<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
------------------------------
PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 7th, 1998.
DATA DIMENSIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-4748 06-0852458
(State or other jurisdiction of (Commission File No.) (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
One Bellevue Center, 411 108th Avenue N.E., Suite 2100,
Bellevue, Washington 98004
(Address of principal executive offices)
Registrant's telephone number, including area code: 425-688-1000
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
Page 1
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INDEX
Item 2. Acquisition of Assets 3
Item 7. Financial Statements and Exhibits
a) Financial statements of ST Labs, Inc. 4
b) Pro forma financial information 16
c) Exhibits - The following exhibits are filed as a part of this
report
2.1 Agreement and Plan of Reorganization by and among Data
Dimensions, Inc., DS Acquisition Corporation, Robert
Arnold, Jr., Tye V. Minckler, and ST Labs, Inc. dated
July 28, 1998.
[The following exhibits and schedules to the Agreement
and Plan of Reorganization have been omitted:]
Exhibit 1.3 Articles of Merger
Exhibit 2 Disclosure Schedule
Exhibit 5.11 Stock Option Assumption Agreement
Exhibit 6.2.3 Legal Opinion of Garvey, Schubert & Barer
Exhibit 6.3.4 Legal Opinion of Summit Law group, PLLC
Exhibit 6.3.13 U.S. Bank Warrant Agreement
[The Registrant undertakes to furnish supplementally to
the Commission a copy of any omitted schedule upon
Commission request.]
4.1 Stock Restriction and Registration Rights Agreement.
4.2 Indemnification and Escrow Agreement.
23.1 Consent of independent accountants.
Page 2
<PAGE> 3
Item 2. Acquisition of Assets
On July 28, 1998, Data Dimensions, Inc. (the "Company") entered into
a definitive agreement with ST Labs, Inc. ("ST Labs") and certain of its
shareholders, pursuant to which, on August 6, 1998, the Company acquired all of
the outstanding common stock of ST Labs in exchange for 515,300 shares of
Company common stock. In addition, the Company assumed all options outstanding
under ST Labs' Option Plans. If fully excercised, such options will result in
the issuance of approximately 158,000 additional shares of the Company's common
stock. The value of the Company shares exchanged in the Merger, combined with
the shares issuable under the Option Plans, is approximately $9.7 million. ST
Labs provides information technology services to its customers including
recruiting contract test engineers, test automation training, and software
testing in its own or customer locations, and testing facilities management.
As a result of the transaction, ST Labs became a wholly-owned subsidiary of
the Company. The Company intends to continue to use the assets acquired in the
manner used by ST Labs prior to the acquisition.
Item 7. Financial statements and exhibits
(a) Financial statements of business acquired
Included herewith are ST Labs audited financial statements as of
December 31, 1997 and for the year then ended and the unaudited
financial statements as of March 31, 1998 and for each of the three
month periods ended March 31, 1997 and 1998.
(b) Pro forma financial information
Included herewith is a pro forma condensed consolidated balance
sheet as of March 31,1998, presented on the basis as if the Company's
acquisition of ST Labs had occurred on March 31, 1998, and condensed
consolidated statements of operations for each of the years ended
December 31, 1995, 1996 and 1997 and each of the three month periods
ended March 31, 1997 and 1998, presenting results of operations as the
combined results of the Company and ST Labs.
This business combination will be accounted for as a
"pooling-of-interests" for 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 will
be restated as though the companies had been combined for all periods
presented.
(c) Exhibits - The following exhibits are filed as a part of this report:
2.1 Agreement and Plan of Reorganization by and among Data
Dimensions, Inc., DS Acquisition Corporation, Robert
Arnold, Jr., Tye V. Minckler and ST Labs, Inc. dated
July 28, 1998.
[The following exhibits and schedules to the Agreement
and Plan of Reorganization have been omitted:]
Exhibit 1.3 Articles of Merger
Exhibit 2 Disclosure Schedule
Exhibit 5.11 Stock Option Assumption Agreement
Exhibit 6.2.3 Legal Opinion of Garvey, Schubert & Barer
Exhibit 6.3.4 Legal Opinion of Summit Law Group, PLLC
Exhibit 6.3.13 U.S. Bank Warrant Agreement
Page 3
<PAGE> 4
[The Registrant undertakes to furnish supplementally to
the Commission a copy of any omitted schedule upon
Commission request.]
4.1 Stock Restriction and Registration Rights Agreement.
4.2 Indemnification and Escrow Agreement.
23.1 Consent of independent accountants.
ST LABS, INC.
FINANCIAL STATEMENTS
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Report of Independent Accountants
To the Board of Directors
and Shareholders of
ST Labs, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' equity and of cash flow present fairly,
in all material respects, the financial position of ST Labs, Inc. at December
31, 1997 and the results of its operations and its cash flows for the year, in
conformity with generally accepted accounting principles. 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 audit. We conducted our audit on these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
accompanying financial statements, the Company has incurred recurring losses
from operations and has a net capital deficiency and a net working capital
deficiency that raise substantial doubt about its ability to continue as a going
concern. The Company has signed a letter of intent to merge with another
corporation. This merger transaction and management's plans in regard to these
matters are also described in Note 8 to the accompanying financial statements.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Seattle, Washington
July 13, 1998
Page 5
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ST LABS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
December 31, March 31,
1997 1998
------- -------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 40
Accounts receivable, less allowance of $90 1,588 $ 2,142
Prepaid and other current assets 87 67
------- -------
Total current assets 1,715 2,209
Equipment and furniture, net (Note 2) 1,561 1,487
Other assets 83 83
------- -------
Total assets $ 3,359 $ 3,779
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit borrowings (Note 4) $ 1,200 $ 1,447
Accounts payable 768 1,075
Accrued compensation and commissions 350
Other accrued expenses 738 1,040
Notes payable to related parties 215 215
Current portion of notes payable (Note 4) 1,182 1,182
------- -------
Total current liabilities 4,453 4,959
Notes payable, net of current portion (Note 4) 491 447
Other noncurrent liabilities 166 148
------- -------
Total liabilities 5,110 5,554
------- -------
</TABLE>
Page 6
<PAGE> 7
<TABLE>
<S> <C> <C>
Commitments and contingencies (Notes 4 and 7)
Stockholders' equity
Common stock and additional paid in capital; no par value; 25 million shares
authorized; 5,615 and 5,715 shares issued and outstanding 1,275 1,375
Accumulated deficit (3,026) (3,150)
------- -------
Total stockholders' equity (1,751) (1,775)
------- -------
Total liabilities and stockholders' equity $ 3,359 $ 3,779
======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
Page 7
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ST LABS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------ ------------------------------
1997 1997 1998
------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Revenue $ 12,987 $ 2,835 $ 3,315
Direct costs 7,615 1,808 1,848
-------- -------- --------
Gross margin 5,372 1,027 1,467
General, administrative and selling expenses 7,793 1,395 1,519
-------- -------- --------
Loss before income tax (2,421) (368) (52)
Interest expense 471 50 72
-------- -------- --------
Net loss $ (2,892) $ (418) $ (124)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ST LABS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common stock and Accumulated
Additional paid in capital deficit Total
----------------------------- ------------ ---------
Shares Amount
<S> <C> <C> <C> <C>
Balance, January 1, 1997 4,858 $ 341 $ (134) $ 207
Issuance of common stock 500 500 500
Exercise of stock options 257 38 38
Capital contribution 67 67
Compensation expense recognized on issuance of stock
options 329 329
Net loss (2,892) (2,892)
------- ------- ------- -------
Balance, December 31, 1997 5,615 1,275 (3,026) (1,751)
Issuance of common stock (unaudited) 100 100 100
Net loss (unaudited) (124) (124)
------- ------- ------- -------
Balance, March 31, 1998 (unaudited) 5,715 $ 1,375 $(3,150) $(1,775)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 9
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ST LABS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------ --------------------------
1997 1997 1998
------------ ------------ ----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(2,892) $ (418) $ (124)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 626 94 164
Compensation expense on stock options 329 -- --
Changes in operating assets and liabilities:
Increase in accounts receivable (118) (233) (554)
Increase in accounts payable 390 287 307
Increase (decrease) in other accrued expenses 748 129 (65)
Other 3 (87) 20
------- ------- -------
Net cash used by operating activities (914) (228) (252)
------- ------- -------
Cash flows from investing activities
Purchases of equipment and furniture (1,212) (952) (90)
------- ------- -------
Net cash used by investing activities (1,212) (952) (90)
------- ------- -------
Cash flows from financing activities
Proceeds from revolving line of credit, net 702 193 247
Proceeds from long-term debt 1,150 1,000 --
Repayment on long-term debt (236) (25) (45)
Proceeds from sale of common stock 538 -- 100
------- ------- -------
Net cash provided by financing activities 2,154 1,168 302
------- ------- -------
Net increase (decrease) in cash 28 (12) (40)
Cash, beginning of period 12 12 40
------- ------- -------
Cash, end of period $ 40 $ -- $ --
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 10
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ST LABS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business - ST Labs, Inc. (the "Company"), formerly Software
Testing Laboratories, Inc., was incorporated in July 1993, in the State of
Washington. The Company provides services which include recruiting contract test
engineers, test automation training, software testing in Company facilities and
at customer locations, and managing a testing facility on behalf of one
particular customer.
Fair value disclosures - Recorded amounts of cash, accounts receivable, prepaid
and other current assets, accounts payable, and other amounts included in
current liabilities meeting the definition of financial instruments approximate
fair value.
Revenue recognition - Revenues are recognized in the period in which they are
earned, when services are provided.
Concentration of credit risk and significant customers - Financial instruments
that potentially subject the Company to concentration of credit risk include
primarily accounts receivable. Accounts receivable consists of account balances
due from several relatively large companies dispersed primarily across the
northwestern United States with industry concentration in information
technology. The Company performs ongoing credit evaluations of its customer's
financial condition and generally requires no collateral from its own customers.
Revenues from major customers exceeding 10% of total revenue included three
customers in 1997 accounting for 20%, 14%, and 11%, respectively, of total
revenue. These customers represented 12%, 14%, and 5% of accounts receivable at
December 31, 1997.
Equipment and furniture - Equipment and furniture are stated at cost and are
depreciated using the straight-line method over estimated useful lives of three
to five years. Leasehold improvements are amortized over the lesser of the lease
term or estimated useful life.
Income taxes - Income taxes are accounted for utilizing the liability method.
Deferred income taxes are provided to represent the tax consequences on future
years for temporary differences between tax and financial reporting basis of
assets and liabilities. A valuation allowance has been provided for the total
amount of deferred tax assets which would otherwise be recorded for income tax
benefits, primarily relating to operating loss carryforwards, as realization is
not considered more likely than not.
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
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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 loss is
presented on the basis as if the compensation has been determined pursuant to
FAS 123.
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ST LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Interim Financial Statements - The interim financial data at March 31, 1998 and
for the three months ended March 31, 1997 and 1998 is unaudited; however, in the
opinion of the Company management, the interim data includes all adjustments,
consisting only of normal recurring adjustments necessary for a fair statement
of results for the interim periods. The interim results of operations for the
three months ended March 31, 1998 are not necessarily indicative of results
expected for the entire year.
NOTE 2 - EQUIPMENT AND FURNITURE
Equipment and furniture consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
----------- -------------
(unaudited)
<S> <C> <C>
Computers and equipment $ 1,928 $ 1,966
Furniture and fixtures 288 291
Leasehold improvements 279 329
------- -------
2,495 2,586
Accumulated depreciation and amortization (934) (1,099)
------- -------
Equipment and furniture, net $ 1,561 $ 1,487
======= =======
</TABLE>
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company provides temporary employee placement services, testing facility
management, and software testing courses on a subcontract basis to a company
which is a shareholder of approximately 15% of the Company's common stock (a
"Significant Shareholder"). Revenues for these services amounted to
approximately $1.1 million in 1997, and related accounts receivable at December
31, 1997 approximated $76,000. In addition, the Significant Shareholder provides
temporary labor services to the Company, which during 1997 amounted to
approximately $1 million, and related accounts payable approximated $141,000 at
December 31, 1997.
In April 1996, the Company borrowed $115,000 from related parties under terms
of loan and warrant purchase agreements. The notes bear interest at 18% per
annum payable monthly and are due in April 1998. The loans are unsecured and are
subordinated to notes payable to bank and are outstanding at June 30, 1998. The
loan agreements provide the holders with warrants to purchase 23,000 shares of
the Company's common stock for $.45 per share through April 1999.
In May 1997, the Company borrowed $100,000 from a related party under terms of a
loan and warrant purchase agreement. The note bears interest at 15% per annum
payable monthly, and is due in May 1998. The loan is unsecured and subordinated
to notes payable to bank and is outstanding at June 30, 1998. The agreement
provides the holder with warrants to purchase 2,000 shares of the Company's
common stock for $1.00 per share through January 2001.
In October 1997, the Company loaned $42,000 to certain shareholders bearing
interest at 12% per annum. The notes mature in October 1998 and may be extended
one year at the option of the holders.
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ST LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - REVOLVING LINE OF CREDIT AND NOTES PAYABLE
The Company has a revolving line of credit with commercial bank (the "Bank").
Amounts available under the line of credit are limited to a borrowing ceiling
calculated as a percentage of eligible accounts receivable and to a maximum
borrowing outstanding of $1.5 million. The line of credit bears interest at
prime plus 1% (9.50% at December 31, 1997). This agreement contains certain
restrictive covenants with which the Company was not in compliance at December
31, 1997. The Company has not received a waiver of these covenant violations
from the Bank. However, in April 1998, the Company's revolving line of credit
agreement was amended to, among other things, increase the maximum available
borrowing to $2 million and revise certain restrictive covenants. Subsequently,
the Company became in violation of the revised restrictive covenants and such
non-compliance continues through July 13, 1998.
In February 1997, the Company entered into a term loan agreement with the Bank
providing for maximum borrowings of $2 million over an 18 month period. The
Company borrowed $1 million with the remainder becoming available to borrow,
subject to certain performance targets. Amounts outstanding under the agreement
bear interest at 12% per annum. In connection with this loan, the Company issued
to the Bank a warrant to purchase 10% of the Company's common stock under
certain future conditions, including if the loan is not paid in full upon
maturity. The Company is obligated under certain circumstances to pay $75,000 if
repayment occurs prior to August 28, 1998 and $150,000 thereafter.
At December 31, 1997, the Company has three equipment notes payable to the Bank
which bear interest between 10% and 11% annually and are due in monthly
installments through February 2002.
The revolving line of credit, term loan and equipment loans are secured by
substantially all assets of the Company and are guaranteed by the Company's two
principal shareholders. Interest paid on Bank borrowings was $407,000 during
1997. Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
----------- -----------
(unaudited)
<S> <C> <C>
Term loan, due December 31, 1998 $ 1,000 $ 1,000
Equipment loan, due September 30, 1998 42 40
Equipment loan, due July 15, 2001 190 178
Equipment loan, due February 28, 2002 441 411
------- -------
1,673 1,629
Current portion (1,182) (1,182)
------- -------
$ 491 $ 447
======= =======
</TABLE>
Future maturities on notes payable at December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
Related Party Bank Total
------------- ------- ------
<S> <C> <C> <C>
1998 $ 215 $1,182 $1,397
1999 147 147
2000 163 163
2001 156 156
2002 25 25
------ ------ ------
$ 215 $1,673 $1,888
====== ====== ======
</TABLE>
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ST LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INCOME TAXES
Deferred income taxes recorded for significant temporary differences between tax
and financial reporting basis of assets and liabilities approximate $910,000 at
December 31, 1997 and primarily relate to operating loss carryforwards. A
valuation allowance has been recorded for the full amount of deferred taxes as
realization of such deferred tax asset is not considered to be more likely than
not. The change in the valuation allowance approximated $850,000 in 1997.
Deferred tax assets at December 31, 1997 are summarized as follows (in
thousands):
<TABLE>
<S> <C>
Net operating loss carry-forwards $ 640
Cash vs. accrual basis of accounting 170
Depreciation 100
-----
910
Valuation allowance (910)
-----
Deferred tax assets, net of valuation allowance $ --
=====
</TABLE>
For income tax purposes, at December 31, 1997, the Company had net operating
loss carry-forwards of approximately $1.7 million which expire in 2008 through
2012. As a result of changes in ownership, utilization of net operating loss
carryforwards are subject to annual limitations.
NOTE 6 - COMMON STOCK AND STOCK OPTIONS
In February 1997, the Company amended its Articles of Incorporation to authorize
the issuance of 25 million shares of common stock and the Board of Directors
declared a ten-for-one stock split on the Company's common stock effected in the
form of stock dividend to holders of record on that date. All share information
has been restated to reflect this split.
During 1997, the Company extended the exercise period for stock options granted
to certain terminated employees and recorded compensation expense of $329,000.
During 1997, certain shareholders of the Company made a capital contribution of
approximately $67,000 to enable the Company to pay an employee severance
obligation.
The Company adopted a Stock Option Plan (the 1995 Plan) in 1995 for key
employees, under which 2 million shares of common stock are reserved for stock
option grants. The vesting period, exercise price and expiration period of
options are established at the discretion of the Board of Directors, except that
incentive stock options must be granted with exercise prices of not less than
100% of fair market value of the underlying common stock on the date of grant.
Options issued under the 1995 Plan become fully vested upon the completion of a
change in control transaction. In 1997, the Company established a 1997 Stock
Option Plan (the 1997 Plan) for key employees under which 500,000 shares of
common stock are reserved for stock option grants. Most terms are comparable to
the 1995 Plan. Stock options vest and become exercisable over periods of one to
three years and expire ten years from the date of grant. Outstanding stock
options at December 31, 1997 had a weighted average contractual life of 8.1
years.
The per share weighted average fair value of stock options granted during 1997
was $0.27 on the date of grant using the minimum value method with the following
weighted average assumptions: expected dividend yield of zero; risk-free
interest rate of 6.6% and an expected life of 5 years.
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ST LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - COMMON STOCK AND STOCK OPTIONS (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for employee stock options
and, accordingly, compensation cost has been recognized in the financial
statements only to the extent that the option exercise price is less than the
fair value of the underlying stock on the measurement date. Had the Company
determined compensation cost based on fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have been increased
from $2.89 million to a pro forma loss of $2.93 million. The full impact of
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net loss amount because compensation cost is amortized over the
options' vesting period of three years.
The following summarizes stock option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
-----------------------
EXERCISE EXERCISE FAIR
PRICE OUTSTANDING PRICE VALUE
------------ ------------ --------- -------
<S> <C> <C> <C> <C>
Balances at January 1, 1997 $ .15 - .83 1,708,500 $ .22 $ .06
Options granted 1.00 583,000 1.00 .27
Options exercised .15 (256,660) .15 .04
Options cancelled .15 - 1.00 (294,180) .26 .07
----------
Balances at December 31, 1997 $.15 - 1.00 1,740,660 $ .48 $ .11
==========
</TABLE>
The following summarizes information about stock options outstanding at December
31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE REMAINING
PRICES OUTSTANDING LIFE EXERCISABLE
- ---------- ----------- --------- ------------
<S> <C> <C> <C>
$ 0.15 910,000 7.2 years 846,667
$ 0.45 211,000 8.2 years 70,333
$ 0.83 30,000 8.8 years 10,000
$ 1.00 589,660 9.5 years 0
--------- ---------
1,740,660 927,000
========= =========
</TABLE>
NOTE 7 - 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 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 operation or liquidity.
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ST LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company leases its corporate headquarters in Bellevue, Washington, under
terms of a noncancelable operating lease that expires in August 2003, subject to
extensions at the Company's option. The Company is responsible for its share of
any property tax and operating costs higher than forecasted for this location.
The Company also has two other noncancelable testing facilities leases expiring
in 2002. The Company has subleased one of these sites to a third party through
March 1999. The Company also leases computer equipment under two operating
leases expiring in 1999 and 2000. Rent expense under noncancelable operating
leases approximated $1.36 million in 1997.
At December 31, 1997, future minimum rental payments under the leases are as
follows (in thousands):
<TABLE>
Years ending December 31,
<S> <C>
1998 $1,385
1999 1,385
2000 1,292
2001 1,333
2002 1,110
Thereafter 687
------
$7,192
======
</TABLE>
In February 1998, the Company entered into a five-year noncancelable lease for a
testing facility. Future minimum lease obligations under this lease aggregate
$387,000.
NOTE 8 - LIQUIDITY
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. To date, the Company incurred recurring
operating losses and has a net capital deficiency and a working capital deficit.
Additionally, as disclosed in Note 4, the Company is in violation of its debt
covenants and substantially all of its outstanding Bank debt is due by the end
of 1998. Based on the Company's current projected earnings and cash flow,
Company management does not believe that cash generated from operations alone
will be sufficient to pay its debt by December 31, 1998. Management is
considering financing alternatives which include, among other things, a business
combination, sale of assets, or a refinancing of the bank debt.
In June 1998 the Company signed a letter of intent to combine with another
corporation. The merger is a stock for stock combination and is intended to be
accounted for as a pooling of interests transaction.
If the above transaction or other financing alternative does not occur, and the
Company is unable to make required payments due December 31, 1998, it may be
unable to continue its operations, except to the extent permitted by the Bank.
Page 16
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DATA DIMENSIONS, INC.
PRO FORMA FINANCIAL INFORMATION
The accompanying pro forma financial information gives effect to the business
combination of Data Dimensions, Inc. (the "Company") and ST Labs, Inc. ("ST
Labs"). This business combination will be 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 will be restated as though the companies
had been combined for all periods presented.
The pro forma financial statements included herein should be read in conjunction
with the Company's audited, annual financial statements included in the
Company's December 31, 1997 Annual Report on Form 10-KSB and its unaudited
interim financial statements included in the Company's March 31, 1998 Quarterly
Report on Form 10-Q, and the ST Labs financial statements, which are included in
this Form 8-K.
The accompanying pro forma condensed consolidated balance sheet presents the
financial position of the combined businesses as of March 31, 1998, giving
effect to the business combination utilizing the pooling-of-interests method of
accounting.
The accompanying pro forma condensed consolidated statements of operations for
each of the years ended December 31, 1995, 1996 and 1997 and each of the three
month periods ended March 31, 1997 and 1998 give effect to the business
combination utilizing the pooling-of-interests method of accounting. These
unaudited pro forma condensed consolidated statements of operations may not be
indicative of results to be expected in the future.
