delivery of verbal or written notice to you of such act: (a) any material breach
of this Agreement by you, (b) any failure by you to perform your duties as
stated herein or assigned by the President and/or Chief Executive Officer of
Data Dimensions, Inc., (c) any act or omission that substantially impairs the
Company's business, goodwill or reputation; (ii) your refusal or repeated
failure to carry out the directions of the President and/or Chief Executive
Officer of Data Dimensions, Inc.; (iii) an act of personal dishonesty,
insubordination, willful misconduct or breach of fiduciary duty by you; (iv)
your violation of any law, rule or regulation (other than minor traffic
violations or similar offenses) which results in conviction for gross
misdemeanors or felony; (v) the existence of any material and unwaived conflict
of interest which is not promptly remedied after reasonable notice; (vi) breach
of the Company's confidentiality/non-competition agreement or trading on insider
information prohibitions; (vii) disability which renders you unable to perform
the essential functions of your job with reasonable accommodation; or (viii)
death.
If the Company causes termination of your employment with Data Dimensions, Inc.
for other than cause, your stock options granted herein will become fully vested
upon your date of termination and remain exercisable for a period of three
months thereafter, and in exchange for a release, you will receive a severance
payment in an amount determined by multiplying your monthly salary ($15,833.33)
six months. The severance payment will be paid at your base rate of pay in
accordance with Data Dimensions Inc.'s normal payroll practices for the number
of applicable months.
10. If there is a change of control of the Company or a Terminating Event as
defined in sections 10.2, 10.3 and 10.4 of the Company's 1997 Stock Option Plan,
or a reduction in your salary, you may elect to terminate your employment and
receive the severance and/or accelerated stock vesting in accordance with the
terms set forth in Paragraph 9 above.
<PAGE> 3
11. Other requirements: Included with this offer letter is the Company's
confidentiality/non-competition agreement and a trading on insider information
acknowledgment. Your employment is contingent on your signing those documents
(which are incorporated into this offer letter by their reference) and abiding
by their terms.
12. Other documents: Included with this offer letter are the Company's employee
handbook, an employee acknowledgment page of the handbook, an I-9 form, a travel
policy acknowledgment, W-4 withholding certificate, and medical enrollment
forms. You will not be able to commence employment with Data Dimensions Inc.
without returning these completed forms, along with the documents referenced in
number 11 above, to our Human Resources Department.
Tom, we look forward to your joining us and to working with you as we continue
to make Data Dimensions Inc. a success. This letter represents the terms of our
offer to you and supersedes anything else that may have been previously
discussed or included in correspondence. If you agree to these terms, please
sign the enclosed copy of this letter and return it to me at your earliest
convenience.
If you have any questions, please give me a call at any time.
Sincerely,
DATA DIMENSIONS, INC.
/s/ LARRY W. MARTIN
- -------------------------------------
Larry W. Martin
President and Chief Executive Officer
I understand and agree to the terms above.
/s/ THOMAS R. CLARK November 14, 1997
- ------------------------------------- --------------------------
Thomas R. Clark Date
<PAGE> 1
Exhibit 16.1
March 30, 1998
Office of the Chief Accountant
Securities and Exchange Commission
450 5th Street N.W.
Washington D.C. 20549
Gentlemen,
We have been furnished with a copy of the response to Item 8 of Form 10-KSB for
the event that occured on March 26, 1998, to be filed by our former client,
Data Dimensions, Inc. We agree with the statements made in response to that
Item insofar as they relate to our Firm.
Very truly yours,
/s/ BDO Seidman, LLP
BDO Seidman, LLP
cc:
Data Dimensions
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF DATA DIMENSIONS, INC.
<TABLE>
<CAPTION>
Jurisdiction
of
Incorporation
-------------
<S> <C>
Data Dimensions Ireland Limited Ireland
Data Dimensions (UK) Limited England
Data Dimensions Information Services, Inc. California
Data Dimensions FSC, Inc. Guam
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-97556 and No. 333-43685) of Data Dimensions, Inc.
of our report dated February 17, 1998, appearing on page F-2 of Data Dimensions,
Inc. Annual Report on Form 10-KSB for the year ended December 31, 1997.
BDO SEIDMAN, LLP
Seattle, Washington
March 27, 1998
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
THOMAS W. FIFE
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned, Thomas W. Fife,
hereby constitutes and appoints Gordon A. Gardiner or Mark D. Brown his true and
lawful attorney-in-fact and agent, for him and his name, place and stead, in any
and all capacities, to sign the Form 10-KSB of Data Dimensions, Inc., a Delaware
corporation, for the fiscal year ended December 31, 1997, and any amendments or
supplements thereto, and to file this Power of Attorney and the Form 10-KSB,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and the NASDAQ National Market System,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, may do or
cause to be done by virtue hereof.
Dated this 18th day of March, 1998.
Signature:
/s/ THOMAS W. FIFE
- --------------------------------------
Thomas W. Fife
<PAGE> 1
EXHIBIT 24.2
POWER OF ATTORNEY
ROBERT T. KNIGHT
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned, Robert T. Knight,
hereby constitutes and appoints Gordon A. Gardiner or Mark D. Brown his true and
lawful attorney-in-fact and agent, for him and his name, place and stead, in any
and all capacities, to sign the Form 10-KSB of Data Dimensions, Inc., a Delaware
corporation, for the fiscal year ended December 31, 1997, and any amendments or
supplements thereto, and to file this Power of Attorney and the Form 10-KSB,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and the NASDAQ National Market System,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, may do or
cause to be done by virtue hereof.
Dated this 18th day of March, 1998.
Signature:
/s/ ROBERT T. KNIGHT
- -------------------------------------
Robert T. Knight
<PAGE> 1
EXHIBIT 24.3
POWER OF ATTORNEY
LUCIE J. FJELDSTAD
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned, Lucie J.
Fjeldstad, hereby constitutes and appoints Gordon A. Gardiner or Mark D. Brown
her true and lawful attorney-in-fact and agent, for her and her name, place and
stead, in any and all capacities, to sign the Form 10-KSB of Data Dimensions,
Inc., a Delaware corporation, for the fiscal year ended December 31, 1997, and
any amendments or supplements thereto, and to file this Power of Attorney and
the Form 10-KSB, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and the NASDAQ National
Market System, granting unto said attorney-in-fact and agent full power and
authority to do and perform each requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, may do or cause to be done by virtue hereof.
Dated this 18th day of March, 1998.
Signature:
/s/ LUCIE J. FJELDSTAD
- --------------------------------------
Lucie J. Fjeldstad
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