-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vl/4rfRwgExIhfhsx5KEfm6+mL5kEU/9GODZjcLtS1SJ7JP06vx5YdCDxmq+dFZ/ BfqXvjki1y71CJjor3yB1A== 0000891020-98-001209.txt : 19980810 0000891020-98-001209.hdr.sgml : 19980810 ACCESSION NUMBER: 0000891020-98-001209 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980807 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980807 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATA DIMENSIONS INC CENTRAL INDEX KEY: 0000026990 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 060852458 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-04748 FILM NUMBER: 98679383 BUSINESS ADDRESS: STREET 1: 777 108TH AVENUE NE STREET 2: SUITE 2070 CITY: BELLEVUE STATE: WA ZIP: 98004 BUSINESS PHONE: 2066881000 MAIL ADDRESS: STREET 1: 777 108TH AVENUE NE SUITE 2070 CITY: BELLEVUE STATE: WA ZIP: 98004 8-K 1 FORM 8-K 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) DELAWARE 0-4748 06-0852458 (State or other jurisdiction of (Commission File No.) (I.R.S. Employer Identification No.) incorporation or organization)
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 2 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 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 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 Page 4 5 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 6 ST LABS, INC. BALANCE SHEETS (IN THOUSANDS)
ASSETS December 31, March 31, 1997 1998 ------- ------- (unaudited) 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 ------- -------
Page 6 7 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.
Page 7 8 ST LABS, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS)
Year Ended Three Months Ended December 31, March 31, ------------ ------------------------------ 1997 1997 1998 ------------ ------------ ------------ (unaudited) (unaudited) 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) ======== ======== ========
The accompanying notes are an integral part of these financial statements. Page 8 9 ST LABS, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
Common stock and Accumulated Additional paid in capital deficit Total ----------------------------- ------------ --------- Shares Amount 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) ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. Page 9 10 ST LABS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended Three Months Ended December 31, March 31, ------------ -------------------------- 1997 1997 1998 ------------ ------------ ---------- (unaudited) (unaudited) 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 $ -- $ -- ======= ======= =======
The accompanying notes are an integral part of these financial statements. Page 10 11 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. Page 11 12 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):
December 31, March 31, 1997 1998 ----------- ------------- (unaudited) 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 ======= =======
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. Page 12 13 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):
December 31, March 31, 1997 1998 ----------- ----------- (unaudited) 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 ======= =======
Future maturities on notes payable at December 31, 1997 are as follows (in thousands):
Related Party Bank Total ------------- ------- ------ 1998 $ 215 $1,182 $1,397 1999 147 147 2000 163 163 2001 156 156 2002 25 25 ------ ------ ------ $ 215 $1,673 $1,888 ====== ====== ======
Page 13 14 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): 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 $ -- =====
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. Page 14 15 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:
WEIGHTED AVERAGE ----------------------- EXERCISE EXERCISE FAIR PRICE OUTSTANDING PRICE VALUE ------------ ------------ --------- ------- 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 ==========
The following summarizes information about stock options outstanding at December 31, 1997:
WEIGHTED AVERAGE EXERCISE REMAINING PRICES OUTSTANDING LIFE EXERCISABLE - ---------- ----------- --------- ------------ $ 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 ========= =========
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. Page 15 16 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): Years ending December 31, 1998 $1,385 1999 1,385 2000 1,292 2001 1,333 2002 1,110 Thereafter 687 ------ $7,192 ======
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 17 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 18 DATA DIMENSIONS, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET MARCH 31, 1998 (IN THOUSANDS) (UNAUDITED)
Data Dimensions ST Labs Pro Forma -------- -------- -------- 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 ======== ======== ========
The accompanying notes are an integral part of the pro forma condensed consolidated financial statements. Page 18 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)
Data Dimensions ST Labs Pro Forma ---------- --------- --------- 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 ======== ======== ========
The accompanying notes are an integral part of the pro forma condensed consolidated financial statements. Page 19 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)
Data Dimensions ST Labs Pro Forma ---------- -------- --------- 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 ======== ======== ========
The accompanying notes are an integral part of the pro forma condensed consolidated financial statements. Page 20 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)
Data Dimensions ST Labs Pro Forma ---------- --------- --------- 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 ======== ======== ========
The accompanying notes are an integral part of the pro forma condensed consolidated financial statements. Page 21 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)
Data Dimensions ST Labs Pro Forma ---------- --------- ---------- 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 ======== ======== ========
The accompanying notes are an integral part of the pro forma condensed consolidated financial statements. Page 22 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)
Data Dimensions ST Labs Pro Forma ---------- -------- --------- 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 ======== ======== ========
The accompanying notes are an integral part of the pro forma condensed consolidated financial statements. Page 23 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 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 EX-2.1 2 AGREEMENT AND PLAN OF REORGANIZATION 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 2
TABLE OF CONTENTS 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
i 3 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
ii 4
DEFINITION 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
iii 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 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 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 3 8 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. 4 9 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 5 10 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. 6 11 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 7 12 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 8 13 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 9 14 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; 10 15 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. 11 16 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. 12 17 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 13 18 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. 14 19 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 15 20 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, 16 21 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 17 22 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. 18 23 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 19 24 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; 20 25 "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 21 26 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. 22 27 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 23 28 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 24 29 (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 25 30 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. 26 31 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 27 32 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; 28 33 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. 29 34 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, 30 35 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 31 36 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 32 37 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. 33 38 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: 34 39 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. 35 40 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. 36 41 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. 37 42 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 38 43 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 39 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 40 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 41 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. 42 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) 43 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 EX-4.1 3 AGREEMENT AND PLAN OF REORGANIZATION 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. 1 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 2 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. 3 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. 4 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; 5 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." 6 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 7 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 8 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. 9 10 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: 10 11 (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 11 12 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] 12 13 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] 13 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: ______ 14 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. A-1 16 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 EX-4.2 4 INDEMNIFICATION AND ESCROW AGREEMENT 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 1 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 2 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 3 4 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 4 5 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 5 6 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). 6 7 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 7 8 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 8 9 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 9 10 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 10 11 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): 11 12 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 12 13 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. 13 14 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 14 15 CHASEMELLON SHAREHOLDER SERVICES L.L.C. By:_________________________________________ Title:______________________________________ 15 16 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:____________________________________________ ______________________ [______________________] 16 EX-23.1 5 CONSENT OF INDEPENDENT ACCOUNTANTS 1 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 -----END PRIVACY-ENHANCED MESSAGE-----