Page 17
<PAGE> 18
DATA DIMENSIONS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Data
Dimensions ST Labs Pro Forma
-------- -------- --------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,897 $ 5,897
Accounts receivable, net 15,616 $ 2,142 17,758
Prepaid and other current assets 1,264 67 1,331
-------- -------- --------
Total current assets 22,777 2,209 24,986
Equipment and furniture, net 3,717 1,487 5,204
Investment in product development, net 1,496 1,496
Other assets 969 83 1,052
-------- -------- --------
Total assets $ 28,959 $ 3,779 $ 32,738
======== ======== ========
Current liabilities:
Line of credit borrowings $ 1,447 $ 1,447
Accounts payable $ 2,191 1,075 3,266
Accrued compensation and commissions 2,745 2,745
Other accrued liabilities 1,900 1,040 2,940
Dividends payable 939 939
Current portion of capital lease obligations 252 252
Deferred income taxes 391 391
Current portion of notes payable 1,397 1,397
-------- -------- --------
Total current liabilities 8,418 4,959 13,377
Notes payable, net of current portion 447 447
Capital lease obligations, net of current portion 448 448
Other non current liabilities 148 148
-------- -------- --------
Total Liabilities 8,866 5,554 14,420
-------- -------- --------
Stockholders' equity:
Common stock and paid in capital 22,251 1,375 23,626
Treasury stock (3,008) (3,008)
Retained earnings (accumulated deficit) 924 (3,150) (2,226)
Cumulative translation adjustment (74) (74)
-------- -------- --------
Total stockholders' equity 20,093 (1,775) 18,318
-------- -------- --------
Total liabilities and stockholders' equity $ 28,959 $ 3,779 $ 32,738
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the pro forma condensed
consolidated financial statements.
Page 18
<PAGE> 19
DATA DIMENSIONS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Data
Dimensions ST Labs Pro Forma
---------- --------- ---------
<S> <C> <C> <C>
Revenue:
Knowledge Consulting $ 5,878 $ 3,790 $ 9,668
Information Services 4,833 4,833
International 354 354
-------- -------- --------
Total revenue 11,065 3,790 14,855
Direct costs 6,494 2,611 9,105
-------- -------- --------
Gross Margin 4,571 1,179 5,750
General, administrative and selling expenses 3,389 1,179 4,568
-------- -------- --------
Income from operations 1,182 -- 1,182
-------- -------- --------
Other income (expense)
Interest expense (207) (27) (234)
-------- -------- --------
Total other income (expense) (207) (27) (234)
-------- -------- --------
Earnings (loss) before income tax 975 (27) 948
Income tax provision (benefit) (380) (380)
-------- -------- --------
Net income (loss) $ 1,355 $ (27) $ 1,328
======== ======== ========
Net income per share - basic $ 0.19 $ 0.17
======== ========
Net income per share - diluted $ 0.17 $ 0.16
======== ========
Weighted average shares outstanding:
Basic 7,209 4,873 7,642
======== ======== ========
Diluted 8,091 4,873 8,524
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the pro forma condensed
consolidated financial statements.
Page 19
<PAGE> 20
DATA DIMENSIONS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Data
Dimensions ST Labs Pro Forma
---------- -------- ---------
<S> <C> <C> <C>
Revenue:
Knowledge Consulting $ 13,793 $ 6,941 $ 20,734
Information Services 6,001 6,001
International 1,042 1,042
-------- -------- --------
Total revenue 20,836 6,941 27,777
Direct costs 12,283 3,606 15,889
-------- -------- --------
Gross Margin 8,553 3,335 11,888
General, administrative and selling expenses 7,397 3,339 10,736
-------- -------- --------
Income (loss) from operations 1,156 (4) 1,152
-------- -------- --------
Other income (expense)
Interest expense (91) (104) (195)
Interest income 583 583
-------- -------- --------
Total other income (expense) 492 (104) 388
-------- -------- --------
Earnings (loss) before income tax 1,648 (108) 1,540
Income tax provision (benefit) 15 15
-------- -------- --------
Net income (loss) $ 1,633 $ (108) $ 1,525
======== ======== ========
Net income per share - basic $ 0.15 $ 0.14
======== ========
Net income per share - diluted $ 0.15 $ 0.13
======== ========
Weighted average shares outstanding:
Basic 10,678 4,858 11,110
======== ======== ========
Diluted 11,230 5,501 11,719
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the pro forma condensed
consolidated financial statements.
Page 20
<PAGE> 21
DATA DIMENSIONS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Data
Dimensions ST Labs Pro Forma
---------- --------- ---------
<S> <C> <C> <C>
Revenue:
Knowledge Consulting $ 35,864 $ 12,987 $ 48,851
Information Services 7,378 7,378
Knowledge Transfer 1,619 1,619
International 2,596 2,596
-------- -------- --------
Total revenue 47,457 12,987 60,444
Direct costs 26,820 7,615 34,435
-------- -------- --------
Gross Margin 20,637 5,372 26,009
General, administrative and selling expenses 16,309 7,793 24,102
Unusual Items 4,024 4,024
-------- -------- --------
Income (loss) from operations 304 (2,421) (2,117)
-------- -------- --------
Other income (expense)
Interest expense (471) (471)
Interest income 415 415
-------- -------- --------
Total other income (expense) 415 (471) (56)
-------- -------- --------
Earnings (loss) before income tax 719 (2,892) (2,173)
Income tax provision (benefit) 700 700
-------- -------- --------
Net income (loss) $ 19 $ (2,892) $ (2,873)
======== ======== ========
Net income (loss) per share - basic $ 0.00 $ (0.22)
======== ========
Net income (loss) per share - diluted $ 0.00 $ (0.22)
======== ========
Weighted average shares outstanding:
Basic 12,308 5,219 12,772
======== ======== ========
Diluted 12,609 5,897 13,133
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the pro forma condensed
consolidated financial statements.
Page 21
<PAGE> 22
DATA DIMENSIONS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Data
Dimensions ST Labs Pro Forma
---------- --------- ----------
<S> <C> <C> <C>
Revenue:
Knowledge Consulting $ 5,810 $ 2,835 $ 8,645
Information Services 1,819 1,819
Knowledge Transfer 267 267
International 676 676
-------- -------- --------
Total revenue 8,572 2,835 11,407
Direct costs 4,897 1,808 6,705
-------- -------- --------
Gross Margin 3,675 1,027 4,702
General, administrative and selling expenses 3,166 1,395 4,561
-------- -------- --------
Income (loss) from operations 509 (368) 141
-------- -------- --------
Other income (expense)
Interest expense (50) (50)
Interest income 147 147
-------- -------- --------
Total other income (expense) 147 (50) 97
-------- -------- --------
Earnings (loss) before income tax 656 (418) 238
Income tax provision (benefit) 230 230
-------- -------- --------
Net income (loss) $ 426 $ (418) $ 8
======== ======== ========
Net income per share - basic $ 0.04 $ 0.00
======== ========
Net income per share - diluted $ 0.03 $ 0.00
======== ========
Weighted average shares outstanding:
Basic 11,999 4,858 12,431
======== ======== ========
Diluted 12,340 5,667 12,844
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the pro forma condensed
consolidated financial statements.
Page 22
<PAGE> 23
DATA DIMENSIONS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Data
Dimensions ST Labs Pro Forma
---------- -------- ---------
<S> <C> <C> <C>
Revenue:
Knowledge Consulting $ 15,070 $ 3,315 $ 18,385
Information Services 1,930 1,930
Knowledge Transfer 617 617
International 298 298
-------- -------- --------
Total revenue 17,915 3,315 21,230
Direct costs 9,999 1,848 11,847
-------- -------- --------
Gross Margin 7,916 1,467 9,383
General, administrative and selling expenses 6,337 1,519 7,856
-------- -------- --------
Income (loss) from operations 1,579 (52) 1,527
-------- -------- --------
Other income (expense)
Interest expense (27) (72) (99)
Interest income 70 70
-------- -------- --------
Total other income (expense) 43 (72) (29)
-------- -------- --------
Earnings (loss) before income tax 1,622 (124) 1,498
Income tax provision (benefit) 625 625
-------- -------- --------
Net income (loss) $ 997 $ (124) $ 873
======== ======== ========
Net income per share - basic $ 0.08 $ 0.07
======== ========
Net income per share - diluted $ 0.08 $ 0.07
======== ========
Weighted average shares outstanding:
Basic 12,664 5,698 13,170
======== ======== ========
Diluted 12,855 6,228 13,408
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the pro forma condensed
consolidated financial statements.
Page 23
<PAGE> 24
DATA DIMENSIONS, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(a) All fees and expenses related to the business combination and to the
consolidation of the combining companies will be expensed as required
under the pooling-of-interest accounting method. These expenses have not
been reflected in the unaudited pro forma condensed consolidated balance
sheet or statements of operations, but will be reflected in the
statement of operations of the Company in the period the business
combination is consummated. Such fees and expenses are presently
estimated to approximate $750,000.
(b) The calculation of unaudited pro forma net income per common share for
each period presented reflects the issuance of Company common stock in
exchange for all of the outstanding shares of ST Labs common stock. The
number of shares included in the basic earnings per share computation
has been determined utilizing the exchange ratio of Company shares for
ST Labs shares as set forth in the business combination merger agreement
(the "Exchange Ratio") based upon the actual weighted average number of
ST Labs common shares outstanding during the period presented, and a per
share price of Company common stock of $14.38. 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 ST Labs additional
shares that would have been outstanding if dilutive common shares had
been issued. Outstanding options and warrants have been considered
utilizing the Treasury stock method in calculating dilutive earnings per
share.
Page 24
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on behalf by the
undersigned hereunto duly authorized.
August 7, 1998 DATA DIMENSIONS, INC.
By:_____________________________________________
Gordon A. Gardiner, Executive Vice President,
Chief Financial Officer and Secretary (Principal
Financial and Accounting Officer)
Page 25
<PAGE> 1
EXHIBIT 2.1
The following exhibits and schedules to the Agreement and Plan of
Reorganization have been omitted:
Exhibit 1.3 Articles of Merger
Exhibit 2 Disclosure Schedules
Exhibit 5.11 Stock Option Assumption Agreement
Exhibit 6.2.3 Legal Opinion of Garvey, Schubert & Barer
Exhibit 6.3.4 Legal Opinion of Summit Law Group
Exhibit 6.3.13 U.S. Bank Warrant Agreement
The Registrant undertakes to furnish supplementally to the Commission a
copy of any omitted schedules upon Commission request.
AGREEMENT AND PLAN OF REORGANIZATION
by and among
DATA DIMENSIONS, INC.,
DS ACQUISITION CORPORATION,
ROBERT ARNOLD, JR., TYE V. MINCKLER
and
ST LABS, INC.
dated as of
July 28, 1998
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ARTICLE 1 - THE MERGER .............................................................................. 1
SECTION 1.1 THE MERGER ......................................................................... 1
SECTION 1.2 WRITTEN CONSENT OF THE SHAREHOLDERS OF THE COMPANY ................................. 2
SECTION 1.3 EFFECTIVE TIME ..................................................................... 2
SECTION 1.4 EFFECT OF THE MERGER ............................................................... 2
SECTION 1.5 CERTIFICATE OF INCORPORATION; BYLAWS ............................................... 2
SECTION 1.6 DIRECTORS AND OFFICERS ............................................................. 3
SECTION 1.7 CONVERSION OF COMMON STOCK ......................................................... 3
SECTION 1.8 SURRENDER OF CERTIFICATES .......................................................... 5
SECTION 1.9 DISSENTERS' RIGHTS ................................................................. 7
SECTION 1.10 TAX AND ACCOUNTING CONSEQUENCES ................................................... 7
SECTION 1.11 TAKING OF NECESSARY ACTION; FURTHER ACTION ........................................ 7
ARTICLE 2 - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND PRINCIPAL SHAREHOLDERS ................ 7
SECTION 2.1 ORGANIZATION OF THE COMPANY ........................................................ 7
SECTION 2.2 COMPANY CAPITAL STRUCTURE .......................................................... 8
SECTION 2.3 SUBSIDIARIES ....................................................................... 8
SECTION 2.4 AUTHORITY .......................................................................... 9
SECTION 2.5 COMPANY FINANCIAL STATEMENTS ....................................................... 9
SECTION 2.6 NO UNDISCLOSED LIABILITIES ......................................................... 10
SECTION 2.7 NO CHANGES ......................................................................... 10
SECTION 2.8 TAXES .............................................................................. 12
SECTION 2.9 RESTRICTIONS ON BUSINESS ACTIVITIES; NECESSARY EQUIPMENT........................... 14
SECTION 2.10 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES ............................ 14
SECTION 2.11 INTELLECTUAL PROPERTY ............................................................. 15
SECTION 2.12 AGREEMENTS, CONTRACTS AND COMMITMENTS ............................................. 16
SECTION 2.13 INTERESTED PARTY TRANSACTIONS ..................................................... 17
SECTION 2.14 COMPLIANCE WITH LAWS .............................................................. 18
SECTION 2.15 LITIGATION ........................................................................ 18
SECTION 2.16 INSURANCE ......................................................................... 18
SECTION 2.17 MINUTE BOOKS ...................................................................... 19
SECTION 2.18 ENVIRONMENTAL MATTERS ............................................................. 19
SECTION 2.19 BROKERS' AND FINDERS' FEES; THIRD PARTY EXPENSES .................................. 20
SECTION 2.20 EMPLOYEE MATTERS AND BENEFIT PLANS ................................................ 20
SECTION 2.21 ACCOUNTS RECEIVABLE ............................................................... 23
SECTION 2.22 CUSTOMERS ......................................................................... 23
SECTION 2.23 IMPROPER PAYMENTS ................................................................. 24
SECTION 2.24 PERMITS ........................................................................... 24
SECTION 2.25 Y2K COMPLIANT ..................................................................... 24
SECTION 2.26 ACCOUNTING MATTERS ................................................................ 24
SECTION 2.27 RELATED PARTY ACCOUNTS ............................................................ 24
SECTION 2.28 DISCLOSURE ........................................................................ 25
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB ................................. 25
SECTION 3.1 ORGANIZATION, STANDING AND POWER ................................................... 25
SECTION 3.2 AUTHORITY .......................................................................... 25
SECTION 3.3 CAPITAL STRUCTURE .................................................................. 26
SECTION 3.4 SEC DOCUMENTS ...................................................................... 26
SECTION 3.5 NO MATERIAL ADVERSE CHANGE ......................................................... 27
SECTION 3.6 LITIGATION ......................................................................... 27
SECTION 3.7 BROKERS' AND FINDERS' FEES ......................................................... 27
SECTION 3.8 DISCLOSURE ......................................................................... 27
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 4 - CONDUCT PRIOR TO THE EFFECTIVE TIME ................................................. 27
SECTION 4.1 CONDUCT OF BUSINESS OF THE COMPANY ............................................. 27
SECTION 4.2 NO SOLICITATION ................................................................ 30
SECTION 4.3 STRATEGIC AGREEMENTS ........................................................... 30
ARTICLE 5 - ADDITIONAL AGREEMENTS ............................................................... 30
SECTION 5.1 INVESTMENT INTENT AND REGISTRATION RIGHTS ...................................... 30
SECTION 5.2 ACCESS TO INFORMATION .......................................................... 30
SECTION 5.3 EXPENSES ....................................................................... 31
SECTION 5.4 PUBLIC DISCLOSURE .............................................................. 31
SECTION 5.5 CONSENTS ....................................................................... 31
SECTION 5.6 FIRPTA COMPLIANCE .............................................................. 31
SECTION 5.7 REASONABLE EFFORTS ............................................................. 31
SECTION 5.8 NOTIFICATION OF CERTAIN MATTERS ................................................ 32
SECTION 5.9 POOLING ACCOUNTING ............................................................. 32
SECTION 5.10 DISCLOSURE DOCUMENT ........................................................... 32
SECTION 5.11 EMPLOYEE STOCK OPTIONS ........................................................ 32
SECTION 5.12 FORM S-8 ...................................................................... 33
SECTION 5.13 LISTING OF ADDITIONAL SHARES .................................................. 33
SECTION 5.14 INDEMNITY AND ESCROW .......................................................... 34
SECTION 5.15 ADDITI0NAL DOCUMENTS AND FURTHER ASSURANCES ................................... 34
ARTICLE 6 - CONDITIONS TO THE MERGER ............................................................ 34
SECTION 6.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO COMPLETE THE MERGER ................. 34
SECTION 6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY AND PRINCIPAL SHAREHOLDERS.. 34
SECTION 6.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUB .............. 35
ARTICLE 7 - TERMINATION, AMENDMENT AND WAIVER ................................................... 38
SECTION 7.1 TERMINATION .................................................................... 38
SECTION 7.2 EFFECT OF TERMINATION .......................................................... 39
SECTION 7.3 AMENDMENT ...................................................................... 39
SECTION 7.4 EXTENSION; WAIVER .............................................................. 40
ARTICLE 8 GENERAL PROVISIONS .................................................................... 40
SECTION 8.1 NOTICES ........................................................................ 40
SECTION 8.2 INTERPRETATION ................................................................. 41
SECTION 8.3 COUNTERPARTS ................................................................... 41
SECTION 8.4 ENTIRE AGREEMENT; ASSIGNMENT ................................................... 42
SECTION 8.5 SEVERABILITY ................................................................... 42
SECTION 8.6 OTHER REMEDIES ................................................................. 42
SECTION 8.7 GOVERNING LAW .................................................................. 42
SECTION 8.8 RULES OF CONSTRUCTION .......................................................... 42
SECTION 8.9 SPECIFIC PERFORMANCE ........................................................... 43
SECTION 8.10 SURVIVAL ...................................................................... 43
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
DEFINITION
<S> <C>
1995 Plan, 4 GAAP, 10
1997 Plan, 4 Governmental Entity, 10
20th Century, 25 Hazardous Material, 20
21st Century, 25 Hazardous Material Activities, 20
Affiliate, 21 Indemnification and Escrow Agreement, 5
Agreement, 1 Indemnification Escrow Shares, 5
Articles of Merger, 2 Indemnification Representative, 6
IRS, 22
Certificate(s), 5 Liens, 13
ChaseMellon, 5
Closing, 2 March Balance Sheet, 10
Closing Date, 2 Material Adverse Effect, 8
Code, 7 Merger, 1
Company, 1 Merger Consideration, 5
Company Common Stock, 1 Merger Sub, 1
Company Disclosure Schedule, 7 Multiemployer Plan, 22
Company Employee Plan, 21
Company Financials, 10 Parent, 1
Company Intellectual Property Rights, 16 Parent Average Closing Price, 3
Company Shareholders, 2 Parent Common Stock, 1
Company Stock Option Plans, 4 Parent SEC Reports, 27
Company's Shareholders' Consent, 2 Pension Plan, 22
Conflict, 10 Principal Shareholder(s), 1
Contract, 18
Registration Rights Agreement, 32
Disclosure Document, 34 Securities Act, 4
Dissenting Company Shares, 7 Stock Option Assumption Agreement, 35
DOL, 22 Surviving Corporation, 1
Effective Date, 1
Effective Time, 2 Tax Authority, 13
Employee, 21 Tax Return, 13
Employee Agreement, 21 Tax(es), 12
End-User Licenses, 16 Taxable, 12
Environmental Permits, 20 Third Party Expenses, 33
ERISA, 21
Escrow Agent, 5
Exchange Shares, 3 U.S. Bank Agreement, 39
Fully Diluted Company Shares, 3 WBCA, 1
</TABLE>
iii
<PAGE> 5
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the agreement, schedules, and
exhibits are hereinafter referred to as this "Agreement") is made and entered
into as of July 28, 1998 (the "Effective Date") among Data Dimensions, Inc., a
Delaware corporation ("Parent"), DS Acquisition Corporation, a Washington
corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), ST Labs,
Inc., a Washington corporation (the "Company"), and Robert Arnold, Jr. and Tye
V. Minckler (individually, a "Principal Shareholder," and collectively the
"Principal Shareholders").
WHEREAS, the Boards of Directors of each of the Company, Parent and
Merger Sub believe it is in the best interests of each company and their
respective stockholders that Parent acquire the Company through the statutory
merger of Merger Sub with and into the Company (the "Merger") and, in
furtherance thereof, have approved the Merger;
WHEREAS, pursuant to the Merger, among other things, and subject to the
terms and conditions of this Agreement, all of the issued and outstanding shares
of common stock, no par value, of the Company ("Company Common Stock") will be
converted into Common Stock of Parent ("Parent Common Stock");
WHEREAS, a portion of the shares of Parent Common Stock issuable by
Parent in connection with the Merger will be placed in escrow by Parent, the
release of which amount will be contingent upon certain events and conditions,
all as set forth in Section 1.8.2 hereof; and
WHEREAS, the Company, Principal Shareholders, Parent and Merger Sub
desire to make certain representations and warranties and other agreements in
connection with the Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, intending to be legally bound hereby, the parties agree as
follows:
ARTICLE I - THE MERGER
Section 1.1 The Merger.
At the Effective Time (as defined in Section 1.3) and subject to and
upon the terms and conditions of this Agreement and applicable law, including
without limitation, the Washington Business Corporation Act ("WBCA"), Merger
Sub will be merged with and into the Company, the separate corporate existence
of Merger Sub will cease and the Company will continue as the surviving
corporation and as a wholly-owned subsidiary of Parent. The Company as the
surviving corporation after the Merger is hereinafter sometimes referred to
as the "Surviving Corporation."
1
<PAGE> 6
Section 1.2 Written Consent of the Shareholders of the Company.
The Company will take all action necessary or advisable in accordance
with applicable law and Articles of Incorporation and Bylaws (i) to solicit the
approval of this Agreement, the Merger and all the transactions contemplated
hereby, by all holders of the issued and outstanding stock of the Company (the
"Company Shareholders"), by means of a unanimous written consent of shareholders
(the "Company's Shareholders' Consent"), or (ii) to call, give notice of,
convene and hold a special meeting of the shareholders of the Company to be held
for the purpose of voting upon this Agreement, the Merger and all the
transactions contemplated thereby. The Company shall use its best efforts to
obtain such shareholder approval. The Company represents and warrants that its
Board of Directors, at a meeting duly called and held, has (x) determined that
the Merger is fair to and in the best interests of the Company and the Company
Shareholders and (y) resolved to recommend to the Company Shareholders that they
approve this Agreement, the Merger and all the transactions contemplated hereby.
Section 1.3 Effective Time.
Unless this Agreement is earlier terminated pursuant to Section 7.1,
the closing of the Merger (the "Closing") will take place following satisfaction
or waiver of the conditions set forth in Section 6, at the offices of Garvey,
Schubert & Barer in Seattle, Washington on August 6, 1998, unless another place
or time is agreed to by Parent and the Company. The date upon which the Closing
actually occurs is herein referred to as the "Closing Date." As soon as
practicable following the Closing, the parties hereto will cause the Merger to
be consummated by filing Articles of Merger substantially in the form of Exhibit
1.3 with the Secretary of State of the State of Washington (the "Articles of
Merger") in accordance with the WBCA (the time of acceptance of such filing
being referred to herein as the "Effective Time"). Each certificate which before
the Effective Time represented shares of Company Common Stock shall thereafter
evidence ownership of the number of full shares of Parent Common Stock into
which such shares of Company Common Stock shall have been so converted pursuant
to Section 1.7.1 hereof.
Section 1.4 Effect of the Merger.
At the Effective Time, the effect of the Merger will be as provided by
the WBCA. Without limiting the generality of the foregoing, and subject thereto,
at the Effective Time, all the property, rights, privileges, powers and
franchises of the Company and Merger Sub will vest in the Surviving Corporation,
and all debts, liabilities and duties of the Company and Merger Sub will become
the debts, liabilities and duties of the Surviving Corporation.
Section 1.5 Certificate of Incorporation; Bylaws.
Unless otherwise determined by Parent prior to the Effective Time, at
the Effective Time, the Articles of Incorporation and Bylaws of the Merger Sub
as in effect immediately prior to the Effective Time will be the Articles of
Incorporation and Bylaws of the Surviving Corporation until thereafter amended.
2
<PAGE> 7
Section 1.6 Directors and Officers.
From and after the Effective Time: (a) the director(s) of Merger Sub
immediately prior to the Effective Time will be the director(s) of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation; and (b) the officers of
Merger Sub immediately prior to the Effective Time will be the officers of the
Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation.
Section 1.7 Conversion of Common Stock.
1.7.1 Exchange Ratio.
Each share of Company Common Stock issued and outstanding immediately
before the Effective Time will, at the Effective Time, by virtue of the Merger
and without any action on the part of the holder thereof, be converted into the
right to receive that fraction of a share of Parent Common Stock equal to the
quotient (the "Exchange Ratio") obtained by dividing
(i) the amount obtained by dividing (a) Nine Million Six Hundred Seventy
Five Thousand Dollars ($9,675,000) by (b) the Parent Average Closing
Price, by
(ii) the number of Fully Diluted Company Shares at the Effective Time.
For purposes of this Agreement, "Parent Average Closing Price" shall mean the
average of the closing prices of Parent Common Stock as reported for
consolidated trading on the NASDAQ National Market System, as reported in the
Wall Street Journal beginning on and including the Effective Date and ending on
and including the date that is two (2) trading days prior to the Closing Date,
provided that (i) if such average is less than $14.00, the "Parent Average
Closing Price" shall be $14.00, and (ii) if such average is more than $16.00,
the "Parent Average Closing Price" shall be $16.00. For purposes of this
Agreement, "Fully Diluted Company Shares" shall mean the sum of (i) the number
of shares of Company Common Stock outstanding as of the Effective Time plus (ii)
the number of shares of Company Common Stock subject to issuance pursuant to
stock options outstanding under the Company Stock Option Plans (as defined in
Section 1.7.1 below), plus (iii) 58,690 shares of Company Common Stock which
will be converted into Exchange Shares in exchange for the warrant held by U.S.
Bank in accordance with Exhibit 6.3.13. The shares of Parent Common Stock issued
at the Effective Time pursuant to this Section 1.7.1 to holders of Company
Common Stock and pursuant to Exhibit 6.3.13 are hereinafter referred to as the
"Exchange Shares". As soon as practicable after the Effective Time, the Company
Shareholders will surrender all certificates representing Company Common Stock
to Parent or a designated exchange agent, together with such duly executed
documentation as may be required by Parent or the exchange agent to effect a
transfer of such shares.
1.7.2 Company Stock Option Plans.
At the Effective Time, the Software Testing Laboratories, Inc. 1995
Stock Option Plan (the "1995 Plan") and the ST Labs, Inc. 1997 Stock Option Plan
(the "1997 Plan," and together
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with the 1995 Plan, the "Company Stock Option Plans") shall be assumed by Parent
in accordance with Section 5.11 hereof.
1.7.3 Capital Stock of Merger Sub.
Each share of Common Stock of Merger Sub issued and outstanding
immediately prior to the Effective Time will by virtue of the Merger and without
any action on the part of the holder thereof, be converted into and exchanged
for one validly issued, fully paid and nonassessable share of Common Stock of
the Surviving Corporation. The Surviving Corporation will issue a stock
certificate evidencing ownership of any such shares of capital stock of the
Surviving Corporation upon surrender of the certificates that formerly
represented the Common Stock of Merger Sub.
1.7.4 Adjustments.
The Exchange Ratio herein will be adjusted to reflect fully the effect
of any stock split, reverse split, stock dividend (including any dividend or
distribution of securities convertible into Parent Common Stock or Company
Common Stock), reorganization, recapitalization or other like change with
respect to Parent Common Stock or Company Common Stock occurring after the date
hereof and prior to the Effective Time.
1.7.5 Fractional Shares.
No fractional shares of Parent Common Stock will be issued in the
Merger. In lieu of any fractional share of Parent Common Stock to which a holder
would have otherwise been entitled, Parent shall pay in cash an amount equal to
the product of such fractional share multiplied by the Average Parent Closing
Price.
1.7.6 Limitation on Shares Issuable.
In no event shall the aggregate value of Parent Common Stock which
Parent is obligated to issue (i) upon the assumption of the Company Stock Option
Plans and (ii) in exchange for outstanding shares of Company Common Stock
pursuant to this Agreement exceed Nine Million Six Hundred Seventy Five Thousand
Dollars ($9,675,000) calculated on the basis of the Parent Average Closing
Price.
1.7.7 Private Placement.
The Parent Common Stock to be issued in the Merger is intended to be
exempt from the registration requirements of the Securities Act of 1933 (the
"Securities Act") pursuant to the private placement exemption provided by
Section 4(2) of the Securities Act and applicable state securities laws. Each
Principal Shareholder hereby agrees to take all reasonable actions and execute
all documents necessary or advisable to qualify the issuance of the Parent
Common Stock pursuant to this Agreement for such exemptions.
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Section 1.8 Surrender of Certificates.
1.8.1 Parent to Provide Common Stock and Cash.
Promptly after the Effective Time, Parent shall, in accordance with this
Section 1.8, (i) issue certificates representing the aggregate number of
Exchange Shares of Parent Common Stock issuable pursuant to Section 1.7.1 in
exchange for certificates formerly representing outstanding shares of Company
Common Stock, and (ii) tender cash in an amount sufficient to permit payment of
cash in lieu of fractional shares pursuant to Section 1.7.4 (the Exchange Shares
and such cash are collectively referred to as the "Merger Consideration").
1.8.2 Exchange Procedures.
At the Closing, each holder of record of a certificate or certificates
which immediately prior to the Effective Time represented issued and outstanding
Company Common Stock (individually a "Certificate" and collectively the
"Certificates") shall deliver to the Parent such shareholder's Certificates. The
holder of such Certificate(s) shall be entitled to receive at the Effective Time
in exchange therefor a certificate representing all of the Exchange Shares
(excluding those shares being placed in escrow as described below) and all the
cash, if any, that such holder is entitled to receive pursuant to Section 1.7
hereof. Of the Exchange Shares otherwise issuable to the Company Shareholders
under Section 1.7.1, a number of Exchange Shares equal to 10% of the aggregate
thereof (the "Indemnification Escrow Shares") rounded up to the nearest whole
share shall be deposited by the Parent with ChaseMellon Shareholder Services,
Inc. ("ChaseMellon" or the "Escrow Agent") in accordance with the terms and
conditions of the Escrow Agreement substantially in the form of Exhibit 1.8.2
(the "Indemnification and Escrow Agreement"). The number of Indemnification
Escrow Shares to be delivered on behalf of each Company Shareholder shall equal
the product of (i) the total number of Indemnification Escrow Shares to be
delivered to the Escrow Agent and (ii) a fraction, the numerator of which is the
number of shares of Parent Common Stock to be received by such Company
Shareholders as Merger Consideration and the denominator of which is the total
number of Exchange Shares, rounded up to the next whole share. The delivery of
the Indemnification Escrow Shares shall be made on behalf of the Company
Shareholders in accordance with the provisions hereof, with the same force and
effect as if such shares had been delivered by Parent directly to such holders
and subsequently delivered by such holders to the Escrow Agent. The shares so
deposited shall be evidenced by a stock certificate in the names of the Company
Shareholders and shall be subject to the restrictions on transfer and assignment
provided in the Indemnification and Escrow Agreement. The Indemnification Escrow
Shares shall not be eligible for registration pursuant to the Registration
Rights Agreements (defined in Section 5.1) of even date herewith. Tye V.
Minckler has been selected by the Company Shareholders as the initial
representative of the Company Shareholders (the "Indemnification
Representative") and, in the event of the inability or unwillingness prior to
the execution of the Indemnification and Escrow Agreement of Tye V. Minckler to
act as Indemnification Representative, a substitute Indemnification
Representative will be selected by the holders of a majority of the shares of
Parent Common Stock to be issued as Merger Consideration. Such Indemnification
Representative is authorized by this Agreement, as a specific term of the Merger
provided for herein, to act as Indemnification Representative of the Company
Shareholders in
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accordance with the provisions hereof, with the powers and authority provided
for in the Indemnification and Escrow Agreement. The approval of this Agreement
by the Company Shareholders shall also constitute their approval of the terms
and provisions of the Indemnification and Escrow Agreement, their confirmation
of the appointment of ChaseMellon to act as Escrow Agent, and their approval of
the terms and provisions therein relating to the Indemnification Representative,
including the provisions relating to the appointment of replacements, and their
confirmation of the appointment of Tye V. Minckler to act as the initial
Indemnification Representative.
1.8.3 Restricted Stock; Transfer Restrictions; Legends.
The shares of Parent Common Stock issued in the Merger shall not be
transferable in the absence of an effective registration statement under the
Securities Act, or an exemption therefrom. In the absence of an effective
registration statement under the Securities Act, neither such shares of Parent
Common Stock nor any interest therein shall be sold, transferred, assigned or
otherwise disposed of, unless Parent shall have previously received an opinion
of counsel knowledgeable in federal securities law, in form and substance
reasonably satisfactory to Parent and accompanied by such supporting documents
as Parent may reasonably request, to the effect that registration under the
Securities Act is not required in connection with such disposition. Parent shall
be entitled to give stop transfer instructions to its transfer agent with
respect to such shares of Parent Common Stock in order to enforce the foregoing
restrictions.
The certificate or certificates representing the shares of Parent Common
Stock issued in the Merger shall bear the following legend restricting the
transfer thereof, in addition to any other legend required by applicable law:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
1.8.4 No Further Ownership rights in Company Common Stock.
All Exchange Shares and any cash paid in lieu of fractional Exchange
Shares shall be deemed to have been issued or paid, respectively, in full
satisfaction of all rights pertaining to such shares of Company Common Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Company Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time, Company
Common Stock certificates are presented to the Surviving Corporation for any
reason, they shall be cancelled and exchanged as provided in this Article 1.
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Section 1.9 Dissenters' Rights.
Notwithstanding anything to the contrary contained this Agreement, any
holder of Company Common Stock issued and outstanding immediately prior to the
Effective Time with respect to which dissenters' rights, if any, are granted by
reason of the Merger under the WBCA and who does not vote in favor of the Merger
and who otherwise complies with Chapter 23B.13 of the WBCA ("Dissenting Company
Shares") shall not be converted into the right to receive the Merger
Consideration at or after the Effective Time pursuant to Section 1.7, unless
such holder fails to perfect, effectively withdraws or loses his or her right to
dissent from the Merger under the WBCA. Such holder shall have only such rights
as are granted by Chapter 23B.13 of the WBCA. If a holder of Dissenting Company
Shares fails to perfect, withdraws or loses his or her dissenters' rights under
the WBCA, then, as of the Effective Time or the occurrence of such event of
failure, withdrawal or loss, whichever last occurs, such holder's Dissenting
Company Shares shall cease to be Dissenting Company Shares and shall be
converted into the right to receive, and shall be exchangeable for, the Merger
Consideration into which such Dissenting Company Shares would have been
otherwise converted pursuant to Section 1.7 hereof.
Section l.10 Tax and Accounting Consequences.
It is intended by the parties hereto that the Merger will (i) constitute
a tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code") and (ii) be accounted for as a
pooling of interests business combination for financial reporting purposes.
Section 1.11 Taking of Necessary Action; Further Action.
If, at any time after the Effective Time, any further action shall be
necessary or desirable to carry out the purposes of this Agreement or to vest
the Surviving Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of the Company and Merger
Sub, the Company and Merger Sub shall fully authorize their respective officers
and directors, in the name of their respective corporations or otherwise, to
take, and will take, all such lawful and necessary action.
ARTICLE 2 - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND PRINCIPAL SHAREHOLDERS
The Company and Principal Shareholders hereby represent and warrant,
jointly and severally, to Parent and Merger Sub, subject to such exceptions as
are disclosed in the disclosure schedule attached as Exhibit 2 to this Agreement
(the "Company Disclosure Schedule") and dated as of the date hereof, as follows:
Section 2.1 Organization of the Company.
The Company is a corporation duly organized and validly existing under
the laws of the State of Washington. The Company has the corporate power to own
its properties and to carry on its business as now being conducted. The Company
is duly qualified to do business and in
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good standing as a foreign corporation in each jurisdiction in which the failure
to be so qualified would have a material adverse effect on the business, assets
(including intangible assets), financial condition or results of operations
(hereinafter referred to as a "Material Adverse Effect") of the Company. The
Company has delivered a true and correct copy of its Articles of Incorporation
and Bylaws, each as amended to date, to Parent.
Section 2.2 Company Capital Structure.
The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, no par value, of which 5,714,780 are issued and
outstanding as of the date hereof. Section 2.2(i) of the Company Disclosure
Schedule sets forth a true and complete list as of the date hereof of all
holders of Company Common Stock, including the number of shares of such stock
held thereby. There are no other outstanding shares of capital stock or voting
securities. All outstanding shares of Company Common Stock are duly authorized,
validly issued, fully paid and nonassessable and are free of any liens or
encumbrances created by, or resulting from the actions of, the Company, and,
except as set forth in Section 2.2(ii) of the Company Disclosure Schedule, are
not subject to preemptive rights or rights of first refusal created by statute,
the Articles of Incorporation or Bylaws of the Company or any agreement to which
Company is a party or by which it is bound. As of the date hereof, the Company
has outstanding, unexercised options under the Company Stock Options Plans
entitling the holders thereof to purchase an aggregate of 1,772,600 shares of
Company Common Stock. A list of all such options is set forth in Section 2.2(i)
of the Company Disclosure Schedule. Except for the rights created pursuant to
this Agreement, the Company Stock Option Plans, and as set forth in Section
2.2(iii) of the Company Disclosure Schedule, there are no other options,
warrants, calls, rights, commitments or agreements of any character to which the
Company is a party or by which it is bound obligating the Company to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any shares of capital stock of the Company or
obligating the Company to grant, extend, accelerate the vesting of, change the
price of, or otherwise amend or enter into any such option, warrant, call,
right, commitment or agreement. Except as disclosed in Section 2.2(iv) of the
Company Disclosure Schedule, there are no contracts, commitments or agreements
relating to voting, purchase or sale of the Company's capital stock (i) between
or among the Company and any of its shareholders or (ii) to the knowledge of the
Company and the Principal Shareholders, between or among any of the Company's
shareholders. The terms of the Company Stock Option Plans permit the assumption
or substitution of options to purchase Parent Common Stock as provided in this
Agreement, without the consent or approval of the holders of such securities,
the Company Shareholders, or otherwise. True and complete copies of all forms of
agreements and instruments relating to or issued under the Company Stock Option
Plans have been delivered to Parent and such agreements and instruments have not
been amended, modified or supplemented, and there are no agreements to amend,
modify or supplement such agreements or instruments in any case from the form
made available to Parent.
Section 2.3 Subsidiaries.
The Company does not have and has never had any subsidiaries and does
not otherwise own and has never otherwise owned any shares of capital stock or
any equity interest in, or
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control of, directly or indirectly any other corporation, partnership,
association, joint venture or other business entity.
Section 2.4 Authority.
The Company has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company. This Agreement has been duly
executed and delivered by the Company and the Principal Shareholders and
constitutes the valid and binding obligation of the Company and the Principal
Shareholders, enforceable against each in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other laws relating to or affecting the enforcement of creditors'
rights generally or by general equitable principles. The execution and delivery
of this Agreement by the Company does not, and, as of the Effective Time, the
consummation of the transactions contemplated hereby will not, conflict with, or
result in any violation of, or default under (with or without notice or lapse of
time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any benefit (a "Conflict") under (i)
any provision of the Articles of Incorporation or Bylaws of the Company or (ii)
any mortgage, indenture, lease, contract or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or its properties or
assets. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
third party (so as not to trigger any Conflict under (i) or (ii) above), is
required by or with respect to the Company or Principal Shareholders in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (i) the filing of the
Articles of Merger and any required certificates with the Washington Secretary
of State, (ii) such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws, (iii) the filing by the Principal
Shareholders with the SEC of a Form 3 Initial Statement of Beneficial
Ownership, if required; (iv) the filing by the Principal Shareholders with the
SEC of a Schedule 13D, if required, and (v) such other consents, waivers,
authorizations, filings, approvals and registrations which are set forth on the
Company Disclosure Schedule.
Section 2.5 Company Financial Statements.
The Company has delivered to Parent its audited balance sheet as of
December 31, 1997 and the related audited statements of operations,
shareholders' equity and cash flows for the year then ended and the Company's
unaudited balance sheet as of March 31, 1998 (the "March Balance Sheet") and the
related unaudited statements of operations, shareholders' equity and cash flows
for the three-month periods ended March 31, 1998 and 1997, together with
accompanying notes thereto, (collectively, the "Company Financials"). The
Company Financials are correct in all material respects and were prepared in
accordance with generally accepted accounting principles ("GAAP") consistently
applied. The Company Financials present fairly
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the financial condition and operating results of the Company as of the dates and
during the periods indicated therein.
Section 2.6 No Undisclosed Liabilities.
The Company does not have any liability, indebtedness, obligation,
expense, claim, deficiency, guaranty or endorsement of any type, whether
accrued, absolute, contingent, matured, unmatured or other (whether or not
required to be recorded or disclosed in financial statements in accordance with
GAAP), except those (i) that are recorded in the March Balance Sheet, or (ii)
that have arisen in the ordinary course of the Company's business since
March 31, 1998.
Section 2.7 No Changes.
Except as set forth in Schedule 2.7 to the Company Disclosure Schedule,
since March 31, 1998, there has not been, occurred or arisen any:
2.7.1 transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
2.7.2 amendments or changes to the Articles of Incorporation or Bylaws
of the Company;
2.7.3 capital expenditure or commitment by the Company in any month in
excess of $50,000 in the aggregate.
2.7.4 destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance),
2.7.5 labor trouble, claim of wrongful discharge or other unlawful labor
practice or action of which the Company has received written notice or of which
the Company is aware;
2.7.6 change in accounting principles, methods, estimates or practices
by the Company;
2.7.7 revaluation by the Company of any of its assets;
2.7.8 declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock;
2.7.9 increase, other than in the ordinary course of business, in the
salary or other compensation payable or to become payable by the Company to any
of its officers, directors, employees or advisors, or the declaration, payment
or commitment or obligation of any kind for the payment, by the Company, of a
bonus or other additional salary or compensation to any such person except as
otherwise contemplated by this Agreement;
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2.7.10 sale, lease, license or other disposition of any of the assets or
properties of the Company, in an amount exceeding $10,000 in any individual case
or $20,000 in the aggregate;
2.7.11 amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound;
2.7.12 except for advances to employees for travel and business expenses
in the ordinary course of business and consistent with past practices, loan by
the Company to any person or entity, incurring by the Company of any
indebtedness (other than drawings on its bank line of credit in the ordinary
course of business), guaranteeing by the Company of any indebtedness (other than
trade debt in the ordinary course of business and consistent with past
practices), issuance or sale of any debt securities of the Company or
guaranteeing of any debt securities of others;
2.7.13 waiver or release of any right or claim of the Company in an
amount in excess of $10,000, including any write-off or other compromise of
any account receivable of the Company;
2.7.14 commencement or notice or, to the Company's knowledge, threat of
commencement of any lawsuit or proceeding against or investigation of the
Company or its affairs;
2.7.15 notice of any claim of ownership by a third party of the
Company's Intellectual Property (as defined in Section 2.11 below) or of
infringement by the Company of any third party's Intellectual Property rights;
2.7.16 issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or of
any other of its securities;
2.7.17 change in pricing or royalties set or charged by the Company to
its customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property to the Company other than such changes
in the ordinary course of business based upon changes in costs or volume which
are consistent with past practices;
2.7.18 event or condition of any character that has or reasonably would
be expected to have a Material Adverse Effect on the Company; or
2.7.19 agreement by the Company or any officer or employees thereof to
do any of the things described in the preceding Section 2.7.1 through Section
2.7.18 other than negotiations with Parent and its representatives regarding the
transactions contemplated by this Agreement.
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Section 2.8 Taxes.
2.8.1 Definitions.
For purposes of this Agreement, the following terms have the following
meanings: "Tax" (and, with correlative meaning, "Taxes" and "Taxable") means (i)
any net income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Entity (a "Tax Authority") responsible for the imposition of any
such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period and
(iii) any liability for the payment of any amounts of the type described in (i)
or (ii) as a result of any express or implied obligation to indemnify and any
other person. As used herein, "Tax Return" or "Return" shall mean any return,
statement, report or form (including, without limitation,) estimated Tax returns
and reports, withholding Tax returns and reports and information reports and
returns required to be filed with respect to Taxes.
2.8.2 Tax Returns and Audits.
2.8.2.1 The Company as of the Effective Time will have prepared and
timely filed (or made timely request for extension) all required Returns
relating to any and all Taxes or income concerning or attributable to the
Company or its operations. The Returns are accurate and correct and do not
contain a disclosure statement under Section 6662 of the Code (or any
predecessor provision or comparable provision of state, local or foreign law).
2.8.2.2 The Company as of the Effective Time: (A) will have paid or
accrued all Taxes it is required to pay or accrue and (B) will have withheld
with respect to its employees all federal and state income taxes, FICA, FUTA and
other Taxes required to be withheld.
2.8.2.3 Except as set forth in Section 2.8.2.3 of the Company
Disclosure Schedule, the Company has not been delinquent in the payment of any
Tax nor is there any Tax deficiency outstanding, proposed or assessed against
the Company, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax.
2.8.2.4 No audit or other examination of any Return of the Company
is presently in progress, nor has the Company been notified of any request for
such an audit or other examination.
2.8.2.5 The Company does not have any liabilities for unpaid
federal, state, local and foreign Taxes which have not been accrued or reserved
against in accordance with GAAP on the March Balance Sheet, whether asserted or
unasserted, contingent or otherwise.
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2.8.2.6 The Company has provided to Parent copies of all federal and
state income Tax Returns since inception.
2.8.2.7 There are no liens, pledges, charges, claims, security
interests or other encumbrances of any sort ("Liens") on the assets of the
Company relating to or attributable to Taxes, other than Liens for Taxes not yet
due and payable.
2.8.2.8 None of the Company's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
2.8.2.9 As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions of
this Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible pursuant to Sections 280G, 162 or 404 of the Code.
2.8.2.10 The Company has not filed any consent agreement under
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code
apply to any disposition of a subsection (f) asset (as defined in Section 341
(f)(4) of the Code) owned by the Company.
2.8.2.11 The Company is not a party to a Tax sharing or allocation
agreement nor does the Company owe any amount under any such agreement.
2.8.2.12 The Company is not, and has not been at any time, a "United
States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
2.8.2.13 The Company has never been a party to a distribution to
which Section 355(e) of the Code applies.
2.8.2.14 The Company is not a party to or bound by any closing
agreement or offer in compromise with any Tax Authority.
2.8.2.15 The Company has never been a member of an affiliated group
of corporations, within the meaning of Section 1504 of the Code, or a member of
combined, consolidated or unitary group for state, local or foreign Tax
purposes.
2.8.2.16 The Company has not made a consent dividend election under
Section 565 of the Code.
2.8.2.17 The Company has not been a personal holding company under
Section 542 of the Code.
2.8.2.18 Except as set forth in Section 2.8.2.18 of the Company
Disclosure Schedule, the Company has neither agreed to make, nor is it required
to make, any adjustment under Sections 481(a) or 263A of the Code or any
comparable provision of state or foreign tax laws by reason of a change in
accounting method or otherwise. The Company has not taken
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action which is not in accordance with past practice that could defer a
liability for Taxes of the Company from any taxable period ending on or before
the date hereof to any taxable period ending after such date.
2.8.2.19 The Company does not have and has not had a permanent
establishment in any foreign country, as defined in any applicable Tax treaty or
convention between the United States and such foreign country, and the Company
has not engaged in a trade or business within, or derived any income from, any
foreign country.
2.8.2.20 The Company is not a party to any joint venture,
partnership, or other arrangement or contract which could be treated as a
partnership for federal income tax purposes.
2.8.2.21 None of the income recognized, for federal, state, local or
foreign income tax purposes, by the Company during the period commencing on the
date hereof and ending on the Effective Time will be derived other than in the
ordinary course of business.
2.8.2.22 No claim has been made by any Tax Authority in any
jurisdiction where the Company does not file Returns that the Company is or may
be subject to Tax by that jurisdiction.
Section 2.9 Restrictions on Business Activities; Necessary Equipment.
There is no agreement (noncompete or otherwise), judgment, injunction,
order or decree to which the Company is a party or otherwise binding upon the
Company which has or reasonably would be expected to have the effect of
prohibiting or impairing any business practice of the Company, any acquisition
of property (tangible or intangible) by the Company or the conduct of business
by the Company. Without limiting the foregoing, the Company has not entered into
any agreement under which the Company is restricted from selling, licensing or
otherwise distributing any of its services or products to any class of
customers, in any geographic area, during any period of time or in any segment
of the market. The Company has all property and equipment necessary to operate
its business as now conducted, and no material expenditures beyond those set
forth in the Company's capital budget (as delivered to Parent) arc required for
the operation of the Company's business as now conducted.
Section 2.10 Title to properties; Absence of Liens and Encumbrances.
2.10.1 The Company Disclosure Schedule sets forth a list of all real
property currently leased by the Company, the name of the lessor and the date
of the lease and each amendment thereto. All such current leases are in full
force and effect, are valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing default or event
of default (or event which with notice or lapse of time, or both, would
constitute a default) by the Company or of which the Company has knowledge by
any other party thereto. No lease or other obligation of the Company contains
any obligation to purchase any real property. The Company does not own any real
property.
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2.10.2 The Company has good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens (as defined in Section 2.8.2.7), except as
reflected in the Company Financials or the Company Disclosure Schedule and
except for liens for taxes not yet due and payable and such imperfections of
title and encumbrances, if any , which are not material in character, amount or
extent, and which do not materially detract from the value, or materially
interfere with the present use, of the property subject thereto or affected
thereby.
Section 2.11 Intellectual Property.
2.11.1 Except as set forth in Section 2.11 of the Company Disclosure
Schedule, the Company owns, or is licensed or otherwise possesses legally
enforceable rights to use, all patents, trademarks, trade names, service marks,
copyrights, and any applications therefor, maskworks, net lists, schematics,
technology, know-how, computer software programs or applications (in both source
code and object code form), and tangible or intangible proprietary information
or material that are used in the business of the Company as currently conducted
(the "Company Intellectual Property Rights ").
2.11.2 Section 2.11.2 of the Company Disclosure Schedule sets forth a
complete list of all patents, registered and material unregistered trademarks,
registered copyrights, trade names and service marks, and any applications
therefor, included in the Company Intellectual Property Rights, and specifies,
where applicable, the jurisdictions in which each such Company Intellectual
Property Right has been issued or registered or in which an application for such
issuance and registration has been filed, including the respective registration
or application numbers and the names of all registered owners. Section 2.11.2 of
the Company Disclosure Schedule also sets forth a complete list of all licenses,
sublicenses and other agreements to which the Company is a party and pursuant to
which the Company or any other person is authorized by the Company to use any
Company Intellectual Property Right, excluding object code end-user licenses
granted to end-users in the ordinary course of business that permit use of
software products without a right to modify, distribute or sublicense the same
("End-User Licenses ") or trade secrets of the Company, and includes the
identity of all parties thereto. The execution and delivery of this Agreement by
the Company, and the consummation of the transactions contemplated hereby, will
neither cause the Company to be in violation or default under any such license,
sublicense or agreement, nor entitle any other party to any such license,
sublicense or agreement to terminate or modify such license, sublicense or
agreement. The Company is the sole and exclusive owner or licensee of, with all
right, title and interest in and to (free and clear of any liens or
encumbrances), the Company Intellectual Property Rights, and has sole and
exclusive rights (and is not contractually obligated to pay any compensation to
any third party in respect thereof) to the use thereof or the material covered
thereby in connection with the services or products in respect of which the
Company Intellectual Property Rights are being used.
2.11.3 No claims with respect to the Company Intellectual Property
Rights have been asserted against the Company or are, to the Company's
knowledge, threatened by any person, nor is the Company aware of any bona fide
claims or any valid grounds for any bona fide claims (i) to the effect that the
manufacture, sale, licensing or use of any of the products or services of
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the Company infringes on any copyright, patent, trade mark, service mark, trade
secret or other proprietary right, (ii) against the use by the Company of any
trademarks, service marks, trade names, trade secrets, copyrights, maskworks,
patents, technology, know-how or computer software programs and applications
used in the Company's business as currently conducted, or (iii) challenging the
ownership by the Company, validity or effectiveness of any of the Company
Intellectual Property Rights. All registered trademarks, service marks and
copyrights held by the Company are valid and subsisting. The business of the
Company as currently conducted or as proposed to be conducted by the Company has
not and does not infringe on any proprietary right of any third party. To the
Company's knowledge, there is no material unauthorized use, infringement or
misappropriation of any of the Company Intellectual Property Rights by any third
party, including any employee, consultant, or former employee or consultant of
the Company. No Company Intellectual Property Right or product or service of the
Company or any of its subsidiaries is subject to any outstanding decree, order,
judgment, or stipulation restricting in any manner the licensing thereof by the
Company. Each employee of and consultant to the Company has executed a
proprietary information and confidentiality agreement substantially in the form
included as an exhibit to Section 2.11.3 of the Company Disclosure Schedule.
Section 2.12 Agreements, Contracts and Commitments.
2.12.1 Except as set forth in Section 2.12 of the Company Disclosure
Schedule, the Company does not have, is not a party to, nor is it bound by:
2.12.1.1 Any collective bargaining agreements,
2.12.1.2 Any agreements or arrangements that contain any severance
pay, or any agreements or arrangements that contain any post-employment
liabilities or obligations,
2.12.1.3 Any bonus, deferred compensation, pension, profit sharing
or retirement plans, or any other employee benefit plans or arrangements,
2.12.1.4 Any employment or consulting agreement with an employee or
individual consultant or salesperson or consulting or sales agreement, under
which a firm or other organization provides services to the Company,
2.12.1.5 Any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
2.12.1.6 Any fidelity or surety bond or completion bond,
2.12.1.7 Any lease of personal property providing for aggregate
future payments in an amount in excess of $10,000,
2.12.1.8 Any agreement of indemnification or guaranty,
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2.12.1.9 Any agreement containing any covenant limiting the freedom
of the Company to engage in any line of business or to compete with any person,
2.12.1.10 Any agreement relating to capital expenditures and
involving future payments in an amount in excess of $ 10,000,
2.12.1.11 Any agreement relating to the disposition or acquisition
of assets or any interest in any business enterprise outside the ordinary course
of the Company's business,
2.12.1.12 Any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in Section
2.12.1.8 hereof,
2.12.1.13 Any purchase order or contract for the purchase of raw
materials in an amount in excess of $10,000,
2.12.1.14 Any construction contracts,
2.12.1.15 Any distribution, joint marketing or development
agreement,
2.12.1.16 Any agreement pursuant to which the Company has granted or
may grant in the future, to any party a source-code license or option or other
right to use or acquire source-code, or
2.12.1.17 Any other agreement with aggregate future payments in an
amount in excess of $10,000 and which is not cancelable without penalty within
thirty (30) days.
2.12.2 Except for such alleged breaches, violations and defaults, and
events that would constitute a breach, violation or default with the lapse of
time, giving of notice, or both, as are all noted in the Company Disclosure
Schedule, the Company has not breached, in any material respect, violated or
defaulted under, or received notice that it has breached, violated or defaulted
under, any of the terms or conditions of any agreement, contract or commitment
set forth on Section 2.11.2 or Section 2.12.1 of the Company Disclosure Schedule
(any such agreement, contract or commitment, a "Contract"). Each Contract is in
full force and effect and is not subject to any default thereunder of which the
Company has knowledge by any party obligated to the Company pursuant thereto.
Section 2.13 Interested Party Transactions.
To the Company's knowledge, except as set forth in Section 2.13 of the
Company Disclosure Schedule, no officer, director or affiliate (as defined under
Regulation C under the Securities Act) of the Company (nor any ancestor,
sibling, descendant or spouse of any of such persons, or any trust, partnership
or corporation in which any of such persons has or has had an economic
interest), has or has had, directly or indirectly, (i) an economic interest in
any entity which furnished or sold, or furnishes or sells, services or products
that the Company furnishes or
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sells, or proposes to furnish or sell, or (ii) an economic interest in any
entity that purchases from or sells or furnishes to, the Company, any goods or
services or (iii) a beneficial interest in any contract or agreement set forth
in Section 2.11.2 or Section 2.12.1 of the Company Disclosure Schedule;
provided, that ownership of no more than five percent (5%) of the outstanding
voting stock of a publicly traded corporation and no more than ten percent
(10%) of the outstanding equity of any other entity will not be deemed an
"economic interest in any entity" for purposes of this Section 2.13.
Section 2.14 Compliance with Laws.
The Company has complied in all material respects with, is not in
material violation of, and has not received any notices of violation with
respect to, any foreign, federal, state or local statute, law or regulation.
Section 2.15 Litigation.
Except as set forth in Section 2.15 of the Company Disclosure Schedule,
there is no action, suit or proceeding of any nature pending or, to the
Company's knowledge, threatened against the Company, its properties or any of
its officers or directors, in their respective capacities as such. To the
Company's knowledge, there is no investigation pending or threatened against the
Company, its properties or any of its officers or directors in their capacities
as agents of the Company by or before any governmental entity. To the Company's
knowledge, no Governmental Entity has at any time challenged or questioned the
legal right of the Company to manufacture, offer or sell any of its products or
services in the present manner or style thereof.
Section 2.16 Insurance.
With respect to the insurance policies and fidelity bonds covering the
assets, business, equipment, properties, operations, employees, officers and
directors of the Company, there is no material claim by the Company pending
under any of such policies or bonds as to which coverage has been questioned,
denied or disputed by the underwriters of such policies or bonds. All premiums
due and payable under all such policies and bonds have been paid and the Company
is otherwise in material compliance with the terms of such policies and bonds.
The Company has no knowledge of any threatened termination of, or material
premium increase with respect to, any of such policies.
Section 2.17 Minute Books.
The minute books of the Company made available to counsel for Parent are
the only minute books of the Company and contain an accurate summary of all
meetings of directors (or committees thereof) and shareholders or actions by
written consent since the time of incorporation of the Company.
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Section 2.18 Environmental Matters.
2.18.1 Hazardous Material.
The Company has not: (i) operated any underground storage tanks at any
property that the Company has at any time owned, operated, occupied or leased,
or (ii) illegally released any material amount of any substance that has been
designated by any Governmental Entity or by applicable federal, state or local
law to be radioactive, toxic, hazardous or otherwise a danger to health or the
environment, including, without limitation, PCBs, asbestos, petroleum,
ureaformaldehyde and all substances listed as hazardous substances pursuant to
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, or defined as a hazardous waste pursuant to the United States
Resource Conservation and Recovery Act of 1976, as amended, and the regulations
promulgated pursuant to said laws (a "Hazardous Material"), but excluding office
and janitorial supplies properly and safely maintained. No Hazardous Materials
have been released, in amounts which could be reasonably expected to involve the
Company in any environmental litigation or impose upon Company any material
environmental liability, as a result of the deliberate actions of the Company,
or, to the Company's knowledge, as a result of any actions of any third party or
otherwise, in, on or under any property, including the land and the
improvements, groundwater and surface water thereof, that the Company has at any
time owned, operated, occupied or leased. To the knowledge of the Company, no
asbestos or asbestos containing materials are present in or on any facility
leased or owned by the Company.
2.18.2 Hazardous Material Activities.
The Company has not transported, stored, used, manufactured, disposed
of, released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, nor has the
Company disposed of, transported, sold, or manufactured any product containing a
Hazardous Material (any or all of the foregoing being collectively referred to
as "Hazardous Material Activities") in violation of any rule, regulation, treaty
or statute promulgated by any Governmental Entity in effect prior to or as of
the date hereof to prohibit, regulate or control Hazardous Materials or any
Hazardous Material Activity.
2.18.3 Permits.
The Company currently holds all environmental approvals, permits,
licenses, clearances and consents (the "Environmental Permits"), if any,
necessary for the conduct of the Company's Hazardous Material Activities.
2.18.4 Environmental Liabilities.
No action, proceeding, revocation proceeding, amendment procedure, writ,
injunction or claim is pending, or to the Company's knowledge, threatened
concerning any Environmental Permit, Hazardous Material or any Hazardous
Material Activity of the Company. The Company has no knowledge of any fact or
circumstance that could be reasonably expected to involve the
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Company in any environmental litigation or impose upon the Company any
environmental liability.
Section 2.19 Brokers' and Finders' Fees; Third Party Expenses.
The Company has not incurred, nor will it incur, directly or indirectly,
any liability for brokerage or finders' fees or commissions or any similar
charges in connection with this Agreement or any transaction contemplated
hereby. Section 2.19 of the Company Disclosure Schedule sets forth the Company's
current reasonable estimate of all Third Party Expenses (as defined in Section
5.4) expected to be incurred by the Company in connection with the negotiation
and effectuation of the terms and conditions of this Agreement and the
transactions contemplated hereby.
Section 2.20 Employee Matters and Benefit Plans.
2.20.1 Definitions.
With the exception of the definition of "Affiliate" set forth below
(such definition will only apply to this Section 2.20), for purposes of this
Agreement, the following terms will have the meanings set forth below:
"Affiliate" will mean any other person or entity under common control
with the Company within the meaning of Section 414(b)(c), (m) or (o) of the
Code and the regulations thereunder;
"ERISA" will mean the Employee Retirement Income Security Act of 1974,
as amended;
"Company Employee Plan" will refer to any plan, program, policy,
practice, agreement or other arrangement providing for compensation, severance,
termination pay, performance awards, stock or stock-related awards, fringe
benefits or other employee benefits or remuneration of any kind, whether formal
or informal, funded or unfunded (including without limitation, each "employee
benefit plan" within the meaning of Section 3(3) of ERISA which is or has been
maintained, contributed to, or required to be contributed to, by the Company or
any Affiliate for the benefit of any "Employee" as defined below), and pursuant
to which the Company or any Affiliate has or may have any material liability
contingent or otherwise;
"Employee" will mean any current, former, or retired employee, officer,
or director of the Company or any Affiliate;
"Employee Agreement" will refer to each management, employment,
severance, consulting, relocation, repatriation, expatriation, visa, work permit
or similar agreement or contract between the Company or any Affiliate and any
Employee or consultant, whether formal or informal, written or oral;
"IRS" will mean the Internal Revenue Service;
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"Multiemployer Plan" will mean any "Pension Plan" (as defined below)
which is a "multiemployer plan," as defined in Section 3(37) of ERISA; and
"Pension Plan" will refer to each Company Employee Plan which is an
"employee pension benefit plan," within the meaning of Section 3(2) of ERISA.
2.20.2 Schedule.
The Company Disclosure Schedule contains an accurate and complete list
of each Company Employee Plan and each Employee Agreement under each such
Company Employee Plan or Employee Agreement and sets forth the estimated 401(k)
contribution by Company for the year ending December 31, 1998 as well as any
liabilities which, with reasonable due diligence, are not discernible solely
from the Company Employee Plan and Employee Agreements. The Company does not
have any stated plan or commitment to establish any new Company Employee Plan or
Employee Agreement, to modify any Company Employee Plan or Employee Agreement
(except to the extent required by law or to conform any such Company Employee
Plan or Employee Agreement to the requirements of any applicable law, in each
case as previously disclosed to Parent in writing, or as required by this
Agreement), or to enter into any Company Employee Plan or Employee Agreement
except as contemplated by this Agreement.
2.20.3 Documents.
The Company has provided to Parent (i) correct and complete copies of
all documents embodying or relating to each Company Employee Plan and each
Employee Agreement including all amendments thereto and written interpretations
thereof; (ii) the most recent annual actuarial valuations, if any, prepared for
each Company Employee Plan; (iii) the three most recent annual reports (Series
5500 and all schedules thereto), if any, required under ERISA or the Code in
connection with each Company Employee Plan or related trust; (iv) if the Company
Employee Plan is funded, the most recent annual and periodic accounting of
Company Employee Plan assets; (v) the most recent summary plan description
together with the most recent summary of material modifications, if any,
required under ERISA with respect to each Company Employee Plan; (vi) all IRS
determination letters and rulings relating to Company Employee Plans and copies
of all applications and correspondence to or from the IRS or the Department of
Labor ("DOL") with respect to any Company Employee Plan; (vii) all
communications material to any Employee or Employees relating to any Company
Employee Plan and any proposed Company Employee Plans, in each case, relating to
any amendments, terminations, establishments, increases or decreases in
benefits, acceleration of payments or vesting schedules or other events which
would result in any material liability to the Company; and (viii) any
registration statement and prospectus prepared in connection with each Company
Employee Plan.
2.20.4 Employee Plan Compliance.
The Company has performed in all material respects all obligations
required to be performed by it under each Company Employee Plan and each Company
Employee Plan has
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been established and maintained in all material respects in accordance with its
terms and in compliance with all applicable laws, statutes, orders, rules and
regulations, including but not limited to ERISA or the Code; (ii) no "prohibited
transaction," within the meaning of Section 4975 of the Code or Section 406 of
ERISA, has occurred with respect to any Company Employee Plan; (iii) there are
no actions, suits or claims pending, or, to the knowledge of the Company,
threatened or anticipated (other than routine claims for benefits) against any
Company Employee Plan or against the assets of any Company Employee Plan; (iv)
each Company Employee Plan can be amended, terminated or otherwise discontinued
after the Effective Time in accordance with its terms, without liability to the
Company, Parent or any of its Affiliates (other than ordinary administration
expenses typically incurred in a termination event); (v) there are no inquiries
or proceedings pending or, to the knowledge of the Company or any affiliates,
threatened by the IRS or DOL with respect to any Company Employee Plan, and (vi)
neither the Company nor any Affiliate is subject to any penalty or tax with
respect to any Company Employee Plan under Section 402(i) of ERISA or Section
4975 through 4980 of the Code.
2.20.5 Pension Plans.
The Company does not now, nor has it ever, maintained, established,
sponsored, participated in, or contributed to, any Pension Plan which is subject
to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of
the Code.
2.20.6 Multiemployer Plans.
At no time has the Company contributed to or been requested to
contribute to any Multiemployer Plan.
2.20.7 No Post-Employment Obligations.
No Company Employee Plan provides, or has any liability to provide,
life insurance, medical or other employee benefits to any Employee upon his or
her retirement or termination of employment for any reason, except as may be
required by statute, and the Company has never represented, promised or
contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employees would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
2.20.8 Effect of Transaction.
2.20.8.1 Except as set forth in Section 2.20.8.1 of the Company
Disclosure Schedule, the execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or upon the occurrence
of any additional or subsequent events) constitute an event under any Company
Employee Plan, Employee Agreement, trust or loan that will or may result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any Employee.
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2.20.8.2 No payment or benefit which will or may be made by the
Company or Parent or any of their respective affiliates with respect to any
Employee will be characterized as an "excess parachute payment," within the
meaning of Section 28OG(b)(1) of the Code.
2.20.9 Employment Matters.
The Company (i) is in compliance in all material respects with all
applicable foreign, federal, state and local laws, rules and regulations
respecting employment, employment practices, terms and conditions of employment
and wages and hours, in each case, with respect to Employees; (ii) has withheld
all amounts required by law or by agreement to be withheld from the wages,
salaries and other payments; (iii) is not liable for any arrears of wages or any
taxes or any penalty for failure to comply with any of the foregoing, and (iv)
is not liable for any payment to any trust or other fund or to any government or
administrative authority, with respect to unemployment compensation benefits,
social security or similar benefits or obligations (other than routine payments
to be made in the normal course of business and consistent with past practice).
2.20.10 Labor.
No work stoppage or labor strike against the Company is pending or, to
knowledge of the Company, threatened. The Company is not involved in or, to the
knowledge of the Company, threatened with, any labor dispute, grievance, or
litigation relating to labor, safety or discrimination matters involving any
Employee, including, without limitation, charges of unfair labor practices or
discrimination complaints, which, if adversely determined, would, individually
or in the aggregate, result in liability to the Company. Neither the Company nor
any of its subsidiaries has engaged in any unfair labor practices within the
meaning of the National Labor Relations Act which would, individually or in the
aggregate, directly or indirectly result in a liability to the Company. The
Company is not presently, nor has it been in the past, a party to, or bound by,
any collective bargaining agreement or union contract with respect to Employees
and no collective bargaining agreement is being negotiated by the Company.
Section 2.21 Accounts Receivable.
The accounts receivable of the Company reflected in the Company
Financials or existing at the Effective Time, including, without limitation,
notes receivable, trade accounts receivable, and employee receivables, arise
from valid transactions in the ordinary course of business, are not subject to
adjustment or discount, and are collectible at the aggregate recorded amounts
thereof. The recorded allowance for doubtful accounts is adequate and calculated
consistent with past practice.
Section 2.22 Customers.
To the Company's knowledge, the acquisition hereunder will not
adversely affect the Company's business relationship with any of its customers.
Copies of all correspondence or other documents relating to complaints received
by the Company since inception, from any of its customers, whether or not
resolved, and any other pending customer complaints have heretofore
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been furnished to Parent. The Company has no obligation to accept any returns
from or make any allowance to any customers by reason of alleged defective
services or products.
Section 2.23 Improper Payments.
The Company has not made, offered or agreed to offer anything of value
to any foreign government official, political party or candidate for government
office nor has it otherwise taken any action which would cause the Company to be
in violation of Sections 103b or 104 of the Foreign Corrupt Practices Act of
1977, as amended. The Company has adequate financial controls to prevent
improper or unlawful payments, gifts or expenditures relative to political
activity to foreign or domestic government officials or others.
Section 2.24 Permits.
The Company currently holds all permits, licenses, clearances and
consents necessary for the conduct of the Company's businesses as such
activities and businesses are currently being conducted.
Section 2.25 Y2K Compliant.
All Company Intellectual Property Rights in the form of computer
software that are owned, developed or utilized by the Company in the operation
of its business or licensed by the Company to others as part of the Company's
business have been tested and are fully capable of providing accurate results
using data having data ranges spanning the twentieth ("20th") and twenty-first
("21st") centuries. Without limiting the generality of the foregoing, all
software licensed from and/or developed by the Company shall (a) manage and
manipulate data involving all dates from the 20th and 21st centuries without
functional or data abnormality related to such dates; (b) manage and manipulate
data involving all dates from the 20th or 21st centuries without inaccurate
results related to such dates; (c) have user interfaces and data fields
formatted to distinguish between dates from the 20th and 21st centuries; and (d)
represent all data related to include indications of the millennium, century,
and decade as well as the actual year.
Section 2.26 Accounting Matters.
Neither the Company nor, to the knowledge of the Company and the
Principal Shareholders, any of its affiliates or stockholders has taken or
agreed to take any action that could prevent Parent from accounting for the
business combination to be effected by the Merger as a "pooling-of-interests."
The Company has not failed to bring to the attention of Parent any actions, or
agreements or understandings, whether written or oral, of the Company or, to its
knowledge, any of the Company's shareholders, that could prevent Parent from
accounting for the Merger as a "pooling-of-interests."
Section 2.27 Related Party Accounts.
Section 2.27 of the Company Disclosure Schedule accurately sets forth
all accounts receivable and accounts payable of the Company as of June 30, 1998
arising from transactions
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(exclusive of salaries, bonuses and reimbursement of business expenses incurred
since March 31, 1998) with employees, officers, directors, shareholders or
affiliates of the Company.
Section 2.28 Disclosure.
None of the representations or warranties made by the Company and
Principal Shareholders (as modified by the Company Disclosure Schedule), nor any
statement made in any Exhibit, Schedule or certificate furnished by the Company
or Principal Shareholders pursuant to this Agreement, contains or will contain
at the Effective Time any untrue statement of a material fact or omits or will
omit to state any material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under which made,
not misleading.
ARTICLE 3 - REPRESENTATIONS AND
WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company and
Principal Shareholders, as follows:
Section 3.1 Organization, Standing and Power.
Each of Parent and Merger Sub is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power to own, lease and operate its property
and to carry on its business as now being conducted. Parent has delivered or
made available a true and correct copy of the Certificate of Incorporation and
Bylaws or other charter documents of Parent, each as amended to date, to counsel
for the Company.
Section 3.2 Authority.
Parent and Merger Sub have all requisite corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Parent and Merger Sub. This Agreement has been
duly executed and delivered by Parent and Merger Sub and constitutes the valid
and binding obligations of Parent and Merger Sub, enforceable in accordance with
its terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting the
enforcement of creditors' rights generally or by general equitable principles.
The execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of a benefit under (i) any provision of the Certificate
of Incorporation or Bylaws of Parent or Merger Sub, or (ii) any agreement filed
as a "Material Agreement" with the SEC. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity or third party (so as not to trigger a Conflict), is required by or with
respect to Parent and Merger Sub in connection with the execution and delivery
of this Agreement by Parent and Merger Sub or the
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consummation by Parent and Merger Sub of the transactions contemplated hereby,
except for the filing of the Articles of Merger and any required certificates
with the Washington Secretary of State, (ii) the filing of one or more of Forms
S-3, S-8 or 8-K with the Securities and Exchange Commission ("SEC"), (iii) any
filings as may be required under applicable state securities laws and the laws
of any foreign country, and (iv) such other consents, authorizations, filings,
approvals and registrations set forth in Section 3.2 of the Parent Disclosure
Schedule.
Section 3.3 Capital Structure.
3.3.1 The authorized capital stock of Parent consists of 20,000,000
shares of Common Stock, of which 12,876,301 shares were issued and outstanding
as of June 30, 1998. The authorized capital stock of Merger Sub consists of 100
shares of Common Stock, 100 shares of which, as of the date hereof, are issued
and outstanding and are held by Parent. All such shares have been duly
authorized, and all such issued and outstanding shares have been validly issued,
are fully paid and nonassessable and are free of any liens or encumbrances other
than any liens or encumbrances created by or imposed upon the holders thereof.
3.3.2 The shares of Parent Common Stock to be issued pursuant to the
Merger have been duly authorized, and reserved for issuance and when issued in
accordance with this Agreement will be validly issued, fully paid,
non-assessable and free of preemptive rights.
Section 3.4 SEC Documents.
Parent has timely filed all forms, reports and documents required to be
filed with the SEC since December 31, 1995 and has made available to the Company
and Principal Shareholders, in the form filed with the SEC, (i) its Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1997, (ii) its
Quarterly Report on Form 10-Q for the period ended March 31, 1998, (iii) all
proxy statements relating to Parent's meetings of stockholders (whether annual
or special) held since December 31, 1997, (iv) all other reports or registration
statements filed by Parent with the SEC since December 31, 1997, and (v) all
amendments and supplements to all such reports and registration statements filed
by Parent with the SEC. All such required forms, reports and documents
(including those enumerated in clauses (i) through (v) of the preceding
sentence) are referred to herein as the "Parent SEC Reports." As of their
respective dates, the Parent SEC Reports (i) were prepared in accordance with
the requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the SEC thereunder applicable to such Parent
SEC Reports and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements and
unaudited condensed consolidated interim financial statements of Parent and its
consolidated subsidiaries included in such reports are correct in all material
respects, were prepared in accordance with GAAP consistently applied, and
present fairly the consolidated financial position of Parent and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended.
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Section 3.5 No Material Adverse Change.
Since the date of the balance sheet included in the Parent's most
recently filed report on Form 10-Q, Parent has conducted its business in the
ordinary course and there has not occurred: (a) any material adverse change in
the financial condition, liabilities, assets or business of Parent; (b) any
amendment or change in the Certificate of Incorporation or Bylaws of Parent; (c)
any damage to, destruction or loss of any assets of the Parent, (whether or not
covered by insurance) that materially and adversely affects the financial
condition or business of Parent; or (d) any material change in its outstanding
capital stock or the issuance of any material options (other than options
granted pursuant to Board approved plans in effect as of such date), warrants,
calls or other rights to purchase any shares of the capital stock of Parent.
Section 3.6 Litigation.
There is no action, suit, proceeding, claim, arbitration or
investigation pending, or as to which Parent has received any notice of
assertion against Parent which in any manner challenges or seeks to prevent,
enjoin, alter or materially delay any of the transactions contemplated by this
Agreement. There is no action, suit or proceeding of any nature pending, or, to
Parent's knowledge, threatened against the Parent or any subsidiary of Parent,
any of their properties or any of their officers or directors, in their
respective capacities as such, which if adversely determined would have a
Material Adverse Effect on Parent.
Section 3.7 Brokers' and Finders' Fees.
Parent has not incurred, nor will it incur, directly or indirectly,
liability for brokerage or finder's fees or commissions or any similar charges
in connection with this Agreement or any transaction contemplated hereby.
Section 3.8 Disclosure.
None of the representations or warranties made by the Parent and Merger
Sub (as modified by the Parent Disclosure Schedule), nor any statement made in
any Exhibit, Schedule or certificate furnished by Parent or Merger Sub pursuant
to this Agreement, contains or will contain at the Effective Time any untrue
statement of a material fact, or omits or will omit to state any material fact
necessary in order to make the statements contained herein or therein, in the
light of the circumstances under which made, not misleading.
ARTICLE 4 - CONDUCT PRIOR TO THE EFFECTIVE TIME
Section 4.1 Conduct of Business of the Company.
During the period from the date of this Agreement and continuing until
the earlier of the termination of this Agreement or the Effective Time, the
Company agrees (except to the extent that Parent may otherwise consent in
writing) to carry on its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, to pay its debts and
Taxes when due, to pay or perform other obligations when due, and, to the extent
consistent with
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such business, to use all reasonable efforts consistent with past practice and
policies to preserve intact its present business organization, keep available
the services of its present officers and key employees and preserve their
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it, all with the goal of preserving
unimpaired its goodwill and ongoing businesses at the Effective Time. The
Company will promptly notify Parent of any materially negative event related to
the Company or its business. Except as expressly contemplated by this Agreement,
neither the Company, nor the Principal Shareholders (as applicable to the
Company Common Stock) will, without the prior written consent of Parent:
4.1.1 Enter into any commitment or transaction not in the ordinary
course of business.
4.1.2 Transfer to any person or entity any rights to the Company
Intellectual Property Rights (other than pursuant to End-User Licenses in the
ordinary course of business);
4.1.3 Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any services or products of the Company;
4.1.4 Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in the Company Disclosure Schedule;
4.1.5 Commence any litigation;
4.1.6 Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor);
4.1.7 Issue, grant, deliver or sell, or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of, or
modify any of the terms of, any shares of its capital stock or securities
convertible into, or subscriptions, rights, warrants or options to acquire, or
other agreements or commitments of any character obligating it to issue any such
shares or other convertible securities;
4.1.8 Cause or permit any amendments to its Articles of Incorporation
or Bylaws;
4.1.9 Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets in an amount in excess of $10,000 in the case of a single transaction or
in excess of $20,000 in the aggregate;
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4.1.10 Sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of business;
4.1.11 Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of the Company or guarantee
any debt securities of others;
4.1.12 Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to standard
written agreements outstanding on the date hereof;
4.1.13 Adopt or amend any employee benefit plan, or enter into any
employment contract, extend employment offers, pay or agree to pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates of its employees, except as consistent with the ordinary
course of the Company consistent with past practice (provided that the price per
share of any equity participation in the Company will be agreed in advance by
Parent);
4.1.14 Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
4.1.15 Pay, discharge or satisfy, in an amount in excess of $10,000 in
any one case or $20,000 in the aggregate, any claim, liability or obligation
absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course or business of
liabilities reflected or reserved against in the Company Financials or that
arose in the ordinary course of business subsequent to March 31, 1998 or
expenses consistent with the provisions of this Agreement incurred in connection
with any transaction contemplated hereby;
4.1.16 Make or change any material election in respect of Taxes, adopt
or change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes; or
4.1.17 Accelerate, amend or change the period of exercisability or
vesting of options or other rights granted under its employee stock plans or
director stock plans or authorize cash payments in exchange for any options or
other rights granted under any of such plans; or
4.1.18 Take, or agree in writing or otherwise to take, any of the
actions described in Section 4.1.1 through Section 4.1.17 above, or any other
action that would prevent the Company from performing or cause the Company not
to perform its covenants hereunder.
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Section 4.2 No Solicitation.
Until the earlier of the Effective Time or the date of termination of
this Agreement pursuant to the provisions of Section 7.1 hereof, the Company and
Principal Shareholders will not (nor will the Company permit, directly or
indirectly, any of the Company's officers, directors, agents, representatives or
affiliates to) directly or indirectly, take any of the following actions with
any party other than Parent and its designees: (a) solicit, conduct discussions
with or engage in negotiations with any person, relating to the possible
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its capital stock or
assets, (b) provide information to any person, other than Parent, relating to
the possible acquisition of the Company (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any material portion of the
Company's capital stock or assets, (c) enter into an agreement with any person,
other than Parent, providing for the acquisition of the Company (whether by way
of merger, purchase of capital stock, purchase of assets or otherwise) or any
material portion of the Company's capital stock or assets or (d) make or
authorize any statement, recommendation or solicitation in support of any
possible acquisition of the Company (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any material portion of the
Company's capital stock or assets by any person, other than by Parent. In
addition to the foregoing, if the Company or any Principal Shareholder receives
prior to the Effective Time or the termination of this Agreement any offer or
proposal relating to any of the above, the Company and Principal Shareholders
will promptly notify Parent thereof, including information as to the identity of
the offeror or the party making any such offer or proposal and the specific
terms of such offer or proposal, as the case may be, and such other information
related thereto as Parent may reasonably request.
Section 4.3 Strategic Agreements.
The Company agrees that it will not enter into any strategic alliance,
joint development or joint marketing agreement during the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, unless it has first secured the written consent
of Parent.
ARTICLE 5 - ADDITIONAL AGREEMENTS
Section 5.1 Investment Intent and Registration Rights.
The Company and the Principal Shareholders shall use their best efforts
to cause each Company Shareholder to execute a Stock Restriction and
Registration Rights Agreement in substantially the form attached as Exhibit 5.1
(the "Registration Rights Agreement").
Section 5.2 Access to Information.
Subject to any applicable contractual confidentiality obligations
(which the Company will use its reasonable best efforts to cause to be waived)
the Company will afford Parent and its accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (a) all of its properties, books,
contracts,
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agreements and records, and (b) all other information concerning the business,
properties and personnel (subject to restrictions imposed by applicable law) of
the Company as Parent may reasonably request. No information or knowledge
obtained in any investigation pursuant to this Section 5.2 will affect or be
deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Merger.
Section 5.3 Expenses.
Whether or not the Merger is consummated, all fees and expenses
incurred in connection with the Merger including, without limitation, all legal,
accounting, financial, advisory, consulting and all other fees and expenses of
third parties ("Third Party Expenses") incurred by a party in connection with
the negotiation and effectuation of the terms and conditions of this Agreement
and the transactions contemplated hereby, will be the obligation of the
respective party incurring such fees and expenses; provided, however, that if
the Closing does not occur, Parent shall reimburse the Company for the Company's
reasonable costs in excess of $25,000 associated with preparing financial
statements (other than the audited 1997 financial statements) necessary for
filing by Parent of a Form 8-K with the SEC.
Section 5.4 Public Disclosure.
Unless otherwise required by law (including, without limitation,
securities laws) or, as to Parent, by the rules and regulations of the National
Association of Securities Dealers, Inc., prior to the Effective Time, no
disclosure (whether or not in response to an inquiry) of the subject matter of
this Agreement will be made by any party hereto unless approved by Parent and
the Company prior to release, provided that such approval will not be
unreasonably withheld or delayed.
Section 5.5 Consents.
The Company will use its reasonable efforts to obtain the consents,
waivers and approvals as may be required in connection with the Merger (all of
such consents, waivers and approvals are set forth in the Company Disclosure
Schedule).
Section 5.6 FIRPTA Compliance.
On the Closing Date, the Company will deliver to Parent a properly
executed statement in a form reasonably acceptable to Parent for purposes of
satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
Section 5.7 Reasonable Efforts.
Subject to the terms and conditions provided in this Agreement, each of
the parties hereto will use its reasonable efforts to take promptly, or cause to
be taken, all actions, and to do promptly, or cause to be taken, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated hereby, to obtain
all necessary waivers, consents and approvals and to effect all necessary
registrations and
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filings and to remove any injunctions or other impediments or delays, legal or
otherwise, in order to consummate and make effective the transactions
contemplated by this Agreement for the purpose of securing to the parties hereto
the benefits contemplated by this Agreement; provided that Parent will not be
required to agree to any divestiture by Parent or the Company or any of Parent's
subsidiaries or affiliates of shares of capital stock or of any business, assets
or property of Parent or its subsidiaries or affiliates or the Company or its
affiliates, or the imposition of any material limitation on the ability of any
of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
Section 5.8 Notification of Certain Matters.
The Company and Principal Shareholders will give prompt notice to
Parent, and Parent will give prompt notice to the Company and Principal
Shareholders, of (i) the occurrence or nonoccurrence of which is likely to cause
any representation or warranty of the Company or Principal Shareholders or
Parent or Merger Sub, respectively, contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Effective Time except as
contemplated by this Agreement (including the Company Disclosure Schedule) and
(ii) any failure of the Company or Parent, as the case may be, to comply with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that the delivery
of any notice pursuant to this Section 5.9 and any due diligence investigation
made on behalf of the other party hereto will not limit or otherwise affect any
remedies available to the party.
Section 5.9 Pooling Accounting.
Parent and the Company will each use its best efforts to cause the
business combination to be effected by the Merger to be accounted for as a
pooling of interests. The Company and Principal Shareholders will not take any
action that could adversely affect the ability of Parent to account for the
business combination to be effected by the Merger as a pooling of interests.
Neither the Company nor the Principal Shareholders will take any action,
including, without limitation, the acceleration of vesting or other modification
of any options, warrants, restricted stock or other rights to acquire shares of
the capital stock of the Company, which could (i) interfere with Parent's
ability to account for the Merger as a pooling of interests or (ii) jeopardize
the tax-free nature of the reorganization hereunder.
Section 5.10 Disclosure Document.
Parent and the Company shall jointly prepare and deliver to the
Company's Shareholders a disclosure document satisfying the requirements of Rule
506 under the Securities Act for an offering to accredited and non-accredited
investors (the "Disclosure Document").
Section 5.11 Employee Stock Options.
5.11.1 At the Effective Time, the Company Stock Option Plans and each
outstanding option to purchase shares of Company Common Stock under the Company
Stock Option Plans, whether vested or unvested, will be assumed by Parent.
Paragraph 2.2(i) of the Company
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Disclosure Schedule sets forth a true and complete list as of the date hereof of
all holders of outstanding options under the Company Stock Option Plans,
including the number of shares of Company capital stock subject to each such
option, the exercise or vesting schedule, the exercise price per share and the
term of each such option. On the Closing Date, the Company shall deliver to
Parent an updated Paragraph 2.2(i) of the Company Disclosure Schedule current as
of such date.
5.11.2 Each such option so assumed by Parent under this Agreement shall
continue to have, and be subject to, the same terms and conditions set forth in
the Company Stock Option Plans, immediately prior to the Effective Time, except
that (i) each such option will be exercisable for that number of whole shares of
Parent Common Stock equal to the product of the number of shares of Company
Common Stock that were issuable upon exercise of such option immediately prior
to the Effective Time multiplied by the Exchange Ratio and rounded down to the
nearest whole number of shares of Parent Common Stock; (ii) the per share
exercise price for the shares of Parent Common Stock issuable upon exercise of
such assumed option will be equal to the quotient determined by dividing the
exercise price per share of Company Common Stock at which such option was
exercisable immediately prior to the Effective Time by the Exchange Ratio,
rounded up to the nearest whole cent; and (iii) shares of Parent Common Stock
issued upon exercise of such assumed options may not be sold until such time as
Parent notifies the holder of such options that the requirements of Accounting
Series Release Numbers 130 and 135, as amended, have been met.
5.11.3 Consistent with the terms of the Company Stock Option Plans and
the documents governing the outstanding options under those Plans, the Merger
will not terminate any of the outstanding options under such Plans. The Company
and the Principal Shareholders shall use their best efforts to cause each person
who immediately prior to the Effective Time is a holder of an outstanding option
under the Company Stock Option Plans to execute a Stock Option Assumption
Agreement in substantially the form attached as Exhibit 5.11 (the "Stock Option
Assumption Agreement").
Section 5.12 Form S-8.
Parent agrees to file, within thirty (30) days after the Closing Date,
a registration statement on Form S-8 covering the shares of Parent Common Stock
issuable pursuant to outstanding options under the Company Stock Option Plans
assumed by Parent. The Company shall cooperate with and assist Parent in the
preparation of such registration statement.
Section 5.13 Listing of Additional Shares.
Parent shall file with the NASDAQ National Market System a Notification
Form for Listing of Additional Shares with respect to the Exchange Shares.
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Section 5.14 Indemnity and Escrow.
Parent, Merger Sub, the Company, the Principal Shareholders (with the
consent of their spouses), ChaseMellon and Tye V. Minckler, as Indemnification
Representative, shall execute an Indemnification and Escrow Agreement
substantially in the form attached as Exhibit 1.8.2.
Section 5.15 Additional Documents and Further Assurances.
Each party hereto, at the request of any other party hereto, will
execute and deliver such other instruments and do and perform such other acts
and things as may be necessary or desirable for effecting completely the
consummation of this Agreement and the transactions contemplated hereby.
ARTICLE 6 - CONDITIONS TO THE MERGER
Section 6.1 Conditions to Obligations of Each Party to Complete the Merger.
The respective obligations of each party to this Agreement to complete
the Merger will be subject to the satisfaction at or prior to the Closing of the
following conditions:
6.1.1 Company Shareholder Approval.
This Agreement and the Merger shall have been approved and adopted by
the Company Shareholders in accordance with the WBCA and Section 1.2 hereof.
6.1.2 No Injunctions or Restraints; Illegality.
No temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal or
regulatory restraint or prohibition preventing the consummation of the Merger
will be in effect.
6.1.3 Indemnification and Escrow Agreement.
The Company, the Principal Shareholders, Merger Sub, Parent and the
Indemnification Representative shall have executed and delivered the
Indemnification and Escrow Agreement.
Section 6.2 Additional Conditions to Obligations of the Company and Principal
Shareholders.
The obligations of the Company and Principal Shareholders to consummate
the Merger and the transactions contemplated by this Agreement will be subject
to the satisfaction at or prior to the Closing of each of the following
conditions, any of which may be waived, in writing, exclusively by the Company
and Principal Shareholders:
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6.2.1 Representations and Warranties.
The representations and warranties of Parent and Merger Sub contained
in this Agreement will be true and correct in all material respects on and as of
the Effective Time, except for changes contemplated by this Agreement (including
the Parent Disclosure Schedule) and except for those representations and
warranties which address matters only as of a particular date (which will remain
true and correct as of such date), with the same force and effect as if made on
and as of the Effective Time, except, in all such cases, for such breaches,
inaccuracies or omissions of such representations and warranties which have
neither had nor reasonably would be expected to have a Material Adverse Effect
on the Parent; and Company will have received a certificate to such effect
signed on behalf of Parent by a duly authorized officer of the Parent.
6.2.2 Agreements and Covenants.
Parent and Merger Sub will have performed or complied (which
performance or compliance will be subject to Parent's or Merger Sub's ability to
cure as provided in Section 8.15 below) in all material respects with all
agreements and covenants required by this Agreement to be performed or complied
with by them on or prior to the Effective Time, and the Company will have
received a certificate to such effect signed by a duly authorized officer of
Parent.
6.2.3 Legal Opinion.
The Company will have received a legal opinion from Garvey, Schubert &
Barer, counsel to Parent, in substantially the form attached hereto as Exhibit
6.2.3.
6.2.4 Third Party Consents.
The Company will have been furnished with evidence satisfactory to it
that Parent and Merger Sub have obtained all consents, approvals and waivers
required for the consummation by Parent and Merger Sub of the transactions
contemplated by this Agreement.
6.2.5 Registration Rights Agreement.
Parent shall have executed and delivered to each of the Company
Shareholders who is to receive Exchange Shares a Registration Rights Agreement
in substantially the form of Exhibit 5.1.
Section 6.3 Additional Conditions to the Obligations of Parent and Merger Sub.
The obligations of Parent and Merger Sub to consummate the Merger and
the transactions contemplated by this Agreement will be subject to the
satisfaction at or prior to the Closing of each of the following conditions, any
of which may be waived, in writing, exclusively by Parent.
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6.3.1 Representations and Warranties.
The representations and warranties of the Company and Principal
Shareholders contained in this Agreement will be true and correct in all
material respects on and as of the Effective Time, except for changes
contemplated by this Agreement (including the Company Disclosure Schedule) and
except for those representations and warranties which address matters only as of
a particular date (which will remain true and correct as of such date), with the
same force and effect as if made on and as of the Effective Time, except, in all
such cases, for such breaches, inaccuracies or omissions of such representations
and warranties which have neither had nor reasonably would be expected to have a
Material Adverse Effect on the Company or Parent; and Parent and Merger Sub will
have received a certificate to such effect signed on behalf of the Company by a
duly authorized officer of the Company.
6.3.2 Agreements and Covenants.
The Company will have performed or complied in all material respects
with all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Effective Time, and Parent and Merger Sub
will have received a certificate to such effect signed by a duly authorized
officer of the Company.
6.3.3 Consents.
Parent will have been furnished with evidence satisfactory to it that
the Company has obtained all the consents, approvals and waivers required for
the consummation by the Company of the transactions contemplated by this
Agreement.
6.3.4 Legal Opinion.
Parent will have received a legal opinion from Summit Law Group, PLLC,
counsel to the Company, in substantially the form attached hereto as Exhibit
6.3.4.
6.3.5 Material Adverse Change.
There will not have occurred any material adverse change in the
business, assets (including intangible assets), financial condition or results
of operations of the Company since March 31, 1998.
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6.3.6 Employment and Noncompetition Agreement.
Robert Arnold, Jr. shall have executed and delivered to Parent an
Employment and Noncompetition Agreement in form and substance satisfactory to
Parent and such agreement shall be in full force and effect.
6.3.7 Employment Agreement.
Tye V. Minckler shall have executed and delivered to the Company and
Parent an Employment Agreement in form and substance satisfactory to Parent and
such agreement shall be in full force and effect.
6.3.8 Diligence Inquiry.
Parent and Merger Sub shall have completed to their satisfaction their
due diligence review of the Company's business and operations.
6.3.9 Registration Rights Agreement.
Parent shall have received an executed Registration Rights Agreement in
the form of Exhibit 5.1 attached hereto from each Company Shareholder who is to
receive Exchange Shares.
6.3.10 Compliance with Regulation D.
Parent shall be satisfied, in its sole discretion, that the approval of
the Merger, this Agreement and all associated transactions by the Company
Shareholders and the issuance of Parent Common Stock hereunder shall have been
conducted in compliance with Regulation D adopted pursuant to the Securities
Act.
6.3.11 FIRPTA Certificate.
The Company shall have delivered to Parent a properly executed
statement satisfying the requirements of Treasury Regulation Sections
1.897-2(h) and 1.1445-2(c)(3) in a form reasonably acceptable to Parent.
6.3.12 Shareholders Approval.
This Agreement shall have been approved and adopted by the requisite
vote or consent of the Company Shareholders in accordance with Section 1.2
hereof.
6.3.13 U.S. Bank Loan.
Parent and U.S. Bank of Washington, N.A. shall have executed an
agreement ("U.S. Bank Agreement ") substantially in the form of Exhibit 6.3.13
and such agreement shall be in full force and effect.
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6.3.14 Dissenters.
The holders of not more than five percent (5%) of the outstanding
shares of ST Labs Common Stock shall have exercised rights of dissent.
6.3.15 Pooling Opinion of Accountants.
Parent shall have received a letter from PricewaterhouseCoopers LLP
affirming concurrence with Parent management's conclusion that pooling of
interests accounting is appropriate for the Merger under Accounting Principles
Board Opinion No. 16, if consummated in accordance with this Agreement, and such
letter shall not have been withdrawn or modified.
6.3.16 Stock Option Assumption Agreement.
Parent shall have received an executed Stock Option Assumption
Agreement in the form of Exhibit 5.11 attached hereto from each person who
immediately prior to the Effective Time is a holder of an outstanding option
under the Company Stock Option Plans.
6.3.17 Warrants.
Notice of exercise, effective upon Closing, shall have been given by
the holders of the warrants listed in Section 2.2(iii) of the Company Disclosure
Schedule.
6.3.18 Settlement Agreement.
The Company, Parent and the general partners of Latitude Venture
Partners shall have entered into a settlement agreement in form and substance
satisfactory to Parent.
6.3.19 Resignations.
The officers and directors of the Company shall have submitted their
resignations effective on the Closing Date.
ARTICLE 7 - TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination.
This Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time:
7.1.1 By written mutual consent of the Company and Parent;
7.1.2 By Parent or the Company if: (i) the Effective Time has not
occurred by August 31, 1998, or such later date as the Parties may agree upon
(provided that the right to terminate this Agreement under this clause 7.1.2 (i)
will not be available to any party whose
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willful failure to fulfill any obligation hereunder has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before such date);
(ii) a federal or state court shall have issued a final, nonappealable order
preventing consummation of the Merger; or (iii) any Governmental Entity shall
have enacted, promulgated or issued or deemed applicable to the Merger any
statute, rule, regulation or order that would make consummation of the Merger
illegal.
7.1.3 By Parent if there will be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger, by any Governmental Entity, which would: (i) prohibit Parent's or
the Company's ownership or operation of any portion of the business of the
Company or (ii) compel Parent or the Company to dispose of or hold separate, as
a result of the Merger, any portion of the business or assets of the Company or
Parent;
7.1.4 By Parent if there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company or the Principal Shareholders and as a result of such breach the
conditions set forth in Section 6.3.1 or Section 6.3.2, as the case may be,
would not then be satisfied; and
7.1.5 By the Company if there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
Parent or Merger Sub and as a result of such breach the conditions set forth in
Section 6.2.1 or Section 6.2.2, as the case may be, would not then be satisfied.
Where action is taken to terminate this Agreement pursuant to this
Section 7.1, it will be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
Section 7.2 Effect of Termination.
Each party's right of termination under Section 7.1 is in addition to
any other rights it may have under this Agreement or otherwise, and the exercise
of a right of termination will not be an election of remedies. If this Agreement
is terminated pursuant to Section 7.1, all further obligations of the parties
under this Agreement will terminate except the obligations in Section 5.3 will
survive; provided, however, if this Agreement is terminated by a party because
of breach of this Agreement by the other party or because one or more conditions
to the terminating party's obligations under this Agreement are not satisfied as
a result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
Section 7.3 Amendment.
This Agreement may be amended by the parties hereto by action taken or
authorized by their respective Boards of Directors, at any time before or after
approval of the matters presented in connection with the Merger by the Company
Shareholders but after any such approval, no amendment may be made which by law
requires further approval by such shareholders without
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<PAGE> 44
such further approval. This Agreement may not be amended except by execution of
an instrument in writing signed on behalf of each of the parties hereto.
Section 7.4 Extension; Waiver.
At any time prior to the Effective Time, Parent and Merger Sub, on the
one hand, and the Company, on the other, may, to the extent legally allowed, (i)
extend the time for the performance of any of the obligations of the other party
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto, and
(iii) waive compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver will be valid only if set forth in an instrument in
writing signed on behalf of such party and shall not prejudice or otherwise
influence whatsoever any other agreements or conditions and/or require or imply
additional future waivers or extensions on similar or different matters.
ARTICLE 8 - GENERAL PROVISIONS
Section 8.1 Notices.
All notices and other communications hereunder will be in writing and
will be deemed given if delivered personally or by commercial delivery service,
or mailed by registered or certified mail (return receipt requested) or sent via
facsimile (with acknowledgment of complete transmission) to the parties at the
following addresses (or at such other address for a party as will be specified
by like notice):
If to Parent or Merger Sub, to:
Data Dimensions, Inc.
One Bellevue Center, Suite 2100
411 - 108th Avenue NE
Bellevue, Washington 98004
Attention: Legal Department
Telephone: 425-688-1000
Facsimile: 425-688-1099
With a copy to:
Garvey, Schubert & Barer
1191 Second Avenue, #1800
Seattle, Washington 98101-2939
Attention: Bruce A. Robertson
Telephone: 206-464-3939
Facsimile: 206-464-0125
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<PAGE> 45
If to the Company, to:
ST Labs, Inc.
Sterling Plaza, 3rd Floor
3535 - 128th Avenue S.E.
Bellevue, Washington 98006
Attention: Tye V. Minckler
Telephone: 425-974-0174
Facsimile: 425-974-0150
With a copy to:
Summit Law Group, PLLC
1501 Westlake Avenue North, Suite 300
Seattle, Washington 98109
Attention: Karen A. Andersen
Telephone: 206-281-9881
Facsimile: 206-281-9882
If to the Principal Shareholders, to each of:
Robert Arnold, Jr.
1912 Shelton Court N.E.
Renton, WA 98056
Telephone: 425-204-7760
Facsimile: 425-204-7759
and
Tye V. Minckler
10209 N.E. 29th Place
Bellevue, WA 98004
Telephone: 425-889-2130
Section 8.2 Interpretation.
The words "include," "includes" and "including" when used herein will
be deemed in each case to be followed by the words "without limitation." The
word "agreement" when used herein will be deemed in each case to mean any
contract, commitment or other agreement, whether oral or written, that is
legally binding. The table of contents and headings contained in this Agreement
are for reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
Section 8.3 Counterparts.
This Agreement may be executed in one or more counterparts, all of
which will be considered one and the same agreement and will become effective
when one or more
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<PAGE> 46
counterparts have been signed by each of the parties and delivered to the other
party, it being understood that all parties need not sign the same counterpart.
Section 8.4 Entire Agreement; Assignment.
This Agreement, the Schedules and Exhibits hereto, and the documents
and instruments and other agreements among the parties hereto referenced herein:
(a) constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior negotiations, agreements
understandings and representations, both written and oral, among the parties
with respect to the subject matter hereof; (b) are not intended to confer upon
any other person any rights or remedies hereunder; and (c) will not be assigned
by operation of law or otherwise except with the prior written consent of all
parties hereto.
Section 8.5 Severability.
In the event that any provision of this Agreement or the application
thereof, becomes or is declared by a court of competent jurisdiction to be
illegal, void or unenforceable, the remainder of this Agreement will continue in
full force and effect and the application of such provision to other persons or
circumstances will be interpreted so as reasonably to effect the intent of the
parties hereto. The parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such void or unenforceable provision.
Section 8.6 Other Remedies.
Except as otherwise provided herein, any and all remedies herein
expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby, or by law or equity upon such
party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
Section 8.7 Governing Law.
Except as otherwise provided herein, this Agreement will be governed by
and construed in accordance with the laws of the State of Washington, regardless
of the laws that might otherwise govern under applicable principles of conflicts
of laws thereof.
Section 8.8 Rules of Construction.
The parties hereto agree that they have been represented by counsel
during the negotiation and execution of this Agreement and, therefore, waive the
application of any law, regulation, holding or rule of construction providing
that ambiguities in an agreement or other document will be construed against the
party drafting such agreement or document.
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<PAGE> 47
Section 8.9 Specific Performance.
The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties will be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
Section 8.10 Survival.
All representations, warranties and agreements contained in this
Agreement or in any agreement or certificate delivered pursuant to this
Agreement shall survive the Closing notwithstanding any investigation conducted
with respect thereto or any knowledge acquired as to the accuracy or inaccuracy
of any such representation or warranty; provided, however, that remedies set
forth in the Escrow Agreement shall be the exclusive remedies for any breaches
of or defaults under the representations, warranties and agreements contained in
this Agreement.
[Remainder of Page Intentionally Omitted)
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<PAGE> 48
IN WITNESS WHEREOF, Parent, Merger Sub, the Company, and the Principal
Shareholders have caused this Agreement to be signed as of the date first
written above.
PARENT: COMPANY:
DATA DIMENSIONS, INC. ST LABS, INC.
By:_______________________________ By:________________________________
Name:_____________________________ Name:______________________________
Title:____________________________ Title:_____________________________
PRINCIPAL SHAREHOLDERS: MERGER SUB:
__________________________________ DS ACQUISITION CORPORATION
Robert Arnold, Jr.
__________________________________ By_________________________________
Tye V. Minckler
Its________________________________
44
<PAGE> 1
EXHIBIT-4.1
STOCK RESTRICTION AND REGISTRATION
RIGHTS AGREEMENT
THIS STOCK RESTRICTION AND REGISTRATION RIGHTS AGREEMENT (this
"Agreement") is entered into as of August ___ , 1998, by and among Data
Dimensions, Inc., a Delaware corporation (the "Company") and those shareholders
and warrantholders of ST Labs, Inc., a Washington corporation ("STL"),
appearing as signatories hereto (each, a "Holder" or, as the context requires,
"seller," and collectively, the "Holders").
WHEREAS, pursuant to the Agreement and Plan of Reorganization dated as
of July 28 , 1998 (the "Merger Agreement"), by and among the Company, DS
Acquisition Corporation, a Washington corporation and wholly-owned subsidiary of
the Company ("Merger Sub"), STL, Robert Arnold, Jr., and Tye V. Minckler, Merger
Sub is being merged with and into STL (the "Merger"); and
WHEREAS, in connection with the Merger Agreement, the shareholders of
STL and U.S. Bancorp (as warrantholder) are acquiring shares of Common Stock of
the Company pursuant to certain exemptions from the registration requirements of
the Securities Act (as defined below); and
WHEREAS, the Company has agreed to grant to the Holders certain
registration rights.
NOW, THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the parties hereby agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"ASR 130 and 135" shall mean the Commission Accounting Series Release
Nos. 130 and 135, as amended.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Common Shares" shall mean the shares of Common Stock of the Company
issued to the Holders on even date herewith pursuant to the Merger Agreement,
excluding those shares placed in escrow as provided in the Merger Agreement.
"Common Stock" shall mean the Common Stock, $.001 par value, of the
Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
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<PAGE> 2
"Quarterly Report Filing Date" shall mean the date that the Commission
requires the Company to file a quarterly or annual report with respect to the
first three month fiscal quarter after the effective time of the Merger which
includes thirty (30) days of post-closing operating results, the period of
post-closing operations required by ASR 130 and 135.
"Registration Expenses" shall mean the expenses so described in
Section 8.
"Restricted Stock" shall mean the Common Shares, excluding Common Shares
which have been (a) registered under the Securities Act pursuant to an effective
registration statement filed thereunder and disposed of in accordance with the
registration statement covering them or (b) sold pursuant to Rule 144 under the
Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean the expenses so described in Section 8.
"Shelf Filing Date" shall mean the date that is six (6) months after the
Effective Time, as defined in the Merger Agreement.
2. Restrictions On Transfer.
Each Holder agrees that such Holder will not transfer or
otherwise reduce such Holder's risks relative to the Common Shares to be
received by each Holder until such time as the Company notifies the Holder that
the requirements of ASR 130 and 135 have been met. Each Holder understands that
ASR 130 and 135 relate to publication of financial results of post-closing
combined operations of the Company and STL. The Company agrees that it will
publish such results on or before the Quarterly Report Filing Date, and that it
will notify the Holders promptly following such publication.
3. Compliance with Securities Laws. Each Holder represents and warrants
that:
(a) Holder has received and reviewed the Confidential Offering
Memorandum, which includes copies of the following:
(i) The Merger Agreement;
(ii) The Company's 1997 Annual Report to Shareholders;
(iii) The Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997;
(iv) The Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1998; and
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<PAGE> 3
(v) The Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders.
(b) Holder acknowledges that [CHECK AT LEAST ONE BOX]:
[ ] Holder is an "accredited investor" as defined in Rule 501(a)
of Regulation D as adopted by the Commission, as set forth in Appendix 1 hereto.
[ ] William L. Eisenhart has acted as Holder's purchaser
representative (as defined in Rule 501(h) of Regulation D as adopted by the
Commission) in connection with evaluating the merits and risks of the Merger.
(c) Holder has been advised that, as of the date hereof, Holder
may be deemed to be an "affiliate" of STL, as the term "affiliate" is used in
and for purposes of ASR 130 and 135.
(d) Holder understands that the representations, warranties and
covenants set forth herein will be relied upon by STL, other shareholders of
STL, the Company, shareholders of the Company and their respective counsel and
accounting firms.
(e) Holder hereby represents and warrants that Holder has not
sold, exchanged, transferred, pledged, disposed of or otherwise reduced Holder's
risk relative to any shares of STL common stock owned by Holder during the
thirty (30) day period preceding the date hereof.
(f) Holder is acquiring the Common Shares to be issued to Holder
solely in exchange for the shares of capital stock of STL owned by Holder or
otherwise issuable to Holder by STL in connection with the transactions
contemplated by the Merger Agreement.
(g) Holder has paid no brokerage or similar commissions in
connection with the acquisition of such Common Shares.
(h) Holder is acquiring such Common Shares solely for Holder's
account.
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<PAGE> 4
(i) Holder has provided such information as may reasonably have
been requested by the Company in order for the Company or its counsel to
evaluate the availability of an exemption under the Securities Act for the
issuance of Company Stock to Holder.
4. Securities Act Matters. Each Holder acknowledges and agrees that the
Common Shares to be issued to Holder have not been (and at the time of
acquisition by Holder, will not have been) registered under the Securities Act
or under the securities laws of any state, in reliance upon certain exemptive
provisions of such statutes. Holder recognizes and acknowledges that such claims
of exemption are based, in part, upon each Holder's representations contained in
this Agreement. Holder further recognizes and acknowledges that, because the
Common Shares are unregistered under federal and state laws, they are not
presently eligible for public resale, and may be sold in the future only
pursuant to an effective registration statement under the Securities Act and any
applicable state securities laws, or pursuant to a valid exemption from such
registration requirements. Holder recognizes and acknowledges that Rule 144
promulgated under the Securities Act (which facilitates routine sales of
securities in accordance with the terms and conditions of that Rule, including a
holding period requirement) is not now available to Holder for resale of the
Common Shares, and Holder recognizes and acknowledges that, in the absence of
the availability of Rule 144, a sale pursuant to a claim of exemption from
registration under the Securities Act would require compliance with some other
exemption under the Securities Act, none of which may be available for resale of
the Common Shares by Holder. Holder recognizes and acknowledges that, except as
set forth in this Agreement, the Company is under no obligation to register the
Common Shares, either pursuant to the Securities Act or the securities laws of
any state.
5. Restrictive Legend. Each certificate representing Common Shares
shall, except as otherwise provided in this Section 5 or in Section 6, be
stamped or otherwise imprinted with a legend substantially in the following
form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN
REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS
AVAILABLE.
THE HOLDER OF THIS SECURITY IS ENTITLED TO CERTAIN REGISTRATION RIGHTS
SET FORTH IN A STOCK RESTRICTION AND REGISTRATION RIGHTS AGREEMENT DATED
AUGUST ______, 1998, A COPY OF WHICH MAY BE OBTAINED FROM THE SECRETARY
OF THE CORPORATION."
Such certificates shall not bear such legend if in the opinion of counsel
satisfactory to the Company the securities being sold thereby may be publicly
sold without registration under the Securities Act or if such securities have
been sold pursuant to Rule 144 or an effective registration statement.
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<PAGE> 5
6. Notice of Proposed Transfer. Prior to any proposed transfer of any
Common Shares, Holder shall give written notice to the Company of the Holder's
intention to effect such transfer. Each such notice shall describe the manner of
the proposed transfer and, if requested by the Company, shall be accompanied by
an opinion of counsel satisfactory to the Company to the effect that the
proposed transfer may be effected without registration under the Securities Act,
whereupon Holder shall be entitled to transfer such security in accordance with
the terms of its notice; provided, however, that no prior notice or opinion of
counsel shall be required if the sale is made in compliance with Rule 144 or if
such transfer is to one or more partners of the transferor (in the case of a
transferor that is a partnership). Each certificate for Common Shares
transferred as above provided shall bear the legend set forth in Section 5,
except that such certificate shall not bear such legend if (i) such transfer is
in accordance with the provisions of Rule 144 (or any other rule permitting
public sale without registration under the Securities Act) or (ii) the opinion
of counsel referred to above is to the further effect that the transferee and
any subsequent transferee (other than an affiliate of the Company) would be
entitled to transfer such securities in a public sale without registration under
the Securities Act. The restrictions provided for in this Section 6 shall not
apply to securities which are not required to bear the legend prescribed by
Section 5 in accordance with the provisions of that Section.
7. Registration Procedures. On or before the Shelf Filing Date, the
Company shall file a "shelf" registration statement pursuant to Rule 415 under
the Securities Act with respect to the Common Shares. In its efforts to effect
the registration of Company Shares the Company will:
(a) prepare and file with the Commission a registration statement
with respect to such securities on or before the Shelf Filing Date and use its
reasonable efforts to cause such registration statement to remain effective
until the earlier of the sale of all Restricted Stock covered thereby or the
first anniversary of the Closing Date; provided, however, that the Company may
suspend sales at any time under the registration statement immediately upon
notice to each Holder at the last known address of each Holder, for a period or
periods of time not to exceed in the aggregate ninety (90) days, if there then
exists material, non-public information relating to the Company which, in the
reasonable opinion of the Company, would not be appropriate for disclosure
during that time; provided further, that if the Company suspends such sales, it
will keep the registration statement effective for such additional time as sales
were suspended;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above;
(c) furnish to each seller of Restricted Stock such number of
copies of the registration statement and each such amendment and supplement
thereto and the prospectus included therein (including each preliminary
prospectus) as such persons reasonably may request in order to facilitate the
public sale or other disposition of the Restricted Stock covered by such
registration statement;
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<PAGE> 6
(d) use reasonable efforts to register or qualify the Restricted
Stock covered by such registration statement under the securities or "blue sky"
laws of such jurisdictions as the sellers of Restricted Stock reasonably shall
request, provided, however, that the Company shall not for any such purpose be
required to qualify generally to transact business as a foreign corporation in
any jurisdiction where it is not so qualified or to consent to general service
of process in any such jurisdiction;
(e) use its reasonable best efforts to have the Restricted Stock
covered by such registration statement subject to quotation on the NASDAQ
National Market System; and
(f) notify each seller of Restricted Stock under such
registration statement (at any time when a prospectus relating thereto is
required to be delivered under the Securities Act), of the happening of any
event of which the Company has knowledge as a result of which the prospectus
contained in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing, and promptly prepare and furnish to
such seller a reasonable number of copies of a prospectus supplemented or
amended so that, as thereafter delivered to the purchasers of such Restricted
Stock, such prospectus shall not include an untrue statement of material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances then
existing
In connection with the registration hereunder, the sellers of Restricted
Stock will furnish to the Company in writing such information requested by the
Company with respect to themselves and the proposed distribution by them as
shall be necessary in order to assure compliance with federal and applicable
state securities laws.
If the registration pursuant to this Section 7 involves an underwritten
public offering, the Company and each seller who wishes to participate in such
underwriting agree to enter into a written agreement with the managing
underwriter in such form and containing such provisions as are customary in the
securities business for such an arrangement between such underwriter and
companies of the Company's size and investment status.
8. Expenses. All expenses incurred by the Company in complying with
Section 7, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel and independent public
accountants for the Company, fees and expenses incurred in connection with
complying with state securities or "blue sky" laws, fees of the National
Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents
and registrars, and costs of issuance, but excluding any Selling Expenses, are
called "Registration Expenses." All underwriting discounts (if any) and selling
commissions applicable to the sale of Restricted Stock are called "Selling
Expenses."
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<PAGE> 7
The Company will pay all Registration Expenses in connection with a
registration statement under Section 7; provided, however, that all such
expenses shall be borne by the participating sellers in proportion to the number
of shares covered by such registration statement if such registration statement
is withdrawn, delayed or abandoned for any reason by the sellers. All Selling
Expenses in connection with any registration statement under Section 7 shall be
borne by the participating sellers in proportion to the number of shares sold by
each.
9. Indemnification and Contribution.
(a) In connection with the registration of the Restricted Stock
under the Securities Act pursuant to Section 7, the Company will indemnify and
hold harmless each seller of such Restricted Stock thereunder, its officers and
directors, each underwriter of such Restricted Stock thereunder and each other
person, if any, who controls such seller or underwriter within the meaning of
the Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which such seller, officer, director, underwriter or controlling
person may become subject under the Securities Act, Exchange Act, state
securities laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of material fact contained in
the registration statement under which such Restricted Stock was registered
under the Securities Act pursuant to Section 7, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereto, (ii)
the omission or alleged omission of a material fact required to be stated
therein or necessary to make the statements therein not misleading or (iii) any
violation by the Company or its agents of any rule or regulation promulgated
under the Securities Act, Exchange Act or state securities laws applicable to
the Company or its agents and relating to action or inaction required of the
Company in connection with such registration, and the Company will reimburse
each such seller, each such officer and director, each underwriter and each such
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission so made in conformity with information furnished
in writing to the Company by any such seller, any such underwriter or any such
controlling person, specifically for use in the registration statement.
(b) In connection with the registration of the Restricted Stock
under the Securities Act pursuant to Section 7, each seller of such Restricted
Stock thereunder, severally and not jointly, will indemnify and hold harmless
the Company, each person, if any, who controls the Company within the meaning of
the Securities Act, each officer of the Company who signs the registration
statement, each director of the Company, each underwriter and each person who
controls any underwriter within the meaning of the Securities Act, against all
losses, claims, damages or liabilities, joint or several, to which the Company
or such officer, director, underwriter or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
(i) the failure of
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<PAGE> 8
such seller to comply with the provisions of Section 12 herein or (ii) any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and each such officer, director,
underwriter and-controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that such seller will be
liable hereunder in any such case if and only to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with information pertaining to such seller, furnished to the
Company in writing by such seller, specifically for use in the registration
statement; and provided, further, that in no event shall any indemnity under
this subsection 9(b) exceed the gross proceeds from the offering received by
such seller(s).
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section 9 and shall only relieve
it from any liability which it may have to such indemnified party under this
Section 9 if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof and the approval by the indemnified party of the counsel chosen
by the indemnifying party, the indemnifying party shall not be liable to such
indemnified party under this Section 9 for any legal expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation and of liaison with counsel so selected;
provided, however, that, if the defendants in any such action include both the
indemnified party and the indemnifying party and if the interests of the
indemnified party reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified party shall have the right to select a
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed by the
indemnifying party as incurred.
(d) In order to provide for just and equitable contribution to
joint liability in any case in which either (i) any Holder of Restricted Stock
exercising rights under this Agreement, or any controlling person of any such
Holder, makes a claim for indemnification pursuant to this Section 9, but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time
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<PAGE> 9
to appeal or the denial of the last right of appeal) that such indemnification
may not be enforced in such case notwithstanding the fact that this Section 9
provides for indemnification in such case, or (ii) contribution under the
Securities Act may be required on the part of any such selling Holder or any
such controlling person in circumstances for which indemnification is provided
under this Section 9; then, and in each such case, the Company and such Holder
will contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (after contribution from others) in proportion to the
relative fault of the Company, on the one hand, and each Holder, severally, on
the other hand; provided, however, that, in any such case, no person or entity
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) will be entitled to contribution from any person or entity
who was not guilty of such fraudulent misrepresentation and; provided, further,
that in no event shall any indemnity under this subsection 9 (d) exceed the
gross proceeds from the offering received by such Holder.
(e) The indemnities provided in this Section 9 shall survive the
transfer of any Restricted Stock by any Holder.
10. Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation thereunder that may at any time
permit a Holder to sell securities of the Company to the public without
registration, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144;
(b) maintain registration of its Common Stock under Section 12 of
the Exchange Act;
(c) file in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
(d) furnish to any Holder, so long as the Holder owns any
Restricted Securities, forthwith upon request: (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, (ii) a
copy of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company; and (iii) such other information
as may be reasonably requested in availing any Holder of any rule or regulation
under the Securities Act which permits the selling of any such securities
without registration or pursuant to such form.
11. Changes in Common Stock. If, and as often as, there is any change in
the Common Stock by way of a stock split, stock dividend, combination or
reclassification, or through a merger, consolidation, reorganization or
recapitalization, or by any other means, appropriate adjustment shall be made in
the provisions hereof so that the rights and privileges granted hereby shall
continue with respect to the Common Stock as so changed.
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12. Sellers' Conduct. With respect to any sale of Common Shares pursuant
to Section 7, each Holder understands and agrees as follows:
(a) Holder will carefully review the information concerning
Holder contained in the registration statement (if any) and will promptly notify
the Company if such information is not complete and accurate in all respects,
including having properly disclosed any position, office or other material
relationship within the past three years with the Company or its affiliates;
(b) Holder agrees to sell Holder's Common Shares only in the
manner set forth in the registration statement;
(c) Holder agrees to comply with the anti-manipulation rules
under the Exchange Act in connection with purchases and sales of securities of
the Company during the time the registration statement remains effective;
(d) Holder agrees to only sell shares in a jurisdiction after
counsel for the Company has advised that such sale is permissible under the
applicable state securities or "Blue Sky" laws;
(e) Holder agrees to comply with the prospectus delivery
requirements of the Exchange Act;
(f) Holder agrees to promptly notify the Company of any and all
planned sales and completed sales of shares;
(g) Holder agrees to suspend sales during the periods when sales
are to be suspended pursuant to Section 7(a) herein; and
(h) Holder agrees not to take any action that could adversely
affect the ability of the Company to account for the business combination to be
effected by the Merger as a pooling of interests.
13. Miscellaneous.
(a) All covenants and agreements contained in this Agreement by
or on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto (including without
limitation transferees of any Restricted Stock, provided, that such transferee
executes a counterpart signature page to this Agreement), whether so expressed
or not.
(b) All notices, requests, consents and other communications
hereunder shall be in writing and shall be mailed by certified or registered
mail, return receipt requested, postage prepaid, or telexed, in the case of
non-U.S. residents, addressed as follows:
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(i) if to the Company, to:
Data Dimensions, Inc.
411 - 108th Avenue N.E.
Suite 2100
Bellevue, Washington 98004
Attention: Legal Department
Telephone No.: (425) 688-1000
Fax No.: (425) 688-1099
(ii) With a copy to:
Garvey, Schubert & Barer
Eighteenth Floor
Second & Seneca Building
1191 Second Avenue
Seattle, Washington 98101-2939
Attention: Bruce A. Robertson
Telephone No.: (206) 464-3939
Fax No.: (206) 464-0125
(iii) if to any other party hereto, at the address of such
party set forth on the signature page hereto;
(iv) if to any subsequent holder of Restricted Stock, to
it at such address as may have been furnished to the Company in writing by such
holder;
or, in any case, at such other address or addresses as shall have been furnished
in writing to the Company (in the case of a holder of Restricted Stock) or to
the holders of Restricted Stock (in the case of the Company) in accordance with
the provisions of this paragraph.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
(d) This Agreement may be amended or modified, and provisions
hereof may be waived, with the written consent of the Company and the holders of
at least a majority of the outstanding shares of Restricted Stock.
(e) This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(f) If any provision of this Agreement shall be held to be
illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to
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such provision and shall not in any manner affect or render illegal, invalid or
unenforceable any other provision of this Agreement, and this Agreement shall be
carried out as if any such illegal, invalid or unenforceable provision were not
contained herein.
[Signature Page to Follow]
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IN WITNESS WHEREOF, the Company and the undersigned Holders have caused
this Agreement to be signed as of the date first above written.
HOLDER: DATA DIMENSIONS, INC.
[________________________]
NAME OF HOLDER
By_____________________________ By ________________________________________
Signature of Holder Signature
________________________________________
Print Name
________________________________________
Title
[You must complete page 3 of this Agreement and the attached Exhibit A]
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<PAGE> 14
EXHIBIT A
Name of Holder: _____________________________________________________________
Principal Residence Address:_________________________________________________
(Number and Street)
________________________________________ Note: Non-principal residence
(City, State) (Zip Code) addresses and post office
boxes cannot be accepted.
________________________________________
(Residence Telephone)
Mailing Address (if ________________________________________________________
different from above) (Number and Street)
_______________________________________________________
(City, State) (Zip Code)
Age:_______________ Citizenship:_______________________________________
Social Security or Taxpayer I.D. No.:_______________________________________
If Holder is a natural person and is an accredited investor described by [ ]
category 12 or 13 (or both) set forth on the attached Appendix 1, please
check this box.
If Holder is a partnership that is an accredited investor described by [ ]
category 11 or 15 (or both) on the attached Appendix 1, please check
this box.
If Holder has not checked either of the boxes above, please check this [ ]
box if at least one of the categories set forth on the attached Appendix
1 describes you. Number of category that applies: ______
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<PAGE> 15
APPENDIX 1
1. A bank (as defined in Section 3(a)(2) of the Securities Act) or a
savings and loan association or other institution (as defined in Section
3(a)(5)(A) of the Securities Act), whether acting in regard to this investment
in its individual or a fiduciary capacity.
2. A broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934.
3. An investment company (as defined in Section 2(13) of the Securities
Act).
4. An investment company registered under the Investment Company Act.
5. A business development company (as defined in Section 2(a)(48) of the
Investment Company Act).
6. A Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958.
7. A plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees, if the plan has total assets in
excess of $5,000,000.
8. An employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974 (an "ERISA Plan") whose decision
to purchase the Common Shares was made by a plan fiduciary (as defined in
Section 3(21) of ERISA), which is either a bank, savings and loan association,
insurance company or registered investment advisor.
9. An ERISA Plan with total assets in excess of $5,000,000 or, if a
self-directed ERISA Plan, with investment decisions made solely by persons that
are "accredited investors."
10. A private business development company (as defined in Section
202(a)(22) of the Investment Advisors Act of 1940).
11. An organization described in Section 501(c)(3) of the Internal
Revenue Code of 1986, as amended, corporation, Massachusetts or similar business
trust or partnership, not formed for the specific purpose of acquiring the
Common Shares, with total assets in excess of $5,000,000.
12. A natural person whose net worth (either individually or jointly
with such person's spouse) at the time of the Closing exceeds $1,000,000.
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13. A natural person who had an individual income in excess of $200,000
or joint income with such person's spouse in excess of $300,000 in each of the
last two calendar years and who reasonably expects to reach the same income
level in the current calendar year.
14. A trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the Common Shares, whose purchase of the
Common Shares is directed by a sophisticated person as described in Rule
506(b)(2)(ii) under the Securities Act.
15. An entity in which all of the equity owners fit into at least one of
the categories listed under paragraphs 1-14 above.
A-2
<PAGE> 1
EXHIBIT-4.2
INDEMNIFICATION AND ESCROW AGREEMENT
THIS INDEMNIFICATION AND ESCROW AGREEMENT (this "Agreement") is dated as
of August ___, 1998, by and among Data Dimensions, Inc., a Delaware corporation
("Parent"), DS Acquisition Corporation, a Washington corporation and a
wholly-owned subsidiary of Parent ("Merger Sub"), ST Labs, Inc., a Washington
corporation (the "Company"), Robert Arnold, Jr. and Tye Minckler (referred to
collectively as the "Principal Shareholders" and individually as a "Principal
Shareholder"), ChaseMellon Shareholder Services, Inc. (the "Escrow Agent") and
Tye Minckler (the "Indemnification Representative"). Except as otherwise defined
herein, capitalized terms have the same meaning ascribed to them in the
Agreement and Plan of Reorganization entered into as of July ___, 1998 by and
among Parent, Merger Sub, the Company and the Principal Shareholders (the
"Merger Agreement").
RECITALS:
WHEREAS, the execution and delivery of this Agreement is a condition to
each party's execution and performance of the Merger Agreement;
WHEREAS, pursuant to Section 1.8.2 of the Merger Agreement, shares of
Parent Common Stock representing approximately ten percent (10%) of the
aggregate number of Exchange Shares shall be delivered on behalf of the Company
Shareholders to the Escrow Agent, to be held by the Escrow Agent upon the terms
and conditions set forth herein as security for potential Losses (as defined in
Section 1.1(a) hereof) incurred by the Parent Parties; and
WHEREAS, pursuant to Section 1.8.2 of the Merger Agreement, Tye Minckler
has been duly appointed as Indemnification Representative.
NOW, THEREFORE, in consideration of the premises and agreements set
forth below, the parties agree as follows:
ARTICLE I
INDEMNIFICATION
1.1 Indemnity Obligations. Subject to the terms and conditions of this
Agreement, the indemnity obligation of the Company Shareholders, the Principal
Shareholders and Parent shall be as follows:
(a) Indemnity by Company Shareholders. The Company Shareholders shall
indemnify and hold harmless Parent and its officers, directors and affiliates
(including the Surviving Corporation) (collectively, the "Parent Parties") from
and against any claims, liabilities, damages, deficiencies, costs and expenses,
including reasonable attorney fees and expenses, and expenses of investigation
and defense (hereinafter individually a "Loss" and collectively "Losses") which
any Parent Party may suffer, sustain or become subject to by reason of or
resulting from (i) any breach by the Principal Shareholders or the Company of
any covenant or agreement set forth in the Merger Agreement or any instrument
delivered pursuant to the Merger Agreement or (ii) any inaccuracy in any
representation or warranty of the Company or the Principal Shareholders
contained in the Merger Agreement or any other
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<PAGE> 2
instrument delivered pursuant to the Merger Agreement (each as modified by the
Company Disclosure Schedule).
(b) Indemnity by Principal Shareholders. The Principal Shareholders
shall jointly and severally indemnify and hold harmless the Parent Parties from
and against all Losses which any Parent Party may suffer, sustain, or become
subject to by reason of or resulting from any inaccuracy in the representations
and warranties contained in Sections 2.2, 2.4, 2.8 and 2.26 of the Merger
Agreement (each as modified by the Company Disclosure Schedule); provided,
however, that the Principal Shareholders shall have no obligation to the Parent
Parties under this Section 1.1(b) until the first to occur of (i) the Escrow
Termination Date (as defined in Section 1.3(a) hereof), or (ii) the date all
Indemnification Escrow Shares have been delivered to Parent in satisfaction of
other Indemnification Claims (as defined in Section 1.1(d) hereof). The
obligation of the Principal Shareholders under this Section 1.1(b) is in
addition to their respective obligations under Section 1.1(a).
(c) Indemnity by Parent. Parent shall indemnify and hold harmless the
Company Shareholders from and against all Losses which the Company Shareholders
may suffer, sustain, or become subject to by reason of or resulting from (i) any
breach by the Parent or Merger Sub of any covenant or agreement set forth in the
Merger Agreement or any instrument delivered pursuant to the Merger Agreement,
or (ii) any inaccuracy in a representation or warranty of Merger Sub or Parent
contained in the Merger Agreement or any other instrument delivered pursuant to
the Merger Agreement (each as modified by the parent Disclosure Schedule).
(d) Definitions. The assertion that a party has suffered a Loss is
hereinafter referred to as an "Indemnification Claim", the party seeking
indemnification is hereinafter referred to as an "Indemnified Party", and the
person from whom indemnification is sought is hereinafter referred to as an
"Indemnifying Party".
1.2 Limitations. The indemnification provided for in Section 1.1 hereof
shall be subject to the following limitations.
(a) Limit on Company Shareholders' Indemnity. Except as provided in
Section 1.2(b) hereof, the Company Shareholders' total liability for
indemnification under Section 1.1(a) shall be limited to the Indemnification
Escrow Shares and the Company Shareholders shall not be liable for any Loss for
which a Notice of Claim (as defined in Section 1.3(a)) has not been given on or
prior to the Escrow Termination Date (as defined in Section 1.3(a)). In
addition, the Company Shareholders shall not be liable for indemnification of
any Parent Party under Section 1.1(a) unless the aggregate amount of all Losses
incurred by all Parent Parties and otherwise subject to Section 1.1(a) exceeds
$50,000 (the "Parent Threshold").
(b) Limit on Principal Shareholders' Indemnity. The Principal
Shareholders' total liability for indemnification under Section 1.1(b) shall not
exceed One Million Dollars ($1,000,000); such amount is in addition to and shall
be determined exclusive of the Principal Shareholders' aggregate Percentage
Interest (as defined in Section 2.2 hereof) in any Indemnification Escrow Shares
delivered to Parent hereunder. The Principal Shareholders shall not be liable
for indemnification of any Parent Party under Section 1.1(b) unless the
aggregate amount of all Losses incurred by all Parent Parties (including Losses
for which indemnity is
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<PAGE> 3
obtained under Section 1.1(a)) exceeds $25,000 (the "Principal Shareholder
Threshold"). In addition, the Principal Shareholders shall not be liable for any
Loss for which a Notice of Claim has not been given on or prior to the five-year
anniversary of the Effective Time.
(c) Limit on Parent Indemnity. Parent's total liability for
indemnification under Section 1.1(c) shall not exceed One Million Dollars
($1,000,000) and Parent shall not be liable for any Loss for which a Notice of
Claim has not been given on or prior to the one-year anniversary of the
Effective Time. In addition, Parent shall not be liable for indemnification of
the Company Shareholders under Section 1.1(c) unless the aggregate amount of all
Losses incurred by the Company Shareholders and otherwise subject to Section
1.1(c) exceeds $50,000 (the "Company Threshold").
1.3 Parent Party Claims.
(a) Delivery of Notice of Claim. At any time after obtaining knowledge
of any facts, claim or demand which has given rise to, or could reasonably give
rise to, an Indemnification Claim under Section 1.1(a) or 1.1(b), Parent may
give written notice of such Indemnification Claim ("Notice of Claim") to the
Indemnifying Party. Parent shall give the Notice of Claim to the Indemnification
Representative and the Escrow Agent if the Notice of Claim is given prior to
5:00 p.m., Pacific time, on the one-year anniversary of the Effective Time (the
"Escrow Termination Date"). Parent shall deliver the Notice of Claim to the
Principal Shareholders if the Notice of Claim is given after the earlier to
occur of (x) the Escrow Termination Date or (y) the date all Indemnification
Escrow Shares have been delivered to Parent in satisfaction of other
Indemnification Claims. A Notice of Claim shall be given by Parent whether or
not the Parent Threshold has been reached. In the case of a Claim seeking
indemnification under Section 1.1(a), the Notice of Claim must be given on or
prior to the Escrow Termination Date. In the case of a Claim seeking
indemnification under Section 1.1(b), the Notice of Claim must be given on or
prior to the five-year anniversary of the Effective Time.
(b) Form of Notice. The Notice of Claim shall set forth the amount of
the Loss suffered, or which may be suffered, by the Parent Party and in the case
of a Notice of Claim seeking indemnity from the Principal Shareholders, the
amount to be paid by the Principal Shareholders.
(c) Distribution of Escrow Shares. Upon receipt of a Notice of Claim at
any time after the Parent Threshold has been reached and prior to the Escrow
Termination Date, the Escrow Agent shall, subject to the provisions of Section
1.3(d) hereof, deliver to Parent, as promptly as practicable after expiration of
the forty-five (45) day notice period set forth in Section 1.3(d) below, a
number of Indemnification Escrow Shares equal to the quotient of the amount of
the Loss set forth in the Notice of Claim divided by the Parent Average Closing
Price (rounded up to the nearest whole share).
(d) Objections. The Indemnification Representative shall have forty-five
(45) days from the date a Notice of Claim is given within which to object, by
written notice of objection given to Parent and the Escrow Agent, to any
Indemnification Claim (a "Challenged Claim"). If notice of objection to any such
claim is not provided by the Indemnification Representative within such 45-day
period, Parent shall give written notice to the Escrow Agent and the
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Indemnification Representative confirming that no such notice has been received,
whereupon the validity and stated amount of the claim and, if the Parent
Threshold has been met, the number of Indemnification Escrow Shares to be
delivered will be deemed to have been accepted (such claims being referred to
herein as "Accepted Claims"). If a notice of objection is provided, the
Indemnification Representative and Parent shall have sixty (60) days in which
they shall attempt to agree on the rights of both parties. If the
Indemnification Representative and Parent shall so agree, a memorandum setting
forth such agreement shall be prepared and furnished to the Escrow Agent who
shall be entitled to rely upon such memorandum. If after 60 days no agreement is
reached, the Indemnification Representative and Parent shall submit the matter
of a Challenged Claim to arbitration in accordance with Article VI hereof. If a
Notice of Claim sets forth a claim or demand asserted by a third party (a "Third
Party Claim"), the provisions of Section 1.5(b) shall also apply.
(e) Claims Against Principal Shareholders. A Principal Shareholder shall
have forty-five (45) days from the date a Notice of Claim is given within which
to object, by written notice to Parent, to any Indemnification Claim (a
"Principal Shareholder Challenged Claim"). If notice of objection to any such
claim is not provided by a Principal Shareholder, the validity and stated amount
of the claim will be deemed to have been accepted and, if the Principal
Shareholder Threshold has been met, payment in the amount of the Loss set forth
in the Notice of Claim shall be delivered to Parent not later than five (5) days
after the expiration of such 45 day period. The parties shall submit the matter
of a Principal Shareholder Challenged Claim to arbitration in accordance with
Article VI hereof. If a Notice of Claim sets forth a Third Party Claim, the
provisions of Section 1.5(b) shall also apply.
1.4 Company Shareholder Claims.
(a) At any time after obtaining knowledge of any facts, claim or demand
which has given rise to, or could reasonably give rise to, an Indemnification
Claim under Section 1.1(c), the Indemnification Representative may deliver a
Notice of Claim to Parent. The Indemnification Representative shall give a
Notice of Claim whether or not the Company Threshold has been reached. The
Notice of Claim must be given on or prior to the Escrow Termination Date, and
shall set forth the amount of the Loss suffered, or which may be suffered, by
the Company Shareholders.
(b) Upon receipt of a Notice of Claim, Parent shall, subject to the
provisions of Section 1.4(c), pay the Indemnification Representative in
immediately available funds within five (5) days of the expiration of the
forty-five (45) day notice period described in Section 1.4(c) an amount equal to
the Loss set forth in the Notice of Claim.
(c) Parent shall have forty-five (45) days from the date a Notice of
Claim is given within which to object, by written notice to the Indemnification
Representative, to any Indemnification Claim (a "Parent Challenged Claim"). If
Parent does not provide notice of objection to any such claim, the validity and
stated amount of the claim will be deemed to have been accepted and payment in
the amount of the Loss set forth in the Notice of Claim shall be delivered to
the Indemnification Representative not later than five (5) days after the
expiration of such 45 day period. The parties shall submit the matter of a
Parent Challenged Claim to arbitration in accordance with Article VI hereof. If
a Notice of Claim sets forth a Third Party
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Claim, the provisions of Section 1.5(b) shall also apply.
1.5 Procedural Matters.
(a) Notice Delivery. So long as the Notice of Claim is given by the
Indemnified Party in accordance with Section 1.3(a) or 1.4(a), no failure or
delay by the Indemnified Party in the giving of a Notice of Claim shall reduce
or otherwise affect the Indemnified Party's right to indemnification hereunder.
Notice of Claim shall be deemed to be given as of:
(x) the second business day after the date of the postmark on
the registered or certified mail (postage prepaid, return receipt
requested) containing the Notice of Claim; or
(y) if the Notice of Claim is personally delivered, the date of
such personal delivery.
(b) Third Party Claims. In the event of a Third Party Claim, the
Indemnifying Party shall have the right, but not the obligation, exercisable by
written notice to the Indemnified Party within ten (10) days of the date of the
Notice of Claim concerning the commencement or assertion of any Third Party
Claim, to participate in the defense of such Third Party Claim. The Indemnified
Party shall not settle such Third Party Claim without the prior written consent
of the Indemnifying Party, which consent shall not be unreasonably withheld or
delayed. Notwithstanding the foregoing, the Indemnified Party shall have the
right to pay or settle any Third Party Claim at any time, provided that in such
event it waives any right to indemnification therefor by the Indemnifying Party.
Within ten (10) days of the date a court of competent jurisdiction or arbitrator
shall determine that the Indemnified Party is liable for all or a portion of the
monetary liability arising out of any Third Party Claim or a settlement is
reached, the Indemnifying Party shall pay such claim as if such claim had been
accepted in accordance with the other provisions hereof unless an appeal is made
in accordance with the next sentence. If the Indemnifying Party desires to
appeal from an adverse judgment, then the Indemnifying Party shall post and pay
the cost of the security or bond required to stay execution of the judgment
pending appeal. Upon the payment in full by the Indemnifying Party of such
amounts, the Indemnifying Party shall succeed to the rights of such Indemnified
Party, to the extent not waived in settlement, against the third party who made
such Third Party Claim. The Indemnifying Party and Indemnified Party shall
submit disputes regarding any payments due under this Section 1.5(b) to
arbitration in accordance with Article VI. The Indemnifying Party and the
Indemnified Party shall cooperate in the defense or prosecution of any Third
Party Claim and shall furnish or cause to be furnished such records, information
and testimony, and attend such conferences, discovery proceedings, hearings,
trials or appeals, as may be requested in connection therewith.
ARTICLE II
ESTABLISHMENT OF ESCROW
2.1 Escrow Shares. On this date, Parent has executed and delivered to
the Escrow Agent a stock certificate in negotiable form representing the
Indemnification Escrow Shares. The Escrow Agent acknowledges receipt of the
Indemnification Escrow Shares and agrees to hold
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and disburse the Indemnification Escrow Shares for the benefit of Parent and the
Company Shareholders in accordance with the provisions of this Agreement.
2.2 Shareholder Percentage Interests. Attached as Schedule I hereto is a
schedule showing for each Company Shareholder (i) the respective percentage
interest (the "Percentage Interest") of each such Company Shareholder in the
Indemnification Escrow Shares, and (ii) the corresponding aggregate maximum
number of Indemnification Escrow Shares issuable to each Shareholder, subject to
the adjustments provided herein.
2.3 Delivery of IRS Form W-9. Upon the request of the Escrow Agent, each
Company Shareholder will deliver to the Escrow Agent such Shareholder's current
IRS Form W-8 or 9. Company and Parent will use its reasonable efforts to assist
the Escrow Agent in obtaining such IRS Forms W-8 or 9 from the Company
Shareholders.
2.4 Escrow Termination Procedures.
(a) On the Escrow Termination Date, Parent and the Indemnification
Representative shall prepare, execute and deliver to the Escrow Agent a
certificate instructing the Escrow Agent as to the number of Indemnification
Escrow Shares, if any, to be retained in escrow following the Escrow Termination
Date. Such number shall be equal to the quotient of the dollar amount of all
Challenged Claims and pending Indemnification Claims which have not been finally
determined (collectively, "Pending Claims") divided by the Parent Average
Closing Price (rounded up to the nearest whole share). The "dollar amount" of
any Pending Claim shall be calculated assuming the maximum possible exposure set
forth in the Notice of Claim; provided, however, that, with respect to a Pending
Claim for which legal action has not been taken against the Indemnified Party
within two years following the Notice of Claim (the "Period"), then the dollar
amount of such Pending Claim shall be as agreed upon by Parent and the
Indemnification Representative, and if they cannot agree within ninety (90) days
of the end of the Period, then such dollar amount shall be determined by
arbitration in accordance with Article VI hereof. The Escrow Agent shall retain
in escrow after the Escrow Termination Date the number of Indemnification Escrow
Shares as are set forth in such certificate of Parent and Indemnification
Representative.
(b) As promptly as practicable after the Escrow Termination Date, the
Escrow Agent shall deliver to the Company Shareholders the balance of the
Indemnification Escrow Shares not delivered to the Parent Parties or retained in
escrow pursuant to Section 2.4(a). Each Company Shareholder shall receive his or
her Percentage Interest of such distribution.
(c) Indemnification Escrow Shares that are not distributed to the
Company Shareholders on the Escrow Termination Date because they have been
retained pursuant to Section 2.4(a) shall be distributed as follows: Upon
receipt by the Escrow Agent of a certificate of Parent and Indemnification
Representative setting forth the amount of the final distribution to Parent and
confirming that all Pending Claims have been finally determined, the balance of
all Indemnification Escrow Shares shall be delivered to the Company Shareholders
in accordance with Section 2.4(b).
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ARTICLE III
VOTING RIGHTS AND DISTRIBUTIONS
3.1 Voting Rights; Distributions. Unless and until the Indemnification
Escrow Shares are delivered to Parent pursuant to this Agreement, Parent shall
cause its stock transfer agent to register such shares in the respective names
of the Company Shareholders in accordance with their respective Percentage
Interests, who shall be entitled to vote their respective Indemnification Escrow
Shares. All cash dividends or distributions of assets declared by Parent with
respect to its Common Stock prior to the Escrow Termination Date shall be
payable directly to the Company Shareholders as if each had received all of the
shares of Parent Common Stock deliverable to such shareholder at the Effective
Time of the Merger and no shares had been placed into escrow under this
Agreement (subject to reduction to reflect the delivery of Indemnification
Escrow Shares to Parent under this Agreement).
3.2 Additional Shares. All shares of Parent Common Stock relating to
Indemnification Escrow Shares still held by the Escrow Agent under this
Agreement and resulting from conversion, stock dividend, stock split,
reclassification, recapitalization or corporate reorganization of Parent, shall
be delivered to the Escrow Agent when deliverable to holders of other
outstanding shares of Parent Common Stock, shall be allocated according to the
Percentage Interest of each Company Shareholder and shall constitute additional
Indemnification Escrow Shares.
3.3 Interest in Escrow Shares. The interest of the Company Shareholders
in the Indemnification Escrow Shares (until released to them hereunder) is
nonassignable and shall be transferable only by operation of law.
ARTICLE IV
THE INDEMNIFICATION REPRESENTATIVE
4.1 Appointment and Replacement. As long as there are shares held in
escrow pursuant to this Agreement, the Company Shareholders, and each of them,
will be represented by the Indemnification Representative who is empowered to
give any and all notices and instructions and take any and all action for and on
behalf of the Company Shareholders, and each of them, under this Agreement. The
Company Shareholders will have the right to remove the Indemnification
Representative and, upon such removal or, in the event of the Indemnification
Representative's death or resignation, to appoint as the new Indemnification
Representative any Company Shareholder at any time and from time to time during
the period when any shares are held in escrow, by a vote of Company Shareholders
holding a majority interest in the Indemnification Escrow Shares held in escrow
at such time evidenced by a writing executed by such majority Company
Shareholders. The appointment of a new Indemnification Representative will be of
no force or effect whatsoever upon Parent or the Escrow Agent or otherwise under
this Agreement until three days after the later of the dates when Parent or the
Escrow Agent is deemed to have received written notice of such appointment,
which notice must include at least: (i) the identity and address of the new
Indemnification Representative and a statement that such Indemnification
Representative has been appointed by a vote of Company Shareholders holding a
majority interest in the Indemnification Escrow Shares then held in escrow; (ii)
the duly acknowledged signatures of each of the Company Shareholders voting for
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the new Indemnification Representative; and (iii) a statement that any
non-signing Company Shareholder has been notified in writing of the appointment
of the new Indemnification Representative. Parent and the Escrow Agent will be
entitled to rely on any notice received in such form without conducting an
investigation of the contents thereof.
4.2 Right to Rely. Any action taken by, or notice or instruction
received from, the Indemnification Representative will be deemed to be action
by, or notice or instruction from, each and all of the Company Shareholders.
Parent may and the Escrow Agent will disregard any notice or instruction
received from any Company Shareholder other than the then-acting Indemnification
Representative with regard to this Agreement prior to the Escrow Termination
Date.
4.3 Conduct of Indemnification Representative. The Indemnification
Representative shall not suffer any liability or Loss for any act performed or
omitted to be performed by him or her under this Agreement in the absence of
gross negligence or willful misconduct. The Indemnification Representative may
consult with counsel in connection with his or her duties hereunder and shall be
fully protected by any act taken, suffered, permitted, or omitted in good faith
in accordance with the advice of counsel. The Indemnification Representative
shall not be responsible for the sufficiency or accuracy of the form, execution,
validity or genuineness of documents or securities now or hereafter deposited
hereunder, or of any endorsement thereof or for any lack of endorsement thereon,
or for any description therein, nor shall he or she be responsible or liable in
any respect on account of the identity, authority or rights of the persons
executing or delivering or purporting to execute or deliver any such document,
security or endorsement, and the Indemnification Representative shall be fully
protected in relying upon any written notice, demand, certificate or document
which he or she in good faith believes to be genuine.
4.4 Retention of Experts; Expenses. The Indemnification Representative
shall be entitled to employ such legal counsel and other experts as he or she
may deem necessary to advise him or her properly with respect to his or her
rights and obligations hereunder and to evaluate Indemnification Claims and to
pursue challenges to Indemnification Claims or to defend Third Party Claims. The
reasonable expenses and fees of such counsel and experts, and any reasonable,
documented out of pocket expenses which the Indemnification Representative
incurs hereunder in relation to evaluating, challenging or contesting claims,
shall be reimbursed by the Company Shareholders.
ARTICLE V
ESCROW AGENT
5.1 Appointment. Parent, the Company, the Principal Shareholders and the
Indemnification Representative hereby appoint ChaseMellon Shareholder Services
L.L.C. ("ChaseMellon") to act as the Escrow Agent and ChaseMellon accepts such
appointment. Parent shall promptly notify Escrow Agent as to the date of the
Effective Time.
5.2 Compensation and Expenses. The Escrow Agent shall be entitled to
reasonable compensation for all services rendered and expenses incurred by it in
the performance of its obligations hereunder. The Escrow Agent shall be entitled
to employ such legal counsel and
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other experts as it may deem necessary to properly advise it in connection with
its obligations hereunder, may rely on the advice of such counsel, shall not be
liable for any action taken or omitted to be taken in reliance thereon, and may
pay them reasonable compensation therefor. The Escrow Agent and such legal
counsel's and other expert's fees and expenses shall be borne by Parent.
5.3 Liability. The Escrow Agent shall not be liable for any diminution
of value of the Indemnification Escrow Shares. The Escrow Agent shall have no
authority to sell or otherwise dispose of or encumber the Indemnification Escrow
Shares except as expressly provided herein. The duties of the Escrow Agent are
purely ministerial in nature, and the Escrow Agent shall not incur any liability
in the performance of its duties hereunder whatsoever, except for willful
misconduct or gross negligence.
5.4 Instructions. Notwithstanding any other provisions herein contained,
the Escrow Agent may at all times act upon and in accordance with the joint
written instructions of Parent and the Indemnification Representative. The
Escrow Agent shall not be liable for any act done or omitted by it in accordance
with such instructions or pursuant to the advice of counsel of its selection.
5.5 Duties. The duties and responsibilities of the Escrow Agent shall be
limited to those expressly set forth in this Agreement and instructions given to
the Escrow Agent pursuant to this Agreement, and the Escrow Agent shall neither
be subject to, have any liability under, nor obligated to recognize, any other
agreement between any or all of the parties hereto even though reference thereto
may be made herein; provided, however, with the written consent of the Escrow
Agent, this Agreement may be amended at any time by an instrument in writing
signed by Parent and the Indemnification Representative. The Escrow Agent shall
advise Parent and the Indemnification Representative from time to time, upon
written request, as to (i) the number of Indemnification Escrow Shares
represented by the certificate held by the Escrow Agent, and (ii) the number of
Indemnification Escrow Shares distributed by the Escrow Agent to the Company
Shareholders. The Escrow Agent shall have the right to perform any of its duties
hereunder through agents, custodians or nominees.
5.6 Documents. The Escrow Agent shall not be responsible for the
sufficiency or accuracy of the form, execution, validity or genuineness of
documents or securities now or hereafter deposited hereunder, or of any
endorsement thereof, or for any lack of endorsement thereon, or for any
description therein, nor shall it be responsible or liable in any respect on
account of the identity, authority or rights of the persons executing or
delivering or purporting to execute or deliver any such document, security or
endorsement of this Agreement, and the Escrow Agent shall be fully protected in
relying upon any written notice, demand, certificate or document which it in
good faith believes to be signed by the proper party, person or entity.
5.7 Right to Rely. The Escrow Agent is authorized, in its sole
discretion, to disregard any and all notices or instructions given by any of the
parties hereto or by any other person, firm or corporation, except only such
notices or instructions as are herein expressly provided for in this Agreement
and orders or process of any court entered or issued with or without
jurisdiction. If any property subject hereto is at any time attached, garnished
or levied upon under any court order, or in case the payment, assignment,
transfer, conveyance or delivery
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of any such property shall be stayed or enjoined by any court order, or in case
any order, judgment or decree shall be made or entered by any court affecting
such property or any part thereof, then and in any of such events, the Escrow
Agent is authorized, in its sole discretion, to rely upon and comply with any
such order, writ, judgment or decree which the Escrow Agent is advised by legal
counsel of its own choosing is binding upon it; and if the Escrow Agent complies
with any such order, writ, judgment or decree, it shall not be liable to any of
the parties hereto or to any other person, firm or corporation by reason of such
compliance even though such order, writ, judgment or decree may be subsequently
reversed, modified, annulled, set aside or vacated.
5.8 Resignation. The Escrow Agent may resign by giving twenty (20) days
advance written notice to Parent and the Indemnification Representative and
thereafter shall deliver the Indemnification Escrow Shares to such substitute
escrow agent as Parent and the Indemnification Representative shall jointly
direct in writing. If such direction to deliver to a substitute escrow agent is
not received by the Escrow Agent within twenty (20) days after mailing such
notice of resignation, it is unconditionally and irrevocably authorized,
directed and empowered to file an interplea motion and deliver all items held by
it to a court of competent jurisdiction.
5.9 Indemnity. In consideration of its acceptance of the appointment as
the Escrow Agent, the Parent agrees to indemnify and hold the Escrow Agent
harmless as to and against any loss, liability or expense incurred by it to any
person, firm or corporation by reason of its having accepted the same or in
carrying out any of the terms hereof (except as such liability may arise out of
or be based upon the gross negligence or willful misconduct of the Escrow
Agent), and to reimburse the Escrow Agent for all its reasonable expenses,
including, among other things, counsel fees and court costs, incurred by reason
of its position hereunder or actions taken pursuant hereto. The indemnity of
this paragraph shall survive the resignation or substitution of the Escrow Agent
or the termination of this Escrow Agreement.
5.10 Termination. The obligations of the Escrow Agent shall terminate
upon the disbursement of all of the Indemnification Escrow Shares.
Notwithstanding any termination of this Escrow Agreement, the provisions of
Section 5.2 and Section 5.9 hereof shall survive such termination and remain in
full force and effect.
ARTICLE VI
DISPUTE RESOLUTION
6.1 Submission of Disputes. Except as provided in Section 6.3, all
disputes related to the obligations of all or any of the parties hereto under
the provisions of this Agreement shall be submitted to, and settled by,
arbitration in Seattle, Washington, in accordance with the Commercial Rules of
the American Arbitration Association. The dispute shall be submitted to one
arbitrator agreed to by the Indemnified Party and the Indemnifying Party. If the
Indemnified Party and the Indemnifying Party cannot agree on one arbitrator, one
arbitrator will be selected by each party, with the two selected arbitrators
then selecting a third arbitrator.
6.2 Fees, Expenses and Awards. The fees and expenses of the arbitration
or arbitrators shall be paid by the Indemnifying Party unless the
indemnification obligation is reduced to less than 80% of the amount in the
related Notice of Claim and in such event the fees
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and expenses shall be shared one-half by Indemnified Party and one-half by the
Indemnifying Party. Any arbitration award may be entered in and enforced by any
court having jurisdiction thereover and the parties hereby consent and commit
themselves to the jurisdiction of the courts of the State of Washington for the
purposes of the enforcement of any arbitration award.
6.3 Disputes as to Duties of Escrow Agent. Any dispute which may arise
with respect to the duties of the Escrow Agent hereunder shall be settled by the
mutual agreement of the parties concerned. The Escrow Agent shall be under no
duty to institute or defend any proceeding unless the subject of such proceeding
is part of its duties hereunder. In the event adverse claims or demands are made
upon any of the Indemnification Escrow Shares, or in the event that the Escrow
Agent, in good faith, is in doubt as to what action it should take hereunder,
the Escrow Agent may, at its option, file a suit as interpleader in a court of
appropriate jurisdiction, or refuse to comply with any claims or demands on it,
or refuse to take any other action hereunder, so long as such dispute shall
continue or such doubt shall exist. The Escrow Agent shall be entitled to
continue so to refrain from acting until (i) the rights of all parties have been
fully and finally adjudicated by a court of appropriate jurisdiction, or (ii)
all differences and doubt shall have been resolved by agreement among all of the
interested persons, and the Escrow Agent shall have been notified thereof in
writing signed by all such persons. The rights of the Escrow Agent under this
Section 6.3 are cumulative of all other rights which it may have by law or
otherwise.
ARTICLE VII
MISCELLANEOUS
7.1 Notices. All notices and other communications hereunder will be in
writing and will be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of complete transmission)
to the parties at the following addresses (or at such other address for a party
as will be specified by like notice):
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If to Parent or Merger Sub, to:
Data Dimensions, Inc.
One Bellevue Center, Suite 2100
411 - 108th Avenue NE
Bellevue, Washington 98004
Attention: Legal Department
Facsimile: 425-688-1099
With a copy to:
Garvey, Schubert & Barer
1191 Second Avenue, #1800
Seattle, Washington 98101-2939
Attention: Bruce A. Robertson
Facsimile: 206-464-0125
If to the Company, to:
ST Labs, Inc.
Sterling Plaza, 3rd Floor
3535 - 128th Avenue S.E.
Bellevue, Washington 98006
Attention: Tye V. Minckler
Facsimile: 425-974-0150
With a copy to:
Summit Law Group, PLLC
1501 Westlake Avenue North, Suite 300
Seattle, Washington 98109
Attention: Karen A. Andersen
Facsimile: 206-281-9882
If to the Principal Shareholders, to each of:
Robert Arnold, Jr.
1912 Shelton Court N.E.
Renton, WA 98056
Facsimile: 425-204-7759
and
Tye V. Minckler
10209 N.E. 29th Place
Bellevue, WA 98004
Facsimile: 425-974-0174
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If to the Indemnification Representative:
Tye V. Minckler
10209 N.E. 29th Place
Bellevue, WA 98004
Facsimile: 425-974-0174
If to the Escrow Agent:
ChaseMellon Shareholder Services L.L.C.
520 Pike Street, Suite 1220
Seattle, Washington 98101
Attention: Joseph S. Campbell
Facsimile: 206-674-3059
With a copy to:
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Ridgefield Park, NJ 07660
Attention: General Counsel
Facsimile: 201-296-4004
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of changes of address shall
only be effective upon receipt.
7.2 Headings. The descriptive headings in this Agreement have been
inserted for convenience only and shall not be deemed to limit or otherwise
affect the construction of any provision hereof.
7.3 Entire Agreement; Assignment. This Agreement and the Merger
Agreement constitutes the entire agreement among the parties with respect to the
subject matter hereof and thereof and supersede all other prior agreements and
understandings, both written and oral, among the parties or any of them with
respect to the subject matter hereof and thereof. This Agreement shall not be
assigned by operation of law or otherwise.
7.4 Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of the parties hereto, and nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
7.5 Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, each of which shall remain in full force and
effect, provided that enforcement of such other provisions in the absence of the
invalid or unenforceable provisions does not deprive either the Company or
Parent of the benefit of the bargain.
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7.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and same Agreement.
7.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof;
provided, that the rights and duties of the Escrow Agent shall be governed by
the laws of the State of New York.
IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Principal
Shareholders, the Indemnification Representative and the Escrow Agent have
caused this Agreement to be signed by their respective officers thereunto duly
authorized, and their respective seals to be affixed hereto, as of the date
first written above.
DATA DIMENSIONS, INC.
By:_________________________________________
Title:______________________________________
DS ACQUISITION CORPORATION
By:_________________________________________
Title:______________________________________
ST LABS, INC.
By:_________________________________________
Title:______________________________________
____________________________________________
ROBERT ARNOLD, JR.
____________________________________________
TYE MINCKLER
Personally, and as Indemnification Representative
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CHASEMELLON SHAREHOLDER SERVICES L.L.C.
By:_________________________________________
Title:______________________________________
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SPOUSAL CONSENT
The undersigned are the spouses of the Principal Shareholders. Each of
the undersigned acknowledges that she has read and clearly understands the
provisions of this Agreement, and hereby expressly approves of and agrees to be
bound by the provisions of this Agreement in its entirety, including but not
limited to, those provisions relating to the indemnification of the Parent
Parties pursuant to Sections 1.1(a) and 1.1(b) hereto.
Date: ___________________________________________ ______________________
[______________________]
Date:____________________________________________ ______________________
[______________________]
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-43685) and in the Prospectus constituting part
of the Registration Statement on Form S-3 (No. 333-52245) of Data Dimensions,
Inc. of our report dated July 13, 1998 relating to the financial statements of
ST Labs, Inc., which appears in the Current Report on Form 8-K of Data
Dimensions, Inc. dated August 6, 1998.
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
August 4, 1998
